The longtime chief executive of American Express,Kenneth Chenault, refused for years to settle an antitrust case with the US government, vowing to fight even as the company’s top rivals cut deals. This long term strategy has now proven ill advised as the company has lost its anti trust lawsuit.
On Thursday, a US District Court judge sided with the Justice Department, ruling that
American Express loses antitrust lawsuit – appeal imminent
AmEx’s rules are anticompetitive by not allowing merchants to promote other cards or offer certain discounts. For Mr. Chenault, the loss was the second big blow in a week, following AmEx’s surprise announcement that its 16-year partnership with Costco Wholesale would end next year – reports the Wall Street Journal.
The ruling means that merchants who accept AmEx plastic would be permitted to encourage customers to use other, potentially cheaper cards, such as ones that are branded by Visa and MasterCard. Merchants also could offer discounts to shoppers for using cards other than AmEx and post signs that specify which card they prefer.
The financial impact isn’t immediately clear, but AmEx could potentially lose customer spending on its cards or be forced to reduce its rates to merchants, according to industry observers. AmEx has said in financial filings that it could suffer a material adverse effect on its business if it lost the case.
AmEx historically has charged merchants higher fees than those that are set by Visa and MasterCard, although that gap has narrowed in recent years. AmEx uses the fees that it charges to merchants to fund its rewards program and provide other perks to its cardholders.
“American Express might have to bring their fees down and that could potentially destroy their brand image as a premium product,” said Richard Hernandez, an antitrust lawyer at McCarter & English LLP in Newark, N.J., who has been following the case.
AmEx said it was disappointed by the judge’s decision and will appeal “because we believe the decision was wrong.” The government wasn’t seeking monetary damages in the case, but instead was trying to force AmEx to drop its restrictions.
“By recognizing that American Express’s rules harm competition, the court vindicates the promise of robust marketplaces that is enshrined in our antitrust laws,” US Attorney General Eric Holder said on Thursday.
On Thursday, American Express’s shares dropped 1.7%, to $78.40, and are off 16% this year. MasterCard gained 1.7%, to $89.20, while Visa’s shares ended basically flat, at $269.10.
The decision, handed down in a 150-page ruling by US District Judge Nicholas Garaufis, comes as AmEx has been losing customers to rivals and falling short of revenue targets. Further, the demise of the Costco deal will affect roughly one in 10 AmEx cards in circulation.
AmEx’s contractual arrangements have prohibited merchants from steering customers to other cards. Those rules “constitute an unlawful restraint on trade,” according to the judge’s ruling.
The case dates back to 2010 when the Justice Department filed a lawsuit against AmEx, contending that its merchant rules inhibit competition and raise fees for consumers. The lawsuit was filed just a day after Visa and MasterCard agreed to scrap similar stipulations.
The judge’s decision is a big setback for Mr. Chenault, 63 years old, one of the longest-reigning bosses in the US financial-services industry.
Mr. Chenault, who joined AmEx in 1981, led the card company through the financial crisis, when it ran into trouble after an ill-timed expansion into credit-card lending, and has long been one of the top-paid executives on Wall Street. His compensation totaled $24.4 million in 2013, the last full year of data available.
Mr. Chenault wanted the company to go to trial, vowed not to settle the case, and insisted on testifying, according to people familiar with the company’s strategy.
During two days of testimony in a Brooklyn court last July, Mr. Chenault repeatedly recounted a period in the 1990s when Visa launched a campaign that encouraged merchants to promote its branded cards with signs that read “We prefer Visa.” The effort, combined with Visa and MasterCard rules that prohibited thousands of banks from striking card-issuing deals with AmEx, represented a “double chokehold” on the company, Mr. Chenault said.
“We were fighting for our survival,” he said on the witness stand.
The ruling doesn’t mean that AmEx must drop its rules immediately. The judge has asked both sides to submit a proposed remedy to the situation.
The prospect of steering customers to cards with the best deals is appealing to Michael Kurtz, manager of Goldstock Jewelers in Pittsburgh, which accepts AmEx cards and other brands.
“Of course, any business that is trying to maximize profits is going to want to influence people in some way or another,” he said, adding that most of his customers already pay with Visa or MasterCard.
In defending itself, AmEx said it isn’t big enough to be an anticompetitive presence in the industry. There were 53.6 million AmEx cards in circulation in 2013 compared with 254.1 million US-issued cards from Visa and 178.3 million cards from MasterCard, according to court documents.
“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 on Thursday.
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