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 said they 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. Filings in Florida and Texas couldn’t immediately be confirmed in court records. Plaintiffs in the California case include a restaurant, a web design firm and a laundry company, according to a complaint filed today in Sacramento federal court.
Credit-card purchases cost retailers more to process than other forms of payment. The laws generally allow merchants to charge lower prices for cash transactions, 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. He says the laws are too vague and impinge on free speech rights.
“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.”
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 law last year. The state is appealing the decision.
The challenges to state surcharge bans are related to nationwide antitrust settlements with U.S. merchants by Visa Inc. (V:US), MasterCard Inc. (MA:US) and American Express (AXP:US) 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 received preliminary approval last month. While it doesn’t include a damages payment, it also granted businesses more 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 swipe 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.
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