On September 26, a federal appeals court reversed a lower court decision that American Express violated antitrust regulations. This new decision means that AmEx can legally enforce anti-steering rules. Since American Express has historically charged higher merchant fees than its competitors, it requires merchants to sign agreements preventing them from offering discounts and other incentives for using other cards, from expressing preference for any other card, and from disclosing information about merchant costs of different cards. AmEx checks for compliance with these nondiscriminatory provisions (NDPs) through oversight of the merchant’s client manager and the merchant’s charge volume, random on‐site visits, and cardholder complaints and reports.
The Justice Department, along with 17 other states, filed lawsuits claiming that these anti-steering contracts unreasonably restrained competition and thus violated federal antitrust laws. In February 2015, a U.S. District Court in New York ruled against American Express and issued an injunction prohibiting the company from using these NDPs for at least 10 years. However, the appeals court temporarily lifted the injunction in December 2015 so that AmEx could enforce the agreements during appeal. This decision means that American Express can now continue to enforce these nondiscriminatory provisions permanently.
The Second U.S. Circuit Court of Appeals overturned the lower court decision on the basis that it erroneously focused solely on the interests of merchants and did not consider interests of consumers. The court ruled that the Justice Department failed to prove customers were harmed by the practice.
The court cited economic theories that the credit card industry is a two-sided market, meaning that both cardholder and merchant depend on the widespread acceptance of a card. Merchants can choose not to accept AmEx if the fees outweigh the benefits. In fact, approximately one third of the nine million merchant locations that accept credit cards do not accept AmEx. If too many merchants do not accept the card, consumers will not use the card.
However, customer insistence for American Express as a result of the extra amenities it can offer makes it worthwhile for businesses to accept AmEx. As Circuit Judge Richard Wesley wrote in the court opinion, “Though merchants may desire lower fees, those fees are necessary to maintaining cardholder satisfaction.” American Express uses the higher fees to fund rewards program and other perks such as customer service, fraud protection, and purchase and return protection. The court concluded that the higher fees are necessary to maintain the image of American Express as a premium product.
The appeals court rejected the district court’s claim that American Express is unfairly using market share to stifle competition. Annual transaction fees for credit cards are about $50 billion, with Visa accounting for about 45 percent of credit card transactions, AmEx for 26 percent, MasterCard for 23 percent, and Discover for 5 percent. Though American Express has the second largest share, the appeals court asserted, “that Amex might not enjoy market power without continuing investment in cardholder benefits indicates, if anything, a lack of market power; evidence showing that Amex must compete on price in order to attract consumers does not show that Amex has the power to increase prices to supracompetitive levels.” Though merchants oppose the higher fees, American Express charges them in order to provide a better service to consumers.
Though the Justice Department may appeal the Second Circuit Court reversal, the decision marks a significant victory for American Express. In reference to the reversal, American Express spokeswoman Marina Norville said, “Consumers will be able to choose how they pay and our card members will not be discriminated against at the point of sale.”
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