Calif. Seeks Billions From American Express

SAN FRANCISCO (CN) - American Express owes California businesses billions of dollars in transaction fees that a federal judge ruled were extracted illegally, San Francisco's city attorney claims in court.

City Attorney Dennis Herrera sued American Express Friday in Superior Court Suing for the People of California, seeking restitution and penalties for unfair competition and restraint of trade.

American Express for years has imposed "illegal and anti-competitive rules, policies and practices" upon businesses that accept AmEx cards, or "merchant restraints," Herrera says.

The federal government and 17 states sued AmEx, MasterCard and Visa in 2010 in a federal antitrust complaint in Manhattan, challenging the merchant restraints. Visa and MasterCard settled a year later, rescinded the merchant restraints, and in response to class actions from merchants, agreed to pay $7.2 billion in damages.

AmEx refused to settle, but "engaged in protracted litigation" with the Department of Justice and "delayed its day of reckoning for more than four years." But in February this year, the federal court found AmEx's merchant restraints were an illegal restraint of trade, Herrera says, citing United States v. Am. Express Co., 88 F. Supp. 3d 143 (E.D.N.Y. 2015).

AmEx has appealed to the Second Circuit but modified its merchant restraints in October to comply with the federal injunction. But the federal court provided only injunctive relief "and did not provide any monetary relief for the very significant harm that AmEx has caused through its systematic antitrust violations," Herrera says. Nor did the federal enforcement action impose civil penalties on Amex for its longstanding illegal conduct."

So San Francisco is suing to bring the merchants monetary relief.

AmEx collects $15 billion a year from merchant swipe fees, according to the complaint. California businesses pay about $2.25 billion of that.

"Amex-branded cards impose the highest swipe fees in California and nationwide. Many Amex-accepting merchants incur swipe fees in excess of 3 percent on each transaction," the complaint states. "To place this percentage in context, the average hotel in the United States operates on a 3.72 percent net margin, and the average general retailer operates on a 2.67 percent net margin. Amex's swipe fees are therefore very significant to merchants."

In other words, the AmEx swipe fee could wipe out the profit from each general retailer's sale, and then some, according to simple math.

The federal judge this year enjoined American Express from enforcing its rules prohibiting merchants from offering discounts to customers who use different, less-expensive cards, from promoting another card, even "by posting an innocuous 'We Prefer Visa' or 'We Prefer Discover' sign, or even by mentioning the very existence of AmEx's high swipe fees to consumers," Herrera says. (Italics in complaint.)

To cover the high cost of AmEx swipe fees, Herrera says, businesses that accept its cards "have responded by charging artificially elevated prices to all consumers," even if they pay with cash or other cards.

In other words, all customers must subsidize AmEx's expensive swipe fees and anti-competitive rules, Herrera says, citing a Federal Reserve study, "An Economic Analysis of the 2010 Proposed Settlement between the Department of Justice and Credit Card Networks."

The federal injunction therefore left some work undone, Herrera says, since American Express can still restrict merchants from imposing a surcharge exclusively on American Express transactions. Merchants might use such a surcharge to recoup the swipe fee, and to dissuade customers from using American Express.

Herrera asks the Superior Court to declare that AmEx's ban on surcharges and the merchant restraints addressed by the federal ruling violate California's Unfair Competition Law.

There are roughly 1 million AmEx "locations in force" in California in the past four years, Herrera says. Each of them has executed numerous transactions, all with the swipe fees, and "Each transaction at each location in force is a separate violation."

He seeks civil penalties of up to $2,500 per transaction and restitution of some of the swipe fees.

Herrera's office did not return calls Monday requesting comment.

A spokesperson for American Express told Courthouse News, "We don't believe the suit has merit. We plan to defend it vigorously."

A very informal poll of merchants in two states - walking around and asking - revealed widespread merchant resentment against American Express. Many store owners said they refuse to accept American Express cards for the reasons described in the complaint.

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