In Federalist 10, James Madison warned of “a number of citizens, whether amounting to a majority or minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adverse to the rights of other citizens or to the permanent and aggregate interests of the community.” These groups — “factions” in Madison’s terms — come together to seek concentrated benefits from favorable legislation and regulation rather than competing in the marketplace, while spreading the costs throughout society. While Madison conceded that such interests could not be stopped completely, he suggested that certain steps could be taken to mitigate the “effects” of these groups, and the damage that they can do to the public interest.
The Framers sought to protect speech from the type of cronyism these no‐surcharge laws manifest. The First Amendment covers speech even if it involves commercial matters; our system of government suggests that when legislatures abridge these protections, courts should subject these laws to the highest form of scrutiny — such as: is there a justification beyond base rent‐seeking? — rather than limply deferring to captured legislative majorities.
The New York legislature, however, ignored the First Amendment rights of both merchants and consumers when — at the behest of the credit card lobby — it passed a law restricting how retailers can convey pricing schemes, as well as the public’s right to know about them. New York’s no‐surcharge laws insulate credit card companies from consumer knowledge about who is actually causing the higher prices on goods when they use their credit card.
The law does this not by restricting the merchants’ ability to charge different prices as between cash and credit payments — that’s legal everywhere — but by regulating the communications about the different prices. To reiterate: the law makes it a crime to impose “surcharges” on people who pay with credit card while leaving it perfectly legal to offer economically equivalent “discounts” to cash‐paying customers.
By mandating how these merchants convey their pricing structure, New York is restricting speech on the basis of its content, which would seem to be an obvious First Amendment violation. A federal district court agreed — as have two other federal courts, including the 11th U.S. Circuit Court of Appeals when it struck down a similar Florida law. The district court held that the law “plainly regulates speech” — not conduct — by drawing a line between prohibited “surcharges” and permissible “discounts” based solely on words and labels. The 2nd Circuit disagreed, however, holding that the law regulates “merely prices,” not speech.
The law not only violates the First Amendment, however, but also — as often happens with cronyism — has disproportionate effects on lower‐income individuals. When retailers aren’t allowed to effectively communicate the price difference between cash and credit, they will, in some instances, charge the higher credit price for users of both. This creates a perverse regressive subsidy from poorer consumers — who are more likely to use cash — by making those cash users pay for swipe fees they could avoid if merchants could convey the price difference.
The Supreme Court should resolve this circuit split over business labels in favor of consumer knowledge and the First Amendment.