Sizzle/Fizzle

Fizzle of the Week: Amex Heads To Supreme Court As CEO Resigns

While any one big piece of bad news in a single week can be enough to knock a big-name brand into fizzle territory, American Express had the misfortune of being hit by something of a one-two punch.

This week, we learned that long-time CEO Ken Chenault will be ending his tenure at the helm of the company in February of 2018.

Chenault has been with American Express for almost four decades – he began his career as a director of strategic planning and rose to become the company’s top executive in 2001.

“I’ve treasured every day of my 37-year career here,” Mr. Chenault, 66, said on a conference call with analysts. “It’s been a journey that spanned profound changes in the world of business.”

Chenault is largely credited with growing American Express past its previous core customer base of corporate customers and wealthy cardholders, and making the card more accessible and popular via co-branding deals he sought out with airlines and large retailers.

During the Chenault era, American Express – despite being much smaller in terms of cards issued – has had the highest customer spending of any card in the United States.

That said, American Express has also seen its share of difficulties over the last few years, as competitors have arisen to take a bite out of both its co-branding relationships and its elite core customer base. Amex very publicly lost two prominent deals with Costco and JetBlue, which took a notable chunk out of the network’s revenue stream. New entrants to the market – notably the Chase Sapphire Rewards card – have managed to lure millennial consumers who might otherwise have been a natural fit for American Express’ platinum card.

The last year, however, has seen a renewed competitive spirit at American Express, with an accompanying stock price increase of 50 percent.

On that note, Chenault is ready to take his bow after 17 years as CEO and chairman, and will hand off the reins to Stephen J. Squeri, a 32-year veteran of the firm and the company’s vice chairman since 2015.

During a normal week, Chenault’s impending exit would be the big news.

But Chenault’s retirement was overshadowed by the news that the Supreme Court will hear the antitrust case against American Express, led by Ohio and 11 other states.

The states allege that Amex is in violation of U.S. antitrust law because it forbids merchants from steering consumers to other cards that carry lower fees.

This case has a long and complicated past, beginning in 2010. At that time, the Obama administration-era Justice Department sued American Express, claiming that those anti-steering rules were actually a violation of antitrust laws because they prevented merchants from using competition as a tool by which to keep interchange fees down. Visa and Mastercard were also named in the original suit, though both firms settled the claims in 2011 and agreed to change their rules.

American Express decided to soldier on, and initially lost.

But Amex appealed, and The 2nd U.S. Circuit Court of Appeals in New York reversed that lower court’s ruling and found in favor of Amex.

The Department of Justice requested that the appeals court reconsider its decision, but the court denied the request – meaning the only avenue left for the case was the Supreme Court.

Eleven of the original 17 states (Ohio, Idaho, Illinois, Iowa, Connecticut, Maryland, Michigan, Montana, Rhode Island, Utah and Vermont) decided in June to go to the Supreme Court. The current Trump-administration DOJ chose not to join the suit.

By August, the DOJ had joined with Amex in requesting that the Supreme Court not hear the case at all, albeit for very different reasons.

American Express believes the 2nd Circuit got the ruling largely right. The DOJ brief makes it clear they do not agree with the decision itself, but that “the key legal question” needs to be examined by lower courts, saying that:

“[The appeals court] seriously departed from sound antitrust principles, and its decision leaves in place restraints that thwart price competition in an important sector of the economy and inflate the retail prices paid by all consumers … consistent with its usual practice of awaiting further percolation in the lower courts before taking up such novel legal issues; the court should deny review here.”

But ultimately, the Supreme Court was not compelled by either Amex’s or DOJ’s pleadings. Earlier this week, the court announced that they would be taking up the customer steering and swipe fee questions that American Express has been litigating with the states for the last seven years.

American Express has confirmed it will “vigorously defend” the 2nd Circuit Court’s ruling, as it “protects a consumer’s right to choose how they pay, prevents our card members from being discriminated against and promotes competition in the payments industry.”

American Express also asserted in court filings that lower credit card swipe fees would actually lower the benefits to consumers.

“Amex uses the vast majority of merchant discount fee revenue to pay valuable benefits to cardholders to incentivize them to obtain and use an Amex credit card at that merchant rather than cards issued on other networks,” the company argued.

But the states have their backers in their appeal as well. Kroger and Walgreens have both argued that card fees are among their largest and fastest-growing expenses. Southwest Airlines, in an amicus brief submitted to the court on the states’ behalf, argues that Amex has insulated itself from competitive market forces, resulting in “hundreds of millions (if not billions) of dollars in excess costs incurred by Southwest, other merchants and their customers.”

One way or another, this issue will at long last be settled.

But until the final outcome is known, learning that the Supreme Court will hear a case that they had hoped was in the rearview mirror – just a few days before it was publicly announced that the CEO of 17 years is retiring – is certainly less sizzle than fizzle.

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