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American Express – Department of Justice Case

August 20, 2015
According to the Federal Reserve Bank of Boston, approximately seventy-two percent of American consumers had at least one credit card in 2012.[1] Obviously, credit cards play an essential role in consumption in the United States, as also evidenced by the variety of different cards accepted by merchants throughout the country. Among the most popular cards owned by consumers are Visa, MasterCard, and American Express – three of the giants in the industry.











By Todd Costa, C’16

Even though credit is so ubiquitous as a method of payment, sometimes its inner-workings can seem a bit esoteric to the average consumer. Of course consumers realize the necessity of repaying the debt on their card in as timely a manner as possible, but not as much attention is paid to the further upstream relationship between merchants and the credit card companies themselves. One of the most telling rules that governs this relationship is the idea of “steering.”[2]

Steering is simply the idea that a merchant has the ability to influence the purchasing decisions of a customer, and it is a concept prevalent in marketing ventures of all kinds. From offering discounts to consumers who purchase a certain number of goods to the use of advertising, steering is widely used to drive sales and profits in competitive markets.[3] The prevalence of steering in so many types of industries made it all the more glaring to the Department of Justice that credit card companies prevented merchants from steering customers to use a specific type of card over another. 

Like consumers, merchants are required to pay fees to credit card companies when a consumer swipes their card to make a purchase. Also like consumers, it is possible that each card company charges merchants a different rate per consumer transaction, thus implying that merchants may have the urge to convince consumers to pay with one type of card over another.[4] But this influence was against the standard rules of card companies, meaning that merchants were often merely forced to bite the bullet when consumers used unfavorable cards.[5]

At this point, a fair question to ask is, “If merchants would rather their consumers not use a specific card, why not terminate business with the credit card company and no longer accept that card at stores?” While in theory this makes logical sense, the reality is far more complicated: merchants who do not accept a certain popular credit card run the risk of alienating an entire group of consumers that pay primarily with that specific card. As a result, these merchants lose customers.

This was exactly the situation that Walgreens faced in 2004 when it terminated its relationship with American Express due to its high merchant swipe fees. Almost immediately, this retail giant faced “public outcry” from its consumer base that preferred using Amex cards to make purchases.[6] As a result, Walgreens was forced to backtrack on its termination and instead renegotiated similar terms with American Express.[7] Essentially, Walgreens was held hostage by American Express: without reinstituting acceptance of its card, the retailer’s business would certainly have suffered as a result. It had almost no choice.

For situations like these, it makes sense that the major credit card companies became a target for the antitrust division of the Justice Department, which began an investigation into these potentially anticompetitive practices of Visa, Discover, MasterCard, and American Express in 2008.[8] Two years later, seventeen states and the United States federal government filed a lawsuit against Visa, MasterCard, and Amex. Relatively soon after the filing of the suit, Visa and MasterCard settled while Amex was determined to take on the Justice Department in court.[9]

During the trial, Amex argued that the credit card market was unfairly biased to the relatively larger Visa and MasterCard, and that the anti-steering regulations were merely a way to give American Express a fighting chance in the industry.[10] Despite this contention, United States District Judge Nicholas Garaufis ruled in February 2015 that American Express’s anti-steering restrictions on merchants “were an unlawful restraint on trade under Section 1 of the Sherman Act.”[11] With this decision, the federal government made a significant step toward protecting competition in the complicated upstream market of the credit card industry.

United States Attorney General Eric Holder believed that the court made the appropriate decision in order to protect 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.”[12]

Of course, on the other hand, American Express representatives made their displeasure over the decision known: “Today’s decision would harm competition by further entrenching the two dominant payment networks… Only a small percentage of Visa and MasterCard holders carry American Express cards. By contrast, most American Express Card Members carry a competing card in their wallet.”[13]

After Garaufis delivered his opinion American Express promised to appeal the decision, so this matter may not yet be put to bed.[14] Even though the outcome of a potential appeal is uncertain, one thing is clear: the federal government is quite willing to delve into the opaque details of some markets in order to promote competition and consumer welfare, and the American Express trial is an example of its drive.

Sources:

United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf

McGrath, Maggie. Antitrust Lawsuit Loss Puts Amex Among the Dow’s Worst Performers. Forbes, 19 Feb 2015. (Accessed 12 July 2015) http://www.forbes.com/sites/maggiemcgrath/2015/02/19/antitrust-lawsuit-loss-puts-amex-among-the-dows-worst-performers/ 

Sidel, Robin. American Express Loses Antitrus Lawsuit on Merchant Rules. Wall Street Journal, 19 Feb 2015. (Accessed 12 July 2015) http://www.wsj.com/articles/american-express-loses-antitrust-lawsuit-on-merchant-rules-1424360909

Holmes, Tamara E. Credit Card ownership statistics. CreditCards.com, 6 November 2014. (Accessed 12 July 2015) http://www.creditcards.com/credit-card-news/ownership-statistics-charts-1276.php

Kratochvil, Petr. Three Credit Cards: Via, MasterCard, American Express. Photograph. 19 Feb 2014 (Accessed 12 July 2015) https://commons.wikimedia.org/wiki/File:1-1204463487cJKy.jpg#file

Further Reading:

Moran, Chris. American Express Loses Antitrust Lawsuit Over Merchant Rules. Consumerist, 19 Feb 2015. (Accessed 12 July 2015). http://consumerist.com/2015/02/19/american-express-loses-antitrust-lawsuit-over-merchant-rules/

Dexheimer, Elizabeth and Christie Smythe. Amex Drops After Losing Antitrust Lawsuit Over Steering. Bloomberg. (Accessed 12 July 2015). http://www.bloomberg.com/news/articles/2015-02-19/amex-declines-after-losing-u-s-antitrust-lawsuit-over-steering

Fisher, Daniel. American Express Antitrust Ruling Won’t Help Consumers. Forbes, 19 Feb 2015. (Accessed 12 July 2015) http://www.forbes.com/sites/danielfisher/2015/02/19/american-express-loses-antitrust-case/

United States of America, State of Arizona, State of Connecticut, State of Idaho, State of Illinois, State of Iowa, State of Maryland, State of Michigan, State of Missouri, State of Montana, State of Nebraska, State of New Hampshire, State of Ohio, State of Rhode Island, State of Tennessee, State of Texas, State of Utah, and State of Vermont v. American Express Company, American Express Travel Related Services Company, Inc., MasterCard International Inc., and Visa Inc. The United States Department of Justice. http://www.justice.gov/atr/cases/americanexpress.html


  [1] Holmes, Tamara E. Credit Card ownership statistics. CreditCards.com, 6 November 2014. (Accessed 12 July 2015) http://www.creditcards.com/credit-card-news/ownership-statistics-charts-1276.php

  [2] United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf, page 3.

   [3]United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf, page 3.

  [4] United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf, page 3-4.

  [5] United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf, page 76.

  [6] United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf, page 76.

  [7] United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf, page 76.

  [8] McGrath, Maggie. Antitrust Lawsuit Loss Puts Amex Among the Dow’s Worst Performers. Forbes, 19 Feb 2015. (Accessed 12 July 2015) http://www.forbes.com/sites/maggiemcgrath/2015/02/19/antitrust-lawsuit-loss-puts-amex-among-the-dows-worst-performers/

  [9] McGrath, Maggie. Antitrust Lawsuit Loss Puts Amex Among the Dow’s Worst Performers. Forbes, 19 Feb 2015. (Accessed 12 July 2015) http://www.forbes.com/sites/maggiemcgrath/2015/02/19/antitrust-lawsuit-loss-puts-amex-among-the-dows-worst-performers/

   [10]United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf, page 129 (footnote 50).

   [11]United States of America, et al. v. American Express Company and American Travel Related Services Company, Inc. United States District Court Eastern District of New York. 19 Feb 2015. (Accessed 12 July 2015) http://www.justice.gov/atr/cases/f312000/312037.pdf, page 150.

  [12] Sidel, Robin. American Express Loses Antitrus Lawsuit on Merchant Rules. Wall Street Journal, 19 Feb 2015. (Accessed 12 July 2015) http://www.wsj.com/articles/american-express-loses-antitrust-lawsuit-on-merchant-rules-1424360909

  [13] McGrath, Maggie. Antitrust Lawsuit Loss Puts Amex Among the Dow’s Worst Performers. Forbes, 19 Feb 2015. (Accessed 12 July 2015) http://www.forbes.com/sites/maggiemcgrath/2015/02/19/antitrust-lawsuit-loss-puts-amex-among-the-dows-worst-performers/

   [14]Sidel, Robin. American Express Loses Antitrus Lawsuit on Merchant Rules. Wall Street Journal, 19 Feb 2015. (Accessed 12 July 2015) http://www.wsj.com/articles/american-express-loses-antitrust-lawsuit-on-merchant-rules-1424360909

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