American Express Loses Antitrust Lawsuit Over Merchant Rules

After nearly five years of legal battles, a federal court has ruled that American Express’s merchant agreements violate antitrust laws and has resulted in higher costs for consumers.

The lawsuit, filed by the Justice Dept. and attorneys general for more than a dozen states, alleged that so-called “anti-steering” or non-discrimination provisions of the AmEx merchant agreement prevent the more than 3 million merchants in the U.S. from pointing their customers to use other cards — like those on the Visa, MasterCard, and Discover networks — that charge lower fees to merchants for each transaction.

In today’s ruling [PDF] by a District Court in Brooklyn, the judge points out that these restrictions on credit card merchant agreements fly in the face of the standard way that retailers do business.

“Merchants routinely attempt to influence customers’ purchasing decisions, whether by placing a particular brand of cereal at eye level rather than on a bottom shelf, discounting last year’s fashion inventory, or offering promotions such as ‘buy one, get one free,’” he writes. “This dynamic, however, is absent in the credit card industry. Under American Express’s NDPs, a merchant may not attempt to induce or “steer” a customer to use the merchant’s preferred card network by, for example, offering a 10% discount for using a Visa card, free shipping for using a Discover card, or a free night at a hotel for using an American Express card.”

So while a merchant might want to suggest or provide a benefit to a customer willing to use a different card, AmEx’s agreement forbids it.

“This, in turn, results in higher costs to all consumers who purchase goods and services from these merchants,” writes the judge, who notes that he repeatedly asked the government and AmEx to reach a settlement. MasterCard and Visa, who were both defendants in the original lawsuit, made deals with the plaintiffs long ago.

“By preventing merchants from steering additional charge volume to their least expensive network… the NDPs short-circuit the ordinary price-setting mechanism in the network services market by removing the competitive ‘reward’ for networks offering merchants a lower price for acceptance services,” explains the court. “The result is an absence of price competition among American Express and its rival networks. In fact, the record shows that merchant prices have risen dramatically in the absence of merchant steering.”

These agreements also put up a barrier against a new competitor into the marketplace hoping to distinguish itself by charging the the least, concludes the judge.

The ruling does not specify remedies for American Express but the judge says those are forthcoming.