Expressions Hair Design Speech Case Back on Track after Detour to NY State Court

creditcardFor more than 40 years, merchants have sought the right to impose surcharges on customers who use credit cards when making purchases. They prefer customers to pay with cash because when a customer pays with a credit card, the merchant must pay a transaction fee to the credit-card issuer. To encourage cash transactions, many merchants would like to express their pricing in a way that conveys to customers that credit purchases lead to higher prices, but a number of States closely regulate how merchants may express that viewpoint.

A First Amendment challenge to such regulations reached the U.S. Supreme Court two terms ago. The Court granted merchants a preliminary victory in Expressions Hair Design v. Schneiderman, ruling that a New York pricing statute did, in fact, regulate speech and overturning a U.S. Court of Appeals for the Second Circuit decision that reached the opposite conclusion.

The remanded First Amendment challenge was side-tracked for the ensuing 18 months by disagreements over the proper interpretation of the New York statute. But last Friday, the New York Court of Appeals issued a definitive interpretation of the statute, and the case is finally ready to move forward again in the Second Circuit. Statements made by judges on the Second Circuit panel indicate that they do not agree with the First Amendment analysis adopted by the Ninth and Eleventh Circuits in striking down similar statutes—an indication that the Expressions case is likely to make its way back to the Supreme Court within the next several years.

The High Court’s recent decision in NIFLA v. Becerra, which broadly interpreted the speech rights of commercial speakers, suggests that the New York statute will not survive the Court’s First Amendment scrutiny. Much will depend on how the Court ultimately interprets its enigmatic 1985 decision in Zauderer v. Office of Disciplinary Counsel.

New York’s Ban on Credit “Surcharges”

For many years beginning in the 1970s, federal law permitted merchants to offer discounts to cash customers, but the law somewhat inconsistently prohibited merchants from imposing “surcharges” above their regular prices on credit-card customers. Almost immediately after expiration of that law in 1984, New York and several other States adopted substantially similar statutes. Not surprisingly, credit-card companies were the leading proponents of the state statutes. The New York statute (N.Y. Gen. Bus. Law § 518) states, “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.” It includes no definition of the word “surcharge.”

New York officials have adopted shifting and inconsistent interpretations of the statute over the past three decades. But there has never been any disagreement that the statute: (1) permits merchants to offer “discounts” to cash customers and (2) bars at least one method of expressing prices: listing only the cash price, and then explaining that credit customers will pay a specified additional fee. Examples of prohibited pricing include, “Haircuts $10.00 (with a $.30 surcharge for credit card users),” or “Haircuts $10.00 (with a 3 percent surcharge for credit card customers).”  The plaintiffs wished to express their pricing in precisely that manner; they filed an as-applied First Amendment challenge to § 518 in 2013.

Supreme Court Reverses Initial Second Circuit Decision

In dismissing the challenge, the Second Circuit reasoned that § 518 regulates conduct, not speech, and thus does not interfere with any First Amendment rights. The Supreme Court reversed, rejecting New York’s contention that the statute was a mere price-control measure.  Rather, the Court explained, “What the law does regulate is how sellers may communicate their prices. … In regulating the communication of prices rather than prices themselves, § 518 regulates speech.” The Court remanded the case with directions for the appeals court to determine, in the first instance, whether the speech restrictions violate the First Amendment.

The lawsuit then took an 18-month detour when the Second Circuit panel decided to ask the New York Court of Appeals (by means of a certified question) to provide a definitive interpretation of the statute. The panel recognized that § 518 prohibits expressing prices in the manner favored by the plaintiffs, but it wanted to know whether the statute bars all use of the word “surcharge” and also prohibits “two-sticker pricing” schemes—that is, listing the prices charged to both cash customers and credit customers.

The panel’s 2017 certified-question order tipped the court’s hand, suggesting that very deferential First Amendment review would apply (under Zauderer) if the New York court interpreted the statute as merely requiring that the higher credit price be listed in dollar-and-cents terms and leaving it to the merchant to decide whether to also list a second, cash price.

The New York Court Responds

The New York Court of Appeals provided its answer on October 26. It adopted a narrow interpretation of § 518, ruling that the statute permits any pricing scheme that lists a merchant’s credit price. For example, a merchant can list both the credit price and the cash price, or it can list the credit price and note that the price represents a “surcharge” over the price available to cash customers. The one pricing scheme deemed unacceptable under the statute is the one the plaintiffs wish to employ: a listing of the cash price along with a notation that credit customers are be assessed a “surcharge” of x percent or of x cents. The case now returns to the Second Circuit.

The New York Court of Appeals was closely divided; three of the seven justices disagreed with the majority’s interpretation. Two justices concluded that § 518 prohibited pricing schemes that include the word “surcharge,” a construction that they recognized might violate the First Amendment. A third justice concluded that the statute was hopelessly vague, thereby rendering it unconstitutional on due-process grounds.

“Surcharges” vs. “Discounts”: Why It Matters

Merchants and credit-card companies are concerned about how prices are expressed because research demonstrates that consumers react quite differently to the words “surcharge” (74% react negatively) and “cash discount” (only 22% react positively). Even though two merchants may offer identical cash and credit prices for a single product, the merchant who warns of a “surcharge” for credit purchasers is much more likely to convince consumers to pay by cash than the merchant who offers a “discount” for cash purchasers.

Furthermore, merchants want to avoid emphasizing the dollars-and-cents credit price for fear that consumers will come to view that price as the “regular” price and will conclude that the merchant is selling its goods at inflated prices. Credit card companies oppose “surcharge” pricing for precisely the same reasons.

But in light of the Supreme Court’s ruling that § 518 implicates First Amendment concerns, New York no longer defends the statute as a bulwark against “unfair” surcharges. It now contends that the statute protects consumers from deceptive bait-and-switch marketing techniques, i.e., credit purchasers are deceived if they base their purchase decision on the advertised price, only to be charged a higher price when they reach the cash register.

There is reason to question whether credit purchasers could actually be misled by a sign that states “Haircuts $10.00 (with a $.30 surcharge for credit card users)” but does not add the phrase “… for a total price of $10.30.” The question ultimately boils down to how much deference courts must grant to legislative judgments regarding the potential for consumer deception when reviewing speech regulations.

The Second Circuit panel has signaled that it is likely to apply a highly deferential review standard. In its December 2017 order, the panel stated that “Zauderer’s less-exacting standard” should apply if (as the New York Court of Appeals later held) § 518 is properly interpreted as merely requiring disclosure of the dollar-and-cents credit price and permitting a merchant to add any other truthful information it may desire—such as that the credit price represents a “surcharge” above the price available to cash customers.

The Second Circuit has interpreted the Zauderer test as akin to rational-basis review. That is, a law compelling commercial speakers to include truthful speech in their advertising/labeling is constitutional so long as the legislature has some rational basis for concluding that the law serves a substantial government interest. If the Second Circuit adheres to that understanding of Zauderer, it is likely to uphold § 518, finding that New York could rationally conclude that the statute reduces the likelihood of consumer deception.

The Supreme Court Is Likely to Revisit Zauderer

If the Second Circuit upholds § 518, Expressions Hair Design is highly likely to make a return appearance in the Supreme Court. Within the past three years, the Ninth and Eleventh Circuits (applying much more demanding standards of review) struck down nearly identical state statutes as unconstitutional. They concluded that the States had failed to carry their burden of demonstrating that the speech regulation would decrease the likelihood of consumer deception. A Second Circuit decision upholding § 518 based on a deferential review standard will likely induce the Supreme Court to hear the case again, in order to resolve the conflict among the federal appeals courts.

Supreme Court review would provide the justices with an opportunity to explain Zauderer, a decision that has been subject to wildly conflicting interpretations. The Court’s decision last June in NIFLA v. Becerra suggests that the Second Circuit and other appeals courts misunderstood Zauderer when they interpreted it as depriving commercial speakers of virtually all First Amendment protections against compelled speech.

NIFLA invoked Zauderer to strike down a California statute that required health clinics to display signs that conveyed the State’s message—a message that was truthful but to which the clinics objected. An encore for Expressions Hair Design would provide the Court with an opportunity to repudiate expansive interpretations of Zauderer and to announce a rule that First Amendment supporters have long advocated: the business community’s constitutional protections against compelled speech are at least as strong as their protections against speech restrictions.

Also published by Forbes.com on WLF’s contributor page.

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