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From Banking and Finance Law Daily, October 4, 2013

New York’s credit card “no surcharge” law unconstitutional

By Thomas G. Wolfe, J.D.

In reviewing New York’s credit card “no surcharge” law, the U.S. District Court for the Southern District of New York ruled that the state law is unconstitutionally vague and violated the plaintiffs’ right to “free speech” protected by the First Amendment to the U.S. Constitution. In reaching its decision, the federal trial court also determined that the plaintiffs—several New York retail businesses and their principals—had standing to bring the action, and granted the merchants’ request for a preliminary injunction to prevent enforcement of the New York law (Expressions Hair Design v. Schneiderman, Oct. 3. 2013, Rakoff, U.S. District Judge).

While the court simultaneously denied the defendants’ motion to dismiss the merchants’ claims, the court determined that the merchants’ claim that New York’s “no surcharge” law is preempted by the federal Sherman Antitrust Act required more development of a factual record to allow the defendants to produce evidence to refute or rebut that particular claim.

Targeted New York law. The New York “no surcharge” law (N.Y. Gen. Bus. Law Article 29-A, sec. 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.” As previously reported in the June 5, 2013, issue of Banking and Finance Law Daily, the law further provides that it is a criminal offense—punishable by a fine of $500 and up to one year of imprisonment—for a seller to violate the law.

While the plaintiff merchants acknowledged that New York permits 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—the merchants contended, among other things, that the particular New York law restricted their protected free-speech rights because the state law requires them to only use the “right language” to communicate the difference to purchasers of their products or services; the state law permits them to refer to a cash “discount” but prevents them from referring to a credit “surcharge.”

Standing, ripeness. The defendants, the New York Attorney General and several New York District Attorneys authorized to enforce the state law, contended that the merchants lacked standing to bring the action and that their challenge to the law was not ripe for adjudication. In rejecting the defendants’ arguments, the court stressed that all the merchants “have every reason to fear … that section 518 will be enforced beyond the bounds of its federal precursor.” Further, the court noted that the New York law “presently burdens and chills plaintiffs' fundamental right of free speech. That is a cognizable injury plaintiffs would continue to suffer on an ongoing basis if review were withheld.”

Free speech claim. In determining that New York’s “no surcharge” law violated the merchants’ First Amendment free speech rights, the court reasoned that, even though the dual pricing dimension of the provision is lawful, the state law impermissibly: (i) distinguishes between prohibited "surcharges" and permissible "discounts" based on words and labels, rather than the economic realities; (ii) regulates “speech, not conduct, and does so by banning disfavored expression”; (iii) does not comply with the standard of “heightened judicial scrutiny” or “intermediate scrutiny,” regardless of which standard is employed; (iv) creates numerous exceptions for certain favored utilities, and the defendants were unable to explain why credit card surcharges would be any less deceptive when imposed by a utility than by a retail business; and (v) is broader than necessary to serve an anti-fraud purpose.

Vagueness claim. In concluding that the “no surcharge” law is unconstitutionally vague, the court noted that the provision (sec. 518) is “subject to the strictest vagueness scrutiny, as it both chills First Amendment rights and imposes criminal penalties. In addition, the statute also contains no ‘scienter requirement,’ thus potentially setting a trap for those who act in good faith.”

Antitrust claim. The plaintiff merchants alleged that, by preventing retail businesses from effectively communicating the costs of credit-card usage to consumers, “section 518 insulates credit card companies from competition, causes the costs of credit to skyrocket, and frustrates the purposes of federal antitrust law—just as Visa and MasterCard's no-surcharge rules did.” While the merchants argued that the state law was preempted by federal antitrust law, the defendants contended that New York’s “no surcharge” law actually fostered competition rather than impeded it.

The court acknowledged that the plaintiff merchants stated a valid claim. However, the court decided that more development of a factual record was needed to allow the defendants to produce evidence to refute or rebut the antitrust claim.

Preliminary injunction. In granting a preliminary injunction to prevent the defendants from enforcing the New York law (sec. 518), the court determined that: (i) the merchants would suffer irreparable harm if the court were to rule otherwise because the “loss of First Amendment freedoms, for even minimal periods of time, unquestionably constitutes irreparable injury”; (ii) the New York law does not incidentally burden the plaintiffs’ free speech rights—as the defendants would have it—but instead prohibits and penalizes free expression; and (iii) the plaintiff merchants did not delay in seeking the injunction because the “controversy over section 518 only became ‘live’ after Visa and MasterCard dropped their contractual bans on surcharges … as part of an antitrust settlement” and the settlement “still has not been approved.”

The case number is 13 Civ. 3775 (JSR).

Attorneys: Deepak Gupta (Gupta Beck PLLC) for plaintiffs. Garrett Joseph Coyle for defendant Attorney General of New York Eric T. Schneiderman. Sheryl Rebecca Neufeld for defendant District Attorney Cyrus R. Vance, Jr. and defendant District Attorney Charles J. Hynes.

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

LitigationEnforcement: ConsumerCredit CreditDebitGiftCards NewYorkNews

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