Merchants say loss of credit card ‘swipe fees’ violates their 1st Amendment rights
What do a unisex hair salon, an ice cream parlor, a liquor store, a martial arts and fitness studio, and an outdoor furniture and billiards company have in common? First, they are all in New York state.
And second, each business and its owners have challenged the state’s no-surcharge law that prevents them from imposing “swipe fees.” The fees charge consumers for the higher costs that merchants bear by allowing customers to use credit cards. The businesses claim the law violates their First Amendment rights because it prohibits them from informing consumers they are paying a surcharge for credit. On the other hand, the merchants say, it allows them to offer discounts for those paying in cash.
The law provides that any business violating the provision may be guilty of a misdemeanor and face a $500 fine, up to one year in prison or both.
“This state-imposed speech code prevents the plaintiffs from effectively conveying to their customers—who absorb the costs of credit through higher prices for goods and services—that credit cards are more expensive means of payment,” says the complaint in Expressions Hair Design v. Schneiderman.
The plaintiffs filed a motion in June for a preliminary injunction in federal court in New York City, seeking a declaration that the New York law is unconstitutional, as well as an order prohibiting the state attorney general’s office from enforcing the law.
“The law censors merchants who want to communicate the high cost of credit to consumers in the most effective way,” says Washington, D.C., attorney Deepak Gupta, who represents the merchants. “It ensures that the credit card industry will continue to impose a hidden tax on American consumers. It means that poor consumers who pay in cash will continue to subsidize the credit card rewards programs of high-income customers.”
Plaintiff Peter Freeman of the Brooklyn Farmacy & Soda Fountain says, “Swipe fees are a huge expense for us. We just want to let our customers know about these fees in a way that will make them pay attention. But we can’t afford the risk that the state will prosecute us for using the wrong words.”
Steven Milles agrees: “Swipe fees are expensive,” says the vice president of Five Points Academy, a Manhattan fitness and martial arts studio. “They constitute anywhere from 2.5 percent to 3.5 percent of every credit card transaction. And 90 percent of our business is by credit card transactions.
“Under this New York law, I don’t have the ability to identify these charges to consumers as a surcharge for using credit,” adds Milles. “I also do not have the ability to pass on these charges to consumers or to charge a different pricing system for those who pay with credit.”
The New York law has been on the books since 1984, yet for many years it was redundant because credit card companies imposed similar speech prohibitions through their contracts with businesses. But after years of litigation, Visa and MasterCard eliminated their no-surcharge rules as part of a settlement that took effect in January. This means that state laws were the only way to prohibit merchants from communicating to consumers the reality of less expensive forms of transactions.
The plaintiffs rely in part on a 1987 decision by the New York Criminal Court in People v. Fulvio in which the court dismissed criminal charges against a gas station owner for violating the no-surcharge law. The court was troubled that dual pricing was OK so long as the difference is characterized as a cash discount, but criminalized if it was characterized as a surcharge for credit.
The court noted that “precisely the same conduct by an individual may be treated either as a criminal offense or as lawfully permissible behavior depending only upon the label the individual affixes to his economic behavior, without substantive difference.” The court further explained that “in each case the innocent and the criminal conduct is based upon the same factual configuration,” and it concluded that the law “creates a distinction without a difference.”
Major retailers, including Kroger Co., Walgreen Co. and Food Lion, have filed an amicus brief in support of the plaintiffs.
The plaintiffs argue that the New York law is an impermissible content-based limitation on protected speech and say it affects both commercial and noncommercial speech. In First Amendment law, noncommercial speech generally receives more free speech protection than commercial speech or purely commercial advertising. The plaintiffs contend that even if it is purely commercial speech, the New York law still fails constitutional review because the “state has no legitimate interest in obscuring the cost of credit card transactions from consumers.”
First Amendment expert Clay Calvert says “the case could turn on whether the courts characterize the speech in question as commercial, which would subject New York’s law to an intermediate level of scrutiny, or whether it is political, which would subject the statute to the more rigorous strict-scrutiny test.
“The word surcharge clearly is political when used in this context, given the battles between retailers and credit card companies over swipe fees and how consumer sentiment could very easily turn against the card companies if consumers are allowed to learn about the swipe fees at the point of purchase,” says Calvert, director of the University of Florida’s Marion B. Brechner First Amendment Project.
“In turn,” he adds, “if enough consumers become riled up, then lawmakers might just take up efforts to limit swipe fees. Clearly the word discount fails to provide important information to consumers about the high swipe fees that credit card companies impose on businesses for each transaction. Given that many people are unaware of the very existence of such fees, mandating the usage of discount instead of surcharge ensures they will stay in the dark.”
The New York AG’s office declined to comment on pending litigation. At a June hearing before U.S. District Judge Jed S. Rakoff for the Southern District of New York, attorneys for the state argued that plaintiffs lacked standing because they had not shown “any serious prospect that the statute will be enforced against them.” They also argued that “the law regulates conduct and, thus, the First Amendment claim fails.”
MORE THAN SEMANTICS
F. Paul Bland Jr., senior attorney for Public Justice, a Washington, D.C., public interest group, views the litigation as a welcome development. “I think that the part of the case that challenges the constitutionality of the New York statute requiring that transactions be described in industry-friendly words is plainly right.
“This isn’t even close; it should be open and shut that the state can’t require certain descriptions of transactions,” he adds. “What’s next: New York making it a crime to use the phrase ‘predatory lending’ and instead requiring people to describe it as ‘corporate generosity?’ This kind of practice sucks money upward in the economy, and depresses actual economic activity that might generate jobs and improve lives.”
The case could be significant. “This dispute is about far more than semantics and verbal gymnastics. It’s a fascinating First Amendment clash—one carrying vast fiscal ramifications for both businesses and consumers,” Calvert says. “At the macro level, this law is all about stopping the free flow of truthful information and keeping consumers in the dark in order to protect the profits of credit card companies.”
Gupta says he is considering similar lawsuits in other states, including California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas. “I see this as a bellwether case,” he adds.
Fitness studio exec Milles adds, “The fact that the case presents a free speech question makes it all the more interesting.”