American Express wins right to block merchants from promoting rival cards
By Tracy Brackman | Published: September 29, 2016
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Earlier this week, a federal appeals court ruled that American Express can prevent merchants from steering customers to credit cards with lower transaction fees. This decision, which overturned a lower court’s 2015 ruling, is a major victory for the New York-based credit card company in a long-running lawsuit.
At the heart of the lawsuit were the nondiscriminatory provisions (NDPs) found in American Express’ merchant contract. These provisions bar merchants from offering cardholders discounts and incentives for using cards that are less costly to the merchant, expressing preferences toward particular cards or disclosing the costs that merchants pay to accept individual cards.
Merchants protest high swipe fees
The driving concern behind the lawsuit were the swipe fees that merchants pay to American Express each time they process a credit card payment. Because American Express typically charges a higher swipe fee than Visa, MasterCard or Discover, merchants were pushing for leeway to encourage customers to use an alternative form of payment, such as a competitor’s credit card or cash, in order to reduce expenses.
Merchants have argued that American Express’ NDPs hinder competition among credit card companies over swipe fees. According to the U.S. Department of Justice (DOJ), swipe fees generate over $50 billion per year for credit card companies.
The DOJ and 17 state attorneys general filed a lawsuit in 2010 claiming that American Express was in violation of federal antitrust laws due to the NDPs in its merchant agreement. The DOJ stated that “these restrictions obstruct merchants from using competition to try to keep credit card fees from increasing.” Visa and MasterCard were named in similar suits, which they settled in 2011 by agreeing to alter their rules.
In 2015, U.S. District Court Judge Nicholas Garaufis ruled in favor of the DOJ. However, the U.S. Court of Appeals 2nd Circuit in New York overturned the lower court ruling this past Monday, citing that Judge Garaufis’ decision was based largely on the merchants’ perspective, ignoring any possible benefits to the cardholder. The three-judge panel held that the fees were “necessary to maintaining cardholder satisfaction” and that merchants “can choose to not accept Amex cards” if they find that the fees outweigh the benefits.
American Express is satisfied with the court’s decision, stating that its cardholders “will be able to choose how they pay and…will not be discriminated against at the point of sale.”
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