Credit Card Surcharge Ban on Life Support after Supreme Court Decision

The U.S. Supreme Court held last week that New York’s ban on credit card surcharging is a restraint on speech under the First Amendment. Expressions Hair Design v. Schneiderman, No. 15-1391 (U.S. Mar. 29, 2017). The case was remanded to determine if that restraint violates the First Amendment.

Why This Matters
This ruling is another win in a series of merchant efforts that are making it increasingly possible to pass through the cost of accepting credit cards to the customer. Typically, accepting payment by credit card costs a merchant about 2-3% of the price paid.

Credit card surcharging is the practice of making the customer pay extra to use a credit card, passing through some or all of the cost of accepting payment by card. Until recently, surcharging was prohibited by the terms of VISA and Mastercard’s merchant agreements and by the laws of 10 states, including New York, Florida, Texas, and California. U.S. merchants have challenged both sets of restrictions, the former for violating antitrust laws and the latter as an unconstitutional restraint on speech. As a result, VISA and MasterCard have changed their rules, leaving the speech challenge as the only remaining barrier to surcharge.

Consequently, the path to surcharging has opened considerably. While some restrictions on surcharging remain, merchants accepting certain payment forms in certain states can create a card acceptance strategy that allows them to safely pass through their costs to customers.

The New Ruling
In Expressions Hair Design, the Second Circuit Court of Appeals had found that the New York surcharge ban regulates economic conduct and therefore does not implicate the First Amendment. In vacating that ruling, the Supreme Court held that the law does not regulate pricing but only “how sellers may communicate their prices.” The Supreme Court explained that the New York law, as applied, permits a merchant to charge two prices, for instance $10 for cash and $9.70, $10, or $10.30 for credit. But if the seller charges $10 for cash and $10.30 for credit, the law requires the seller to communicate the pricing as a sticker price of $10.30 and a discounted $10 price for cash. “In regulating the communication of prices rather than prices themselves, [the New York statute] regulates speech,” the Supreme Court concluded.

On April 3, 2017, in two related cases, the Supreme Court vacated a ruling upholding the Texas ban on surcharging and left intact a ruling from the Eleventh Circuit that had found Florida’s ban violative of the First Amendment.

The Takeaway
If the courts strike down state surcharge bans as unconstitutional, many merchants will likely add surcharges in order to recover their acceptance costs and to incentivize other, potentially less expensive forms of payment. Expressions Hair Design does not compel that conclusion, but the Court’s hostility to restraints on commercial speech (with all eight justices agreeing with the result) may make it hard for the court on remand to find this restraint justified.