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From Antitrust Law Daily, May 7, 2014

Government suit against American Express’ anti-steering provisions can proceed

By Linda O’Brien, J.D., LL.M.

In an action by the Department of Justice and 17 states, alleging that the anti-steering provisions in American Express’s merchant agreements were anticompetitive, issues of material fact remained in dispute regarding the actual adverse effects of the anti-steering provisions and the company’s market power, according to the federal district court in Brooklyn. Thus, American Express’ motion for summary judgment was denied (U.S. v. American Express Co.,May 7, 2014, Garaufis, N.).

American Express Co. (Amex) is a financial services corporation that markets and issues credit and charge cards directly to cardholders. Amex contracts with merchants to enable them to accept payment with Amex cards. To provide services to cardholders and merchants, Amex operates a platform for processing card transactions. Amex charges merchants various fees in exchange for providing payment processing services, include fixed monthly and per transaction fees which are composed of a transaction and a merchant discount fee. Amex’s average merchant discount fee is three to eight percent greater than those charged by other major credit card companies. In response to merchant preference marketing campaigns by the other major credit card companies, Amex implemented anti-steering rules which limit the ability of merchants to steer customers toward the use of another credit card.

The Department of Justice and attorneys general of 17 states brought suit against Amex, alleging anticompetitive conduct in violation of Section 1 of the Sherman Act. The government alleged that anti-steering provisions in Amex’s merchant agreements prevented merchants from offering discounts or incentives to customers to use less expensive forms of payment. The provisions reduced competition for payment card services at the merchant level and enabled Amex to charge merchants higher prices for the services that it could in a competitive market. Amex moved for summary judgment on the government’s claim.

The court found that there were genuine issues of material fact as to whether Amex’s anti-steering rules have an actual adverse effect on competition and whether Amex has market power. In determining whether the vertical agreement between Amex and its participating merchants violated Section 1 of the Sherman Act, the court used a rule of reason analysis. Amex argued that the government must prove market power in the relevant market and could not do so because of Amex’s low market share. In rejecting Amex’s argument, the court noted that, under the rule of reason analysis, a plaintiff may show actual adverse effect directly and was not limited to establishing market power.

Actual adverse effect. The government contended that actual adverse effect on competition could be demonstrated based on Amex’s higher merchant fees. The anti-steering rules limit merchants’ ability to provide information on the cost of various cards or incentives to use a different card to customers. The government also argued that competition among payment card brands through preference campaigns and other promotions would begin again if the anti-steering rules were lifted, which would eventually lower prices across the industry. Thus, the government demonstrated that there was an actual dispute of material fact regarding whether the anti-steering rules had an actual adverse effect on competition.

Market power. Market power is the ability to price substantially above the competitive level and to persist in doing so for a significant period without erosion by new entry or expansion, according to the court. The government argued that it could show that Amex possessed and exercised market power in the relevant market and that market share is not the only indicator of market power. Customer “insistence” amplifies Amex’s market power because it restricts merchant ability to discontinue accepting Amex cards and paying the attendant fees. The government also asserted that Amex’s market power was illustrated by its ability to price discriminate by charging different discount rates to merchants in different industries. Amex responded that customer insistence is merely brand loyalty and that brand loyalty does not equate to market power. Amex also contended that price discrimination did not always demonstrate market power and could occur in fully competitive markets. The court noted that, although the basic facts relating to Amex’s market share were undisputed, there were factors that the court could may consider relevant to market power that extend beyond market share. Facts relating to those issues remained in dispute. Thus, the grant of summary judgment was inappropriate, the court concluded.

The case is No. 1:10-cv-04496-NGG-RER.

Attorneys: Andrew J. EwaltU.S. Department of Justice, for U.S. Evan R. Chesler (Cravath, Swaine & Moore) for American Express Co. and American Express Travel Related Services Co., Inc.

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

MainStory: TopStory Antitrust NewYorkNews

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