NEW YORK (Reuters) - American Express Co violated U.S. antitrust law by prohibiting merchants from steering consumers to use lower-cost credit cards, a federal judge ruled on Thursday, in the company’s second major setback this month.
The decision by U.S. District Judge Nicholas Garaufis in Brooklyn followed American Express’ loss on Feb. 12 of a lucrative, exclusive partnership with warehouse retailer Costco Wholesale Corp.
It is also a victory for the U.S. government and 17 states, which in 2010 sued American Express over allegations it forbade merchants from recommending to consumers which cards to use.
The New York-based company’s activities “imposed actual, concrete harms on competition in the credit and charge card network services market,” Garaufis wrote in a 150-page decision. He said he will decide on remedies later.
American Express shares fell 1.7 percent.
Card companies charge merchants more than $50 billion a year to process consumer transactions, the government said. Those fees have also spurred many years of litigation by the merchants themselves against the card companies.
“Today’s decision is a triumph for fair competition and for American consumers,” U.S. Attorney General Eric Holder said in a statement. “By recognizing that American Express’s rules harm competition, the court vindicates the promise of robust marketplaces that is enshrined in our antitrust laws.”
American Express said it will appeal, and that Garaufis’ decision would harm competition by “further entrenching the two dominant payment networks,” Visa and MasterCard.
“We believe that freedom of choice and fair competition are worth defending,” American Express said.
Visa Inc and MasterCard Inc had also been sued by the various governments over their “anti-steering” rules for merchants, but settled in 2011 by agreeing to make changes.
“Large retailers can save a good chunk of money by encouraging customers to use cards like Visa and MasterCard,” said Matt Schulz, senior industry analyst at CreditCards.com, an online marketplace. “If a large retailer can go from paying 5 percent on a transaction to even 4 percent, that is a lot.”
American Express has said its “premium” services justify its processing fees, which are higher than some rivals charge.
It also said its merchant rules help it compete with Visa and MasterCard, which together have more than 1.1 billion cards in the United States versus 55 million for American Express.
Garaufis, however, said American Express wrongfully exploited its 26.4 percent share of purchase volume in the U.S. credit and charge card market by banning merchants from giving incentives for consumers to use one card over another, or telling consumers they might be better off if they did.
“There is nothing to offset credit card networks’ incentives - including American Express’s incentive - to charge merchants inflated prices for their services,” the judge wrote. “This, in turn, results in higher costs to all consumers who purchase goods and services from these merchants.”
Douglas Kantor, a partner at Steptoe & Johnson who represents the National Association of Convenience Stores, welcomed the decision.
“It ought to open up the marketplace for more price competition where there isn’t any at all today,” he said in an interview. “That helps merchants and consumers, because it can help keep prices down, and spur spending and economic activity.”
Richard Dagen, an antitrust partner at Axinn, Veltrop & Harkrider, said the decision may make it easier for small or new rivals to compete with American Express, Visa and MasterCard.
“You might have a chance for someone like Discover to make inroads,” he said, referring to Discover Financial Services . “Whenever that happens, you’re likely to see lower prices for the merchants, which hopefully get passed on to consumers.”
Garaufis ruled after presiding over a seven-week non-jury trial last summer.
The lawsuit sought to force American Express to give merchants who accept its cards the freedom to encourage consumers “to use any payment method they choose.”
No money damages were sought, but American Express has said a loss could have a “material adverse effect” on its business.
That could add to the loss of earnings stemming from the demise of its partnership with Costco, which began in 1999 and will end in March 2016.
American Express is the only credit payment form accepted at Costco’s U.S. stores. Costco last year decided to replace American Express as its card partner in Canada with MasterCard and Capital One Financial Corp.
Shares of American Express closed down $1.38 at $78.40. Visa fell 2 cents to $269.10, and MasterCard rose $1.47 to $89.20.
The case is U.S. et al v. American Express Co et al. U.S. District Court, Eastern District of New York, No. 10-04496.