Supreme Court Weighs in on Credit Card Surcharging Laws

On March 29, 2017, the Supreme Court handed down an important decision regarding state anti-surcharge laws, which prohibit merchants from charging credit card users a surcharge above the sticker price. In Expressions Hair Design v. Schneiderman, 581 U.S. _____ (2017), the plaintiffs—five businesses that desired to impose such surcharges—had challenged the constitutionality of the ban imposed by New York, one of ten states that have enacted such laws (Eric Schneiderman is the attorney general of New York). In a unanimous judgment, the Court held that the New York law constitutes a regulation of commercial speech, overruling the U.S. Court of Appeals for the Second Circuit which concluded that the state ban was a regulation on conduct, not speech, and therefore was not subject to First Amendment scrutiny. While by vacating the Second Circuit’s ruling, the Court announced that the law does indeed implicate First Amendment protections, the Court did not opine as to whether the law actually violates the First Amendment. Rather, the Court remanded the case back to the Second Circuit to reanalyze the ban as a speech regulation.

The law at issue is New York General Business Law § 518, which 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.” The legislative history of statute is important in that New York (like several of those other states with comparable laws) enacted this law in 1984, immediately after Congress allowed a nearly identical federal law to expire. Notably, however, even though the New York legislature copied the expiring federal statute almost verbatim, one major difference remained: the federal statute included a definitions section that defined the terms “surcharge,” “discount,” and “regular price” in way that made it clear that while merchants were not allowed to charge an extra fee for credit card holders (either a fixed amount or a percentage increase) above a single, standard advertised price (the “regular price”), merchants were allowed to designate a regular price that they charged to credit card holders, and then offer a discount to customers who paid cash. Similarly, merchants were permitted to list two different prices—a cash price and a credit card price—in which case the credit card price would be deemed the “regular price” and the merchant would not run afoul of the surcharge ban (which is the model adopted by many gas stations). The New York lawmakers, however, perhaps inadvertently, failed to include the definitions section, and so in the New York statute the term surcharge remained undefined. The plaintiffs in this case argued that the law was unconstitutionally vague as it did not indicate which, if any, of these three pricing schemes are permitted. Furthermore, they argued that the law violated their right to free speech on the grounds that the permissibility of the various pricing schemes seem to hinge on how the price is communicated to customers rather than on economic realities (since all these pricing schemes are economically equivalent).

The Court unanimously agreed that the Second Circuit erred in denying the plaintiffs’ claim. However, the Court was split—down non-partisan lines—as to what instructions to give the lower court. The majority opinion, written by Chief Justice Roberts and joined by Justices Kennedy, Thomas, Ginsburg, and Kagan, held that regardless of the other interpretive questions surrounding the statute, the law certainly prohibited the “single-sticker” practice (that is, to display the cash price and the additional surcharge for credit card users) that the plaintiffs stated was their preferred pricing scheme. Therefore, the majority concluded that the statute was not vague as it applied to the question before the Court, and the Court did not attempt to resolve other ambiguities in the statute or analyze the other two pricing schemes, instead leaving those questions for the Court of Appeals.

Justice Sotomayor, in a concurrence joined by Justice Alito, noted that the New York statute does not, on its face, address labeling at all. Under its plain reading, the law that “no seller . . . may impose a surcharge . . .” can be interpreted simply to prohibit charging a higher price to credit card users altogether, regardless of the words used to describe the pricing. (Indeed, that is likely how one would read it if not for the existence of the defunct federal law that the New York law is suspected to have been intended to track.) Therefore, depending on the correct interpretation of the statute—which is a matter for the New York state courts, not the federal judiciary—there may not be any need for a constitutional ruling. An unusual procedural rule available in many states (including New York) called certification allows a federal court to put a state-law question directly to the state’s highest court to receive an authoritative state response. In this case, Sotomayor argued, the Second Circuit should be ordered to certify the case to the New York Court of Appeals to allow the state court to interpret § 518 and definitively determine what pricing schemes or pricing displays the law prohibits.

Justice Breyer also issued a concurrence, in which he questioned the efficacy of distinguishing laws for purposes of First Amendment analysis based on whether a law regulates “speech” or “conduct.” Instead, he reasons, we should ask whether, or how, a challenged rule affects an interest that the First Amendment protects.

Recent years have seen a circuit split on state surcharge laws. In this case and in a parallel Texas case, federal appellate courts upheld the state statute on the grounds that they regulated conduct and not speech. In contrast, the Eleventh Circuit struck down Florida’s law governing surcharges on First Amendment grounds. While this new decision from the Supreme Court does not conclusively decide the case, instead remanding the case back to the lower court, it will affect challenges to other states’ statutes that have been rejected by federal courts on similar grounds (such as the Texas decision). The immediate impact is that the burden has now been shifted to the State of New York to show that the speech restrictions imposed by the law are justified. If the plaintiffs prevail and the New York law is struck down, we can expect the other states’ laws will soon follow.

Several years ago, Visa and MasterCard negotiated an anti-trust settlement (which is still being challenged in the courts) under which they revised their operating rules to allow merchants to impose surcharges in many cases. The repeal of these state laws will be the final hurdle before surcharges are permitted nationwide.