Cash or Card

Posted in: Consumer Law

Both the United States and Brazil have recently taken clear positions on the laws that regulate merchants charging different amounts for goods depending on the method of payment. It is thus instructive to look at the similarities and differences between the two countries’ laws on surcharges.

The U.S. Supreme Court recently decided Expressions Hair Design v. Schneiderman, a suit brought by merchants challenging New York General Business Law §518, providing that “[n]o 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.” Five New York businesses and their owners who wished to impose surcharges for credit card use (any means of increasing the regular price to a cardholder which is not imposed upon customers paying by cash, check, or similar methods) filed suit against state officials, arguing that the law violates the First Amendment by regulating how they communicate their prices, and that it is unconstitutionally vague under the Due Process Clause of the Fourteenth Amendment.

The New York Case and the Unconstitutionality of the Surcharge

Whenever a consumer uses a credit card to make a purchase, the merchant is charged a swipe fee by the credit card issuer. In order to offset such costs, some merchants want to discourage the use of credit card or at least pass on the fees to customers by charging different prices to cash and credit customers. The New York law prohibits surcharges on credit card transactions although it permits discounts for the use of cash.

The merchants have defended that the law regulates how sellers may communicate their prices in opposition to the First Amendment, as long as such a regulation on speech prevents merchants from openly discussing costs of credit cards. Ten other states—including California, Connecticut, Florida, Massachusetts and Texas—have similar laws prohibiting merchants from overcharging consumers on credit card transactions. Credit card companies have been questioning such laws over the past few decades, aware of the negative impact that surcharge has on consumer behavior.

In 2013, the district court ruled in favor of the merchants by concluding that §518 regulates speech and violates the First Amendment under the commercial speech doctrine. In addition, because the law turned on the virtually incomprehensible distinction between what a vendor can and cannot tell its customers, the District Court considered the law unconstitutionally vague. In 2015, the U.S. Court of Appeals for the Second Circuit vacated the district court’s judgement with instructions to dismiss the merchants’ claims. It held that the law posed no First Amendment problem because price controls regulate conduct, not speech, so it did not determine whether §518 survives First Amendment scrutiny.

Initially, the Supreme Court accorded deference to the court of appeals’ interpretation of “surcharge” mentioned in section 518. Nevertheless, it has stated that “section 518 is not like a typical price regulation, but it regulates how sellers may communicate their prices; and, in regulating the communication of prices rather than prices themselves, §518 regulates speech.” Therefore, as long as the New York General Business Law’s prohibition of credit card surcharges regulates speech, according to the Supreme Court, it implicates the First Amendment. For this reason, although recognizing that section 518 is not vague as applied to petitioners, the Court vacated the decision and remanded the case to the court of appeals to determine whether Section 518 survives First Amendment scrutiny as a speech regulation.

Revisiting the Surcharge in Brazil

In Brazil, courts and consumer protection agencies understand that price differentiation based on payment method is illegal. But the possibility of imposing surcharge on credit card payments is now at stake because of a Provisional Measure (a special Executive Order) (MP no. 764/16), issued last year by President Michel Temer, which authorizes differentiation on goods and services prices offered to the consumer, depending on type (deferred or (at) sight) or method of payment (credit card or cash). The MP also states that any contractual clause prohibiting or restricting price differentiation provided for in payment service contracts is null and void (a prohibition resembling the Durbin Amendment to the Dodd-Frank Act in 2010).

The Measure statements, similar to part of Expressions Hair Design and its supporters’ claims, point out that price differentiation is an important mechanism for better measuring the value of products and services and brings relevant benefits to consumers. For example, it: (i) allows merchants to post different prices for different payment methods; (ii) modifies the market players balance; and (iii) minimizes cross-subsidy between consumers who do not use a card (mostly low income population) and those who use this payment method (mostly high income population). The statements also argue that differentiation (iv) induces lower average prices of products; (v) is aligned with the regulatory trend observed in other countries; and (vi) increases merchant’s legal certainty.

This MP departs from previous Brazilian regulations prohibiting surcharges on credit card transactions e.g.: (i) Ministerial Order No. 118/1994 of the Ministry of Finance, which states that there can be no price difference in transactions with credit card; and (ii) Resolution No. 34/1989, of the National Consumer Protection Council, which considers irregular any increase in the price of merchandise in credit card purchases. Both benchmarks are deemed illegal and ultra vires regulations by numerous legislative bills.

The new presidential regulation also snubs prevailing judicial precedent about surcharges. In 2016, the Superior Tribunal of Justice (STJ) (last instance in the Brazilian legal system for deciding issues not directly related to the Constitution), reaffirming previous rulings, decided in Miramar Gas Station Ltd v. City of Vitória that pricing based on payment method is illegal. In summary, the STJ stated that there is no confusion among the different legal relationships between (i) the financial institution (issuer) and the credit card holder (consumer); (ii) the credit card holder (consumer) and accredited business establishment (supplier); and (iii) the financial institution (issuer and, possibly, credit card administrator) and the accredited commercial establishment (seller of goods and services). The establishment is guaranteed the payment made by the consumer with the credit card, as the administrator assumes full responsibility for credit risks, including possible fraud. For assuming such risks, the commercial establishment pays to the issuer a previously contracted percentage of this transaction (swipe fee).

In addition, it has ruled that merchants, by admitting credit card purchases increase the commercial activity, sales and profits, due to credit card practicality, an increasingly customary payment method; credit card payments, once authorized the transaction, it releases the consumer from any obligation to the seller. Thus, credit card payment is a pro soluto, “sight payment”. Finally, STJ has found that a surcharge is a merchants’ abusive practice.

How Different Are American and Brazilian Consumers?

Even though numerous regulations and agencies protect Brazilian and American consumers, legal protections differ from one country to the other, and it must be so, as Naomi Mezey (inspired by Savigny) suggests, because law is located in the realms of social life and culture. According to Luciano Maia, “in the North American model, competition protection is seen as a fundamental tool for consumer protection, whereas in the Brazilian model, there isn’t a clear perception from society in relation to this issue. In Brazil, consumer and competition protection systems run totally apart.” Further, and more relevant, consumer protection in Brazil is based on the almost absolute premise of consumer vulnerability and, as a result, it is more paternalistic. These particularities drastically reduces libertarian discussions of merchant rights, including free speech rights. Therefore, although discussions related to surcharge in Brazil and U.S. are similar and may inform each other, some relevant premises regarding consumer rights are significantly different.


One response to “Cash or Card”

  1. ann says:

    Interesting article and a concern. It seems to be a very poitical issue. Gas stations have provided surcharges in Florida for years and insurance companies demand patients pay more for a cash payment, per their lobby power. I do not agree with this. I am hoping California wins the Single Pay system in Healthcare. Federal tax money shouldn’t make insurance companies billionaires, for non cash purchases.

    Recently, in my experience, another unregulated industry that basically price gouges the consumer is air conditioning services, in Florida. I received an estimate that provided a surcharge, if I used a credit card for purchases over $500.00. It was never discussed prior to this. Others will let you know that they give discounts for cash. I personally like the extra benefits that using the credit card provides for the consumer; especially, on a piece of equipment that costs thousands of dollars that you do not see, until it arrives at the house. Otherwise, the consumer is at the mercy of a salesperson, who is allowed to have non transparent rates, increases them in the summer and voids warranties, if you purchase the same unit for thousands less, over the internet. Is it only in America that Consumers are gouged in this industry? Bait and switch also occurred with my estimates with the air conditioning industry. They talked about one unit and gave an estimate for another. Cash reductions without warranties or protections is risky for the consumer with this unregulated industry. Consumers usually do buy expensive appliances or purchases with price transparency, as it is called competition and will bring the prices down. Consumers need to be protected from the people who scam the consumer with possible faulty merchandise and business not paying their fair share of taxes. Credit cards help the consumer and businesses in many ways. The fee is a tax right off for the business and consumers should not be penalized for using a credit card on purchases or services. Furthermore, I believe the insurance company should not tell businesses how to charge customers that do not use their insurance service. I believe this behavior is what makes cartels and the mafia illegal.