Supreme Court Determines New York Credit Card Surcharge Ban Regulates Speech

On March 29, the United States Supreme Court issued its ruling in Expressions Hair Design et al. v. Schneiderman, in which a group of retailers challenged New York’s prohibition on credit card surcharges. The challenged New York statute, N.Y. General Business Law § 518, provides that “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.”

Prior to 2013, Visa and MasterCard rules mostly prohibited U.S. merchants from imposing surcharges for credit card payments, rendering the New York statute essentially redundant. However, as a result of a massive 2013 antitrust settlement (which was recently overturned by the Second Circuit Court of Appeals and is in the process of being re-engineered), Visa and MasterCard amended their rules to permit merchants to surcharge credit card payments, bringing the New York statute and similar laws in a handful of other states back into the news—and in several instances, into court.

The Expressions plaintiffs sought to enjoin the New York Attorney General from enforcing § 518 against them, arguing that the statute violates the First Amendment by regulating how they can communicate prices to their customers. Rather than raising prices across the board and offering a discount for cash payments, the retailers wanted the ability to maintain and post their usual, single prices, but charge an additional fee for credit card payments to properly reflect the added costs imposed by the credit card networks.

The merchants prevailed in the United States District Court for the Southern District of New York, which held that § 518 is unconstitutional because, among other infirmities, the statute impermissibly regulates merchants’ speech by drawing an arbitrary distinction between the words “discount” (which was permissible) and “surcharge” (which was forbidden) even though the economic underpinnings of both are essentially the same.

The Second Circuit Court of Appeals reversed the District Court, holding that § 518 is not unconstitutional because it is simply a pricing regulation and because it is “far from clear” that § 518 prohibits dual pricing (i.e., separate prices for cash and credit, as opposed to a single price plus a surcharge for a particular mode of payment). The Supreme Court granted certiorari to review the Second Circuit’s decision.

In the Supreme Court, the merchants waived a facial challenge to the overall constitutionality of § 518, and instead challenged the statute only as it has been applied to them in one particular pricing scenario: posting a single cash price and an additional credit card surcharge (either as a percentage of the price or a fixed amount). For instance, a particular retailer might post the price of a particular item at $9.99 but also disclose that it imposes a 3% surcharge for credit card payments. The Supreme Court agreed with the Second Circuit’s determination that § 518 would bar this type of pricing arrangement. However, the Supreme Court disagreed with the Second Circuit’s holding that § 518 is simply a pricing regulation, holding instead that § 518 regulates speech because it regulates “the communication of prices rather than prices themselves” (emphasis added). Accordingly, the Supreme Court remanded the case to the Second Circuit to consider § 518 instead in the same context the District Court previously did—as a regulation of commercial speech and thereby determine the constitutionality of the surcharge ban as applied to this pricing arrangement.

It is likely, given the Supreme Court’s directive to consider § 518 as a speech regulation, that the Second Circuit will reverse its prior course on remand and will instead uphold the District Court’s determination that § 518 is unconstitutional, at least as applied to the “single price” pricing arrangement described above. The takeaway for merchants accepting credit cards from customers located in New York (debates regarding the applicability of § 518 to business-to-business transactions aside) is that, pending the Second Circuit’s ruling on remand, it is very likely § 518 will no longer prohibit the posting of a single price and the imposition of a surcharge atop that price for payment by credit card.

– Bruce Nathan, Esq., and Andrew Behlmann, Esq., Lowenstein Sandler LLP

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