Supreme Court Decisions in Credit Card Cases Favor Small Business

Date: April 06, 2017

Related Content: Legal - Blog Regulations

Last week the Supreme Court touched upon two cases important to small business – both concerning rules for merchants accepting credit cards. The major headline was in Expressions Hair Design v. Schneiderman. In this case five businesses are challenging a New York law that prohibits them from charging a surcharge to customers choosing to pay with a credit card. The businesses argued that rather than regulating economic conduct, the law is actually regulating speech and that it is therefore unconstitutional under the First Amendment. After all, the law doesn’t prohibit different prices dependent upon the way customers pay; rather, the practical impact of the law is simply to prohibit businesses from using the term “surcharge.” They are allowed to offer “discounts” for customers paying in cash.

To illustrate this point, consider a customer who makes a $10 purchase. Assuming a 3% transaction fee, the merchant might want to post a sign specifying that the item in question costs “$10.00, plus a 3% ($0.30) surcharge for credit cards.” But New York law prohibits that sign. This means that the only way the merchant can charge more for credit card transactions is to post a sign saying that the baseline price is $10.30, while offering a $0.30 discount to customers paying in cash. Doing so would not run afoul of the New York law.

In the Court below, the Second Circuit Court of Appeals had previously concluded that the New York’s law permissibly regulates economic conduct, not speech—meaning that the protections of the First Amendment should not apply. But, the Supreme Court disagreed. The Supreme Court said that the New York law does in fact regulate speech, and that the First Amendment applies. This means that the Second Circuit must now determine whether the law’s restrictions on speech go so far as to violate the First Amendment rights of businesses. If successful in striking-down this law, these merchants may affect big changes in credit card processing rules. This would be a major coup-d’état for businesses. To be sure, decision striking down New York’s law would also call into question similar legal restrictions in numerous other states. So we will certainly continue to monitor developments in this case.

Separately, the Supreme Court issued an order, earlier this week, declining to hear arguments in Photos Inc. v. Home Depot, which is also—incidentally—out of the Second Circuit. That case concerned the swipe fees that credit card companies charge businesses for accepting their cards. As you may recall, we told you last month about how the Second Circuit overturned a proposed settlement agreement in this case because it was not giving credit card merchants a fair shake. This was welcome news to us. In fact, NFIB opposed that settlement on behalf of our members. As we argued, the proposed settlement offered too little compensation and was under-protective of small businesses.

Now that the Supreme Court has declined to revive the settlement, the case will proceed forward. At the end of the day, we hope the Court will either invalidate the most burdensome and oppressive terms imposed on merchants in their credit card servicing agreements, or that the parties may agree to a settlement that truly vindicates small business rights. We’ll continue to follow these cases and to offer further commentary and analysis.

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