NEW YORK -- American Express Co. violated U.S. antitrust law by prohibiting merchants from steering consumers to use lower-cost credit cards, a federal judge has ruled, reported Reuters.
In his decision, U.S. District Judge Nicholas Garaufis in Brooklyn ruled that the New York City-based company's activities "imposed actual, concrete harms on competition in the credit and charge card network services market," Garaufis wrote in a 150-page decision. He said he will decide on remedies later.
Card companies charge merchants more than $50 billion a year to process consumer transactions, the government said. Those fees have also spurred many years of litigation by the merchants themselves against the card companies.
"Today's ruling is one step forward to bringing badly needed competition and transparency to the entire credit-card industry," the Merchants Payments Coalition (MPC)--of which the National Association of Convenience Stores (NACS) is a founding member--said in a separately issued statement. "Allowing retailers to ask consumers to use a less expensive card will result in lower prices for consumers and a fairer market for the fees merchants currently pay to accept credit and debit cards. Judge Garaufis got it exactly right that card networks charge merchants inflated prices that result in higher costs for consumers. Merchants have been saying this for years. The card companies have the power to manipulate market forces and that they use that power to unlawfully constrain merchants from lowering prices for consumers."
U.S. Attorney General Eric Holder praised the decision by a judge in the U.S. District Court in the Eastern District of New York who found in favor of the U.S. Department of Justice's lawsuit claiming that American Express' rules for merchants violate antitrust laws.
"[The] decision is a triumph for fair competition and for American consumers," Holder said in announcing the decision. "By recognizing that American Express's rules harm competition, the court vindicates the promise of robust marketplaces that is enshrined in our antitrust laws."
The U.S. Department of Justice and 17 state attorneys general sued American Express, Visa Inc. and MasterCard International Inc. in 2010 to eliminate restrictions that the three credit-card networks imposed on merchants. The Justice Department argued that these restrictions obstruct merchants from using competition to try to keep credit-card fees from increasing. The civil case, brought under Section 1 of the Sherman Antitrust Act, sought to end the violation and to restore competition.
The trial focused on credit-card interchange or swipe fees that generate more than $50 billion annually for credit-card networks. Millions of merchants of all sizes and in scores of industries pay those fees. Despite these large fee revenues, the Justice Department argued that price competition over merchant swipe fees has been almost non-existent, and for decades the credit-card networks have not competed on price. Today's decision was rendered by Judge Nicholas G. Garaufis.
"Merchants pay over $50 billion in credit card swipe fees each year. The department and the attorneys general of 17 states brought this case because competition over those fees was being suppressed," said Deputy Assistant Attorney General for the Antitrust Division Leslie C. Overton. "The Court's ruling establishes that the American Express anti-steering rules block merchants from using competition to keep credit card swipe fees down, which means higher costs to those merchants' customers. I am proud of the outstanding work done by the investigative and trial teams. As today's decision reaffirms, the Antitrust Division remains committed to ensuring that competition is not restricted in this important sector of the economy."
Settlements with Visa and MasterCard were filed at the same time the case against American Express was begun; the settlements prohibit the two networks from continuing their rules and practices that had obstructed competition. The court approved the settlements on July 20, 2011, and they applied immediately to Visa and MasterCard. American Express was not a party to the settlements, and the litigation against American Express continued.
The department argued that the principal reason for an absence of price competition among credit card companies has been rules imposed by each of the networks that limit merchants' ability to take advantage of a basic tool to keep prices competitive. That tool – commonly used elsewhere in the economy – is merchants' freedom to "steer" transactions to a network willing to lower its price. Each network has long prohibited such steering to lower-cost cards. Now that Visa and MasterCard have reformed their anti-steering rules, American Express rules stood as the last barrier to competition.
At trial, an array of merchants came forward to explain both the substantial costs they incur when their customers pay with credit cards and their inability to ignite competition among the networks to reduce those costs. In fact, the rules not only prevent merchants from offering their customers lower prices or other incentives for choosing a less costly card, they even block merchants from providing consumers with truthful price information about the cost of swipe fees of different credit cards.
Click here to view examples, used as trial exhibits, of what the Amex rule prohibits.
Closing arguments in the trial took place on Oct. 9, 2014. Craig Conrath was the lead trial attorney for the United States. The 17 plaintiff states were Arizona, Connecticut, Idaho, Illinois, Iowa, Maryland, Michigan, Missouri, Montana, Nebraska, New Hampshire, Ohio, Rhode Island, Tennessee, Texas, Utah and Vermont. The court also entered a scheduling order instructing the parties to submit, within 30 days, a joint proposed remedial order.
The case is U.S. et al v. American Express Co et al., U.S. District Court, Eastern District of New York, No. 10-04496.
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