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Amercian Express Class Action Lawsuit

A class action lawsuit has been filed against American Express Company and American Express Travel Related Services Company, Inc. The lawsuit accuses these companies of imposing anti-competitive practices in the credit card market.  The plaintiffs’ lawsuit is based on a combination of federal and state antitrust laws, state consumer protection statutes, and claims of unjust enrichment.

This week, a group of debit card users has achieved class certification in a lawsuit against American Express Co. The class, representing users from 11 states and the District of Columbia, alleges that American Express’s rules have indirectly inflated rival card costs.

What Is the American Express Lawsuit About?

The lawsuit, filed in the United States District Court for the Eastern District of New York, represents a collective action on behalf of millions of consumers and entities who have used electronic payment methods other than American Express cards. The plaintiffs allege that American Express’s Anti-Steering Rules in its merchant agreements have unreasonably restrained trade and inflated prices in the credit and charge card transaction market.

At the heart of the lawsuit against American Express are consumers who use credit and debit cards from networks like Visa, Mastercard, and Discover but not American Express. They claim that Amex’s anti-competitive rules have increased merchants’ rates, which are subsequently passed on to consumers across all forms of electronic payment.

Central to the plaintiffs’ argument is the claim that American Express’s Anti-Steering Rules have led to higher transaction costs, fewer credit card transactions, and, ultimately, increased prices for consumers across the United States. The lawsuit seeks damages, restitution, and injunctive relief for the alleged harms caused by these practices.

Two Classes of Plaintiffs (One Survives)

The plaintiffs sought to certify two classes in their lawsuit: one for credit card users and another for debit card users. They argued that American Express’s enforcement of anti-steering rules violated Section 1 of the Sherman Act, which prohibits trade-restraining agreements. The lawsuit targets transactions at 38 major merchants, including Target Corp., Albertsons Cos., and Publix Super Markets.

While the judge granted the debit card users class status, he denied it for the credit card user group. The denial was based on the plaintiffs’ failure to demonstrate that eliminating Amex’s anti-steering provisions would lead to reduced or stable annual fees for credit cards. According to the judge, the credit card class couldn’t prove an injury that could be demonstrated with common evidence, a hurdle the debit card class did not face.

This Has Been a Long Battle

This is not the first round of this battle. The U.S. District Court for the Eastern District of New York has previously upheld crucial findings against American Express regarding its Anti-Steering Rules. This decision, stemming from a rigorous seven-week bench trial conducted in July and August 2014 and concluded on February 19, 2015, underscores that this is another step in a larger battle in ongoing antitrust lawsuits facing major card companies.

In that case, the court’s findings centered on Amex’s imposition of Anti-Steering Rules on merchants, which have been a focal point of antitrust scrutiny. These rules prohibit merchants from guiding customers towards using less expensive payment methods, leading to higher merchant fees across major card networks, including Visa, Mastercard, Discover, and Amex.

A significant consequence of these rules, as identified by the court, is the increase in consumer prices. Merchants, bearing the brunt of higher fees, pass on these costs to consumers, resulting in higher retail prices across the board. This situation is further complicated as consumers who do not use Amex cards end up subsidizing the premium rewards Amex offers to its cardholders. These rewards, funded by elevated merchant fees, impose an indirect cost on all customers, irrespective of their payment method.

Furthermore, the court observed that the additional revenue Amex gathers through these higher fees is not entirely balanced out by the rewards or benefits provided to its cardholders. This imbalance results in a net increase in the cost of credit or charge card transactions for everyone, not just those using Amex cards.

How Credit Card Merchant Fees Work

In the Visa and Mastercard systems, merchant fees comprise three components: a network fee, an acquirer fee, and an interchange fee. Visa and Mastercard retain the network fee, while the acquirer fee goes to the institution servicing the merchant. The interchange fee, set by Visa or Mastercard, is collected by the issuing bank when a transaction is settled.

The interchange rate, and consequently the total merchant fee, varies based on the merchant’s industry and the type of credit card used. High-reward cards often have higher interchange rates, thus costing merchants more.

In contrast, Amex uses a different pricing model, charging a single merchant fee for all its credit and charge cards. This means merchants pay the same fee to Amex, regardless of whether the consumer uses a high-reward Platinum Card or a lower-reward Green Card.

Amex sets merchant fees by industry, establishing a base rate for each sector, like airlines or retail. Typically, Amex’s merchant fee hovers between 2.5% and 3.5% of the transaction amount for many industries. If 3% is the merchant fee, a $1,000 purchase with an Amex card would result in the merchant receiving $970, with the remaining $30 being Amex’s revenue.

People pay off their American Express bills. The bulk of Amex’s revenue comes from merchant fees, unlike its competitors, who derive 75-80% of their revenue from interest – arguably excessive interest.

Compared to Amex, other credit cards like Discover and most Visa and MasterCard cards have lower merchant fees, making them less costly for merchants. These fees are a significant expense for merchants of all sizes, leading many small businesses to opt out of accepting Amex or any general-purpose credit and charge cards at all. Which is why many do not take your American Express card.

There Is a Lot on the Line

General purpose credit and charge cards, commonly known as GPCCs, serve as a key method for consumers across the United States to buy goods and services from millions of merchants. We spend more than $3.1 trillion a year with these cards.