AmEx can bar merchants from steering card customers elsewhere

By Jonathan Stempel

NEW YORK (Reuters) - A federal appeals court on Monday cleared the way for American Express Co (N:AXP) to block merchants that accept its cards from steering customers toward lower-cost cards from other issuers.

The 2nd U.S. Circuit Court of Appeals in New York said a lower court judge in Brooklyn erred in February 2015 in finding that American Express' "anti-steering" rules violated federal antitrust law.

Underlying the case were the fees that merchants pay to process card transactions, and which can be passed along to cardholders in the form of higher prices.

The lower court judge, Nicholas Garaufis, had found that non-discrimination provisions (NDPs) in American Express' merchant agreements, meant to dissuade customers from using cards from MasterCard and Visa, unreasonably restrained competition.

But the appeals court said Garaufis erred by focusing entirely on the interests of merchants rather than cardholders.

"Though merchants may desire lower fees, those fees are necessary to maintaining cardholder satisfaction," Circuit Judge Richard Wesley wrote for a three-judge panel.

"So long as AmEx's market share is derived from cardholder satisfaction, there is no reason to intervene and disturb the present functioning of the payment-card industry," he added.

The decision may help American Express compete for space in customer wallets with Visa Inc (N:V) and MasterCard Inc (N:MA), whose cards are more plentiful but whose customers spend less.

It may also help American Express boost revenue as it cuts costs to help offset the loss of lucrative co-branding relationships such as with Costco Wholesale Corp (O:COST).

Shares of American Express, whose largest shareholder is billionaire Warren Buffett's Berkshire Hathaway Inc (N:BRKa), closed down 43 cents, or 0.7 percent, at $63.42. They had been down about 1.4 percent when the decision was issued.

FREEDOM TO CHOOSE

Monday's decision is a defeat for the U.S. government and 17 states, led by Ohio, that challenged American Express' anti-steering rules.

Visa and MasterCard settled similar lawsuits in 2011 by agreeing to change their rules.

Card companies charge merchants more than $50 billion a year to process consumer transactions, the government has said.

Mark Abueg, a U.S. Department of Justice spokesman, declined to comment.

Kate Hanson, a spokeswoman for Ohio Attorney General Mike DeWine, said decision is being reviewed.

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American Express welcomed the decision. "Consumers will be able to choose how they pay and our card members will not be discriminated against at the point of sale," spokeswoman Marina Norville said.

In his ruling, Garaufis had said the non-discrimination provisions enabled American Express to wrongfully exploit its 26.4 percent share of purchase volume in the U.S. credit and charge card market.

The judge later imposed an injunction that also allowed merchants to offer discounts, rebates and other incentives to customers for using other cards with lower fees.

But in December, after American Express said the injunction would cause irreparable harm, the appeals court temporarily lifted that injunction, enabling the company to enforce its anti-steering rules during the appeal.

Monday's decision means it can continue doing so.

"Whatever market power AmEx has appears, on this record, to be based on its rewards programs and perceived prestige," Wesley wrote. "The NDPs protect that program and that prestige."

Visa and MasterCard together recently had close to 1.2 billion cards in the United States. American Express had 47 million as of June 30, down from 55.3 million a year earlier.