anticompetitive effects

On January 28, the US Federal Trade Commission (FTC) announced that it had accepted a proposed settlement with office supply distributors Staples and Essendant in connection with Staples’ proposed $482.7 million acquisition of Essendant. The settlement suggests that the FTC is currently more willing than the US Department of Justice (DOJ) to accept conduct remedies to resolve competitive issues raised by vertical mergers.

WHAT HAPPENED:

  • The FTC Commissioners voted 3-2 to accept a proposed settlement establishing a firewall to prevent Staples from receiving competitively sensitive customer information from Essendant.
  • Staples is the largest reseller of office products in the US, and one of only two retail office supply superstores in the US. Essendant is one of only two nationwide office product wholesale distributors. In September 2018, Staples agreed to acquire Essendant.
  • Staples competes with various resellers to sell office supplies to mid-sized companies. Many of those resellers rely on Essendant as their wholesale distributor. In that role, resellers have to provide Essendant with detailed information about their end customers’ identities, purchasing history, product preferences and similar data.
  • The FTC alleged in its complaint that the transaction was likely to harm competition by giving Staples access to the commercially sensitive information (CSI) of Essendant’s resellers and those resellers’ end customers. The FTC contended that access to that information could allow Staples to offer higher prices than it otherwise would when bidding against a reseller for an end customer’s business.
  • To address this competitive concern, the FTC imposed a conduct remedy. Specifically, the FTC required the parties to establish a firewall limiting Staples’ access to the CSI of Essendant’s resellers and the end customers of those resellers.
  • Two FTC Commissioners issued dissenting statements, arguing that the settlement does not fully remedy the transaction’s likely anticompetitive effects. In the dissenters’ view, the evidence suggests that the integrated firm could implement a strategy of raising costs for Staples’ reseller rivals.

WHAT THIS MEANS:

  • The settlement indicates that the FTC remains willing to cure competitive issues raised by vertical mergers with conduct remedies, such as firewalls, instead of imposing a divestiture or seeking to block the deal.
  • Under Makan Delrahim’s leadership, the DOJ’s Antitrust Division has been less receptive of conduct remedies, even in vertical merger cases. Delrahim has stated that conduct remedies are fundamentally regulatory and are inconsistent with the DOJ’s role as a law enforcement agency.
  • The DOJ refused to accept conduct remedies to resolve the competitive issues arising from AT&T’s acquisition of Time Warner. DOJ challenged the transaction in federal court. In June 2018, a DC district court judge ruled against the DOJ, and the case is currently on appeal to the DC Circuit.
  • One of the FTC Commissioners, Rebecca Kelly Slaughter, argued in her dissenting statement that the FTC should be more willing to challenge, and seek to block vertical mergers when it identifies competitive concerns. That position is more aligned with the DOJ’s currently stated policy, but overall the FTC appears more willing to accept conduct remedies than the DOJ.

In an antitrust case involving bundled discount on sutures, the United States Court of Appeals for the Tenth Circuit affirmed a lower court decision granting summary judgment in favor of defendants Cardinal Health 200, LLC and Owens & Micro Distribution, Inc.  The Tenth Circuit held that Plaintiff-Appellant Suture Express, Inc. could not prove that the defendants individually possessed market power and that it had not demonstrated that defendants caused substantial adverse effects on competition.

WHAT HAPPENED:

  • Suture Express, a distributor focused on the sale of sutures, sued Cardinal Health and Owens & Micro, which are national distributors of a broad array of medical-surgical products, claiming that they had engaged in illegal tying through their practice of bundling sutures with other medical-surgical products in a manner that penalized customers that purchased sutures from other suppliers.
  • The parties filed cross motions for summary judgment and the lower court granted summary judgment to the defendants.  The court held that Suture Express’ claims failed as a matter of law because it could not prove that the defendants individually possessed market power.  The court also held that Suture Express could not meet the antitrust injury requirement because it had not shown that competition had been harmed.
  • The Tenth Circuit affirmed the lower court’s ruling.  On the issue of market power, the appellate court agreed with the lower courts’ findings that the defendants’ market shares on the alleged tying products (medical-surgical products excluding sutures) were relatively low (31 percent and 38 percent), there were many examples of customers switching to other distributors, and the defendants’ declining profit margins on medical-surgical products excluding sutures demonstrated that the defendants did not have the ability to control prices.
  • With respect to antitrust injury, the Tenth Circuit stated that the antitrust laws are meant to protect competition, not individual competitors.  The appellate court noted that despite the fact that roughly half of the market was not constrained by the bundling arrangement at issue, Suture Express accounted for a relatively small portion of this piece of the market.  This raised the question of whether it was just Suture Express that was harmed as opposed to competition generally.

WHAT THIS MEANS:

  • Establishing market power when defendants have relatively low market shares is difficult.  While market shares in and of themselves are not determinative of whether market power exists, the courts give market shares significant weight and when evidence of low market shares is combined with the other factors the Tenth Circuit found here, it is difficult for a plaintiff to meet its burden.
  • Vertical pricing arrangements that offer discounts to customers, even if associated with a bundling arrangement, are often viewed as procompetitive.  A plaintiff has the difficult burden of showing that a defendant’s bundle creates anticompetitive effects that outweigh its procompetitive effects.  The plaintiff must demonstrate that the arrangement caused harm not only to the plaintiff, but to competition as a whole.  Even if a plaintiff finds it difficult to compete against a defendant’s bundle, if customers have shown that they are willing and able to switch from the defendant’s bundle, establishing harm to competition will be a challenge.

After a seven-week bench trial in an enforcement action by the U.S. Department of Justice (DOJ) and 17 state attorneys general, U.S. District Judge Garaufis (Eastern District of New York) held that American Express Co.’s (Amex’s) “anti-steering” rules (Non-Discrimination Provisions or NDPs) are an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act.  The NDPs in Amex’s agreements with merchants prevent merchants from attempting “to induce or ‘steer’ a customer” from paying with non-AmEx credit cards by, for instance, offering discounts or incentives to customers paying with other cards, even though “the cost of [such] transaction[s] [would likely] be lower for the merchant.”  At bottom, the court’s holding centered on its conclusion that “these NDPs create an environment in which there is nothing to offset [Amex’s incentive] to charge merchants inflated prices [to process transactions, which] results in higher costs to all consumers who purchase goods and services from these merchants.”

In the initial step of its rule-of-reason analysis—DOJ’s burden to demonstrate that the NDPs “have had an ‘adverse effect on competition as a whole in the relevant market,’” which may be met by “establishing that [Amex] had sufficient market power to cause an adverse effect on competition”—the court focused first on market definition, then market power and anticompetitive effects.

Regarding the relevant market, Amex argued that it includes both debit and credit cards.  It distinguished United States v. Visa, where the Second Circuit held that credit cards and debit cards are distinct relevant markets, in light of “the dramatic growth in customers’ use of debit cards” since that 2003 decision.  The court disagreed, finding that “debit cards have not become reasonably interchangeable with [credit] cards or network services in the eyes of credit-accepting merchants, who are the relevant consumers in this case.”  Rather, the court employed a market definition comprising only credit cards, where AmEx holds a 26 percent share.  The court did, however, reject DOJ’s argument for an even smaller submarket, i.e., credit card services for only travel and entertainment merchants (where Amex’s market share is even higher), based on its finding that DOJ failed to show that credit card companies are able to charge discriminatory prices to those merchants.

The court went on to conclude that “Amex’s NDPs have adversely affected competition in the [relevant] market, and [Amex] possesses sufficient market power to cause such effects.”  The court found that Amex “enjoy[s] significant market share in a highly concentrated market with high barriers to entry, and are able to exercise uncommon leverage over their merchant-consumers,” for instance by “imposing significant price increases . . . without any meaningful merchant attrition.”  The court also found actual adverse effects on interbrand competition (i.e., that the NDPs “render[] low-price business models untenable, stunt[] innovation, and result[] in higher prices”), reasoning that the NDPs “deny[] merchants the opportunity to influence their customers’ payment decisions and thereby shift spending to less expensive cards[, such that the NDPs] impede a significant avenue of horizontal interbrand competition in the [relevant] market.”

In the second step of its rule-of-reason analysis—Amex’s burden “to offer evidence of the pro-competitive effects of their agreement”—Amex argued that its NDPs “are reasonably necessary (1) to preserve [their] differentiated business model and thus [their] ability to drive competition in the network services market, and (2) to prevent merchants from ‘free-riding’ on [their] investments in [their] merchant and cardholder value propositions.”  The court ultimately disagreed, holding that “these purported justifications do not offset, much less overcome, the more widespread and injurious effects of the NDPs on interbrand competition in the relevant market.”  Accordingly, the court found a Section 1 violation without reaching the third step of a rule-of-reason analysis (DOJ’s potential burden “to prove that any ‘legitimate competitive benefits’ proffered by [Amex] could have been achieved through less restrictive means”).

Despite holding the NDPs illegal and recognizing that, “[i]f necessary, the court will itself craft an injunction that implements the Decision and renders [Amex’s] contractual provisions compliant with the antitrust laws,” the court expressed reluctance to “intervene in [this] highly complex and high-stakes industry” by requiring “wholesale abandonment” of Amex’s merchant regulations.  So, the court—averring that “the parties themselves are likely best equipped to determine how [Amex’s] merchant regulations might be rewritten” in a manner that preserves their pro-competitive aspects (i.e., “preserving a positive point-of-sale experience for [Amex’s] cardholders[] and protecting their products from actual mistreatment, mischaracterization, or denigration by merchants”) issued a scheduling order giving the parties 30 days to propose a remedial order.

The case is U.S. et al. v. American Express Co. et al., 1:10-cv-04496-NEG-RER (E.D. N.Y., Feb. 19, 2015); the decision, scheduling order and other case documents are available here.