Merchants Say Potato; Courts Say Potahto - The New York Credit Card Surcharge Saga Continues

October 31, 2018

As we previously reported, there has been much legal confusion as to how New York merchants can pass on the credit-card “swipe fees” to their customers. In the case of Expressions Hair Design v. Schneiderman, a hair salon, which had posted a notice that a 3% surcharge would be added to credit card users, was informed by one of its customers that the sign was in violation of New York General Business Law Section 518. That law provides that: “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.” A violation of the statute is considered to be a criminal misdemeanor.

The lawsuit has gone through a tortuous circular path through the courts as it was reinterpreted as to just what exactly the law prohibited. It started in the Southern District of New York, which found it to violate the First Amendment for controlling commercial speech. It was overturned on appeal and made it way to the U.S. Supreme Court. The Supreme Court punted and sent it back to the Second Circuit, which sent it to the New York State Court of Appeals for a clarification of New York law. The courts wrestled whether there can be a dual pricing scheme, and if so, do the semantics on how the pricing is conveyed really matter if the result is the same. Moreover, can a criminal statute be enforceable if it is vague?

The Second Circuit did not opine on whether this criminal statute is legal. Rather, it asked the New York State Court of Appeals to advise and clarify the scope of Section 518: “Does a merchant comply with New York's General Business Law § 518 so long as the merchant posts the total dollar and cents price charged to credit card users?” 

The New York State Court of Appeals confirmed that a dual pricing scheme is allowed by law and attempted to alleviate this confusion by holding that the statute is simply a “disclosure” law. Thus, a merchant can legally charge two different prices for credit card and cash transactions, but the credit card price must be advertised as the total price. For example, if Expressions Hair Design imposes a 3% charge for credit card users for a $20 haircut, it must advertise that a haircut is $21.20 -- but that there is a discount of 3% for those paying in cash. The reasoning is that consumers would be seeing the exact price they would be paying using a credit card, and thus, they could not be misled. This logic is why the Court of Appeals deemed Section 518 to be a disclosure statute. Merchants must disclose the entire dollars-and-cents price because consumers should not have to do any mathematical calculations. This is where the hair salon ran into trouble; because it just mentioned the percentage add on separate from the price of the service. Had Expression Hair Design phrased it differently by offering a cash discount, just like you see at your local gas station, they would not have been charged with a violation.

It is now incumbent upon the Second Circuit to accept or reject the Court of Appeal’s interpretation and make a final ruling. However, this may not be as straightforward as it appears. After all, the Southern District Court of New York proclaimed that “Alice in Wonderland has nothing on section 518.” Since there are conflicting reasons in the Court of Appeals judicial opinions, it appears that Alice has now met the Mad Hatter. 

As mentioned, the majority’s opinion states that section 518 is a disclosure statute provided that the exact amount of the full price is the merchant’s credit card price that is laid out in a specific amount and it may offer a cash discount. The majority did not feel the statute was vague or a restriction of free commercial speech. 

Justice Rivera concurred with the majority by simply focusing on the dictionary definition of a “surcharge”. By reading Webster’s Dictionary, the concurrence states that a merchant who posts the exact total price for a credit card purchase has complied with the statute, provided it does not use the word “surcharge.” 

While another judge agreed that the Second Circuit’s question should be answered affirmatively, he parted ways with the majority and said that the Court could provide “no reasonable answer” about what the statute actually prohibits. [This was the job of the Court of Appeals – to construe the definition of the statute – as suggested by the Supreme Court and then requested by the Second Circuit.] This was no easy task – and ultimately, Justice Wilson counted five possible interpretations of the statute, and he seemed to write that the majority picked one definition at random. Random selection of one definition is the epitome of vagueness; and a criminal statute that is vague cannot be legal due to the stakes involved. His opinion seems to be swayed because of his own experience paying New York income taxes online, where the NY Department of Taxation and Finance charges a 2.25% “convenience” fee for using a credit card – but the owner of a hair salon could be jailed for doing the same. 

A separate dissent opens with the statement that the statute is not a disclosure statute, as the majority concluded. Justice Garcia pointed to the fact that the New York Legislature could have called for the total disclosure of a price, but it chose not to do so. This meant that the price differential between credit cards and cash was intended to be seen as a discount, and not as a surcharge – and this has been the way that the New York Legislature has allowed the statute to function. The dissenting justice concluded by simply stating the obvious: if a merchant uses the word “discount,” he has not broken the law; if he uses the word “surcharge,” then the law is broken, and he could face jail time. 

As the case of Expressions Hair Design v. Schneiderman descends further into Wonderland, we can only wait as the Second Circuit, once again, decides the fate of New York General Business Law Section 518. Will the court immediately accept the majority opinion? Or will it find one of the other opinions more persuasive? We must merely examine through the Looking Glass as the saga continues.