In the ongoing skirmishes between card networks and merchants in the surcharge world, the U.S. Supreme Court has just issued a significant ruling on a novel theory. Merchants in the State of New York sought to charge consumers higher fees for purchases made by credit cards. New York state law contains a prohibition on the imposition of surcharges in such instances. The law states that merchants may not "impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means." N.Y. Gen. Bus. Law §581. The law is similar to a prohibition on surcharging credit card use that the major card networks had previously imposed on merchants, but which was challenged as a violation of the anti-trust laws and consequently, has not been in effect for some time. The merchants had argued that the law prohibits free speech by regulating how they communicate the surcharge to their customers. The merchants used the "single tag" method, in which the cash price appears on the item; consumers were advised that the surcharge amount is in addition to the amount on the price tag. The merchants are not prohibited from discounting prices for payment by cash.
The State of New York's position was that the law regulates the actions of the merchants. The District Court found in favor of the merchant's free speech argument, however, the Second Circuit vacated that judgment and instructed the District Court to dismiss the case. In the view of the Second Circuit the law did not violate the merchants' right of free speech under the First Amendment. The U.S. Supreme Court determined that the law does regulate speech and remanded the case to the Second Circuit for a determination of whether the law violates the First Amendment.
The free speech concept argued in this case, that the law prohibits the merchants from communicating the surcharge to their customers, marks a novel Constitutional argument. The outcome may be the final resolution of this long running pricing battle. Other states have similar prohibitions on surcharging so the decision could reverberate outside of the Second Circuit. We will be following developments very closely.
You may be aware of the long-running battle between merchants and credit card issuers related to interchange fees—the fees charged by a card-issuing bank to a merchant's bank in a credit card transaction. For years, many merchants have sought to pass along interchange fees to customers choosing to pay by credit card by charging those customers a higher price than those paying by cash. However, the method by which these different charges may be conveyed to customers has been subject to restrictions under both federal and state law, as well as under contracts between merchants and card issuers. Since 1974, under the federal Truth in Lending Act, card issuers may not contractually prohibit merchants from offering discounts to cash-paying customers. See 15 U.S.C. § 1666f(a). At the same time, contracts between merchants and issuers, as well as various state laws, have prohibited merchants from charging a surcharge to those paying by credit card.1 Effectively, this means that a merchant may charge cash payers and credit card payers two different prices. However, if a merchant advertises a good or service for one "sticker price," any difference in price charged must be framed as providing a discount off sticker price to cash payers, as opposed to a surcharge on sticker price to credit card payers.
Now the U.S. Supreme Court has weighed in. On March 29, 2017, the U.S. Supreme Court issued its opinion in Expressions Hair Design v. Schneiderman, Case No. 15-1391, 581 U.S. ___ (2017). At issue in Expressions was whether a New York law that governs how merchants may disclose a surcharge on credit card purchasers amounted to a regulation of the merchant's speech, as opposed to a regulation of solely the merchant's conduct. The Court held that the law did constitute a regulation of speech, and remanded the case to the U.S. Court of Appeals for the Second Circuit to determine whether the law violates the petitioner merchants' First Amendment rights. As a result of the Court's decision, the merchants will now have another opportunity to argue their constitutional claim.
The state law restrictions on merchants imposing surcharges on customers paying by credit card were similar, if not identical, to restrictions contractually imposed on merchants by credit card issuers. However, as a result of recent antitrust litigation brought by merchants, the legality of such contractual restrictions is less certain. Therefore, state laws prohibiting credit card surcharges have been subject to increased scrutiny in recent years. At issue before the Supreme Court in Expressions was New York's statute prohibiting surcharges to customers paying by credit card—merchants may not "impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means." N.Y. Gen. Bus. Law § 518.
The petitioners in Expressions are merchants who wish to impose a surcharge on customers paying by credit card because they believe surcharges are more effective than cash discounts. The merchants have also noted their desire to make clear that it is the credit card companies, and not the merchants themselves, that are responsible for the higher prices, and they would like to convey that to customers. The method they choose to use is based on the "single tag" concept in which the actual price is on the item's price tag. The surcharge is an amount in excess of that price. The manner in which merchants inform credit-card-paying customers of this surcharge is prohibited by the law at issue, and forms that basis of the merchants' complaint.
The merchants brought suit challenging the New York statute as both in violation of their free speech rights and unconstitutionally vague. In 2013, Judge Rakoff of the U.S. District Court for the Southern District of New York held that the law regulated speech and violated merchants' First Amendment rights. In 2015, the Second Circuit reversed, and vacated Judge Rakoff's opinion with instructions to dismiss. The Second Circuit found the law amounted to a regulation on price alone; therefore, the law governed only conduct, and not speech. As a result, the Second Circuit never ruled on the First Amendment claims raised by the retailers.
At issue before the U.S. Supreme Court was whether the New York law regulated the merchants' speech, or only regulated the merchants' conduct.2 In a unanimous opinion authored by Chief Justice Roberts, the Court held that the law did regulate speech. The Court found that New York's law was more than a price regulation, as it involves regulation of the communication of prices, rather than the prices themselves. The Court noted that the law does not speak to the specific prices that merchants are allowed to charge to credit card or cash payers, but only how those prices are communicated to the customers. As a result, the Court found that the law regulates not only conduct, but also speech, and is therefore subject to a First Amendment analysis. Because the Second Circuit did not reach the issue of whether the New York statute violated the merchants' First Amendment speech rights, the Supreme Court remanded to the Second Circuit for a decision on this issue.
Justices Breyer and Sotomayor issued separate concurrences, each agreeing that New York's law did regulate speech. However, both justices argued that the operation of the statute was less than clear, and as a result, would have recommended remand with an instruction for the Second Circuit to certify the case to the New York Court of Appeals for a more definitive interpretation of its own state statute.
Although the Court did not reach the merits of the merchants' First Amendment claims, the Court's decision does extend the case and allow the merchants to make their arguments before the Second Circuit. In addition, the case resolves a circuit split between the Eleventh Circuit on the one hand (which previously held a nearly identical law in Florida regulated speech), and the Second and Fifth Circuits on the other (which held that such laws only regulated conduct).
Our Financial Industry Group has deep and extensive experience in this area of law, especially Roberta Torian, former GC to a credit card issuer. We can help you navigate contractual, state law and TILA hurdles.
- Initially, federal law prohibited surcharges by merchants to customers paying by credit card; however, this federal prohibition expired in 1984 and was never renewed. Following the expiration of the federal prohibition, several states imposed their own credit card surcharge prohibitions.
- The Court also very briefly discussed the petitioners' claim that the statute is unconstitutionally vague, but quickly rejected the argument.
This article is presented for informational purposes only and is not intended to constitute legal advice.
