Last Thursday, a federal district court judge found that American Express Co.’s anti-steering rules violated U.S. antitrust laws by barring merchants from encouraging customers to use other credit cards. The ruling not only handed a victory to the U.S. Department of Justice (DOJ) and the 17 state attorneys general bringing the suit, but may also, coupled with the DOJ’s earlier settlements with Visa Inc. and MasterCard Inc., have a major impact on the relationship between U.S. merchants and credit card companies in the future.

Each time a customer uses a credit card, a merchant pays a fee to the credit card company that facilitates the customer’s purchase. A merchant may therefore prefer to have a customer use a certain credit card over others in order to benefit from lower fees. American Express’ contracts with merchants, however—like those of most credit card companies—contain “anti-steering rules” (or, as American Express terms them, “Non-Discrimination Provisions”). These rules prevent a merchant from attempting to induce or “steer” a customer to use any particular credit card by offering discounts or other incentives to customers. The DOJ, along with 17 states, contended that this practice violated Section 1 of the Sherman Act.

The DOJ reached settlements with both Visa and MasterCard prior to filing suit against American Express in the Eastern District of New York in 2010. The court approved the settlements on July 20, 2011.

In contrast, American Express refused to reach an agreement to revise its contractual terms and proceeded to a seven-week bench trial, which took place last summer. The trial included over 30 fact witnesses, including representatives from some of the nation’s largest retailers, airlines and hotels, as well as four expert witnesses. Judge Nicholas G. Garuafis specifically noted his reluctance to issue a ruling in this matter, observing that he had repeatedly urged the parties to reach an agreeable settlement. Ultimately, however, he concluded that the anti-steering rules “reduce American Express’s incentive—as well as those of Visa, MasterCard, and Discover—to offer merchants lower discount rates and, as a result, they impede a significant avenue of horizontal competition in the network services market. On the basis of the record developed at trial, the court finds that the challenged restraints have impaired the competitive process in the network services market, rendering low-price models untenable, stunting innovation, and resulting in higher prices for merchants and their consumers.” The court concluded that the anti-steering provisions constitute an unlawful restraint on trade under the Sherman Act.

Judge Garaufis issued a separate scheduling order giving the parties 30 days to file a proposed injunction. If American Express and the plaintiffs cannot agree to terms of their own proposed injunction, however, the court will be forced to develop its own to ensure American Express’s merchant contracts comply with federal antitrust law. Although American Express’s attorneys have indicated that they plan to appeal the decision, the ruling and consequent revisions to merchant contracts by not only American Express, but also Visa and MasterCard—the nation’s three largest credit card companies—could have a significant impact on the way credit cards are used by merchants. Expect far more discounts for using Visa, free shipping with American Express, or free giveaways for using Visa to appear at stores, hotels, and airlines in the future.