Second Circuit: AmEx Anti-Steering Provisions Not Anticompetitive

The US Court of Appeals for the Second Circuit held in United States v. American Express Company that the district court erred in holding that American Express's non-discriminatory provisions violated Section 1 of the Sherman Act, and reversed and remanded the case in favor of American Express.

Practical Law Antitrust

On September 26, 2016, the US Court of Appeals for the Second Circuit held in United States v. American Express Company that the district court erred in holding that non-discriminatory provisions (NDPs) in American Express's contracts with its merchants unreasonably restrained trade in violation of Section 1 of the Sherman Act (No. 15-1672 (2d Cir. Sept. 26, 2016) ( ).


District Court Decision

In American Express, the Department of Justice (DOJ) and 17 state attorneys general alleged that the NDPs harmed competition by forbidding merchants that accept American Express cards from steering customers towards using other cards with lower discount rates (the rate credit card companies and their networks charge to merchants when their credit card is used). As part of its business model, American Express charges a higher discount rate than its competitors, including Visa, MasterCard, and Discover. However, the NDPs expressly prohibit merchants that accept American Express from:

  • Implying they prefer other cards to American Express.

  • Dissuading customers from using American Express in favor of other credit card brands or payment methods.

  • Promoting other credit cards over American Express, except, in certain circumstances, when the merchant has its own private label card.

Plaintiffs alleged that by forbidding merchants from steering customers to cards with lower discount rates, the NDPs block merchants from using competition to keep discount rates low, resulting in higher costs to the consumer.

The US District Court for the Eastern District of New York held that the NDPs violated Section 1 because:

  • Plaintiffs adequately alleged:

    • a relevant market;

    • defendant's market power; and

    • an adverse effect on competition in the relevant market.

  • The defendant's procompetitive justifications were not persuasive, including the argument that NDPs are necessary to prevent:

    • harm to its unique and innovative business model; and

    • free-riding.

For more on the district court decision, see Legal Update, EDNY Finds that American Express's Anti-Steering Rules Violate Sherman Act Section 1 ( .


Second Circuit Reversal

The Second Circuit found that the district court had erred in defining the relevant market. The court reasoned that, contrary to the district court's findings, cardholders should be included in the market definition alongside merchants. Considering the entire relevant market, the plaintiffs failed to show that NDPs had a sufficiently adverse effect on competition to violate Section 1.

The court noted that NDPs affect competition both for merchants and cardholders by protecting the crucial revenue American Express obtains from its relatively high merchant fees. Merchant fee revenues fund the benefits American Express cardholders obtain, and those benefits attract cardholders. As a result, a reduction in American Express's merchant fee revenue might decrease both:

  • The amount of benefits the consumer receives from the credit card.

  • Competition among payment-card networks for cardholders.

Therefore, the court found that plaintiffs were required to show that the NDPs harmed both merchants and cardholders by reducing the quality or quantity of credit card purchases, and failed to do so.

The court reversed and remanded the case and instructed the lower court to rule in favor of American Express.

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