Judge Rakoff Strikes Down New York’s Credit-Card Surcharge Law

by Deepak Gupta

Back in June, I blogged about my firm's constitutional challenge to New York's credit-card surcharge law — a law that aims to protect credit card company profits by preventing merchants from communicating the true cost of credit to consumers.  

This morning, U.S District Judge Jed Rakoff issued a fantastic 35-page opinion agreeing with our challenge in every respect and holding 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. The first few lines of the opinion provide a nice overview:

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.

Here's the summary of the case that I posted here back in June.

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.

This morning, our firm (Gupta Beck) 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, has been assigned to U.S. District
Judge Jed Rakoff.

Our principal claim is that New York’s law violates our clients'
constitutional right to free speech and that the state is, in effect,
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.

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