The U.S. Supreme Court has agreed to consider the validity of state credit card surcharge laws, granting certiorari in a case from the Second Circuit Court of Appeals.

What happened

To encourage credit card use, Congress added a provision to the Truth in Lending Act (TILA) in 1976 that prohibited credit card surcharges. The provision was based on a psychological phenomenon known as "loss aversion," meaning that losses loom larger for consumers than improvements or gains of an equivalent amount. In the context of surcharges, that translated into credit card surcharges proving more effective than cash discounts at discouraging credit card use.

When the TILA provision expired in 1984, ten states around the country enacted their own version of the law prohibiting credit card surcharges: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. Enforcement of the laws varied over the years, in part due to standard provisions in credit card association rules that prohibited the use of surcharges.

After the card associations dropped their prohibitions on surcharges as a result of the settlement of litigation with merchants and state enforcement picked up, merchants began to challenge the state laws. In 2013, five businesses and their managers and owners filed suit in New York federal court, alleging that Section 518 of the state's General Business Law prohibiting surcharges violated both their First Amendment free speech rights as well as their due process rights under the Fourteenth Amendment, requesting the law be declared unconstitutional.

Enacted in 1984, Section 518 states: "No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means. Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both." Merchants are still permitted to offer cash discounts.

The plaintiffs told the court they would like to impose a credit card surcharge instead of offering a cash discount and display prominent signage to explain the dual pricing scheme without fear of state action.

A federal court judge sided with the plaintiffs, declaring Section 518 unconstitutional, but a panel of the Second Circuit reversed last year in Expressions Hair Design v. Schneiderman. Section 518 does not regulate speech, the court explained—it regulates conduct. Prices, although necessarily communicated through language, do not constitute "speech" within the meaning of the First Amendment.

"By its terms, Section 518 does not prohibit sellers from referring to credit-cash price differentials as credit-card surcharges, or from engaging in advocacy related to credit-card surcharges; it simply prohibits imposing credit-card surcharges," the panel wrote. "Whether a seller is imposing a credit-card surcharge—in other words, whether it is doing what the statute, by its plain terms, prohibits—can be determined wholly without reference to the words that the seller uses to describe its pricing scheme."

The merchants filed a writ of certiorari with the U.S. Supreme Court, citing a circuit split on the issue. While the Fifth Circuit reached a similar conclusion as the Second, the Eleventh Circuit found that Florida's prohibition on imposing a surcharge on credit card purchases while simultaneously permitting a discount for cash ran afoul of the First Amendment.

"[T]he conflict here is particularly undesirable because merchants need one clear answer to a question that affects the nation's economy: how they may present their prices to consumers," the merchants argued in their cert petition. "And until they get an answer, many merchants will refrain from dual pricing altogether, even though it is legal, because they cannot convey the cost of credit how they would like—as a credit-card surcharge."

In his brief in opposition, New York Attorney General Eric T. Schneiderman said the petition should be denied because "the decision below correctly held that a direct price regulation such as New York's surcharge prohibition does not implicate the First Amendment at all because it addresses conduct, rather than speech."

Granting the petition, the eight Justices agreed to answer the question of "[w]hether state no-surcharge laws unconstitutionally restrict speech conveying price information (as the Eleventh Circuit has held), or regulate economic conduct (as the Second and Fifth Circuits have held)."

Oral argument will be scheduled for later in the term.

To read the merchants' cert petition, click here.

To read the AG's brief in opposition, click here.

Why it matters

The Justices' decision before the term ends next June will have major implications for retailers across the country and particularly those in states with surcharge laws, such as California and New York.