An Appellate Court Victory Bolsters AmEx in Its Efforts to Enforce Acceptance Terms

By John Stewart
@DTPaymentNews

A federal appeals court on Monday handed American Express Co. a signal victory in the age-old battle with merchants over card-acceptance costs, but in doing so it may also have bolstered the card giant in its efforts to set and enforce merchant pricing.

The U.S. Court of Appeals for the Second Circuit ruled AmEx did not violate antitrust rules with its so-called non-discriminatory provisions (NDPs). These provisions banned AmEx-accepting merchants from inducing—or “steering”—customers to use other cards or other payment methods when they tried to use an AmEx card.

The stunning decision reverses a February 2015 ruling from the U.S. District Court in Brooklyn, N.Y., that the NDPs violated the Sherman Antitrust Act. Plaintiffs in the case, which dated to 2010, included the U.S. Department of Justice and 17 state attorneys general.

The appellate court had refused last year to stay the lower court’s order against AmEx’s anti-steering rules, allowing merchants at least temporarily to ask customers to use other cards. That decision led many observers to believe the appellate court might have been sympathetic to the Brooklyn court’s ruling.

Monday’s decision from a three-judge panel “did come as a surprise,” Anita Boomstein, a partner with New York City-based law firm Hughes Hubbard & Reed LLP who has closely followed the case, tells Digital Transactions News.

The DoJ says it has no comment on Monday’s appellate court decision. AmEx, however, issued a celebratory statement: “American Express is pleased with the appellate court’s decision to uphold the non-discrimination provisions in our merchant contracts. This means consumers will be able to choose how they pay and our card members will not be discriminated against at the point of sale.”

The court victory comes at a time when AmEx has been rocked not only by legal setbacks but also by significant market reversals, including a decision by retailing giant Costco Wholesale Corp. to end a long-time cobranding and acceptance relationship with AmEx and replace it with a similar arrangement with Citigroup Inc. and Visa Inc.

But now AmEx might be in a stronger position, at least with respect to pricing and terms for merchants that accept its cards. The appellate court based much of its reasoning on the notion that networks like AmEx must do business not only with merchants but also with cardholders, and that the offers and rewards necessary to attract consumers and get them to spend on the card ultimately benefit merchants at the network’s expense.

“Though merchants may desire lower fees, those fees are necessary to maintaining cardholder satisfaction—and if a particular merchant finds that the cost of AmEx fees outweighs the benefit it gains by accepting AmEx cards, then the merchant can choose to not accept AmEx cards. Indeed, many merchants have already made and continue to make this choice,” wrote circuit judge Richard Wesley, writing for the panel.

In arguing that cardholders often insist that they be able to use their AmEx cards at the point of sale so they can earn rewards, the panel expressly rejected the Brooklyn court’s finding that AmEx enjoyed and unfairly wielded market power.

“Cardholder insistence results not from market power, but instead from competitive benefits on the cardholder side of the platform and the concomitant competitive benefits to merchants who choose to accept AmEx cards,” Wesley wrote. “We conclude that, so long as AmEx’s market share is derived from cardholder satisfaction, there is no reason to intervene and disturb the present functioning of the payment-card industry.”

But Boomstein argues it’s the appellate court that erred, not the district court, and merchants’ position in the payments chain has been weakened. “This [Monday ruling] just perpetuates an unfair system, that’s the bottom line here,” she says. “Merchants have no leverage to accept or reject those [AmEx] terms. There’s no burden on cardholders. Cardholders always have a choice of which card to use. The merchant is the only one in the entire equation that has a gag order.”

For now, at any rate, that “gag order” will remain in place.