Second Circuit upholds law against "credit surcharges" that allows "cash discounts"

Expressions Hair Design v. Schneiderman, 803 F. 3d 94 (2d Cir. 2015)

 

Somehow I missed this when it came out last September! New York General Business Law § 518 provides that “[n]o 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.” The district court enjoined this law on First Amendment grounds, and the court of appeals reversed.

 

The background: merchants pay swipe fees to credit card issuers, 2-3% of a transaction.  Merchants would like to pass these costs on to consumers using credit and let them know about the charge in order to convince them to pay cash, so they’d like to impose a “surcharge.”  A discount for cash can also be offered, but we know behaviorally it’s less effective of a frame.  It’s also plausible that people who were deterred from using credit cards would buy less (since we find it harder to spend cash than to use credit), thus dampening retail sales.  (Though presumably the merchants who want to “surcharge” will take that into account for themselves.)  Proponents of bans on surcharges also argue that they “tend to exceed the amount necessary for the seller to recoup its swipe fees, meaning that sellers will effectively be able to extract windfall profits from credit-card users.”  By contrast, cash discounts won’t be set higher than the marginal cost of credit.  (Citing my colleague Adam Levitin and spelling his name correctly this time!) Plus, because credit-card surcharges (unlike cash discounts) offer a means of increasing customers’ bills, “dishonest sellers may attempt to profit at their customers’ expense by imposing surcharges surreptitiously at the point of sale.”

 

Federal law used to ban surcharges; when that law expired in 1984, eleven states, including New York, enacted their own no-surcharge rules.  The law wasn’t very significant for a while because of no-surcharge contracts imposed by credit card issuers, but now those aren’t in effect any more because of antitrust law, and the NY AG went after a few sellers for imposing “surcharges” to listed prices.

 

Plaintiff Expressions alleged that its current policy is to charge two different prices, one for credit-card customers and one for cash customers. But it was concerned that describing this difference as a “surcharge,” or “say[ing] that credit is ‘extra’ or ‘more,’” might violate § 518. Expressions would like to charge credit-card customers 3% more than cash customers, and to display a sign that “characterize[s] the price difference as a 3% credit-card surcharge on top of the listed cash price” without “displaying the total credit-card price as a dollar figure.”

 

The court began by noting that § 518’s use of the word “surcharge” “assumes that a seller to which the statute applies will have a ‘usual or normal’ price that serves as a baseline.”  This isn’t the ultimate price charged to cash customers, but is the “regular” price.  So, “if a seller’s regular price is $100, it may not charge credit-card customers $103 and cash customers $100, but if the seller’s regular price is $103, it may charge credit-card customers $103 and cash customers $100.”  Sellers who post single prices are posting the “regular” price, and can’t charge credit-card customers more than the sticker price if cash customers aren’t also charged. But the state law, unlike the federal law before it, didn’t explicitly use the term “regular price,” and didn’t deal with the issue of whether a seller can post a double sticker price, one with the credit price and one with the cash price.

 

However, plaintiffs were seeking to invalidate the law’s prohibition on advertising a single price plus a credit-card surcharge, not just the arguable prohibition on dual sticker prices.  The court concluded that §518 was constitutional as applied to single-sticker price sellers; the double-price advertising challenge failed because §518 could readily be construed to be limited to the single-sticker context.

 

The court concluded that §518 regulated conduct, not speech.  Prices aren’t speech, though they are communicated through speech.  While advertising lawful prices is protected by the First Amendment, setting prices can be regulated directly.  “If prohibiting certain prices does not implicate the First Amendment, it follows that prohibiting certain relationships between prices also does not implicate the First Amendment.”  Plaintiffs conceded that a flat ban on any discounts or surcharges for credit-card use wouldn’t trigger First Amendment scrutiny.

 

Plaintiffs responded that, because credit-card surcharges and cash discounts “ultimately amount to equivalent differences between the price charged to credit-card customers and the price charged to cash customers,” §518 burdened speech by drawing a line based on words, rather than on economic realities.  But by its terms, §518 didn’t bar any referring to credit-cash price differentials as credit-card surcharges, “or from engaging in advocacy related to credit-card surcharges; it simply prohibits imposing credit-card surcharges.”  

 

Whether a seller is imposing a credit-card surcharge can be determined without reference to the words the seller uses to describe its pricing scheme: “If the seller is charging credit-card customers an additional amount above its sticker price that it is not charging to cash customers, then the seller is imposing a forbidden credit-card surcharge.”  Thus, the only relevant words and labels were (1) the sticker price and (2) the price charged to credit-card customers.  Those prices aren’t speech, and regulating the relationship between them didn’t regulate speech.

 

[Though I can see the argument that marking the product with the (cash) price is speech, because it’s a statement “this is the price” as well as being the price (unless there’s a credit surcharge).  It’s a performative speech act—but interestingly, it is only performative so long as the law says so.  So we could say that the law is regulating the performative part of the price: the law is specifying what the “price” is.  Without the anti-surcharge law, the seller could say “I didn’t mean to say that was the ‘price’ just because I put it on the sticker.”  But that would raise pretty obvious issues of consumer deception.  In consumer protection law, we generally don’t let sellers redefine words just because they would like to, even if there’s a small-print disclosure—what a reasonable consumer would take away is the measure.]

 

Plaintiffs erred in insisting that imposing a surcharge (an amount over sticker price) was equivalent to the words used to describe that pricing scheme, “credit-card surcharge.”  The law didn’t “favor” using the term “discount.”  It simply regulated the relationship of sticker price to the price charged to credit-card customers.  A seller who does this could call it a “discount” or a “cabbage” and would still violate the law.  A seller who offered a discount on its sticker price to cash customers could call it a “surcharge” and would be acting lawfully.  Of course, it might be more natural to use more common labels, but the fact that each pricing scheme has a label doesn’t mean it is the label.

 

Plaintiffs argued that “credit-card surcharges” were the same thing as “cash discounts” because consumers react differently to them.  (Put that way, that argument sounds counterintuitive, because you might ordinarily think that people react differently for some reason; the implicit argument is that there is a predictable cognitive error (though maybe it’s just a heuristic that is useful in many situations) and that government cannot intervene to ensure that the consumer will perceive the baseline in a particular way.)  But that argument assumed that NY had regulated the labels, and not the prices.  The presumption against content regulation doesn’t help answer the question of whether the law at issue regulates speech or conduct.  Consumers can be made unhappy lots of ways; “the mere fact that consumers react negatively to surcharges thus does not prove that surcharges are speech.”  Consumers just don’t like being charged extra, because of loss aversion.  Consumers are annoyed when the sticker price is lower than the price they’re charged. If the sticker price is $103, credit-card customers won’t be particularly annoyed by having to pay $103, even if cash customers get a discount, and nothing about that “turns on any words uttered by the seller.” [Other than the sticker price, which created the initial expectation.] “[W]e are aware of no authority suggesting that the First Amendment prevents states from protecting consumers against irrational psychological annoyances.”

 

Moreover, it’s fine to ban certain prices because of how consumers react to them.  The Supreme Court has explicitly approved price controls designed to suppress consumer demand.  The First Circuit allowed Providence to ban discounts for tobacco products based on evidence that such discounts would lead “to higher rates of tobacco use among young people.” Although sellers could have lowered list prices to achieve the same dollar amounts as the discount price, that fact doesn’t change the regulation from a price regulation to a speech regulation.  New York can likewise decide to spur demand for credit-card use without violating the First Amendment, as applied to single-sticker sellers.

 

The court of appeals also reversed the finding of unconstitutional vagueness. Section 518 plainly has a “core meaning that can reasonably be understood”: “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,” just like the lapsed federal ban.

 

In a footnote, the court noted plaintiffs’ argument that the surcharge ban is a naked giveaway to the credit-card lobby.  However, the legislature identified a number of “public-regarding” aims as well, and anyway, “a panel of this Court has recently expressed the view (that we need not address) that even unadulterated ‘economic favoritism’ is a sufficiently rational basis to justify a state law regulating economic activity,” because we don’t like Lochner.  Anyway, plaintiffs didn’t bring a rational basis challenge; the wisdom of §518 was not for the court of appeals to judge.