Supreme Court Will Decide If American Express Can Stop Stores From Encouraging Customers To Use Less-Expensive Cards

If you have multiple credit cards in your wallet, you probably decide which one to use based on factors like each card’s interest rate, current balance, and rewards programs. Merchants want to make that choice easier by offering discounts or other incentives for using cards that cost the retailer less to process, but American Express forbids its merchants from offering such deals, but it will soon be up to the Supreme Court to decide whether or not that’s legal.

This is a legal dispute we’ve been covering for a few years as it’s made its way through the court system. It involves the “anti-steering” or non-discrimination provisions (NDP) of the AmEx merchant agreement. In plain English, it states that merchants who accept American Express aren’t allowed to do anything that would encourage customers to use a competing credit card network like Visa, MasterCard, or Discover.

That’s a problem for some retailers, since American Express typically charges more per transaction than the other networks. In 2010, the U.S. Department of Justice, along with the attorneys general for 17 states, filed a federal lawsuit against American Express, alleging that the credit card company illegally restrained trade by barring merchants from doing anything to steer customers toward non-AmEx payment card options.

AmEx Loses…

In Feb. 2015, a U.S. District Court judge in Brooklyn sided with the states, saying that the AmEx contract conditions run counter to long-held practices of merchants being able to direct customers toward certain products and services.

“Merchants routinely attempt to influence customers’ purchasing decisions, whether by placing a particular brand of cereal at eye level rather than on a bottom shelf, discounting last year’s fashion inventory, or offering promotions such as ‘buy one, get one free,’” explained the judge. “Under American Express’s NDPs, a merchant may not attempt to induce or ‘steer’ a customer to use the merchant’s preferred card network by, for example, offering a 10% discount for using a Visa card, free shipping for using a Discover card, or a free night at a hotel for using an American Express card.”

Since these merchants are making less money every time a customer uses an American Express card when they could have used something else, the judge concluded that AmEx’s anti-steering rule results in higher prices for all customers.

Then AmEx Wins

The merchants’ victory was short lived. In Sept. 2016, the Court of Appeals for the Second Circuit overturned the lower court’s ruling, finding that the judge had focused “entirely on the interests of merchants while discounting the interests of cardholders.”

“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,” explained the three-judge appellate panel. “Indeed, many merchants have already made and continue to make this choice.”

The lower court judge had also taken issue with AmEx’s fee hikes, finding that the purported new benefits and rewards offered after the cost increase were not sufficient to offset the higher price. But again the Second Circuit disagreed, saying that there is no rule requiring a one-to-one correspondence between a fee hike and any associated benefits.

Taking It To SCOTUS

With the Justice Department and several states dropping off after losing that appeal, the remaining plaintiff states — Ohio, Connecticut, Idaho, Illinois, Iowa, Maryland, Michigan, Montana, Rhode Island, Utah, and Vermont — filed a petition [PDF] with the Supreme Court in June 2017.

The states argue, among other things, that there are at least two distinct “markets” for the credit card industry: There is the relationship between the card company and the consumer, and then there is the relationship between the card company and the merchants who accept these cards. Therefore, contends the petition, the states only need to show that AmEx’s anti-steering condition illegally restrains trade in one of these markets, not both as the Second Circuit concluded.

The petition also claims that, even if you accept the appeals court’s ruling that antitrust actions must affect both merchants and consumers, the Second Circuit should not have directed a verdict in AmEx’s favor. Rather, say the states, the case should have been remanded back to the District Court with instructions regarding the burden of proof.

Southwest Airlines, Discover, CVS, Kroger, Walgreen, Publix, Safeway, and several others, have filed briefs in support of the states’ petition.

This morning, the Supreme Court agreed to hear arguments in this appeal — now titled Ohio v. American Express Co. — meaning a decision will likely come in the first half of 2018.

“I am pleased that the U.S. Supreme Court has agreed to take on this case,” said Ohio Attorney General Mike DeWine this morning. “The issues in this appeal involve anti-competitive practices that hinder Ohio consumers and Ohio retailers and merchants.”

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