A New Front in the Battle Over Swipe Fees: A Constitutional Challenge to New York’s Credit-Card Surcharge Law

by Deepak Gupta

Congress stop unfair feesWhenever 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. Here are a few quotations from the press release:

"A ‘surcharge’ and a ‘discount’ are just two ways of framing the same price information,” says Adam Levitin, a Georgetown law professor who has studied no-surcharge rules. “But consumers have a much stronger reaction to ‘surcharges,’ and are less likely to use credit cards if they understand that they will have to pay more. Credit card companies know this, which is why they insist that any price difference be labeled as a ‘discount.’” Those interested can read a couple of Levitin's law review articles on this topic here and here. He's been writing in depth in this area for years.

“Swipe fees harm consumers and merchants alike,” says Ira Rheingold, Executive Director of the National Association of Consumer Advocates. “They’re like an invisible tax, funneling vast amounts of money from consumers to large banks and credit-card companies. And, worst of all, low-income consumers who pay in cash end up subsidizing rewards for high-income credit users.” 

“Swipe fees are a huge expense for us,” says plaintiff Peter Freeman of
Brooklyn Farmacy & Soda Fountain, a neighborhood ice-cream parlor in
Carroll Gardens, Brooklyn. “We just want to let our customers know
about these fees in a way that will make them pay attention. But we
can’t afford the risk that the state will prosecute us for using the
wrong words.”

Nine other states (California, Colorado, Connecticut, Florida, Kansas, Maine, Maine, Oklahoma, and Texas) have laws similar to New York’s, and challenges to those laws are expected to follow today’s action. The laws have taken on new life since this February when Visa and Mastercard, under a national class-action settlement, dropped contractual provisions prohibiting merchants from imposing surcharges. The battle is also playing out in statehouses across the country, with credit-card company lobbyists now urging more states to pass no-surcharge laws. 

The complaint can be viewed here.

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