On February 19, 2015, Judge Nicholas G. Garaufis of the United States District Court for the Eastern District of New York ruled in favor of the United States Department of Justice (“DOJ”) and held that the American Express (“Amex”) anti-steering rules (so-called Non-Discrimination Provisions or “NDPs”) violated Section 1 of the Sherman Act.

The problems with NDPs, at least at first blush, are evident.  As Judge Garaufis posed the issue: “[A]ll else being equal, a given merchant might prefer that a customer carrying both a Visa and an Amex card in her wallet use the Visa card, since the cost of the transaction is likely to be lower for the merchant.  But pursuant to Amex’s NDPs, merchants who accept American Express are not permitted to encourage customers to pay for their transactions with credit cards that cost the merchants less to accept.”  The court found that this directly led to inflated acceptance costs to merchants, and indirectly to consumers.

To reach these conclusions, the court essentially found the relevant market to be for General Purpose Credit Cards (“GPCC”), which includes card issuance and network services—the court called this a network services market.  This was a market found in earlier credit card cases, but is notable here because the court considered—and rejected—the inclusion of debit cards in the relevant market.  The court found that while there has been an explosion in the use of debit cards over the past 10 years, debit cards were not reasonably interchangeable with GPCC.  The court rejected, however, a DOJ proposed sub-market for network services–credit cards used for travel and entertainment purposes—as being unduly narrow.

After defining the market, the court found that Amex had market power based on a 26.4% market share.  Typically, courts reject a finding of market power when share is below 30%, but here the court observed that other factors— e.g., cardholder loyalty to Amex—permitted the conclusion that Amex has market power.  It is an interesting point, and likely will be the subject of much debate if Amex appeals the ruling to the United States Court of Appeals for the Second Circuit.  Based on the finding of market power, and the impact of NDPs on merchants and consumers, the court found adverse competitive effects.

The court also rejected Amex’s arguments that the procompetitive benefits of the NDPs outweighed any anticompetitive effect.  As expressed by Judge Garaufis, the procompetitive benefits that Amex argued were: “(1) to preserve American Express’s differentiated business model and thus the company’s ability to drive competition in the network services market, and (2) to prevent merchants from ‘free-riding’ on the network’s investments in its merchant and cardholder value proposition.”  In other words, Amex argued that the NDPs allow it to offer a high-end (relatively expensive) card that attracts more affluent cardholders with high rewards, while delivering customers to merchants who tend to spend more.

The court stated that while these arguments were “perhaps intuitively appealing,” it ultimately rejected them.  As to the first point, the court found that Amex had effectively eliminated one form of competition—price competition—in order to foster other forms of non-price competition.  The court found that that is not a viable argument under the antitrust laws.  As to the second point, while the court found that there could be some limited free-riding—merchants lure affluent Amex cardholders into the store and then direct them to use a competitive card—the adverse effects of such free-riding do not overcome the adverse competitive effects of the NDPs.

The court indicated it will next consider the appropriate remedies in light if its decision, so stay tuned for further developments.