Design v. Schneiderman

• Decision Date: 03 October 2013
• Docket Number: No. 13 Civ. 3775(JSR).,13 Civ. 3775(JSR).
• Citation: 975 F.Supp.2d 430
• Court: U.S. District Court — Southern District of New York
• Parties: EXPRESSIONS HAIR DESIGN, Linda Fiacco, The Brooklyn Farmacy & Soda Fountain, Inc., Peter Freeman, Bunda Starr Corp., Donna Pabst, Five Points Academy, Steve Milles, Patio.com LLC, and David Ross, Plaintiffs, v. Eric T. SCHNEIDERMAN, in his official capacity as Attorney General of the State of New York, Cyrus R. Vance, Jr., in his official Capacity as District Attorney of New York County, Charles J. Hynes, in his official capacity as District Attorney of Kings County, and Gerald F. Mollen, in his official capacity as District Attorney for Broome County, Defendants.

975 F.Supp.2d 430

EXPRESSIONS HAIR DESIGN, Linda Fiacco, The Brooklyn Farmacy & Soda Fountain, Inc., Peter Freeman, Bunda Starr Corp., Donna Pabst, Five Points Academy, Steve Milles, Patio.com LLC, and David Ross, Plaintiffs,

v.Eric T. SCHNEIDERMAN, in his official capacity as Attorney General of the State of New York, Cyrus R. Vance, Jr., in his official Capacity as District Attorney of New York County, Charles J. Hynes, in his official capacity as District Attorney of Kings County, and Gerald F. Mollen, in his official capacity as District Attorney for Broome County, Defendants.

No. 13 Civ. 3775(JSR).

United States District Court,

S.D. New York.

Oct. 3, 2013.

Held Unconstitutional

N.Y.McKinney's General Business Law § 518Deepak Gupta, Gupta Beck PLLC, Washington, DC, Gary B. Friedman, Scott H. Levy, Tracey Kitzman, Friedman Law Group, New York, NY, Mark A. Wendorf, Reinhardt, Wendorf & Blanchfield, St. Paul, MN, for Plaintiff.

Garrett Joseph Coyle, Sheryl Rebecca Neufeld, Sharon Nicole Scher, New York City Law Department, New York, NY, for Defendants.

PRELIMINARY INJUNCTION, OPINION, AND ORDER

JED S. RAKOFF, District Judge.

Alice in Wonderland has nothing on section 518 of the New York General Business Law. Under the most plausible interpretation of that section, if a vendor is willing to sell a product for $100 cash but charges $102 when the purchaser pays with a credit card, the vendor risks prosecution if it tells the purchaser that the vendor is adding a 2% surcharge because the credit card companies charge the vendor a 2% “swipe fee.” But if, instead, the vendor tells the purchaser that its regular price for the product is $102, but that it is willing to give the purchaser a $2 discount if the purchaser pays cash, compliance with section 518 is achieved. As discussed below, this virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 unconstitutional.

The instant action is brought by five retailers and their principals against the Attorney General of the State of New York and the District Attorneys of New York, Kings, and Broome Counties challenging the constitutionality of section 518 of the New York General Business Law. That statute prohibits a seller from imposing a “surcharge” on customers who elect to pay with a credit card, rather than by cash, check, or other similar means, seeN.Y. Gen. Bus. Law § 518, and has been applied so as to prohibit retailers from informing their customers that the fees they pay to credit card companies and then pass on to their customers are in the nature of surcharges above the price they would otherwise charge. Plaintiffs wish to impose surcharges on credit-card transactions and to so inform their customers, but are constrained from doing so by section 518, which they assert violates the First Amendment, is unconstitutionally vague, and also is preempted by the Sherman Antitrust Act. Pending before the Court are plaintiffs' motion for a preliminary injunction based on the First Amendment and vagueness challenges and defendants' cross-motion to dismiss the complaint in its entirety. For the reasons that follow, plaintiffs' motion is granted, and defendants' motion is denied.

Section 518 provides: “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.” Id. Violations of this prohibition carry criminal penalties: “any seller who violates [section 518] shall be guilty of a misdemeanor punishable by a fine not to exceed five hundred dollars or a term of imprisonment up to one year, or both.” Id. Criminal prosecutions under section 518 are brought by the appropriate county District Attorney. SeeN.Y. County Law §§ 700, 927. In addition, the New York Attorney General is authorized to bring civil enforcement actions to enjoin “continuous” violations of the statute, N.Y. Gen. Bus. Law § 513, and to seek restitution, damages, and cancellation of business licenses against “repeat [ ]” or “persistent” offenders, N.Y. Exec. Law § 63(12).

Section 518 by its terms only prohibits credit-card “surcharge[s],” and all parties here agree that the statute does not bar sellers from offering an equivalent “discount” to consumers who use cash.¹ In terms of their immediate economic consequences, surcharges and discounts are merely different labels for the same thing—a price difference between cash and credit. A number of studies have indicated, however, that consumers perceive credit-card surcharges negatively as a kind of loss or penalty, while cash discounts are perceived positively as a kind of gain or bonus. See generally Daniel Kahneman, Jack L. Knetch & Richard H. Thaler, Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, 5 J. Econ. Persp. 193, 199 (1991); Adam Levitan, The Antitrust Super Bowl: America's Payment Systems, No–Surcharge rules, and the Hidden Costs of Credit, 3 Berkeley Bus. L.J. 265, 280–81 (2006); see alsoS.Rep. No. 97–23, at 3 (“The [U.S. Senate Banking] Committee recognizes that while discounts for cash and surcharges on credit cards may be mathematically the same, their practical effect and the impact they may have on consumers is very different.”).

The parties draw very different conclusions about the impact these varying consumer reactions have on the financial relations between buyers, sellers, and third-party credit providers. Plaintiffs claim that framing the incremental cost of credit-card usage as a “surcharge” is an accurate and effective way to convey to consumers that paying with credit is actually more expensive than paying with cash. Absent surcharges, consumers may be unaware that when they use a credit card, the relevant credit card company charges the retailer a fee, usually around two to three percent of the sales price. See, e.g., Decl. of Linda Fiacco (“Fiacco Decl.”) ¶ 3; FAC ¶ 7. Such fees, known as “swipe fees,” are among greatest and fastest growing operating expenses for merchants in some industries. See Adam J. Levitin, Priceless? The Economic Costs of Credit Card Merchant Restraints, 55 UCLA L.Rev. 1321, 1345 (2008); FAC ¶ 28. Plaintiffs accordingly want to impose credit card surcharges, rather than give cash discounts, and to so inform their customers, precisely because consumers are more likely then to notice the fees, dislike them, and switch to cash in order to avoid them. Over time, this behavior will place downward pressure on swipe fees, which credit card companies will be forced to reduce in order to prevent more and more consumers from switching to cash. See Levitan, The Antitrust Super Bowl, supra, at 313 (noting that after surcharges were permitted in Australia and customers were notified of same, swipe fees there declined significantly); FAC ¶ 27.

Plaintiffs also argue that, in the absence of being able to impose surcharges and label them as such, some retailers cannot effectively call consumers' attention to the price differences between cash and credit, and therefore must charge higher headline prices for everyone. Surcharge bans like section 518 thus in effect force cash users (who are said to be disproportionately poor and minority persons), to subsidize the retail purchases of credit card users. See Adam J. Levitin, Priceless? The Social Costs of Credit Card Merchant Restraints, 45 Harv. J. on Legis. 1, 35 (2008); FAC ¶¶ 28–29. This hidden, regressive subsidy for credit card usage is not insubstantial. See Scott Schuh, Oz Shy, & Joanna Stavins, Who Gains and Who Loses from Credit Card Payments? at 21 (Fed. Reserve Bank of Boston, Public Policy Discussion Paper No. 10–03, 2010) (“The average cash-paying household transfers $149 ... annually to card users,” each of whom on average “receives a subsidy of $1,333 ... annually from cash users.”).

Defendants, however, contend that, in enacting section 518, the New York legislature effectively concluded that a surcharge ban would actually protect consumers from unfair surprise and deception. Defendants note that consumers tend to plan and anchor their expectations around the advertised sticker price of a given item they intend to purchase. If a consumer later learns that she can earn a discount from that price for using cash, she is not harmed. But if the consumer later learns that there is an additional charge, above the sticker price, if she chooses to pay by credit card, her expectations may be frustrated.

Whatever its purported purpose, section 518 is the product of a decades-long battle between credit card companies on the one hand and retailers and consumer advocates on the other. In the early days of credit cards, credit card companies included clauses in their contracts with retailers that strictly forbade those retailers from charging different prices for cash and credit transactions. See Edmund W. Kitch, The Framing Hypothesis: Is It Supported by Credit Card Issuer Opposition to a Surcharge on a Cash Price?, 6 J.L. Econ. & Org. 217, 219–20 & n. 4 (1990); FAC ¶ 32. That practice ended in 1974 when Congress amended the Truth in Lending Act to provide that a “card issuer may not, by contract or otherwise, prohibit any ... seller 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.” Fair Credit Billing Act, Pub. L. No. 93–495, tit. III, § 306, 88 Stat. 1500, 1515 (1974) (codified at 15 U.S.C. § 1666f(a)).

Thereafter, the battleground moved from whether merchants could charge different prices for cash and credit to how merchants could communicate those different prices to consumers. In 1976, at the urging of the credit card industry, Congress passed another amendment to the Truth in Lending Act, providing, as section 518 now provides, that “[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...