Second Circuit: a credit-card surcharge by any other name would smell just as sweet—and be just as illegal (updated 11/4/15)

Expressions Hair Design v. Schneiderman, No. 13-4533, 13-4537 (2d Cir. Sept. 29, 2015).

Processing a credit-card transaction costs merchants more than processing a cash transaction. That’s because credit-card companies charge merchants a fee that historically has amounted to about two or three percent of the transaction.

You might think that the higher cost of processing a credit-card transaction would prompt merchants to charge consumers more for credit card transactions. Up until quite recently, however, contracts between merchants and credit-card networks—MasterCard, Visa, American Express, and Discover—prohibited merchants from imposing credit-card surcharges. But things may be changing. Under a recent class-action settlement, MasterCard and Visa agreed to drop these contractual prohibitions on credit-card surcharges.

That’s why this appeal is important. This appeal focuses on a New York law“section 518”that forbids merchants from imposing credit-card surcharges. Up until the recent class-action settlement, section 518 was redundant: it prohibited something that was already prohibited by the merchants’ contracts with credit-card networks. After the settlement, however, section 518 has independent effect. 

A group of merchants challenge section 518 on the ground that it violates the First Amendment. The merchants’ argument begins with an uncontroversial proposition: while section 518 prohibits merchants from imposing surcharges on credit-card users, it allows them to offer a discount to customers who pay in cash. In economic terms, however, surcharges and discounts are really the same thing. The merchants prefer surcharges only because they do a better job of discouraging credit-card use than do discounts. Due to loss aversion, credit-card customers are more reluctant to pay a surcharge than to miss out on a discount.

The merchants say, then, that the State of New York forbids them to say they are imposing a credit-card surcharge, but allows them to say they are imposing a cash discount—even though the two things are economically identical. This content-based regulation of speech, say the merchants, amounts to a First Amendment violation.

But the Second Circuit holds that section 518 targets conduct, not speech. It forbids sellers from charging credit-card customers an amount above the sticker price that it’s charging to cash customers. A seller who does this may call it whatever it wants, but it’s still illegal under New York law. And while section 518 regulates pricing, that’s perfectly constitutional, even though prices must be communicated through words: price regulation has never been thought to present a First Amendment problem.

UPDATE (11/4/15): The Eleventh Circuit has just reached a different conclusion about a similar Florida statute prohibiting surcharges. As others have noted, this decision may be a good candidate for en banc rehearing.