Supreme Court considers credit card surcharges

Billions at stake for retailers, banks; ruling could put downward pressure on rewards

By  |  Published: January 10, 2017

 Supreme Court considers credit card surcharges

The Supreme Court heard arguments Tuesday to strike down New York State’s ban on surcharges for credit card transactions, an issue that could have far-reaching consequences for card users nationwide.

At issue is whether the state’s law violates free speech guarantees by blocking merchants from communicating the higher cost they face for card transactions.

“This is about whether the state can criminalize truthful speech,” said Deepak Gupta, attorney for a group of merchants opposing New York’s law.

New York is one of 11 states that outlaw credit card surcharges, which cover about 40 percent of the U.S. population. Opponents want to recover the costs of card interchange fees, usually 2 to 3 percent of each card swipe. Commonly called swipe fees, the revenue is collected by the major card networks Visa, Mastercard, American Express and Discover.

STATES WITH ANTI-SURCHARGE LAWS
California
Colorado
Connecticut
Florida
Kansas
Maine
Massachusetts
New York
Oklahoma
Texas
Utah

Billions at stake
A broad ruling against New York’s surcharge ban could create a domino effect on other states’ laws, put downward pressure on card rewards, and move retailers a step closer to recovering tens of billions of dollars in swipe fees annually. The court will make its decision sometime before its summer recess, usually by the end of June. Analysts expect the eight-member court will refrain from bold departures from the status quo.

Questions from the justices Tuesday indicated that they were reluctant to expand speech protections to price regulations, and unclear on how the state law was interpreted in practice.

“I just don’t see anything about speech in the statute,” said Justice Sonia Sotomayor. “As long as the price listed is the higher price, you can describe it any which way you please.”

That, Gupta responded, would standardize the credit card price.

At stake in the battle is an estimated $50 billion a year in interchange fees, according to merchants, which help pay cardholder rewards, such as airline miles and cash back.

New York and its defenders say states have a right to protect consumers from add-on costs not included in the published price of goods. State laws that regulate extra charges are a long-standing pillar of consumer protection, they say.

Striking down the New York statute would allow merchants to increase their profits under the guise of recovering interchange fees.

— Credit Union National Association filing

“Striking down the New York statute would allow merchants to increase their profits under the guise of recovering interchange fees,” the Credit Union National Association said in a friend-of-the-court opinion.

Retailers disagree. In the absence of surcharges, they are left to recover the network fees through the prices they charge all customers, whether they use plastic or not, said Albertson’s, Kroger’s, CVS and other chains. Unlike the retail sector, there is little competition in the interchange market, which is controlled by a few dominant networks.

“American consumers know that there is no such thing as a free lunch,” the retailers said. “But many do not understand that there is no such thing as a free credit card transaction.”

Expressions Hair Designs in Vestal, N.Y., and four other small merchants filed the lawsuit against New York’s attorney general on grounds the ban violates their constitutional right of free speech. Companies are free to offer consumers a discount for not using a credit card, they argue, and the discount can have the same monetary result as a surcharge. Therefore, the surcharge ban merely restricts the wording of their policies, not the economic reality, they said.

U.S. District Court Judge Jed Rakoff ruled in their favor in 2013 and was overturned by the Second Circuit Court of Appeals in September 2015. The Supreme Court agreed to hear the case in fall 2016 as similar challenges were mounted against surcharge laws in Florida, California and Texas.

American consumers know that there is no such thing as a free lunch. But many do not understand that there is no such thing as a free credit card transaction.

— Retailers' filing

The ability to impose a surcharge rather than offer a discount is important, however, because shoppers are more likely to avoid a surcharge than take advantage of a discount, even if the amount of money involved is identical.

Surcharge, discount: semantics?
New York Attorney General Eric Schneiderman disputed the idea that a discount is the same as a surcharge. An expired federal law, on which the state law is based, made clear that discounts must be deducted from an established, regular price, while surcharges are added to the price.

Many consumer advocates support the merchants, saying lower-income consumers who lack cards wind up subsidizing interchange fees. Card users, meanwhile, benefit from rewards of points, airline miles or cash back funded largely by the fees.

“In its most extreme form, food-stamp consumers end up subsidizing first-class upgrades for users of   rewards credit cards,” Adam Levitin, a Georgetown University law professor, wrote in a court filing.

However, a group of consumer advocates including Public Citizen sided with New York, saying a ruling against the state could undermine a host of other consumer protections that regulate what merchants charge.

The Supreme Court case is one front in a larger battle over interchange fees. In 2012, a years-long court dispute was settled with modifications in network rules that allowed surcharges up to 4 percent. The proposed settlement was rejected by a judge in 2016 as inadequate and too complex for retailers to implement. However, card networks retained the permission to surcharge until 2020.

It’s unclear whether many retailers will use surcharge rights, even if permitted by state laws and card network contracts.

“Surcharging is not something retailers are anxious to do – it’s seen as unfriendly,” said Mallory Duncan, general counsel of the National Retail Federation and chairman of the interest group Merchants Payments Coalition. The case “is much more important for the debate between card companies and merchants than it is for consumers,” he said in an interview.

However, the ability to impose surcharges would be a bargaining chip in negotiations with networks, he said. Cards with the highest fees – usually ones with the richest rewards for cardholders – would be under pressure to moderate their costs. And national chains that held back from imposing surcharges partly because of the inability to do so in all states would have more leeway to do so.

See related: Judge: Merchants can steer you to lower-cost card


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Updated: 10-23-2017

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