Federal Judge Finds AmEx’s Anti-Steering Rule Violates Antitrust Law

On February 19, the U.S. District Court in the Eastern District of New York ruled in favor of a U.S. Department of Justice lawsuit brought against American Express Company and American Express Travel Related Services Company (AmEx) for violating antitrust laws by imposing “anti-steering” rules on merchants. Under the anti-steering rules, which AmEx calls its “Non-Discrimination Provisions” (NDPs), merchants cannot influence their customers’ card choices by incentivizing them to use cards with lower swipe fees.

U.S. District Judge Nicholas G. Garaufis found that AmEx’s NDPs violate Section 1 of the Sherman Act, which prohibits “every contract ... in restraint of trade or commerce among the several States.” The judge said that AmEx’s practices have blocked low-cost business models and have resulted in higher prices to merchants and consumers.

In 2010, the Justice Department, along with 17 state attorneys general, sued American Express, Visa Inc., and MasterCard International Inc. to eliminate restrictions imposed on retailers by the credit card services that were aimed at eliminating competition in regards to swipe fees. Visa and MasterCard settled with the courts in July 2011, while AmEx continued its litigation.

In his decision, Judge Garaufis noted, “NDPs have caused and continue to cause actual harm to competition in the network services market…. American Express’s merchant restraints [deny] merchants the opportunity to … shift spending to less expensive cards. With the NDPs in place, merchants lack any meaningful means of controlling their consumption of network services in response to changes in price, short of dropping acceptance altogether….

“Thus, by disrupting the price-setting mechanism ordinarily present in competitive markets, the NDPs reduce American Express’s incentive — as well as those of Visa, MasterCard, and Discover — to offer merchants lower discount rates and as a result, they impede … competition in the network services market.”

The Justice Department hailed the court’s decision. “Merchants pay over $50 billion in credit card swipe fees each year,” said Deputy Assistant Attorney General for the Antitrust Division Leslie C. Overton, in a statement. “The department and the attorneys general of 17 states brought this case because competition over those fees was being suppressed. 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.”

National Retail Federation Senior Vice President and General Counsel Mallory Duncan said the ruling could help bring about competition in the card market. “This is a pretty important step forward,” he said, as reported by NRF’s Public Policy blog. “It vindicates what we’ve said all along — that the credit card market is broken and the consequence has been high fees for merchants and consumers.”

The court’s decision noted that merchant prices have risen dramatically in the absence of merchant steering and that AmEx’s anti-steering rules have stopped any possibility of a current card network or a new entrant to the market differentiating itself from its competitors by pursuing a lowest-cost provider strategy.

AmEx plans to appeal the court’s ruling. In a statement, the company said that the ruling will “harm competition to the detriment of consumers and merchants” and would further entrench “the two dominant payment networks, Visa and MasterCard. Only a small percentage of Visa and MasterCard holders carry American Express cards. By contrast, most American Express Card Members carry a competing card in their wallet. Today’s decision means merchants would be able to steer customers to use Visa and MasterCard, while it would be virtually impossible to steer away from them.”