Caveat Vendor

New York’s Statutory Prohibition on “Surcharging” Credit Card Transactions Held Unconstitutional

October 07, 2013

By Paul Hastings Professional

A New York state law prohibiting retailers from assessing “surcharges” on transactions in which customers pay using a credit card has recently been held unconstitutional by a court in the Southern District of New York. In Expressions Hair Design v. Schneiderman, Case No. 13-3775 (S.D.N.Y. Oct. 3, 2013), District Judge Jed Rakoff preliminarily enjoined the enforcement of New York’s “no surcharge” law, concluding that the law violated the First Amendment and was unconstitutionally vague. Even if the decision is appealed, as some have predicted, the decision may inspire constitutional challenges in other states with similar laws.

Case Background

In June 2013, five retailers sued the New York Attorney General and the District Attorneys of New York, Kings, and Broome Counties, challenging the constitutionality of New York General Business Law section 518, and seeking a preliminary injunction against enforcement of the law. Section 518 states that “[n]o 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.”

As explained in the opinion, the practice of surcharging arose in response to the costs assumed by retailers who accept credit cards from the major payment card networks (i.e., Visa, MasterCard, Discover and American Express), which set certain “swipe fees” for transactions that run through their networks. With those fees ranging between 2 and 5% per transaction, many retailers would prefer to pass those costs on to consumers rather than bear the acceptance costs themselves.

Although the imposition of “surcharges” is prohibited under section 518, the parties agreed that retailers were free to offer an equivalent “discount” to customers who pay using cash, checks, or debit cards. Other states’ “no surcharge” laws make this loophole more explicit. For instance, California’s law provides that: “No retailer . . . may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer may, however, offer discounts for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, provided that the discount is offered to all prospective buyers.” Cal. Civ. Code § 1748.1(a) (emphasis added).

The dispute in Expressions Hair Design arose because the plaintiff retailers wished to charge higher prices for transactions that were funded using a credit card, but did not want to do so by offering their customers a “discount” for using cash. The plaintiffs believed that offering “discounts” would make their advertised prices appear higher than they were, and instead preferred to tell their customers that payment with a credit card would be “surcharged” due to the fees imposed by the card networks. The latter statement was prohibited under New York’s “no surcharge” law, while offering a “discount” for cash payment was not. Accordingly, the plaintiffs alleged that section 518 violated the First Amendment as a content-based restriction on speech, and was unconstitutionally vague under the Due Process Clause.

The Court’s Constitutional Analysis

With regard to the plaintiffs’ First Amendment claims, the court began by noting that content-based restrictions on speech are “presumptively invalid,” and require “heightened scrutiny,” under Sorrell v. IMS Health Inc., 131 S. Ct. 2653, 2664, 2667 (2011). Although defendants had argued that section 518 merely regulates non-expressive conduct—i.e., imposing a surcharge on credit card transactions—and not speech, the court squarely rejected this notion: “Pricing is a routine subject of economic regulation, but the manner in which price information is conveyed to buyers is quintessentially expressive, and therefore protected by the First Amendment.”

The court therefore applied “intermediate scrutiny” under the test from Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S.  557, 560 (1980). The court held that section 518 “cannot pass muster under this standard” because section 518 did not prohibit misleading speech, and concerned otherwise lawful conduct. The court noted that “surcharges can actually make consumers more informed rather than less,” because they could be used to “truthfully and effectively convey[] the true costs of using credit cards[.]” Moreover, the court held that the state’s interest in protecting consumers from deception was not substantial enough to justify section 518’s content-based speech restriction, and that the statute was “far broader than necessary” to serve the state’s purposes.

The court also held that section 518 failed the constitutional void-for-vagueness doctrine, which “requires that laws be crafted with sufficient clarity to give the person of ordinary intelligence a reasonable opportunity to know what is prohibited and to provide explicit standards for those who apply them.” VIP of Berlin, LLC v. Town of Berlin, 593 F.3d 179, 186 (2d Cir. 2010) (internal quotations omitted). Because liability under section 518 could vary depending on “the labels that sellers use to describe their prices,” the court concluded that it was unconstitutionally vague.

Accordingly, the court granted a preliminary injunction that prevents the defendants from enforcing section 518 during the pendency of the case.

Potential Implications

As mentioned above, the unconstitutionality of New York’s “no surcharge” law could have implications in the 9 other states that have similar laws on their books. The decision could also have significant reverberations in the settlement that has been preliminarily approved in In re Payment Card Interchange Fee and Merchant Discount Antitrust Litig., No. 05-1720 (E.D.N.Y. July 13, 2012) (Memorandum of Understanding), the multi-district antitrust litigation brought on behalf of a nationwide class of retailers against Visa and MasterCard based on their assessment of “interchange” fees on merchants who accept their branded credit cards. The estimated $7 billion settlement in the Interchange Fee case, which is currently hanging by a thread in the Eastern District of New York, contains a provision requiring Visa and MasterCard to remove certain restrictions in their network rules that prohibit merchants from surcharging. If the settlement in the Interchange Fee case is finally approved, surcharging may become more prevalent in the states that already permit that practice, and state laws that prohibit surcharging may face challenges similar to New York’s. But whether merchants’ increased ability to impose “surcharges” will result in their increased use and whether that, in turn, will actually drive consumers away from credit cards and toward forms of payment that are less costly to merchants, remains to be seen.

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