No One Is Forcing You to Accept American Express

That is the gist of what a majority of five conservative Supreme Court justices told a group of petitioner merchants who had banded together to ask the nation’s highest court to let them file a class action suit against American Express. Instead, the merchants were told that they should pursue their rights individually in arbitration cases, as stated in the contracts they had all signed with the credit card company. The high court ruling follows a decade of litigation and overturns a New York federal appeals court decision, which would have allowed the merchants to bring a class action suit against AmEx.

The plaintiffs’ discontent stems from a provision in the American Express’ merchant agreement, which stipulates that they should accept all of the credit card company’s payment products, without discrimination. The merchants’ problem is that, whereas they do want to be taking AmEx’s premium and corporate cards, they don’t want to be forced to accept the company’s regular consumer credit cards, for which they are charged much higher processing fees than they are for similar Visa, MasterCard and Discover cards (these companies, by the way, all have adopted the same “honor all cards” policy). So let’s take a look at the ruling and its implications.

Using Its Monopoly Power

Writing for the majority, Justice Antonin Scalia defined the core of the issue:

According to respondents, American Express used its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit cards.

But the merchants would not turn to arbitration, because it is prohibitively expensive. According to an economist they hired, the cost of an expert analysis necessary to prove the antitrust claims would be “at least several hundred thousand dollars, and might exceed $1 million,” while the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled (the merchants sought treble damages). However, Justice Scalia observes in his characteristic style, “the antitrust laws do not guarantee an affordable procedural path to the vindication of every claim”. Moreover, he adds, “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.” So there you have it.

Justice Elena Kagan, writing for the dissenters, sees the matter rather differently:

The owner of a small restaurant (Italian Colors) thinks that American Express (Amex) has used its monopoly power to force merchants to accept a form contract violating the antitrust laws. The restaurateur wants to challenge the allegedly unlawful provision (imposing a tying arrangement), but the same contract’s arbitration clause prevents him from doing so. That term imposes a variety of procedural bars that would make pursuit of the antitrust claim a fool’s errand. So if the arbitration clause is enforceable, Amex has insulated itself from antitrust liability–even if it has in fact violated the law. The monopolist gets to use its monopoly power to insist on a contract effectively depriving its victims of all legal recourse.

And here is the nutshell version of today’s opinion, admirably flaunted rather than camouflaged: Too darn bad.

Well, I actually agree with Kagan that this is precisely Scalia’s message. However, I believe that the court nevertheless made the right decision by preventing the merchants from pursuing a class action suit against AmEx.

No One Is Forcing You to Take AmEx

American Express cards are indeed much more expensive for merchants to accept than the other major brands. However, AmEx’s fees are clearly disclosed in an agreement the credit card company sends to each one of its merchants at the very beginning of their relationship. This agreement is separate from the one covering the terms of Visa and MasterCard acceptance, which the merchant signs with his payment processor, and the merchant can choose to accept it or not. As AmEx executives never tire of saying, if you don’t like their fees, don’t take their credit cards. And at UniBul we have quite a few merchants who have exercised their right and don’t accept American Express.

However, once you’ve signed the agreement, you are bound to its terms, very much including the pricing provisions. And I really object to the idea that a merchant who has voluntarily chosen to accept AmEx’s cards, in full knowledge of the associated costs, should be awarded “damages”, nay, “treble damages” for doing so. How exactly has he been damaged?

Oh, and even though this is not the issue here, how do you estimate these “damages”? Justice Scalia, evidently citing the aforementioned economist hired by the plaintiffs, tells us that AmEx’s rates are “approximately 30% higher than the fees for competing credit cards”. But these “damages” should be set against the benefits associated with the acceptance of a particular card brand. To make the obvious observation, if a consumer has access to no other payment method but an AmEx card, a transaction would not take place. Moreover, a transaction may not take place even if the consumer does have access to another payment method. For example, my primary credit card at the moment is American Express Blue, whose rewards program I like better than the ones of my other credit cards. So one of my primary criteria when choosing a merchant from whom to buy something I need (especially online) is whether or not they accept AmEx; if they don’t, I go elsewhere. So estimating “damages”, even if they really existed, would have been incredibly tricky.

The Takeaway

I really wish that the merchants had stopped fixating on credit card processing fees as much as they do or at least that they did not resort to such extortionary methods to try and get what they want. For that is precisely what they are doing in the AmEx case. Yes, acceptance of AmEx cards is more costly than it is for Visa and MasterCard, but no one is forcing you to do it. You have full knowledge of AmEx’s terms of acceptance and the right to reject them. But once you’ve accepted them, you have no right to claim that AmEx has wronged you and seek “treble damages” in return.

Image credit: Wikimedia Commons.