Academic journal article Missouri Law Review

Behavioral Economics Goes to Court: The Fundamental Flaws in the Behavioral Law & Economics Arguments against No-Surcharge Laws

Academic journal article Missouri Law Review

Behavioral Economics Goes to Court: The Fundamental Flaws in the Behavioral Law & Economics Arguments against No-Surcharge Laws

Article excerpt


Should merchants be permitted to charge a consumer a higher price if the consumer wants to pay with a debit or credit card than if she uses cash or the retailer's proprietary credit card? In 2017, the Supreme Court heard argument in the case of Expressions Hair Design v. Schneiderman, (1) a challenge brought by New York retailers to strike down a state law (2) that prohibits merchants from imposing surcharges on consumers who use payment cards. (3) Several other states, including Florida, California, and Illinois, have enacted similar laws. (4) Critics of state no-surcharge laws (as well as some courts) contend that, because surcharging and discounting are effectively economically indistinguishable, the only difference between them is the label used to describe them and thus that banning one of these labels constitutes an impermissible state restriction on commercial speech:

The Eleventh Circuit... in reviewing Florida's credit-card surcharge
ban under the First Amendment [held that] : "[t]autologically speaking,
surcharges and discounts are nothing more than two sides of the same
coin; a surcharge is simply a 'negative' discount, and a discount is a
'negative' surcharge." The panel thus recognized that the "sole effect"
of Florida's surcharge ban was to keep sellers "from uttering the word
surcharge, criminalizing speech that [was] neither false nor
misleading." (5)

The Second Circuit, reversing the district court, upheld New York's law and rejected the merchants' claim that permitting merchants to offer "cash discounts," but not to offer "credit surcharges," constitutes an impermissible restraint on commercial speech under the First Amendment. (6) The Supreme Court disagreed and remanded the case to the Second Circuit for further consideration consistent with the Court's holding that the New York state law, as applied, constitutes commercial speech regulation. (7)

Other challenges in other states had been brought on the same or similar grounds, resulting in a circuit split with the Second and Fifth Circuits on one side and the Eleventh Circuit on the other. (8) The merchant challengers of these laws argued that, because the laws prohibit them from posting a single, cash price (and then charging credit card customers more than the posted price at the register), their First Amendment rights were impermissibly restricted under the laws. (9) The states that have enacted these laws--and the courts that have upheld them--argued that the statutes do not limit speech but actually limit conduct: the action of imposing a monetary surcharge on a consumer who desires to use a payment card, not the mere labeling of the practice as either a cash discount or a surcharge. (10) They further argued that, even if the state laws do affect speech, they do not impose an impermissible restriction on speech under the First Amendment. (11) Following the Court's decision in Expressions Hair Design, the argument will now turn to this question.

Although the merchants' core argument rests on the First Amendment, they invoke Behavioral Law and Economics ("BLE") to support their claim. Specifically, they argue that, from the perspective of consumers, it actually matters whether a particular price adjustment is quoted as a surcharge or a discount --that its label, and not its underlying mechanics, affects consumer conduct. (12) They thus contend that, because consumers "are much more likely to respond to surcharges (perceived as losses for using credit) than to discounts (perceived as gains for not using credit)," (13) the state's no-surcharge law impermissibly restricts speech. (14)

Based on various concepts taken from Behavioral Economics ("BE"), (15) the merchants argue that there is no relevant difference between the conduct involved in surcharging versus discounting; that labeling a particular price adjustment to be a "surcharge" will be more effective at diverting consumers away from network-branded credit cards; and that this will lead to increased use of supposedly less-expensive payment devices such as cash:

Because both credit-card surcharges and cash discounts ultimately
amount to equivalent differences between the price charged to
credit-card customers and the price charged to cash customers. … 
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