(CN) – The Second Circuit declined to revisit a panel decision that granted a major victory to American Express, ruling that the card issuer’s rules banning merchants from asking consumers to use lower-fee cards do not violate antitrust laws.
The Second Circuit issued the order Thursday holding the government’s motion for rehearing en banc was denied. It did not provide any explanation for its decision.
The federal government, 18 states and several large retailers, including Kroger Co., Walgreen Co., Home Depot, Amazon.com sued American Express and other credit card companies in October 2010, claiming their use of nondiscrimination provisions, or NPDs, prevents the millions of merchants who take credit cards from steering customers to lower-fee cards.
MasterCard and Visa settled immediately, leaving AmEx the lone holdout defending against the lawsuit. A federal judge approved a final judgment in 2011 that required MasterCard and Visa to remove the allegedly anticompetitive clauses from their contracts and replace them with terms more favorable to vendors.
AmEx charges merchants higher fees than other cards do to recoup the cost of their credit-card rewards programs, which are more generous than those of other companies and often attract higher-income customers.
Merchants, however, are not permitted to request that a customer use a different card or charge an AmEx user a higher price to compensate for the higher card fee.
U.S. District Judge Nicholas Garaufis found the NPDs anticompetitive because they “short-circuit the ordinary price-setting mechanism in the network services market,” resulting in “an absence of price competition among American Express and its rival networks.”
He said consumers pay the price, literally, as AmEx’s policies often force merchants to raise prices on all consumers.
A 2010 research paper from the Federal Reserve Bank of Boston confirmed this viewpoint, finding that lower-income consumers subsidize the cost of credit-card rewards programs by paying with cash.
“Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or ‘cash’) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $149 to card-using households and each card-using household receives $1,133 from cash users every year,” the report says.
Consumers paying with lower-fee cards such as Visa or MasterCard are therefore also, to a lesser degree than cash users, subsidizing AmEx’s rewards program. American Express cards account for 26 percent of credit card purchases in the U.S.
But the Second Circuit said relying on “cardholder insistence” to prove AmEx’s market power is misplaced, and it reversed Garaufis’s ruling in September.
“Cardholder insistence is exactly what makes it worthwhile for merchants to accept AmEx cards – and thus cardholder insistence is exactly what makes it worthwhile for merchants to pay the relatively high fees that AmEx charges,” Judge Richard Wesley wrote for a unanimous three-judge panel.
Wesley added, “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 supra-competitive levels.” (Emphasis in original).
The full Second Circuit reviewed numerous amici briefs in the matter, including one from four economists arguing that the district court’s market definition was wrong because it excluded the cardholder side of the market and focused only on merchants.
“The overall demand for a credit card transaction is the vertical summation of the respective demand curves of the merchant and the cardholder. Demand is two-sided. The consumer surplus created by a transaction conducted on the two-sided platform of the credit card network is the sum of the cardholder’s surplus and the merchant’s surplus. Because antitrust law aims to maximize consumer surplus, it necessarily must consider the effect that the disputed business practice has on consumer surplus on both sides of a two-sided market,” the amicus brief says.
The court also heard from more major retailers, including Target, Bridgestone, Sears, United Airlines, and the New York Times Company who all claim to have been harmed by AmEx’s rules for years.
“Although consumers who pay with AmEx may receive rewards that partially offset the higher prices, the vast majority of consumers—including those who do not even use AmEx—absorb the price increase without any corresponding benefit. Those customers thereby subsidize AmEx cardholder benefits and AmEx profits, and at significant cost, as AmEx’s acceptance cost is the highest in the industry,” the retailers told the appeals court.
American Express spokesman Andrew Johnson said the company was very pleased with the court’s decision.
“With today’s decision, consumers can continue to choose how they pay and our Card Members will not be discriminated against at the point of sale. Our Non-Discrimination Provisions in our merchant contracts remain in effect, just as they did before the trial court issued its injunction in February 2015,” he said.
It is as-yet unclear whether the government will choose to seek review from the U.S. Supreme Court.