SCOTUS Rules State Credit Card Anti-Surcharge Law Regulates Speech, Not Conduct

The Supreme Court of the United States recently held that a state law penalizing merchants for charging a surcharge for credit card payments did not restrict the amount that a store could collect when a buyer paid by credit card (i.e., a regulation on conduct).

Instead, the Court held that the state statute regulated how sellers may communicate their prices, and was therefore a regulation on speech subject to First Amendment scrutiny.

As you may recall, in Dana’s R.R. Supply v. AG, 807 F.3d 1235 (11th Cir. 2015), the U.S. Court of Appeals for the Eleventh Circuit held that a similar anti-surcharge statute was an unconstitutional restriction on commercial speech, because the pricing scheme sought to be employed was not misleading, the regulation did not advance any substantial state interest, and it was not narrowly tailored to meet constitutional scrutiny.

Accordingly, in this case, on remand the U.S. Court of Appeals for the Second Circuit may find that the state law at issue here is an unconstitutional content-based restriction on non-misleading commercial speech.

A copy of the opinion in Expressions Hair Design v. Schneiderman is available at:  Link to Opinion.

This case involves New York’s anti-surcharge statue for credit card payments.  When a customer makes a payment with a credit card, merchants are charged a processing fee by the card issuer.  The petitioners were five New York merchants (collectively, “Merchants”) who wanted to pass the processing fee along to their customers by employing different pricing for the use of a credit card, or by offering a discount for the use of cash.

As way of background, when credit cards were first introduced, contracts between card issuers and merchants barred merchants from charging credit card users higher prices than cash customers.  Congress put a partial stop to this practice in the 1974 amendments to the Truth in Lending Act (TILA).  The amendment prohibited card issuers from contractually preventing merchants from giving discounts to customers who paid cash.  See § 306, 88 Sta. 1515.  But, the amendment said nothing about credit card surcharges.

Subsequently, in 1976, another TILA amendment barred merchants from imposing surcharges on credit card payments.  Act of Feb. 27, 1976, §3(c)(1), 90 Stat. 197.  In 1981, Congress delineated the distinction between discounts and surcharges by defining “regular price” as the merchant’s “tagged or posted” price.  Cash Discount Act, § 102(a), 95 Stat. 144.  Because a surcharge was defined as an increase from the regular price, there could be no credit card surcharge where the regular price was the same as the amount charged to customers using credit cards.  The effect of all this was that a merchant could violate the surcharge ban by posting a single price and then charging credit card users more than that posted price.

Congress allowed the federal surcharge ban to expire in 1984.  However, the provision preventing credit card issuers from contractually barring discounts for cash remained.  This caused several states, including New York, to enact their own surcharge bans.  But, unlike the federal ban, New York’s anti-surcharge statute did not define the term “surcharge.”

As you may recall, New York prohibits its merchants from “impos[ing] a surcharge on a [customer] who elects to use a credit card in lieu of payment by cash, check, or similar means” (the “anti-surcharge statute”).  N.Y. Gen. Bus. Law. Ann. § 518 (2012).  A merchant who violates the anti-surcharge statute commits a misdemeanor and risks “a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.”  Id.

The Merchants argued that New York’s anti-surcharge statute restricted their constitutional right to truthful commercial speech under the First Amendment.

The trial court ruled in favor of the Merchants.  It held that the anti-surcharge statute regulated speech and violated the First Amendment under the Supreme Court’s commercial speech doctrine.  See, e.g., Va. State Bd. of Pharmacy v. Va. Citizens Consumer Council, 425 U.S. 748, 764-65 (1976) (the First Amendment provides limited protection for commercial speech based on society’s “strong interest in the free flow of [truthful and legitimate] commercial information”).

The U.S. Court of Appeals for the Second Circuit vacated the trial court’s ruling with instructions to dismiss the Merchants’ claims.  In so ruling, the Second Circuit determined that the anti-surcharge statute regulated conduct rather than speech, and therefore the anti-surcharge statute did not violate the First Amendment.

The first issue before the Supreme Court was whether the anti-surcharge statute prohibited a pricing scheme that provides a cash price and a different price for credit card customers, expressed either as a percentage surcharge or a dollars-and-cents additional amount.

The Second Circuit read “surcharge” in the anti-surcharge statute to mean “an additional amount above the seller’s regular price,” and thus concluded that the statute prohibited sellers from posting a single sticker price and charging credit card customers an additional fee.  The Supreme Court did not find any clear error in this interpretation, and also concluded that the anti-surcharge statute bars the pricing regime that the Merchants wish to employ.

On the constitutional issue, the Second Circuit concluded that the anti-surcharge statute posed no First Amendment problem because the law regulated conduct, not speech.  The Second Circuit reached this conclusion with the premise that price controls regulate conduct alone.

However, the Supreme Court disagreed.  According to the Supreme Court, the anti-surcharge statute was not a typical price regulation, as it did not limit the amount that merchants can collect from a cash or credit card payer.  Instead, the Supreme Court held, the statute regulates how sellers may communicate their prices.

Because the anti-surcharge statute regulated speech, the Supreme Court held that the Second Circuit should have conducted an inquiry into whether the statute, as a speech regulation, survived First Amendment scrutiny.

Accordingly, the Supreme Court vacated the judgment and remanded for the Second Circuit to analyze New York’s anti-surcharge statute as a speech regulation.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.