Supreme Court likens surcharging to free speech

Five New York retailers who took their credit card surcharge battle to the U.S. Supreme Court have been sent back to New York's lower courts. Plaintiffs in Expressions Hair Design v. Schneiderman 15-1391 won the right to surcharge in 2013, lost on appeal in 2015, and escalated their grievances to the Supreme Court on the basis that anti-surcharge laws violate their First Amendment right to free speech and due process under the U.S. Constitution.

The Supreme Court's opinion, issued March 29, 2017, validated the plaintiffs' assertion that regulating retail prices is tantamount to regulating speech. The high court had only agreed to review the constitutionality of existing anti-surcharge laws; its opinion will theoretically guide New York and nine other states that currently ban the practice.

"The question presented is whether [the New York anti-surcharge law] §518 regulates merchants' speech and—if so—whether the statute violates the First Amendment," wrote Chief Justice Roberts. "We conclude that §518 does regulate speech and remand for the Court of Appeals to determine in the first instance whether that regulation is unconstitutional."

A brief history

In their review of the case, Supreme Court Justices considered interchange pricing and previous legal opinions that have shaped payments history and business models. They noted card issuers initially forbid merchants to charge higher prices to customers who paid by credit card. The 1974 Truth in Lending Act (TILA) legalized cash discounts; the revised 1976 TILA banned credit card surcharging.

Surcharging was legitimized in January 2013 following a retail class action settlement against Visa and Mastercard. The card brands issued guidelines requiring participating retailers to post signage and disclaimers in precise language and implement standardized pricing models. Individual U.S. states subjected these national guidelines to further scrutiny and interpretation.

Ten states went on to ban credit card surcharging altogether. These bans led to court actions in Florida, New York and Texas, which will be subject to review following the Supreme Court's decision. While these bans remain in place, noncompliant retailers in New York, California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas could face stiff penalties and even prison time for violating anti-surcharge laws, which vary by state, legal analysts have noted.

Interchange plus and minus

Chief Justice Roberts noted the plaintiffs pay "tens of thousands of dollars every year to credit card companies" and those fees add up. "Rather than increase prices across the board to absorb those costs, the merchants want to pass the fees along only to their customers who choose to use credit cards," he wrote. "They also want to make clear that they are not the bad guys—that the credit card companies, not the merchants, are responsible for the higher prices. The merchants believe that surcharges for credit are more effective than discounts for cash in accomplishing these goals."

The Court's opinion further noted that the petitioning merchants are proposing a pricing scheme that posts a cash price and an additional credit card surcharge, expressed either as a percentage surcharge or as a "dollars and cents" additional amount.

"Under this pricing approach, petitioner Expressions Hair Design might, for example, post a sign outside its salon reading 'Haircuts $10 (we add a 3% surcharge if you pay by credit card),'" Chief Justice Roberts wrote. "Or, petitioner Brooklyn Farmacy & Soda Fountain might list one of the sundaes on its menu as costing '$10 (with a $0.30 surcharge for credit card users).'"

Awaiting further guidance

Despite the Supreme Court's inconclusive ruling and yet-to-be-determined actions by state courts, merchants and payments industry stakeholders remain hopeful that all 50 U.S. states will legalize credit card surcharging.

"While they are throwing the decision back down to New York's 2nd U.S. Circuit Court of Appeals, this opinion makes a persuasive case for all other states and circuits," said David Leppek, President of Transaction Services LLC. "While the Solicitor General may not currently have a clear political ax to grind, the topic of merchant surcharging could be viewed as an anti-regulation move to help small businesses, something the current administration has generally supported."

Adam Atlas, Attorney at Law, said, "ISOs see surcharging as a new land-grab. Some, throwing caution to the wind, have opted for an all-out sales effort offering merchants the right to shift card fees to cardholders. Others, exercising more caution, have opted to limit themselves to only those states that do not have an outright ban on the practice."

Atlas suggested the Supreme Court opinion may embolden ISOs who want to be first-to-market with cardholder-payment of card fees. He urged ISOs to think twice about rolling out such programs in states where surcharging is banned. "Issuing banks are heavily invested in merchants paying processing fees, partly to make sending easier and to facilitate the accumulation of debt by cardholders," he added. "While this case is an important milestone, I don't think this is the last chapter in the battle over surcharging."

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