(CN) — American Express doesn’t violate antitrust laws by banning merchants from asking consumers to use lower-fee cards, even though the policy effectively raises prices on all consumers, the Second Circuit ruled.
The federal government, 18 states and many large retailers such as Kroger Co., Walgreen Co., Home Depot, Amazon.com and others brought their lawsuit against American Express and other credit card companies back 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.
Last year, 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. Its cards account for 26 percent of credit card purchases in the U.S.
AmEx’s high merchant fees are the flipside of a rewards program that is very attractive to cardholders who may refuse to patronize merchants who do not accept that card.
But the Second Circuit said relying on “cardholder insistence” to prove AmEx’s market power is misplaced, and it reversed Garaufis’s ruling late Monday.
“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.
The judge 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 supracompetitive levels.” (Emphasis in original).
This finding resonates with AmEx senior vice president Joseph Quagliata’s testimony that his is an “extremely, extremely competitive business.”
Wesley also said the lower court ignored the fact that about one-third of U.S. merchants currently do not accept AmEx cards.
“A single merchant running a pool supply store in a small town, for example, very well might choose not to accept Amex because the products he sells, such as pool toys and cleaning supplies, do not generate enough profit to justify paying the relatively high fees he would be charged to accept Amex cards,” the 66-page ruling states.
But large retailers selling big-ticket items have a very different situation, as do consumers when deciding what card rewards they may receive by using an AmEx card to make a big purchase.
“For his or her part, the cardholder may be more likely to purchase a high-ticket item from a merchant who accepts Amex because this purchase will yield relatively high cardholder rewards and benefits – but it is less likely that the cardholder will insist on using Amex for small purchases, like pool cleaning supplies, that yield fewer cardholder rewards,” Wesley wrote. “In this way, cardholder insistence is precisely what makes accepting Amex cards worthwhile for those merchants that do.”
Therefore, there is no anticompetitive danger in the NDPs that prevent a merchant from offering a discounted price for not using an AmEx card when its market power is based on amenities that benefit both consumer and merchant, the Second Circuit ruled.
Wesley said it was a legitimate interest for AmEx not to “want a cardholder who takes ample advantage of such amenities – and prestige – when travelling to be talked into accepting a discount at the point of purchase of lawn furniture by paying with Visa or MasterCard.”
AmEx spokeswoman Marina Norville told Courthouse News, “American Express is pleased with the appellate court’s decision to uphold the non-discrimination Provisions in our merchant contracts. This means consumers will be able 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.”
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