By Robin Sidel
A U.S. judge ruled on Thursday that American Express Co.'s rules
for merchants violate antitrust law, dealing a major setback to the
card company that has been hit by a series of blows.
The case, which was heard by a judge in a trial that lasted
seven weeks last summer, stems from a 2010 lawsuit in which the
Justice Department contended that AmEx's rules for merchants
inhibit competition and result in higher fees for consumers. The
government wasn't seeking monetary damages in the case, but instead
was trying to force AmEx to drop its restrictions.
U.S. Judge Nicholas Garaufis said in a 150-page verdict that
AmEx's rules "constitute an unlawful restraint on trade." The case
was heard in federal court in Brooklyn, N.Y.
One of the key rules at issue bars merchants who accept AmEx
cards from encouraging customers to use another card other than
AmEx.
AmEx has repeatedly defended its rules and said in financial
filings that it could suffer a material adverse effect on its
business if it lost the case. AmEx uses the fees that it charges to
merchants to fund its well-known rewards program and provide other
perks to its cardholders.
The ruling doesn't mean that AmEx must drop its rules
immediately. The judge has asked both sides to submit a proposed
remedy to the situation because "the parties themselves are likely
best equipped to determine how American Express' merchant
regulations might be rewritten so as to satisfy American Express'
interests" and comply with antitrust rules.
On Thursday, AmEx said in a statement that it was disappointed
by the decision and will appeal "because we believe the decision
was wrong."
American Express shares dropped about 2% in midmorning trading
and are off 16% so far this year.
The ruling comes at a tough time for AmEx, which has been
falling short of its revenue targets. To counter that, the company
is trying to expand its acceptance among small merchants and is
also broadening into prepaid debit cards for consumers who normally
wouldn't qualify for a traditional AmEx card.
Last week, AmEx announced that its 16-year-old partnership with
Costco Wholesale Corp. would dissolve next year after the two sides
were unable to reach agreement on terms for a new co-branded card.
AmEx is currently the only credit card that is accepted at Costco
stores, although the chain also accepts debit cards.
Meanwhile, rivals Visa Inc. and MasterCard Inc. had similar
merchant rules in place for years, but scrapped them in 2010 just
before the justice department sued AmEx. Visa and MasterCard agreed
to allow merchants to offer discounts, rebates and other incentives
to get customers to use cards with lower merchant fees, such as
"plain vanilla" plastic that doesn't have any rewards programs or
annual fees.
AmEx, however, refused to settle the case, saying it isn't big
enough to be an anticompetitive presence in the industry. There
were 53.6 million AmEx cards in circulation in 2013 compared with
254.1 million U.S.-issued cards from Visa and 178.3 million cards
from MasterCard, according to court documents.
Among other things, merchants who accept AmEx cards aren't
permitted to steer customers to other cards, such as those branded
by Visa and MasterCard.
"The court's ruling will not provide any benefit to consumers
and will, in fact, harm competition by further entrenching the two
dominant networks," AmEx said in its statement.
AmEx Chief Executive Officer Kenneth Chenault testified in the
antitrust trial, saying that the company's reputation is hurt when
merchants steer customers away from using AmEx cards.
"The most damaging thing that can happen to the American Express
brand is when our card members are discriminated against at the
point of sale, " he said.
In his decision, Judge Garaufis said that he had urged both
sides to settle the case and that "the court does not come to its
decision in this case eagerly or easily."
"The court recognizes that it does not possess the experience or
expertise necessary to advise, much less dictate to, the firms in
this industry how they must conduct their affairs as going
concerns," he wrote.
Write to Robin Sidel at robin.sidel@wsj.com
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