American Express: Stories from the GCR Archives

DOJ questions Amex in credit card probe

Originally published 4 November 2008

Financial services company American Express has admitted receiving a United States Department of Justice subpoena as part of an investigation of the credit card industry.

The civil investigative demand, received on 14 October, asks for documents and information about the company’s merchant surcharging policies, and its “anti-steering” policies that prohibit merchants from discriminating against the card in favour of other forms of payment, according to a regulatory filing.

“During the last few years, as regulatory interest in credit card network pricing to merchants and related issues has increased, the company has responded to many enquiries from banking and competition authorities throughout the world,” American Express says in a Securities and Exchange Commission report filed on Friday.

The company says it intends to cooperate with the request.

The DOJ declined to comment on the filing.

The subpoena does not imply any wrongdoing on the part of American Express. But it does shed light on a DOJ investigation that follows in the wake of a slew of private lawsuits targeting the credit card industry’s financial relationship with merchants.

In June, several companies, including drug retailer CVS Pharmacies, sued American Express for instituting an “anti-steering” policy allegedly restricting what merchants could tell customers regarding Amex’s fees and prices.

The plaintiffs allege the rules were anticompetitive because they precluded customers from learning that American Express charged merchants higher prices, and because they prevented customers from receiving price reductions from using a lower-cost card.

American Express has yet to respond to the complaint.

Constance K Robinson, a partner at Kilpatrick Townsend Stockton in Washington, DC, says that while the government typically leads enforcement efforts, in this case it is difficult to tell which came first, the division’s investigation or the private actions.

“It could be that the government reviewed the allegations and decided there is some aspect that it views itself as a better plaintiff to advance the interest of consumers,” Robinson says.

For example, she says, private plaintiffs usually seek damages while the government may think a rule change will help consumers. In general, if the government thinks a private suit will result in adequate relief for consumers, it may not choose to participate.

“Each party looks out for different interests,” Robinson says.

Speaking about public and private enforcement generally, James Mutchnik, partner at Kirkland & Ellis in Chicago, says the flow of investigations from agencies to the private bar is no longer the hard-and-fast rule.

“With increasing frequency, things are getting reversed,” Mutchnik says.

He says that in some cases the plaintiff’s counsel will “shop” an investigation to the DOJ or Federal Trade Commission once a private action has been filed. If public enforcers launch an investigation, it can deter a judge from dismissing the private lawsuit based on a similar set of circumstances.

“But the government doesn’t live in a box,” Mutchnik says. “They can pick up the paper, and it doesn’t take much to start a preliminary inquiry.”

Amex hit with DOJ antitrust suit

By Ron Knox

Originally published 5 October 2010

The US Department of Justice has sued American Express, saying that its merchant rules limit consumer choice and violate antitrust laws.

Antitrust specialists say the vertical restraints case could be destined for trial – potentially the first such civil trial for the Antitrust Division under the stewardship of Assistant Attorney General Christine Varney.

The lawsuit, filed yesterday in the Eastern District of New York, accuses American Express of putting in place rules that stop merchants from offering customers discounts, rewards and facts about credit card fees that may lead them to use different methods of payments.

The lawsuit alleges that the fees harm both consumers and merchants who accept American Express cards. It was filed alongside claims made by several states, including California, Missouri, Texas and Iowa.

American Express rivals Visa and MasterCard were also named in the complaint. However, the division says they’ve reached a tentative settlement agreement with Visa and MasterCard that, if approved by the court, would see the companies allowing merchants the freedom to inform customers of potentially cheaper methods of payment.

The case appears to be a major priority for the division, as evidenced by the presence of US Attorney General Eric Holder at yesterday’s press conference – one of the only times Holder has taken a public role in an antitrust case.

“With today’s lawsuit we are sending a clear message: we will not tolerate anticompetitive practices,” Holder says. “We want to put more money in consumers’ pockets and, by eliminating credit card companies’ anticompetitive rules, we will accomplish that.”

Varney says the settlement with MasterCard and Visa is “an important step” in bringing more competition among credit cards to the point of sale.

“The department’s lawsuit against American Express will continue that effort and, if successful, allow merchants more freedom to benefit their customers,” Varney says.

In a statement, MasterCard says that its practices have always allowed merchants to offer discounts for cash or other rival cards, and that its merchant rules have always been more flexible than those of its competitors.

“MasterCard’s practices are both lawful and pro-competitive, and we view this settlement as a great result,” says Noah Hanft, MasterCard general counsel. “We are very pleased that, after a comprehensive and lengthy investigation and intensive lobbying efforts by lawyers representing retailers in a pending lawsuit, this matter has been resolved without our having to substantially change our business practices.”

American Express says the government’s lawsuit is a “significant retreat” from prior DOJ efforts to promote competition in the industry, and that its new approach would ultimately reduce consumer choice.

Specifically, the company says the DOJ’s proposed remedy would interfere with consumer choice at the checkout counter by steering American Express cardholders to another payment network.

The DOJ says in its complaint that American Express’s merchant fees, which it charges merchants every time they swipe a customer’s American Express credit card, are the highest of any credit card network.

The company says the government’s theory ignores a point that the DOJ has previously made and courts have confirmed: that American Express does not have the market power required to force merchants to do anything.

“We have no intention of settling the case,” Kenneth Chenault, chairman and chief executive of American Express, said in a statement. “We will defend the rights of our card members at the point of sale and our own ability to negotiate freely with merchants. We are confident that the courts will recognize the perverse anticompetitive nature of the government’s case, and that we will continue providing a competitive, superior service to cardmembers and merchants.”

The case joins similar private lawsuits, also filed in Eastern New York.

Janet McDavid, partner at Hogan Lovells in Washington, DC, says that the DOJ’s case faces major obstacles. McDavid has represented American Express in other matters.

First, she says, the lawsuit is a rule-of-reason case that requires market power – something that American Express does not have.

Second, she says, any potential anticompetitive effects “have to be balanced against [Amex’s] pro-competitive rationale for its non-discrimination policies.”

DOJ sheds light on arguments against Amex

By Pallavi Guniganti

Originally published 24 February 2014

The DOJ last week released a public version of its opposition to American Express’s motion for summary judgment, providing a rare look into a case in which many crucial court documents remain sealed.

After the government’s 2010 settlements with Visa and MasterCard, American Express is the last defendant standing in the way of the Antitrust Division’s effort to break the credit card companies’ restraints on merchants. The division says these anti-steering or anti-discrimination rules, which forbid businesses that accept Amex-branded credit cards from expressing a preference for any other brand, stifle horizontal competition among the credit
card companies.

Merchants pay rates for access to the credit card companies’ payment networks that the division says are higher than they would be in a more competitive environment. These costs are passed on to all consumers – not just those using credit cards – in the form of higher prices for goods and services, due to the prohibition on discriminating against or among cards.

The division and Amex will face off next month regarding the company’s attempt to get the case kicked out before trial. Amex argues that the government cannot show that the company has market power and, in the absence of such a showing, the court cannot find Amex liable under the rule-of-reason standard.

The DOJ repeatedly cited a previous case against Visa and MasterCard for exclusionary rules that prohibited their member banks from issuing cards branded by competitors Amex and Discover, in which the government’s success at trial was upheld by the Court of Appeals for the Second Circuit. While a different New York federal judge is now overseeing the Amex litigation, Judge Nicholas Garaufis remains bound by Second Circuit precedent.

The Second Circuit decision in the DOJ’s lawsuit about the exclusionary rule states: “For the government to prevail in a rule-of-reason case under Section 1, the district court concluded, and the parties do not argue otherwise, that the following must be shown: as an initial matter, the government must demonstrate that the defendant conspirators have ‘market power’ in a particular market for goods or services.”

The DOJ, in its memorandum of law, counters that a lawsuit under Section 1 of the Sherman Act does not require it to prove that Amex has market power because such an enquiry is part of a speculative question about whether a company’s conduct might affect competition negatively. Here, the government says, the negative effects on competition of Amex’s rules are already apparent.

With Amex forced to accept the government’s factual claims as true for the purpose of summary judgment, the DOJ relies heavily on its own counter-­statement of material facts to support its argument that Amex’s anti-steering rules, though challenged under the rule-of-reason, are “plainly anticompetitive”.

But the government is not ceding the market power point to Amex. Instead, it argues that if necessary, it can prove Amex’s market power. Extensive merchant testimony, the DOJ says, shows that Amex “clearly possesses” market power because nearly every major retailer feels compelled to accept American Express cards despite the high cost.

The company’s ability to “impose merchant restraints that plainly inhibit, or exclude, price competition among card networks across most of the market” is evidence of market power, according to the DOJ’s memorandum of law.

Amex looks to a more quantitative measurement and says companies like itself, with market shares of less than 30%, are presumptively incapable of exercising market power.

But the company’s own boasting to investors and in internal documents about its customers’ loyalty – to the point of cardholders insisting that a purchase be made with Amex and choosing a merchant based on Amex card acceptance – and about the percentage of major retailers who are paying for the Amex network, fuelled much of the DOJ’s market power argument.

Judge Garaufis has scheduled oral arguments regarding Amex’s summary judgment motion for 19 March.

DOJ insists Amex card loyalty equates to market power

By Pallavi Guniganti

Originally published 7 July 2014

In its opening statement at trial against American Express today, the Department of Justice pressed its claim that the third-largest credit card company’s anti-steering rules for merchants are not only anticompetitive but are also an exercise of market power.

Opening the potentially weeks-long trial in Brooklyn today, the DOJ said it plans to show Amex’s behaviour harmed competition, which Judge Nicholas Garaufis of the Eastern District of New York previously said the government may do to prove its case under Section 2 of the Sherman Act.

But the government’s lead litigator in the case also argued that Amex customers’ insistence on using the card gives the company market power, despite its relatively smaller share of the market than rivals Visa and MasterCard.

The federal government and 17 states sued Visa, MasterCard and American Express in 2010 for imposing rules barring merchants from steering customers toward one method of payment over another, even if one of the methods
costs less.

Visa and MasterCard settled, but Amex has fought the lawsuit on the grounds that the merchant rules are necessary to keep it competitive against those larger card networks.

The ways in which a merchant might lobby customers to use a credit card that charges the lowest fee, through a discount or even a sign noting the different costs, “are a basic part of how competition works”, said DOJ trial attorney Craig Conrath.

Conrath described Amex’s rule as a vertical restraint aimed at horizontal inter-brand competition – precisely the kind that the Supreme Court held in Leegin to be the most important. Conrath said that in Leegin the vertical restraint kept retailers from discounting the manufacturer’s brand; in contrast, Amex’s restraint on retailers keeps them from discounting competitors’ brands.

“Most courts have to start from scratch in evaluating market power,” Conrath said, but prior litigation against credit card companies provides a roadmap that includes customer preference, in which “merchants testified that they could not refuse payment by Visa or MasterCard.”

Among other merchant witnesses, the government plans to present the former chief executive of US pharmacy chain Walgreens to describe what happened when the drugstore chain attempted to negotiate lower merchant fees from Amex, and then to stop accepting Amex when negotiation failed. According to the government, customers threatened to stop shopping at Walgreens and created so much “blowback” that the pharmacy relented.

“That’s how insistence is played out in the real world,” Conrath said. Though Amex sometimes claims that its references to insistence are just puffery, it uses the metric internally to make decisions such as the “highest rational price” they could charge different merchants based on the need to accept Amex cards, he said.

Of course, market power in itself is not a violation of antitrust laws. Conrath said the problem arises because Amex puts roadblocks in the path of any competitor who attempts to achieve a higher market share of transactions by offering merchants a lower fee in exchange for steering customers to the lower-cost card.

If merchants cannot realistically drop Amex because of consumer loyalty, he said, then the anti-steering rules should be evaluated as the act of a company abusing its power.

The government’s opening statement indicates that it will attempt to counter Amex’s portrayal of itself as a small maverick by focusing on narrower markets than those argued by the company.

For example, in its court papers Amex has said its average merchant fee has declined, which is contrary to the behaviour typical of market power. Conrath countered that Amex raised merchant fees by 65% for a specific subset that have the highest levels of customer insistence. “Raising price purely because we can is a textbook case of market power,” he said.

Opening statements continue today. The trial should last at least six weeks.

Amex CEO’s testimony emphasises “intense” negotiation

By Pallavi Guniganti

Originally published 31 July 2014

Pushing back on government claims that American Express has market power, the head of the credit card company repeatedly said at trial today that it must make concessions and offer additional benefits to keep merchants in its network.

Chief executive Kenneth Chenault testified that the company’s effort to keep the average merchant fee paid to Amex for each transaction from decreasing was met with resistance from retailers, despite benefits provided through programmes such as marketing payments to merchants.

“People like getting things for free, so it’s always a difficult negotiation. Even when you’re providing strong value, it is very, very intense,” Chenault said.

The DOJ had focused on this explicit push by Amex to increase its prices to merchants as indicative of the company’s market power. While the push slowed the decline in the average fee rate, the effort ended around 2010, Chenault said. “The negotiations were already intense and it increased the level of merchant dissatisfaction.”

Under questioning by Amex’s counsel, Cravath, Swaine & Moore partner Evan Chesler, Chenault said: “The threat of cancellation is terrifying. We do almost anything legal to avoid cancellation. It’s not just the impact of the cancellation of that merchant. It’s the spillover of that cancellation.”

This spillover effect on the cardholder’s purchases at other stores decreases the customer’s perception that the credit card is generally accepted, he said. Chenault claimed that there is no such issue of perception of coverage for Amex’s rivals, Visa and Mastercard, because customers already have confidence that if a merchant accepts any credit cards, it must accept those.

In response to Amex’s defence that it lacks market power because several million merchants do not accept its card, the DOJ has argued that the 100 largest retailers in the US do accept it, and the non-accepters generally are smaller companies. Chenault said Amex does care about these small merchants and has tried a range of strategies and tactics to bring them into the network.

“They don’t need us to operate their business. But they do need Visa and Mastercard if they’re going to accept plastic,” he said. “So, the challenge is persuading them. And what we have to do is invest in our model: we have to differentiate it; we have to provide benefits and services for our merchants; benefits and services and rewards for our cardholders. We have to fund that to remain in business and be successful,” with the funding sourced largely from merchant fees.

Chenault testified in support of Amex’s trial position that the relevant market includes debit cards, contrary to the DOJ’s stance that the market should be defined to include only credit cards. Amex does not offer a debit card – Chenault said it is “not feasible” – and including debit cards in the relevant market for antitrust purposes would cut its market share from 26% to 14%.

Addressing another major government argument that American Express has market power from its cardholders’ loyalty, or “insistence”, on using that card, Chenault said this is merely an affinity for the product based on the company’s investment in rewards and customer service.

“In reality, they’re not signing an oath that ‘I will only use American Express for the rest of my life.’ That’s not the way the marketplace works. We’re fighting every single day to persuade our customers to use our card,” he said. “These insistence studies and surveys are not scientific,” and merchants often do not believe that they will lose customers by refusing to accept Amex.

Chenault’s testimony continues today and he is scheduled to be cross-­examined by DOJ prosecutors this afternoon.

Amex and DOJ fire off final briefs

By Pallavi Guniganti

Originally published 30 September 2014

Post-trial papers from the government and American Express filed ahead of closing arguments show that weeks in court brought them no closer together on the facts or law relevant to the claim that the credit card company’s merchant rules unreasonably restrain competition.

The two sides continue to disagree on: whether the relevant market is merchants, or also cardholders and their transactions; whether that market includes competition from debit cards; the government’s burden of proof; Amex’s market power or lack thereof; whether benefits to cardholders outweigh the alleged harms to merchants; and much more.

The DOJ and several states first sued American Express along with Visa and MasterCard in 2010, for the credit card companies’ network rules that limited merchants’ ability to encourage customers to use the payment option that would cost the merchant less. All three had prohibited such steering to lower-­cost cards, but Visa and MasterCard opted to settle and reform the offending restrictions.

Amex insisted that its rules were necessary to keep it in competition with its larger rivals, and that allowing merchants to accept its cards yet discriminate against them would gut its business model. After Judge Nicholas Garaufis refused to dismiss the case, it went to a bench trial in Brooklyn federal court this past summer.

The witnesses there appear to have been heard somewhat differently by each side, judging by their respective post-trial briefs. For example, the company’s chief executive Kenneth Chenault testified that if its restrictions were eliminated, the company would not survive.

His lawyers wrote: “He was not alone. American Express’s president Ed Gilligan and American Express’s expert, Professor B Douglas Bernheim, among others, agreed that without non-discrimination provisions American Express’s ability to compete with a differentiated model would be at an end.”

Yet the DOJ stated that Gilligan and Bernheim “distanced themselves from Mr Chenault’s dire forecast” because Gilligan said he expects to continue to work for the company for another decade, while Bernheim would not “make a prediction that American Express will vanish”.

The government also disparaged Amex’s claim that its average fee rates to merchants have declined in the past decade. The DOJ brief calls Bernheim’s analysis to that effect “error-ridden” and “implausible” because it ignored “a made-for-litigation adjustment to the price for a single major merchant, Delta”.

Another expert for American Express, Berkeley professor Richard Gilbert, had his recent work for the DOJ brought up in the government’s brief. It says he admitted in the Amex trial’s debate over the inclusion of debit cards into the relevant market that functional interchangeability alone is an insufficient reason to include products.

“His recent testimony in the Apple e-books case provides a useful analogy. There the question was whether e-books and print books were in the same market. The e-book and print editions of any particular title share many functional similarities, most prominently identical text,” the DOJ wrote. “But when Professor Gilbert considered their reasonable interchangeability, applying the hypothetical monopolist test, he found that print books were not in the same antitrust market as e-books.”

The Antitrust Division and American Express will meet again before a decision is rendered. Judge Garaufis has scheduled closing arguments for 9 October.

American Express merchant rules are anticompetitive, judge says

By Yasmine Harik

Originally published 20 February 2015

After five years of litigation, a New York federal judge has ruled that American Express violated antitrust laws by forbidding merchants from encouraging customers to use alternate credit cards when making purchases.

In a case that pitted the DOJ against major credit card companies American Express, Mastercard and Visa, Judge Nicholas Garaufis on Thursday handed the DOJ a hard-fought victory.

Despite his reservations about telling a credit card company how to run its business, Judge Garaufis said he had no choice but to find that Amex’s rules were anticompetitive, given the breadth of the DOJ’s evidence over a seven-week trial last summer in Brooklyn.

“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,” he wrote. But ultimately, Amex’s anti-steering rules “constitute unreasonable restraints on trade” in the credit and charge card market, the judge said in his 150-page verdict.

Judge Garaufis said he had repeatedly asked both sides to reach a settlement that would balance Amex’s legitimate concerns about protecting its business with the public interest in competition, but an agreement never came to fruition.

“Having failed to do so, the court is left with no alternative but to discharge its duty by deciding the question before it: whether plaintiffs have shown by the preponderance of the evidence that Amex’s [provisions] violate US antitrust laws,” Judge Garaufis wrote. “Upon consideration of the case law in this circuit and the factual record developed at the lengthy bench trial . . . the court finds that plaintiffs have made such a showing.”

The DOJ first sued American Express along with Visa and MasterCard in 2010, challenging the companies’ rules that prohibited merchants from encouraging customers to use other payment cards with lower transaction fees for the merchant. Categorically forbidding incentives, such as discounts, free shipping and other deals, was anticompetitive, the DOJ argued.

All three companies had prohibited steering to lower-cost cards, but Visa and MasterCard opted to settle with the DOJ at the time and voluntarily agreed to remove or revise the bulk of their steering rules.

Amex, however, refused to settle the case, arguing instead that it was not big enough to be an anticompetitive presence in the industry. According to court documents, there were only 54 million Amex cards in circulation in 2013, compared with 254 million US-issued cards from Visa and over 178 million cards from MasterCard.

The DOJ was not seeking monetary damages in the case, but was trying to force Amex to drop its restrictions. Amex insisted that its rules were necessary to compete with larger rivals, and that allowing merchants to accept its cards yet discriminate against them would “gut its business model”.

In reaching his decision, Judge Garaufis found that Amex “possesses sufficient market power to harm competition, as evidenced by its significant market share, the market’s highly concentrated nature, high barriers to entry and the insistence of Amex cardholders on using their cards” – insistence that, he said, prevents most merchants from dropping acceptance of Amex when faced with price increases.

“The record demonstrates, in fact, that Amex has the power to repeatedly and profitably raise their merchant prices without worrying about significant merchant attrition,” Judge Garaufis said.

In addition, he agreed with the plaintiffs that Amex’s provisions caused actual anticompetitive effects on inter-brand competition. “The record shows that merchant prices have risen dramatically in the absence of merchant steering,” Judge Garaufis said.

“Today’s decision is a triumph for fair competition and for American consumers,” US Attorney General Eric Holder said in a statement. “By recognising that American Express’s rules harm competition, the court vindicates the promise of robust marketplaces that is enshrined in our antitrust laws.”

Thursday’s ruling does not mean Amex must drop its rules immediately. In a separate scheduling order, Judge Garaufis gave the parties 30 days to propose a fix.

“The parties themselves are likely best equipped to determine how American Express’s merchant regulations might be rewritten so as to satisfy American Express’ interests and comport with the Sherman Act,” he said.

Judge Garaufis also said that while an appropriate remedy will require certain provisions to be removed from Amex merchant contracts entirely, it may be possible for other challenged clauses to be “revised, amended or re-characterized” in a way that meets both parties’ interests.

In a statement released yesterday, the company said it was disappointed with the ruling and planned to appeal. Amex shares fell 1.7% in Thursday’s trading.

“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. “We continue to believe that the DOJ’s arguments are flawed and believe we should prevail on appeal.”

DOJ loses American Express appeal on multi-sided grounds

By Pallavi Guniganti

Originally published 27 September 2016

A federal appellate court on Monday unanimously reversed the DOJ’s trial victory against American Express, holding that the company’s restrictions on merchants could not be found to have violated antitrust law without the lower court first weighing their benefits to consumers.

After oral argument in December 2015, the US Court of Appeals for the Second Circuit had stayed the lower court’s order for the company to stop barring merchants from offering cardholders incentives to use, or expressing preference or information about, cards that are less costly for merchants to accept.

The appellate court yesterday ordered the District Court for the Eastern District of New York to enter judgment in favour of Amex, rather than remanding for fresh consideration in light of the Second Circuit’s statement of the law.

Brooklyn federal judge Nicholas Garaufis had previously found that neither side offered a reliable basis on which to definitively conclude whether the credit card issuer was spending a competitive level of profits from merchant fees on benefits for cardholders.

Without such evidence, the appellate court said, the government could not carry its burden under the standard the Second Circuit set out: “to show that the [restrictions] made all Amex consumers on both sides of the platform – both merchants and cardholders – worse off overall.”

The ruling will have a significant impact even beyond the credit card industry, observers said. The requirement to look at both sides of the transaction – the merchants who use a platform as well as the consumers who buy through it – could affect a variety of multi-sided markets with network effects, ranging from Amazon to Uber.

The Second Circuit also pushed back on what appeared to be a lower standard for the market share needed to exercise market power in vertical restraints.

At trial, Amex’s lawyers repeatedly argued that the company presumptively did not have such power, because it never had more than 30% of payments made by credit card in the US. The Antitrust Division had said, and Judge Garaufis agreed, that Amex had market power in a different form due to “customer insistence” on using the card, which enabled the company to increase merchants’ fees without a high rate of attrition.

The appellate court rejected the notion that the customer loyalty Amex had won through spending billions on advertising and rewards constituted market power. It said “increases in merchant fees are a concomitant of a successful investment in creating output and value”, and added that “cardholder insistence results not from market power, but instead from competitive benefits on the cardholder side of the platform and the concomitant competitive benefits to merchants who choose to accept Amex cards.”

The ruling

The opinion extolled the “untold efficiencies” created by the credit cards for millions of consumers. In addition to the ease of payment to merchants, the court touted the various rewards that cardholders can earn, such as airline miles, hotel stays and cash.

“Widespread acceptance of a card among sellers in turn depends heavily upon widespread acceptance among the consumers targeted by each seller,” Judge Richard Wesley wrote, joined by Judges Ralph Winter and Christopher Droney. “The functions provided by the credit card industry are highly interdependent and, at the cardholder/merchant acceptance level, result in what has been called a ‘two‐sided market’.”

However, the court noted, the two sides are also in tension: the fees that Amex charges merchants for each payment made using its cards are also the source of revenue to pay for cardholders’ rewards. This is particularly true for American Express in contrast with Visa and MasterCard, which derive most of their revenues from interest charged to cardholders and operate through member banks.

To bolster its position in the late 1980s and early 1990s, Amex strengthened what it called “non‐discriminatory provisions” – and the DOJ called “anti-­steering provisions” – contractually requiring merchants who accept its cards not to discourage customers from using them. The appellate court deemed the “welcome acceptance” mandate to be a vertical restraint, with the potential to have pro-competitive effects and that should be judged by the rule of reason.

The lower court had defined the relevant market incorrectly by failing to evaluate the relationship between the restraints on merchants and the benefits to cardholders, the Second Circuit said.

“Separating the two markets here – analysing the effect of Amex’s vertical restraints on the [merchant] market for network services while ignoring their effect on the [cardholder] market for general-purpose cards – ignores the two markets’ interdependence,” Judge Wesley wrote. “Separating the two markets allows legitimate competitive activities in the market for general purposes to be penalized, no matter how output‐expanding such activities may be.”

The Second Circuit also suggested that Amex legitimately sought to prevent freeriding by merchants who would advertise their acceptance of the card as a way to draw in a higher-income clientele, but then offer a discount at the register for not using that card.

It criticised the government for seeking a remedy that might make Amex more similar to Visa and MasterCard, and increase market concentration by reducing Amex’s share, contrary to the normal antitrust enforcement mission of fighting oligopolies.

Amex chief executive Kenneth Chenault, who testified extensively at the trial, said in a statement that the company had fought for what it believed was right and had “earned a major victory today”.

“As we have consistently maintained, we do not believe the previous trial court ruling would have provided any benefit to consumers. Instead, it would have harmed competition by further entrenching the two dominant networks, Visa and MasterCard,” Chenault said.

He noted that the DOJ may decide to appeal “and we stand ready to continue the fight if need be.”

The Antitrust Division declined to comment.

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