Under NY GBL § 518, a vendor who wants to impose a surcharge for using a credit card to compensate for the credit card companies’ surcharges risks criminal prosecution if it labels its credit card price a surcharge rather than advertising that it offers a discount for using cash. The court found this restriction unconstitutional. Section 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.” Everyone agreed, however that the statute didn’t bar “discounts” for cash.
A surcharge for credit and a discount for cash are, in theory, equivalent. But consumer psychology is different: “consumers perceive credit-card surcharges negatively as a kind of loss or penalty, while cash discounts are perceived positively as a kind of gain or bonus.” (Citing, inter alia, my colleage Adam Levitin—albeit misspelling his name.) Plaintiffs argued that “surcharge” was “an accurate and effective way to convey to consumers that paying with credit is actually more expensive than paying with cash,” given that the prices charged to merchants by credit card companies are among the largest and fastest-growing expenses for some merchants. (Citing Levitin again.) Using “surcharge” would, they argued, make consumers more likely to notice the fees and act to avoid them, producing downward pressure on the credit card fees, known as “swipe fees.” When notice of surcharges was permitted in Australia, swipe fees there declined significantly. Without using surcharges labeled as such, “some retailers cannot effectively call consumers’ attention to the price differences between cash and credit, and therefore must charge higher headline prices for everyone.” Thus, surcharge bans force cash users to subsidize credit card users’ purchases, and this is a problem insofar as cash users tend to be disproportionately poor and minority. The yearly subsidy from cash-using households has been estimated at $149, with $1333 transferred to each card user.
Defendants responded that the surcharge ban protected consumers from unfair surprise and deception, because consumers “tend to plan and anchor their expectations around the advertised sticker price of a given item they intend to purchase.” A consumer who later learns of a discount isn’t harmed, but if she learns of an additional charge for using credit, her expectations can be frustrated.
Credit card companies used to ban price differences by contract. Then Congress amended TILA to bar that practice, but enacted a ban on using the word surcharge, as GBL § 518 did. That law lapsed in 1984, which led the credit card companies to lobby states to enact similar laws, which was the genesis of § 518; credit card companies also barred use of “surcharge” by contract. In 2013, Visa and MasterCard agreed to drop these prohibitions as part of a larger antitrust settlement.
The plaintiff businesses paid swipe fees and would like to charge higher prices for credit. But they contended that framing this as a cash discount “would make advertised prices look higher than they are, without making it transparent that the higher price would be due solely to credit card transaction costs -- precisely the information [they] wish to convey to [their] consumers.” Four of the five businesses thus simply charged the same price for all transactions. The fifth used to post a sign that informed customers of a 3% additional charge for credit, until informed by a lawyer-customer that this was illegal. It still charged more for credit, without characterizing that as a surcharge or extra charge for credit as opposed to a discount for cash.
Defendants argued that § 518 was an anti-fraud law barring “surcharges” that were increases over the “regular price,” and that the “regular price” was the price communicated to consumers. Thus, defendants argued, if the credit card price was displayed at least as conspicuously as the cash price, then the credit card price would be the “regular price” and there’d be no violation of the law. Some of the plaintiffs, defendants argued, didn’t propose to advertise credit card prices any less prominently than cash prices, and thus lacked standing. However, several plaintiffs did want to advertise their surcharges only as a percentage fee on top of their cash prices, and would violate defendants’ reading of the statute. In any event, the court rejected defendants’ “rather convoluted interpretation” of the statute, which on its face simply banned surcharges and thus chilled retailers from characterizing their prices as surcharges without providing guidance on how prominently prices had to be displayed. The court found that there was a real risk of prosecution, as New York had enforced the law before, even against someone who testified that his signs clearly stated both the cash price and the credit price, and against people who didn’t post prices but only announced them orally. While the (lapsed) federal definitions were designed to permit two-tier pricing systems as long as consumers were exposed to the highest price when they saw a tagged or posted price, New York hadn’t adopted those definitions.
After Sorrell v. IMS Health, content-based restrictions on speech require heightened scrutiny and are presumptively invalid, even for commercial speech (even though that category is defined by its content). Under Caronia, criminal laws warrant even more careful scrutiny. Plaintiffs argued that §518 restricted speech based on its content: describing an extra charge as a surcharge. Defendants responded that §518 only regulated nonexpressive conduct, imposing a surcharge, and that in the alternative it only imposed a disclosure requirement, which required only rational basis review.
The court agreed with the plaintiffs. The law drew the line between prohibited surcharges and permissible discounts based on words and labels, not economic realities. Anyway, even under defendants’ reading, the law still violated the First Amendment. Though sellers could set the credit card price at any level they wanted, that was the conduct at issue; the speech was in how they communicated that price. “Pricing is a routine subject of economic regulation, but the manner in which price information is conveyed to buyers is quintessentially expressive, and therefore protected by the First Amendment.” (And the manner in which price information is conveyed can pretty easily misleading, given the many ways in which prices can be gamed, but we’re not worrying about that right now.)
The argument that § 518 was just a disclosure rule also failed. Under the law, disclosure wasn’t sufficient; the statute also barred sellers “from advertising their cash price in a way that causes consumers to perceive it as the regular, baseline price against which all other prices are measured.” By comparison, Minnesota’s surcharge law simply required a seller to inform the buyer of the surcharge both orally at the time of sale and by a conspicuously posted sign. (Of course, that doesn’t really deal with the bait and switch issue of the consumer who’s already decided to buy then having to accept the higher price or leave, unless we assume—contrary to most of what we know about consumer behavior—that consumers read those signs. Compare the litigation about the practice of posting “prices,” then charging consumers ablanket percentage over the posted price at checkout no matter what form of payment they used—the stores using that practice claimed that they did disclose it on signs in the store, but unsurprisingly it was still deceptive. A real disclosure law would require posting cash price/credit price together.) The court reasoned that a seller “who fully complied with Minnesota’s disclosure requirement would still violate defendants’ reading of section 518 if it displayed its cash price one iota more prominently than the credit card price.” That makes it an anti-disclosure statute, because it bars disclosures of cash prices “even marginally more conspicuously” than credit prices. (By that standard, the FTC’s disclosure guidelines seem to be anti-disclosure guidelines as well, since they bar adding distractors to an ad that divert consumers from any required disclosures.) Because § 518 was an outright bar on speech, the relaxed standard of Zauderer was inapplicable.
Thus, intermediate scrutiny applied, and § 518 failed it. The court therefore didn’t reach plaintiffs’ argument that listing the prices of their goods and services wasn’t commercial speech, but shockingly indicated that it was inclined to agree. Though commercial speech generally “does no more than propose a commercial transaction,” or is “related solely to the economic interests of the speaker and its audience,” and though price information “no doubt proposes a transaction and relates to economic interests,” this was “more than just a debate about how best to sell toothpaste,” whatever that means. Plaintiffs wanted to explain why prices were at the level they were and who was responsible for that. “Given current debates over swipe fees and financial regulation more generally, those questions have a powerful noncommercial valence” (emphasis added). (WTF? Look, there are debates about whether fluoride is dangerous and how to preserve dental hygiene “more generally”; that doesn’t mean “our toothpaste has flouride” is noncommercial speech. This interpretation of “does no more than propose a commercial transaction” empties the category, since all proposals of commercial transactions implicitly and necessarily make arguments about why a person ought to have certain preferences or satisfy those preferences in a certain way.)
Anyhow, intermediate scrutiny: dual pricing was lawful in itself, and the speech covered was non-misleading. Though surcharges might be misleading if they were hidden or inadequately disclosed, the cases teach that potentially misleading information can’t absolutely be banned if it can be presented in a nondeceptive way. There was nothing “inherently misleading” about describing a price difference as a credit surcharge or about displaying a credit price “with marginally less prominence than the cash price.” Truthfully and effectively conveying the true costs of using credit cards could actually make consumers more informed rather than less.
(Look, I’m actually hugely sympathetic with the outcome here, except for that endorsement of displaying a credit price less prominently. But this rationale is pretty misleading: the court is equivocating about who bears that “true cost.” If I’m using credit, the “true cost” is a big benefit to me, according to the court’s own evidence. It’s the dynamic effects that make a difference, once retailers feel that they can get away with charging a “surcharge” where they couldn’t be bothered to give a “discount,” given the realities of consumer behavior. And those realities, not for nothing, indicate that consumers are not computers, which means we ought to recognize that displaying the credit price less prominently could easily confuse consumers even if it “shouldn’t”—the use of “discount for cash” instead of “surcharge for credit” shouldn’t affect consumers, but it plainly does.)
Compared to credit card surcharges aren’t misleadingly presented, §518 “perpetuates consumer confusion by preventing sellers from using the most effective means at their disposal to educate consumers about the true costs of credit-card usage.” Thus, the law doesn’t directly advance consumer protection interests.
Also, §518 was riddled with numerous “exemptions and inconsistencies [that] bring into question the purpose” of the statute. The bait-and-switch concern offered by defendants applied only to credit card surcharges, not other additional charges, and thus the law didn’t actually protect them, “since handling charges, shipping costs, service fees, processing fees, ‘suggested tips,’ and any number of other types of additional charges -- which consumers may or may not be able to take steps to avoid -- may still be added on top.” Plus, New York exempted itself and some favored utilities from the statute, indicating that it wanted to escape the blame of higher prices but didn’t want to let other sellers do so. “Defendants offer no explanation for why credit-card surcharges are somehow less deceptive when imposed by the Water Board, for example, than when imposed by ordinary commercial retailers like the plaintiffs.”
In addition, §518 was far broader than necessary to serve anti-fraud goals; New York could easily have regulated only surcharges that were deceptive or misleading, or it could have used Minnesota’s model. Anyway, New York already had laws barring false advertising and deceptive acts and practices. Thus, § 518 was overbroad and violated the First Amendment.
It was also impermissibly vague, since it failed to provide adequate notice of what was barred, as defendants interpreted it. Making liability turn on the labels sellers used to describe their prices was impermissible because careful or sophisticated sellers could avoid liability by using “discount for cash” while more careless ones would be liable for using “credit price.” (I don’t know why this is vague as opposed to credit card-company-favoring but ok.) The narrowing interpretation offered by defendants—credit prices had to be displayed at least as prominently as cash prices—would present a closer question, but was too far from the statutory text to matter.
The court found that whether §518 was preempted as anticompetitive by the Sherman Act presented a factual question that couldn’t be resolved at this stage of the case.