On Jan. 30, 2009, the United States Court of Appeals for the Second Circuit of New York deemed unenforceable a provision in American Express Co.'s card acceptance agreement. This ruling reversed a 2006 decision by the U.S. District Court for the Southern District of New York that upheld an AmEx contract clause requiring merchants to waive class action litigation.
Second Circuit Court of Appeals Judge Rosemary Pooler said that to enforce the clause would "grant AmEx de facto immunity from antitrust liability by removing the plaintiffs' only reasonably feasible means of recovery."
Plaintiffs in the case claimed they had been denied the right to contest the company's merchant discount fee price structure for credit and charge cards. (Unlike credit cards, charge cards' balances must be paid in full each month.)
Merchants had sued to recover the excessive discount fees they claim AmEx charges compared to those of Visa Inc. and MasterCard Worldwide. According to merchants, the "economic damages" accrued since 2001 range from about $1,000 to $3,000 per merchant.
Under AmEx's agreement, merchants must settle disputes either through arbitration or by filing individual lawsuits. The impetus for the suit, filed in August 2003, was that lawsuits and arbitration costs for individual merchants were not economically feasible.
"In my opinion, it would not be worthwhile for an individual plaintiff to pursue arbitration or litigation where out-of-pocket costs - just for expert economic study and services - would be at least several hundred thousand dollars, and might exceed $1 million," said Gary L. French, an economist for financial consultancy Nathan Associates Inc.
According to Attorney Adam Atlas, who specializes in the payments industry, this kind of financial burden on merchants was a main reason why the waiver was deemed unenforceable. "Some smart attorney crafted this clause with the specific intent of preventing merchants from grouping together," Atlas said.
"If a court declares a provision in a contract to be illegal or inconsistent with the law, then that clause disappears from the contract as if it were never written. On a one-to-one basis, merchants could never afford this case. No one's going to spend a million dollars for a chance to recoup a few grand, so the court really took a common sense approach and said that merchant access to justice is denied unless this waiver is removed," he added.
Additionally, merchants are still compelled to accept the Honor All Cards policy in AmEx's merchant service agreement, which they claim is also a violation of antitrust laws.
The Honor All Cards rule states that merchants must accept both AmEx credit and charge cards or neither of the two. That case is pending.
AmEx built its reputation as a high-ticket charge card company. But the company has in recent years created new credit card products marketed to lower-ticket purchasing groups, like college students, who, unlike typical AmEx cardholders, do not indulge in high per-transaction spending.
"These nonbusiness, low-ticket individuals are the traditional market stomping grounds of Visa and MasterCard," Atlas said. "Before [AmEx] began issuing credit cards to lower-end cardholders, a merchant's decision to accept AmEx was a no brainer; it brings in high-ticket clientele. The Honor All Cards policy - in every run-of-the-mill AmEx agreement - was inconsequential.
"Lo and behold, AmEx gets into the credit card business. Now merchants are in a difficult spot, having to choose between accepting both cards and paying the significantly higher discount fee [for low-ticket purchases] or rejecting both and shutting themselves out of the higher-volume purchases. It becomes an impossible decision for the merchant because neither position is commercially reasonable."
Atlas believes AmEx may eventually have to waive the Honor All Cards policy. "The case is relevant to ISOs," he said. "If merchants are allowed to pick and choose between AmEx cards, it may actually result in a decrease in income to some of the ISOs who start to see declining low-ticket cards, which leads to a reduction in acquiring income."
According to Atlas, the court was "very careful" in its decision regarding merchants' ability to file class action lawsuits and made sure it applied "only to this case and to these plaintiffs." However, he believes the ruling could have a broad impact on our industry.
"Basically, any acquirer who tries to limit the rights of a class action on the part of its merchants will have to rethink their litigation strategy," he said. "Because of this ruling, I think they're going to have to prepare themselves for greater exposure to class action claims."
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