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New York's Ban on Credit Card Surcharges Saved by 2nd Cir. Ruling

By Casey C. Sullivan, Esq. on October 01, 2015 | Last updated on March 21, 2019

Your credit is once again as good as gold in New York, thanks to a recent ruling by the Second Circuit. The state's ban on credit card surcharges is not unconstitutional, the court ruled Tuesday. Under the law, companies cannot impose a surcharge on a customer who chooses to pay by credit card rather than cash, check, or gold doubloons.

That law, in place since 1984, was invalidated two years ago when a district court found that it violated merchants First Amendment and due process rights. The Second Circuit disagreed, however, reviving the 31 year old law.

Fighting Over Credit Card Charges

Credit cards aren't free. Consumers regularly get hit with absurd interest rates while merchants are charged each time a shopper swipes a card. Those charges to merchants, known as "swipe fees," typically cost two to three percent of the transaction. As a result, plenty of stores prefer if you'd pay in cash. As an inducement, some apply a credit card surcharge in order to recover fees. Not only do those surcharges attempt to recoup swipe fees, they also often exceed them, the Second Circuit found.

New York banned the practice in 1984, after a similar federal prohibition failed. Almost three decades later, a coalition of small businesses, from an upstate unisex hair salon to a Brooklyn soda shop, sued, arguing that the prohibition on surcharges violated their constitutional rights.

Their arguments convinced Judge Jed Rakoff, otherwise famous for objecting to the SEC's bank-friendly settlements. Judge Rakoff found that the ban violated the merchants' free speech, causing "customer confusion by preventing sellers from using the most effective means at their disposal to educate consumers about the trust cost of credit-card usage."

Confusing Pricing for Speech

The merchants alleged that the surcharge ban prevented them from posting one price, then charging two prices (a cash price and a surcharge price) on those items, which would violate their First Amendment rights. Alternatively, they want to post two prices: one for cash, one for credit.

However, the law doesn't regulate speech, the Second Circuit found, but commercial conduct. It is the surcharging that is prohibited -- preventing the listing of illegal prices is simply a corollary of that, one which does not touch on First Amendment rights. Further, the fact that cash discounts were allowed, but credit surcharges were banned, was not a limit on what merchants communicate to customers.

As the Court noted, the central flaw in the merchants' argument was "their bewildering persistence in equating the actual imposition of a credit-card surcharge ... with the words that speakers of English have chosen to describe that pricing scheme."

The Second Circuit similarly rejected the merchants' argument that the surcharge ban was unconstitutionally vague under the Due Process Clause. The law was easily understood, the court said: You may not charge credit card users a surcharge on the sticker price of goods.

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