Thursday, July 5, 2018

FYI: SCOTUS Rules Credit Card Company's Anti-Steering Rules Did Not Violate Antitrust Law

In a 5-4 ruling, the Supreme Court of the United States (SCOTUS) held that anti-steering provisions in agreements between a credit card company and merchants wishing to accept the card does not violate federal antitrust law.

 

A copy of the opinion is available at:  Link to Opinion

 

The defendant credit card company ("Company") required merchants who wanted to accept the Company's credit cards to agree to an anti-steering contractual provision.

 

Under the Company's business model, and unlike other credit card companies, it earned most of its revenues not from collecting interest from cardholders but from merchant fees.  Focusing on cardholder spending, the Company offered more generous rewards to its customers than its competitors.  However, to fund these rewards programs, the Company charged merchants higher fees than its rivals.

 

Merchants wanting to avoid these higher fees, while still enticing the Company's cardholders to shop at their stores, would sometimes attempt to dissuade cardholders from using the Company's card at the point of sale, in a practice known as "steering".

 

The anti-steering provisions prohibited merchants from implying a preference for non-Company cards, dissuading customers from using Company cards, imposing special restrictions or fees on the use of cards, or promoting other cards more than the Company's.  The anti-steering provisions did not prevent merchants from steering customers toward debit cards, checks, or cash.

 

The United States and several states ("Plaintiffs") sued the Company claiming its anti-steering provisions violated section 1 of the Sherman Act, which prohibits "[e]very contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States."  15 U.S.C. § 1.

 

After a seven-week trial, the trial court found that the anti-steering provision violated section 1.  In reaching its ruling, the trial court found that the credit card market should be treated as two separate markets – one for merchants and one for cardholders.  Evaluating the effects on the merchant side of the market, the trial court found that the Company's anti-steering provisions were anticompetitive in violation of the Sherman Act.

 

On appeal, the Second Circuit reversed, concluding that the credit card market is one market, not two.  Evaluating the credit card market as a whole, the Second Circuit concluded that the Company's anti-steering provisions were not anticompetitive and did not violate section 1.

 

The matter was then appealed to the Supreme Court of the United States.

 

Initially, the SCOTUS noted that the phrase "restraint of trade" in the Sherman Act "is best read to mean 'undue restraint.'"  Thus, section 1 outlaws "only unreasonable restraints."

 

Restraints may be unreasonable in one of two ways.  Restraints are unreasonable per se if they "always or almost always tend to restrict competition and decrease output."  Typically, only "horizontal" restraints imposed by an agreement between competitors qualify as unreasonable per se.

 

"Restraints that are not unreasonable per se are judged under the 'rule of reason,'" which "requires courts to conduct a fact-specific assessment of 'market power and market structure . . . to access the [restraint]'s actual effect' on competition."

 

Because both sides agreed that the anti-steering provision was a vertical restraint "imposed by agreement between firms at different levels of distribution," the provisions were assessed under the "rule of reason" standard. 

   

"To determine whether a restraint violates the rule of reason . . . a three-step, burden-shifting framework applies."  First, "the plaintiff has the initial burden to prove that the challenged restraint has a substantial anticompetitive effect that harms consumers in the relevant market."  Second, "[i]f the plaintiff carries its burden, then the burden shifts to the defendant to how a precompetitive rationale for restraint."  Third, "[i]f the defendant makes this showing, then the burden shifts back to the plaintiff to demonstrate that the precompetitive efficiencies could be reasonably achieved through less anticompetitive means."

 

At issue was whether the Plaintiffs had carried their initial burden of proving that the Company's anti-steering provisions had an anticompetitive effect.

 

To meet their burden, the Plaintiffs relied "exclusively on direct evidence to prove that [the Company's] anti-steering provisions have caused anticompetitive effects in the credit-card market."  To assess the evidence, the Court determined that it "must first define the relevant market."

 

Credit card companies operate in what economists call a two-sided platform, because they provide separate but interrelated services to both cardholders and merchants.  For the cardholders, the network extends them credit, which allows them to make purchases without cash and to defer payment until later.  They can also receive rewards based on the amount they spend.  For merchants, the network allows them to avoid the cost of processing transactions and offers them quick, guaranteed payment.  This saves them the trouble and risk of extending credit to customers, and increases the number and value of sales that they can make.

 

Due to indirect network effects, two-sided platforms cannot raise prices on one side without risking a feedback loop of declining demand.  Thus, two-sided transaction platforms, like the credit card market, "facilitate a single, simultaneous transaction between participants," as "the network can only sell its services . . . if a merchant and cardholder both simultaneously choose to use the network."

 

The SCOTUS determined that "competition cannot be accurately assessed by looking at only one side of the platform in isolation," and therefore, "[i]n two-sided transaction markets, only one market should be defined."

 

As a result, the Court "analyze[d] the two-sided market for credit-card transactions as a whole to determine whether the plaintiffs have shown that [the Company's] anti-steering provisions have anticompetitive effects."

 

The SCOTUS held that the Plaintiffs did not meet their burden to prove anti-competitive effects in the relevant market.  In so ruling, the Court noted that the Plaintiffs "stake their entire case on proving that [the Company's] agreement increase[d] merchant fees," which the Court found "unpersuasive."

 

In fact, the Court determined that the Company's "business model has spurred robust Interbrand competition and has increased the quality and quantity of credit-card transactions," and "[t]he promotion of Interbrand competition . . . is . . . 'the primary purpose of the antitrust laws.'"

 

Because the SCOTUS held that the Company's anti-steering provisions did not unreasonably restrain trade, it affirmed the ruling of the Second Circuit.  

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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Sunday, July 1, 2018

FYI: 3rd Cir Holds ATDS Must Have "Present Capacity" to Autodial, Follows ACA Int'l

Following the D.C. Circuit's ruling ACA Int'l v. FCC, 885 F.3d 687 (D.C. Cir. 2018), the U.S. Court of Appeals for the Third Circuit recently held that an "automatic telephone dialing system" under the federal Telephone Consumer Protection Act, 47 U.S.C. § 227, et seq. (TCPA) must have the present or current capacity to store or produce telephone numbers using a random or sequential number generator, and to dial those numbers.

 

A copy of the opinion is available at:  Link to Opinion

 

The plaintiff purchased a cell phone with a reassigned telephone number.  The prior owner of the number subscribed to an e-mail service provider's "Email SMS Service," which automatically sends a text message each time an e-mail was sent to the user's e-mail account.  The plaintiff received text messages from the service provider every time the prior owner received an e-mail, and the plaintiff's supposed attempts to turn off the notifications were allegedly unsuccessful.

 

The plaintiff filed a putative class action alleging that the service provider violated the TCPA by sending thousands of unsolicited text messages. 

 

As you may recall, under the TCPA, it is unlawful to make or send a non-emergency call or text or pre-recorded message "using any automatic telephone dialing system" to any telephone number assigned among other things to a cellular telephone service.  47 U.S.C. § 227(b)(1)(A)(iii).

 

The TCPA defines an automatic telephone dialing system (ATDS) as "equipment which has the capacity -- (A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers."  47 U.S.C. § 227(a)(1).

 

In 2014, the trial court granted summary judgment in favor of the servicer provide after concluding that the Email SMS Service did not have the capacity to store or produce telephone numbers using a random or sequential number generator.

 

As you may recall, the Federal Communications Commission (FCC) altered the landscape of TCPA litigation when it issued a declaratory ruling and order in 2015 (2015 Order).  In the 2015 Order, the FCC stated among other things that "the capacity of an autodialer is not limited to its current configuration but also includes its potential functionalities."

 

Based on the FCC's 2015 Order, the Third Circuit vacated the trial court judgment and remanded the case for further consideration.  On remand, the service provider again moved for summary judgment, and both parties submitted expert reports addressing the Email SMS Service's latent or potential capacity.  The trial court excluded the plaintiff's expert reports and concluded that the Email SMS Service did not qualify as an ATDS. 

 

This appeal followed.

 

During this appeal, the U.S. Court of Appeals for the District of Columbia issued its opinion in ACA Int'l v. FCC, 885 F.3d 687 (D.C. Cir. 2018).  The D.C. Circuit held among other things that the FCC exceeded its authority by expanding the term "capacity" to include any latent or potential capacity of a device.  The D.C. Circuit set aside this portion of the FCC's 2015 Order.

 

In light of ACA Int'l, the Third Circuit determined that the appellant "can no longer rely on his argument that the Email SMS Service had the latent or potential capacity to function as an autodialer."  Thus, the only issue before the Third Circuit was whether the plaintiff presented sufficient evidence to demonstrate that the Email SMS Service had "the present capacity to function as an autodialer."

 

The plaintiff's first three expert reports focused on latent or potential capacity, and proposed various ways in which the Email SMS Service could be modified to generate random or sequential numbers.  The plaintiff argued that certain limited modification may nevertheless fall within the scope of present capacity under ACA Int'l. 

 

However, the Third Circuit found the proposed modification too speculative, which would require several months of work to implement.  As the Third Circuit explained, "[t]he reports [were] founded upon the exact type of hypothesizing that [was] foreclosed by ACA International."

 

The plaintiff's fourth expert opined that the Email SMS Service system was an ATDS, because  "[t]he ability to generate random numbers is a fundamental function inherent in information technology computer systems employing the most common operating systems, security protocols and encryption."

 

Notably absent, as Third Circuit explained, was "any explanation of how the Email SMS System actually did or could generate random telephone numbers to dial." 

 

Because the plaintiff failed to present any evidence to demonstrate that the Email SMS Service had the present or current capacity to perform ATDS functions, the Third Circuit concluded that the plaintiff's expert reports lacked "fit or relevance" and were properly excluded. 

 

Accordingly, the Third Circuit affirmed the trial court's orders excluding the plaintiff's expert reports and granting summary judgment in favor of the service provider.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC   |   Wisconsin

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.


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Financial Services Law Updates

 

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