WASHINGTON (CN) – American Express must head to the Supreme Court, the justices said Monday, to defend its policy of banning merchants from asking consumers to use lower-fee cards.
The underlying case erupted in 2010 over nondiscrimination provisions, or NPDs, that credit card companies require merchants to follow in exchange for their business. Though the initial case involved multiple challengers and defendants, a settlement with MasterCard and Visa soon left AmEx as the lone holdout defending against the lawsuit.
As the credit card with the most generous rewards program for customers, it also charges the highest merchant fees. The card’s NPD prohibits merchants from asking a customer to use a different card or from applying a special charge on AmEx users.
A federal judge in New York found the NPDs anticompetitive, but the Second Circuit reversed last year.
“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,” U.S. Circuit 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 supracompetitive levels.” (Emphasis in original).
Per its custom the U.S. Supreme Court did not issue any comment Monday in taking up the case.
The state of Ohio leads the petitioners, represented by state Attorney General Eric Murphy.
Cravath attorney Evan Chesler represents AmEx, with the U.S. Solicitor General’s Office intervening on its behalf alongside the Tennessee attorney general.
Eight private firms including Gupta Wessler and Winston & Strawn have also filed friend-of-the-court briefs for the case.
In last year’s ruling, Judge Wesley 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 traveling to be talked into accepting a discount at the point of purchase of lawn furniture by paying with Visa or MasterCard.”