Lydian Journal

ARTICLES U.S. v. American Express, et The Lydian Journal 2.0: A Note from the Editor al.— Failing To Make Something law and r e gulation (Outside-In)Novation: The Changing Paradigm for Out Of Nothing Driving Payments Platform by Tom Brown Growth O’Melveny & Myers LLP Adjunct Professor, U.C. Berkeley Law School^ The Utility of Retail Payments October 2010 in Addressing the Financial Inclusion Gap in Developing Countries Introduction

Some Unpleasant Credit Card The Department of Justice has been responsible for enforcing the nation’s antitrust laws Arithmetic for more than a century. A group of lawyers dedicated to antitrust enforcement, the Antitrust Division, has existed within the Department of Justice for more than 90 years. [1] U.S. v. American Express, The list of companies that have faced antitrust cases brought by the Department of Justice, et al.— Failing To Make Something Out Of Nothing both before and after the creation of the Antitrust Division, reads like a who’s who of U.S. commerce: Standard Oil, U.S. Steel, Alcoa, General Motors, American Tobacco, and An Overview of Social the Chicago Board of Trade. Although the significance of the antitrust laws did not ebb Commerce and What’s as U.S. industry shifted from manufacturing to information services, the Antitrust Division Fueling its Growth has used cases against AT&T, IBM, Microsoft, MasterCard, and Visa to write the rules of commercial engagement for the information economy. Of course, the Antitrust Division Making Sense of Ever-Changing Payment Technologies has launched some duds over the years, as federal courts and commentators have not hesitated to point out. [2] Even some of the Division’s successes seem, with the benefit of Payments Wiki – China hindsight, to have been poorly conceived. Yet the Division’s cases generally have been serious affairs. Comment on the Articles on PYMNTS.com I. U.S. v. American Express, et al. – A Claim That Nothing Is Something AUTHORS Viewed against this backdrop, the Antitrust Division’s recent case against American Tim Attinger Express, MasterCard, and Visa is puzzling. At first blush, the Division’s case seems to be about nothing. Indeed, the allegations at the heart of the complaint read like the set-up Tom Brown for a joke that one-time American Express pitchman, Jerry Seinfeld, might have used to David S. Evans end his TV show:

Patrick Gauthier “Jerry: So have you ever can tell because his eyes some license with the Ignacio Mas been out shopping and bulge a little – but he allegations. But its core seen what happens when can’t say anything. So comes straight from the Scott Schuh someone takes out an long as the card is out, he complaint. The complaint American Express card? stands there speechless. alleges that each of the Karen Webster [Pause] One moment [Pause] Wouldn’t it be major credit and charge card Jing Yang the clerk is going on nice if the American networks – American Express, about this and that. Express card worked on MasterCard, and Visa – has Then the card appears, people other than sales maintained rules that prevent and the clerk is literally clerks?” merchants from promoting dumbfounded. He wants other general purpose cards to say something – you To be sure, the joke takes at the point of sale. It claims

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ARTICLES that MasterCard and Visa the marketplace and use power aside, to make an The Lydian Journal 2.0: A Note prevent merchants from those terms to suppress antitrust case out of the from the Editor offering discounts or taking opportunities that would restraints challenged by the law and r e gulation other steps to promote otherwise be available Antitrust Division. That is, (Outside-In)Novation: The general purpose charge to potential rivals, the whether American Express Changing Paradigm for Driving Payments Platform and credit cards at the point antitrust laws are generally has violated the Sherman Growth of sale. According to the unconcerned about the Act by telling agents that complaint, American Express terms on which a firm does are distributing its services, The Utility of Retail Payments goes further, even barring business with its customers. as well as the services of in Addressing the Financial merchants from “asking In a short statement released its competitors, that once Inclusion Gap in Developing Countries customers at the point of sale in response to the filing of the customer has expressed if they would consider using the complaint, American a clear preference to use Some Unpleasant Credit Card another [general purpose Express has made clear its service rather than a Arithmetic credit or charge card].” [3] that it intends to take aim competing offering, the at the Antitrust Division’s agent must accept the U.S. v. American Express, The only thing missing is the assertion that it has market consumer’s preference. The et al.— Failing To Make Something Out Of Nothing suggestion that American power, and that argument, if answer to this question is Express has market power – successful, would provide a no, and the explanation An Overview of Social the sine qua non of the type defense to the claim. as to why is rooted in the Commerce and What’s of claim that the Antitrust distinction between the goals Fueling its Growth Division has alleged. Unless The larger question raised that the Sherman Act seeks the defendant has the by the case is whether it is to promote and the actions Making Sense of Ever-Changing Payment Technologies power to dictate terms to possible, issues of market that it prohibits.

Payments Wiki – China II. Section One of the Sherman Act – Finding Direction in Open- Comment on the Articles Ended Language on PYMNTS.com The language of Section One of the Sherman Act is famously opened-ended. It prohibits “contracts, combinations and… conspiracies… in restraint of trade.” [4] No one, AUTHORS however, believes that the language of Section One means what it says.

Tim Attinger Justice Brandeis’ opinion in Chicago Board of Trade does and its effect, actual or Tom Brown Board of Trade of City of not provide much guidance probable. The history Chicago v. United States on how to distinguish a of the restraint, the evil David S. Evans explains why. The language reasonable restraint from an believed to exist, the of Section One of the unreasonable one. Indeed, reason for adopting the Patrick Gauthier Sherman Act would, if read the opinion substitutes one particular remedy, the Ignacio Mas literally, bring the wheels of open-ended inquiry for purpose or end sought commerce to a halt. Every another. It instructs courts to be attained, are all Scott Schuh contract, as his opinion facing antitrust cases to relevant facts. [6] Karen Webster observes, “restrains. To bind, to restrain, is of their very … consider the facts This articulation of the Jing Yang essence.”[5] Since Chicago peculiar to the business approach for identifying Board of Trade, the Sherman to which the restraint is unreasonable restraints of Act has been understood to applied; its condition trade has been described prohibit only “unreasonable before and after the as a “Brandeisian swamp,” restraints.” restraint was imposed; [7] in which “everything is the nature of the restraint relevant [and] nothing is

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ARTICLES dispositive.” [8] long run. [9] command firms to behave The Lydian Journal 2.0: A Note in a particular way towards from the Editor In the nine decades since Antitrust law is, thus, often their customers. law and r e gulation the Supreme Court handed described as a consumer (Outside-In)Novation: The down its decision in protection statute. It protects Firms are not obliged to Changing Paradigm for Driving Payments Platform Chicago Board of Trade, the benefits that consumers maximize the welfare of Growth courts and policy makers derive from have arrived at a consensus unrestrained The Utility of Retail Payments about what the Sherman competition in Addressing the Financial Act exists to accomplish and – lower Inclusion Gap in Developing Countries how antitrust enforcement prices, higher achieves that end. This quantities, Some Unpleasant Credit Card consensus recognizes a better quality. Arithmetic critical distinction between the objectives of antitrust But antitrust U.S. v. American Express, enforcement and the law does et al.— Failing To Make Something Out Of Nothing objects on which antitrust not compel enforcement acts. market An Overview of Social outcomes. Antitrust law their customers or take steps Commerce and What’s The current chief of the permits firms to set their that facilitate the success of Fueling its Growth economic section of the prices too high, restrain their their rivals. Antitrust Division captured output, and fail to improve Making Sense of Ever-Changing Payment Technologies this distinction in a speech the quality of their products. The antitrust laws leave that he gave in 1996 firms free to engage in Payments Wiki – China when he last served in the Antitrust law simply prevents conduct such as a price role during the Clinton firms from putting in place discrimination that, when Comment on the Articles Administration: agreements that restrict viewed through the narrow on PYMNTS.com competition or taking steps prism of the model of [A]ntitrust policy… must that extinguish opportunities perfect competition, conflicts AUTHORS

Tim Attinger Most companies are challenged to deploy Tom Brown capital most effectively against new business David S. Evans growth for a number of reasons. Patrick Gauthier

Ignacio Mas pay careful attention for existing rivals or suppress with the interests of their Scott Schuh to firms’ business the development of new customers. [10] strategies, the motives ones. Karen Webster behind these strategies, The antitrust laws even allow Jing Yang and their likely effects, This articulation of antitrust firms to sacrifice profits in with the ultimate aim of law contains an important situations where maximizing preserving competition, limiting principle. The profits would create so as to promote antitrust laws, although opportunities for rivals. [11] efficiency and maximize they protect the process consumer benefits in the of competition, do not

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The Lydian Journal 2.0: A Note III. The Division’s Complaint Is Flawed from the Editor The Antitrust Division’s complaint loses sight of this distinction between the goals that law and r e gulation (Outside-In)Novation: The antitrust law seeks to promote and that which the antitrust laws forbid. The complaint Changing Paradigm for challenges American Express’ rules on the theory that they prevent emerging payment Driving Payments Platform systems from competing with established ones. However, it offers no facts to support this Growth conclusion. The complaint boils down to the claim that American Express might lower the The Utility of Retail Payments cost of acceptance if forced to drop its anti-steering rules. Yet this result, unless driven by in Addressing the Financial the expansion of some suppressed rival, does not support an antitrust claim. Inclusion Gap in Developing Countries The theory on which the after a consumer has Payment services are a Some Unpleasant Credit Card Antitrust Division has selected a particular form jointly consumed good. In Arithmetic challenged American of payment is critical order for a payment service Express’ anti-steering rules to competition between to be of real use, it must be U.S. v. American Express, is narrow. The complaint general purpose credit accepted and used by both et al.— Failing To Make Something Out Of Nothing alleges that the rules and charge card systems; the recipient of the payment “suppress[] competition with and (frequently a merchant) and An Overview of Social rival networks at the ‘point an originator of a payment Commerce and What’s of sale,’ where merchants The complaint does (frequently a consumer). Fueling its Growth interact directly with not acknowledge the In order to launch a new customers, by disrupting the pro-consumer rationale payment service, a would- Making Sense of Ever-Changing Payment Technologies ordinary give and take of the behind anti-steering, be entrepreneur must reach marketplace.” [12] There are let alone grapple with a critical mass of both Payments Wiki – China at least three problems with why a network forced recipients of transactions and this attack: to abandon such rules generators of transactions. Comment on the Articles might lower the price on PYMNTS.com The complaint identifies of acceptance even There is no single right way as an obstacle to the independent of the sort to catalyze the growth of AUTHORS

Tim Attinger The theory on which the Antitrust Division has Tom Brown challenged American Express’s anti-steering David S. Evans rules is narrow. Patrick Gauthier

Ignacio Mas emergence of new of anticompetitive effect a payment system. Cash, Scott Schuh general purpose credit that motivates antitrust check, and the various and charge card systems enforcement. electronic payment systems Karen Webster a set of rules that are all solved this problem in removed from the 1. The situation contemplated different ways. Given the Jing Yang obstacles that emerging by the complaint is removed relatively few truly new payment systems must from the experience of an systems that have emerged surmount; emerging payment system. in the thousands of years As others have explained, that human beings have The complaint does not a would-be payment system been engaged in trade, it explain why the moment faces a particular challenge. is apparent that this is not

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ARTICLES an easy problem to solve. has a very different objective little apparent effort to steer The Lydian Journal 2.0: A Note But this problem has nothing in mind, i.e. completing the consumers to cash, check, or from the Editor whatsoever to do with the sale. Merchants can capture its electronic equivalent. law and r e gulation (Outside-In)Novation: The problem imagined by the some gains by getting Changing Paradigm for Antitrust Division. The Antitrust customers to switch from one The Antitrust Division Driving Payments Platform Division contemplates a form of Growth world in which merchant payment to and consumer can each another. Yet The Utility of Retail Payments in Addressing the Financial select from multiple those gains Inclusion Gap in Developing payment options. Yet by are not Countries the time a payment system infinite, and has achieved the level of there are Some Unpleasant Credit Card acceptance necessary for it significant Arithmetic to be regarded as a substitute opportunity U.S. v. American Express, for American Express, costs et al.— Failing To Make MasterCard, or Visa, it can associated Something Out Of Nothing hardly be described as with emerging. haggling An Overview of Social over the customer’s preferred probably regards this Commerce and What’s Fueling its Growth 2. The complaint does not payment method (e.g., the experience as irrelevant to its explain why a potential rival possibility of losing this sale case because cash, check, Making Sense of Ever-Changing to those three systems would or the next one). It seems and even debit cards fall Payment Technologies view the moment after a likely that most merchants outside the market allegedly consumer has identified his would prefer to use time that affected by the anti-steering Payments Wiki – China or her preferred way to pay could be spent haggling rules – the market for general as the pivotal moment for with a customer over how purpose credit and charge Comment on the Articles persuading that consumer to to make a purchase doing cards. However, a consumer on PYMNTS.com try another general purpose something else. [14] This who has expressed a credit or charge card. Once truth is reflected in the daily preference for such a card AUTHORS people have committed to a experience of millions of from one provider may not

Tim Attinger

Tom Brown Merchants make little apparent effort to steer

David S. Evans consumers to cash, check, or its electronic

Patrick Gauthier equivalent.

Ignacio Mas particular course of action, people at millions of merchant regard a card from another Scott Schuh it tends to be difficult to locations every day. As the provider as the next best Karen Webster change their mind. Generally complaint concedes, all substitute. Consumers tend speaking, it is easier to of the payment networks to concentrate their credit Jing Yang influence a choice than it is to permit merchants to offer or charge card purposes on change it. [13] discounts for other forms of a single card, rather than payment. Indeed, federal spread those purchases over Moreover, any effort to law guarantees merchants multiple credit or charge influence the choice must take the right to offer a discount cards. [15] Yet some data place through a merchant that for cash. Yet merchants make suggests that many consumers

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ARTICLES regard debit cards as a (seeing as how they have so to use cards issued on the The Lydian Journal 2.0: A Note suitable alternative to credit much money) paying with MasterCard or Visa system from the Editor or charge cards. [16] some other form of payment. more often than people who law and r e gulation (Outside-In)Novation: The Although these two data It is difficult to see how concentrate their spending Changing Paradigm for points are not conclusive, preventing a payment system on MasterCard or Visa cards Driving Payments Platform they raise the possibility that from meeting Growth the network rules actually that need permit more effective steering advances the The Utility of Retail Payments in Addressing the Financial than they prohibit. interests that Inclusion Gap in Developing the antitrust Countries 3. The complaint does not laws exist to acknowledge the possibility serve. The Some Unpleasant Credit Card that the anti-steering rules simultaneous Arithmetic serve an important consumer desire for U.S. v. American Express, protection interest. Many status and et al.— Failing To Make consumers likely consider financial Something Out Of Nothing the choice about how to privacy make a particular payment does, An Overview of Social a private matter. Dee Hock, however, suggest why use American Express cards. Commerce and What’s Fueling its Growth the founder of Visa, regarded MasterCard and Visa might privacy as an essential abandon their rules in the The fact that American Making Sense of Ever-Changing building block of a successful face of an enforcement Express cardholders tend to Payment Technologies payment system. He posited action. Although MasterCard rely on alternatives would a world in which transactions and Visa have expanded create a bit of a dilemma Payments Wiki – China of all types, not just credit their brands out of the “all for American Express if the cards, would clear over cards for all people” niches Antitrust Division’s lawsuit Comment on the Articles unified electronic payment that they once occupied, were to succeed. To the on PYMNTS.com systems, such as Visa. He the premium cards offered extent that American Express suggested that the nature over the MasterCard and cardholders dislike being AUTHORS of the account accessed by Visa networks do not appear asked to use another general Tim Attinger The complaint does not acknowledge the Tom Brown possibility that the anti-steering rules serve an David S. Evans

Patrick Gauthier important consumer protection interest.

Ignacio Mas the consumers was a private to be quite as iconic as purpose card, American Scott Schuh matter between a given the premium cards offered Express would need to find Karen Webster consumer and his or her by American Express. Yet other ways to vindicate that bank. Put slightly differently, cards bearing the marks interest. The most obvious, Jing Yang someone who drops an of the two companies are of course, would be to lower American Express Platinum carried by far more people, the price of acceptance to Card on the counter to pay particularly when debit cards the price of the next best for some groceries probably are added to the mix. People substitute. But American does not want to be asked whose primary card is an Express might elect to run the whether they would mind American Express card tend risk that merchants would not

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ARTICLES choose to steer American conceivable that MasterCard of emerging alternatives The Lydian Journal 2.0: A Note from the Editor Express cardholders to and Visa could be the to all three of the major MasterCard and Visa. That primary beneficiaries of the general purpose payment law and r e gulation (Outside-In)Novation: The assessment could prove Antitrust Division’s claims – card systems. Changing Paradigm for flawed, however. It is claims pursued in the name Driving Payments Platform Growth IV. Perhaps It Is Time to Do The Opposite The Utility of Retail Payments in Addressing the Financial Inclusion Gap in Developing As it has with a great many industries, the Antitrust Division has played an important role Countries in shaping the evolution of the payment industry in the United States over the past almost 40 years. Beginning with its waffling in the Worthen litigation and continuing through its Some Unpleasant Credit Card challenge to the loyalty rules maintained by MasterCard and Visa, the Antitrust Division’s Arithmetic interventions have frequently not produced the intended results.

U.S. v. American Express, et al.— Failing To Make As it has with a great many systems. Even though its Well, the rules disappeared Something Out Of Nothing industries, the Antitrust own decision not to support several years ago, and Division has played an Visa’s rule precipitated the smart cards have yet to An Overview of Social Commerce and What’s important role in shaping change in the status quo, the emerge in any real way in Fueling its Growth the evolution of the payment Division immediately opened the United States. industry in the United States an investigation into the Making Sense of Ever-Changing over the past almost 40 overlapping ownership. This track record suggests Payment Technologies years. Beginning with its another parallel to waffling in the Worthen Likewise, when the Antitrust “Seinfeld.” A few seasons Payments Wiki – China litigation and continuing Division brought the lawsuit into the series, Jerry’s through its challenge to the challenging the loyalty rules friend, George Costanza, Comment on the Articles on PYMNTS.com loyalty rules maintained maintained by MasterCard reached the conclusion that by MasterCard and Visa, and Visa, it claimed that his instincts were always the Antitrust Division’s allowing banks associated wrong. Having come to AUTHORS interventions have frequently with MasterCard and Visa this conclusion, he adopted not produced the intended to issue cards over the a new self-management Tim Attinger results. American Express network tool. Whenever his instincts would unleash a new pointed in a particular Tom Brown When the Antitrust Division wave of innovation in the direction, he did the declined Visa’s invitation industry. Attorney General opposite. Following this David S. Evans to support Visa’s then-rule Reno claimed at the press heuristic, George’s fortunes Patrick Gauthier barring dual participation conference announcing the turned. Given the Antitrust in the Visa and MasterCard lawsuit that MasterCard and Division’s track record Ignacio Mas networks in the suit brought Visa’s rules had suppressed in the industry and the by the Worthen Bank of the emergence of smart underwhelming complaint, Scott Schuh Arkansas, the Antitrust cards in the United States, perhaps courts will take a Karen Webster Division did not expect implying that the smart cards cue from George and do the that nearly all banks would would materialize as soon opposite of what the Division Jing Yang immediately join both as the rules disappeared. has asked.

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ARTICLES Endnotes The Lydian Journal 2.0: A Note from the Editor ^ Tom resides in the San Francisco office of O’Melveny, where he works on antitrust and financial services litigation law and r e gulation and counseling. His clients in the industry include Visa. The views expressed in this article are Tom’s alone. Tom (Outside-In)Novation: The thanks his colleague, Sam Zun, for excellent research assistance. Changing Paradigm for Driving Payments Platform [1] Antitrust Division, Timeline of Antitrust Enforcement Highlights at the Department of Justice (available at http:// Growth www.justice.gov/atr/timeline.pdf).

The Utility of Retail Payments [2] See, e.g., United States v. AMR Corp., 140 F. Supp. 2d 1141 (D. Kan. 2001) (rejecting antitrust claims against in Addressing the Financial American Airlines predicated on the failure to maximize profits). Inclusion Gap in Developing Countries [3] United States et al. v. Am. Express Co. et al., No. 10-cv-04496-NGG(CLP), Docket No. 1 (“Complaint”) ¶ 31.

[4] 15 U.S.C. § 1. Some Unpleasant Credit Card Arithmetic [5] Bd. of Trade of City of Chicago v. United States, 246 U.S. 231, 238 (1918).

U.S. v. American Express, [6] Id. et al.— Failing To Make Something Out Of Nothing [7] Donald I. Baker, Compulsory Access to Network Joint Ventures Under the Sherman Act: Rules or Roulette?, 1993 UTAH L. REV. 999, 1036 (1993). An Overview of Social Commerce and What’s [8] Frank H. Easterbrook, The Limits of Antitrust, 63 TEX. L. REV. 1, 12 (1984). Fueling its Growth [9] Carl Shapiro, Deputy Assistant Attorney General, Dep’t of Justice Antitrust Div., Antitrust in Network Industries, Making Sense of Ever-Changing Address before the American Law Institute and American Bar Association (Jan. 25, 1996) (available at http://www. Payment Technologies justice.gov/atr/public/speeches/0593.pdf).

[10] See Brooke Group Ltd. v. Brown & Williamson Tobacco Corp., 509 U.S. 209, 220 (1993) (“Congress did not Payments Wiki – China intend to outlaw price differences that result from or further the forces of competition”).

Comment on the Articles [11] See AMR, supra note 2, at 1218 (rejecting government’s theory that “an established competitor should not, on PYMNTS.com and indeed, cannot deviate from its existing market strategy in the face of aggressive price cutting by a new entrant”).. AUTHORS [12] Complaint, supra note 3, ¶ 3. [13] This is consistent with the advocacy effect, under which people come to believe more strongly in the position Tim Attinger they first advocate—or, as here, the card they choose first. See Corinne Bendersky & Jared R. Curhan, Cognitive Dissonance in Negotiation: Free Choice or Justification?, SOC. COGNITION Vol. 27, No. 3, 455, 471 (2009) Tom Brown (citing Robert Cialdini, Attitudinal Advocacy in the Verbal Conditioner, J. PERSONALITY & SOC. PSYCHOL. Vol. 17, No. 3, 350 (1971)). David S. Evans [14] Diane Offereins, president of payment systems for Discover, is quoted making this point in an article by Peter Eichenbaum about the Antitrust Division’s case. See Peter Eichenbum, Discover Says Antitrust Lawsuit Won’t Help Patrick Gauthier Consumers (“[Merchants] don’t want people dallying in line having conversations over what they’re going to pull out of their wallets.”) (available at http://www.businessweek.com/news/2010-10-07/discover-says-antitrust-lawsuit- Ignacio Mas won-t-help-consumers.html).

Scott Schuh [15] Marc Rysman, An Empirical Analysis of Payment Card Usage 7 (May 11, 2004) (unpublished manuscript, available at http://74.125.155.132/scholar?q=cache:q_ovS2iYNUEJ:scholar.google.com/&hl=en&as_sdt=2000). Karen Webster

[16] Tom Brown & Lacey Plache, Paying with Plastic: Maybe Not So Crazy, 73 U. CHI. L. REV. 63, 83-85(2006). Jing Yang

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