UPDATE 1-U.S. Supreme Court justices skeptical of American Express merchant fees

fees@ (Adds detail from arguments, paragraphs 3-8)

WASHINGTON, Feb 26 (Reuters) - Liberal U.S. Supreme Court justices on Monday sharply questioned American Express over restrictions the company places on merchants forbidding them from encouraging customers to use rival credit cards with lower fees, which several states and the Trump administration claim violate federal antitrust law.

The high court heard about an hour of arguments in an appeal by the states, led by Ohio, of a 2016 ruling by lower court in New York that cleared American Express of stifling competition through its so-called anti-steering provisions in contracts with merchants.

While liberal justices suggested the provisions could harm consumers, the court has a 5-4 conservative majority. Justice Neil Gorsuch was the only conservative whose questions appeared to show support for American Express.

Liberal Elena Kagan said that businesses, such as a local coffee shop, would be able to pass on lower fees to customers without the anti-steering measures. "That sounds like a market that isn't working like it is supposed to," Kagan told the attorney for American Express, Evan Chesler.

The case could have major implications for American Express, whose business model is closely tied to the fees it charges to merchants for each transaction, which fund the benefits it offers its cardholders.

The legal issue centered on how courts find antitrust violations when businesses cater to two groups at the same time and limits on competition for one side might offer benefits for the other.

The two groups in this case are cardholders and merchants but the ruling would likely reverberate more widely because the dynamic is common in other industries, such as advertising and e-commerce.

American Express says its system has allowed it to compete against the dominant networks, Visa and MasterCard. The states, backed by the administration of President Donald Trump, argue that the anti-steering measures have blocked low-fee rival networks, raised fees for merchants, and inflated retail prices for everyone, including those who do not use credit cards. (Reporting by Andrew Chung; Editing by Will Dunham)