First Costco, Now This: AmEx Gets Slapped in Court

Can't a company catch a break around here? American Express , which just lost exclusivity as the credit card of choice for big retailer Costco Wholesale , has suffered a new body blow. The judge in a long-simmering lawsuit brought against the company decided that certain AmEx provisions for its merchants violate antitrust laws. That's dispiriting news on the surface, but let's look a little deeper into the ruling.

Steering into troubleThe judge's key issue with American Express is the company's ban on "steering." AmEx's contracts prohibit merchants from pushing customers toward rival cards through discounts for using those competing products, or by the promotion of such cards. The new ruling will allow AmEx-contracted merchants to engage in such practices.

The decision is the latest development in a lawsuit stretching back several years. The Department of Justice filed it just after settling similar charges in 2010 with card transaction processing networks Visa and MasterCard . AmEx elected to fight the suit against it rather than compromise like its rivals.

AmEx, of course, views the requirements at issue differently. It terms them its "non-discrimination provisions," and considers them protective measures.

In its view, according to a recent press release from the company, "Eliminating these protections would inhibit consumers' choice to pay with their preferred payment method and allow merchants who have agreed to honor our cards to then discriminate against them when our Card Members choose to pay with American Express."

A window opensThat press release was AmEx's immediate public reaction to the decision, which, it claimed, "will harm competition to the detriment of consumers and merchants." The card giant sounded a defiant note, saying that it intends to appeal the decision.

We'll see if it goes that far. The judge in the case has requested that the company and the DOJ get together and, within 30 days, submit a remedial order proposing modifications to the anti-steering provisions that would address the regulatory concerns.

This, plus the fact that Justice isn't seeking monetary compensation in the case, is an encouraging sign. It seems both the DOJ and the judge simply want to level the competitive landscape, stimulating competition and lowering the costs of credit card acceptance for both merchants and, by extension, consumers.

Speedy recoveryNo one likes to lose, of course. Investors traded down AmEx stock by around 2% to $78.39 last Thursday, the day the ruling was handed down. Yet the stock rebounded on Friday, ending the week a bit over Wednesday's close.

I think that's largely because the decision wasn't a surprise. AmEx is famously pricey for customers to carry and for merchants to accept. Most of the company's credit cards have high annual fees ($450, in the case of the Platinum Card). On the merchant side the transaction fees tend to be notably higher than those charged by Visa or MasterCard.

Although AmEx has had plenty of success offering products aimed at the less affluent,its success still relies somewhat on its positioning as a higher-end product. Its relatively rich customer base spends more, allowing the company to justify the higher merchant fees and the "non-discrimination" provisions in its contracts.

But any such requirements that are, in effect, exclusionary are probably going to come to the attention of regulators sooner or later. AmEx was always living on borrowed time with those provisions.

Life goes onAmEx has stated previously that losing the case could result in a "material adverse effect" on its operations.

Just now it's difficult to ascertain how its business will be affected, but in my view even that bland legal boilerplate language is melodramatic. It's not like Visa and MasterCard plunged into the dirt after agreeing to their respective settlements with Justice; on the contrary, both have seen pronounced rises in revenues and profitability since then.

I think AmEx will quietly put the case to rest by working out an acceptable remedial order with the DOJ. It's hard to win against the government, and the firm's smart brain trust probably realizes that it has little to gain by continuing the fight. We shouldn't be shocked to hear news of the two sides reaching a settlement in the very near future.

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Eric Volkman has no position in any stocks mentioned. The Motley Fool recommends American Express, Costco Wholesale, MasterCard, and Visa. The Motley Fool owns shares of Costco Wholesale, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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