The U.S. Supreme Court threw out a government lawsuit that accused American Express Co. of thwarting competition by prohibiting merchants from steering customers to cards with lower fees. (Photographer: Al Drago/Bloomberg)  

American Express Case Could Shield Tech Giants From Antitrust Scrutiny

(Bloomberg) -- A U.S. Supreme Court ruling favoring American Express Co. could shield Silicon Valley companies from accusations that they are thwarting competition just as antitrust enforcers are vowing to heighten scrutiny of the technology sector.

The justices, voting 5-4 along ideological lines, said Monday the U.S. government and 11 states failed to prove that American Express harmed cardholders by prohibiting merchants from steering customers to cards with lower fees.

Writing for the court, Justice Clarence Thomas said antitrust enforcers focused only on the fees paid by retailers to American Express and failed to prove that consumers suffered any harm. The government "did not offer any evidence that the price of credit-card transactions was higher than the price one would expect to find in a competitive market," Thomas wrote.

The case focused on what antitrust lawyers call a two-sided market, in which a company sells products or services to two distinct but interrelated groups of customers -- merchants and cardholders, in American Express’s case.

‘Higher Burden’

Consumer advocates said the ruling could make it harder to sue dominant tech companies over their own two-sided markets. Uber Technologies Inc., for example, serves both drivers and riders. Amazon.com Inc.’s platform is used by third-party sellers and retail consumers.

"This Supreme Court decision will make it significantly more difficult for antitrust to police the dominant tech platforms," said Gene Kimmelman, president of the advocacy group Public Knowledge in Washington. "This unwinds at least 70 years of precedent for how to think of platform transactions, and it places an unbelievably higher burden on law enforcement."

The decision comes as the technology industry’s biggest players are facing calls for greater scrutiny in Washington. The head of the Federal Trade Commission, Joe Simons, said last week that technology firms would be examined as part of a broad review of competition policy and enforcement matters. And in April, Makan Delrahim, the head of the Justice Department’s antitrust division, said antitrust officials should be “open and receptive" to evidence that some tech companies may be engaging in exclusionary conduct to gain control of a market.

Marianela Lopez-Galdos, the director of competition and regulatory policy at the Computer and Communications Industry Association, said the decision won’t insulate the technology industry from antitrust scrutiny. CCIA is a technology industry lobbying group that counts Amazon and Alphabet Inc.’s Google as its members. The European Union’s top court, in a different case, took the same view when analyzing multi-sided business models, according to Lopez-Galdo, and yet the EU has been aggressive in investigating antitrust violations by technology companies.

"If you try to prove there is harm to consumers looking only at one side of the market, you are actually doing a poor job because you are not understanding how these business models operate," she said.

The Supreme Court ruling preserves American Express’s high-fee business model and deals a blow to retailers looking to reduce the $50 billion in fees they pay to credit-card companies each year. It’s a defeat for Discover Card Services, which said the rules undercut its ability to compete with American Express.

‘Major Victory’

American Express called the ruling a "major victory" for the company and consumers, saying the decision will promote competition and innovation in the payments industry.

Some of the country’s biggest retailers, including Walmart Inc. and Target Corp., sided with the government. Deborah White, general counsel of the Retail Industry Leaders Association, countered that the ruling will let American Express "stifle competition and prevent consumers from understanding the cost of rising credit card fees."

American Express jumped as much as 2.95 percent in New York. Visa Inc. slipped as much as 4.3 percent, and Mastercard Inc. fell as much as 3.9 percent. Discover dropped as much as 2.2 percent.

Antitrust enforcers said American Express uses its leverage over merchants to thwart competition from cards that would charge retailers lower fees. American Express’s agreements with retailers bar them from doing anything to encourage the use of competing cards, such as offering discounts.

High Fees

Writing for the dissenters, Justice Stephen Breyer said American Express was demanding "contractual protection from price competition." He said the anti-steering policy helped foil Discover’s effort to adopt a low-fee business model in the 1990s.

Because of the anti-steering policy, "consumers throughout the economy paid higher retail prices as a result, and they were denied the opportunity to accept incentives that merchants might otherwise have offered to use less-expensive cards," Breyer wrote. He took the unusual step of reading a summary of his dissent from the bench for emphasis.

Thomas, however, said antitrust enforcers failed to account for the cardholder rewards funded by American Express’s merchant fees.

"AmEx’s increased merchant fees reflect increases in the value of its services and the cost of its transactions, not an ability to charge above a competitive price," Thomas wrote.

Thomas’s reasoning won’t always apply in the tech sector, said Stephen Calkins, a law professor at Wayne State University. The court made a distinction between two-sided markets like credit cards, where a transaction occurs simultaneously between a consumer and retailer, and a two-sided platform like newspapers, which sell space to advertisers and news to readers separately.

More Like Newspapers

Google and Facebook are more like newspapers than credit cards and so would probably have a harder time taking advantage of the court’s decision by arguing their markets are similar to American Express, said Calkins, who signed a brief siding with the government.

"Any potential defendant is pleased whenever the court takes a conservative approach and makes it harder for plaintiffs to prevail, so Google and Facebook benefit," he said. "But I don’t see reason for them to break out the champagne."

But critics of the technology industry say they are worried.

“The Supreme Court’s decision risks shielding from effective antitrust scrutiny every dominant tech platform in America, including Amazon, Google and Facebook,” said Lina Khan, director of legal policy at the Open Markets Institute in Washington.

The lawsuits originally targeted Visa and Mastercard over their anti-steering policies as well. Those two companies settled the claims in 2010.

The case is Ohio v. American Express, 16-1454.

©2018 Bloomberg L.P.