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From Banking and Finance Law Daily, May 1, 2015

Amex ordered to drop prohibition on "steering" by merchants

By Jeffrey May, J.D.

American Express can no longer bar merchants that accept Amex cards from “steering” customers to another brand of payment or debit card. Merchants will be able to offer customers a discount or rebate to encourage the use a different card or post signage of the merchant's preference for a particular brand. Yesterday, the federal district court in Brooklyn, New York, issued a permanent injunction, prohibiting Amex from enforcing its so-called “anti-steering” rules and ordering the firm to delete language from its agreements with merchants that prevent them from encouraging customers to use other cards. Unless the order is stayed, the permanent injunction is to take effect in 30 days and to remain in effect for 10 years (U.S. v. American Express Co., April 30, 2015, Garaufis, N.).

The permanent injunction follows the court's Feb. 19, 2015, decision, finding that the U.S. Department of Justice and 17 state attorneys general established at trial that the Amex rules violated Sec. 1 of the Sherman Act. The court had asked the parties to try to reach an agreed-upon remedy. Noting, however, that the parties “reached only limited common ground,” the court “generally adopt[ed] proposals made by the Government and reject[ed] competing proposals made by Defendants.” The court described American Express’s core proposals as “too narrow or unwieldy to effectuate the remedial objectives of a permanent injunction under the Sherman Act.”

The court identified language in contracts between Amex and merchants that was no longer enforceable; however, it did not go so far as to craft contract language to inform merchants of their right to engage in steering, as the government had requested. The court explained that it would not “put words into American Express’s mouth.” However, the injunction included affirmative contractual language, establishing a “safe harbor” of acceptable language concerning merchant signage and oral communications.

Boundaries of permitted steering. Generally, the court's order gives merchants the ability to decide when it is in their best interests to steer. The court rejected Amex’s proposals that steering be permitted only on a transaction-by-transaction basis—using a calculation of “All-In Merchant Fee” supplied by Amex—and only to a “Less Expensive General Purpose Card.” The court's order also permits steering to credit or charge cards, as well as debit cards, even though debit and credit network services were found to comprise separate relevant markets for purposes of the court's market power analysis. “[T]he mere fact that debit cards are not part of the general purpose credit and charge card network services market does not mean that the court lacks the power to include brands of debit cards within the scope of the Permanent Injunction,” the court explained.

In addition, the court rejected a request from Amex that the permanent injunction contain a provision that would “confirm … that American Express is entitled to exercise its right not to do or continue to do business with a merchant that chooses to steer Card Members away from its Cards.” The court explained that, under the circumstances, it could limit an antitrust violator’s right to refuse to deal.

Compliance provisions. In addition to notifying Amex-accepting merchants of changes to its Non-Discrimination Provisions (NDPs) in its agreements with merchants, as required by the permanent injunction, the order also contains compliance provisions to guarantee that Amex “meets its obligations and changes its perception of and response to steering by merchants.” The court pointed to Amex’s “previous, aggressive enforcement of the NDPs, and certain of the positions that it took at trial,” as the bases for the “robust compliance provisions.” The court rejected Amex’s argument that compliance provisions were reserved only for antitrust violators who engaged in criminal, intentional, or malfeasant conduct.

Visa and MasterCard consent decree. When the government brought the case against Amex in 2010, it made similar allegations against the country’s three largest credit and charge card transaction networks. MasterCard and Visa agreed to settle the charges at that time. In July 2011, the consent decree as to MasterCard and Visa was approved. The parties disputed the significance of the consent decree in crafting the permanent injunction against Amex. The court explained that the permanent injunction “parallels the Consent Decree in some respects, and deviates from the Consent Decree in other respects.” The court went on to note that the differences did not render “punitive” a permanent injunction provision that Amex opposed and that did not appear in the consent decree. Similarly, the fact that the permanent injunction contained a provision not in the consent decree that the government opposed did not mean that Amex was inequitably granted rights not available to Visa and MasterCard, in the court’s view.

Department of Justice reaction. “We are pleased that the court has ordered American Express to eliminate its illegal anti-steering rules,” Leslie Overton, Acting Assistant Attorney in charge of the Department of Justice Antitrust Division, said in a statement released late last night. “These rules have stifled competition among credit card networks by blocking merchants from encouraging their customers to use particular credit cards. The court’s remedy will benefit merchants, who pay more than $50 billion in credit card ‘swipe fees’ annually, as well as the consumers who ultimately bear these costs. Merchants’ ability to encourage the use of particular credit card networks will incentivize American Express and its competitors to compete to earn a greater share of a merchant’s business. The court’s order reinforces the victory the department has won for consumers.”

The case is No. 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.; MasterCard International Inc.; Visa, Inc.

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