Why it matters

New York’s ban on credit card sales transactions surcharges was upheld by the Second Circuit Court of Appeals, reversing a federal court judge’s 2013 ruling striking down the law and joining the majority of other courts to find similar bans constitutional. Enacted in 1984 as the federal ban on surcharges expired, the New York law prohibits sellers from imposing a surcharge on consumers who elect to use a credit card in lieu of other forms of payment, while still allowing merchants to offer a cash discount. A handful of businesses in the state challenged the constitutionality of the law on the grounds it violated their First Amendment free speech and Fourteenth Amendment due process rights. A federal court judge sided with the plaintiffs, striking down the law in 2013. But a unanimous three-judge appellate panel reversed, holding the law regulated conduct and not speech. The court rejected the retailers’ argument that the difference between a cash discount and a surcharge triggered free speech considerations because the terms were “labels” resulting in distinct consumer reactions. As for due process concerns, the panel found the law was not unconstitutionally vague and that retailers would be able to comply without a problem. Eleven states have enacted similar surcharge bans but courts have reached differing conclusions about their constitutionality. Like the Second Circuit, federal courts in Florida and Texas held that the law only regulated economic activity and did not involve First Amendment rights; in March, a California judge reached the opposite conclusion—citing the New York district court decision for support—ruling that the state’s surcharge ban violated sellers’ First Amendment rights. Those decisions are currently on review to the Fifth, Eleventh, and Ninth Circuit Court of Appeals, respectively.

Detailed discussion

In 1984, the New York state legislature enacted Section 518 of the General Business Law, which 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.

Section 518 was passed in reaction to the expiration of provisions of the Truth in Lending Act (TILA) that prohibited credit card surcharges. The provisions were 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 means credit card surcharges are more effective than cash discounts at discouraging credit card use.

To encourage credit card use, Congress added the surcharge ban to TILA. Lawmakers also expressed concern that allowing sellers to add surcharges would result in rates higher than the amount necessary to recoup its swipe fees, with sellers able to extract windfall profits from credit card users.

When the federal law expired in 1984, eleven states enacted their ownlaws prohibiting credit card surcharges: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, New York, Oklahoma, and Texas. Enforcement of the New York law was limited over the years, in part due to the standard provisions in credit card issuers’ contracts that prohibited the use of surcharges.

Over the last decade, as sellers began challenging these provisions, issuers like Visa have dropped their contractual prohibitions on credit card surcharges. In response, five New York businesses and their owners and managers filed suit challenging Section 518 in 2013. The plaintiffs claimed the law 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.

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 and struck down Section 518 as unconstitutional.

A panel of the Second Circuit Court of Appeals reversed.

Section 518 does not regulate speech, the court explained—it regulates conduct. Prices, although necessarily communicated through language, do not rank as “speech” within the meaning of the First Amendment.

Price control laws (such as those banning sale prices for cigarettes) have never been thought to implicate free speech rights, and if “prohibiting certain prices does not implicate the First Amendment, it follows that prohibiting certain relationships between prices also does not implicate the First Amendment,” the court said.

“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 words and labels used by the sellers are merely prices, which are not speech within the meaning of the First Amendment, “nor are they transformed into ‘speech’ when considered in relation to one another,” the court added. “Because all that Section 518 prohibits is a specific relationship between two prices, it does not regulate speech.”

Consumers’ different reactions to the labels “discount” and “surcharge” did not change the court’s conclusion. “[C]onsumers react negatively to credit-card surcharges not because surcharges ‘communicate’ any particular ‘message,’ but because consumers dislike being charged extra,” the panel wrote. “Nothing about the consumer’s reaction in either situation turns on any words uttered by the seller. And although the difference in the consumer’s reaction to the two pricing schemes may be puzzling purely as an economic matter, we are aware of no authority suggesting that the First Amendment prevents states from protecting consumers against irrational psychological annoyances.”

The court rejected the plaintiffs’ argument that the law illegally prevented a “dual price” display, where the retailer listed one price for customers paying with cash, check, or debit card and a higher price for customers paying with a credit card. Noting that “it is far from clear that Section 518 prohibits the relevant conduct in the first place,” the court said the plaintiffs were attempting to expand application of the law beyond its reach, a position the court would not adopt.

If a state statute is susceptible to multiple interpretations, one which would render it overbroad and one which would not, and the state courts have not weighed in on the issue, the panel said it needed to adopt the narrower, less problematic interpretation in favor of the law’s constitutionality. “[W]e cannot hold a duly enacted state law unconstitutional based entirely on speculation that the New York courts might give it an expansive and arguably problematic reading that its text does not require,” the court said, further declining to certify the question to the state’s highest court for consideration.

Turning to the sellers’ due process claims, the court said this count failed “for essentially the same reasons as Plaintiffs’ First Amendment challenges.”

Section 518 had a core meaning that could reasonably be understood, the Second Circuit said: “sellers who post single sticker prices for their goods and services may not charge credit-card customers an additional amount above the sticker price that is not also charged to cash customers.”

“We have complete confidence that sellers ‘of ordinary intelligence’ will—if they post single sticker prices—readily understand how to avoid imposing a credit-card surcharge, and that New York authorities will have sufficient guidance in determining whether such sellers have violated the law,” the court said.

The panel remanded the case for dismissal of the plaintiffs’ claims.

To read the decision in Expressions Hair Design v. Schneiderman, clic khere.