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The Sherman Antitrust Act: How It Applies To Major Credit Card Companies

For this week’s blog post, we will continue with the topic of recent Supreme Court decisions that are affecting the business, e-commerce, and internet world.  Specifically, we will discuss Ohio v. American Express, a case involving the Sherman Antitrust Act and major credit card companies.

In the United States, credit card use is composed mainly of four cards: Visa (45%), American Express (26.4%), MasterCard (23.3%), and Discover (5.3%).  In 2010, the government and 17 states sued American Express, Visa, and Mastercard, alleging that the credit card companies were unreasonably restraining trade and therefore violating the Sherman Antitrust Act.  The government claimed that the credit card companies’ “anti-steering provisions” suppressed competition from rival credit card networks. These anti-steering provisions were between the credit card companies and merchants, and prohibited merchants from “steering” cardholders at the point-of-sale to use cards with lower merchant transaction fees.  Notably, American Express charged the highest transaction fee for merchants.

In fact, both Visa and MasterCard settled with the government in a consent decree in 2011 to change their anti-steering provisions.  American Express, however, continued to litigate up until the Supreme Court case was decided on June 25, 2018. American Express’s business model is different than most credit card companies, which generate revenue mainly from the credit portion of the transactions.  It instead focuses on offering better rewards to consumers than other credit cards, typically attracting a higher-spending for the wealthier consumer.  It then generates the majority of its revenue from merchant fees, arguing that higher merchant fees are justified by the higher spending clientele that it brings to merchants (AmEx also has a higher minimum spending amount for cardholders than other credit cards).

So, because a higher merchant transaction fee is charged when an AmEx card is used, merchants generally would want to encourage consumers to use other credit cards with lower merchant transaction fees.  Anti-steering provisions are AmEx’s way of combatting this issue.  According to the court documents, the provisions “prohibit merchants from implying a preference for non-AmEx cards; dissuading customers from using AmEx cards; persuading customers to use other cards; imposing any special restrictions, conditions, disadvantages, or fees on AmEx cards; or promoting other cards more than AmEx.”

When the court looks at anti-competitive effects under the Sherman Act, it utilizes a “rule of reason” to discern whether the alleged act is unreasonably anti-competitive.  In order to win an anti-trust case, a plaintiff must establish that anti-competitive effects exist from defendant’s actions.  In this case, the government would have to show that AmEx’s anti-steering provisions have an unreasonable restraint on competition in the relevant market. The Court determined that the relevant market is consumers and merchants – i.e., two sides of the credit card market. Because the Court found that anti-steering provisions had no anti-competitive effect on consumers, the Court held that the government failed to establish anti-competitive effects on the market as a whole.

The Supreme Court held that AmEx’s higher merchant fees by themselves did not sufficiently prove that the anti-steering provisions unreasonably restrained competition.  The high court found that AmEx encouraged competition by attracting wealthier cardholders who spend more money and providing these cardholders to merchants. AmEx argued that the higher fees it charges merchants are “to offer 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.”

The Supreme Court also found no evidence indicating anti-steering provisions restrained competition among credit card companies.  In fact, evidence showed that the credit card market experienced growth and improved quality while AmEx’s provisions were in place. Competition from MasterCard, Visa, and Discover also acted as a check on AmEx.  Visa and MasterCard issued “premium cards” to compete for cardholders. These premium cards have higher fees for merchants and also more rewards for consumers.  Hence, because the government failed to show anti-competitive effects on the market, the Supreme Court ruled 5-4 in favor of AmEx.

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