Ruling on Surcharge Law, NY Court Adds to Murky Situation

Financial Services Law

In the latest piece of the surcharge controversy, New York’s highest court interpreted state law to hold that a merchant complies with the statute so long as it posts the total dollars and cents price charged to credit card users.

The opinion—answering a certified question posed by the U.S. Court of Appeals for the Second Circuit in seeking clarification of what constitutes a surcharge—adds to the current state of confusion for merchants, already waiting to see whether the court will approve the second attempt at a settlement in separate, long-running litigation with two card networks that would permit surcharges.

What happened

In response to the expiration of the provision in the federal Truth in Lending Act (TILA) that prohibited credit card surcharges, the New York legislature enacted Section 518 of the General Business Law, which states: “No seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check or similar means. Any seller who violates the provisions of this section shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.”

The New York law took effect in 1984 along with similar statutes in ten other states: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, Oklahoma and Texas. Enforcement of the New York law was limited over the years, largely due to card network rules that already prohibited surcharges on credit card transactions.

Surcharges on credit card sales were permitted for the first time as part of a settlement to long-standing litigation brought by merchants against the card networks. In response, in 2013, a group of New York businesses filed suit challenging Section 518. The plaintiffs claimed the law violated their First Amendment free speech rights and requested it be declared unconstitutional based on the lack of clarity as to how a merchant was permitted to express the price. The word “surcharge” is not defined in the statute. The challenge the courts faced was whether two-tiered pricing violates the statute and what constitutes a permitted discount from the regular price versus a prohibited surcharge. 

A federal district court sided with the merchants and struck down the law, but a panel of the U.S. Court of Appeals for the Second Circuit reversed. Section 518 does not regulate speech, the court held—it regulates conduct.

Other federal courts also were asked to consider state surcharge laws, including the Ninth Circuit, which held that California’s prohibition on imposing a surcharge on credit card purchases ran afoul of the First Amendment.

Due to a split in the decisions, the Supreme Court granted certiorari in the Second Circuit case. The justices vacated and remanded, holding that the statute must be analyzed as a speech regulation under the First Amendment.

On remand to the Second Circuit, the federal appellate panel faced a narrower question: whether a “single-sticker-price scheme” violates Section 518. Some of the merchants stated that they wanted to post a single price for their goods and services and then display the credit card surcharge to be imposed (either as a percentage of the base price or as a dollar amount) alongside that single price. For example, a merchant might post a price of $10 for an item but note “with roughly equal prominence” that a 3 percent surcharge would be imposed if a credit card were used.

Uncertain about the state law, the Second Circuit certified a question to New York’s highest court: whether a merchant complies with Section 518 if it posts the total dollars and cents price charged to credit card users.

The New York Court of Appeals answered in the affirmative. Section 518 was modeled on the former provision of the TILA, and the “meaning of that legislation is the key to the certified question in this case,” the court said.

“The purpose of the federal statute is clear,” the court wrote. “It was intended to ensure ‘that consumers will be seeing at least the highest possible price they will have to pay when they see a tagged or posted price.’ … In other words, the concern of Congress was the prohibition of deceptive marketing.”

New York lawmakers had a similar goal in mind, the court explained, concluding that Section 518, like its federal precursor, permits differential pricing but requires that a higher price charged to credit card users be posted in a total dollars and cents form. In that way, consumers are told the highest price they will have to pay when they see a tagged or posted price and do not have to engage in arithmetic.

Merchants are also permitted to use terms such as “surcharge,” “additional fee” or “extra cost” to communicate that the credit card price is higher than the cash price, the court added.

“By disclosing the total dollars and cents price charged to credit card users, a merchant complies with the statute,” the court wrote. “The process by which the merchant characterizes the higher amount is irrelevant to the statutory requirement. In short, merchants are free to call the price differential anything they wish without fear of prosecution under the statute.”

Therefore, the statute prohibits plaintiffs’ proposed single-sticker-price scheme, which did not express the total dollars and cents credit card price and instead required consumers to calculate the price.

Evidencing the continuing lack of clarity, the majority opinion was followed by a concurrence, a concurring/dissenting opinion and a dissent.

To read the opinion in Expressions Hair Design v. Schneiderman, click here.

Why it matters

While the New York Court of Appeals decision provides some clarity on acceptable language under state law, the overall situation for merchants remains very unclear. The Second Circuit must now evaluate the plaintiff’s proposed pricing scheme in light of the opinion. The decisions in similar litigation in other jurisdictions—including California, Florida and Texas—must be evaluated in light of the Supreme Court’s ruling. Adding to this confusion, merchants 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 the card networks, and whether the card network rules that were changed in anticipation of the first settlement agreement will remain in place.