A federal judge in a New York district court ruled in favor of five retailers seeking the right to surcharge customers who use credit cards at checkout. The Oct. 3, 2013, preliminary injunction suspends the N.Y. statute that bans surcharging. In the Manhattan court, U.S. District Judge Jed Rakoff said the law violated retailers' constitutional right to inform customers of the cost of electronic payment acceptance.
The law, which is contained in section 518 of the New York General Business Law code, forbids merchants from adding a percentage above the retail price of goods and services to offset the cost of interchange. The law states, "Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both."
In his preliminary injunction order, Judge Rakoff said the law trumped even the looking-glass world depicted in the children's classic, "Alice in Wonderland." He said retailers can't surcharge legally but can legally offer discounts to customers who use cash instead of credit to pay for purchases. "[T]his virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 unconstitutional," he wrote.
Payment attorney Paul Rianda agreed, stating, "I also cannot reconcile how one or the other is any different." He also called the potential penalties excessive, given that "this is really a business issue and not what one would generally see as something more of an ethical or moral nature."
The lawsuit was brought by five N.Y.-based merchants, including a hair salon, an ice cream parlor and a liquor store, against the office of the New York Attorney General, Eric T. Schneiderman. In June 2013, when the lawsuit was filed, the plaintiffs' legal council Gupta Beck PLLC said N.Y. merchants are allowed to charge different prices to consumers who pay with credit versus those who pay with cash, but that the "price difference must be described as a 'discount' for cash, not a 'surcharge' for credit – even though they are mathematically identical."
The law firm noted at the time that the same policy was in effect in several other states: California, Colorado, Connecticut, Florida, Kansas, Maine, Oklahoma and Texas. Many other states are contemplating adding surcharge bans, according to Rianda.
Rianda also noted that U.S. businesses rarely surcharge, even if they have the right to do so. "I think that merchants should be allowed to pass on the cost of processing credit cards if they want to do so," he said. "Most merchants, I think, would not want to surcharge for competitive reasons, but they should at least have the option." He added that, regardless of card brand rules, state law dictates whether surcharging is ultimately legal.
According to an Oct. 8, 2013, legal alert issued by the law firm Ballard Spahr LLP, the federal ban on surcharging expired in 1984, but Visa Inc. and MasterCard Worldwide continued the prohibition. However, in December 2012, the card brands changed their surcharging policies as a condition of the preliminary settlement in the $7.9 billion class-action lawsuit over alleged interchange price fixing by the card companies.
The following January, Visa and MasterCard implemented the new policy that allows merchants to cover the costs of credit card transactions by charging up to 4 percent extra per such transaction.
The repercussions from lifting the ban are unclear. In February 2013, the Electronic Payments Coalition, a payments industry advocate, said merchants demanded the surcharge allowance be included in the settlement. But the National Retail Federation, which represents the interests of retailers, said the majority of merchants have no intention of surcharging.
The NRF stated that the card brand rules associated with surcharging make it prohibitive for merchants. The federation added that Visa and MasterCard require each retailer to have the same card acceptance policies in all its stores, which breeds confusion for regional or national enterprises that have store locations in no-surcharge states.
Among the other hindrances to surcharging, the NRF cited the card brands' policy that merchants supply "detailed" surcharging plans at least 30 days in advance of implementation.
The EPC called the NRF's statements false and misleading. It said Visa and MasterCard have no rules preventing merchants from surcharging credit card transactions in states that do not prohibit surcharging and that merchants have sought to change the brands' no-surcharge policy for years. 
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