CAN THE VICTORIAN GOVERNMENT

LEGAL SERVICES ETHICS BOARD

SPY ON ACTIVE CASES, DISAGREE
WITH US ETHICS RULINGS, AND SPY
ON MARKET SHARE EVIDENCE?
Alleging that a landlord was evicted, a foreign government board, the VLSB, threatened
protected discloser witnesses on the US Prosecution Side with expertise on the Reserve
Bank and market power issues in an appeal.

By Melissa Lipman
Law360, New York (December 15, 2015, 5:54 PM ET) -- When the Second Circuit hears
American Express' challenge Thursday to an order requiring it to let merchants encourage
customers to pay with less expensive credit cards, the question of whether a company with
less than a third of a market has enough power to make its rules problematic will take center
stage.
A three-judge panel is set to hear arguments over the district court's decision that American
Express Co.'s anti-steering rules violated federal antitrust law and the injunction the U.S.
Department of Justice won forcing AmEx to change those policies.
At the core of the dispute are questions about whether U.S. District Judge Nicholas G.
Garaufis gave enough consideration to AmEx's argument that any restrictions it imposed on
merchants' ability to steer payments and drive down swipe fees were balanced out by the
benefits it offered cardholders and whether AmEx's 26.4 percent of the credit and charge card

market was really high enough for its rules to do much damage to competition.
The market share question in particular has caught the attention of antitrust attorneys who
face questions about how to advise clients on what slice of a market is large enough to have
market power, and guidance from the Second Circuit on the issue could lead to tougher
enforcement in the future.
"If the court upholds this case and finds that American Express' restrictions on merchants can
be anti-competitive given its relatively modest share compared to the typical successful
antitrust case, that that can lend support to more aggressive antitrust cases in the future, both
private suits and government suits," said Squire Patton Boggs LLP's antitrust co-chairman
Mark Botti. "On the other hand, if the court focuses on the market share and is influenced by
it to rule in the defendants' favor, I don't think that makes much of a change to where the law
was or where the enforcement balance was before this case."
The DOJ originally sued AmEx in October 2010 after it inked settlements with Visa Inc. and
MasterCard Inc. over similar policies. Those companies agreed to change their anti-steering
rules, but the government and the retailers maintained that all credit card companies have
been able to keep the fees they charge merchants high in the alleged anti-competitive
environment created by AmEx's rules.
After a seven-week trial during the summer of 2014, Judge Garaufis agreed that AmEx's rules
barring merchants from encouraging consumers from using other credit card brands violated
antitrust law. He concluded that despite having only 26.4 percent of the relevant market of
credit and charge cards, AmEx still had enough market power to thwart competition among
different credit card brands with its rules.
Though 30 percent is often thought of as the baseline market share for a company to have
market power in an antitrust analysis, the judge wrote in this case that that AmEx's 26 percent
of the market by transaction volume was "compelling evidence of market power."

The court further pointed to evidence that

AmEx was able to run several campaigns to
boost merchant transaction rates without
much attrition, underscoring the fact that
lower market shares can be bolstered by
other evidence to prove market power.

The Second Circuit has already refused to stay the court's injunction pending appeal, but
how it approaches the market share issue whether it upholds the district court's
conclusions and how broadly or narrowly it discusses the threshold needed to show market
power could have implications beyond the current case.

"The very interesting issue from a counseling perspective is that American Express is alleged
to have this 26 percent market share, which is below the 30 percent share that we generally
think about ... when we're advising clients," said Pepper Hamilton LLP partner Jeremy Heep.
"Generally when clients are saying, 'I'm proposing this pricing practice or distribution
restriction,' anything that's vertical ... when they're below the 30 percent threshold generally
the advice is that it's a pretty low risk proposition."
Of course the AmEx case does have some unusual features, including the government's
argument that AmEx has considerable leverage because of the insistence that its cardholders
have on being able to use their American Express cards, according to Heep.
"It depends on what the appellate court says and how they say it, but I suspect that if this is

upheld the advice that I give will be largely the same but may have to contain an additional
caveat," Heep said. "That would involve some additional prodding and pushing to make sure
we really understand how the market is structured, the one that's at issue in the advice
scenario, to make sure we're not falling into however the Second Circuit characterizes the
AmEx situation."
The approach the Second Circuit takes to analyzing the two-sided market in the case could
also have broader implications, attorneys said.
AmEx has focused heavily on that notion that the district court didn't adequately consider
the pro-competitive benefits its policies allowed it to offer to cardholders the other side of
the credit card market.
"They pitched it multiple ways whether the [government's case] was showing harm to
competition to the market as a whole, [saying] is this a two-sided market and should the
government and court have looked at and shown harm in this broader two-sided market," said
BakerHostetler partner Jonathan Lewis. "It does have the potential to plow new ground in
terms of how one looks at competitive effects when two-sided markets are involved."
Judges Ralph K. Winter, Richard C. Wesley and Christopher F. Droney will hear the case for
the Second Circuit.
The Department of Justice is represented by Nickolai G. Levin, who will argue the case for
the government, Craig W. Conrath, Mark H. Hamer, Joseph P. Vardner, Leslie J. Overton,
Kristen C. Limarzi, Robert B. Nicholson, James J. Fredricks and Shana M. Wallace.
The plaintiff states are represented by Mitchell L. Gentile of the Ohio Attorney Generals
Office.
American Express is represented by Evan R. Chesler, who will argue the case for the
company, and Peter T. Barbur and Kevin J. Orsini of Cravath Swaine & Moore LLP and
Donald L. Flexner, Philip C. Korologos and Eric J. Brenner of Boies Schiller & Flexner LLP.
The case is U.S. et al. v. American Express Co. et al., case number 15-1672, in the U.S. Court
of Appeals for the Second Circuit.

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