AmEx Can Bar Merchants From Steering Users to Rival Cards

  • Federal appeals court in New York overturns earlier decision
  • Government failed to show customers harmed by practice

American Express Co. can prohibit merchants from steering customers to credit cards with lower transaction fees, a federal appeals court ruled in a blow to businesses trying to reduce annual card fees that run around $50 billion.

The decision by the appeals court in Manhattan is the most definitive ruling on AmEx’s relationship with merchants. A federal judge had found the credit card company’s policy violated antitrust law, but the higher court said the retailers aren’t obliged to accept AmEx cards and pay its fees. The case was brought by the U.S. Justice Department in 2010.

"Though merchants may desire lower fees, those fees are necessary to maintaining cardholder satisfaction,” Circuit Judge Richard Wesley said in a written opinion.

American Express shares pared their decline on the news. The stock fell 0.7 percent to $63.42 in New York after dropping as much as 1.6 percent earlier. American Express shares have tumbled 16 percent in the past 12 months, the worst performance in the Dow Jones Industrial Average.

“Today’s ruling is a positive for AmEx as it seems that investors were concerned about the negative impact of potential steering and the ability for the networks to create an environment where merchants would want to steer more frequently,” Sanjay Sakhrani, a Keefe, Bruyette & Woods analyst, said in a note to clients.

American Express argued that its rules promote competition by allowing it to remain in the market with its rivals Visa Inc. and MasterCard Inc. The higher fees it charges allows it to deliver more expensive benefits to its cardholders, setting it apart from competitors, it said.

Panel Agrees

The three-judge panel agreed.

“If a particular merchant finds that the cost of AmEx fees outweighs the benefit it gains by accepting AmEx cards, then the merchant can choose to not accept AmEx cards,” the panel said. “Indeed, many merchants have already made and continue to make this choice.”

Visa accounted for about 45 percent of credit card transactions in the U.S. in 2013, while AmEx had 26.4 percent, MasterCard 23.3 percent and Discover Financial Services had 5.3 percent, according to the decision.

The appeals court said the government had failed to prove that American Express customers were harmed by the company’s practice and ordered the lower court to rule in favor of the company.

High Fees

“It appears that the court fails to recognize that high swipe fees, baked into the cost of virtually everything consumers buy, forces those who pay with cash and debit to subsidize the frequent flyer miles of the well-to-do,” said Mallory Duncan, general counsel for the National Retail Federation, which is still reviewing the decision.

AmEx’s Chief Executive Officer Kenneth Chenault said in a statement the card issuer was “very satisfied with this significant win.” He said the firm will continue to fight the case if the Justice Department appeals.

“Consumers will be able to choose how they pay and our card members will not be discriminated against at the point of sale,” Marina Norville, a spokeswoman for New York-based AmEx, said in an e-mailed statement. “Our non-discrimination provisions in our merchant contracts remain in effect, just as they did before the trial court issued its injunction in February 2015.”

The decision may have reverberations in an unrelated case in San Francisco, where the city is seeking billions of dollars in a lawsuit accusing AmEx of stifling competition with excessive fees. The judge, who isn’t bound by the New York appeals court, has put that case on hold pending the ruling. 

American Express also faces suits by merchants seeking damages for the company’s alleged violation of antitrust law. The company may argue those cases must also be dismissed based on Monday’s ruling.

2014 Trial

The case was tried in 2014 before U.S. District Judge Nicholas Garaufis, who considered the case without a jury. More than 30 witnesses testified, including representatives from airlines, retailers and hotel companies. Garaufis ruled in February 2015 that American Express rules harm competition in violation of U.S. antitrust law.

The company has “the power to repeatedly and profitably raise” its merchant prices “without worrying about significant merchant attrition,” Garaufis said. “The result is an absence of price competition among American Express and its rival networks.”

The rules have also “foreclosed the possibility of a current network or new entrant” differentiating itself by imposing lower fees, he said.

Mark Abueg, a spokesman for the Justice Department, declined to comment on the ruling.

The case is U.S. v. American Express Co., 15-1672, U.S. Circuit Court of Appeals, Second Circuit (Manhattan).

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