* Decision by Manhattan federal judge Jed Rakoff
* NY law banning card surcharges violated First Amendment
By Jonathan Stempel
NEW YORK, Oct 3 (Reuters) - In a decision with possible broad implications for U.S. consumers and retailers, a federal judge has blocked enforcement of a New York state law that bans merchants from imposing surcharges on customers who pay by credit card rather than cash.
Supporters of the decision by U.S. District Judge Jed Rakoff in Manhattan said it could make it easier for retailers to transact with customers, and make customers better understand the costs of making purchases with credit cards.
Rakoff agreed with several retailers that the law, which carries potential criminal penalties including prison, violated their free speech rights under the First Amendment because it prohibits them from telling customers about the extra costs of paying with plastic.
The law "perpetuates consumer confusion by preventing sellers from using the most effective means at their disposal to educate consumers about the true costs of credit-card usage," Rakoff wrote in a 35-page decision on Thursday.
"Even beyond the informational content of surcharges, sellers' inability to effectively inform consumers of the true costs of credit has the effect of artificially subsidizing credit at the expense of cash, increasing overall credit-card usage and consumer debt," he added.
Five retailers including a hair salon, an ice cream store and a martial arts studio had challenged the constitutionality of the law, which was enacted after the U.S. Congress in 1984 allowed a federal law prohibiting surcharges to lapse.
The decision could call into question the status of similar laws in nine U.S. states. Those states include the four most populous - California, Florida, New York and Texas - as well as Colorado, Kansas, Massachusetts and Oklahoma.
"This is a big victory, not just for consumers and merchants in New York but across the country," Deepak Gupta, a partner at Gupta Beck in Washington, D.C. representing the plaintiffs, said in an interview. "The card industry wants to perpetuate the myth that using a credit card is free, or priceless. But the cost is baked into the price of all the goods and services we buy."
IMPACT ON OTHER LAWS
Authorities including New York State Attorney General Eric Schneiderman, Manhattan District Attorney Cyrus Vance and Brooklyn District Attorney Charles Hynes argued that the state law protected shoppers by enabling them to rely on advertised prices, rather than be surprised at checkout with surcharges.
"We are reviewing the decision and considering our next step," Melissa Grace, a spokeswoman for Schneiderman, said.
The offices of Vance and Hynes had no immediate comment.
"Rakoff is well-known and works in one of the most powerful district courts in the country," said Clay Calvert, a University of Florida professor and First Amendment specialist. "His reasoning could be very influential on judges in other courts considering similar laws elsewhere."
The judge issued a preliminary injunction against enforcing the law while the case before him is pending. He also let the plaintiffs pursue claims that federal antitrust law preempted the New York law.
Retailers have long complained about the cost of accepting credit cards, including the so-called interchange or "swipe" fees that they pay to card networks such as MasterCard Inc and Visa Inc.
John Gleeson, a federal judge in Brooklyn, New York, is weighing approval of a $7.2 billion class-action settlement between retailers, MasterCard and Visa over swipe fees.
Rakoff said the information conveyed by surcharges "is relevant to current debates over swipe fee regulation, as well as financial regulation more broadly."
RETAILERS, CONSUMER GROUPS OPPOSED LAW
The New York law subjects retailers to a potential one-year prison sentence and $500 fine for imposing surcharges.
In practice, it prevents retailers from selling a $100 item for $102 to customers who pay with a credit card.
By contrast, it does nothing to stop retailers from offering "discounts," such as by charging $98, to customers who use cash.
Several retailers and consumer groups supported the plaintiffs, including supermarket chains Kroger Co and Safeway Inc, drugstore chain Walgreen Co, the U.S. Public Interest Research Group and Consumer Action.
Calvert, the Florida professor, said Rakoff's decision "will make consumers more aware of the swipe fees that retailers pay, and if enough become more outraged, it could put pressure on lawmakers in Washington to cap the fees."
The Manhattan case is Expressions Hair Design et al v. Schneiderman et al, U.S. District Court, Southern District of New York, No. 13-03775.