* Decision by Manhattan federal judge Jed Rakoff
* NY law banning card surcharges violated First Amendment
By Jonathan Stempel
NEW YORK, Oct 3 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.