Judge Rules Against New York's Ban on Credit Card Surcharges

NEW YORK -- As a federal judge sitting in Brooklyn, N.Y., decides the fate of a proposed billion-dollar settlement to a class-action lawsuit over credit card swipe fees, New York retailers won a battle over the state's ban on surcharges.

On Thursday, U.S. District Judge Jed Rakoff of the Southern District of New York ruled that a New York law prohibiting retailers from adding a surcharge to credit card purchases is unconstitutional. The surcharge is intended to make up for the credit card swipe fees.

As part of his ruling, Rakoff ordered the state not to enforce the ban during a legal challenge filed by several small businesses. The businesses filed a lawsuit in June arguing the law violated free speech rights by penalizing them for adding surcharges, while at the same time allowing them to provide discounts to customers paying with cash or debit cards, according to report by Bloomberg.

"Alice in Wonderland has nothing on section 518 of the New York General Business Law," Rakoff wrote. "This virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 unconstitutional."

According to the report, Rakoff said the law violated the First Amendment because it prevented merchants from calling the difference between prices charged to cash customers and credit card users a "surcharge." The term "surcharge" communicates to customers that credit cards are costly for merchants, the businesses argued.

A spokeswoman for New York Attorney General Eric Schneiderman said the office is reviewing the decision and considering its next step.

The ruling comes as U.S. District Judge John Gleeson, Eastern District of New York in Brooklyn, is deciding the fairness of a proposed $7.25-billion settlement deal that would bring to an end a 2005 class-action lawsuit brought by merchants against Visa Inc., MasterCard Inc. and several other financial institutions. The suit alleges the credit card companies violated antitrust law by fixing swipe fees, which averaged 2 percent of the purchase price. The proceeds went to card-issuing banks and generated more than $40 billion a year for U.S. lenders, as CSNews Online previously reported.

Gleeson presided over the fairness hearing on Sept. 10. He is expected to take between 30 and 120 days to issue a ruling, which means a decision can come done any day.

Part of the proposal includes a provision that would allow merchants to add surcharges to credit card purchases. However, at least 10 states -- including New York -- prohibit surcharges. Deepak Gupta, a lawyer for the New York businesses that challenged the law, said that merchants are preparing similar constitutional challenges in other states that prohibit surcharging, Bloomberg reported.