AmEx Accused by U.S. of Stifling Card Firm Competition

American Express Co.’s rules barring merchants from encouraging customers to use credit cards with lower processing costs stifle competition, a U.S. lawyer argued at the start of the iconic company’s antitrust trial.

Businesses that accept AmEx are prohibited by the company from offering incentives to customers who use competing cards such as those issued by Visa Inc. and MasterCard Inc., which charge less to process payments. AmEx’s all-or-nothing proposition is illegal, the government claims in a lawsuit joined by 17 states.

“AmEx has controlled the price and has excluded competition,” Craig W. Conrath, a Justice Department lawyer, told U.S. District Judge Nicholas Garaufis today in Brooklyn, New York federal court. “AmEx does not have to worry that a competitor is going to come along with a lower price.”

Witnesses at the the trial, which might last more than eight weeks, may include merchants, credit card firm executives and academic experts as the government seeks to prove American Express abuses market power with rules to protect its fees, Conrath said. Garaufis will decide the case without a jury.


American Express Chairman and Chief Executive Officer Kenneth I. Chenault may also be called to testify along with representatives from merchants including Southwest Airlines Co., Jo-Ann Stores Inc. and Home Depot Inc., according to a government witness list.

The trial follows years of private litigation by merchants against card firms over fees. The costs are largely hidden from consumers and, the government says, amount to about $50 billion a year.

American Express argues that its rules are needed to compete with the “duopoly” of Foster City, California-based Visa and Purchase, New York-based MasterCard, which it says have more than 1 billion cards in the U.S. combined.

There are fewer than 55 million American Express cards, and about 3 million shops refuse the cards while accepting competitors’, AmEx says.

“Everyone who has our card has theirs,” said Evan Chesler, a lawyer for AmEx. “But very few people who have their card have ours.”

AmEx said its higher fees benefit merchants, with targeted advertising and fraud reduction programs, as well as consumers who get rewards such as opportunities to get highly sought entertainment tickets before the general public.

Tighter Rules

The U.S. alleged that American Express tightened its rules starting in the 1990s when Visa won business by emphasizing lower costs. Discover Financial Services later struggled to gain market share when promoting its lower fees because of the other card firms’ anti-steering rules, the Justice Department alleged.

Visa, MasterCard and AmEx were all sued over similar rules by the government in 2010. Visa and MasterCard agreed to make changes to their rules to settle the case.

While some merchants opt to go without accepting American Express, almost all of the country’s 100 largest merchants take the card, according to the U.S.

Deerfield, Illinois-based Walgreen Co., the second-largest U.S. drugstore company by market value, said it would stop accepting the card in 2004 then reversed its decision a month later after further negotiations. Chesler said the retailer ultimately decided it didn’t want to inconvenience its customers.

Michael Polzin, a spokesman for Walgreen, declined to comment on the trial.

The case is U.S. v. American Express Co., 1:10-cv-04496, U.S. District Court, Eastern District of New York (Brooklyn).

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