Cards in Courts: NY Surcharge Battle Ends, Amex Claims Tossed

Financial Services Law

The beginning of 2019 brought updates in the world of payment cards, with what appears to be an end to the long-running litigation over credit card surcharges in the state of New York.

In addition, American Express scored a victory with the dismissal of several claims in an anti-steering action filed against it, leaving just one claim for an upcoming antitrust trial scheduled for later this year.

What happened

When payment card networks dropped the prohibition on credit card surcharges as part of the 2012 settlement of the merchant interchange litigation, merchants in ten states—California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, New York, Oklahoma and Texas—were unable to take advantage of the change due to existing state laws banning credit card surcharges.

In response, groups of merchants in California, Florida, New York and Texas filed lawsuits. The New York businesses and their owners claimed Section 518 of the General Business Laws violated their First Amendment free speech rights, requesting the statute be declared unconstitutional.

A federal district court sided with the merchants and struck down the law. But the U.S. Court of Appeals for the Second Circuit reversed, holding that Section 518 regulates conduct, not speech. Prices, although necessarily communicated through language, are not “speech” within the meaning of the First Amendment, the court said.

However, other federal appellate courts reached different conclusions when considering other state surcharge laws. For example, the Eleventh Circuit ruled that Florida’s prohibition on imposing a surcharge on credit card purchases while simultaneously permitting a discount for cash runs afoul of the First Amendment.

Recognizing the split, the Supreme Court granted certiorari in the New York case and reversed. Section 518 must be analyzed as a speech regulation under the First Amendment, the justices said.

On remand, New York’s highest court answered a certified question from the Second Circuit to rule that a merchant complies with the statute so long as it posts the total dollars and cents price charged to credit card users.

Having received some clarity on acceptable language under state law, the merchants informed the attorney general’s office that they had decided not to pursue their claims or any of the relief sought in their complaint, instead electing to dismiss the action with prejudice.

“Given plaintiffs’ unilateral decision to abandon their claims, defendant-appellant Attorney General James moves the Court to vacate the final judgment below, remand with instructions to the district court to dismiss the complaint with prejudice, and dismiss the current appeals as moot,” according to a joint motion filed in the case.

In other payment card news, American Express was able to narrow the claims against it in a Sherman Antitrust Act case pending in New York federal court. The consolidated litigation involves groups of merchants challenging the network’s anti-steering rules, or Non-Discrimination Provisions (NDPs).

The NDPs prevent the merchants from differentially pricing the use of payment cards, stating a preference for any form of payment, or allowing the retail customer to use different payment cards on differing terms or conditions established by the merchant. The merchants argued that the restraints are anticompetitive because they impede competition among payment card networks and nullify the operation of the price mechanism. As a result, merchant fees for the network are higher than they otherwise would be, they told the court.

In their complaint, the merchants sought to proceed to trial on four formulations of the relevant market: a one-sided all-general purpose credit card (GPCC) market, a one-sided Amex-only market, a two-sided all-GPCC market and a two-sided Amex-only market.

The network moved for summary judgment on three of the four markets, leaving the two-sided all-GPCC market definition claim to move forward. U.S. District Judge Nicholas G. Garaufis granted the motion, tossing claims based on the other three markets.

Key to the court’s decision was the convoluted procedural history of the litigation. The merchants originally filed multiple lawsuits in 2008, and the cases progressed through pretrial motions until October 2010, when the Department of Justice (DOJ) and attorneys general of 18 states filed suit against Amex, Visa and Mastercard with nearly identical allegations to those in the merchant litigation. Visa and Mastercard entered into a consent decree with the DOJ, but Amex declined to settle.

The government action proceeded to a bench trial, and in February 2015, the court found by a preponderance of the evidence that the NDPs challenged by the government violated Section 1 of the Sherman Act. Amex appealed, and the Second Circuit reversed. The Supreme Court granted cert and affirmed the federal appellate panel, holding that both sides of the card network platform should have been included when defining the relevant market. The justices ordered that judgment be entered in favor of Amex.

Matters then resumed in the merchant litigation. Emphasizing the doctrine of stare decisis, Judge Garaufis said the Supreme Court decision left the merchants unable to pursue either claim based on a one-sided market definition. The justices could not have been more clear in their holding, he said, ruling that “credit-card networks are two-sided platforms.”

“It strains credibility for the [merchants] to claim that this case is essentially dissimilar from the Government Action,” the court said. “[T]he facts in the [merchants’ litigation] are identical to those in the Government Action. Because the Supreme Court has already answered the exact question presented to this court with respect to the same defendant, the court may not find for the [merchants] on the basis of their one-sided market allegations.”

As for the merchants’ theory that Amex restrained competition within a two-sided market made up only of its own network, the court said an antitrust claim cannot survive where the defendant has economic power in a proposed market due exclusively to the contractual arrangements it has entered into with a distinct class of consumers.

The merchants would be permitted to steer customers away from using Amex cards but for the inclusion of the NDPs in the contracts that the merchants voluntarily entered into, Judge Garaufis wrote. The only thing allegedly restraining competition for transactions with Amex, and therefore distinguishing those transactions from transactions using any other credit card, are the NDPs.

At this juncture, the merchants’ claims foundered, the court said, due to their attempt to prove market power by reference to “critical loss analysis.” The merchants told the court that Amex’s precontract power that compelled merchants to accept the terms of their cardholder agreements—including the NDPs—arose from the fact that cardholders insist on paying with their Amex cards and would shop elsewhere to use their card of choice.

“As Amex correctly identifies, this is cardholder insistence by another name,” the court said. In the government action, the Second Circuit stated that “‘[c]ardholder insistence results not from market power, but instead from competitive benefits on the cardholder side of the platform and the concomitant competitive benefits to merchants who choose to accept Amex’s cards.’ That statement compels the court’s rejection of the [merchant’s] Amex-only market allegations based on critical loss analysis.”

Finding that precedent foreclosed all three of the challenged market theories, Judge Garaufis granted summary judgment in favor of American Express.

To read the joint motion in Expressions Hair Design v. Underwood, click here.

To read the memorandum and order in In re American Express Anti-Steering Rules Antitrust Litigation, click here.

Why it matters

With the dismissal of the case challenging Section 518, merchants may begin adding surcharges to credit card purchases in New York as long as the total dollars-and-cents price being charged is disclosed to consumers. However, the picture remains less clear in other states. While a d├ętente has been reached in New York, litigation continues on state surcharge laws in California, Florida and Texas. Merchants also remain in a state of limbo as to whether the district court overseeing the credit card network litigation will approve the second attempt at a settlement with Visa and Mastercard.

And the practical question becomes: Will New York merchants actually begin adding a surcharge to credit card purchases? Even in states without anti-surcharge laws, many merchants have been reluctant to impose such fees, which of course are unpopular with consumers, resulting in fewer sales.

In the antitrust action, the merchants had their claims reduced to just one market theory that will move forward against Amex later this year.