The contentious battle over credit card surcharges has escalated to the U.S. Supreme Court, giving hope to retailers in 10 states that currently ban the practice of adding a fee to credit card transactions. A court challenge brought by five retailers in Expressions Hair Design v. Schneiderman 15-1391 made its way through New York courts, initially winning in September 2013, only to be overturned on appeal two years later by New York’s 2nd U.S. Circuit Court of Appeals.
The retail petitioners allege surcharge laws violate their First Amendment rights to free speech and due process under the U.S. Constitution. These claims became the basis for the Supreme Court review.
The New York court disagrees that surcharge laws violate free speech, calling its measures “price-control laws” that “regulate economic conduct rather than speech.” New York Attorney General Eric Schneiderman and Manhattan District Attorney Cyrus Vance noted these price-control laws do not control pricing for goods and services, but only “how those prices are communicated ‒ that is, which of the two prices the merchant may frame as the ‘regular’ price on the label, and which the merchant may convey through a separate sign.”
The New York attorneys compared surcharging credit card transactions to “bait-and-switch” tactics that reportedly occur at gas stations. Restricting surcharge practices protects consumers by maintaining price consistency and preventing surprises during the checkout process, they said.
10 dissenting states
Retailers filed similar complaints in Florida and Texas in May and June 2016, petitioning courts to “resolve a direct and acknowledged circuit split over whether state no-surcharge laws violate the First Amendment, and they have been filed from each of the three circuits that have thus far divided on the issue,” the plaintiffs stated.
Surcharging is restricted in New York, California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas. In New York, retailers found guilty of adding fees to credit card transactions can face a $500 fine and up to a year in prison. New York U.S. District Judge Jed Rakoff issued a preliminary injunction against the law in September 2013, siding with complainants by stating the law violates the First Amendment and “perpetuates consumer confusion by preventing sellers from using the most effective means at their disposal to educate consumers about the true costs of credit card usage.”
Court to decide state rights
The Supreme Court’s stated purpose is to clarify “whether and to what extent the Constitution limits state-imposed restrictions on the manner by which merchants can frame and convey truthful pricing information.”
David Leppek President of Transaction Services LLC, said, “The Supreme Court will not decide on the legality of surcharging, but on whether or not individual states have the right to ban the practice. Federal restrictions against credit card surcharging can be traced back to the 1980s, when card brands tried to make credit card transactions equivalent to cash. These campaigns were done relatively quietly, with little fanfare. Consequently, very few states can recall why surcharging was banned in the first place.”
No-surprise guidelines
Surcharging compliance guidelines became effective Jan. 27, 2013, following a class action settlement by retailers against Visa Inc. and Mastercard. The guidelines specify criteria for qualifying transactions, including mandatory signage and disclaimers for participating merchants. For example, merchants may surcharge credit cards, but not debit or prepaid transactions. Merchants are also required to post point-of-entry and point-of-transaction signage and specifically worded disclaimers on credit card receipts.
Varying state-by-state guidelines and restrictions can make surcharge compliance a daunting process for merchants doing business in multiple states, which has prompted some ISOs and acquirers to explore ways to simplify the practice
“Transaction Services has automated the compliance process, confirming that transactions originate in states that allow it and that it meets all criteria,” Leppek said. “The solution can be implemented at the POS, a hosted payment page or as a direct integration tool.”