Merchants in three states are challenging laws that prevent them from imposing extra charges for credit-card purchases, months after settling with the card companies over transaction fees.
The merchants filed lawsuits today in Florida, Texas and California as part of a campaign to eliminate the laws that they claim were enacted at the behest of credit-card companies in the 1980s. The cases, filed in federal courts Tallahassee, Austin and Sacramento, were brought by businesses including a restaurant, a web design firm, a jewelry store, a landscaping company, a precious metals dealer and a model-train shop.
Credit-card purchases cost retailers more to process than other forms of payment. By passing the cost along as a “surcharge,” retailers may be able to steer customers to lower-cost cash and debit-card transactions, the plaintiffs alleged. Also, the bans force some shops to charge all customers the same higher price, according to the merchants.
The laws generally let stores charge less for cash purchases, which they can describe as a “discount,” while forbidding them from calling higher prices for credit-card payments a “surcharge,” said Deepak Gupta, a lawyer for the merchants.
“It’s just outlawing one label versus another,” Gupta said. “What this really is at the end of the day is an industry speech code.” He says the laws are too vague and impinge on free speech rights.
Ten U.S. states have laws on the books banning surcharges, according to Gupta. U.S. District Judge Jed Rakoff in Manhattan in October barred New York state from enforcing its statute, finding that it violated the free speech protections of the U.S. Constitution.
“Alice in Wonderland has nothing on section 518 of the New York General Business Law,” Rakoff wrote of the measure last year. The state is appealing the decision.
The challenges to state surcharge bans are related to nationwide antitrust settlements between U.S. merchants and Visa Inc., MasterCard Inc. and American Express Co. over swipe fees, which are charged to businesses when consumers pay with credit cards.
The $5.7 billion settlement with Visa and MasterCard, approved by a federal judge in Brooklyn, New York, in December, allows merchants to impose surcharges under certain conditions.
The American Express settlement won preliminary approval last month. While it doesn’t include a damages payment, it granted businesses freedom to add surcharges to steer customers to less costly debit cards.
Lawsuits over the surcharge bans are a move to “take back power from financial institutions,” said Gary B. Friedman, a lawyer for merchants in the American Express case, who is also representing businesses in the cases filed today.
Florida, Texas and California, three of the most populous U.S. states, are the “next step” after the win in New York, he said.
Behavioral economic research has shown that consumers react differently to the use of terms “discount” and “surcharge,” Gupta said. Consumers tend to change their behavior to avoid extra charges, he said.
Paula Cook, a plaintiff in the Texas case and owner of precious-metals dealer Montgomery Chandler Inc., said in a phone interview that, to account for the fees, she has to advertise higher prices than she would like. Customers typically spend $5,000 to $10,000 on purchases, making the credit-card fees of 2.6 to 3.5 percent significant, she said.
“We should just be able to say it’s 4 percent” and let customers know “I’m not getting it but I have to charge it,” she said.
Swipe, or interchange, fees are generally higher in the U.S. than in other countries because they are “hidden” from consumers, the lawyers said in the complaint filed today in Sacramento.
About 41 percent of U.S. credit-card users are completely unaware of the fees, which help pay for rewards programs, according to the complaint. Merchants also pay fees for debit card transactions, which are regulated by the government under the 2010 Dodd-Frank Act and aren’t at issue in the lawsuits filed today.
Fearful of crossing the line between surcharges and discounts, some merchants choose not to engage in differential pricing at all for credit cards and end up passing higher prices along to all customers, the lawyers said.
The result is “regressive,” Friedman said in an interview. “Food-stamp recipients are subsidizing frequent-flier miles.”
In some states, such as New York and Florida, businesses that violate the surcharge bans can be subject to criminal penalties, Gupta said.
Merchants can be fined $500 and jailed under the surcharge law in Florida, according to the complaint filed in Tallahassee. A plaintiff in that case, Key West jewelry store TM Jewelry LLC, got a letter from the state attorney general’s office in 2013 warning it that surcharges were illegal and telling the company to “suspend this practice immediately to avoid the possibility of further action by our office,” according to the complaint.
The jewelry store, which had been imposing higher prices for credit-card transactions, stopped charging different amounts for credit and other purchases, according to the complaint.
In New York, where offenders can also be fined $500 and jailed, the attorney general’s office has investigated gas stations over surcharging credit-card transactions, according to the lawyers.
Whitney Ray, a spokesman for Florida Attorney General Pam Bondi, said in an e-mail that the office hasn’t been served with the merchant’s suit. He declined to comment further.
Charlie Castillo, a spokesman for Texas Attorney General Greg Abbott, had no immediate comment.
Representatives of California Attorney General Kamala Harris didn’t immediately respond to a call seeking comment.
The cases are Italian Colors Restaurant v. Harris, 2:14-cv-00604, U.S. District Court, Eastern District of California (Sacramento); Rowell v. Abbott, 1:14-cv-190, U.S. District Court, Western District of Texas (Austin); Dana’s Railroad Supply v. Bondi, 1:14-cv-00025, U.S. District Court, Northern District of Florida (Tallahassee).