A New York state law that prohibits merchants from imposing a surcharge on credit card purchases does not violate the First Amendment or the Due Process Clause, the U.S. Court of Appeals for the Second Circuit recently ruled. It held that the state only regulates conduct, not speech.

The lawsuit, which was filed by five merchants and their principals, alleged that New York’s law is a restriction on speech that violates the plaintiffs’ First Amendment rights because it does not allow merchants to tell customers that they are paying more for using credit than for using cash or another payment method. The complaint acknowledged that New York law permits merchants to offer a discount to customers for not using credit.

The plaintiffs claimed, however, that labeling the price differential between a cash and credit purchase price as a “discount” rather than a “surcharge” is less effective in communicating to customers that credit cards are a more expensive means of payment and therefore less likely to deter a consumer from using credit. They also alleged that the law violates the Due Process Clause of the 14th Amendment because it does not provide guidance on what speech is prohibited.

The Second Circuit’s analysis proceeded from its view that the plaintiffs were seeking First Amendment protection for two distinct pricing schemes. Under the first scheme, which it labeled a “single sticker-price” scheme, a merchant posted only a single price for its goods and services but charged a higher price to credit-card customers. Under the second scheme, which it labeled a “dual-price” scheme, a merchant posted two different prices—one for credit-card customers and one for cash customers. 

Reversing the district court, which had entered a judgment declaring the New York law unconstitutional, the Second Circuit ruled that, as applied to the single sticker-price scheme, the law did not implicate the First Amendment because it regulated a pricing practice, not speech. According to the Second Circuit, the law “[b]y its terms…does not prohibit sellers from referring to credit-cash price differentials as credit-card surcharges, or from engaging in advocacy related to credit-card surcharges; it simply prohibits imposing credit-card surcharges.” The Court concluded that the plaintiffs were “simply wrong” in 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 declined to reach the merits of the plaintiffs’ claim, that as applied to a dual-price scheme, the New York law violated the First Amendment because a merchant using that scheme would fear prosecution for how it characterized the price difference to its customers. According to the plaintiffs, a merchant might risk prosecution merely for referring to the price difference as a “surcharge” or an “extra charge” for paying with a credit card “even though its customers do effectively pay more for using a credit card.” (emphasis supplied). Observing that the New York courts had not yet addressed the law’s scope, the Second Circuit was unwilling to speculate that they would construe the law to apply outside of the single sticker-price context and abstained from addressing the plaintiffs’ as-applied challenge.

The Second Circuit also ruled that the district court erred in holding that the New York law was unconstitutionally vague in violation of the Due Process Clause. In the Court’s view, the law’s “core meaning” could be “readily” understood by sellers posting single-sticker prices, namely, that they “may not charge credit-card customers an additional amount above the sticker price that is not also charged to cash customers.” With respect to the plaintiffs’ argument that the law’s alleged vagueness could chill constitutionally protected conduct because it was unclear how far the law extended (and thus how much constitutionally protected conduct it reached), the court again concluded that abstention was appropriate to allow New York courts to construe the statute’s scope. 

In addition to New York, other states with “no surcharge” laws include California,  Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, Oklahoma, and Texas. The California, Florida, and Texas laws have also been the subject of First Amendment challenges. Federal district courts in Texas and Florida have rejected the challenges to those states’ laws while a California federal district court has ruled that California’s law is unconstitutional.

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.

If you have questions, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky, Marjorie J. Peerce, or Bowen "Bo" Ranney


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