The Slippery Business of Surcharging

By Dawn Causey, Tom Pinder and Andrew Doersam

Imagine taking a trip to New York this winter and walking up to the Rockefeller Center skating rink to rent some skates and spend a few minutes on that famous ice. Now contemplate being charged an extra fee for using your credit card instead of cash. Currently, a state law prevents Empire State merchants from imposing this kind of fee on consumers, while allowing retailers to offer a discount for those who use cash. The nation’s highest court will soon hear a challenge brought by merchants against this law.

The practice of charging a credit card fee on top of an advertised (“sticker”) price is known as “surcharging,” and ten states and Puerto Rico have anti-surcharging statutes in place. When a retailer provides a discount off the sticker price to consumers who tender cash, they are engaging in “cash discounting.” While the final price may end up the same under both practices, anti-surcharging statutes have not been interpreted to prohibit cash discounting.

In Expressions Hair Design v. Schneiderman, the Supreme Court is considering a challenge from retailers who claim that anti-surcharging laws violate their constitutional rights to free speech by restraining one method of conveying prices. Federal District Court Judge Jed Rakoff declared the law unconstitutional, ruling it was an “incomprehensible” restriction of commercial speech. Using similar reasoning, the Eleventh Circuit struck down Florida’s no-surcharge law in Dana’s R.R. Supply v. Florida.

But courts have also defended the laws. In the New York case, the Second Circuit reversed Judge Rakoff, holding that the law regulates prices—not speech—explaining that “prices, although necessarily communicated through language, do not qualify as ‘speech’ under the First Amendment.” And in Texas, the Fifth Circuit upheld the Lone Star State’s no-surcharge law in Rowell v. Pettijohn, calling it an economic pricing-regulation that passes constitutional muster.

Now it is up to the high court to resolve this conflict among the lower courts, and settle whether no-surcharging laws regulate speech or commercial conduct. The Court generally has held that the First Amendment only shields conduct when it is “expressive.”

ABA and the Credit Union National Association agree with the attorneys general defending these statutes that they protect consumers from unclear prices and arbitrary, last-minute fees that can exceed the merchant’s true cost of card acceptance. The existing allowance for cash discounting means that the sticker price serves as the ceiling for the consumer’s final cost, rather than the floor. This is real consumer choice. In the absence of these laws, merchants may engage in unregulated markups at the register under the guise of recovering card fees, leaving consumers with less in their pockets and card issuers with unfair reputational harm.

Dawn Causey is general counsel at ABA, where Tom Pinder is SVP for litigation and Andrew Doersam is a paralegal.