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‘Swipe fee’ can be passed on to charge customers

Supreme Court says usage fees are ‘free speech’
Published: April 21, 2017
With every passing year, more and more consumers in the U.S. and Canada are choosing to pay for goods with credit cards rather than cash. While this makes transactions simple for customers, retailers can be hurt by the 2 to 3 percent charge administered by credit-card companies for every swipe.

While some merchants raise prices accordingly and charge both cash and card-carrying customers more, others would prefer to pass the fee along to only credit-card users by way of a surcharge.

The latter option was, until recently, impossible in 10 states, where state laws prohibited retailers from imposing extra charges to cover “swipe fees”. Even if a retailer gave a discount to customers paying cash, some laws also prevented businesses from displaying that discount to customers ahead of time.

One of these laws in New York, enacted in 1984, made it a crime to impose a surcharge for the use of credit cards The law subjected merchants to a potential one-year prison sentence and $500 fine for imposing credit-card surcharges. In April 2016, five New York businesses, including a hair salon and an ice cream parlor, banded together to fight the law and for their right to be transparent about the fees imposed on them by credit-card companies and the ensuing charges customers would receive for using plastic.

On March 29, the U.S. Supreme Court ruled that laws like this amount to a speech regulation that could be unconstitutional. It ruled 8-0 in favor of these businesses to protect their communication to customers under the First Amendment.

The case, Expressions Hair Design v. Schneiderman, made the argument that the laws kept them from explaining to customers that credit-card transactions cost the retailer and cut into their profits. Other states with similar laws are California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma and Texas, as well as Puerto Rico.

“Those fees add up, and the merchants allege that they pay tens of thousands of dollars every year to credit-card companies,” Chief Justice John G. Roberts Jr. wrote in his opinion on the case. “Rather than increase prices across the board to absorb those costs, the merchants want to pass the fees along only to their customers who choose to use credit cards. They also want to make clear that they are not the bad guys—that the credit-card companies, not the merchants, are responsible for the higher prices.”

The credit-card industry has petitioned for “anti-surcharge laws” since the 1980s, fearing that added costs would deter consumers from using credit cards. It has long been the mission of the industry to make the retailer fees invisible to customers.
With such laws being ruled unconstitutional, Chief Justice Roberts laid out some examples as to how the plaintiffs in the case could now make it clear to customers that surcharges would be applied to credit-card users: “Petitioner Expressions Hair Design might, for example, post a sign outside its salon reading ‘Haircuts $10 (we add a 3 percent surcharge if you pay by credit card),’ ” the chief justice wrote. “Or, petitioner Brooklyn Farmacy & Soda Fountain might list one of the sundaes on its menu as costing ‘$10 (with a $0.30 surcharge for credit-card users).’ ”

Chief Justice Roberts concluded, that the New York law, “In regulating the communication of prices rather than prices themselves, regulates speech.”

Despite the Supreme Court’s unanimous ruling, it did not strike down New York’s law altogether. It will now be sent back to the appeals court in New York to determine if the law infringes on merchants’ constitutional free speech rights.