AmEx Vows Appeal After Federal Court Deals T&E Giant a Loss Over Its Anti-Steering Rules

By Jim Daly and John Stewart

Continuing its recent string of setbacks, American Express Co. Thursday lost a crucial federal court fight in which it defended policies banning merchants from steering AmEx cardholders to cheaper forms of payment. The U.S. Department of Justice and 17 state attorneys general challenged the policies in 2010 as anticompetitive.

AmEx said immediately following the decision that it will appeal the ruling.

In a 150-page decision, U.S. District Judge Nicholas G. Garaufis said the DoJ had “proven by a preponderance of the evidence that the challenged restraints constitute an unlawful restraint of trade” under the federal Sherman Act. Garaufis, a judge in the federal court in Brooklyn, N.Y., will schedule a hearing to determine legal remedies.

“The court’s ruling will not provide any benefit to consumers and will, in fact, harm competition by further entrenching the two dominant networks,” New York City-based AmEx said in a statement. “We continue to believe that the Department of Justice’s arguments are flawed and believe we should prevail on appeal.”

A DoJ spokesperson could not be reached for comment Thursday morning.

The DoJ and states also accused Visa Inc. and MasterCard Inc. of violating antitrust laws with their respective anti-steering rules, but they settled the case immediately and removed or revised the challenged policies. AmEx, however, vowed to fight, calling the lawsuit a “significant retreat” from the DoJ’s earlier efforts to promote payment competition.

Garaufis wrote that, as a general matter, steering, the type of merchant behavior so-called non-discrimination policies (NDPs) attempt to prevent, “is both pro-competitive and ubiquitous. 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 went on to write that, “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.”

Even though AmEx’s U.S. merchant base (approximately 3.4 million, according to figures appearing in the Garaufis decision) is smaller than the Visa/MasterCard base of about 8 million merchants, AmEx still has the “power to repeatedly and profitably raise their merchant prices without worrying about significant merchant attrition. In addition, plaintiffs have proven that American Express’s NDPs have caused actual anticompetitive effects on interbrand competition.”

“By preventing merchants from steering additional charge volume to their least expensive network, for example, 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,” the decision goes on. “The result is an absence of price competition among American Express and its rival networks.”

The judge’s decision comes about six months after a bench trial featuring testimony from more than 30 witnesses, including merchants, executives from competitors Visa, MasterCard, and Discover, and also various experts and an array of current and former AmEx executives.

Garaufis’s decision is in line with what the DoJ has found in investigating the conduct of card networks in recent years, according to payments attorney Anita Boomstein, a partner with New York City-based Hughes Hubbard & Reed LLP. “The federal court’s decision [Thursday] is consistent with the Department of Justice’s findings that the actions of the three major networks in prohibiting point-of-sale conduct by merchants is anti-competitive,” Boomstein tells Digital Transactions News.

The court defeat comes on the heels of several other setbacks for AmEx, including the impending loss of its big cobranded card program and exclusive credit card acceptance deal with Costco Wholesale Corp., the loss of another cobranded card with JetBlue Airways Corp., and the layoff of 4,000 employees, about 6% of its workforce, as part of a restructuring.

AmEx’s stock price, $78.13 in mid-day trading, was down about 2% from Wednesday’s close.