Credit cards are the fastest growing payment form. But the payment form is the most expensive for suppliers, leading many to rollout surcharge programs to offset the majority of the card costs. The Supreme Court’s recent decision will settle the constitutionality of state no‐surcharge laws.
For many suppliers, credit cards have not only become the preferred payment form for customers, but one of the most significant operating costs for suppliers. A mandate from the finance team is to make cards cost competitive with other payment forms. The way to offset rising costs is through a surcharge, passing the interchange fee (approximately 85% of the card charge) to the customer.
As part of a class action settlement with retailers in 2013, Visa and Mastercard amended the network rules to allow merchants, including suppliers, to surcharge. With the card networks allowing surcharging, suppliers considered as part of their nationwide surcharge rollout, whether 10 states that enacted nosurcharge laws limit the suppliers’ surcharge strategy.
The constitutionality of the state no‐surcharge laws has been vigorously challenged, with the litigation focused on whether the no‐surcharge laws violate the First Amendment and commercial speech on pricing, or instead whether they regulate economic conduct. No‐surcharge states allow merchants to provide discounts to cash and check payers, but not add a surcharge to credit cards. The Supreme Court has agreed to hear an appeal from the Second Circuit Court of Appeals that involves the constitutionality of no‐surcharge laws. The Supreme Court is expected to rule not later than June, 2017. How will the Supreme Court’s ruling affect suppliers’ right to surcharge? Are there steps suppliers should take during the pendency of the Supreme Court’s review, whether a surcharge has been rolled out or is about to be?
States No‐Surcharge Law Overlay
In 1976, the U.S. Congress enacted a federal law prohibiting surcharging. The credit card networks enacted contractual provisions in their merchant agreements barring surcharging. In 1983, the federal law barring surcharging expired. With the sunset of the federal law, the credit card networks lobbied state legislatures to enact no‐surcharge legislation to discourage retailers from surcharging consumers. Those 10 states that enacted no‐surcharge laws are: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas.
The uniform theme of the states enacting no‐surcharge laws is to protect consumers within their states from retailers adding a charge to cards, therefore acting as a form of tax on those consumers choosing cards to pay for their goods or services.
The no‐surcharge laws allow merchants to charge higher prices when a customer pays with a credit card, provided they disclose that the price difference is a cash discount and not a card surcharge. While surcharging is a more accurate disclosure the costs the merchant incurs with accepting cards rather than a cash discount, the card networks were concerned in lobbying for no‐surcharge legislation that surcharging may discourage card use.
Litigation Challenges to No‐Surcharge Laws
Of the ten states that have enacted no‐surcharge laws, four have had their laws challenged as unconstitutional. In 2013, the first litigation challenge was brought in New York, where five New York businesses sued New York, challenging the law on free speech grounds. The District Court found the nosurcharge law unconstitutional and overturned the law, but was reversed on appeal to the Second Circuit Court of Appeals. The Second Circuit determined that prices set by retailers was not “speech”, and therefore, the First Amendment was not relevant. The Second Circuit focused more on how surcharging was labelled, rather than the implications of the fee or its cost to merchants and consumers. Similar litigation challenges were brought in California and Texas. In March 2015, a federal court in California found its no‐surcharge law unconstitutional and unenforceable, which the state attorney general has appealed to the Ninth Circuit Court of Appeals. On the other hand, in Texas the no‐surcharge law was upheld, and that decision was affirmed by the Fifth Circuit Court of Appeals. By contrast, the Florida no‐surcharge law was upheld, but reversed on appeal by the 11th Circuit Court of Appeals. The card networks are not directly involved in the litigation challenges, but deferring to the states’ nosurcharge defense.
The Topic for the Supreme Court to Decide
The U.S. Supreme Court granted review of the Second Circuit Court of Appeals, where the court dismissed the free speech arguments and found the New York law only regulated economic conduct. The Supreme Court is the highest federal court and has the final ruling on constitutional law, which is at issue with the no‐surcharge laws.
The businesses challenging the state no‐surcharge laws contend the surcharge bar violates their free speech rights because it prevents them from freely disclosing their pricing alternatives. Merchants are
not allowed to say they charge card customers a higher price for cards, although a surcharge is a more accurate description of the costs of cards. An example: a product is priced at $1,000, plus $20 if a credit
card is used. This is a surcharge and impermissible under the no‐surcharge laws. But if the product is priced at $1,020, with a $20 discount for cash, is permissible.
More States Enacting No‐Surcharge Laws?
During the pendency of the Supreme Court’s consideration of the no‐surcharge laws, is there an effort by other states to adopt no‐surcharge laws? The answer is no. The chart below summarizes recent states’ efforts to consider enacting no‐surcharge laws. Not one state has adopted anti‐surcharge legislation since Visa and Mastercard settled their class action litigation and amended their rules to allow suppliers to surcharge customers in 2013.
Retail/Consumer vs. Supplier/Business Customer and No‐Surcharge Litigation
The focus of the no‐surcharge litigation is retailers complaining about pricing disclosures with point of sale payments by consumers. A number of national retailers filed amicus briefs in support of the plaintiff retailers requesting the Supreme Court to rule on the issue. While the Circuit Court rulings have not expressly carved out suppliers and their business customers from the reach of no‐surcharge laws, the entire focus of the no‐surcharge litigation challenge relates to the facts of retailers and consumers.
What It Means to the Supplier and a Surcharge Rollout
What is a supplier’s surcharge strategy in light of the Supreme Court agreeing to weigh in on the nosurcharge laws? Whether the supplier has rolled out a nationwide surcharge program, or is in the process of doing so, the focus is on the customer base. If the supplier is selling to B2B customers, as opposed to selling directly to consumers, the supplier’s best practice is to condition card acceptance on the customer and cardholder agreeing to a card payment agreement form, that includes a contractual waiver and governing law provision. That provision provides that customers consent to waive the application of the surcharge prohibition when paying by credit card. That language may read:
All credit card commerce between [Applicant] and
[Vendor] shall be governed by and interpreted in
accordance with the laws of the State of [ ] without
regard to conflict of law provisions thereof, and all actions,
disputes, and proceedings arising from, relating to or in
connection with credit card commerce between [Applicant]
and [Vendor] shall be subject to the exclusive jurisdiction of
the federal district courts for [State] or, in the event the district
court lacks subject matter jurisdiction, the [State] state courts
located in [County]. For the avoidance of doubt, the
foregoing is intended to be a mandatory forum selection
clause divesting all other courts of jurisdiction to hear any
actions, disputes, and proceedings arising from, relating to
or in connection with credit card commerce between
[Applicant] and [Vendor].
The contractual surcharge waiver for B2B customers would be enforced during the pendency of the Supreme Court’s consideration of the no‐surcharge ruling, and after the ruling if the Supreme Court upholds the enforceability of the no‐surcharge laws.
The takeaway for the credit team is that a conclusive ruling on the constitutionality of the no‐surcharge laws will be forthcoming by Q2 of 2017. Having said that, suppliers selling in the B2B space may contract around the no‐surcharge laws through a card payment agreement with customers containing a contractual waiver and choice of law provision.
Scott Blakeley is a principal at Blakeley LLP, where he practices creditors’ rights and bankruptcy law. His email is email@example.com