United States v. Am. Express Co.

88 F.Supp.3d 143

UNITED STATES of America, et al., Plaintiffs

v.AMERICAN EXPRESS COMPANY and American Express Travel Related Services Company, Inc., Defendants.

No. 10–CV–4496 NGGRER.

United States District Court, E.D. New York.

Signed Feb. 19, 2015.

Andrew J. Ewalt, Bennett Matelson, Blake W. Rushforth, Craig W. Conrath, Ethan C. Glass, Gregg I. Malawer, Ihan Kim, J. Robert Kramer, John Read, Joseph P. Vardner, Katharine Mitchell–Tombras, Lisa Scanlon, Mark Hamer, Susan Musser, Thomas E. Carter, U.S. Department of Justice, Washington, DC, Michael E. Cole, Rachel O. Davis, Office of the Attorney General, State of Connecticut, Hartford, CT, Layne M. Lindebak, Iowa Department of Justice, Des Moines, IA, Ellen S. Cooper, Gary Honick, Office of the Attorney General of Maryland, Baltimore, MD, D.J. Pascoe, Michigan Department of Attorney General, Lansing, MI, Kyle A. Poelker, Anne E. Schneider, Missouri Attorney General's Office, Jefferson City, MO, Mitchell L. Gentile, Office of the Ohio Attorney General, Columbus, OH, Kim Mae Van Winkle, Bret Fulkerson, David Ashton, Texas Attorney General's Office, Austin, TX, Chadwick O. Brooker, Robert W. Pratt, Office of the Illinois Attorney General, Chicago, IL, Victor J. Domen, Tennessee Attorney General Office, Nashville, TN, Chuck Munson, Montana Department of Justice, Helena, MT, Abigail Stempson, Nebraska Attorney General's Office, Lincoln, NE, Brett T. Delange, Oscar S. Klaas, Stephanie Nicole Guyon, Office of the Idaho Attorney General, Boise, ID, Ryan Kriger, Vermont Attorney General, Montpelier, VT, David N. Sonnenreich, Ronald J. Ockey, Office of the Attorney General of Utah, Salt Lake City, UT, Nancy M. Bonnell, Office of the Attorney General, Phoenix, AZ, David Anthony Rienzo, New Hampshire Department of Justice, Concord, NH, for Plaintiffs.

Evan R. Chesler, Kevin J. Orsini, Cravath, Swaine & Moore, Bernadette Miragliotta, Mark G. Califano, American Express Company, Donald L. Flexner, Eric Brenner, Philip C. Korologos, Boies, Schiller & Flexner LLP, Thomas E.L. Dewey, Dewey Pegno & Kramarsky LLP, New York, NY, Alden Lewis Atkins, Vinson & Elkins, L.L.P., Robert M. Cooper, Boies, Schiller & Flexner LLP, Washington, DC, John F. Cove Jr., Boies, Schiller & Flexner LLP, Oakland, CA, Matthew S. Tripolitsiotis, Boies Schiller & Flexner LLP, Armonk, NY, William T. Thomas, Boies Schiller & Flexner, Fort Lauderdale, FL, for Defendants.

DECISION

NICHOLAS G. GARAUFIS, District Judge.

TABLE OF CONTENTS

INTRODUCTION	149
FINDINGS OF FACT AND CONCLUSIONS OF LAW	152

I. BACKGROUND 152

A.	Overview of the GPCC Card Industry	152
B.	Competition and Pricing in the GPCC Card Industry	156
C.	The Non–Discrimination Provisions	160

1.	Origins of Amex's NDPs	160
2.	The Challenged Restraints	162

II.	LEGAL STANDARD	167
III.	MARKET DEFINITION	170

A. GPCC Card Network Services Market 171

1.	The Relevant Product Is Network Services	171
2.	Debit Network Services Are Not Reasonably Interchangeable	175

B. Plaintiffs' Proposed T & E Submarket 185

IV. MARKET POWER 187

A.	Market Share, Concentration, and Barriers to Entry	188
B.	Cardholder Insistence	191
C.	Pricing Practices	195

1.	Value Recapture	195
2.	Price Discrimination	198
3.	Merchant Pricing Premium	199

D. Amex's Remaining Market Power Counterarguments 202

V. ADVERSE EFFECTS ON COMPETITION 207

A.	The NDPs Impede Horizontal Interbrand Competition	208
B.	The NDPs Block Low–Cost Business Models	213
C.	The NDPs Have Resulted in Higher Prices to Merchants and Consumers	215
D.	The NDPs Stifle Innovation	217
E.	Removal of the NDPs Would Benefit Merchants and Consumers	218

VI. PRO–COMPETITIVE JUSTIFICATIONS 224

A.	Defendants' Ability To Drive Competition	225
B.	Free–Riding	234

VII. CONCLUSION 238

INTRODUCTION

The United States and the attorneys general of seventeen states¹ (collectively, “Plaintiffs” or the “Government”) bring this antitrust enforcement action against Visa Inc. (“Visa”), MasterCard International Incorporated (“MasterCard”), American Express Company, and American Express Travel Related Services Company, challenging each network's anti-steering rules as anticompetitive restraints in violation of Section 1 of the Sherman Antitrust Act. (Compl. (Dkt. 1).) Visa and MasterCard entered into consent decrees with the Government, pursuant to which they voluntarily agreed to remove or revise the bulk of their challenged restraints. (See Final J. as to Defs. MasterCard Int'l Inc. & Visa Inc. (Dkt. 143).) Defendants American Express Company and American Express Travel Related Services Company (collectively, “Defendants,” “American Express,” or “Amex”) elected to litigate Plaintiffs' challenge to their anti-steering rules, which they term American Express's Non–Discrimination Provisions (the “NDPs”). The NDPs, which are contained in both Defendants' standard acceptance agreement and also the more customized agreements they negotiate with a select number of large merchants, prevent the roughly 3.4 million merchants who accept American Express credit and charge cards from steering customers to alternative credit card brands, such as Visa, MasterCard, and Discover.

Before turning to the contractual restraints at issue in this case, it is helpful to outline the type of behavior that Defendants' NDPs are intended to prevent. As a general matter, steering is both pro-competitive and ubiquitous. Merchants routinely attempt to influence customers' purchasing decisions, whether by placing a particular brand of cereal at eye level rather than on a bottom shelf, discounting last year's fashion inventory, or offering promotions such as “buy one, get one free.” This dynamic, however, is absent in the credit card industry. Under American Express's NDPs, a merchant may not attempt to induce or “steer” a customer to use the merchant's preferred card network by, for example, offering a 10% discount for using a Visa card, free shipping for using a Discover card, or a free night at a hotel for using an American Express card.

Each time a customer uses a credit card, the merchant, in one way or another, pays a fee to the network services provider that facilitates the customer's purchase. Thus, when a customer uses a Visa credit card, the merchant pays some combination of fees, commonly known as the “discount rate” or the “merchant discount rate,” for the privilege of accepting that card. When a customer uses an American Express card, the merchant similarly pays a fee. However, the merchant's cost of accepting American Express—one of the three largest network services providers in the country—has tended to be greater than the cost of accepting other cards, such as Visa or MasterCard. To speak in generalities that are perhaps unwarranted given the extensive trial record in this case, all else being equal, a given merchant might prefer that a customer carrying both a Visa card and an Amex card in her wallet use the Visa card, since the cost of the transaction is likely to be lower for the merchant. But pursuant to Amex's NPDs, merchants who accept American Express are not permitted to encourage customers to pay for their transactions with credit cards that cost the merchants less to accept.

As explained below, these NDPs create an environment in which there is nothing to offset credit card networks' incentives—including American Express's incentive—to charge merchants inflated prices for their services. This, in turn, results in higher costs to all consumers who purchase goods and services from these merchants.

The court does not come to its decision in this case eagerly or easily. The credit card industry is complex, and it is a critical component of commerce in the United States. General purpose credit and charge (“GPCC”) card networks, including American Express, must balance the demands of two sets of customers—merchants and cardholders—in a market that is highly concentrated and distorted by a history of antitrust violations. The court recognizes that it does not possess the experience or expertise necessary to advise, much less dictate to, the firms in this industry how they must conduct their affairs as going concerns. For that reason, the court has repeatedly urged the parties in this case to negotiate a mutually agreeable settlement that appropriately balances American Express's legitimate business interests with the public's interest in robust interbrand competition. However, the parties having failed to do so, the court is left with no alternative but to discharge its duty by deciding the question before it: whether Plaintiffs have shown by the preponderance of the evidence that Amex's NDPs violate the U.S. antitrust laws. Upon consideration of the case law in this circuit and the factual record developed at the lengthy bench trial, which was held over a seven-week period during the summer of 2014 and featured over thirty fact witnesses and four expert witnesses, the court finds that Plaintiffs have made such a showing.

As noted, credit card networks cater to the needs of two distinct sets of consumers, merchants and cardholders. Their very function is to bring these two sides together to consummate value-generating transactions. Guided by the Second Circuit's 2003 decision in United States v. Visa, 344 F.3d 229 (2d Cir.2003), which conducted an antitrust market analysis in this industry to resolve a public enforcement action initiated by the Department of Justice under Section 1, the court agrees with Plaintiffs that this two-sided platform comprises at least two separate, yet deeply interrelated, markets: a market for card issuance, in which Amex and Discover compete with thousands of Visa- and MasterCard-issuing banks; and a network services market, in which Visa, MasterCard, Amex, and Discover compete to sell acceptance services. For the reasons described herein, the court concludes that the relevant market for its antitrust analysis in this case is the market for GPCC card network services. Notwithstanding Defendants' vigorous arguments to the contrary, the dramatic growth in customers' use of...