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Justices scrutinize retailers’ credit-card contracts

Should a large corporation, by virtue of its economic might, be allowed to tell small-business people how to communicate with their customers?

We’re not talking subsidiaries or even affiliated companies. If an independent small company does business with the large corporation, does it thereby surrender its right to offer certain kinds of discounts and even to speak certain words out loud in a customer’s hearing?

Why, yes, it does, when the large corporation in question is American Express. So said the Supreme Court at the end of June. But, as any lawyer would be quick to say, free speech and business autonomy were “not the issue” in the case. They were mere collateral damage.

Seventeen states and the federal government brought an antitrust challenge to the “anti-steering” provisions in credit-card companies’ contracts with retailers. When a retailer accepts your credit card as payment for a purchase, it agrees to pay a certain amount to the credit card issuer – a “swipe fee.” Of the big four credit card companies (Visa, MasterCard, Amex and Discover), Amex has traditionally charged the highest swipe fee. That gives retailers an obvious incentive to steer customers into using one of its competitors instead. As explained by Justice Breyer, “A merchant might tell the customer, for example, ‘American Express costs us more,’ or ‘please use Visa if you can,’ or ‘free shipping if you use Discover.'”

To combat the pernicious habits of free speech and customer discounts, Amex’s contracts “prohibit merchants from implying a preference for non-Amex cards; dissuading customers from using Amex cards; persuading customers to use other cards; … or promoting other cards more than Amex.” In short, Amex dictates what merchants are allowed to tell their customers, and what discounts and incentives they may offer.

In the late 1990s, Discover, by far the smallest of the four, tried lowering its swipe fee. It hoped that stores would pass the savings along to their customers, giving them a reason to switch to Discover. But the gambit failed because of the gag rules in Amex’s, MasterCard’s and Visa’s contracts. Eventually Discover gave up and raised its rates.

It’s difficult to imagine a clearer example of a business practice that prevents competition based on price, resulting in higher prices for consumers. And that sure looks like an unreasonable restraint on trade, which is prohibited by the venerable Sherman Act (named after its author, Ohio Sen. John Sherman, brother of Union Gen. William Tecumseh Sherman – I told you it was venerable). The case seemed so open-and-shut that Visa and MasterCard, who were originally named as Amex’s co-defendants, quickly settled, agreeing to rescind the anti-steering provisions in their contracts. Only Amex fought on to the bitter end.

Its persistence paid off. Justice Thomas, writing for the Supreme Court’s 5-4 majority, concluded that the competition-stifling, price-raising effect on merchants and consumers was irrelevant. Rather, the only question was whether Amex was unreasonably restraining competition in the market for credit-card services, a market with only four players. Visa “has 45% of the market as measured by transaction volume. Amex and MasterCard trail with 26.4% and 23.3%, respectively, while Discover has just 5.3% of the market.” The issue, as framed by Thomas, was whether Amex’s anti-steering provisions prevented Visa and MasterCard from competing with it.

Far from it. When viewed strictly in terms of the battle of the four giants, Amex’s practices were the only thing that allowed it to remain in the fight. If merchants were allowed to steer their customers in a way that maximized their own profits – if, in other words, the free market were allowed to decide the matter – “the viability of the entire Amex network” would be endangered and Visa would approach ever-nearer to monopoly.

And so, years after Visa and MasterCard voluntarily revoked their anti-steering provisions, Amex gets to keep its own. Merchants who accept American Express have to pay whatever swipe fee the company demands and keep quiet about it.

Still, ultimate power remains with the merchants. They have no reason to accept Amex unless doing so increases their profit. So even with the gag rule in place, market forces retain limited room to work their magic.

One more thing: The case is a classic example of the unfortunate way law fossilizes social science. Justice Thomas’s economic analysis relies on various secondary sources, which presumably reflect the thinking of some actual economists. But he doesn’t cite their arguments in the spirit of academic debate. Rather, by treating economic theory as immutable law, he transforms it into just that. The field of economics will continue to develop. But until the Supreme Court revisits the issue, antitrust law won’t.

Joel Jacobsen is an author who recently retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at