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From Banking and Finance Law Daily, September 30, 2015

New York’s credit card ‘no surcharge’ law constitutional

By Thomas G. Wolfe, J.D.

The U.S. Court of Appeals for the Second Circuit has ruled that New York’s law prohibiting sellers from imposing a surcharge on consumers who elect to use a credit card—instead of cash, check, or similar means—for payment does not violate the U.S. Constitution. The Second Circuit concluded that the federal trial court had erred in its 2013 decision preventing the state of New York from enforcing the law. Accordingly, the Second Circuit reversed the lower court’s ruling that the state law violated the First Amendment’s Free Speech Clause and was void for vagueness under the Fourteenth Amendment’s Due Process Clause (Expressions Hair Design v. Schneiderman, Sept. 29, 2015, Livingston, D.).

In deciding that New York’s credit card “no surcharge” law (New York General Business Law Article 29-A, § 518) passes constitutional muster, the federal appellate court determined that the law did not violate the First Amendment because it was directed more toward price regulation and conduct than it was toward “speech,” and did not regulate speech as applied to “single-sticker-price” sellers. Similarly, the Second Circuit determined that the New York law did not violate the Fourteenth Amendment because the law has a “core set of applications in which it is not unconstitutionally vague,” and the court invoked abstention principles as well.

Swipe fees. As observed by the Second Circuit’s opinion, when a consumer pays for goods or services with a credit card, the credit-card issuer charges the merchant a percentage of the purchase price—commonly referred to as a “swipe fee.” Meanwhile, businesses and merchants typically seek to pass these swipe fees along to consumers while informing the consumers of the charge.

New York law. New York’s credit card “no surcharge” law (New York General Business Law Article 29-A, § 518) provides: “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means. 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.”

Complaint. The plaintiffs in the case, several New York retail businesses and their principals, maintained that the New York credit card “no surcharge” law permitted merchants to engage in dual pricing—charging a lower price for the use of cash, check, or a debit card and charging a higher price for the use of a credit card.

In particular, the plaintiff merchants contended that the New York law restricted their protected free-speech rights because the state law required them to only use the “right language” to communicate the difference to purchasers of their products or services; the state law permitted them to refer to a cash “discount” but prevented them from referring to a credit “surcharge,” they asserted. The plaintiff merchants also claimed that the law was unconstitutionally vague in violation of their due process rights.

Trial court’s decision. As previously reported (see Banking and Finance Law Daily, Oct. 4, 2013), the U.S. District Court for the Southern District of New York ruled that the New York law was unconstitutionally vague and violated the plaintiff merchants’ right to “free speech” protected by the First Amendment to the U.S. Constitution. In reaching its decision, the federal trial court also granted the merchants’ request for a preliminary injunction to prevent enforcement of the New York law.

The defendant New York officials appealed that ruling to the Second Circuit.

First Amendment. On appeal, the Second Circuit noted that the state statute did not define the “surcharge” term. The court acknowledged that the New York law prohibited charging credit-card holders an additional amount above the regular price that is not also charged to cash customers, but permitted offering cash customers a discount below the regular price that was not also offered to credit-card customers.

Ultimately, the court did not find a constitutional violation of the First Amendment’s free speech clause. Among other things, in its 57-page opinion, the court stressed that: (1) the plaintiff merchants relied too heavily on “hypothetical pricing schemes that they neither currently employ at their businesses nor claim they would employ but for Section 518”; (2) section 518 did not regulate First Amendment speech “as applied to single-sticker-price sellers”; (3) any constitutional challenge premised on section 518ʹs “application outside the single-sticker-price context (whether facial or as-applied) necessarily fails because section 518 is ‘readily susceptible’ to a construction under which its application is limited to that context”; (4) since prices, price regulations, and other forms of direct economic regulation do not implicate First Amendment concerns, “prohibiting certain prices does not implicate the First Amendment” as well; and (5) the operation of the New York law was centered on pricing and conduct, not on “words and labels.”

Fourteenth Amendment. The Second Circuit also determined that the New York law was not unconstitutionally vague in violation of the due process clause of the Fourteenth Amendment. The court emphasized that section 518 “plainly has a core meaning that can reasonably be understood,” namely that “sellers who post single sticker prices for their goods and services may not charge credit-card customers an additional amount above the sticker price that is not also charged to cash customers.”

Further, the Second Circuit underscored the fact that, in keeping with Supreme Court precedent, a statute is unconstitutionally vague “only if it cannot be construed in a way that eliminates the vagueness problem.” The federal appellate court contended that the law was based on a “core set of applications in which it is not unconstitutionally vague.” Moreover, the court found principles of abstention “appropriate in this context also.”

Final Disposition. In concluding that the federal district court erred in holding that section 518 of New York’s General Business Law violated the First Amendment’s free speech clause and the Fourteenth Amendment’s due process clause, the Second Circuit vacated the trial court’s judgment and remanded the matter for dismissal.

The consolidated case involves Docket Nos. 13-4533 and 13-4537.

Attorneys: Judith Vale (Assistant Attorney General), Barbara D. Underwood (Solicitor General), and Steven C. Wu (Deputy Solicitor General) for Eric T. Schneiderman in his official capacity as Attorney General of the State of New York. Larry A. Sonnenschein, Ronald E. Sternberg, and Zachary W. Carter (Corporation Counsel of the City of New York) for Cyrus R. Vance, Jr. in his official capacity as District Attorney of New York County and for Charles J. Hynes in his official capacity as District Attorney of Kings County. Deepak Gupta (Gupta Beck PLLC) and Gary Friedman (Friedman Law Group, LLP) for plaintiffs-appellees. Henry C. Meier for amicus curiae Credit Union Association of New York. Linda P. Nussbaum (Grant & Eisenhofer, P.A.) for amici curiae The Kroger Company, Safeway Inc., Walgreen Co., Food Lion, LLC, Hy-Vee Inc., H.E. Butt Grocery Co., The Great Atlantic & Pacific Tea Co., Inc., Albertson’s LLC, and Rite Aid Corp. J. Douglas Richards (Cohen Milstein Sellers & Toll PLLC) for amici curiae Consumer Action, National Association of Consumer Advocates, National Consumers League, and U.S. Public Interest Research Group.

Companies: Bunda Starr Corporation; Expressions Hair Design; Five Points Academy; LLC; The Brooklyn Farmacy & Soda Fountain, Inc

MainStory: TopStory ConnecticutNews ConsumerCredit CreditDebitGiftCards NewYorkNews StateBankingLaws VermontNews

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