The judge overseeing the U.S. Department of Justice's antitrust lawsuit against American Express ruled Thursday that provisions in its merchant agreements violate federal law and "constitute unreasonable restraints on trade."
U.S. District Judge for the Eastern District of New York Nicholas Garaufis ordered Amex to modify or eliminate provisions that prevent merchants from encouraging consumers to use other forms of payment.
Amex vowed to appeal.
Judge Garaufis on Thursday noted that Amex's anti-steering provision changes "may not require their wholesale abandonment. Rather, the court is confident that there exists a middle ground that strikes the appropriate balance between American Express's legitimate interests as a going concern and the public interest."
The judge directed Amex and DOJ to work on a negotiated resolution and submit the proposal to the court within 30 days, according to an order dated Feb. 19.
At a later date, the judge noted, "the court will separately issue a remedial order and a judgment after it determines the appropriate remedy."
As such, it is unclear when and to what extent merchants, including those in the travel sector, could wriggle free of Amex's anti-steering provisions. A few travel merchants had expressed a desire to do so, considering Amex on average charges higher swipe fees than competitors.
At trial, Southwest Airlines and Alaska Airlines both contested the anti-steering provisions. Southwest, for example, noted that if it could encourage customers to use cheaper forms of payment it could negotiate lower merchant fees with Amex, court documents noted. Meanwhile, Amex prevented Alaska Airlines from steering corporate clients to use cheaper forms of payment in exchange for lower negotiated fares, according to testimony.
They may be in the minority. Credit Suisse analyst Moshe Orenbuch said many merchants likely would not steer customers away from Amex because "they wouldn't want to risk losing the business."
However, if merchants had the option to not accept Amex or steer away from it, that could lead to some erosion in Amex merchant rates.
"We don't have a point estimate, but what we have said and continue to say is that there will be some of it [steering away from Amex] and it will be one of the contributors that will pressure Amex's merchant discount rate over time," Orenbuch said.
The extent merchants would want to steer is unclear, especially since many have not taken advantage of a new ability, gained in December 2013 as part of the settlement of a class-action suit, to levy surcharges on Amex transactions as long as they're not higher than those for competing card products.
In the travel sector, Orenbuch noted that only some discount airlines have elected to surcharge__"in general, airlines aren't," he said.
While the decision could eventually impact Amex merchant relationships, Orenbuch said it shouldn't have much impact on corporate card use.
"You can't tell [a company] not to use the American Express corporate program," Orenbuch said. "I have to use my corporate card__you can't steer me away from it." The majority of corporate cards issued in the United States are Amex cards, according to court documents.
Amex at trial had lambasted the suit as DOJ overreach, claiming the government cannot show real harm stemming from its practices and noting that it's just too small to impose its will in an antitrust manner. Amex argued that its anti-steering provisions protected cardholders by preventing merchants from discriminating against or embarrassing them at the point of sale.
The judge agreed with DOJ that Amex provisions had several ill effects on consumers and merchants, finding they impede competition, block the introduction of low-cost payment models, "stifle" innovation and result in higher consumer and merchant pricing.
Even during closing arguments, the judge encouraged Amex and DOJ to work toward a settlement. That is how Visa and MasterCard resolved the matter after DOJ first brought suit against all three major card companies in 2010.
"Visa and MasterCard settled because they know it's not practical to be discriminated against at the point of sale because the clerk can't figure out which one is a high-cost Visa card or a low-cost Visa card, whereas you could discriminate against American Express," Orenbuch said.
While its competitors agreed to settle and alter merchant agreements, Amex pursued a legal defense that came to trial last summer and reached closing arguments in October 2014.
During those arguments, DOJ counsel noted it was "willing" to settle the suit as it had with MasterCard and Visa. Yet, Amex counsel said DOJ only had offered the company the same settlement deal those companies accepted__a deal Amex had long resisted.
The company in a statement Thursday noted it does plan to file an appeal "at the appropriate time shortly after final judgment is entered." Amex CFO Jeff Campbell during an earnings call with analysts last year anticipated "a lengthy appeals process" would follow the court's decision.
Amex CEO Kenneth Chenault even claimed that lifting those provisions posed an existential threat to Amex. "If we're discriminated against at the point of sale, our business model would be destroyed," he said in testimony in July.
"The court's ruling will not provide any benefit to consumers and will, in fact, harm competition by further entrenching the two dominant networks," the Amex statement noted. "We continue to believe that the Department of Justice's arguments are flawed and believe we should prevail on appeal."