Post-Amex – market definition and anticompetitive effects

August 2023  |  SPECIAL REPORT: COMPETITION & ANTITRUST

Financier Worldwide Magazine

August 2023 Issue

When the Supreme Court decided Ohio v. American Express Co in 2018, its opinion drew immediate criticism from certain economists and the antitrust plaintiffs’ bar. The court held that the US Department of Justice (DOJ) Antitrust Division failed to prove a relevant product market and anticompetitive effects in its antitrust case challenging Amex’s contracts that prevent merchants from steering Amex cardholders to other payment methods.

The DOJ had alleged that the contracts harmed merchants because they could not avoid paying Amex’s higher transaction fees by encouraging use of another payment method. Amex countered that the provisions and higher fees benefitted cardholders by, among other things, enabling greater rewards. Affirming the Second Circuit’s reversal of the district court’s judgment for the DOJ, the court concluded the DOJ improperly defined a market limited to merchants.

The court explained that Amex operates in a two-sided transaction platform that provides “different products or services to two different groups – cardholders and merchants – who both depend on the platform to intermediate between them”. Two-sided platforms exhibit “indirect network effects”, which exist when the value of the platform to one group depends on how many members of a different group participate. For this reason, the DOJ must allege a relevant market that includes both sides of the platform – cardholders and merchants – and prove net harm to both sides.

Critics characterised the opinion as an “upheaval” in jurisprudence and “an analytical dead end”, among other things. They argued that the rule of reason framework already provides sufficient flexibility to address platform conduct, and worried that the new standard would allow market definition to hide competitive effects. Critics were particularly concerned that applying this standard could shield technology platforms from enforcement of the antitrust laws.

Five years later, the sky has not fallen. Amex has not prevented enforcers or private plaintiffs from pursuing antitrust claims against technology platforms. Since Amex, courts consistently have required inclusion of both sides of transaction platforms in the relevant market, and proof of net harm to both sets of consumers. Plaintiffs have responded accordingly with more careful pleading in cases involving transaction platforms. But, the cases are fact-specific, and, as courts continue to interpret Amex, additional rules and fractures in interpretation are likely to arise.

Select post-Amex case law

The Second Circuit was among the first courts to interpret Amex in U.S. Airways, Inc. v. Sabre Holdings Corp. There the product at issue was Sabre’s global distribution system (GDS), which is a computerised platform that travel agents use to search content provided by travel suppliers, including airlines, and to book and manage travel. The court vacated a jury verdict against Sabre, because the jury instructions did not comport with Amex. The panel held that the GDS is a two-sided transaction platform, because sales require simultaneous use by both airlines and travel agencies. And, because the district court’s jury instructions permitted the jury to evaluate competitive effects only on the airline side of the GDS without considering effects on travel agencies, the Second Circuit held the instructions were wrong “as a matter of law”.

Since Amex, courts have required plaintiffs to plead and prove two-sided markets and two-sided competitive harm when the product at issue is a two-sided transaction platform. In Reilly v. Apple Inc., the developer of an app that was removed from the iOS App Store alleged Apple “unlawfully maintain[ed] its monopoly power in the iOS App Distribution Market”. Relying on Amex, the district court granted Apple’s motion to dismiss because the plaintiff’s allegations showed the iOS App Store is a two-sided transaction platform, and the complaint “fail[ed] to apprehend or analyse the two-sided nature of the marketplace for transactions for apps”.

Notwithstanding the dire predictions of critics of Amex, many claims have survived Amex-like challenges through artful pleading and allegations or proof of harm to both sides of a platform market. As one example, in PLS.com LLC v. National Association of Realtors, PLS.com, a nationwide property pocket listing service, argued that a National Association of Realtors’ rule preventing members from listing on PLS.com without also using the NAR’s service violated the Sherman Act. PLS alleged the rule harmed competition by discouraging entry by new listing services.

The district court agreed with the defendant that Amex compelled dismissal because real estate listing services are two-sided transaction platforms and the plaintiff failed to allege harm to both sellers’ and buyers’ agents. The Ninth Circuit reversed, holding, in relevant part, that Amex’s two-sided harm requirement applies at the pleading stage, and that the plaintiff’s allegations of stifled entry sufficed at that stage. A determination as to whether the defendant was correct that the market was a two-sided transaction platform would be made post-discovery.

Some courts have rebuffed defendants’ attempts to expand Amex to products that do not meet the Supreme Court’s definition of a two-sided transaction platform. In In re Delta Dental, Antitrust Litigation, a putative class of dentists brought antitrust claims against dental insurance providers. In their motion to dismiss, defendants argued that dental insurance is a two-sided transaction platform. The court disagreed, holding that dental insurance lacks the key feature of a transaction platform – a sale resulting from the simultaneous use by participants on both sides – because reimbursement is untethered in time and cost from the insured’s premium payment.

Courts continue to refine interpretations of Amex. In United States v. Sabre Corp. (Sabre-Farelogix), a 2020 DOJ challenge to a merger between Sabre and Farelogix, a district court judge confirmed the Second Circuit’s earlier holding that Sabre’s GDS is a two-sided transaction platform. But, the court then went further, quoting Amex’s “holding that ‘[o]nly other two-sided platforms can compete with a two-sided platform for transactions’” to conclude that Sabre’s GDS and Farelogix’s product “do[] not compete” because Farelogix provides services only to customers on one side of the GDS platform.

The DOJ and others criticised the court for interpreting Amex in a way that would prevent plaintiffs from alleging that innovative firms like Farelogix, while not two-sided platforms themselves, are able to develop new ways of transacting that could allow market participants to bypass platforms and become competitive alternatives. In the three years since the Sabre-Farelogix opinion, few courts have had the opportunity to interpret that portion of Amex, though, in one such case, Davitashvili v. Grubhub Inc., the district court similarly held that plaintiffs appropriately – at least at the pleading stage – omitted one-sided products from a market consisting of two-sided transaction platforms.

Going forward

In five years, Amex’s holding and requirement for two-sided harm has become fixed in jurisprudence. To be clear, not all commentary has been negative. Many feel that the opinion correctly focused on market-specific competitive realities instead of simply applying abstract theory.

Some supporters lauded the majority opinion: “[i]f nothing else, Ohio v. American Express stands for the proposition that the now well-established economics of multi-sided platforms cannot be ignored in antitrust litigation”. Courts will continue to interpret Amex’s other holdings as parties attempt to limit or expand Amex’s reach, but Congress ultimately may be critics’ only hope in overturning Amex. The proposed Competition and Antitrust Law Enforcement Reform Act of 2021 would have done just that, but the bill never made it past the Senate Judiciary Committee.

In a recent hearing before the Senate Judiciary Subcommittee on Competition Policy, Antitrust, and Consumer Rights, Daniel Francis, assistant professor of law at New York University, criticised Amex, stating that the decision “imposed a burden on plaintiffs to not only prove evidence of competitive harm, such as price increase, but also to affirmatively disprove claimed offsetting benefits”. Criticism likely will continue, but it will not stop application of the Amex standard, at least not any time soon.

 

Tara Reinhart is a partner, Evan Kreiner is a counsel and Katherine Calabrese is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. Ms Reinhart can be contacted on +1 (202) 371 7630 or by email: tara.reinhart@skadden.com. Mr Kreiner can be contacted on +1 (212) 735 2491 or by email: evan.kreiner@skadden.com. Ms Calabrese can be contacted on +1 (212) 735 2135 or by email: katherine.calabrese@skadden.com.

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BY

Tara Reinhart, Evan Kreiner and Katherine Calabrese

Skadden, Arps, Slate, Meagher & Flom LLP

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