The Supreme Court of the United States recently heard an oral argument concerning New York's surcharge law, addressing whether the statute—which prohibits the imposition of surcharges on customers who pay with credit cards but permits discounts for those who pay in cash—constitutes an infringement of merchants' First Amendment rights.

What happened

In reaction to the expiration of provisions of the Truth in Lending Act (TILA) that prohibited credit card surcharges, the New York 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.

New York's law took effect in 1984 along with similar statutes in ten other states: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, 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.

But over the last decade, as sellers began challenging these provisions, issuers have dropped their contractual prohibitions on credit card surcharges. In response, a group of New York businesses and their owners and managers filed suit challenging Section 518 in 2013. The plaintiffs claimed the law violated their First Amendment free speech rights, requesting it be declared unconstitutional.

A federal district court judge sided with the merchants and struck down the law but a panel of the U.S. Court of Appeals for the Second Circuit reversed. Section 518 does not regulate speech, the court held—it regulates conduct. Prices, although necessarily communicated through language, do not rank as "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."

However, other federal circuit courts reached different conclusions when considering surcharge laws, including the U.S. Court of Appeals for the Eleventh Circuit. Recognizing the split, the Supreme Court of the United States granted certiorari in the Second Circuit case.

At oral argument, the justices seemed skeptical when questioning the merchants' counsel. "I just don't see anything about speech in the statute," Justice Sonia Sotomayor commented, while Justice Stephen Breyer noted that the law appears to be a form of price regulation that states a merchant "can't charge a surcharge" for credit and is silent about any cash discount.

Responding to Justice Breyer, Deepak Gupta, counsel for the merchants, told the Court that state officials informed some of the merchants that they didn't need to change what they charged—instead, they needed to change what they told consumers. "That's not price regulation," Gupta said. "That's the regulation of how prices are communicated."

Justice Elena Kagan did not appear persuaded, commenting that the merchants placed a great deal of emphasis "on a few cases in which prosecutors describe the law in a certain way," but that the New York statute, "as written, doesn't really do any of the things that you are saying."

Indicating another path the Court could take, Justice Samuel Alito remarked that he was "uncomfortable" ruling on the constitutionality of a state law without the input of the state's highest court. "So why shouldn't we certify that question of interpretation to that court before we plunge into this First Amendment issue?" he asked. Gupta answered that the merchants had raised an as-applied constitutional challenge based on the application of the law to the plaintiffs.

Eric Feigin, arguing as amicus curiae on behalf of the United States, tracked Justice Alito's position to suggest that the Court remand the case to the Second Circuit "and allow for the New York Court of Appeals to have a definitive interpretation of the law, because there's clearly some dispute about what the New York law does."

Advocating on behalf of the New York Attorney General's Office, Steven Wu told the justices that the "plain text of New York's statute refers only to a pricing practice and not to any speech." Justice Kagan pointed out that the state's "enforcement history" seemed to be at odds with this argument while Justice Alito expressed concern that individual district attorneys could have different interpretations of the statute.

Justice Ruth Bader Ginsburg also pushed back on Wu's characterization of the law as "direct price regulation," noting that it "doesn't set any price at all. It lets the merchant set the price. And the question is how that price is described."

Considering various hypothetical pricing scenarios and how the state would view them, Justice Anthony Kennedy asked if the New York statute is too vague. Wu answered in the negative, stating that the law could withstand a vagueness challenge. He also indicated that a dual pricing system would be legal under the statute, although Justice Kagan replied that the Second Circuit had "abstained" from deciding that issue.

To read the transcript of the oral argument in Expressions Hair Design v. Schneiderman, click here.

Why it matters

A decision from the justices is expected later this term, with significant implications for retailers across the country and particularly those in states with surcharge laws, including California and New York.