Courts Split on Legality of Surcharge

September 12, 2014 at 8:56 am Leave a comment

As readers of this blog know, last Fall a federal district court in Manhattan ruled that New York’s law banning merchants from imposing surcharges on credit card purchases violated the First Amendment of the Constitution. An appeal of that decision is currently pending. (In the interest of full disclosure, the Association has filed a friend of the court brief urging the Second Circuit to side with New York’s Attorney General and reverse this ruling).

New York isn’t the only state where laws prohibiting credit card surcharges are being challenged. As the Second Circuit prepares to decide whether New York law violates the Constitution, a recent decision in Florida upheld a Florida statute that also caps credit card surcharges. The decision underscores that, although surcharge litigation may have started in New York, it won’t end there. The Second Circuit decision will set precedent for other states where this issue will be litigated. In addition, the surcharge litigation deals with issues beyond the propriety of surcharges. The litigation will help delineate the boundary between the protections guaranteed by the First Amendment and the rights of regulators and legislators to place restrictions on how information is presented to consumers.

On the off chance that you haven’t been paying much attention to the issue, here is a quick recap. Section 518 of NYs General Business Law prohibits merchants from imposing surcharges on credit card purchases. At the same time, it permits merchants to offer cash discounts. In Expressions Hair Design v. Schneiderman, 975 F. Supp. 2d 430, 435-36 (S.D.N.Y. 2013), Judge Radcliff held that the distinction prohibited merchants from informing customers about the true cost of credit. In addition, he argued that the surcharge prohibition made all consumers pay for the increased cost of credit transactions by making it impossible to restrict the extra charge to customers paying with credit cards.

But, most importantly, the Judge concluded that:

Under the most plausible interpretation of that section, if a vendor is willing to sell a product for $100 cash but charges $102 when the purchaser pays with a credit card, the vendor risks prosecution if it tells the purchaser that the vendor is adding a 2% surcharge because the credit card companies charge the vendor a 2% ‘swipe fee.’ But if, instead, the vendor tells the purchaser that its regular price for the product is $102, but that it is willing to give the purchaser a $2 discount if the purchaser pays cash, compliance with section 518 is achieved…. this virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 unconstitutional.

Conversely, one could argue that there are fundamental differences between prohibiting surcharges, as New York and other states do, and allowing merchants to surcharge credit card purchases without restriction. After all, in Australia where surcharge bans were eliminated, consumers are now demanding that they be re-imposed. Furthermore, legislators and regulators place restrictions on how information is presented to consumers all the time. If restrictions such as New York’s run afoul of the Constitution then an important tool for consumer regulation is being removed.

Which brings us to the impetus for today’s blog. Recently, a Florida court upheld Florida’s surcharge ban against claims that it violated the Constitution.

This statute is no more a First Amendment violation than are the Truth-in-Lending Act, which restricts how a lender can pitch its interest rates, and the Fair Debt Collection Practices Act, which restricts how a creditor can present its claim for repayment. A whole host of statutes impose similar restrictions on the relationships between businesses and their customers, and many implicate communications.

The Florida case is Dana’s Railroad Supply, et al V. Pamela Jo Bondi (CASE NO. 4:14cv134-RH/CAS).

The fact that two courts came to such different conclusions underscores that the issues raised in these cases are going to be litigated for years to come as higher courts try to reach a consensus on if and when surcharge bans violate the Constitution.

On that note, have a great weekend, even if you, like me, feel an obligation to watch the Giants game.

Entry filed under: Legal Watch, New York State. Tags: .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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