Is A Restriction On Credit Card Surcharges A Free Speech Violation?

Image courtesy of Gem

When you think of First Amendment disputes, your mind probably conjures images of protestors, or investigative journalism, or maybe you think of the never-ending debate over where to draw the line between obscenity and protected forms of expression. You probably don’t immediately connect the dots between the First Amendment and a state law about credit card surcharges — but the U.S. Supreme Court has been asked to decide that very issue.

This morning, the nation’s highest court heard arguments in the conveniently named case of Expressions Hair Design v. Schneiderman, a dispute over state laws that restrict the way retailers charge different prices to customers who pay with cash and those who pay with credit card.

All states allow merchants some leeway to charge card users a higher price than cash-paying customers, but New York and nine other states have laws that regulate how retailers communicate this price difference.

The New York law in question prohibits retailers from imposing a “surcharge” to a purchase made using a credit card. However, even though it’s not explicitly allowed in the statute, the state doesn’t stop merchants from offering a “discount” to customers who pay in cash.

Going Supreme

The petitioners in this case — five New York businesses — contend that the state law violates their First Amendment rights by dictating how they communicate this price difference. The merchants had been first convinced a federal court judge of their argument, only to have that ruling overturned on appeal.

Meanwhile, federal appeals panels in other parts of the country involving similar state-level laws have come to different conclusions. So not only do these businesses believe their case has merit, but the Supreme Court is the only party that can sort out the differing opinions of the appellate courts.

In their petition [PDF] to the Supreme Courts, the merchants argue that while mathematically, there is no difference between a credit card surcharge and an equivalent cash discount, there is a significant issue of consumer perception.

“[T]he surcharge label is more effective at communicating the true cost of credit cards and discouraging their use,” explain the merchants, who claim that the credit card industry has long pushed back against use of the term “surcharge.”

By telling merchants they can’t call something a “surcharge,” the petitioners contend the government is effectively saying, “If you use dual pricing, you may tell your customers only that they are paying less to pay without credit, not that they are paying more to pay with credit — even though they are paying more for credit. Liability thus turns on the words used to describe identical conduct— nothing else.”

In their response [PDF], New York Attorney General Eric Schneiderman’s office points out that the state’s law is substantively no different from a federal law that lapsed in 1984.

“Congress enacted this federal prohibition because of its view that credit-card surcharges caused consumer and economic harms that mere cash discounts did not,” explains the state. “Specifically, the federal prohibition was intended to prevent sellers from using surcharges to extract windfall profits; to avoid consumer confusion and unhappiness caused by the imposition of extra charges above the posted price; and to stop fraudulent and deceptive sales tactics by sellers who could lure consumers with a lower sticker price but then surprise them with a credit-card surcharge at the point of sale.”

Consumers Harmed Either Way?

Both sides of this debate received support, in some cases from consumer advocates who often take similar positions on issues. On the one end of the spectrum, you had people warning that consumers would be harmed by not being told the truth about credit card fees and costs; at the other end, there’s the argument that consumers would be harmed by allowing every regulation on commerce to potentially become a First Amendment issue.

The U.S. Public Interest Research Group was one of a number of parties to file briefs with the court in support of the merchants. The USPIRG brief [PDF] referred to the New York law as a “classic example” of an unconstitutional restriction on commercial speech.

“New York’s no-surcharge law deliberately keeps consumers in the dark about important pricing information, and does so for reasons unrelated to protecting those consumers from false advertising or other harm,” explains the brief, arguing that New York is barring retailers from “disclosing that they have added an extra cost to the price of goods or services to cover the fees on credit-card transactions.”

Likewise, the National Association of Consumer Advocates see credit card surcharges as a “valuable tool” to educate shoppers on the fact that businesses have to pay these “swipe fees” — the cost paid to banks and payment-processing networks for each card purchase — and that shopping with plastic does put a burden on merchants.

“It is estimated that merchants incur upwards of $50 billion of swipe fees per year,” writes NACA [PDF]. “Merchants have no choice but to pass on these credit card costs to consumers in the form of higher retail prices… The main reason that there is not more awareness and outcry about this issue is that swipe fees are hidden from consumers.”

Meanwhile, a separate group of consumer advocates — including Public Citizen, the National Consumer Law Center, and our colleagues at Consumers Union — argue [PDF] that if the court rules that the New York surcharge law is unconstitutional, it could set a dangerous precedent for other important regulations.

They contend that the argument that New York’s surcharge prohibition is a regulation on speech “erases the line between protected speech and commercial conduct, and would advance the creep of First Amendment analysis into the sphere of economic regulatory activity that is properly subject to only the most deferential judicial review.”

If you accept the merchants’ argument, say these advocates, any attempt restrict commercial communications could be subject to strict First Amendment scrutiny, contrary to decades of previous SCOTUS rulings holding that commercial speech has only limited protection from government regulation.

Justices Divided

The two sides finally got their chance to go before the eight sitting SCOTUS justices today, where the divisive nature of this debate is making it difficult to predict how the court will ultimately rule.

Justice Elena Kagan was first to raise the question of whether or not this was really a restriction on speech, giving the hypothetical situation of a store that lists a price of $1, but then tells cash-paying customers “For you it’s 95 cents because I impose a surcharge for people who use credit cards.”

“Because as long as the price listed is the higher price, is the price that a credit card [customer] has to pay, as long as that’s true, you can describe it any which way you please,” she said to Deepak Gupta, the attorney representing the merchants. “And you can describe it in terms of imposing a surcharge or charging credit card customers more, and it still is not going to violate this law.”

However, Gupta countered that this is not the sort of transaction the merchants want to offer. They want to show a retail price “and then tell you that it’s going to cost a certain percentage more… to pay with a credit card.”

Justice Stephen Breyer was similarly skeptical, asking if this was really just a matter of the merchants wanting to add a surcharge when the law says they can’t.

“What’s that got to do with speech? I grant you, all business activity takes place through speech,” said Breyer. “Unless you want to say whenever a businessman is regulated in what he can do, that violates the First Amendment… because they do it through speech.”

At the core of Breyer’s concerns is the issue of what is the “regular price”? Is it the unadvertised cash price or the advertised higher price that includes the extra money tacked on to account for the swipe fees the merchant will pay?

Breyer seemed to take the stance that the merchants want to be able to advertise the lower cash price, and then hit customers with a surcharge for paying with credit. In his apparent view, the New York law is strictly a regulation on commerce, not speech.

“We all agree that the regulation of prices, the kind of price regulation you’re talking about, Justice Breyer, is economic conduct that doesn’t implicate First Amendment concerns,” acknowledged Gupta. “We also agree… that communicating price information to consumers is protected by the First Amendment and is at the heart of the commercial speech doctrine.”

Justice Samuel Alito was the first to express a sentiment that meshes with the merchant’s line of thought, saying that if their interpretation of the statute is accurate, then “what New York State has done is to force the merchant to… post a particular sticker price — namely, the higher sticker price — as opposed to the lower sticker price… So that is mandated speech. Isn’t that your argument?”

Even when Gupta bristled at the use of the term “mandated,” conceding that the New York law doesn’t actually dictate the words merchants must use, Alito continued to argue the merchants’ case, saying that “if it’s okay to post the higher price and nothing more, and if the higher price is the credit
card price… they are forcing the merchant to speak in a particular way.”

Let New York Sort It Out?

As mentioned above, the New York law actually says nothing about allowing discounts for cash; it merely forbids the use of credit card surcharges. Multiple justices pointed out that this could easily be interpreted as simply requiring one price, regardless of payment method. Justice Alito even recommended sending that question to the New York state Court of Appeals to sort out exactly what the statute means before “we plunge into this First Amendment issue.”

Attorney Eric Feigin from the U.S. Solicitor General’s Office — not representing either party in the dispute — agreed that it might be best for the state court to come up with a “definitive interpretation” of this statute, but also told the justices that his office believes that the New York law “simply requires a disclosure in dollars-and-cents form of any higher credit card price in circumstances where the merchant has decided to display the lower cash price in dollars-and-cents form.”

So in that regard, there’s nothing to stop a merchant from advertising two separate prices as “$10 cash; $10.20 credit.” Instead, his interpretation of the law is that — like the similar lapsed federal law Schneiderman references — a merchant would be barred from listing a price as something like “$10 plus 2% surcharge for credit card customers” or “$.20 surcharge per item for credit card users.”