Chicago Business Litigation Lawyer Blog
Whenever consumers use credit cards, merchants pay swipe fees, which are typically passed along to all consumers in the form of higher prices. American consumers pay the highest swipe fees in the world—eight times those paid by Europeans. These fees, which amount to about $50 billion annually, are highly regressive: low-income and minority cash customers end up subsidizing high-income credit customers. Unfortunately, most consumers don’t know about the fees. And even those who do typically can’t do anything about them.
Merchants are, however, permitted to charge different prices to consumers who pay with credit versus cash, which would give consumers the option to choose a lower-cost payment method in exchange for lower prices. The credit-card lobby has long fought to stop merchants from being able to implement such dual pricing. Under state laws adopted at the industry’s behest, the price difference must be described as a “discount” for cash, not a “surcharge” for credit—even though they’re mathematically identical. In New York, a merchant who uses the wrong word could face criminal prosecution.
A number of New York businesses filed a lawsuit challenging the constitutionality of the New York state law forbidding merchants from imposing a “surcharge” on any customer who pays with a credit card. Along with the Friedman Law Group, we represent five New York merchants: a hair salon, an ice-cream parlor, a liquor store, a martial-arts academy, and an outdoor furniture store. The suit, filed in federal court in Manhattan, was assigned to U.S. District Judge Jed Rakoff.
The main claim is that New York’s law violates businesses’ constitutional right to free speech and that New York state is thus seeking to enforce the credit-card industry’s preferred speech code. Merchants, we contend, should be able to use whatever words are most effective to inform their customers about the high cost of using credit cards, and consumers have a right to receive that communication.
United States District Judge Jed Rakoff issued a lengthy and well reasoned opinion agreeing with the challenge in all respects. The Court held that the law violates the First Amendment and is void for vagueness. The opinion provides a detailed analysis of not only the constitutional arguments, but also the behavioral economics of no-surcharge rules and their regressive economic effect that harms consumers and results in significantly higher prices.
The beginning of the opinion states:
Alice in Wonderland has nothing on section 518 of the New York General Business Law. Under the most plausible interpretation of that section, if a vendor is willing to sell a product for $100 cash but charges $102 when the purchaser pays with a credit card, the vendor risks prosecution if it tells the purchaser that the vendor is adding a 2% surcharge because the credit card companies charge the vendor a 2% “swipe fee.” But if, instead, the vendor tells the purchaser that its regular price for the product is $102, but that it is willing to give the purchaser a $2 discount if the purchaser pays cash, compliance with section 518 is achieved. As discussed below, this virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 unconstitutional.
You can view the opinion here.