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Published On: February 20, 2015Categories: Antitrust, Litigation

American Express Antitrust Monopolization Ruling a Victory for Small Businesses–Will It Stick?

An antitrust decision. The United States District Court in Brooklyn rendered a somewhat surprising defeat to American Express Co. (AMEX) After sevens weeks of grueling (and probably boring) testimony at trial, Judge Garaufis held American Express liable for monopolization and violations of the United States’ antitrust laws because AMEX’s rules forbode merchants from steering customers to cards that had lower merchant-fees by, say, offering them a discount for using the store’s own proprietary card. (Decision) In other words, AMEX’s rule was that “If presented with an AMEX for payment, you have to accept it.” The question is whether that is an act of monopolization or attempted monopolization.

The Department of Justice brought the case with the Attorneys General of the Arizona, Connecticut, Idaho, Illinois,  Iowa, Maryland, Michigan, Missouri, Montana, Nebraska, New Hampshire, Ohio, Rhode Island, Tennessee, Texas, Utah, and Vermont against Visa, Mastercard and American Express–the others resolved their differences, AMEX chose to fight.

AMEX’s primary defense is that it didn’t have “market power.” At its root, an antitrust case is predicated upon the ability exclude competition. Since you can’t tell a competitor what to do unless you have an intellectual property right in the “thing” you’re talking about (a legal monopoly), the primary ways to exclude competition are either (1) through an agreement with the competitor or a key market participant not to compete, essentially (e.g., to fix prices, to reduce supply, to split up a market), or (2) to have sufficient market power that you can simply direct others not to buy from the competition or price yourself in a way that destroys competition.

American Express didn’t have an agreement as such, so the question was whether it had sufficient market power to exclude competition. AMEX seems to have agreed that it had somewhere around 30% of the market for credit cards/charge cards. AMEX rightly pointed out that “Hey, customers could simply choose to use their VISA/Mastercard (who have an overwhelming percentage of the market) and we [AMEX] are powerless to stop them.” A good argument for sure. Another good argument was that maybe customers LOVE American Express, so that’s why they use them–i.e., they have a strong brand which is not anti-competitive,

But Market Power can sometimes be an “ipso facto” type of inquiry in an antitrust monopolization case. If AMEX tried to exclude competition by telling merchants they could not give customers a discount for using a competitor’s card, or deal with the competition, and the merchants complied because they didn’t want to risk losing sales they would get from AMEX’s customers, then ipso facto, the story goes, AMEX has sufficient Market Power. It probably shouldn’t work this way–indeed, the trial was chalk full of economists and experts who showed market dynamics, made but-for calculations, and regaled the court with fancy terminology. In the end, the simplest story is usually the one that courts buy.

There is no question that this decision is “good” for small and medium-sized businesses, at least in principle. Larger businesses usually have leverage to negotiate their merchant fees with AMEX, or do so through cooperatives with parent or sibling companies. The rest don’t have that kind of bargaining stature. But I question what this will change in practice.

I seriously doubt that American Express even needed to tell stores that they had to accept AMEX when it was presented to them. Apparently, little to no evidence was presented that demonstrated how many people who had AMEX and wanted to use it actually would change their mind in favor of the store’s proprietary card, or in favor of a less expensive alternative. Obviously the discount could not be larger than the percentage fee AMEX takes, that wouldn’t make sense (unless the store wanted to use that as a loss leader to make interest on financing the sale through its proprietary card–more on that in a second). So the discount couldn’t be that high, and the elasticity factor seems troubling to me–and dubious to make a huge dent in AMEX’s market share. I don’t have a store card, but my wife has a couple, and when she shops in those stores she doesn’t present our AMEX, she presents the store card automatically. AMEX’s rules don’t forbid–and they couldn’t police it even if they did–the stores simply offering their cards with a general discount on merchandise (which they do quite conspicuously in my experience).

I also question what will happen to this decision in the future up on appeal to the Second Circuit. The Second Circuit court of appeals will probably hear this case in about a year. Monopolization cases are in disfavor these days. I don’t have a crystal ball. But I wouldn’t be surprised to see this opinion overturned on one or more grounds. Hopefully it will be common-sense, and not the malarkey we’ve become accustomed to from some of the courts of appeals (I’m looking at you Ninth Circuit).

Mazin