In a 5-4 decision in Ohio v. American Express, the Supreme Court affirmed that the anti-steering provisions of American Express’s merchant agreement do not violate Section 1 of the Sherman Act.

Credit card companies’ core business involves two transactions. First, the credit card company provides credit services to its cardholders, as well as additional benefits such as frequent flier miles, cash back, etc. Second, in exchange for a per-transaction fee, the credit card company assumes the risk and costs the merchant would otherwise incur in extending credit to its customers. The credit card company also provides the merchant a customer base that will be more likely to patronize those merchants that accept the credit card.

Unlike Mastercard and Visa, which earn significant revenue by charging their cardholders interest, American Express makes most of its money from the merchants’ per-transaction fee. As part of its merchant agreement, American Express forbids the retailer from steering the customer toward other credit cards that charge a lower transaction fee. American Express charges higher merchant fees than do Mastercard and Visa, but Mastercard and Visa also included anti-steering provisions in their merchant agreements.

After a full trial, a district court found that American Express’s anti-steering provisions violate Section 1 of the Sherman Act by suppressing competition among credit card companies in offering merchants competitive transaction fees.

A majority of the Supreme Court, affirming the Second Circuit, disagreed. Justice Thomas’s majority opinion found that the district court used an improper relevant market because it included only the merchant side of the transaction; the district court’s analysis ignored the cardholder side of the transaction. The relevant product market, according to the majority, was a “two-sided platform” that includes both the cardholder and the merchant. American Express cannot complete a transaction unless 1) the cardholder chooses to acquire and use his or her American Express card, and 2) the merchant chooses to accept the American Express card. American Express cannot raise prices on one side of the transaction without suffering adverse consequences on the other side of the transaction. For example, if American Express raises its transaction fees on the merchants, fewer merchants will accept American Express, which, in turn, makes an American Express card less attractive to consumers. Indeed, the evidence revealed that 1) American Express charged higher merchant fees than did Mastercard and Visa, 2) fewer merchants accept American Express than accept Mastercard and Visa, and 3) fewer consumers have an American Express card than have Mastercard or Visa cards—exactly what one would expect to find with American Express charging higher transaction fees in a competitive market. Thus, the majority found that both sides of the transaction—the merchant and the cardholder—must be included in a single relevant market.

After defining the proper relevant market, the majority found that the anti-steering provision was a vertical restraint of trade, and subject to the rule of reason. The majority found that the plaintiffs failed to show that the anti-steering provisions had anticompetitive effects in the market. The majority explained that evidence of a price increase on one side of a two-sided transaction platform cannot demonstrate an anticompetitive exercise of market power. Rather, the plaintiffs were required to show that the anti-steering provisions increased the cost of credit card transactions above a competitive level, reduced the overall number of credit card transactions or otherwise stifled competition in the credit card market. The majority reviewed the record and found no evidence of any of these effects. Although the record showed price increases in American Express’s merchant transaction fees, there was no evidence in the record that these increases arose from American Express anticompetitively exercising its market power. Thus, the Supreme Court affirmed the Second Circuit and found the anti-steering provisions did not violate Section 1 of the Sherman Act.

The dissent, written by Justice Breyer, agreed that American Express’s anti-steering provisions should be analyzed under the rule of reason. But the dissent would have limited the relevant market to the merchant transaction. According to the dissent, the merchant transaction fee and the cardholder agreement are complementary products, not part of the same market. Under a narrower relevant market, the dissent would have upheld the district court’s factual findings that the anti-steering provisions suppress competition.

The dissent also claimed that the majority opinion “seems categorically to exempt vertical restraints from the ordinary ‘rule of reason’ analysis that has applied to them since the Sherman Act’s enactment in 1890.” But the dissent’s characterization exaggerates the majority’s holding. The plaintiffs argued that they were not required to define the relevant market because they offered direct evidence of anticompetitive effects in the market, i.e., increased transaction fees. The majority rejected that argument because the plaintiffs relied on cases addressing horizontal agreements not to compete, which will necessarily have anticompetitive effects, so precise market definition was unnecessary. By contrast, vertical agreements rarely suppress competition unless the participant has market power, which can be determined only by defining the relevant market. The majority did not, however, find that vertical restraints are exempt from the rule of reason analysis.

The scope of American Express is somewhat narrow because it turned on the factual question of whether the proper relevant market was the credit card companies’ transaction with the merchant, or whether the market was the two-sided platform transaction. However, three aspects of American Express are likely to be significant going forward.

First, the majority opinion underscores that the relevant product market definition must conform to market realities. The dissent complained that few, if any, Supreme Court decisions recognize a two-sided platform market. But the Supreme Court takes very few antitrust cases, so that absence should not be surprising. More important, the Supreme Court’s willingness to find such a two-sided platform market emphasizes that no set formula exists to define the relevant product market. Rather, the relevant market definition must conform to the actual realities of how the product is sold. In American Express, it is unlikely that American Express, which had only about a 25 percent market share and two strong competitors in the marketplace—Mastercard and Visa—could profitably impose anticompetitive transaction fees on merchants. A narrow market definition, however, led to such a finding at the trial court.

Second, the majority set forth a clean statement of the three-step rule of reason analysis:

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. If the plaintiff carries its burden, then the burden shifts to the defendant to show a procompetitive rationale for the restraint. If the defendant makes this showing, then the burden shifts back to the plaintiff to demonstrate that the procompetitive efficiencies could be reasonably achieved through less anticompetitive means.

Although this language is not a substantive change to the rule of reason, it is a useful clarification of the analytical steps. The Supreme Court’s rule of reason cases can be difficult to follow and often lack a clearly defined standard. If nothing else, American Express should make briefing rule of reason cases before trial courts easier.

Third, American Express continues the Supreme Court’s and the Department of Justice’s trend over the past several years in acknowledging that vertical restraints of trade are less likely to be anticompetitive than are horizontal restraints of trade.