New York - During the first trial day in the U.S. Justice Department's antitrust suit against American Express, DOJ lawyer Craig Conrath reiterated one of the plaintiff's complaints that merchants who depend heavily on business travelers paying with corporate cards are "especially vulnerable" to the card network's anti-steering rules and "face substantially higher pricing from American Express." The trial began on Monday here in federal court.
In the suit filed in 2010, DOJ challenges practices among card networks that prohibit merchants from using incentives to encourage consumers to use cheaper forms of payment. Visa and MasterCard settled with DOJ, agreeing to "allow merchants to offer discounts, incentives and information to consumers to encourage the use of payment methods that are less costly," according to DOJ. Amex argues that its merchant agreements "protect card members against discrimination and disruption at the point of sale."
In his opening statements, Conrath attempted to develop a case proving the T&E market is a "separate relevant market" consisting of general purpose credit and charge cards, in which Amex "can charge different prices to different customers for the same services," according to a pre-trial memorandum filed June 20 by DOJ. "Amex charges different prices for its GPCC card network services to merchants in different industries—that is, Amex price-discriminates."
Conrath also tried to demonstrate that Amex has "market power" and has used it to control pricing, "exclude competition" and "force purchasers to do something they otherwise wouldn't do in a regular competitive market." Amex cards represent more than 60 percent of all corporate card sales volume, according to documents filed by DOJ.
As evidence of Amex's market power, Conrath presented to the court company documents previously used during presentations to negotiate pricing with American Airlines, Alaska Airlines, Continental Airlines and Southwest Airlines, among others.
Alaska Airlines 'Couldn't Do Anything About It'
The plaintiff's first witness called was Alaska Airlines managing director of revenue accounting Kevin Thiel. He described a 2008 meeting with Amex to negotiate a rate increase resulting in the "single largest rate increase we've ever seen and we couldn't do anything about it." The increase eventually was negotiated to be applied incrementally during a two-year period, effective January 1, 2009, but the specifics were redacted.
Amex in its 2008 presentation of documents to Alaska Airlines showed that it represented 59 percent of the airline's 2007 corporate card charge volume. Amex also noted that 86 percent of Amex cardholders (based on an Amex study) would fly only on airlines that accept Amex cards.
When asked what would happen if Alaska Airlines chose not to pay Amex's increased rate and therefore not accept Amex cards, Thiel said, "Passengers could migrate to Delta," which now competes on some Alaska Airlines routes. "That would be very damaging."
Amex also noted to Alaska that 21 percent of Amex corporate cardholders are required by their employers to use Amex cards. Thiel said the carrier "could likely lose the business" of those companies if it didn't accept Amex.
"We can't afford to drop Amex," Thiel told the court. "There's too much at risk. We're forced to pay the increases."
Although Alaska Airlines has its own co-branded Visa card with Bank of America, which Thiel said is a "lower-cost payment method," the carrier is prohibited by its Amex agreement from suggesting to customers this alternative form of payment.
Amex's Defense
In opening remarks, Amex's lawyers argued that the government is attempting to move competition to the point of sale, which is a "critical place of vulnerability" for the card network. As most Amex cardholders also carry MasterCard and Visa cards, Amex lawyer Evan Chesler said it would be "easy" for merchants to insist consumers use competitor cards.
"What would happen if every time American Express cardmembers presented their cards and were told, 'You're going to hurt our business and my family if I use your Amex card?' " Chesler asked. "Without welcome acceptance, the rest of the value proposition has only marginal value.
"If such steering were pervasive, it might force American Express to charge lower merchant discount fees and disable its ability to branch out to other markets," he added.
Chesler also noted that there are 55 million Amex cards in the United States—far fewer than MasterCard and Visa cards in circulation—accepted by 6 million merchants, compared with the combined 9 million accepting merchants for its two largest competitors.
Amex also attempted to build a case regarding the threat from debit cards, which increasingly are used to pay for travel. Amex doesn't have one.
Amex also argued its share of T&E charge volume has decreased throughout the years (representing 26.4 percent of purchase volume in 2013, according to court documents).
Chesler also noted that Amex's T&E net merchant discount rates between 2002 and 2010 decreased "significantly" to 2.48 percent from 2.6 percent.
Amex on Monday began cross-examining Alaska Airlines' Thiel, and continued into Tuesday. The trial is expected to proceed for about nine weeks.