American Express Hammered for Antitrust

BROOKLYN (CN) - By banning merchants from asking consumers to use less-expensive cards, American Express violates U.S. antitrust laws, a federal judge ruled Thursday.

The U.S. government, seven states and a handful of businesses brought their lawsuit against American Express back in October 2010, claiming that the company's use of "non-discrimination provisions," or NPDs, prevent the 3.4 million merchants who take American Express cards from steering customers to alternative credit card brands like Visa, MasterCard and Discover.

American Express tried to argue that the challenged restraints promoted competition, but U.S. District Judge Nicholas Garaufis didn't buy it.

"As a general matter, steering is both pro-competitive and ubiquitous," the judge wrote.

Indeed stores have long used placement of certain products at eye-level versus the bottom shelf, or offering deals, to move products, the court found.

"This dynamic, however, is absent in the credit card industry," the decision states.

The NDPs that American Express employs meanwhile "create an environment in which there is nothing to offset credit card networks' incentives - including American Express's incentive - to charge merchants inflated prices for their services," Garaufis wrote.

"This, in turn, results in higher costs to all consumers who purchase goods and services from these merchants," the judge added.

Garaufis said such policies "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."

American Express has not yet returned a request for comment.

Customers usually pay "discount rates" or "merchant discount rates" to offset the costs a merchant pays credit card companies to use their network services provider.

Garaufis wrote, however, that "a merchant's cost of accepting American Express - one of the three largest network services providers in the country - has tended to be greater than the cost of accepting other cards," a factor that may prompt merchants to use a different card.

The judge's 150-page decision caps a seven-week bench trial in the summer of 2014 that featured more than 34 witness. In the end, Garaufis said the United States has "made such a showing" that Amex's policies violate U.S. antitrust laws.

Garaufis said he would issue a separate remedies order against American Express at an undisclosed date.

Attorney General Eric Holder called the decision a "triumph for fair competition."

"By recognizing that American Express's rules harm competition, the court vindicates the promise of robust marketplaces that is enshrined in our antitrust laws," he said.

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