The US Court of Appeals for the Second Circuit this summer refused to stay an order, pending appeal, that required American Express to halt the so-called "anti-steering" requirements in its merchant contracts.

This is the most recent development in the five-year-old litigation brought by the US Department of Justice (DoJ) against American Express. Like several other antitrust cases this year, it raises serious issues about whether the antitrust laws are still interpreted to promote aggressive competition on the merits. In this disturbing decision, for example, the court found that a competitor with 26 percent of the market, possessed "market power should be."

Summed up quickly, American Express’ contractual relationships prohibited its merchants from "steering" customers to other cards, or encouraging them to use alternative payment methods. These prohibitions covered other forms of payment that the merchant might prefer or that consumers might prefer. Examples of these prohibitions include discounts for the use of another card, displaying slogans like "We Prefer Discover" or asking customers to "please keep in mind that credit and charge expenses are some of our highest costs."

The DoJ had originally challenged the marketing tactics of all three major credit card companies. Visa and Mastercard settled. Amex insisted on going to trial. The trial lasted almost two months during the summer of 2014. Then in February 2015, the judge issued a 150-page opinion. He applied a Rule of Reason analysis and found that the American Express merchant rules were anti-competitive. 

The critical part of the court’s decision is the following:   "The court concludes that American Express does possess antitrust market power in the GPCC card network services market sufficient to cause an adverse effect on competition. Specifically, the court finds that Defendants enjoy significant market share in a highly concentrated market with high barriers to entry, and are able to exercise uncommon leverage over their merchantconsumers due to the amplifying effect of cardholder insistence and derived demand."

But this statement needs to be analysed under the light of other important industry facts, which were acknowledged in the court’s decision. 

First, American Express is by no means the largest installed base of major credit cards. It has 26.4 percent of the general purpose credit card market, slightly more than MasterCard at 23.3 percent, but just slightly over half of Visa’s market share, at 45 percent. And the market the court used ignored the impact of debit cards, despite what the court acknowledged as "the dramatic growth in customers’ use of debit cards in the last decade."

Second, for many years, American Express was excluded from being able to form relationships with card-issuing banks, because Visa and Mastercard had imposed exclusionary rules on those institutions. Even today, Amex has a network of only nine banks that issue cards, and these make up only about one percent of Amex’s annual charge volumes.

Third, Visa had run what the court called a "remarkably effective" anti-Amex campaign, hammering home slogans like "It’s Everywhere You Want To Be" and  "We Prefer Visa." The result of this campaign was a 25-45 percent shift in card volume from American Express to Visa. In 1995, Amex had only 20 percent of the general purpose credit card market. In 19 years, as of the trial last summer, Amex had succeeded in gaining only 6.4 percent of the market, hardly an imposing expression of economic power. Finally, the court’s decision recognized that at least part of the "power" attributed to Amex came not from its merchant restrictions, but rather what it called "cardholder insistence." This essentially means that Amex cardholders themselves "don’t leave home without it," and also may not buy at a store where it is disfavoured.

However, the court concluded that Amex "does possess antitrust market power in the GPCC card network services market sufficient to cause an adverse effect on competition."

In theory, the outcome could result in a merchant’s offering two-tier pricing, with the cost of using an American Express card carrying a higher charge to the consumer than another form of payment. However, many industry observers believe that major merchants would never alienate their customers with this tactic. 

The decision also seems to ignore the fact that a merchant, or at least a substantial merchant, can successfully bargain against, or discipline, American Express. This is not a hypothetical situation. As the financial services have so dramatically reported recently, JetBlue recently terminated its Amex co-branded card relationship in favour of other card issuers. In the same period, Costco not only terminated its cobranded relationship, but will no longer even accept Amex cards in its stores. Costco reportedly represents about eight percent of Amex’s overall billed business. The court’s decision reviews earlier attempts by merchants to discontinue accepting Amex cards, and concludes that "even the nation’s largest merchants are not immune to the effects of cardholder insistence." But that conclusion seems to ignore the "natural experiments" carried out successfully by Costco and JetBlue.

On 16 June 2015, the Second Circuit refused to stay enforcement of the judge’s order, but did promise an expedited appeal.

In the 150 pages of the decision, there are, as expected, many complex issues, including an analysis of so-called two-sided markets. Notwithstanding that, this decision is clearly a problematic development in antitrust law. It both permits injunctive relief, based on non-price vertical restraints, against a company that is not the dominant player, and it concludes that a competitor – with only about a quarter of the market – possesses market power.