A Supreme Court Decision Favors Merchants in Latest Round in Battle Over Surcharging

Merchants won a skirmish on Wednesday in their long-simmering battle with the card networks over acceptance costs with a decision by the U.S. Supreme Court to void a lower-court ruling that upheld a state law banning credit card surcharging.

The decision, in which all eight Justices concurred, sends the case back to the U.S. Court of Appeals for the Second Circuit for reconsideration. The appeals court had ruled in favor of the state of New York, which argued its ban on credit card surcharges is a price regulation. The merchants in the case, Expressions Hair Design v. Schneiderman, say the New York law is instead an unlawful restriction on free speech, since it effectively prevents them from advertising the extra cost they incur to accept credit cards. Ten states including New York ban surcharging.

The Supreme Court’s opinion, written by Chief Justice John Roberts, sympathized with the merchants’ argument and appeared to lay down doctrine concerning whether such statutes go beyond price regulation to violate free-speech rights. “In regulating the communication of prices rather than prices themselves, §518 regulates speech,” Roberts wrote, referring to the New York statute in question. The New York law permits price discounts but, the plaintiffs argue, leaves unclear how they can communicate discounts without the appearance of advertising a surcharge.

While the ultimate outcome of the case remains undecided, merchant groups were quick to cheer Wednesday’s opinion, citing it as an important step toward controlling the costs of accepting credit cards. “Today’s ruling is a clear stand in favor of the free speech protections of the First Amendment,” said Mallory Duncan senior vice president and general counsel for the National Retail Federation, a Washington, D.C.-based trade association, in a statement. “The nation’s highest court has recognized that whether a merchant chooses to communicate credit card fees through a surcharge or through a cash discount is a matter of speech.”

Mastercard Inc.did not immediately respond to a request for comment on the Supreme Court’s opinion. Visa Inc. refused to comment. Both networks have long restricted surcharging as prejudicial to their card brands, but in a historic antitrust settlement in 2012 they agreed to allow merchant surcharging where the practice is not restricted by state law. That concession, however, is now shrouded in doubt along with the entire antitrust case. Earlier this week, the Supreme Court refused to hear an appeal by the card networks and some merchants, sending the case back to a federal court in Brooklyn, N.Y., where it was originally decided.

With Wednesday’s ruling, merchants hope they may finally have made progress toward gaining negotiating leverage with the networks and bank card issuers over interchange rates, the key pricing regime in which merchant acquirers pay a fee on each transaction to card issuers and then pass the cost on to their client merchants. “While merchants don’t want to surcharge, having the ability to do so would be an important negotiating tool in convincing the card industry to charge reasonable fees instead of continuing to drive up consumer prices through this skyrocketing hidden tax,” said the NRF’s Duncan in his statement.

Meanwhile, the opinion has also encouraged firms that specialize in technology that calculates card-acceptance costs for merchants and automates service-fee and surcharge policies. “With this result, we’re confident predicting that more opportunity is on the horizon, and the CardX team looks forward to serving additional markets,” said Jonathan Razi, president of CardX, a Chicago-based startup that was founded in 2013. Razi’s statement appeared in a blog post Wednesday after the Supreme Court decision was announced.

Arguments before the high court in Expressions Hair Design v. Schneiderman were made in January.