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United States v. American Express Co.

United States District Court, E.D. New York

February 19, 2015

UNITED STATES OF AMERICA, et al., Plaintiffs,

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For United States of America, Plaintiff: Andrew J. Ewalt, Joseph P. Vardner, U.S. Department of Justice, Antitrust Division, Washington, DC; Bennett Matelson, J Robert Kramer, John Read, Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Craig W. Conrath, Antitrust Division, Litigation III, Washington, DC USA; Gregg I. Malawer, Department of Justice, Antitrust Division, Washington, DC USA; Mark Hamer, Department of Justice, Washington, DC USA.

For State of Connecticut, Plaintiff: Ethan C. Glass, Bennett Matelson, U.S. Department of Justice, Washington, DC USA; Michael E. Cole, Hartford, CT USA; Rachel O. Davis, PRO HAC VICE, Office of the Attorney General, State of Connecticut, Hartford, CT USA.

For State of Iowa, Plaintiff: Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Layne M. Lindebak, PRO HAC VICE, Iowa Department of Justice, Des Moines, IA USA; Bennett Matelson, U.S. Department of Justice, Washington, DC USA.

For State of Maryland, Plaintiff: Ellen S. Cooper, Baltimore, MD USA; Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Gary Honick, PRO HAC VICE, Office of the Attorney General, State Of Maryland, Baltimore, MD USA; Bennett Matelson, U.S. Department of Justice, Washington, DC USA.

For State of Michigan, Plaintiff: D.J. Pasco, Michigan Department of Attorney General, Lansing, MI USA; D.J. Pascoe, Michigan Department of Attorney General, Corporate Oversight Division, Lansing, MI USA; Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Bennett Matelson, U.S. Department of Justice, Washington, DC USA.

For State of Missouri, Plaintiff: Kyle A. Poelker LEAD ATTORNEY, Missouri Attorney General's Office, Jefferson City, MO USA; Anne E. Schneider, PRO HAC VICE, Attorney General of Missouri, Jefferson City, MO USA; Ethan C. Glass, Bennett Matelson, U.S. Department of Justice, Washington, DC USA.

For State of Ohio, Plaintiff: Ethan C. Glass, Bennett Matelson, U.S. Department of Justice, Washington, DC USA; Mitchell L. Gentile, PRO HAC VICE, Office of the Ohio Attorney General, Columbus, OH USA.

For State of Texas, Plaintiff: Kim Mae Van Winkle LEAD ATTORNEY, Texas Attorney General's Office, Austin, TX USA; Bret Fulkerson PRO HAC VICE, Office of the Texas Attorney General, Austin, TX USA; David Ashton, Texas Attorney General, Antitrust Section, Austin, TX USA; Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Jeffrey Cullinane, PRO HAC VICE, Office of the Attorney General, State Of Texas Antitrust Division, Austin, TX USA; Bennett Matelson, U.S. Department of Justice, Antitrust Division, Washington, DC USA.

For State of Illinois, Plaintiff: Chadwick O. Brooker, PRO HAC VICE, Illinois Attorney General, Chicago, IL USA; Ethan C. Glass, Bennett Matelson, U.S. Department of Justice, Washington, DC USA; Robert W. Pratt, PRO HAC VICE, Office of the Illinois Attorney General, Chicago, IL USA.

For State of Tennessee, Plaintiff: Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Victor J. Domen, PRO HAC VICE, Tennesse Attorney General Office, Nashville, TN USA; Bennett Matelson, U.S. Department of Justice, Antitrust Division, Washington, DC USA.

For State of Montana, Plaintiff: Chuck Munson, PRO HAC VICE, Montana Department of Justice, Helena, MT USA; Ethan C. Glass, Bennett Matelson, U.S. Department of Justice, Washington, DC USA.

For State of Nebraska, Plaintiff: Gregory Walklin, LEAD ATTORNEY, PRO HAC VICE, Nebraska Department of Justice, Lincoln, N.E. USA; Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Bennett Matelson, U.S. Department of Justice, Antitrust Division, Washington, DC USA.

For State of Idaho, Plaintiff: Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Oscar S. Klaas, Idaho Attorney General, Boise, ID USA; Stephanie Nicole Guyon, PRO HAC VICE, Office of the Idaho Attorney General, Boise, ID USA; Bennett Matelson, U.S. Department of Justice, Antitrust Division, Washington, DC USA.

For State of Vermont, Plaintiff: Ryan Kriger, LEAD ATTORNEY, Vermont Attorney General, Montpelier, VT USA; Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Bennett Matelson, U.S. Department of Justice, Antitrust Division, Washington, DC, USA.

For State of Utah, Plaintiff: David N. Sonnenreich, Ronald J Ockey, PRO HAC VICE, Office of the Attorney General of Utah, Salt Lake City, UT USA; Ethan C. Glass, Bennett Matelson, U.S. Department of Justice, Washington, DC USA.

For State of Arizona, Plaintiff: Ethan C. Glass, Bennett Matelson, U.S. Department of Justice, Washington, DC USA; Nancy M Bonnell, Office of the Attorney General, Phoenix, AZ USA.

For State of Rhode Island, Plaintiff: Ethan C. Glass, Bennett Matelson, U.S. Department of Justice, Washington, DC USA.

For State of New Hampshire, Plaintiff: David Anthony Rienzo, PRO HAC VICE, New Hampshire Department of Justice, Concord, N.H. USA; Ethan C. Glass, U.S. Department of Justice, Washington, DC USA; Bennett Matelson, U.S. Department of Justice, Antitrust Division, Washington, DC USA.

For American Express Company, American Express Travel Related Services Company, Inc., Defendants: Evan R. Chesler, LEAD ATTORNEY, Cravath, Swaine & Moore, 825 Eighth Avenue New York, N.Y. USA, Donald L. Flexner, Eric Brenner, Philip C. Korologos, Robert M. Cooper, Boies, Schiller & Flexner LLP, New York, N.Y. USA; Kevin J Orsini, Cravath, Swaine & Moore LLP, New York, N.Y. USA; Matthew S. Tripolitsiotis, Boies Schiller & Flexner LLP, Armonk, N.Y. USA; Thomas E.L. Dewey, Dewey Pegno & Kramarsky LLP, New York, N.Y. USA; William T. Thomas, Boies Schiller & Flexner, Fort Lauderdale, FL USA.

For Individual Plaintiffs in 11-Md-2221, also known as All Plaintiffs in 11-md-2221, Interested Party: Kenny Nachwalter Miami, FL USA; Linda P. Nussbaum, Grant & Eisenhofer P.A., New York, N.Y. USA; William Jay Blechman, PRO HAC VICE, Kenny Nachwalter, P.A., Miami, FL USA.

For Class Plaintiffs in 11-Md-2221, Interested Party: Tracey L. Kitzman, Friedman Law Group, LLP, New York, N.Y. USA.

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NICHOLAS G. GARAUFIS, United States District Judge.





A. Overview of the GPCC Card Industry

B. Competition and Pricing in the GPCC Card Industry

C. The Non-Discrimination Provisions

1. Origins of Amex's NDPs

2. The Challenged Restraints



A. GPCC Card Network Services Market

1. The Relevant Product Is Network Services

2. Debit Network Services Are Not Reasonably Interchangeable

B. Plaintiffs' Proposed T& E Submarket


A. Market Share, Concentration, and Barriers to Entry

B. Cardholder Insistence

C. Pricing Practices

1. Value Recapture

2. Price Discrimination

3. Merchant Pricing Premium

D. Amex's Remaining Market Power Counterarguments


A. The NDPs Impede Horizontal Interbrand Competition

B. The NDPs Block Low-Cost Business Models

C. The NDPs Have Resulted in Higher Prices to Merchants and Consumers

D. The NDPs Stifle Innovation

E. Removal of the NDPs Would Benefit Merchants and Consumers


A. Defendants' Ability To Drive Competition

B. Free-Riding


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The United States and the attorneys general of seventeen states[1] (collectively, " Plaintiffs" or the " Government" ) bring this antitrust enforcement action against Visa Inc. (" Visa" ), MasterCard International Incorporated (" MasterCard" ), American Express Company, and American Express Travel Related Services Company, challenging each network's anti-steering rules as anticompetitive restraints in violation of Section 1 of the Sherman Antitrust Act. (Compl. (Dkt. 1).) Visa and MasterCard entered into consent decrees with the Government, pursuant to which they voluntarily agreed to remove or revise the bulk of their challenged restraints. (See Final J. as to Defs. MasterCard Int'l Inc. & Visa Inc. (Dkt. 143).) Defendants American Express Company and American Express Travel Related Services Company (collectively, " Defendants," " American Express," or " Amex" ) elected to litigate Plaintiffs' challenge to their anti-steering rules, which they term American Express's Non-Discrimination Provisions (the " NDPs" ). The NDPs, which are contained in both Defendants' standard acceptance agreement and also the more customized agreements they negotiate with a select number of large merchants, prevent the roughly 3.4 million merchants who accept American Express credit and charge cards from steering customers

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to alternative credit card brands, such as Visa, MasterCard, and Discover.

Before turning to the contractual restraints at issue in this case, it is helpful to outline the type of behavior that Defendants' NDPs are intended to prevent. As a general matter, steering is both pro-competitive and ubiquitous. Merchants routinely attempt to influence customers' purchasing decisions, whether by placing a particular brand of cereal at eye level rather than on a bottom shelf, discounting last year's fashion inventory, or offering promotions such as " buy one, get one free." This dynamic, however, is absent in the credit card industry. Under American Express's NDPs, a merchant may not attempt to induce or " steer" a customer to use the merchant's preferred card network by, for example, offering a 10% discount for using a Visa card, free shipping for using a Discover card, or a free night at a hotel for using an American Express card.

Each time a customer uses a credit card, the merchant, in one way or another, pays a fee to the network services provider that facilitates the customer's purchase. Thus, when a customer uses a Visa credit card, the merchant pays some combination of fees, commonly known as the " discount rate" or the " merchant discount rate," for the privilege of accepting that card. When a customer uses an American Express card, the merchant similarly pays a fee. However, the merchant's cost of accepting American Express--one of the three largest network services providers in the country--has tended to be greater than the cost of accepting other cards, such as Visa or MasterCard. To speak in generalities that are perhaps unwarranted given the extensive trial record in this case, all else being equal, a given merchant might prefer that a customer carrying both a Visa card and an Amex card in her wallet use the Visa card, since the cost of the transaction is likely to be lower for the merchant. But pursuant to Amex's NPDs, merchants who accept American Express are not permitted to encourage customers to pay for their transactions with credit cards that cost the merchants less to accept.

As explained below, these NDPs create an environment in which there is nothing to offset credit card networks' incentives--including American Express's incentive--to charge merchants inflated prices for their services. This, in turn, results in higher costs to all consumers who purchase goods and services from these merchants.

The court does not come to its decision in this case eagerly or easily. The credit card industry is complex, and it is a critical component of commerce in the United States. General purpose credit and charge (" GPCC" ) card networks, including American Express, must balance the demands of two sets of customers--merchants and cardholders--in a market that is highly concentrated and distorted by a history of antitrust violations. The court recognizes that it does not possess the experience or expertise necessary to advise, much less dictate to, the firms in this industry how they must conduct their affairs as going concerns. For that reason, the court has repeatedly urged the parties in this case to negotiate a mutually agreeable settlement that appropriately balances American Express's legitimate business interests with the public's interest in robust interbrand competition. However, the parties having failed to do so, the court is left with no alternative but to discharge its duty by deciding the question before it: whether Plaintiffs have shown by the preponderance of the evidence that Amex's NDPs violate the U.S. antitrust laws. Upon consideration of the case law in this circuit and the factual record developed at the lengthy bench trial, which was held

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over a seven-week period during the summer of 2014 and featured over thirty fact witnesses and four expert witnesses, the court finds that Plaintiffs have made such a showing.

As noted, credit card networks cater to the needs of two distinct sets of consumers, merchants and cardholders. Their very function is to bring these two sides together to consummate value-generating transactions. Guided by the Second Circuit's 2003 decision in United States v. Visa, 344 F.3d 229 (2d Cir. 2003), which conducted an antitrust market analysis in this industry to resolve a public enforcement action initiated by the Department of Justice under Section 1, the court agrees with Plaintiffs that this two-sided platform comprises at least two separate, yet deeply interrelated, markets: a market for card issuance, in which Amex and Discover compete with thousands of Visa- and MasterCard-issuing banks; and a network services market, in which Visa, MasterCard, Amex, and Discover compete to sell acceptance services. For the reasons described herein, the court concludes that the relevant market for its antitrust analysis in this case is the market for GPCC card network services. Notwithstanding Defendants' vigorous arguments to the contrary, the dramatic growth in customers' use of debit cards in the decade since Visa has not rendered obsolete the market definitions used in that case, nor does it warrant debit's inclusion in the relevant antitrust market. Indeed, both anecdotal merchant testimony and the testimony of Plaintiffs' economics expert presented at trial result in the court's determination that debit cards have not become reasonably interchangeable with GPCC cards or network services in the eyes of credit-accepting merchants, who are the relevant consumers in this case. Plaintiffs' attempt to define a submarket for GPCC card network services provided to merchants in travel and entertainment industries, however, is unavailing.

In reaching its decision, the court applies a full rule of reason analysis that takes stock of the voluminous evidentiary record developed at trial, and also considers and accounts for the interrelationships between the merchant and cardholder sides of the credit card platform. A few of the court's primary findings bear mentioning here. First, American Express possesses sufficient market power in the network services market to harm competition, as evidenced by its significant market share, the market's highly concentrated nature and high barriers to entry, and the insistence of Defendants' cardholder base on using their American Express cards--insistence that prevents most merchants from dropping acceptance of American Express when faced with price increases or similar conduct. The record demonstrates, in fact, that Defendants have the power to repeatedly and profitably raise their merchant prices without worrying about significant merchant attrition. In addition, Plaintiffs have proven that American Express's NDPs have caused actual anticompetitive effects on interbrand competition. By preventing merchants from steering additional charge volume to their least expensive network, for example, the NDPs short-circuit the ordinary price-setting mechanism in the network services market by removing the competitive " reward" for networks offering merchants a lower price for acceptance services. The result is an absence of price competition among American Express and its rival networks. In fact, the record shows that merchant prices have risen dramatically in the absence of merchant steering. Defendants' NDPs also have foreclosed the possibility of a current network or a new entrant to the market differentiating itself from its competitors by pursuing a lowest-cost

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provider strategy. Finally, the court has carefully considered American Express's proffered pro-competitive justifications and finds them to be insufficient to render the NDPs permissible under Section 1.



This public enforcement action was tried without a jury before this court over a sevenweek period between July 7, 2014, and August 18, 2014. Over the course of the proceedings the court received testimony from over thirty fact witnesses, including nearly twenty merchant witnesses representing a selection of the nation's largest retailers, airlines, and hotels; representatives from each of the three major credit card networks that compete with American Express; and an array of current and former American Express employees and executives, including the company's long-time Chairman and Chief Executive Officer, Kenneth Chenault. Plaintiffs additionally presented expert testimony from Dr. Michael Katz, a Professor of Economics at the Haas School of Business at the University of California at Berkley, and Dr. Gary Ford, a Professor Emeritus at the Kogod School of Business at American University. Professors Richard J. Gilbert, Ph.D., also of the University of California at Berkley, and B. Douglas Bernheim, Ph.D., a Professor of Economics at Stanford University, provided expert testimony on behalf of American Express. In addition to the testimony adduced at trial, which amounts to nearly 7,000 transcript pages, the court received over 1,000 exhibits into the evidentiary record. In reaching a determination as to Defendants' liability under Section 1 of the Sherman Act, the court has considered carefully the relevance of and appropriate weight to afford this evidence, as well as the credibility of the parties' respective witnesses and their testimony.[2]

Based upon its measured consideration of the record just described, and upon the findings of fact and conclusions of law set forth herein pursuant to Federal Rule of Civil Procedure 52(a), the court concludes that Plaintiffs have proven by a preponderance of the evidence that the challenged restraints violate Section 1 of the Sherman Act.

A. Overview of the GPCC Card Industry

Since the advent of the modern payment card industry in the 1950s, general purpose

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credit and charge cards, or " GPCC" cards, have become a principal means by which consumers in the United States purchase goods and services from the nation's millions of merchants. (See PX2578A at '389-90[3]; Tr. at 3581:10-12 (Silverman/Amex).) In 2013, for example, the four dominant networks providing authorization and settlement services--Visa, American Express, MasterCard, and Discover--facilitated roughly $2.399 trillion in credit and charge card spending at participating merchants. (See DX6576 at 8.) The typical U.S. consumer carries multiple forms of payment in his or her wallet.[4] Alongside general purpose credit and charge cards--the focus of the court's analysis in the this litigation--merchants also accept payment through some combination of debit cards, proprietary or private label credit or charge cards issued by individual merchants, direct Automated Clearing House or " ACH" transfers, checks, and cash, among other means. While each of these methods competes to some degree for share of consumers' wallets, they have one essential characteristic in common: Each payment system brings customers and merchants together in order to consummate a transaction that benefits both participants.

An introduction to the credit and charge card industry is a suitable starting point for the court's inquiry into the competitive dynamics therein. Credit cards enable cardholders to make purchases at participating merchants by accessing a line of credit extended to the cardholder by the issuer of that card. (Joint Stmt. of Undisputed Facts (" Jt. Stmt." ) (Dkt. 447-1) ¶ 2.) Cardholders are invoiced for purchases typically once per month and often have a grace period during which payment may be made. (Id.) The delay between a purchase event and the cardholder's deadline for paying the bill on which that purchase appears is referred to as the " float," and it enables cardholders to temporarily defer payment on their purchases at no additional cost (i.e., without paying interest). (Tr. at 6245:1-12, 6532:6-9 (Bernheim).) A cardholder may either pay off the balance of his bill in full each month or pay it off over time while accruing interest on the balance. (Jt. Stmt. ¶ 2.) Many credit card issuers impose a preset spending limit on a cardholder's outstanding credit amount, typically based on the issuer's determination of the cardholder's creditworthiness. (Id.)

Charge cards similarly allow cardholders to make payments by accessing a line of credit extended by the card issuer, but generally do not offer a revolving credit facility akin to that offered on credit cards, and instead require that the cardholder pay the balance in full each month. (Id. ¶ 3.) Some American Express cardholders, however, do have an ability to maintain a

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balance, or " revolve," on their Amex charge cards, blurring the distinction between Defendants' credit and charge offerings. (Tr. at 5161:5-24 (Gilbert).) Even though charge cards typically are not paired with a line of credit, cardholders generally derive a benefit from the ability to defer payment during the float period, depending on the point during the billing cycle at which the purchase is made. (Jt. Stmt. ¶ 3; Tr. at 4065:15-19 (Katz).) Unlike credit cards, charge cards typically do not have preset spending limits. (Jt. Stmt. ¶ 3.)

Two specific types of credit and charge cards bear brief mention here, and will be the subject of greater discussion in later sections. First, general purpose credit cards may be issued in partnership with a merchant pursuant to a co-brand agreement. These " co-brand" cards typically bear the logos of the merchant, network, and issuing bank (where relevant), and enable cardholders to earn rewards directly from the merchant partner when purchases are made on the card. (See, e.g., Tr. at 1617:13-1618:22 (Brennan/Hilton), 3603:3-21 (Silverman/Amex).) Prominent examples of co-brand cards include the Delta SkyMiles Credit Card issued by American Express, which processes over the American Express network; the American Airlines Advantage Card, which is issued by Citibank and runs on MasterCard's network; and the Marriott Rewards Premier Credit Card, which is issued by Chase on the Visa network. Second, American Express also maintains a robust--indeed, the largest--corporate card business in the industry. (Id. at 817:2-9 (Hochschild/Discover); PX2486 at '053.) American Express issues corporate cards to individuals through a corporate account that has been established with their employers, allowing employers to more easily monitor employees' business expenditures and streamline the accounting and reimbursement processes. (Tr. at 817:2-12 (Hochschild/Discover), 1226:18-1227:12 (Kimmet/Home Depot), 3963:11-24 (Katz).)

By facilitating transactions between merchants and their cardholding consumers, the general purpose credit and charge card systems that are the subject of this litigation function as " two-sided platforms." (Id. at 3827:15-20, 3828:23-3829:3 (Katz), 5022:24-5023:22 (Gilbert).) In a two-sided platform, a single firm or collection of firms sells different products or services to two separate yet interrelated groups of customers who, in turn, rely on the platform to intermediate some type of interaction between them. (Id. at 3828:23-3829:14 (Katz).) See generally David S. Evans & Richard Schmalensee, Industrial Organization of Markets with Two-Sided Platforms, 3 Competition Pol'y Int'l 150 (2007) [hereinafter Evans & Schmalensee (2007)]; Jean-Charles Rochet & Jean Tirole, Two-Sided Markets: A Progress Report, 37 RAND J. Econ. 645, 645-46 (2006) (describing basic contours of two-sided systems). Examples of such two-sided models abound: Newspapers and other advertising-based forms of media sell distinct products and services to subscribers and advertisers; shopping malls provide services jointly to retailers and shoppers; computer operating systems provide a platform for bringing together program developers and end users; and a seemingly endless array of Internet companies like eBay, OpenTable, eHarmony, and Groupon exist to facilitate some form of value-generating interaction between distinct sets of consumers. See David S. Evans & Michael Noel, Defining Antitrust Markets When Firms Operate Two-Sided Platforms, 2005 Colum. Bus. L.Rev. 667, 672-79 (2005) [hereinafter Evans & Noel (2005)]. The fundamental function of a two-sided platform is to reduce the transaction

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costs associated with the parties finding one another, and to thereby enable their customers to realize gains from trade or other interactions that otherwise might not occur. See Evans & Schmalensee (2007) at 151, 158.

Credit and charge cards, like all methods of payment, serve as two-sided intermediaries between merchants and their cardholding customers. American Express, for example, provides cardholders with card-payment services and merchants with card-acceptance services in order to facilitate transactions between the two. Importantly, and unlike many two-sided platforms, American Express provides these services simultaneously; for every unit of payment services sold to the cardholder at the moment of purchase, a matching service is sold to the merchant in order to execute the transaction, and vice versa. (Tr. at 6211:3-11, 6211:23-6212:13 (Bernheim).) Thus, credit and charge card networks are also referred to as two-sided " transaction markets" --the two sides of the platform are brought together to consummate a single, simultaneous transaction, and the products provided by the platform are consumed in fixed proportions by the consumer and merchant. See Lapo Filistrucci et al., Market Definition in Two-Sided Markets: Theory and Practice (Tilburg Law Sch. Legal Studies Research Paper Series No. 09/2013) at 12, available at

The two-sided nature of the GPCC card industry necessarily affects the court's antitrust analysis in this case. While the nature and import of these effects are addressed in greater detail where relevant, a number of observations relating to the symbiotic relationship between the two sides of the credit card platform provide context both for American Express's separate value propositions for merchants and cardholders and the contractual restraints at issue in this litigation. A key feature of the payment network services industry, like all two-sided platforms, is that it is subject to indirect or cross-platform network effects, a phenomenon referred to in this case as the " chicken and the egg problem." (Tr. at 820:23-821:16 (Hochschild/Discover), 4296:11-4297:10 (Chenault/Amex).) See also ABA Section of Antitrust Law, Market Definition in Antitrust: Theory and Case Studies 439-44 (2012) [hereinafter ABA, Market Definition]. Indirect network effects exist when the number of agents or the quantity of services bought on one side of a two-sided platform affects the value that an agent on the other side of the platform can realize. (Tr. at 3829:15-20 (Katz).) See ABA, Market Definition at 440-42; Evans & Schmalensee (2007) at 151-52. In this case, for example, having a credit or charge card on a particular network like Discover is more valuable to the cardholder when there are more merchants willing to accept that card and, conversely, the value to merchants of accepting Discover cards increases with the number of cards on that network in circulation. (Tr. at 3829:21-3830:7 (Katz), 4397:2-11 (Chenault/Amex); DX4184 at '856.)

The GPCC industry's susceptibility to spillover effects is closely related. In the present context, spillover refers to the phenomenon by which a cardholder's experience at one merchant when using a particular network's card, here an American Express card, affects that cardholder's willingness to use the same card on the next transaction, whether at the same merchant or a different merchant. (Tr. at 4169:5-17 (Katz), 4339:7-18 (Chenault/Amex).) As with indirect network effects, spillover can be either positive or negative. For example, when a major merchant is added to Amex's network, cardholders are more likely to use their

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Amex cards at other merchants in the same area. (See DX4007 at '928, '932-34 (ascribing this effect to inactive cardholders becoming active cardholders, rather than to higher spending levels among active cardholders).) American Express's defense of the restraints in this case centers on the NDPs role in avoiding negative spillover and preserving what the company calls " welcome acceptance." Defendants contend that if the NDPs are eliminated, a cardholder who is steered away from American Express at one merchant will be less likely to use an Amex card at the next merchant, even if that second merchant does not attempt to influence the card choice. (Tr. at 3066:4-3068:12 (Pojero/Amex), 6356:10-6357:24 (Bernheim).) See infra Part VI.A (discussing Amex's primary pro-competitive justification for the challenged restraints).

Therefore, in order to compete effectively, networks must account for the interdependence between the demands of each side of the platform and strike a profit-maximizing balance between the two. As a result, even in a case such as this, where the court's analysis focuses on one side of the relevant platform (merchants), due consideration must be given to the competitive dynamics on the other side (cardholders). This is particularly true here, as merchants' demand for payment card acceptance is largely derived from consumers' demand for payment card usage. (Jt. Stmt. ¶ 4; Tr. at 6628:24-6629:13 (Katz).) As explained by Defendants' economics expert, " [t]he only reason that a merchant wants to use a payment product is that a customer wants to use the product" to purchase some good or service from the merchant. (Tr. at 6217:5-12 (Bernheim).) Yet even though merchants may not have an independent demand for American Express's network services, the choice of which GPCC network is used for any given transaction is a joint decision between the merchant and consumer. Steering, as Professor Katz correctly noted, describes " the interaction between the two sides in order to make that joint decision." (Tr. at 3834:7-24, 3831:1-21 (Katz).)

B. Competition and Pricing in the GPCC Card Industry

American Express operates a business model that is materially different than that of Visa and MasterCard, its primary competitors in the credit and charge card industry. However, to understand American Express's differentiated structure, it is helpful to understand how Visa and MasterCard function. Visa and MasterCard sit at the center of a disaggregated platform that can involve as many as five distinct actors: cardholders, issuers, networks, acquirers, and merchants. Cardholders obtain their credit or charge cards from issuers, which are banks or other financial institutions that issue cards with particular features (i.e., rewards, cash back, purchase protection), set the financial terms on the cards (i.e., annual fees, interest rates, float periods), extend cardholders credit where required, and issue cardholders their bills and collect required payments. (Jt. Stmt. ¶ 5.) Similarly, to accept credit cards, a merchant must have a relationship with an acquiring bank or financial institution. (Id. ¶ 6.) The acquirer is responsible both for merchant acquisition (i.e., signing up merchants to accept particular brands of cards, providing point-of-sale technology) and for accepting card transaction data from merchants for verification and processing. (Id. ¶ 7.) The network sits as the platform's middleman, bringing merchants and their acquirers together with cardholders and their issuers. (Tr. at 3827:23-3828:13 (Katz).) The network's most fundamental function is to establish protocols and procedures by which issuers and acquirers capture, authorize, and settle

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transactions; they also establish nearly all elements of the price charged to merchants on each transaction (except for the fee charged by the acquirer/processor), provide valuable fraud protection services, and operate the infrastructure necessary to facilitate interactions between the two sides of the platform. (Id. at 3828:14-22.)

When a cardholder swipes his credit or charge card at a point-of-sale device in order to make a purchase, the transaction information is immediately sent to the merchant's acquirer. The acquirer effectively obtains the receivable owed by the consumer arising from his purchase, and therefore has a payable obligation to the merchant. (See Jt. Stmt. ¶ 12.) The acquirer discharges this obligation by paying the merchant the funds owed on the transaction less the " merchant discount fee," which represents the merchant's cost of accepting payment on the credit or charge card used by the consumer. The merchant discount fee paid by the merchant generally consists of an ad valorem element--i.e., a percentage discount rate multiplied by the purchase price--but may include additional flat fees. (Id. ¶ ¶ 13, 15.) On the Visa and MasterCard networks, which are frequently referred to as " 4-party" or " 5-party" systems to reflect the number of agents involved, the merchant discount fee is primarily comprised of three elements: a percentage interchange fee, an acquirer fee, and a network fee. (Id.) As the terminology suggests, the acquirer fee is retained by the acquiring bank for services rendered to the merchant, while the network fee is paid to Visa and MasterCard as the price of facilitating the transaction. (Id.) Like the network fee, the interchange component, which represents the bulk of the overall discount fee and is passed through to the issuing bank, is set by Visa or MasterCard. (See Tr. at 2966:8-2967:12 (Pojero/Amex); DX7295 at 4 (MasterCard Interchange Rate Programs).) Unlike American Express and Discover, as will be discussed shortly, the interchange rate charged on the Visa and MasterCard network varies along two axes: (1) the industry the merchant belongs to, and (2) the actual card product used by the cardholder. MasterCard, for example, has more than 240 different interchange rate categories, and Visa has more than 70 categories. (Jt. Stmt. ¶ 16.)

By contrast, American Express operates a partially integrated " 3-party" or " closed-loop" payment card system. In addition to operating its credit and charge card network, American Express also acts as the card issuer and merchant acquirer for the vast majority of transactions involving its cards. (See Tr. at 3791:4-15 (Silverman/Amex); see also Jt. Stmt. ¶ 9; Tr. at 1069:18-1070:15 (Quagliata/Amex).) Thus, in most cases, American Express maintains direct relationships with its cardholders and accepting merchants: It provides issuing services to cardholders, acquiring and processing services to merchants, and network services to both sides of the platform in order to facilitate the use and acceptance of its payment cards. The same cannot be said of Visa and MasterCard, Defendants' largest competitors. Rather, Visa and MasterCard function exclusively as networks, providing certain core payment services but relying on banks and other financial institutions to undertake the card issuance and merchant acquisition and processing functions. (Jt. Stmt. ¶ 10; Tr. at 2116:4-10 (Berry/Amex).) Visa cardholders therefore generally interact with the network through their issuing banks, the largest of which include JPMorgan Chase, Bank of America, Citibank, and Capital One (see PX1560 at 10), and merchants that accept Visa cards interface with acquirer-processors like Chase Paymentech and First Data Corporation, rather than with Visa

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itself (see Tr. at 2384:19-22 (Priebe/Southwest), 2965:2-7 (Pojero/Amex)).

American Express does not always interact directly with its cardholders and merchants, however. Prior to the decision in United States v. Visa U.S.A., Inc., Visa and MasterCard maintained bylaws preventing their member banks from issuing credit cards on competing networks, like Discover and American Express.[5] 163 F.Supp.2d 322 (S.D.N.Y. 2001) (" Visa I" ), modified, 183 F.Supp.2d 613 (S.D.N.Y. 2001), aff'd, 344 F.3d 229 (2d Cir. 2003) (" Visa II" ). After these so-called " exclusionary rules" were removed following the Department of Justice's successful antitrust enforcement action in Visa, Amex launched its Global Network Services (" GNS" ) business and began partnering with traditional issuing banks to disseminate cards through non-proprietary channels. (Tr. at 4295:6-18 (Chenault/Amex), 2995:16-20 (Pojero/Amex).) There are currently nine GNS partners issuing Amex cards, which account for roughly one percent of its total U.S. charge volume each year. (Id. at 4295:16-18, 4326:19-25 (Chenault/Amex.) Likewise, in its efforts to close its " merchant coverage gap" --American Express is accepted in approximately three million fewer merchant locations than Visa, MasterCard, and Discover--the company has increasingly relied on third-party merchant acquirers to recruit small merchants to its network. (Id. at 2845:17-2850:2 (Pojero/Amex) (discussing American Express's External Sales Agent, OnePoint, and OptBlue initiatives).) See also infra Part IV.D. Discover, the fourth and final significant competitor in this market, has pursued a hybrid model; in addition to operating its network, Discover issues its own card products but relies on third-party acquirers and processors to service the merchant side of the platform. (See Tr. at 812:21-814:9, 815:12-24, 824:7-825:7 (Hochschild/Discover).)

American Express's merchant pricing structure further differentiates its model from those of Visa, MasterCard, and Discover. Whereas the discount rates applied to purchases on Visa or MasterCard products vary depending on the type of card used--i.e., high-rewards cards are subject to higher interchange rates and thus cost merchants more to accept--American Express charges a single discount rate for all Amex credit and charge products, in addition to certain flat fees charged on a per transaction basis. (See Jt. Stmt. ¶ 16; Tr. at 2132:14-19 (Berry/Amex), 2566:16-25 (Funda/Amex), 2978:6-2979:19 (Pojero/Amex); see also DX7295.) Accordingly, the discount rate merchants are charged by American Express for purchases made on the highrewards Platinum Card, the " bedrock of [Amex's] brand," is the same as for purchases made on its cards with less generous rewards, like the Green Card or EveryDay Credit Card. (Tr. at 2566:11-20 (Funda/Amex), 3112:9-20 (Pojero/Amex), 3602:5 (Silverman/Amex).)

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Like its competitors, American Express strives to maintain " pricing integrity" within industry groups, such as airlines, lodging, or gas stations. To that end, American Express sets a pricing table for each merchant segment that contains a " headline" or " base" discount rate charged across the entire industry, often with minor variations depending on the annual charge volume of each individual merchant in that industry. (Tr. at 4684:3-4685:12, 4697:16-21 (Glenn/Amex).) However, American Express will negotiate its acceptance agreements with certain large merchants, and sometimes is required to provide monetary incentives such as signing bonuses or cooperative marketing funds in order to ensure continued acceptance by the merchant. (See id. at 4685:16-4687:3 (Glenn/Amex).) See also infra Part IV.D. These " side payments" are credited against the merchant's headline discount rate, often on a retrospective basis, in order to calculate its " effective" discount rate.

Finally, the " spend-centric" nature of American Express's business model is unique in the industry. Unlike its competitors' " lend-centric" models, which rely on the interest charged on revolving balances to generate more than half of their revenue, the primary driver of American Express's revenue is the merchant discount fee. (See Tr. at 827:20-828:9 (Hochschild/Discover), 3534:19-3535:6 (Silverman/Amex), 4303:6-24 (Chenault/Amex).) Together with its closed-loop framework, which also is a " key differentiator" for the network vis-à-vis its competitors, Defendants' spend-centric model is integral to the company's value proposition to its merchants. (Tr. 1069:20-1070:17 (Quagliata/Amex).) American Express contends that due to its efforts to " encourage [cardholders] to maximize their spend on [Amex's] card products" --including, among other things, offering premium rewards programs, superior customer service, and other ancillary benefits to cardholders--merchants that accept American Express gain access to customers who are both " ready to spend" and who generally spend more on an annual and per transaction basis than non-cardholders. (See id. at 1061:21-1062:5 (Quagliata/Amex), 2091:12-2092:12 (Glass/Amex), 3535:25-3536:4 (Silverman/Amex), 4304:8-13 (Chenault/Amex); see also id. at 3290:3-14 (Biornstad/MasterCard); DX7238 at '375.) See also infra Part IV.C.3.

In addition to delivering higher spending customers, Amex's merchant value proposition relies on the network's ability to leverage its closed-loop infrastructure to deliver marketing and data analytics services to merchants that its competitors cannot match. (Tr. at 4305:7-4306:6 (Chenault/Amex), 4720:3-10 (Glenn/Amex).) By retaining end-to-end control of all spending data on its network, American Express is able to sell its merchants information on and analysis of its cardholders' spending behaviors, allowing the merchant to engage in more effective targeted marketing or identify new locations for geographic expansion, among other applications. (Id. at 1072:5-1079:18 (Quagliata/Amex), 2117:2-2119:4, 2277:4-17 (Berry/Amex) (noting Amex can assist merchants in understanding their customers by providing data on spending in the merchant's own industry, as well as in other industries), 4307:8-4309:15 (Chenault/Amex), 4718:5-21, 4720:19-4721:6 (Glenn/Amex), 5530:10-5531:21 (Landau/DryBar); see also, e.g., DX7598 at '015.) The closed-loop system also allows American Express to provide merchants and cardholders with advanced fraud management services. (Tr. at 4306:7-17 (Chenault/Amex), 4933:22-4934:6 (Glenn/Amex).) Finally, American Express provides dedicated client managers for its

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largest merchants (see id. at 625:12-626:24 (Quagliata/Amex)), and engages in a variety of efforts intended to promote spending at small businesses--a merchant population where the network enjoys less widespread acceptance than its competitors--including promotions like " Small Business Saturday" and " Shop Small" (id. at 5704:2-5709:23 (Gilligan/Amex)).

On the other side of the platform, American Express's cardholder value proposition centers on the suite of rewards and other benefits the company provides to encourage cardholders to use their cards for purchases at Amex-accepting merchants. These enticements commonly are offered by the issuers of general purpose credit and charge cards and may include a combination of per transaction benefits, such as " points," cash back, or airline frequent flyer miles, as well as other membership benefits, such as airport lounge access, purchase protection, or rental car insurance. Cardholders enrolled in American Express's Membership Rewards program, for example, receive Membership Rewards points for purchases made on their Amex cards, and may then redeem those points with Amex or one of its redemption partners for merchandise, gift cards, frequent flyer miles, statement credits, or other goods and services. (Tr. at 3548:13-3549:22 (Silverman/Amex), 4298:20-4300:13 (Chenault/Amex).) When offered on Visa or MasterCard products, these rewards are generally funded through the interchange fee paid by the merchant that is passed through to the issuing bank. (See Tr. at 4040:21-24 (Katz).) As a general matter, Visa and MasterCard products that tend to have rich rewards packages also tend to carry higher interchange rates, which explains why it is more expensive for merchants to accept high-rewards Visa and MasterCard cards when compared to more basic cards on the same networks. See infra Part IV.D (discussing, among other things, Visa's and MasterCard's introduction of premium interchange categories). In addition to its rewards programs, American Express also offers its cardholders what it believes to be superior customer service, fraud protection, and purchase and return protection, among other benefits. (Tr. at 3610:1-16 (Silverman/Amex), 4296:11-4297:10, 4309:20-4310:2 (Chenault/Amex).)

C. The Non-Discrimination Provisions

The purpose and effect of American Express's NDPs, as well as the vigor with which the company defends them, cannot be fully appreciated without an understanding of their historical context.

1. Origins of Amex's NDPs

American Express entered the payment cards industry in 1958, offering charge cards for use primarily at travel and entertainment, or " T& E," merchants. (Tr. at 4327:21-4328:6 (Chenault/Amex).) Intended to cater to the needs of business travelers, American Express's early charge cards competed with other niche payment systems offered by Diners Club and Carte Blanche. (Id. at 4328:16-4329:10 (Chenault/Amex).) Following the entry of Visa and MasterCard into this market in the mid-1960s, American Express undertook a concerted effort to shift its payments business from a T& E-centric enterprise to a general purpose credit and charge card network similar to those offered by the bank associations (Visa and MasterCard). For instance, at the urging of its current Chief Executive Officer, Kenneth Chenault, and later under his leadership, Amex endeavored to expand its acceptance network to include so-called " everyday spend" merchants like gas stations, supermarkets, and pharmacies, with an aim toward increasing its cards' relevance to consumers'

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everyday spending needs. (Id. at 4394:25-4395:5 (Chenault/Amex).) Amex additionally took steps during the late 1980s and early 1990s to improve its value propositions to both merchants and cardholders by, for example, introducing what would become the company's touted Membership Rewards program and developing new technology to better leverage its closed-loop network in service of its merchants. (Id. at 4333:18-4334:10, 4336:17-4337:18 (Chenault/Amex).) As a result of these efforts, Amex's share of credit and charge card spending in the United States rose to about 25% by 1990. (See DX7828 at 50; Tr. at 5154:7-10 (Gilbert).)

Beginning in the late 1980s, however, Visa and MasterCard took a number of steps intended to curtail American Express's efforts to move into non-T& E merchant segments, which had traditionally been the bankcards' " bread and butter." (See PX0132 at '867; Tr. at 3312:24-3313:6 (Morgan/Visa).) First, the bank associations adopted the so-called exclusionary rules, which prevented member institutions from issuing card products on either American Express's or Discover's networks. These rules were later found to violate the Sherman Act in Visa, and were removed in 2004. (See Tr. at 859:21-860:4 (Hochschild/Discover)). Second, and more importantly for the purpose of this litigation, Visa and MasterCard ran a number of marketing campaigns that highlighted American Express's perceived and actual competitive disadvantages in the marketplace--specifically, Amex's smaller merchant acceptance network, consumers' resulting perceptions of the utility and value of Amex's card products, and the network's significantly higher discount rates to merchants. (See id. at 3372:2-3373:12 (Morgan/Visa); PX0132 at '930.) Visa, for example, sought to encourage consumer preference for its credit cards and steer transactions away from its competitors through several advertising campaigns, including the " It's Everywhere You Want To Be" and " We Prefer Visa" initiatives. (Tr. at 3306:4-3307:11, 3321:21-3324:17, 3409:15-23 (Morgan/Visa); PX0082; PX0133 at '985-86; see also Tr. at 3318:16-3320:24 (Morgan/Visa).) These efforts were remarkably effective. The " We Prefer Visa" campaign, for example, appears to have contributed to a 25-45% shift in card volume from American Express to Visa (see PX0133 at '986; see also Tr. at 4351:3-6 (Chenault/Amex)), and Amex's overall share of GPCC charge volume dipped to approximately 20% by 1995. (Tr. at 5154:7-15 (Gilbert), 6305:18-6306:6 (Bernheim); DX7828 at 50.)

American Express responded to its competitors' efforts to induce merchants to steer volume away from its network by tightening the contractual restraints at issue in this litigation, its so-called Non-Discrimination Provisions (" NDPs" ). Formulated to control the manner in which merchants treat Amex cardholders at the point of sale, limitations on merchant steering have existed in Amex's card acceptance agreements in one form or another since the 1950s. (See PX1389 at 3 (1959 Agreement); DX0020 at '696 (1977 Agreement); Tr. at 4328:7-10 (Chenault/Amex).) In the late 1980s and early 1990s, however, Amex bolstered its NDPs to ensure that merchants could not state a preference for any GPCC card network other than American Express, and simultaneously intensified its efforts to enforce these provisions when it detected merchant steering. (Compare PX1389 at '189 (sample 1992 agreement), '293 (sample 1998 agreement), with PX1389 at '155 (sample 1989 agreement containing less restrictive NDPs); see also PX1103 at '353, '396-97 (discussing Amex's response to " We Prefer Visa" campaign); Tr. at 4490:13-4491:18 (Chenault/Amex).) Indeed, American Express's

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CEO acknowledged at trial that the NDPs were revised to preclude the use of preference language favoring other issuers or networks after the company's experience during the " We Prefer Visa" campaign. (Tr. 4492:16-4493:14, 4531:17-4532:11 (Chenault/Amex).)

American Express's response is hardly surprising. As a number of American Express executives testified, a cardholder's experience at the point of sale when using an Amex card is a critical point of contact between American Express and the cardholder. (See Tr. at 3066:4-3067:13 (Pojero/Amex), 4953:8-23 (Hayes/Amex); see also id. at 884:11-20 (Hochschild/Discover), 6357:20-24 (Bernheim) (noting this is a critical touchpoint for the network " that affects consumers' perceptions of Amex and Amex isn't there to control that at all, the merchant is in charge of that" ).) Since the entire purpose of carrying a payment card is to enable the consumer to consummate transactions with merchants, the consumer's decision to pull an American Express card from his wallet at the point of sale represents a critical " moment of truth" for the company. (Tr. at 3066:4-3067:13 (Pojero/Amex), 3573:11-15 (Silverman/Amex) (" [T]here's effectively two moments of truth for [Amex] customers . . . [o]ne is to get them to buy the card . . . [t]he second is every time they make a purchase, to get them to use the card." ).) Because the NDPs represent the Defendants' attempt to control as much of that experience as possible, purportedly to ensure its cardholders enjoy what the network calls " welcome acceptance," the network's decision to tighten its restraints in response to the " We Prefer Visa" campaign and similar initiatives is not tremendously surprising. (See DX0319 at '002; Tr. at 4372:8-4373:1 (Chenault/Amex).) In Amex's view, merchant steering to less expensive card networks--or " suppression," as it is referred to within American Express--endangers the cardholder's purchasing experience and therefore endangers the network itself. (See Tr. at 4477:12-20 (Chenault/Amex).) Yet, as discussed in the remainder of this Decision, Amex's efforts to ensure welcome acceptance go too far in the view of the Sherman Act--the NDPs unreasonably and unjustifiably suppress a critical avenue of interbrand competition in the relevant market.

2. The Challenged Restraints

The vast majority of American Express's 6.4 million merchant locations are bound by the company's standard card acceptance agreement, and consequently, by its standard NDPs. (Tr. at 642:18-648:3 (Quagliata/Amex).) Unless a merchant has a customized or negotiated acceptance agreement with American Express--and, notably, fewer than 1,000 merchants are in this position--the terms and conditions of merchant acceptance of Amex's credit and charge products are set forth in a form card acceptance agreement with the network. (Tr. at 636:2-639:13 (Quagliata/Amex), 2831:17-25 (Funda/Amex) (estimating Amex has fewer than 1,000 custom contracts); PX0003.) These form contracts incorporate by reference the company's Merchant Regulations and require Amex-accepting merchants to adhere to the policies and procedures found therein. (Tr. at 642:15-643:5 (Quagliata/Amex); PX0003 at 13 (section 1.b.i).) American Express's standard NDPs are located in section 3.2 of Amex's Merchant Regulations (PX0003 at 13 (section 1.b.i)), and provide that a merchant who accepts American Express credit or charge products may not:

o indicate or imply that [it] prefer[s], directly or indirectly, any Other Payment Products over [Amex's] Card,

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o try to dissuade Cardmembers from using the Card,
o criticize or mischaracterize the Card or any of our services or programs,
o try to persuade or prompt Cardmembers to use any Other Payment Products or any other method of ...

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