New York Law Regulates Business Owners’ Speech

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Justices unanimously decide that a New York law prohibiting credit card surcharges regulates speech.

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What is the difference between a store owner who sets a price tag at $10.30 but charges cash users only $10.00, and a store owner who sets a price tag at $10.00 but charges credit card users $10.30? According to a New York General Business Law (“section 518”), only the first scenario is legal.

The New York law provides that “no seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means”— meaning that businesses are allowed to give discounts to cash users but cannot impose surcharges on credit card users.

In Expressions Hair Design v. Schneiderman, five New York business owners challenged this law.

The business owners alleged that section 518 violates their First Amendment right to freely communicate prices, and also argued that the law is “unconstitutionally vague” because the New York Legislature did not define the word “surcharge.”

The business owners explained that each time a customer uses a credit card to make a purchase, the owners are required to pay a small transaction fee—generally two percent or three percent of the purchase price—to the credit card company. Although the amount may seem small, those payments can accumulate to more than $10,000 per year. Accordingly, the business owners wanted the freedom to display a cash price, along with an additional surcharge for credit card users, in order to pass on the burden to customers.

The owner of Expressions Hair Design, one of the businesses that challenged section 518, explained that he wanted to put up a sign outside his hair salon stating, “Haircuts $10” with another statement in parentheses below stating “we add a 3 percent [or $0.30] surcharge if you pay by credit card.”

The U.S. Court of Appeals for the Second Circuit ruled against the business owners, holding that section 518 did not violate the First Amendment. The Second Circuit characterized the setting of a price as an action rather than speech—in other words, it determined that the law “regulated conduct, not speech.”

In defining the word “surcharge,” the Second Circuit relied on the term’s ordinary meaning, which it said is “a charge in excess of the usual or normal amount.” The Second Circuit reasoned that the business owners’ signs would violate the New York law, since people would consider the initial posted price as the “usual or normal amount.”

The U.S. Supreme Court disagreed, at least in part.

Chief Justice Roberts, in the majority opinion for the Court, explained that because section 518 does not affect the actual price that business owners charge, the law effectively regulates only how owners communicate their prices. Chief Justice Roberts observed that, under section 518, a business owner “is not free to communicate his reason for the difference in price,” and is instead required to communicate the lower price as a discount. Accordingly, the Court held that New York’s law regulates speech.

However, because the Second Circuit had determined that section 518 did not regulate speech at all, the Supreme Court decided not to consider whether section 518 could survive First Amendment scrutiny—and instead sent the case back to the Second Circuit to evaluate whether, as a regulation of speech, section 518 is permissible under the First Amendment.

The Supreme Court agreed with the Second Circuit that section 518 is not unconstitutionally vague in relation to the business owners, because the law specifically prohibits a surcharge.

Justice Sotomayor concurred in the judgment, but explained she would have requested the New York legislature to provide clear definitions for section 518 before making a final judgment.

Justice Sotomayor asserted section 518 is open to three different interpretations. One interpretation would require business owners to charge the same price for all customers, whether they pay with cash or a credit card. Another interpretation would prohibit business owners from displaying one price and charging credit card users a higher price, and a third interpretation would only prohibit business owners from characterizing the difference in price as a surcharge, regardless of how the price is displayed.

Justice Sotomayor explained that—because section 518 is a state law—the outcome of the constitutional challenges in this case rests upon how the state courts choose to interpret section 518; and the state courts could always interpret the statute in a way that does not implicate any constitutional questions.

Justice Sotomayor argued that the majority should have requested that section 518’s ambiguity be resolved before making a final judgment—ambiguity that, she stated, prevented the Supreme Court from making a full ruling regarding whether the law violates the business owners’ freedom of speech. Therefore, although she agreed with the Court’s ultimate conclusion, she argued that the Court should have deferred making a decision on the case until New York state courts assign section 518 a clear interpretation, a process called certification.

The Supreme Court’s decision returns the case to the Second Circuit, where the case will be sent back to the state court to define the statute’s terms. This is a long process, Justice Sotomayor explained, which could have been avoided.

This essay is part of an eight-part series, entitled The Supreme Court’s 2016–2017 Regulatory Term.