Free Speech Challenges to Credit Card Surcharge Laws

I recently helped write and organize an amicus brief urging the Supreme Court to grant cert in Expressions Hair Design v. Schneiderman. The case involves a circuit split on the constitutionality of “no surcharge” laws in New York, Florida, and a few other states. These states allow retailers to give “discounts” to cash and check payers but forbid retailers from adding “surcharges” when customers pay by credit card. Some retailers have challenged these laws under the First Amendment because the laws treat identical conduct differently based on how the sellers represent their prices.

Everybody thinks this is an easy case. The trouble is, everybody is divided about whether the First Amendment applies at all, some saying “obviously yes,” and others saying “obviously no.”

The Second and Fifth Circuits are in the “obviously no” camp. They dismissed the free speech arguments and found that these laws regulate only economic conduct.

A California district court and the Eleventh Circuit are in the “obviously yes” camp. So am I. This camp thinks the laws inarguably regulate speech. Despite appearances, the laws do not constrain pricing. Instead, they constrain how goods are labeled, and how prices are broken down and explained.

In the course of recruiting co-signers, it became clear that law professors are generally reluctant to recognize when commercial speech is being regulated, and also tend to assume that even when it’s clear communications are being suppressed, the suppression operates in consumers’ best interests. These instincts are wrong in the specific case of anti-surcharge laws, and they are likely to be misguided in the larger case of commercial speech as well. I’ll explain here why I think so.

Anti-surcharge laws regulate speech, not conduct.

These anti-surcharge cases are at bottom debating the scope of the First Amendment. The Second Circuit concluded that laws that prohibit a surcharge but allow a discount regulate economic conduct, not speech:

the central flaw in [the merchants’] argument [] is their bewildering persistence in equating the actual imposition of a credit-card surcharge (i.e., a seller’s choice to charge an additional amount above the sticker price to its credit-card customers) with the words that speakers of English have chosen to describe that pricing scheme. . . . But Plaintiffs are simply wrong. What [the law] regulates—all that it regulates—is the difference between a seller’s sticker price and the ultimate price that it charges to credit-card customers.

What’s bewildering to me is that the Second Circuit relies twice on a reference to a “sticker price” without acknowledging the expression involved. Stores are free to charge separately for an item and for the credit card transaction to purchase the item, but a sticker that says “$102, but $2 less for cash,” is legal while a sticker that says “$100, plus $2 for credit cards” can lead to jail time. The difference between criminally liable “surcharges” and perfectly legal “discounts” is, therefore, the way that retailers explain their pricing schemes.

Anti-surcharge laws do not target false and misleading speech

When I first heard about the free speech challenges to anti-surcharge laws, I immediately understood that the laws were regulating communication, but I suspected they might just target fraud. I though that the laws might be enforced out of concern for consumers who reasonably assume that they will be able to purchase an item by credit card for its sticker price and are surprised when their total is rung up. I assumed the laws would operate either as a form of compelled speech (to force retailers to give consumers information they need to know about the fully-loaded price they will pay at the cash register) or as a ban on misleading commercial speech (to make sure merchants don’t give consumers the impression that they will pay less than they actually will). Misleading commercial speech is not constitutionally protected. This potential for consumer deception is what the dissenting 11th Circuit judge had on his mind, and what Rebecca Tushnet is thinking about, I suspect, when she explains that “even if there’s a small-print disclosure—what a reasonable consumer would take away is the measure” of a misleading price.”

By the way, the theory that anti-surcharge laws target deception implicitly concedes that the laws regulate communication. Once we’re going down this road, we’re operating in a space where price communications are presumptively protected unless the regulation bans unprotected false or misleading speech. The First Amendment coverage question will therefore float or sink on the question of deception.

The fact is, anti-surcharge laws are not especially concerned about consumer deception. The anti-surcharge laws sweep broader than deception by banning clear statements, provided in advance of purchase, about additional credit card fees. Any explanation of prices that identifies credit cards as the source of additional costs rather than rolling them into the price of the item is illegal.

The surcharge bans are similar to a law the Kentucky legislature passed in 2005 restricting how telecommunications providers could label their customer’s bills. The state imposed a new tax and allowed telecom providers to pass the costs onto their customers, but the providers were forbidden from labeling the extra cost as a tax on customers’ bills. That ham-fisted attempt to avoid accountability for raising taxes was seen for what it was: an unconstitutional restriction on truthful commercial speech.

If New York is concerned about deception, it could cure the flaws in its anti-surcharge laws by replacing it with a compelled speech rule like this one used in Minnesota. It could mandate a disclaimer when sticker prices report cash prices to make sure customers understand that a credit card fee will apply. As co-signer Jonathan Adler has explained:

Where commercial speech is potentially misleading or even unclear, a requirement of curative counterspeech will typically be preferable to a limitation on speech. As the Court has noted, where possible, the remedy for potentially misleading speech should be more speech. Thus, requirements that producers or vendors qualify claims about products in advertisements and labels are more permissible than limitations or prohibitions on label or ad claims.

But a law requiring a clear disclaimer would be redundant. As long as consumers expect to be able to pay the same price for cash and credit cards, I suspect existing false advertising and unfair business practices laws will already push retailers to make clear disclaimers.

Anti-surcharge laws manipulate speech to nudge consumers into credit card transactions

The next way one might try to rationalize the anti-surcharge laws is to suppose that consumers are well-served by seeing one sticker price that reflects the most they will have to pay at the cash register. Perhaps New York and the other states with surcharge bans are regulating the way costs are framed for consumers.

This explanation, whatever its merit, would have to undergo constitutional scrutiny under the commercial speech doctrine. Under this theory, the state is regulating commercial speech, but it is doing so for an important consumer-protective purpose.

This theory cracks with just a little probing. The anti-surcharge laws wind up censoring not just truthful information, but valuable information: specifically, information that disaggregates the costs of the good or service from the costs of the credit card transaction. This information tends to benefit consumers by making them more likely to avoid transaction costs than they would be if the higher price were normalized and the consumer were offered a discount. The behavioral economics literature shows that the anti-surcharge laws have it backwards: they make consumers more likely to use a card, and thus to pay the higher price, in a dual pricing system. As an amicus brief filed by behavioral economists explains, lab experiments confirm that consumers are more likely to avoid a surcharge than to seek a discount. (This is entirely consistent with Kahneman and Tversky’s loss aversion work.)

The law also discourages retailers from engaging in dual pricing, meaning that cash buyers will continue to subsidize the credit card industry and its customers who pay their bills every month—a regressive transfer of wealth if I ever saw one. The California district court that struck down the anti-surcharge law cited Elizabeth Warren, who points out the detrimental effects of discouraging dual prices.

The negative effects from framing and cross-subsidies surely outweigh any benefits to consumers for seeing a single, higher sticker price (if there are any.) So if New York is attempting to use anti-surcharge laws to protect consumers, it seems to be doing it exactly wrong.

Courts can handle the judicial review of commercial speech regulations

One last form of resistance that I encountered while recruiting signatories was that the topic of prices, surcharges, and discounts is too complicated for the judiciary to understand and is best left to democratically accountable legislatures and agencies.

This is an argument that can be (and has been) trotted out every time the courts engage in constitutional scrutiny of any statutory or regulatory rule. The balancing of interests related to abortion, gay marriage, guns, and discrimination is also complicated, yet few legal scholars would accept judicial disengagement in these areas.

In any case, the premise is wrong. The consequences of anti-surcharge laws are not difficult to predict. State anti-surcharge laws are not the product of reasoned debate or the calculated tinkering by policy wonks. The laws were born from pure pork. They were pushed through by concerted lobbying efforts of credit card companies seeking refuge when a federal law of the same sort was allowed to expire. It requires no special training in economics or public policy to see that in this case, the credit card companies got a law that served their private interests.

If it seems strange that many law professors are prepared to defend the anti-surcharge law as presumptively protecting the public interest, (warning: shameless plug is imminent) I suggest looking at Derek’s and my new draft titled “Information Libertarianism.” We show that laws like the anti-surcharge bans that work against the public interest while appearing to work for it are much more common when the government regulates speech rather than directly regulating whatever it is they mean to achieve. In this case, a statute that bluntly bans retailers from engaging in dual pricing based on method of payment would clearly be an economic regulation rather than a speech regulation. But it would also be an unpopular regulation—one that reveals the state’s blatant pandering to the credit card industry. That type of law would not be confused for a consumer protection law.

By the way, I love credit cards.

This post has, up to this point, demonized the credit card industry. But my criticism of credit card companies applies only to their role in this particular episode of commercial speech bans. In fact, I suspect merchants are exaggerating the true costs of credit card swipe fees since handling cash, protecting it, and depositing it is costly to merchants. Keeping cash on hand is costly to consumers, too. Credit card users who are annoyed by swipe fees probably do not fully appreciate what they get in return. I for one will gladly pay a small swipe fee if the alternative means having to rely more heavily on ATMs and the inherent risks of carrying cash. For the most creditworthy consumers, swipe fees are more than balanced out by plum credit card rewards like miles and cash reimbursements. But this preference of mine does not change the essential point that disaggregating various sources of costs gives consumers more control to decide which services to take on and which to avoid.

I hope the Supreme Court takes up the case. States have a history of regulating speech under the guise of something that sounds like conduct, be it incitement or harassment. It would be a shame if “sticker prices” became an open avenue for banning truthful commercial speech.

Comments are closed.