In 2010, 17 states and the federal government sued three major credit card companies, American Express, Visa, and MasterCard, for unreasonably restraining trade in violation of the Sherman Act. The Petitioners argued the credit card companies had used anti-steering provisions to impermissibly suppress free market competition. Unlike American Express, Visa and Mastercard decided to rescind their anti-steering provisions and not proceed to trial. American Express went on to lose on the district court level but achieved a reversal in the Second Circuit.
Today, June 25th, the Supreme Court affirmed the Second Circuit’s ruling in a 5-4 opinion authored by Justice Clarence Thomas. Justice Thomas was joined by Justices Gorsuch, Kennedy, Alito, and Chief Justice Roberts.
Oramel Skinner joins us to discuss the Court’s ruling and its implications.
Oramel Skinner, Chief of Government Accountability & Special Litigation Unit, Arizona Attorney General's Office.
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Operator: Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by the Federalist Society's Corporations, Securities, and Antitrust Practice Groups, was recorded on Monday, June 25, 2018 during a live Courthouse Steps teleforum conference call held exclusively for Federalist Society members.
Mr. Micah Wallen: Welcome to The Federalist Society's teleforum conference call. This afternoon we will be discussing today's Supreme to Court-, Supreme Court decision in Ohio v. American Express. My name is Micah Wallen and I'm the Assistant Director of Practice Groups at The Federalist Society.
As always, please note that all expressions of opinion are those of the expert on today's call.
Today, we are happy to have with us O.H. Skinner, who is Chief of the Government Accountability and Special Litigation Unit in the Arizona Attorney General's Office. After hearing from our speaker, we will go to audience Q&A. Thank you for speaking with us, O.H., the floor is yours.
Mr. Oramel (O.H.) Skinner: Thank you so much. And thanks everybody for joining today. Uh, again, just in case that, uh, the front boiler plate is inadequate, the State of Arizona and our Office of the Arizona Attorney General were involved at various stages in this case, but the views you're going to hear today are, are my own personal view and kind of a, a hot take based on a couple hours of being able to review the opinion this morning. Uh, the rest of you had a few hours head start on me 'cause I'm here in Arizona.
So as a little bit of background, uh, but not hopefully too much background, this is a case that arose out of an action that was envisioned against, uh, Amex, MasterCard, and Visa regarding how they steered, uh, in their contracts with merchants. And, uh, I should be clear, in their contracts with merchants, those card providers' networks required merchants to not steer customers to lower-cost, uh, services. So anybody who, you know, I -- there was a little shop next to me in law school that if you walked in and said, "I'm interested in using a credit card," they would sometimes say, "Oh, but it's really important that you use a debit card or cash because, you know, we have to pay those hard -- those high charges." Anybody who says anything like that that would technically be a violation of the steering provision -- antisteering provisions in these contracts.
MasterCard and Visa settled, um, prior to, to major litigation in this case. But Amex didn’t. And they lost in the District Court. But then, where things started to get very interesting is in the Second Circuit, a panel that consisted of, um, Judge Winter, Judge Wesley, and Judge Droney, with Judge Wesley writing, uh, reversed the District Court, uh, in this case back to Amex and two particular things jumped out at the time to me and were topics that were of discussion amongst many of the players in the case.
The first one is that Judge Wesley went out of his way to note that the District Court had relied in substantial part, uh, on the idea that there was circumstantial evidence to support a conclusion that there was an anticompetitive effect in this case. Um, most people here probably in the antitrust space at least know that if you're going to want to fight one of these antitrust cases, step one is you're defining the market. And then, step two is the plaintiffs bear the initial burden of showing an anticompetitive effect in the relevant market. And here Judge Wesley went out of his way in a way that really attracted attention—at least to me and to a couple of others that I know—in noting that, that the circumstantial evidence was inadequate and that there needed to be more in order to show the required anticompetitive effect.
And that was a major deal from, you know, the view that I had of looking at this case. And I think others should look at it. Um, also Judge Wesley noted that there was a looking at the wrong market. And this is what a lot of people are going to talk about in the analysis of the case today is that the question wasn't whether there was an anticompetitive effect in the price that Amex was charging to merchants, uh, which is, you know, the businesses, um. Undoubtedly, there may have been higher prices by Amex charged to those merchants or, or an increase in the price through this antisteering provision. But the benefits needed to be looked at from the consumer perspective. It was a two-sided market. You needed to look at both sides of it. You couldn't just look at what was happening with the merchants. You needed to look at the merchants and the consumers.
And that jumped out as a huge thing to me because this is something that any of us who really believe that antitrust law should be doing something for consumers needs to recognize as a narrow view of the market here would've actually resulted in a harm to consumers. This would've been applying the antitrust laws in a way that would've ignored a consumer benefit from this market, and focused instead on simply what was happening to the merchants. And Judge Wesley noted that that was incorrect.
And then, Justice Thomas' opinion in a…I, I think this was somewhat surprising to some that he was writing this opinion and many seemed to think that the oral argument went in favor of the States. But Justice Thomas' opinion, uh, echoes the two themes that Judge Wesley had written on.
Now, circling back to a little bit of procedural history, um, once the Second Circuit's opinion came down, you started to see some states—Arizona included—drop out of the coalition of states. Um, that, that was an interesting outcome. It, it may have reflected the idea that Judge Wesley's opinion actually was a very pro-consumer opinion. You then saw at the petition stage a large group of states, including many that the—that I end up working with on a daily basis—sought cert. But DOJ opposed cert. DOJ had been riding along with the States throughout everything in the case, but opposed cert. Uh, the Court took the case and then DOJ went and continued to support the States, um.
The oral argument seemed to go in favor of the States and against Amex is what most people in the world of the internet seemed to be saying. But yet, the opinion came out today, and it's 5-4, and Justice Thomas wrote it. And what I think is particularly salient and may end up being the key things to consider, uh, other than the effect it may have on the use of your Amex card is that on the ninth page of the slip op, Justice Thomas has this interesting phrasing where he may be embracing this robust view of what the required showing is, uh, a much more -- maybe a more robust view of what a plaintiff in an antitrust action must show.
Uh, Justice Thomas says, "to determine whether a restraint violates the rule of reason, the parties agree that a three-step, burden-shifting framework applies. Under this framework, the plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market." And interestingly, this is entirely freeform by him. This is not quoting an opinion. He has a see cite to, uh, a, a, treatise. And he has a -- also see cite to a Second Circuit opinion from the '90s.
So this may well be something that ends up having an effect going forward, the idea that now you don’t just need to be able to show some anticompetitive effect through circumstantial evidence. You may need to have to show a substantial anticompetitive effect that harms consumers, which may well raise the burden at the front end and make it slightly easier for defendants to defend against antitrust claims where there is no real consumer harm.
Uh, Justice Thomas spends a significant part of the opinion then talking about the, the main meat, I think, for the pubic, which is the idea that this is a two-sided market, that there are merchants and that there are cardholders, and that the more merchants you have, the more cardholders will benefit because they have more options to use their credit card. And then the more cardholders you have, the more merchants benefit because that is something that ends up being highly valuable to the merchants is having access to a huge network of people who will spend their money. And that the definition of the market, the goal of the market is to increase transactions, and that you need both sides for this and that if you actually raise the price too high on one side of the two-sided market, you're going to see merchants drop off or consumers drop off. And so you have to balance this and shift the pricing to ensure that you have the appropriate equilibrium of merchants and consumers. This is a significant part of the opinion.
Justice Thomas then notes "that Amex uses its higher merchant fees"—this is on 16 of the slip op—"Amex uses its higher fees to offer its cardholders a more robust rewards program, which is necessary to maintain cardholder loyalty and encourage the level of spending that makes Amex valuable to merchants. That Amex allocates prices between merchants and cardholders differently [than] Visa and MasterCard is simply not evidence that it wields market power to achieve anticompetitive [effects]."
This is the -- this is one of the key aspects, if I'm looking at this—and I would encourage others to think about it—he is really focused on the idea that whatever the effects on merchants are, because there is a benefit that is flowing to the consumer—the cardholder—you can't myopically look at one side of this two-sided market and he is very aware of the effects on consumers and is focused on the idea that because of Amex's approach, you are getting higher rewards program -- higher value of awards program for consumers. You are seeing consumers have access to a different spectrum of cards. He talks about the amount of competition this has brought into the market. He talks about the idea that Chase has brought in a whole new line of credit cards specifically designed to target Amex and that also impose higher fees on merchants because they're trying to scramble and respond to Amex.
So the opinion is a really, uh, strong embrace of the idea that you cannot ignore the consumers in this kind of analysis. And given that, that two-sided markets like this may well be exactly how a lot of new internet companies should be analyzed in this space, this, this well -- may well be a very important opinion, uh, going forward in terms of focusing on the actual consumer effects and not just trying to find some theoretical antitrust violation embedded in a business model somewhere.
And then, at the end of the opinion, we're going back to this idea of the burden. Uh, it's the very last paragraph: "In sum, the plaintiffs have not satisfied the first step of the rule of reason. They have not carried their burden of proving that Amex’s antisteering provisions have anticompetitive effects." So, you know, to most people, I think you're going to hear a lot of about the both sides of the market, the pro-consumer perspective, how important it is to look at the benefits, and whether in that whole market, given that both merchants and consumers are technically customers of Amex, that you're not seeing an anticompetitive effect that harms consumers.
I think it's also important for those people who are going to be litigating these claims going forward to see whether there is a carry-through of what arguably was in Judge Wesley's opinion and appears to be in Judge Thomas' op-, Justice Thomas' opinion that the plaintiff now may have, in these types of cases, a significantly higher initial burden than many would've expected to prove that the challenge restraint has, in Justice Thomas' words "a substantial anticompetitive effect that harms consumers."
That could end up having a dramatic effect depending upon -- especially if you run into judges like Judge Wesley who may be are a little bit more viewed as being somebody who's going to look, uh, carefully at dismissal of claims like this and could have, uh, a very powerful and meaningful effect on people going forward.
I'll also note for the -- to the extent I've now talked long enough to bore anyone, uh, an interesting thing may have occurred, which is on the first page of Justice Breyer's dissent, which is joined by Justice Sotomayor, Justice Kagan, and Justice Ginsburg. It appears that Justice Breyer, the Francophile, has misspelled the word laissez-faire. Uh, so I will at least draw that to all of your attentions that, uh, those things happen to even, even the great minds on the Court.
Uh, and with that, I think I, I will kick it to questions. I know this is a little shorter, but I think it may be that, uh, knowing what people are concerned about or have questions about I can enlighten them more, other than the two big takeaways that I think are the most important parts of this case.
Mr. Micah Wallen: Thank you. Let's go to audience questions. In a moment, you'll hear a prompt indicating that the floor mode has been turned on. After that, to request a floor, enter the star key and then the pound key on your telephone keypad.
When we get to your request, you will hear a prompt and then you may ask your question. We'll answer the questions in the order in which they are received. Again, to ask a question, please enter the star key and then the pound key on your telephone keypad.
Let's go to our first question.
Mr. Chris Bowen [sp]: Uh, thank you. This is Chris Bowen. Um, I was wondering if you could comment on the future of vertical antitrust enforcement in light of this decision and in light of the rejection of the challenge the AT&T/Time Warner merger earlier to-, earlier this year?
Mr. Oramel (O.H.) Skinner: I think the best I can say -- I, I know a little bit less about the, the AT&T/Time Warner merger. I, I will say that I think you gathered you may well see that there is a harder burden at the first step of the burden-shifting analysis here in the rule of reason. And it may be that you -- if that is the case, you're going to see, I think probably rightly, that there needs to be a strong showing of a "substantial"—those are Justice Thomas' words—"anticompetitive effect that harms consumers." And I think that, that remembering to look at the consumer and find anticompetitive effects on consumers, um, I think is an important touchstone in this area. And it may be that you're going to have a harder time with, uh, people bringing enforcement actions when it will be very theoretical or circumstantial what the harm to consumers would be.
Um, and I think that's -- that could have a significant effect on the willingness of public entities to bring enforcement actions if in fact the first step in the rule of reason analysis is raised. Um, that, that's going to lower the likelihood of cases being brought. Probably. I mean, I just, just can't imagine when -- if there's a real shift in the rule of reason analysis and a broadening of the market definition that just makes these cases trickier by definition.
Mr. Chris Bowen: Thank you.
Mr. Micah Wallen: Well, and I'm not seeing another question lined up. I'll ask one. O.H., you mentioned near the beginning, uh, briefly about the, the DOJ's role in this case and their stance. Um, did you have any additional thoughts on that and why they seem to, uh, kind of straddle the fence and be on both sides of this case at different points in its development?
Mr. Oramel (O.H.) Skinner: Yeah, yeah. I don’t have any deep insights into why Noel and—Noel Francisco and his team—did that precisely. But I will say that it is -- you know, working in government service, it was surprising to me, and I think to many, how strongly Judge Wesley's opinion seemed to not just stop in its tracks on enforcement action, but shift some of the analysis, you know—and especially from a very esteemed panel in the Second Circuit—shifting the analysis to focus more on consumer and to potentially raise the burden at this first step.
And for those who believe that the antitrust laws are important but can be, uh, can lose sight of consumers and potentially, uh, be a tool of the government to, um, an interim tool against businesses, this -- that, that's a very powerful message from Judge Wesley's opinion. And you immediately saw, uh, Arizona was the first state and then several other states started dropping out of pursuing an effort to flip Judge Wesley's opinion. Um, states never like to lose a case, but I think that may reflect the idea that if losing the case comes with it, a clarification of the law that might actually correct for some past slippage in how things were applied, there is not a reason to then pursue that appeal further and try to flip what is otherwise a correct opinion that ends up benefiting consumers in the future.
And I think that may well have been part of what happened with DOJ is DOJ was looking at Judge Wesley's opinion and saying if that's the opinion that's going to stand, and it's going to potentially have these two effects where you, you look at a broader market, you really focus on consumer harm, and you don’t allow claims to proceed unless they can show that consumer harm, that may well have tracked with the DOJ as well that that's a good standard. Once the case was taken and that standard was not, not gone, but now something new is going to come out, at that point I think you see the advocacy side come back around.
DOJ was involved in this case. They were one of the ones that brought the claims. And once it's back on, they're going to continue to argue robustly for winning. But I think you saw that that little nuance that can occur, especially when you're representing the United States that, that everybody -- that a large number of people may well have viewed Judge Wesley's opinion as being if you're going to lose a case, at least get a good set of law like that that is strongly focused on consumers and may well be a better representation of what antitrust law should be.
Mr. Micah Wallen: Interesting. And also, in terms of the, of the breakdown of the Justices and what happened in the case, wh-, was it a bit of a surprise, uh, what came out this morning? Or was this, uh, what was expected?
Mr. Oramel (O.H.) Skinner: Well, I will say that to me -- look, I've not followed this case quite as closely as maybe some who are -- who spend every day living antitrust, but having read Judge Wesley's opinion and knowing what was out there, I was fully expecting that there was at least a substantial likelihood of a 5-4 decision that robustly restates a lot of what Judge Wesley said.
I, I can tell you that it is somewhat surprising because some people seemed to think that at the oral argument, some of the swingier Justices were very probing in their, uh, arguments against Amex and seemed to indicate a lack of comfort with Amex's position. So I think it was somewhat of a surprise. I think the fact that Justice Thomas wrote it was somewhat of a surprise to people. Um, but it, it, it seems to be a very full-throated embrace of some of the important principles that Judge Wesley set down in his Sec-, Second Circuit opinion.
Mr. Micah Wallen: A brief announcement: our next teleforum conference call is scheduled later today at 4 PM Eastern Time and will be on the three Supreme Court gerrymandering cases this term. The expert joining us will be Hans von Spakovsky, who is the manager of the Election Law Reform Initiative and Senior Legal Fellow at The Heritage Foundation.
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Well, I'm not seeing any more questions lined up. Uh, the line is still open. If you wish to ask a question, just dial the st-, star and then the pound key on your telephone keypad. And in the meantime, O.H., if you had any closing remarks.
Mr. Oramel (O.H.) Skinner: Yeah, I guess…and this goes back to the question that was asked and maybe I didn't answer it as fully. If I were in the antitrust space, I would pick up Justice Thomas -- if I were on the defense side of the antitrust space—something I am not in at the moment—um, I would pick up Justice Thomas' language and work very hard because you may find a lot of judges who are very open to embracing a, a higher standard for plaintiffs at the first step of the burden-shifting analysis—a very consumer focused view that requires something more than circumstantial evidence to show consumer harm, and especially if whatever is being challenged and you're on the defense side, is a -- something that can be, uh, offered as a pro-consumer or-, effect. you just -- this could well be a, a big opinion, especially the language that I keep flagging about how the plaintiff needs to show a substantial anti-, anticompetitive effect that harms consumers.
This case is arguably about two-sided markets, the definition of the market and the credit card markets in particular. And that will be a major role that this case will play going forward to the extent that people bring antitrust claims against, uh, large tech companies or those that have, you know, a two-sided market where both sides are pretty robust and involved and you need to attract both sides.
But the idea of the burden being raised, if that is true—and it's only a first read—that would be huge, and the defense bar would -- I think if I were on this defense side, I would be grabbing a hold of that because it's unclear exactly how courts will use this language. But there is a roadmap here that potentially makes motions to dismiss harder to overcome for plaintiffs, harder to overcome for states—which is a, a rough road for us, uh, who work in public service—but, uh, a more powerful tool on the defense side in these cases if it's tested and used that way.
So I think this, this opinion is about two things and one is a very interesting one and you'll see a lot of the articles about and the other one, uh, it's not 100% clear to me that that's what it's doing, but it looks like it's raising the bar in a way that applies to all sorts of antitrust claims irrespective of whether they're two-sided markets or, or, or not.
Mr. Micah Wallen: Very nice. Thank you very much. And on behalf of The Federalist Society, I want to thank our expert for the benefit of his valuable time and expertise today. We welcome listener feedback by email at firstname.lastname@example.org. Thank you all for joining us today. We are adjourned.
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