New York State Court of Appeals Ruling Requires Fuller Disclosure for Supplier Surcharging: What it Means to the Credit Team and a Nationwide Surcharge Rollout
By: Scott Blakeley, Esq
While The New York State Court of Appeals has ruled on the topic of surcharges, the matter has been sent to the Second Circuit Court of Appeals to determine the law’s validity. Pending the court’s opinion, credit practitioners should be aware of the potential impacts to the billing process. CRF will report on the Second Circuit Court of Appeals as their opinion is rendered.
On October 23, 2018, the New York State Court of Appeals (Appeals Court) delivered the response to a certified question handed down from the U.S. Federal Court of Appeals for the Second Circuit: What must the merchant (supplier) disclose to customers when they surcharge in order to comply with New York’s no-surcharge law – the percentage cost of acceptance, or something more, by actually calculating the dollar amount of the surcharge?1
According to the majority opinion from the Appeals Court, a supplier must disclose the total dollar amount of the surcharge, not merely the surcharge percentage (say 2.25%) to comply with New York’s no-surcharge law. What does the Appeals Court’s ruling mean for suppliers’ surcharge disclosure to customers, especially in contrast with the Visa and MasterCard surcharge rules?
Enacted in 1984, New York’s no-surcharge law prohibits sellers from imposing a surcharge on customers who use credit cards in lieu of paying by check, cash or other payment forms. In 2013, five merchants, led by Expressions Hair Design, sued New York in federal court arguing to restrict the enforcement of New York’s no-surcharge law as a violation of First Amendment rights and being unconstitutionally vague. Merchants’ claim to the violation of First Amendment rights stemmed from the method used to display price differentials to customers.
Making its way through the Southern District of New York to the Second Circuit Court of Appeals, it reached the U.S. Supreme Court in 2017. The Supreme Court vacated the Second Circuit’s ruling that New York’s no-surcharge law does regulate speech through the “communication of prices rather than the prices themselves.”2
The Second Circuit tasked the New York State Court of Appeals to clarify New York’s surcharging disclosure requirement to customers.
Visa and MasterCard Surcharge Rule Disclosures
In 2013, Visa and MasterCard amended their network rules to allow for surcharging. To comply with the network rule surcharges, suppliers must disclose to customers their surcharge, which is the interchange fee, and cannot bury the surcharge through a price increase. The customer surcharge disclosure, which can be a line item on an invoice, does not require the supplier to do the math and calculate the dollar amount of the surcharge on the invoice. For New York, the Appeals Court’s ruling requires the supplier to actually calculate the dollar amount of the surcharge.
New York’s Surcharge Disclosure Ruling
The Appeals Court’s decision provides further analysis to the recent surcharge decisions in California, Florida, and Texas. Retailer litigation challenges in each state has defeated its no-surcharge laws. The Appeals Court found the no-surcharge law to be a disclosure law and clarifies the disclosure detail suppliers must make to comply with New York’s no-surcharge law.
The Court Mandates Specific Disclosure of Surcharge Amount
A majority of the Appeals Court found New York’s no-surcharge law is violated when a supplier does not disclose to customers the full dollar cost of the surcharge. Merely disclosing the interchange fee as the surcharge is not sufficient under New York’s law, although sufficient under the card network rule, as it may be confusing for customers to undertake an arithmetical calculation to evaluate total cost.
The Second Circuit Court of Appeals will now determine whether New York’s no-surcharge law is a valid restriction on commercial speech and either accept or reject the Court of Appeal’s interpretation to issue a final ruling.
What the Court’s Ruling Means to the Supplier Surcharge Rollout
The most expedient way for a supplier to comply with the Appeals Court’s ruling is to calculate the surcharge amount by disclosing both the interchange percentage amount (say 2.25%) and multiplying that by the invoice amount. In other words, the supplier does the mathematical calculation. Given a supplier’s nationwide surcharge rollout, a best practice may be to make this calculation and disclosure no matter where the customer is located.
Scott Blakeley is a principal at Blakeley LLP, where he practices creditors’ rights and bankruptcy. His email: firstname.lastname@example.org.
1- Expressions Hair Design, v. Eric T. Schneiderman, &c.100.U.S.1,2.
2- Expressions Hair Design v Schneiderman, 877 F3d 99, 101 [2d Cir 2017].