The American Express Co., long criticized for the high fees it charges merchants who accept AmEx cards, is now defending those fees, along with its anti-steering rules, in U.S. District Court in New York. The case, which a judge began hearing on July 7, 2014, is all that remains of a massive anti-trust suit filed in 2010 by the U.S. Department of Justice and several state attorneys general challenging AmEx, MasterCard Worldwide and Visa Inc. rules banning merchants from "steering customers" to less costly payment options.
MasterCard and Visa almost immediately reached multibillion-dollar, out-of-court settlements with the DOJ and the states; AmEx did not. The DOJ contends that AmEx's no-steering rules are anti-competitive because AmEx cards are too important for some merchants (especially those in travel and entertainment) not to accept.
"AmEx's rules have plain anti-competitive effects: they restrain the price competition that would otherwise discipline card networks from charging merchants higher fees – fees that merchants' customers ultimately pay as higher retail prices," Justice Department lawyers stated in a pretrial memorandum.
AmEx countered that with over 53 million cards in consumers' wallets, its market share is minor and that the fees it charges are necessary to recoup costs such as fraud control and cardholder rewards. The card company added that most AmEx cardholders typically carry other cards – notably MasterCard and Visa cards – that they can just as easily use to pay for purchases. It just doesn't want merchants encouraging customers to use those other cards in lieu of AmEx cards. AmEx does allow merchants to negotiate surcharging authority, but they must also surcharge MasterCard and Visa card payments.
AmEx also believes it should not be held to the same standards as MasterCard and Visa because, unlike those brands, it must sell both merchants and their customers on using AmEx cards.
"While it is certainly true that card networks need both cardholders and merchants, there is no precedent to support AmEx's position that plainly anti-competitive practices harming merchants – and ultimately tens of millions of their customers (including those who pay with other credit cards, debit cards, checks or cash) – can be excused because AmEx rewards a fraction of those customers (i.e., its cardholders) with some of the bounty that AmEx reaps from avoiding price competition," the DOJ stated in its pretrial memorandum.
The DOJ further challenged AmEx's assertions by producing AmEx documents detailing pricing negotiations with several major airlines. Those documents, dating back to 2008, described AmEx's shares of various airlines' corporate charge volume as being at or near 60 percent. They also describe proprietary research indicating that 86 percent of AmEx cardholders will not fly on airlines that don't accept AmEx plastic.
The presentation of evidence and legal arguments is expected to take at least two months. The judge in the case could reach a decision by the end of 2014.
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