NEW YORK — American Express violated U.S. antitrust laws by barring merchants from asking customers to use one credit card over another, a federal judge ruled Thursday.
The case was a major blow to American Express, who argued that its policies kept it competitive against the larger payment networks Visa and MasterCard and their bank partners.
U.S. District Court Judge Nicholas Garaufis said in his ruling that American Express nondisclosure policies harmed competition and prevented merchants from trying to lower their credit card processing costs. He also said AmEx's policies kept consumers unaware how much using their credit cards cost merchants, which required merchants to pass along those costs in the form of higher prices.
At the center of the case are the fees merchants pay to process credit and debit cards, which have been largely hidden from the average consumer. Every time a credit or debit card is used at a merchant, the banks and payment networks would take a small percentage of the transaction as a fee.
The fee varies on what type of card is used, but typically debit cards were cheaper for merchants to process than credit cards. The credit cards that gave consumers things such as reward points, cash back or airline miles, which are the cards American Express offers, were among the most expensive for merchants to process.
Consumers never directly pay for these fees, but do so through higher prices merchants must charge to cover the processing costs.
American Express required merchants who accept its cards to accept all credit cards equally and could not encourage consumers to use one credit card over another through practices like signs that say "We Prefer Visa" or possibly offering discounts to Discover cardholders.
Visa and MasterCard used to have similar nondisclosure policies, but ended those practices after settling with the Justice Department in 2010. American Express refused to settle, and the issue went to trial in the summer last year, arguing that merchants could discriminate against AmEx cardholders due to the higher fees. AmEx also argued that, as the third-largest payment network, it was not in a competitive position to inhibit competition.
Those arguments were rejected. Judge Garaufis ruled that the loyalty American Express cardholders have for their cards have been often enough to keep merchants accepting American Express cards. Also while American Express is the third-largest payment network, it is the second-largest credit card network by payment volume.
American Express, in a statement, called the decision "wrong" and plans to appeal.
"The court's ruling will not provide any benefit to consumers and will, in fact, harm competition by further entrenching the two dominant networks," the company said.
The ruling will not change American Express' policies immediately. Judge Garaufis asked both American Express and the Justice Department to submit proposed ideas on how to remedy the situation as a result of the ruling.
American Express shares fell 2 percent in mid-day trading following the ruling.