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From Antitrust Law Daily, February 19, 2015

Amex anti-steering rules found to impede interbrand competition

By Jeffrey May, J.D.

So-called “anti-steering” rules that prevent millions of merchants who accept American Express cards from steering customers to alternative credit card brands violate Sec. 1 of the Sherman Act, the federal district court in Brooklyn, New York, has decided. Finding that the U.S. Department of Justice and the states that challenged the rules were entitled to relief, the court called upon the parties to reach an agreed-upon remedy. It noted, however, that if the parties were unable to do so, it would craft an injunction implementing the decision and rendering American Express’s contractual provisions compliant with the Sherman Act (U.S. v. American Express Co., February 19, 2015, Garaufis, N.).

The decision comes more than four years after the Justice Department and state attorneys general filed a complaint against the country’s three largest credit and charge card transaction networks. MasterCard and Visa agreed to settle the charges when the complaint was filed in October 2010. In July 2011, the consent decree as to MasterCard and Visa was approved (2011-1 Trade Cases ¶77,529). Under the consent decree, MasterCard and Visa agreed to allow their merchants to offer consumers discounts or rebates for using a cheaper form of payment. In addition, merchants can inform customers as to which cards would result in lower business costs, thereby enabling cost savings to be passed on to the consumer.

Last summer, the court held a bench trial that lasted for seven weeks to consider portions of American Express’s non-discrimination provisions (NDPs), which operate to block merchants that accept American Express cards from encouraging their customers to use another credit or charge card, even where that card is less expensive for the merchant to accept. The trial featured over 30 fact witnesses and four expert witnesses. Noting that it “has repeatedly urged the parties in this case to negotiate a mutually agreeable settlement,” the court has now rendered its decision in favor of the government, albeit not “eagerly or easily.”

Market power. At the outset, the court noted that non-price vertical restraints between firms at different levels of production, such as American Express’s NDPs, were properly analyzed under the rule of reason—“the most searching form of antitrust analysis.” The court defined the relevant antitrust market as the market for general purpose credit and charge (GPCC) card network services. Rejected was a submarket suggested by the plaintiffs for GPCC card network services provided to merchants in travel and entertainment (T&E) industries. American Express’s pricing practices in T&E industries were not shown to be sufficiently discriminatory to establish a cognizable price discrimination market around merchants in T&E industries. The court also refused to expand the market to include debit cards, as American Express urged.

The court found that American Express, with the second largest GPCC card network when measured by charge volume accounting for 26.4% of general purpose credit and charge card purchase volume in the United States, possessed market power in the “highly concentrated” and “remarkably static” network services market, which contained high entry barriers. The court’s finding of market power was supported by American Express’s loyal cardholder base and evidence of certain Amex pricing practices, such as ability to price discriminate between various industry segments, and its stated policy of maintaining a pricing premium over the rates of Visa and MasterCard.

Anticompetitive harm. Even if the government had not established market power, it alternatively discharged its burden under the rule of reason by proving anticompetitive harm to the merchants, the primary consumers of American Express’s network services, attributable to the NDPs. The court explained that, by disrupting the price-setting mechanism ordinarily present in competitive markets, the NDPs reduced American Express’s incentive—as well as those of Visa, MasterCard, and Discover—to offer merchants lower discount rates and, as a result, impeded a significant avenue of horizontal interbrand competition in the network services market. It was noted that the plaintiffs also could show harm to consumers because inflated merchant discount rates were passed on to consumers in the form of higher retail prices.

According to the court, the steering rules prevent merchants from influencing their customers’ payment choices, thereby rendering merchant demand for network services less responsive to changes in the price charged for those services. Thus, the NDPs effectively removed the incentive for American Express or its network competitors to compete with one another by offering merchants a lower price. Without merchant participation in the point-of-sale payment decision, a lower price would not translate into increased volume for the network, according to the court. The steering rules also had barred merchants from expressing a preference for Discover when it launched a campaign in 1999 to persuade merchants to “shift their business to [Discover’s] lower-priced network.”

Pro-competitive justifications. In an attempt to refute the finding that the anti-steering rules restrained competition, American Express offered two reasons for the necessity of the restraints: (1) to preserve American Express’s differentiated business model and thus the company’s ability to drive competition in the network services market, and (2) to prevent merchants from “free-riding” on the network’s investments in its merchant and cardholder value propositions. Both justifications were rejected by the court.

“American Express itself has identified a range of potential, permissible steps that the company could take in order to protect its ability to deliver a differentiated product if steering is permitted,” the court noted.

Department of Justice reaction. “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,” said Leslie C. Overton, Deputy Assistant Attorney General at the Department of Justice Antitrust Division. “As today’s decision reaffirms, the Antitrust Division remains committed to ensuring that competition is not restricted in this important sector of the economy.”

American Express response. American Express has vowed to appeal the decision, which it says will “further entrench the two dominant payment networks, Visa and MasterCard.” The company issued a statement today, saying that its NDP provisions protect “consumers’ choice to pay with their preferred payment method and allow merchants who have agreed to honor our cards to then discriminate against them when our Card Members choose to pay with American Express.”

This is Case 1:10-cv-04496-NGG-RER.

Attorneys: Andrew J. Ewalt, U.S. Department of Justice. Evan R. Chesler (Cravath, Swaine & Moore) for American Express Co.

Companies: American Express Co.; American Express Travel Related Services Co., Inc.; MasterCard International Inc.; Visa, Inc.

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