American Express Co. drives a hard bargain with businesses that want to attract its affluent cardholders: treat the card like any other form of payment despite higher processing costs if you want those customers.
The lender prohibits businesses that accept American Express cards from offering incentives, such as discounts, to customers who use cards from companies that charge less to process payments, including Visa Inc. and MasterCard Inc. Those all-or-nothing rules, long an irritant to business, violate antitrust law, according to the U.S.
The government is set to try and lift those restrictions starting July 7, when its civil lawsuit against American Express goes to trial in Brooklyn, N.Y., federal court. American Express, based in New York, calls the lawsuit an "extreme and unprecedented assault" on its business model of courting elite card members with perks funded by merchant fees.
The nonjury proceeding, which could take more than eight weeks, would follow years of private litigation by merchants against Amex, Visa and MasterCard over the fees they charge to process payments. A Justice Department victory might give merchants leverage as they continue to try and cut the costs, which are largely hidden from U.S. consumers and amount to about $50 billion a year.
"If the government wins, then merchants are going to have substantial rights to steer customers to cheaper payment forms," said Gary B. Friedman, a lawyer who represented merchants in a private Amex lawsuit. "Right now, a merchant may not even inform a consumer of how expensive it is to use an Amex card."
In its case before U.S. District Judge Nicholas Garaufis, the U.S. alleges American Express has obstructed competition for years, tightening its rules starting in the 1990s when Visa won business by emphasizing its lower processing costs.
Amex said its average merchant fee is 3 percent higher than MasterCard's and 8 percent higher than Visa's, according to a ruling Garaufis issued in May. The company says its rates have actually fallen the average fee for merchants was 2.51 percent in 2013 and 2.52 percent in 2012.
"Amex charges merchants the highest prices, on average, of any card network, so merchants have every incentive to encourage their customers to pay in other ways," lawyers for the Justice Department said in a filing made public last month. That's why the company put the restrictions in place, the lawyers said.
American Express argues that its rules are needed to compete with the "duopoly" of Foster City, Calif.-based Visa and Purchase, N.Y.-based MasterCard, which together have more than 1 billion cards in the U.S. There are fewer than 55 million American Express cards, and about 3 million shops refuse American Express while accepting competitors, according to the card firm.
Amex said it also invests fee revenue into running its network and providing benefits for merchants such as fraud reduction programs, merchant financing and targeted marketing and data analytics.
"Most people don't have only American Express," said Todd Zywicki, a professor at the George Mason University School of Law in Arlington, Va. "The reason they can charge higher fees is that merchants want access to their higher quality American Express consumers."
The Justice Department filed its lawsuit in 2010 against Amex as well as Visa and MasterCard over similar rules. Visa and MasterCard agreed to make changes to settle the lawsuit.
"This is the DOJ cleaning up shop," said Darren Bush, a professor at University of Houston Law Center who specializes in antitrust law. "Amex is the holdout."
Amex may "need those rules in place to remain competitive with Visa and MasterCard, and they're willing to put more on the line against DOJ," he said.
Visa and MasterCard reached a record $5.7 billion antitrust accord with U.S. merchants over allegations of fixing their fees in July 2012. A judge's approval of the settlement has been appealed by scores of large merchants, including Wal-Mart Stores Inc. and Home Depot Inc., who contend it's far from large enough to make up for tens of billions of dollars collected every year. They also allege it unfairly bars merchants from suing in the future over fee practices.
If the government loses the Amex case, "then consumers will continue to pay too much and competition will be limited," said Mallory Duncan, general counsel for the National Retail Federation in Washington.