Cash Discounts, Credit Surcharges and Free Speech
In New York and nine other states, merchants are barred from charging credit-card purchasers a surcharge, but are allowed to offer discounts for paying in cash. The U.S. Supreme Court on Tuesday took up the fascinating question of whether this requirement violates the merchants’ freedom of speech.
It’s a juicy constitutional question: Are prices subject to the First Amendment at all? And it sweetens the pot with an intellectual problem in law and economics: Given that we know customers react differently to surcharges and discounts, even when they’re economically equivalent, should the state be allowed to ban one and require the other?
The New York law challenged in the case, Expressions Hair Design v. Schneiderman, was passed in 1984, after Congress allowed a similar federal ban on credit-card surcharges to lapse. For years it hardly mattered, because the industry itself prohibited surcharges as part of its contracts with merchants. In 2013, after being sued in a class action, Visa and Mastercard agreed to drop the contractual ban, making the New York law a litigation target.
The law, as interpreted courts, assumes the existence of something the courts have called a “regular price,” and bans surcharges above it. In the words of the U.S. Court of Appeals for the 2nd Circuit, “If a seller’s regular price is $100, it may not charge credit-card customers $103 and cash customers $100, but if the seller’s regular price is $103, it may charge credit-card customers $103 and cash customers $100.”
Judge Jed Rakoff, who through his writings and opinions has become arguably the most outspoken and influential district judge in the federal system, struck down the law as violating the First Amendment. To give you a sense of his attitude, the first line of his opinion read, “Alice in Wonderland has nothing on section 518 of the New York General Business Law.”
Rakoff’s argument was, essentially, that it violates free speech to prohibit a merchant from calling spade a spade. If the discount and the surcharge are basically the same in economic terms, the state can’t bar the merchant from truthfully describing the transactions.
But the 2nd Circuit reversed Rakoff’s judgment. In an opinion by Judge Debra Livingston, a widely respected former Columbia Law School professor, the court first held that the First Amendment didn’t apply to the law at all, because the law only regulates price. And price controls, the court pointed out, have never been subjected to First Amendment scrutiny. The court went on to reason that “if prohibiting certain prices does not implicate the First Amendment, it follows that prohibiting certain relationships between prices also does not implicate the First Amendment.”
That doesn’t seem quite right to me. The issue in the case isn’t the setting of prices or the relationship between them. It’s how merchants are allowed to describe the prices that exist as a matter of economic reality. That should subject the rule to at least the level of free-speech analysis that applies to commercial transactions, which is more forgiving to regulation than the level applied to other speech, but still has some bite.
What seems to have motivated Livingston’s opinion is an argument drawn from behavioral law and economics about the way humans respond to different depictions of the same economic reality. The judge cited several fundamental studies, including a famous one on “loss aversion” by the Nobel-winning psychologist Daniel Kahneman, which show that losses loom larger to most people than gains. As a result, many consumers would decline the cash discount but would object to the credit-card surcharge.
Livingston reasoned that the differences in reaction authorize the states’ regulation. As she put it, “although the difference in the consumer’s reaction to the two pricing schemes may be puzzling purely as an economic matter, we are aware of no authority suggesting that the First Amendment prevents states from protecting consumers against irrational psychological annoyances.”
The Supreme Court must decide not only whether free speech applies at all to the law but also whether a state can regulate economically identical transactions differently.
The best solution for the justices would be to subject the New York law to free-speech scrutiny, but not bar the government from ever regulating the way economic transactions are described.
As Rakoff correctly noted, it seems bizarre to ban merchants from telling their customers that in effect they are paying a credit-card surcharge by declining the cash discount. That’s speech, albeit speech connected to commerce.
For a regulation on commercial speech to be constitutional, it must advance an important government interest by means substantially related to that interest. The government cannot have an important interest in banning the conveying of truthful economic information, which is what merchants would be doing if it weren’t for the law.
Yet there may be situations where the government is permitted to regulate even true commercial speech, for example when there is behavioral evidence that the information is likely to be misunderstood by customers. That could come up in the context of advertising or risk disclosures to consumers.
In the case of the surcharges, however, the state should not be held to have a sufficient interest in persuading consumers to use credit cards even when it goes against their economic interests. The credit-card lobby would like that, of course. And there is a respectable pro-consumer argument that says it’s rational to buy on credit. But these reasons don’t outweigh the merchant’s right to speak the economic truth -- or the consumer’s right to hear it.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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