By Robin Sidel
Kenneth Chenault rolled the dice and lost.
The longtime chief executive of American Express Co. refused for
years to settle an antitrust case with the U.S. government, vowing
to fight even as the company's top rivals cut deals.
On Thursday, a U.S. District Court judge sided with the Justice
Department, ruling that AmEx's rules are anticompetitive by not
allowing merchants to promote other cards or offer certain
discounts. For Mr. Chenault, the loss was the second big blow in a
week, following AmEx's surprise announcement that its 16-year
partnership with Costco Wholesale Corp. would end next year.
The ruling means that merchants who accept AmEx plastic would be
permitted to encourage customers to use other, potentially cheaper
cards, such as ones that are branded by Visa Inc. and MasterCard
Inc. Merchants also could offer discounts to shoppers for using
cards other than AmEx and post signs that specify which card they
prefer.
The financial impact isn't immediately clear, but AmEx could
potentially lose customer spending on its cards or be forced to
reduce its rates to merchants, according to industry observers.
AmEx has said in financial filings that it could suffer a material
adverse effect on its business if it lost the case.
AmEx historically has charged merchants higher fees than those
that are set by Visa and MasterCard, although that gap has narrowed
in recent years. AmEx uses the fees that it charges to merchants to
fund its rewards program and provide other perks to its
cardholders.
"American Express might have to bring their fees down and that
could potentially destroy their brand image as a premium product,"
said Richard Hernandez, an antitrust lawyer at McCarter &
English LLP in Newark, N.J., who has been following the case.
AmEx said it was disappointed by the judge's decision and will
appeal "because we believe the decision was wrong." The government
wasn't seeking monetary damages in the case, but instead was trying
to force AmEx to drop its restrictions.
"By recognizing that American Express's rules harm competition,
the court vindicates the promise of robust marketplaces that is
enshrined in our antitrust laws," U.S. Attorney General Eric Holder
said on Thursday.
On Thursday, American Express's shares dropped 1.7%, to $78.40,
and are off 16% this year. MasterCard gained 1.7%, to $89.20, while
Visa's shares ended basically flat, at $269.10.
The decision, handed down in a 150-page ruling by U.S. District
Judge Nicholas Garaufis, comes as AmEx has been losing customers to
rivals and falling short of revenue targets. Further, the demise of
the Costco deal will affect roughly one in 10 AmEx cards in
circulation.
AmEx's contractual arrangements have prohibited merchants from
steering customers to other cards. Those rules "constitute an
unlawful restraint on trade," according to the judge's ruling.
The case dates back to 2010 when the Justice Department filed a
lawsuit against AmEx, contending that its merchant rules inhibit
competition and raise fees for consumers. The lawsuit was filed
just a day after Visa and MasterCard agreed to scrap similar
stipulations.
The judge's decision is a big setback for Mr. Chenault, 63 years
old, one of the longest-reigning bosses in the U.S.
financial-services industry.
Mr. Chenault, who joined AmEx in 1981, led the card company
through the financial crisis, when it ran into trouble after an
ill-timed expansion into credit-card lending, and has long been one
of the top-paid executives on Wall Street. His compensation totaled
$24.4 million in 2013, the last full-year data available.
Mr. Chenault wanted the company to go to trial, vowed not to
settle the case, and insisted on testifying, according to people
familiar with the company's strategy.
During two days of testimony in a Brooklyn court last July, Mr.
Chenault repeatedly recounted a period in the 1990s when Visa
launched a campaign that encouraged merchants to promote its
branded cards with signs that read "We prefer Visa." The effort,
combined with Visa and MasterCard rules that prohibited thousands
of banks from striking card-issuing deals with AmEx, represented a
"double chokehold" on the company, Mr. Chenault said.
"We were fighting for our survival," he said on the witness
stand.
An AmEx spokesman declined to make Mr. Chenault available for
comment.
Over the course of his tenure, Mr. Chenault has transformed
AmEx's customer base and greatly expanded its merchant acceptance.
Once known as a card for the affluent that was accepted at
exclusive restaurants and hotels, AmEx customers can now use the
card at fast-food restaurants and dollar stores.
Mr. Chenault also is pushing the company into new areas,
including prepaid debit cards for consumers who wouldn't qualify
for a traditional AmEx card. It also is trying to expand acceptance
among small merchants. But the company has struggled as other
financial institutions develop cards aimed at affluent
customers.
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.
The prospect of steering customers to cards with the best deals
is appealing to Michael Kurtz, manager of Goldstock Jewelers in
Pittsburgh, which accepts AmEx cards and other brands.
"Of course, any business that is trying to maximize profits is
going to want to influence people in some way or another," he said,
adding that most of his customers already pay with Visa or
MasterCard.
In defending itself, AmEx said 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.
"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 on Thursday.
Write to Robin Sidel at robin.sidel@wsj.com
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