Judge Jed Rakoff, of the District Court ofNew York’s Southern District, has issued a preliminary injunctionto block a 1984 state law that prohibits merchants from imposingsurcharges on credit card payments. At face value the ruling isquite surprising considering that no-surcharge laws remain in forcenine states (CA, CO, CT, FL, KS, ME, MA, OK, and TX), and there issupport in several other states for implementing such laws. InNovember 2012, a judge’s preliminary approval of a proposedsettlement between merchants and the card networks gave merchantsthe right to surcharge as of January 27, 2013.
Anti-surcharging laws are essentially consumer protection laws.They are intended to prevent consumers from paying more than theyexpect at the point of sale. Judge Rakoff expects that merchantsurcharging will force the card networks to lower interchangerates, which will benefit small businesses.
From American Banker:
“Absent surcharges, consumers may be unaware that when they use acredit card, the relevant credit-card company charges the retailera fee,” Rakoff wrote. Permitting surcharges, he argues, “Will placedownward pressure on swipe fees, which credit-card companies willbe forced to reduce in order to prevent more and more consumersfrom switching to cash.”
Interestingly enough, the opinion does not mention any anticipatedtrickle-down benefits to consumers resulting from reducedinterchange rates. Rather, Judge Rakoff references research thatsuggests that no-surcharge rules “force cash users (who are said tobe disproportionately poor and minority persons) to subsidize theretail purchases of credit card users.”
What makes this case different from other surcharging debates isthat Rakoff’s ruling is based primarily on First Amendment issuespertaining to the current New York State law, not the economicimpact of surcharging. The current law does not restrict merchants’ability to charge different prices for cash and credittransactions. It merely says that merchants must characterize thediscrepancy as a cash discount and not a credit surcharge. Theplaintiffs are objecting to such a restriction of expression.
The law, according to Rakoff’s opinion, “draws the line betweenprohibited ‘surcharges’ and permissible ‘discounts’ based on wordsand labels rather than economic realities.” The Court has perhapsappropriately issued an injunction based on its interpretation ofthe law. Unfortunately for consumers, the potential negativeeconomic impact of surcharging was not debated fully in this case.In light of this ruling, it would not be surprising to see newlegislation proposed that is designed to restrict surcharging onthe basis of harm to consumers.
Click here to read a past PaymentsJournalPerspective on the proposed Merchant Antitrust Settlement. Click here to read the court’s opinion.