On Thursday, A judge in the United States District Court in the Eastern District of New York found in favor of the United States Department of Justice and 17 state attorneys general who filed a lawsuit claiming that American Express’ rules for merchants violate antitrust laws.
The 17 plaintiff states were Arizona, Connecticut, Idaho, Illinois, Iowa, Maryland, Michigan, Missouri, Montana, Nebraska, New Hampshire, Ohio, Rhode Island, Tennessee, Texas, Utah and Vermont.
Over the course of a seven week trial during the summer of 2014, the department argued that these restrictions obstruct merchants from using competition to try to keep credit card fees from increasing. The civil case, brought under Section 1 of the Sherman Antitrust Act, sought to end the violation and to restore competition.
The trial focused on credit card “swipe fees” which generate over $50 billion annually for credit card networks. Millions of merchants of all sizes and in scores of industries pay those fees. Despite these large fee revenues, the Justice Department argued that price competition over merchant swipe fees has been almost non-existent and for decades the credit card networks have not competed on price. Thursday’s decision was rendered by Judge Nicholas G. Garaufis.
Settlements with Visa and MasterCard were filed at the same time the case against American Express was begun; the settlements prohibit the two networks from continuing their rules and practices that had obstructed competition. The court approved the settlements on July 20, 2011, and they applied immediately to Visa and MasterCard. American Express was not a party to the settlements, and the litigation against American Express continued.
The department argued that the principal reason for an absence of price competition among credit card companies has been rules imposed by each of the networks that limit merchants’ ability to take advantage of a basic tool to keep prices competitive. That tool – commonly used elsewhere in the economy – is merchants’ freedom to “steer” transactions to a network willing to lower its price. Each network has long prohibited such steering to lower-cost cards. Now that Visa and MasterCard have reformed their anti-steering rules, American Express rules stood as the last barrier to competition.
At trial, an array of merchants came forward to explain both the substantial costs they incur when their customers pay with credit cards and their inability to ignite competition among the networks to reduce those costs. In fact, the rules not only prevent merchants from offering their customers lower prices or other incentives for choosing a less costly card, they even block merchants from providing consumers with truthful price information about the cost of swipe fees of different credit cards.