Does New York’s no-surcharge law (N.Y. Gen. Bus. Law § 518), which requires merchants to label price differences as a cash “discount” rather than a credit-card “surcharge,” unconstitutionally restrict speech?
The Court must consider whether New York’s surcharge ban that requires merchants to label price differences as a cash discount rather than a credit-card surcharge unconstitutionally restricts speech. Petitioners Expressions Hair Design et al. argue that criminalizing truthful speech about credit-card costs violates the First Amendment because it prevents the free flow of accurate ideas amongst the public. Eric T. Schneiderman, in his official capacity as Attorney General of the State of New York, on the other hand, asserts that the law regulates conduct and not speech; thus, the price controls fall outside of the ambit of the First Amendment entirely. The outcome of this case will impact how a state can restrict the actions and language of merchants with respect to different forms of payments by consumers.
Questions as Framed for the Court by the Parties
Whether New York’s regulation of the conditions under which sellers differentiate prices charged to consumers paying by credit card and consumers paying by other means, N.Y. Gen. Bus. Law § 518, is subject to scrutiny under, and consistent with, the First Amendment.
Whenever a consumer uses a credit card to make a purchase, the merchant is charged a swipe fee. Merchants typically pass on these charges to consumers through higher prices regardless of whether they pay by credit card or not. When credit cards were first introduced, credit-card companies’ contractual rules forbade differential pricing based on whether a consumer used cash or credit. However, in 1974, amongst federal antitrust scrutiny, American Express settled a lawsuit to allow merchants to provide consumers with differential price information. Subsequently, Congress passed the Truth in Lending Act (“TILA”) that permitted merchants to offer consumers a discount for using a form of payment that was not credit-card based. Credit-card companies, aware of the impact that labeling has on consumer behavior, lobbied that any price difference between cash and credit purchases should be labeled a “cash discount” instead of a “credit-card surcharge.” In 1976, Congress was sufficiently persuaded to enact a temporary ban on “surcharges,” despite previous legislative authorization permitting “discounts.” Congress defined the word “discount” as “a reduction made from the regular price,” and included in the definition that it “shall not mean a surcharge.” In 1984, Congress denied renewal of the TILA and New York adopted legislation using the same text.
Shortly thereafter, five New York merchants brought this suit seeking the ability to tell their consumers that there is a surcharge for using credit. One petitioner, Expressions Hair Design, had a sign that notified its consumers that it would charge 3% more for haircuts paid with a credit cards until it learned about the New York law. Expressions Hair Design now advertises two prices, a lower one for cash and a higher one for credit, and carefully avoids describing the price difference as a surcharge or an extra cost as a result of paying with a credit card. The other petitioners, Brooklyn Farmacy & Soda Fountain, Brite Buy Wines & Spirits, Five Points Academy, and Patio.com want to set one single price for their goods and services, impose an extra charge for credit card use, and to call the difference a credit “surcharge.”
In the Southern District Court of New York, the State argued that the statute is “an anti-fraud statute” that only bars additional hidden fees and does not prohibit surcharges. The district court held that the law violated the First Amendment as it was impermissibly vague and regulated speech. The district court further concluded that the statute failed the Central Hudson test for commercial-speech restrictions.
On appeal, the court held that New York’s law “regulates conduct, not speech” and divided the First Amendment challenge based on two kinds of dual pricing: the first concerns posting a price on a label while notifying consumers of the surcharge through a separate sign, and the second concerns a merchant’s including two prices on the label and characterizing the price difference as a surcharge. The court declined to “reach the merits” on the latter question citing Railroad Commission of Texas v. Pullman Co., 312 U.S. 496 (1941), and held that the law was not unconstitutionally vague.
IS SPEECH BEING REGULATED AT ALL?
Expressions Hair Design posits that New York’s law violates the First Amendment because it criminalizes truthful speech; therefore, it should be subjected to First Amendment scrutiny. Expressions Hair Design argues that the free flow of information, including pricing information, informs the public on how to best allocate their resources and that the New York law prevents this flow. Further, Expressions Hair Design notes that any restrictions that deprive consumers of such information must survive First Amendment scrutiny. Thus, Expressions Hair Design argues that by criminalizing truthful speech, New York’s law prevents consumers from fully understanding the cost of credit compared to the costs of cash. Expressions Hair Design also argues that New York’s law prevents sellers from having the option of choosing between two interchangeable labels: discounts and surcharges. Thus, Expressions notes that such a regulation on speech is unlawful viewpoint discrimination because it prevents merchants from openly discussing costs of credit cards, which generally would not survive First Amendment Scrutiny.
New York Attorney General Eric T. Schneiderman (“the Attorney General”) counters by arguing that the surcharge prohibition regulates conduct, not speech, and thus is outside the ambit of the First Amendment. The Attorney General asserts that the ban on surcharges functions as a direct price control that regulates how sellers can collect money from their consumers. The Attorney General contends that the surcharges and discounts are mutually exclusive terms that describe a difference in conduct; thus, the state can regulate the use of surcharges because it is controlling conduct and not speech. The Attorney General argues that merchants are still able to express their views on credit-card costs with their consumers; thus, the law does not infringe on speech protected by the First Amendment. Furthermore, the Attorney General argues that any burden that a surcharge prohibition has on a seller’s regular price is incidental to the law’s permissible regulation of conduct, which is generally lawful under the First Amendment.
ASSUMING THE NEW YORK LAW REGULATES SPEECH, WOULD IT SURVIVE CENTRAL HUDSON’S COMMERCIAL SPEECH TEST?
Assuming that the New York law does regulate speech, both parties agree that the commercial speech test described by the Court in Central Hudson Gas & Electric Corp., Inc. v. Public Service Commission of New York, 447 U.S. 557 (1980), applies. The Central Hudson commercial speech test requires the government to provide actual evidence of four factors in order to be constitutional under the First Amendment. The four factors are: (1) whether speech concerns lawful activity and is not misleading; (2) whether asserted governmental interest justifying law is substantial; (3) whether the regulation directly advances the governmental interest asserted; (4) whether the challenged law is not more extensive than is necessary to serve that interest.
DOES THE SPEECH CONCERN LAWFUL ACTIVITY AND IS NOT MISLEADING?
Expressions Hair Design argues that because allowing dual pricing based on whether consumers pay with cash or a credit card is legal, labeling the price adjustment as either a discount or a surcharge will not be inherently misleading. The use of the word “surcharge”, Expressions Hair Design asserts, actually informs consumers rather than confuses them because merchants are honestly conveying the costs associated with credit cards.
The Attorney General disagrees and asserts that the word “surcharge” can be misleading because surcharges allow sellers to charge prices above the regular price but also entice credit-card users to make a purchase by posting their regular prices only. Thus, the Attorney General argues that a consumer could get to the front of a checkout line to realize she has to pay more than expected.
IS THERE AN ASSERTED SUBSTANTIAL GOVERNMENTAL INTEREST THAT JUSTIFIES THE LAW?
Expressions Hair Design argues that New York has no legitimate interest that is furthered by prohibiting surcharges. Expressions Hair Design argues that the state’s proffered interest in prohibiting profiteering by merchants is not a legitimate reason to ban truthful speech. In particular, Expressions Hair Design notes that the surcharge prohibition can actually reduce consumer awareness, which goes against the state’s general interest in protecting consumers. Expressions Hair Design also asserts that New York’s other interests are hypothetical concerns, and First Amendment scrutiny requires the State to assert real harms in order for the statute to be valid.
The Attorney General provides three justifications for banning surcharges. . First, the Attorney General argues that sellers will use surcharges for profiteering by charging excessive or unfair fees on credit-card users. Second, the Attorney General argues that banning surcharges prevents sellers from creating an unfair bargaining environment through unfair and misleading sales practices compared to discounts. Finally, the Attorney General argues that New York has an interest in avoiding surcharges because surcharges may stifle retail sales, and thus hurt the economy. The Attorney General argues that the economy may be stifled from surcharges because consumers generally view surcharges as unjustified penalties.
DOES THE REGULATION DIRECTLY ADVANCE THE GOVERNMENTAL INTEREST ASSERTED?
Expressions Hair Design argues that New York does not have a legitimate interest in protecting consumers about the cost of credit. According to Expressions Hair Design, even if the Court finds that New York’s proffered interests are valid, the law is invalid because the statute does not directly advance any of those interests. Expressions Hair Design argues that if New York truly wanted to prevent deceptive sales practices, it would allow sellers to label credit-card costs as a surcharge to emphasize the extra costs associated with credit cards. Furthermore, Expressions Hair Design posits that the current regulation actually conceals credit-card costs. Expressions Hair Design asserts that the state’s interest in preventing profiteering and improving the retail economy are not served by this law because it allows sellers to charge whichever price they want as long as they label it as a discount, and high prices could deter consumers.
The Attorney General, on the other hand, argues that the surcharge prohibition eliminates a pricing practice that would allow sellers to profit off of credit-card users by charging them excessive fees. According to the Attorney General, when merchants charge excess prices above the regular price for a consumer paying with a card, there is a risk that the seller will mislead consumers by posting regular prices to attract buyers only to impose a surcharge upon check out. The Attorney General also asserts that surcharging is more susceptible to unfair sales practices because there is greater incentive to hide surcharges compared to discounts; thus, the state law directly advances that state’s valid interest in prohibiting surcharges as a way to protect consumers from unfair sales tactics. Furthermore, the Attorney General argues that the law advances the state’s interest in protecting its retail economy by protecting consumers in an effort to encourage them to continue purchasing retail products with a variety of payment methods.
IS THE CHALLENGED LAW MORE EXTENSIVE THAN IS NECESSARY TO SERVE THAT INTEREST?
Expressions Hair Design argues that the surcharge law is far more extensive than necessary to serve any legitimate interest. New York already has laws prohibiting false advertising and deceptive practices, which Expressions Hair Design argues undermines the need for this law to prevent deception. Expressions Hair Design also argues that New York could have used a narrower alternative to prevent price gouging by regulating the difference charged between credit-card users and those paying with cash or by allowing sellers to impose reasonable surcharges.
The Attorney General argues that the law is narrowly tailored to the state’s interests in a manner that is no broader than necessary to serve those interests. The Attorney General asserts that no other alternative regulations can prevent such consumer harms; surcharge prohibition is the most direct and effective approach to prevent price gouging because it directly prohibits excessive fees. According to the Attorney General, the surcharge prohibition helps reduce profiteering without burdening speech more than is necessary because it regulates commercial speech and does not restrict how a seller chooses to discuss credit-card costs. The Attorney General argues that New York cannot allow surcharges because evidence demonstrates that when sellers are allowed to impose surcharges, they do so beyond what is required to recoup credit-card fees. The Attorney General posits that the law’s goal is to prevent any consumer harm, not just to limit the amount of consumer harm.
DO CREDIT SURCHARGES “BAIT AND SWITCH” CONSUMERS?
Alan S. Frankel, arguing in support of Expressions Hair Design, posits that allowing merchants to label their credit-card fees as surcharges will allow consumers to compare and determine which surcharges are lowest. Frankel posits that this information would allow credit-card users to decide which credit card to use based on which one costs the user the least. In addition, Professor Adam J. Levitin, another supporter of Expressions Hair Design, notes that increased consumer awareness will induce both merchants and credit-card companies to keep fees low and dissuade price-gouging. Ahold U.S.A., Inc. et al. argue that no-surcharge laws incentivize more credit-card transactions than would normally occur in a free market where consumers understand the cost of transactions. With an efficient payment system, Frankel argues that merchants could publicize the costs of different payment choices and pass these costs to users directly, thus aligning consumers’ private costs with social benefits.
The Credit Union National Association (“CUNA”), supporting the Attorney General, claims that the surcharge ban prevents bad consumer experiences and consumer confusion. CUNA and Florida et al. note that the no-surcharge law benefits both consumers and merchants. CUNA notes that the no-surcharge law encourages credit-card use that is actually good for merchants. CUNA also posits that credit-card use is good for merchants because the “emergency liquidity” that credit allows for has benefits that cash cannot offer. For example, CUNA notes that increased cash usage would create safety risks because of the increased likelihood of theft. CUNA further argues that credit-card usage is actually cheaper than cash because of the lower variable costs—cash requires more security paid for by the merchants than credit does. Florida et al. add that credit-card usage promotes commerce, which means more profits for merchants.
DO CREDIT SURCHARGE BANS TRANSFER FEES TO LOW INCOME CONSUMERS?
As both sides agree, every sale between a merchant and a consumer involves a transaction cost. As Professor Levitin points out, credit-card transactions cost merchants more than cash transactions. Like all business costs, Professor Levitin posits that merchants pass along costs onto their consumers so that the merchants may remain profitable. Further, Frankel provides two ways merchants can pass on credit-card transaction costs to consumers: (1) by setting a lower price for the lower-cost transactions and a higher price for the higher-cost transactions, or (2) by setting one intermediary price for all consumers to pay. As Ahold U.S.A., Inc. et al. point out, most merchants find it easier to raise prices for all consumers regardless of their payment method of choice. The result, according to Professor Levitin, is that cash buyers end up paying higher retail prices, while credit-card consumers receive a discount on their transaction costs. As a result, Ahold U.S.A, Inc. et al. posit that wealthy consumers benefit both from lower transaction costs and from the perks of credit-card ownership, while poorer consumers end up having to pay higher retail prices.
While CUNA agrees that there are transaction costs when using credit cards, they argue that the wealthy do not benefit at the poor’s expense. Rather, Florida, et al. argue that the no-surcharge law and credit cards on a whole benefit low-income consumers because credit cards allow them access to emergency liquidity funds and provide better rates than pay-day lenders. Further, Florida, et al. argue that allowing surcharges would make price advertising “confusing at best and meaningless at worse.” Because the advertised price could have a large surcharge added to it, a low-income consumer who plans her spending ahead of time would be faced with much higher prices at checkout.
- Dani Kass, High Court to Review NY Law Banning Credit Card Surcharges, Law360 (Sept. 29, 2016).
- Greg Stohr, Credit-Card Surcharge Laws Draw Review at U.S. High Court, Bloomberg Politics (Sept. 29, 2016).