N.Y. Judge Blocks 'Incomprehensible' Credit Card Surcharge Law
Since the passage of a state law provision on credit card purchases nearly 30 years ago, vendors in New York could tell customers that they'd get a discount for paying for items with cash instead of plunking down a credit card. But if retailers called the extra cost tied to credit card purchases a "surcharge," they'd be liable for penalties under the law.
The distinction didn't make any sense to a group of retailers represented by Deepak Gupta of Gupta Beck and Gary Friedman of the Friedman Law Group, who challenged the law in federal court earlier this year. Happily for them, it also perplexed U.S. District Judge Jed Rakoff in Manhattan. On Thursday Rakoff granted a preliminary injunction blocking enforcement of the law, concluding it was nonsensical and -- more importantly -- unconstitutional.
"Alice in Wonderland has nothing on section 518 of the New York General Business Law," Rakoff wrote. "[T]his virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 unconstitutional."
The plaintiffs filed the lawsuit in June, claiming that the state's no-surcharge law violates the First Amendment, that it's unconstitutionally vague under the Due Process Clause of the Fourteenth Amendment, and that it's preempted by federal antitrust law. The initial complaint named New York Attorney General Schneiderman as defendant, but it was amended in July to add district attorneys in Manhattan, Brooklyn, and Broome County.
In a motion to dismiss the case, the defendants argued that the plaintiffs lacked standing since none of them had faced enforcement actions. But Rakoff ruled that the argument missed the point. The state law had a chilling effect on the plaintiffs' free speech, he wrote, and plaintiffs "legitimately fear enforcement and therefore have standing."
"Indeed, by truthfully and effectively conveying the true costs of using credit cards, surcharges can actually make consumers more informed rather than less, thus furthering rather than impeding the purposes of the First Amendment," Rakoff wrote. "It would be perverse to conclude that a statute that keeps consumers in the dark about avoidable additional costs somehow 'directly advances' the goal of preventing consumer deception."
The ruling isn't attorney Gary Friedman's first big victory in a legal battle over credit card fees. We twice named him Litigator of the Week (here and here) for his efforts leading a massive antitrust class action against American Express over merchant fees.
"Today's ruling is an absolute watershed," Friedman told us Thursday. He said Rakoff's finding that the New York law is unconstitutional will be useful in getting nine remaining states that have similar laws to repeal them. "Today's decision from Judge Rakoff is going to make it easy for a state legislator to say 'Why do we want to have this unconstitutional statute on our books?'" Friedman said.
Friedman added that he hopes the defendants will treat the preliminary injunction ruling as decisive, and not press ahead in defending the law. "This was the whole ballgame," he said.
Melissa Grace, a spokeswoman for Schneiderman, said the AG's office was reviewing the decision and considering its next steps.