Government Probe of POS Rules Gets New Life as DoJ Case Against AmEx Proceeds

By Kevin Woodward

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A U.S. Department of Justice lawsuit alleging anti-competitive behavior by American Express Co. can proceed, a judge in the U.S. District Court for the Eastern District of New York ruled Wednesday. Seventeen states also are plaintiffs in the case.

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The order from judge Nicholas G. Garaufis ruled that disputes about whether American Express legally wields market power to enforce price measures and other claims about the card company’s anti-steering rules are subject to resolution at trial.

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The case is important because of the government’s continuing inquiry into the point of sale.

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“It’s pretty significant because it shows the government’s continuing efforts to look at what the main card brands are doing in terms of restraining merchants at the point of sale,” says Anita Boomstein, a partner at Hughes Hubbard & Reed LLP, New York City.

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The DOJ initially sued Visa Inc., MasterCard Inc., and AmEx in 2010, but immediately announced settlements with the two other card brands. AmEx contested the allegations, something it continues to do today. In a statement, the company says, “American Express continues to believe that it has strong defenses to the DOJ lawsuit and will defend the case vigorously.”

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The earliest a trial could start is following the July 4 holiday, when an unrelated case is concluded, according to a court filing.

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The Department of Justice is alleging section 3.2 in the AmEx operating rules effectively restrains merchants in being able to shift consumers to favor one brand over AmEx and to inform customers about the cost of credit, Boomstein says. “Merchants are really hamstrung,” she says.

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But AmEx argues it has little market share and its practices are not a violation of the Sherman Antitrust Act. Justice says AmEx does have market power, as evidenced by its being able to control pricing over time, Boomstein says. “It’s an effort by the government to make the cost of payments more transparent and give merchants more leverage,” she says.

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That advantage might exist in the form of preference campaigns operated by the card brands. In Wednesday’s filing, the judge cites a deposition from a MasterCard travel-and-entertainment executive that in the absence of AmEx’s anti-steering rules, MasterCard would use preference campaigns with merchants. Such campaigns could lower prices for merchants.

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Such an argument could be plausible, says Howard Herndon, an attorney specializing in payments at Waller Lansden Dortch & Davis LLP, Nashville, Tenn. “With people being able to provide discount arrangements or incentives to drive their card to being the preferred card of the merchant, that will then drive greater competition among the card brands,” Herndon says, “which will ultimately benefit the merchants perhaps through lower costs.”