Supreme Court
Credit: iStock

Imagine you’re at the mall shopping for a sweater. You pick out a red one and a blue one. The red sweater costs $40, with a $1.50 discount if you pay cash. How would you like to pay?

The blue sweater, meanwhile, costs $38.50, with a $1.50 surcharge if you pay with a credit card. How would you like to pay?

As any economist will tell you, your answer should be the same in each case, because the prices of the two sweaters are identical: $38.50 if you pay cash, $40 if you pay credit. But as any behavioral economist will tell you, people respond very differently depending on whether the price difference is presented, or “framed,” as a discount or a surcharge. The threat of a surcharge is much more powerful than the offer of a discount: people are much more likely to pay cash for the blue sweater than the red one.

That brings us to Tuesday’s Supreme Court oral arguments. A New York State law prevents merchants from imposing a surcharge on people who pay with a credit card, but allows them to offer a cash discount. Business owners hate the law because they prefer customers to pay in cash so that the businesses can avoid paying a fee to credit card companies—and they know that imposing a surcharge, rather than offering a cash discount, is the most effective way to get customers to do that. So a few New York businesses sued, claiming that the law violates their right to free speech under the First Amendment. Allowing discounts but banning surcharges, they argue—allowing the red sweater pricing but not the blue one—boils down to restricting what businesses can say, not what they can charge. (The lead plaintiff is named, all too perfectly, Expressions Hair Design.)

New York claims that the surcharge ban, which was modeled after an expired federal law, is designed to protect consumers from bait-and-switch pricing tactics. But it’s actually a favor to politically powerful credit card companies, who, like store owners, know that surcharges are bad for their business. Consumer advocacy groups have long opposed laws like New York’s on the grounds that they conceal the true cost of credit card fees and lead to the cost of the fees being passed on to all consumers, even those who can’t afford credit cards—in other words, it’s a regressive wealth transfer.

Yet consumer groups were divided in yesterday’s case. Organizations including Consumers Union, which has actively opposed surcharge bans, filed an amicus brief defending the New York law. Why?

Because the case is a potential Trojan horse. Even though a victory for the plaintiffs would be a good thing for consumers when it comes to credit card fees, a ruling that recognizes a First Amendment interest in setting prices could be used to strike down regulations that help consumers.

For the better part of a decade, one of the most pressing issues in free speech law has been the increasing use of the First Amendment as a weapon to strike down economic regulations. This trend has come to be known in academic circles as “First Amendment Lochnerism.” It’s a reference to Lochner v. New York, a notorious 1905 case in which the Supreme Court ruled that legal limits to working time—meant to protect laborers—violated freedom of contract. For decades, in what became known as the Lochner era, the court would strike down regulation after regulation on similar grounds. The Lochner era is widely regarded as the apotheosis of justices substituting their own judgment for that of legislators—striking down a law because they disagreed with it.

In recent years, the Supreme Court has begun drifting back in that direction, using freedom of speech, rather than freedom of contract, as its rationale. (Haley Sweetland Edwards wrote about this trend for Washington Monthly in 2014.) In a 2011 case called Sorrell v. IMS Health Inc., for instance, it struck down a Vermont statute that prevented the sale of prescription data to pharmaceutical marketers on the grounds that marketing is speech and thus marketers were being discriminated against on the basis of their speech.

In court yesterday, Justice Stephen Breyer worried openly about the possibility of offering free market crusaders another First Amendment deregulatory tool. “[W]e are diving headlong into price regulation,” he said. “And so the word that I fear begins with an L and ends with an R; it’s called Lochner.

Is Breyer’s fear justified? Deepak Gupta, the lawyer for the plaintiffs challenging the law, insisted that it wasn’t. He wasn’t asking the court to rule that the act of setting a price counts as speech for the purposes of the First Amendment. Rather, he said, the problem with the New York law is that it only restricts how businesses communicate their prices, not what the prices are. He pointed to examples of lawyers for New York State telling store employees that they would risk criminal prosecution simply for saying a product cost five cents more for credit card purchasers instead of five cents less for cash buyers.

But, as Justice Elena Kagan pointed out, the challengers seemed to have “two very different theories of what makes this a speech restriction.” It’s the second theory that should keep Breyer up at night: merchants must be allowed to impose a surcharge because, as Gupta put it, charging more money is “their most effective way of communicating the hidden cost of credit cards to their customers.” That argument raises the specter of Lochnerism because, despite Gupta’s assurances, it implies that the act of charging a price is actually “speech” that requires First Amendment protection.

The first theory is less alarming. If the law really polices the words businesses use to describe the same price difference, it’s hard to deny that it’s restricting speech. But it isn’t at all clear whether the law really does that. New York’s lawyer, Steven C. Wu, said it doesn’t. The statute, he pointed out, doesn’t say anything about speech; it simply says, “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.” Businesses can say whatever they want, Wu argued, including the word “surcharge.” They can even list two prices for each product: one for cash, one for credit card. The only thing they can’t do, Wu said, is display one sticker or list price, and then add a surcharge to that price for people who pay with a credit card. In other words, the display price must by default be the highest price.

If that’s what the law means, then the challengers’ argument loses its bite. All kinds of business practices are more or less effective at getting customers to behave in certain ways. Supermarkets put the candy by the register because they know it encourages impulse buying. But just because something can be used to manipulate people’s behavior doesn’t make it a protected act of self-expression. If businesses are free to hang a sign next to the register lambasting the surcharges that customers have to pay, then how can they say they’re losing the opportunity to communicate?

So the case likely hinges on which description of the law the court accepts. But the justices seemed reluctant to wade in on that question. As Justice Sonia Sotomayor put it, speaking to Gupta, “I’m not sure what you or anybody is saying about this statute or what it means, but not because it’s necessarily vague. I just don’t see anything about speech in the statute.” As a result, the court looks poised to send the case back down to the New York courts. According to Supreme Court precedent, state courts should take the first crack at interpreting what a state law means before the Supreme Court weighs in on its constitutionality. So New York’s highest court will probably get a chance to decide which interpretation is correct—the challengers’ or the state’s.

But the case could make it back to the Supreme Court. And even if it doesn’t, more cases like it—casting commercial activity as “speech” in order to shield it from regulation—will keep coming. With a conservative replacement for the late Justice Antonin Scalia soon to be appointed, that makes economic regulations, especially consumer protections, yet another area where Justice Anthony Kennedy will represent the swing vote.

Kennedy has been at the vanguard of the court’s First Amendment Lochnerism—he wrote the 2011 opinion in Sorrell. But yesterday, he didn’t seem very hostile to New York’s law. Breyer’s comments about Lochner were clearly intended for his colleagues, particularly Kennedy. To hold back the tide of deregulation in the name of free speech, he will have to hope his message is getting through.

Gilad Edelman

Follow Gilad on Twitter @GiladEdelman . Gilad Edelman, a Washington Monthly contributing editor, is a politics writer for WIRED.