Appellate Court’s Ruling Against AmEx Hands a Tool to Merchants—But Will They Use It?

Now that a federal appeals court has refused to stay a lower court’s ruling, merchants are free to induce customers to use cards other than those of American Express Co. while the appeals court hears AmEx’s argument that the lower court erred. That means merchants, at least for now, have a key tool to reduce their card-acceptance costs.

But it’s unclear just how many merchants will want to rock the boat with AmEx-wielding customers now that cash registers are ringing after a long recession. At the same time, the probability that AmEx will prevail on appeal remains low, says an attorney who has closely followed the case.

The Second U.S. Circuit Court of Appeals on Tuesday refused to temporarily halt a decision issued by a federal court in February that found AmEx had violated antitrust law with its longstanding rules banning merchants from steering customers to other cards once they try to use AmEx. The U.S. District Court in Brooklyn found in favor of the U.S. Department of Justice and 17 state attorneys general after a seven-week bench trial.

AmEx appealed that decision and also asked for the stay to preserve the status quo pending its appeal. While denying the stay, the Second Circuit did agree to hear the appeal on an expedited basis.

As a result, pending the appeal, U.S. merchants will be free starting July 1 to use discounts, rebates, or other special offers to induce customers to use a card other than AmEx. They can also post signs or otherwise express their preference to customers for other brands. They cannot, however, surcharge customers for using AmEx. The federal court’s ruling was originally set to take effect June 1 but was delayed 30 days to give the appeals court a chance to rule on the stay.

Discount rates on AmEx cards have long been substantially higher than on competing cards, though Visa Inc. or MasterCard Inc. cards carrying rewards programs can sometimes cost merchants just as much to accept.

It remains unclear, however, how many merchants will take advantage of this newfound freedom. Merchants may be loath to offend customers who prefer to use AmEx. “Merchants now are starting to make money,” says an executive with one merchant processor who asked not to be identified. “They’re busy and they’re happy.”

Still, merchants may also know they have plenty of time. It doesn’t seem likely AmEx will prevail in its appeal, says Anita Boomstein, a partner with New York City-based law firm Hughes Hubbard & Reed LLP who has closely followed the case. “It’s difficult to imagine the Second Circuit would overturn the lower court,” she tells Digital Transactions News. Given that the Brooklyn court’s Judge Nicholas G. Garaufis heard extensive testimony over a seven-week period, “It would appear to be solid reasoning,” she says of Garaufis’s decision to strike down AmEx’s anti-steering rule.

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For its part, AmEx says it is working to comply with the federal court's decision. “We are disappointed the request for a stay was denied,” says an emailed statement provided by a spokesperson. “We will move forward to modify the Non-Discrimination Provisions in our merchant contracts, per the trial court’s remedy.”

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The company also says it is pressing its appeal of that decision because of its potential to harm competition in the payments market. “As we have previously stated…we believe it will not provide any benefit to consumers and will in fact harm competition by further entrenching the two dominant networks,” says the statement. “We believe the trial court’s ruling is not supported by the facts or the law.”

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“Steering is not a good thing for consumers and we believe many merchants agree,” the statement continues.

The DoJ filed its suit against AmEx in October 2010 after the company refused to alter its anti-steering rules. At the same time, it reached settlements with MasterCard and Visa in which those companies agreed to change similar policies.