2nd Circuit Upholds N.Y. Ban on Retail Surcharges

(CN) - A New York law that bars retailers from imposing a surcharge on credit card purchases is constitutional, the Second Circuit ruled.

In a unanimous decision announced Tuesday, a three-judge panel held the law, which imposes criminal penalties on businesses that charge customers a so-called "swipe fee," does not violate retailers' free speech or due process rights.

Expressions Hair Design and several other New York businesses sued the state, as well as the Brooklyn and Manhattan district attorneys, in Federal Court on June 4, 2013.

They contended New York General Business Law Sec. 518, which was enacted in 1984, violated their constitutional rights.

The law states 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."

It also states that any seller who violated the law would be charged with a misdemeanor, and if found guilty, would be subject to a fine of up to $500 or a year in jail, or both.

While the bill for Sec. 518 said it sought to protect consumers from "dubious marketing practices and variable purchase prices," it also said merchants could offer a discount for cash.

While the New York State Consumer Protection Board supported the bill, the Retail Council of New York State opposed it, arguing that swipe fees required merchants to up prices.

Indeed, the businesses who sued the state said they would like to charge credit-card customers a surcharge, rather than give cash customers a discount, to account for the swipe fees.

Expressions, a hair salon in Vestal, N.Y. - the only plaintiff that claims to currently charge different amounts for credit and cash purchases - says it would like to charge 3 percent more for the former method - but fears that calling this a "surcharge," might violate Sec. 518.

The plaintiffs said Sec. 518 violates the First Amendment's right to free speech, is vague under the 14th Amendment's due process clause, and is preempted by the Sherman Antitrust Act.

On Oct. 3, 2013, U.S. District Judge Jed Rakoff struck down the law, holding that the law burdens speech by relying on "words and labels, rather than economic realities," and that its "virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders Sec. 518 unconstitutional."

The Second Circuit vacated that ruling Tuesday, tossing aside the plaintiffs' claim that credit-card surcharges and cash discounts are just "labels" that draw distinct consumer reactions.

"In fact, consumers react negatively to credit-card surcharges not because surcharges 'communicate' any particular 'message,' but because consumers dislike being charged extra," U.S. Circuit Judge Debra Ann Livingston wrote for the three-judge panel.

"If a consumer thinks, based on a seller's sticker price, that she will be paying $100 for the seller's goods or services, then she will be annoyed if it turns out that she actually has to pay $103 simply because she has chosen to use a credit card; by contrast, if the sticker price is $103, she will be less annoyed by having to pay $103, even if cash customers only have to pay $100," Livingston continued. "Nothing about the consumer's reaction in either situation turns on any words uttered by the seller. And although the difference in the consumer's reaction to the two pricing schemes may be puzzling purely as an economic matter, we are aware of no authority suggesting that the First Amendment prevents states from protecting consumers against irrational psychological annoyances."

Sec. 518 is not unconstitutionally vague under the due process clause, the ruling states.

"We have complete confidence that sellers 'of ordinary intelligence' will-if they post single sticker prices-readily understand how to avoid imposing a credit-card surcharge, and that New York authorities will have sufficient guidance in determining whether such sellers have violated the law," Livingston wrote.

New York Attorney General Eric Schneiderman applauded the ruling.

"I look forward to continuing to work to protect consumers from harmful pricing practices," Schneiderman said.

Representatives for the plaintiffs did not immediately respond to a request for comment from Courthouse News.

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit