Commenting that “Alice in Wonderland has nothing on” a New York law that prohibits merchants from imposing a surcharge on credit card purchases, a New York federal court has entered a preliminary injunction that prohibits the New York Attorney General from enforcing the law. Five merchants and their principals sought the injunction in connection with a lawsuit they filed challenging the statute’s constitutionality. (See our prior legal alert for a discussion of the lawsuit.)

Although the federal ban on credit card surcharges expired in 1984, MasterCard’s and Visa’s contractual rules continued to prohibit merchants from imposing surcharges. That prohibition ended earlier this year, however, as required by the terms of the national settlement of the numerous class actions filed against MasterCard and Visa by merchants claiming the companies had engaged in anticompetitive behavior in setting credit card interchange rates. Accordingly, “no surcharge” state laws, such as the challenged New York law, are the only remaining obstacle to surcharges for merchants accepting MasterCard and Visa credit cards.

The plaintiffs had sought a preliminary injunction based on their claims in the underlying lawsuit that New York’s law was unconstitutional because it violated their First Amendment free speech rights and the Due Process Clause of the 14th Amendment by failing to provide guidance on what speech was prohibited. The defendants had filed a cross-motion to dismiss the complaint in its entirety.

As an initial matter, the court found that, because the statute presently chilled plaintiffs’ fundamental right to free speech, the case was ripe, and because they “legitimately fear that [the law] may be enforced against them,” all of the plaintiffs had standing.

The court agreed with the plaintiffs that the law violated the First Amendment by prohibiting them from advertising their pricing in a manner that characterized the difference between the cash and credit price as a surcharge for a customer’s use of credit instead of paying with cash or by another payment method. The court declined to validate the surcharge ban as a mere disclosure statute that required an item’s credit price and cash price to be displayed with at least equal prominence. In part, this refusal was based on the earlier prosecution of a gas station owner who advertised both credit and cash prices for gasoline. It was also based in part on the court’s view that characterizing the law as a disclosure requirement departed too far from the statutory language banning surcharges. According to the court, even if the law could be so characterized, any disclosure requirement was not sufficiently tailored to the State’s concern about potential deception resulting from surcharges.

Additionally, the court concluded that, because it failed to provide guidance on what speech was prohibited, the statute was unconstitutionally vague in violation of the Due Process Clause. Finally, the court refused to dismiss the plaintiffs’ claim that the law was preempted by the Sherman Act, concluding that a Sherman Act decision on the merits would require extensive fact-finding.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs). Our attorneys―including the attorneys who joined us from the New York City litigation firm Stillman & Friedman, P.C., to form Ballard Spahr Stillman & Friedman LLP―have substantial experience in handling litigation with the Department of Financial Services and the New York Attorney General.

For more information or to address issues with New York authorities, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, James A. Mitchell at 212.223.0200 x8006 or mitchellj@bssfny.com, or Marjorie J. Peerce at 212.223.0200 x8039 or peercem@bssfny.com.


Copyright © 2013 by Ballard Spahr LLP.
www.ballardspahr.com
(No claim to original U.S. government material.)

 

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

 

 

 

 

 

 

 

 

 

 

 

 

 


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