Digital Transactions Authoritative, insightful and timely information for payments professionals
By Jim Daly
An injunction that puts New York State’s ban on merchants’ credit card surcharges on hold could be a prelude to a bigger legal assault on states’ surcharge restrictions. If pro-surcharging merchants prevail, their actions could add some oomph to a provision in the pending settlement of unrelated litigation over interchange that nominally would permit surcharges but in practice is nearly meaningless to regional and national retailers.
Last week, U.S. District Judge Jed S. Rakoff in Manhattan issued a preliminary injunction barring New York from enforcing its law banning merchant surcharging of credit card transactions while the case is litigated. The injunction followed Rakoff’s ruling that the ban is unconstitutional because it violates the plaintiffs’ First Amendment right to freedom of speech by restricting what they can communicate about pricing.
Rakoff’s ruling came from a lawsuit filed in June by five small businesses and their owners against New York Attorney General Eric T. Schneiderman and the district attorneys of three counties. At the beginning of his written decision, the judge ridiculed what he called the “virtually incomprehensible distinction” in New York law between permissible discounts for payments by cash or debit card but impermissible credit card surcharges.
“Alice in Wonderland has nothing on Section 518 of the New York General Business Law,” Rakoff wrote. “Under the most plausible interpretation of that section, if a vendor is willing to sell a product for $100 but charges $102 when a purchaser pays with a credit card, the vendor risks prosecution if it tells the purchaser that it 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.”
Rakoff agreed with the contention of the merchants, who wanted to surcharge credit card transactions and tell their customers about their policies but were forbidden from doing so, that the law is unconstitutionally vague.
“He’s a judge who gets right to the point,” says plaintiffs’ attorney Deepak Gupta, founder and principal of the Gupta Beck PLLC law firm in Washington, D.C. “This is one of our main arguments—it’s really just semantics. A surcharge and a discount are just different labels for the same transaction.”
The New York Attorney General’s office did not respond to a Digital Transactions News request for comment. A Schneiderman spokesperson told the Bloomberg news service that his office was reviewing the decision and considering its next step. Gupta says he expects the state to appeal.
The New York development is giving proponents of card surcharges hope that similar bans in other states might be overturned. Some 11 states prohibit surcharges, which besides New York include such populous ones as California, Texas, Florida and Massachusetts. In April, Utah enacted a ban and Texas extended its surcharge prohibition to debit and prepaid cards, according to the National Conference of State Legislatures.
A number of states also are considering surcharge restrictions, but Rakoff’s decision, should it stand, seemingly makes existing and future bans vulnerable. “We are looking into the other states,” Gupta says. “The laws in these other states are indistinguishable from New York’s. Given the judge’s decision, those laws are unconstitutional as well.”
How merchants will behave if the bans fall is unclear. The pending settlement of the big credit card litigation being adjudicated in U.S. District Court in Brooklyn, N.Y., just a few miles from Rakoff\'s courtroom, eases restrictions on the practice by Visa Inc. and MasterCard Inc. The non-damages part of the $7.2 billion agreement, including the surcharging changes, has already taken effect even though the presiding judge, John Gleeson, has yet to give final approval to the settlement.
Opponents of the controversial settlement say the revised surcharging rules are still cumbersome and, further, that freedom to surcharge is meaningless to any business operating in a state with a statutory ban because it effectively excludes multi-state retailers.
Legal issues aside, many merchants will not surcharge for fear of alienating customers. “Major retailers have been very clear the past several months, since surcharging came up in the lawsuit settlement proposal, that they have no interest in surcharging,” a spokesperson for the Washington-based National Retail Federation says by email.
Surcharging might be more attractive to small retailers with just one or only a few locations in a state that permits it because they pay higher card-acceptance costs than high-volume merchants. Gupta says none of his clients has yet instituted a surcharge because their merchant contracts only recently began reflecting revised network rules as a result of the settlement, and they still need to have their point-of-sale systems updated to facilitate surcharging. In addition, he’s cautioning clients that despite their initial victory, the case is not over.
“The decision just came down; obviously we’re not advising our clients to make any rash decisions,” he says. “This isn’t going to happen overnight.”
A spokesperson for the Electronic Payments Coalition, a Washington-based lobbying group that often speaks for the card networks and banks on interchange and related issues, says the EPC has not taken a position on the states’ legislation. “But we believe it is important that checkout fees remain transparent and consumers are protected,” the spokesperson says by email.
