Antitrust

Subscribe to Antitrust

You may have gone to pay for a purchase and been told by the store owner that there was an extra charge to pay by credit card. And you’ve undoubtedly gone to a gas station with two sets of prices: lower prices for cash and higher prices for credit cards.

Is there any difference between the two practices? Under Florida law, there is. Under section 501.0117, Florida Statutes, the store owner actually committed a misdemeanor by imposing a “surcharge” for paying by credit card:

A seller or lessor in a sales or lease transaction may not impose a surcharge on the buyer or lessee for electing to use a credit card in lieu of payment by cash, check, or similar means, if the seller or lessor accepts payment by credit card. A surcharge is any additional amount imposed at the time of a sale or lease transaction by the seller or lessor that increases the charge to the buyer or lessee for the privilege of using a credit card to make payment.

On the other hand, section 501.0117 says it “does not apply to the offering of a discount for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card…” So it’s perfectly legal for gas stations to have lower cash prices.

In other words, under section 501.0117, businesses may offer a discount for using cash, but may not add an extra charge for using a payment card. Is there any real difference between charging less for not using a payment card (legal) and charging more for using a payment card (illegal)? Or is it merely a semantic difference?

Those are the questions at the heart of the 11th Circuit’s opinion in Dana’s Railroad Supply v. Attorney General, State of Florida, decided November 4, 2015. We’ll get back to the 11th Circuit’s answer, but first some background.

The Campaign Against State Anti-Surcharge Prohibitions

Dana’s is one of a series of lawsuits that have recently been brought by small businesses challenging state law prohibitions on credit card surcharges. Nine states have such laws. A Washington, D.C. law firm known for consumer rights advocacy, Gupta Beck, has filed suits challenging the surcharge prohibitions of the four largest–California, New York, Texas, and Florida–on first amendment grounds.

What’s behind the challenges? While the anti-surcharge statutes may appear, at first glance, to be consumer protection statutes intended to protect consumers from extra charges, the plaintiffs say the laws are actually intended to protect the ability of major credit card issuers (Visa, Mastercard, and American Express) to charge merchants excessive card processing (swipe) fees, which they say are two to three times higher in the U.S. than in other countries.

It was the major credit card issuers that lobbied for anti-surcharge statutes. In the late 1970s and early 1980s, Congress passed a federal anti-surcharge statute, but it expired and was not renewed. After its expiration, the plaintiffs say, the major credit card issuers lobbied state legislatures to pass state laws like section 501.0117.

Until recently, Visa and Mastercard’s merchant agreements prohibited merchants, even in states without statutory prohibitions, from charging customers extra for paying by credit card. But in a class action settlement resolving an antitrust case against the issuers, Visa and Mastercard agreed to remove those prohibitions from their merchant agreements. (The settlement has not yet become final, as certain class members have objected to the settlement. An appeal of the district court’s approval of the settlement is currently pending before the U.S. Court of Appeals for the 2nd Circuit.) But the removal of such provisions in merchant agreements can’t affect merchants’ practices in states where surcharges are still prohibited by statute.

What’s So Bad About Surcharges?

Why would Visa and Mastercard want to ban surcharges? As a matter of economics, the higher prices are, the fewer items consumers tend to buy. So if credit cards are more expensive to use, consumers are less likely to use them.

How do anti-surcharge laws hurt consumers? Merchants must pay credit card processing fees, but can’t charge credit card users directly for the fees. So credit card use raises the merchants’ overall costs. And because they are prohibited from passing on the costs of credit card processing directly to credit card users, the charges are instead reflected in higher prices charged to all customers to cover the costs.

(For example, suppose 50% of a merchant’s customers use credit cards and the merchant is charged 4% per transaction. With surcharges allowed, the merchant could charge 4% extra to the credit card users to cover the processing. With surcharges prohibited, the merchant must charge all customers 2% higher prices to cover the processing fee.) In this sense, anti-surcharge laws help one group of customers (credit card users) at the expense of another group (cash-paying customers). That transfer is magnified due to the prevalence of rewards cards (which often cost merchants the most to process), as cash customers are essentially paying (through higher prices merchants must charge across the board to cover credit card processing) for the rewards a subset of customers receive for using their credit cards.

But in another sense, anti-surcharge prohibitions hurt all consumers, as well as all merchants. They do so by increasing credit card usage, which leads to higher merchant costs, which lead to higher prices across the board.

And they do so by allowing Visa and Mastercard to charge higher processing fees than they otherwise could. Due to the lack of surcharges, consumers don’t know how much of the price of the items they buy is attributable to credit card processing charges (just as they don’t know what portion of an item’s price is attributable other items of overhead), so consumers, the card companies’ customers, don’t put any pressure on card issuers to charge lower transaction fees.

But recall that while merchants can impose surcharges for using credit cards, they can offer cash discounts. Why wouldn’t allowing merchants to give discounts for cash-paying customers have the same effect as allowing merchants to charge credit card users a surcharge? According to the merchants (and the economics research on which they rely), consumer behavior is more likely to change to avoid a loss than to avoid missing out on a benefit. So if paying with a credit card results in a surcharge (a loss), consumers will be less likely to choose to use a credit card than if paying with a credit card simply means missing out on a cash discount (a potential gain).

Speech or Conduct?

The challenges to anti-surcharge statutes are premised on the assertion that those statutes regulate speech, rather than conduct. That is because the 1st Amendment only applies to speech.

Structuring a transaction is generally thought to be conduct, not speech, and many statutes regulate such activities without any suggestion that they are regulating speech. So how is section 501.0117’s prohibition on surcharges any different?

According to the 11th Circuit, section 501.0117 doesn’t prohibit the conduct it appears at first glance to govern, which the court characterized as “dual pricing,” i.e., charging higher prices to credit card users than to cash buyers. That can’t be the function of the statute because it allows cash discounts, which are the functional equivalent of credit card surcharges.

Presuming that the statute must do something, the court pondered whether it might prohibit surcharges that are not disclosed before the transaction occurs. But it concluded that conduct could not be what the statute prohibits, due to the language of section 501.0117 as well as because it is already prohibited by another statute.

If the statute doesn’t prohibit dual-pricing, and prohibits “surcharges” but not “discounts,” then its focus can only be on speech, i.e., the words merchants may use to describe the fact that consumers must pay extra to use a credit card. Merchants are allowed to call higher credit card prices standard prices, and lower cash prices “discounts,” but are prohibited from calling cash prices standard and credit card prices “surcharges.”

But whether you call the lower price a discount and the other price standard or call one price standard and the other a surcharge doesn’t change the conduct, only the words used to describe it. So section 501.0117 regulates–and prohibits–certain speech. The court analogized the statute to a state law prohibiting restaurants from serving half-empty glasses of water but permitting them to serve half-full glasses.

Once finding that the statute regulates speech rather than conduct, it was not a large jump to conclude that it violates the 1st Amendment. The 1st Amendment allows some leeway for the government to regulate commercial speech. But commercial speech restrictions must relate to “misleading or related to unlawful activity,” the government must have a substantial interest at stake, and the regulation must advance that interest, in a way that does not prohibit more speech than necessary.

Given the court’s understanding of section 501.0117 as merely regulating semantics, telling merchants words they can and can’t use to describe dual pricing, it followed that section 501.0117 could not past muster. Arguably, the statute actually requires misleading speech rather than prohibiting it. The reason for dual pricing, after all, is to allow the merchant to charge more (surcharge) for credit card transactions to pay for the credit card processing fees.

Will Credit Card Surcharges Become the Norm?

For now, it would seem that merchants in Florida are free to impose surcharges for credit card transactions. But it remains to be seen whether this decision will have any real effect on the marketplace.

There’s also a chance the November decision may not be the final word. In the case challenging New York’s anti-surcharge law, the 2nd Circuit unanimously rejected the argument that the statute regulated speech.

And Judge Carnes reached the same conclusion about section 501.0117 in his vigorous dissent from the 11th Circuit’s decision in Dana’s. So there’s a non-trivial possibility that the 11th Circuit might reconsider the case en banc, or even that the Supreme Court might review it, if requested.

As I mentioned in my last post, the Florida Supreme Court’s decision to approve the Florida Senate’s amended redistricting plan wasn’t the only late April 2012 decision to bring a measure of closure to unsettled legal issues. The stars seem to have aligned such that our state appellate courts as well the U.S. Court of Appeals for the 11th Circuit all released decisions in late April bringing a measure of closure on prominent, unsettled issues.

First, in Geico General Insurance Co. v. Virtual Imaging Services, Inc. (a/a/o Maria Tirado), No. 3D11-581,the 3rd DCA went a long way toward finding closure on the hotly contested issue of whether PIP insurers can take advantage of the reimbursement rate caps provided in the 2008 amendments to Florida’s No Fault/Personal Injury Protection Law if their policies don’t expressly state that the caps will be used. That issue, on which the 4th DCA had the first word among Florida appellate courts in its 2011 decision in Kingsway Amigo Insurance Company v. Ocean Health, Inc., has pre-occupied PIP lawyers ever since. I’ve also written multiple posts about it, including this one, this one, and this one.

In its Tirado decision, the Third District did a tremendous favor for opponents of the rule set down in Kingway Amigo (PIP insurers and their lawyers chief among them) by certifying the issue as a question of great public imporance. You may recall that the lack of an express and direct conflict among the District Courts of Appeal on the issue has prevented the Florida Supreme Court from stepping in end the controversy.

But now the issue has been certified as a question of great public importance, the Florida Supreme Court can exercise jurisdiction to review Tirado even without a conflict among the DCAs. If the Supreme Court chooses to do so, as the ultimate arbiter of Florida law, it can bring closure to this ongoing PIP battle. I’m guessing that it will.

Second, in the parallel cases of Calder Race Course, Inc. v. Florida Department of Business and Professional Regulation, West Flagler Associates, Ltd. v. Fla. DBPR, and Florida Gaming Centers, Inc. v. Fla. DBPR, the Florida Supreme Court brought closure on the issue of whether the legislature validly exercised its Constitutional authority in enacting 2009 legislation that allowed Hialeah Race Track to operate slot machines. That legislative enactment had been challenged by the three Miami-Dade facilities that were already licensed to operate slot machines prior to the legislation, as discussed in this post. On the same day as its redistricting decision was released, the Supreme Court declined to exercise its discretionary jurisdiction over the competitors’ appeal from the 1st DCA’s decision upholding Hialeah Race Track’s authorization to operate slot machines.

Third, the 11th Circuit released its long awaited decision in FTC v. Watson Pharmaceuticals, Inc., (a/k/a In re: Androgel Antitrust Litigation) addressing the prominent antitrust/patent/health care law issue of the validity of so-called “reverse payment” or “pay for delay” settlements between pharmaceutical patent holders (i.e. name brand drug makers) and competing drug makers seeking to market generic alternatives. The FTC and the Antitrust Division of the DOJ, in addition to certain academics have fretted for years about such arrangements, and their effects on drug prices…

Continue Reading April Showers Bring Closure On Unsettled Legal Issues Too

Despite the annual slow down in appellate courts (as in the rest of the world) at this time of year, December 2011 has seen a spate of major antitrust decisions being handed down. As I know from experience, antitrust cases are about as complex as it comes, and as a result, they often require long opinions to decide. It may be that these decisions’ release dates might have something to do with busy judges putting off these time-consuming decisions to the end of the year, but wanting to get them out before they became part of year-end unresolved case statistics. But that would only be a guess.

In any event, major decisions have recently come down at the federal level from the 3rd and 11th Circuits, and on the state level from Florida’s 4th District Court of Appeal.

The 4th DCA’s decision in MYD Marine Distributor, Inc. v. International Paint Ltd. (released on December 14, 2011) takes on the U.S. Supreme Court’s major decisions in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which requires plaintiffs pleading claims based on antitrust conspiracies to include detailed factual allegations supporting the assertion that the defendants entered into an unlawful agreement, and Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007), which set down standards for pleading that a conspiracy harmed competition. The 4th DCA held that both decisions apply to cases filed in Florida state court asserting claims under the Florida Antitrust law. But it also held that MYD’s complaint, which alleged that its competitor marine paint distributors had conspired with one another as well as with the manufacturer of a premium paint for boats to have MYD cut off as a distributor of that paint because MYD was undercutting their prices. 

The 11th Circuit’s decision, FTC v. Phoebe Putney Health System, Inc. (released on December 9, 2011) threw a wrench in the Federal Trade Commision’s campaign to take on consolidation among large healthcare facilities that threaten competition and contribute to rising healthcare costs. In the Phoebe Putney case, the FTC sought to enjoin the acquisition by a public hospital of its only competitor in Dougherty County, Georgia, and thereby create a monopoly in that market.

In an opinion authored by Judge Tjoflat, the 11th Circuit agreed that the transaction would create a monopoly but affirmed the dismissal of the FTC’s case, holding that the “state action doctrine” made antitrust laws inapplicable and rendered the FTC powerless to challenge the transaction. In essence, the court held that in authorizing public hospitals like Phoebe Putney to acquire other hospitals, the Georgia legislature had contemplated and authorized even acquisitions that created monopolies. The state action doctrine therefore exempted the transaction from antitrust scrutiny. This decision essentially forecloses the FTC and DOJ from challenging any merger in Georgia involving a public hospital, and its reasoning could result in foreclosing challenges to acquisitions involving public hospitals in other states as well. 

The 3rd Circuit’s en banc decision in Sullivan v. DB Investments, Inc. (released on December 20, 2011), is a significant decision dealing with antitrust class actions brought by alleged “indirect purchasers” of price-fixed goods. The en banc court held that it is appropriate (at least in the settlement context) to certify a nationwide class of indirect purchasers asserting antitrust claims under the laws of all 50 states, even though class members from certain states did not have the right to sue for damages for antitrust violations.

A more thorough discussion of Sullivan follows. 

Continue Reading ‘Tis the Season for Antitrust