Friday, June 13, 2008

Retail Drugstore Chains Allege AmEx’s Anti-Steering Provisions Are Anticompetitive

Drugstores Sue AmEx for Antitrust Violations - Retail drugstore chains CVS, Rite Aid, and Walgreens have filed suit against American Express (“AmEx”), alleging that AmEx violated the federal antitrust laws through restrictions it imposed on merchants that accept AmEx credit cards.

Anti-Steering Provisions Allegedly Anticompetitive - AmEx’s contracts with merchants prohibit them from doing anything that would steer customers toward payment cards with lower fees to merchants, including criticizing AmEx cards or promoting or stating a preference for competing cards. In their lawsuits, the retail pharmacies allege that “[t]he purpose and effect of these anti-steering rules was to . . . prevent the merchants from discounting or lowering the price paid by retail customers who use payment products or methods that are less costly to the merchant . . . [and] prevent merchants from truthfully informing retail customers that their use of an AmEx payment card imposes higher costs on the merchant than other payment card products or payment methods and that those higher costs result in higher retail prices to consumers.” (Para. 2) (download Rite Aid Complaint .pdf).

Pratices Allegedly Hurt Consumers - According to the plaintiffs, the result of AmEx’s actions was to force merchants to “raise the prices they charged to all customers . . . in order to cover the high and anticompetitively elevated cost of transactions where the customer used an AmEx payment card.” (Complaint para. 4). Plaintiffs seek treble damages under the Sherman Act, asserting causes of action for monopolization, attempted monopolization, and unreasonable restraint of trade.

Potential Issue - One potential problem in Plaintiffs’ theory is that they could simply have refused to enter into contracts with AmEx altogether, and could choose to only accept less expensive payment options. Plaintiffs’ complaints seek to avoid this problem by alleging that “[i]t was not economically feasible for merchants simply to stop accepting AmEx payment cards.” (Complaint para. 35).

Related Litigation - The drug store chains’ lawsuits were designated as related to a multi-district litigation pending against Visa and Master Card regarding interchange fees. See In re Payment Card Interchange Fee & Merchant-Discount Antitrust Litigation, No. 1:05-md-1720-JG-JO (E.D.N.Y.) (download First Consolidated Amended Class Action Complaint as .pdf). That lawsuit raises some similar facts and issues, but has different defendants (Visa and Master Card) and has a different focus.

A class action lawsuit that more closely mirrors the retail drug chains’ suit (compared to the Visa/Mastercard suit) was previously filed in 2006 against AmEx . That suit challenges AmEx’s anti-steering provisions and seeks only injunctive relief (not monetary damages). See Performance Labs, Inc. v. American Express, No. 06-cv-2974 (S.D. N.Y. Apr. 18, 2006) (download as .pdf).

Pro-Consumer Retail Lawsuits - I admire retailers who are willing to get involved in plaintiff-side litigation to lead efforts to prevent anticompetitive activity, especially where the alleged misconduct results in increased prices to consumers. My firm has been working on one such lawsuit, and is investigating others. Because of the internal politics at in-house legal departments, it can often be difficult for counsel to approve a retailer’s involvement in such lawsuits. The resulting conservative approach often prevents legal departments from maximizing the value of their potential claims.

Future Related Cases? - I would not be surprised to see additional companies file similar suits against AmEx based on the anti-steering provisions, as the potential damages – which are subject to trebling – could be substantial. Parties who opt out of a class action lawsuit are often able to negotiate a higher settlement than class members, making it attractive for parties with large claims to opt out of a suit.

The three drug store cases filed this week are: Rite Aid Corp. v. Am. Express Travel Related Servs. Co., No. 1:2008cv02135 (E.D.N.Y. June 10, 2008) (Gleeson, J.); CVS Pharmacy, Inc. v. Am. Express Travel Related Servs. Co., No. 1:2008cv02136 (E.D.N.Y. June 10, 2008); and Walgreen Co. v. Am. Express Travel Related Servs. Co., No. 1:2008cv02137 (E.D.N.Y. June 10, 2008).

Media reports about the lawsuits are available here and here (subscription required).


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