Expressions Hair Design v. Schneiderman

808 F.3d 118, 2015 U.S. App. LEXIS 21521, 2015 WL 8537667
Court of Appeals for the Second Circuit·Decided September 29, 2015·No. Nos. 13-4533, 13-4537·Published·Cited by 24 cases

Opinion

DEBRA ANN LIVINGSTON, Circuit Judge:

New York General Business Law § 518 (“Section 518”) provides that “[n]o 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.” Plaintiffs-Ap-pellees in this action (“Plaintiffs”) are five New York businesses and their owners and managers.1 They sued the Attorney [122]*122General of the State of New York and the District Attorneys of New York County and Kings County (collectively, “New York”) in the United States District Court for the Southern District of New York, claiming that Section 518 violates the First Amendment’s Free Speech Clause and is void for vagueness under the Fourteenth Amendment’s Due Process Clause. The district court (Jed S. Rakoff, Judge) agreed with Plaintiffs on both counts, and eventually entered a final judgment declaring Section 518 unconstitutional and permanently enjoining New York from enforcing the law against Plaintiffs. On appeal, we conclude that the application of Section 518’s text to surcharges added to single sticker prices violates neither the First Amendment nor the Due Process Clause. We further decline to address other applications, invoking Pullman abstention. See R.R. Comm’n of Tex. v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941). We therefore vacate the judgment entered by the district court and remand for dismissal of Plaintiffs’ claims.

BACKGROUND

A. “Swipe Fees” and Credit-Card Surcharges

Every time a consumer pays for goods or services with a credit card, the credit-card issuer charges the merchant a percentage of the purchase price. (The parties and. literature refer to these fees as “swipe fees” or “merchant-discount fees.”) The typical fee is two to three percent of the transaction amount. Plaintiffs and other businesses that chafe at these fees would like to pass them along to consumers while also making consumers aware of the charge in an effort to convince them to pay cash. Accordingly, they would like to charge more than their regular price to customers who use credit cards; that is, they would like to impose a “surcharge” on credit-card users. Another way of passing the cost of credit along to customers is to offer a discount from the regular price to customers who use cash. While these two means of passing along the cost of credit may seem equivalent (in that they both ultimately result in credit-card customers paying more than cash customers), differences between them have led to a series of efforts by both credit-card companies and legislators to prohibit credit-card surcharges specifically.

One difference between credit-card surcharges and cash discounts involves consumers’ reactions to them. A psychological phenomenon known as “loss aversion” means that “changes that make things worse (losses) loom larger than improvements or gains” of an equivalent amount. Daniel Kahneman et al., Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, 5 J. Econ. Persp. 193, 199 (1991). For this reason, credit-card surcharges are more effective than cash discounts at discouraging credit-card use among consumers, which has naturally led credit-card companies to oppose them. See Richard Thaler, Toward a Positive Theory of Consumer Choice, 1 J. Econ. Behav. & Org. 39, 45 (1980). But some consumer advocates and lawmakers, too, have favored protecting consumers from the inconvenience and annoyance of having extra charges added to their bills, and have also suggested that discouraging credit-card use may have adverse econom-[123]*123ie effects on the broader economy by “dampen[ing] retail sales.” J.A. 114.

According to proponents of prohibitions on credit-card surcharges, experience also suggests that such surcharges will tend to exceed the amount necessary for the seller to recoup its swipe fees, meaning that sellers will effectively be able to extract windfall profits from credit-card users.2 By contrast, cash discounts are unlikely to lead to the same problem, because merchants will not set the amount of the discount higher than the marginal cost of credit. See, e.g., Adam J. Levitin, Priceless? The Economic Costs of Credit Card Merchant Restraints, 55 UCLA L.Rev. 1321, 1352 (2008) (“[M]erchants’ ability to discount is limited by the spread between the credit price and the merchandise cost to the merchant. If the merchant offers discounts by more than that spread, the merchant will lose money on the transaction. Merchants might need to increase the credit price to create a sufficient spread to profitably offer a discount that affects consumer behavior.”). Further, because credit-card surcharges (unlike cash discounts) offer a means of increasing customers’ bills, dishonest sellers may attempt to profit at their customers’ expense by imposing surcharges surreptitiously at the point of sale.

B. The Lapsed Federal Ban on Credit-Card Surcharges

New York enacted Section 518 in 1984. Because the law’s enactment was motivated by the expiration of a federal law that prohibited credit-card surcharges, we briefly recount the history of that federal law.

In the early days of credit cards, credit-card issuers’ contracts with merchants prohibited merchants from charging different amounts to customers who used credit cards and those who used other methods of payment. In 1974, however, Congress amended the federal Truth in Lending Act (“TILA”) to protect merchants’ ability to offer their customers discounts for using cash. See Fair Credit Billing Act § 167, Pub.L. No. 93-495, tit. III, 88 Stat. 1500 (1974) (codified in relevant part at 15 U.S.C. § 1666f(a)) (providing that issuers could not “prohibit ... seller[s] from offering a discount to a cardholder to induce the cardholder to pay by cash, check, or similar means rather than use a credit card”). In the same amendments, Congress also provided that these protected cash discounts did not rahk as “finance charges” governed by TILA’s disclosure requirements. Id. In 1975, the Federal Reserve Board (the “Fed”) promulgated a regulation clarifying that the statutory exemption from TILA’s disclosure requirements did not also apply to credit-card surcharges. See Fair Credit Billing, Description of Transactions, 40 Fed.Reg. 43, 200, 43,203 (Sept. 19, 1975). In 1976, Congress again amended TILA to both ratify the Fed’s interpretation and ban credit-card surcharges entirely. See An Act to Extend the State Taxation of Depositories Act, Pub.L. No. 94-222, 90 Stat. 197 (1976) (the “1976 Amendments”). Specifically, the 1976 Amendments provided: “[n]o seller in any sales transaction may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means.” Id. § 3(c)(1). Moreover, to clarify the distinction between protected discounts and newly unlawful surcharges, the 1976 Amendments defined the term “surcharge” as “any means of increasing the regular price [124]*124to a cardholder which is not imposed upon customers paying by cash, check, or similar means”; defined the term “discount” as “a reduction made from the regular price”; and clarified that a discount “shall not mean a surcharge.”3 Id. § 3(a) (codified in relevant part at 15 U.S.C.

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Expressions Hair Design v. Schneiderman, 808 F.3d 118, 2015 U.S. App. LEXIS 21521, 2015 WL 8537667 (2d Cir. 2015).

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