Expressions Hair Design Update: The Second Circuit Certifies Interpretation Question to the Court of Appeals

You’ve bought things with a credit card before, right? Me too. Have you ever thought that you might be charged a different price for what you’re buying because you’re not paying in cash? Me neither, and that seems to be what New York General Business Law § 518 tries to prevent.  It provides:

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.

But what does section 518 actually prohibit a merchant from doing?  How far is its reach?  The Second Circuit previously suggested that section 518 appears to bar a retailer from posting a cash price and noting along side it that those paying with a credit card will be charged a certain amount more, the so-called “single-sticker-price scheme.”  Retailers seem to be able to offer discounts to people paying in cash, however.  No New York courts have addressed the reach of the provision, and so what exactly is prohibited remains an unsettled question.

The Second Circuit has now asked the Court of Appeals to resolve that question.  For those who haven’t been following the case closely, including its quick trip to the Supreme Court, here’s a brief recap.  In Expressions Hair Design v Schneiderman, five New York retailers challenged section 518 as a violation of their First Amendment rights by impermissibly regulating how they communicate their prices to customers.  The District Court found in the retailers’ favor, but the Second Circuit vacated the District Court judgment. The Second Circuit held that section 518 regulated conduct, not commercial speech, and thus did not violate the First Amendment.

The Supreme Court granted certiorari, however, and reversed. The Supreme Court held that section 518 does regulate commercial speech, and clearly bars the single-sticker-price scheme to which the retailers had limited their challenge. The The Court, therefore, remanded the case to the Second Circuit to address the question that it did not previously, whether Section 518’s regulation of commercial speech survived First Amendment scrutiny.  Although the Court’s consideration of the question was limited to the single-sticker pricing scheme set forth by the retailers, the Court noted that the Second Circuit was free to consider the constitutionality of other pricing schemes should it decide to do so.

On remand from the Supreme Court, the Second Circuit asked the parties for further briefing on the First Amendment issues and whether the unsettled statutory interpretation question should be certified to the Court of Appeals for a determination under New York law.  In response, the State argued that the Second Circuit should certify two questions concerning the interpretation of section 518 to the Court of Appeals because the statute’s constitutionality turns on the Court’s answer to those questions.  Particularly, the State asked the Second Circuit to certify these questions:

The retailers, on the other hand, argued that the Supreme Court’s opinion foreclosed the certification route by adopting the Second Circuit’s prior interpretation of section 518.  Regardless, the retailers argued, certification was inappropriate because the Court of Appeals could not construe section 518 as prohibiting any dual pricing scheme because such an interpretation “would directly conflict with a federal statute expressly protecting the right of merchants to provide discounts to cash-paying customers, see 15 U.S.C. § 1666f—and so would likely be preempted under the Constitution’s Supremacy Clause. The constitutional-avoidance doctrine thus has no application in a case like this one, where avoiding one set of constitutional problems necessarily presents the court with an entirely new set of constitutional problems.”  (Plaintiffs’ Brief, at 18).

After evaluating the parties’ arguments, the Second Circuit decided on the certification route, and certified this question:

Does a merchant comply with New York’s General Business Law § 518 so long as the merchant posts the total‐dollars‐and‐cents price charged to credit card users?

Because the Supreme Court remanded on “whether Section 518, as applied to the single‐price scheme, is either a valid regulation of commercial speech under Central Hudson or a permissible disclosure rule under Zauderer,” the Second Circuit decided that the Court of Appeals’ interpretation of the scope of the statute would help the Court choose which test applies.

More fundamentally, because the question whether to apply Central Hudson’s test or Zauderer’s turns in part on a functional analysis of Section 518, the First Amendment inquiry in this case properly begins by accounting for the way the statute operates in practice. Despite the general rationale it offered in Zauderer for the lesser standard of review it articulated in that case, the Supreme Court has never clearly specified a governing framework that determines when Zauderer’s less‐exacting standard should apply instead of Central Hudson’s intermediate scrutiny. However, the Supreme Court has suggested that, at a minimum, Zauderer supplies the governing standard when evaluating the constitutionality of a law (1) designed to address misleading commercial speech (or, presumably, its equivalent, the non‐disclosure of information material to the consumer), (2) which mandates only that the merchant make certain truthful statements, and (3) which does not prevent the merchant from conveying additional truthful information.

We see no obvious way to conduct the functional analysis this view of the Central Hudson/Zauderer distinction requires without first gaining greater clarity about the correct application of Section 518 under New York law. Here, of course, the State argues that Section 518 is designed to address the possibility that consumers will be misled if a merchant does not clearly disclose, at the outset, the price it charges to credit card users. As a result, the scope of Section 518’s prohibition is crucial to our analysis in this case. If Section 518 forces a merchant to disclose an item’s credit‐card price, without otherwise either barring the merchant from (a) implementing (and describing to customers) a pricing scheme that differentiates between payments by credit card and cash or (b) conveying to its customers other information the merchant finds relevant, then Zauderer might apply. However, if the statutory prohibition sweeps much more broadly, then Central Hudson might apply. At the very least, without some clarification of Section 518’s scope from the Court of Appeals, and in the absence of some other way to identify the actual scope of Section 518’s rule, it is not clear that we can even decide the basic question of which standard of review — Central Hudson or Zauderer — properly applies.

Here’s the thing, though. In certifying the interpretation question to the Court of Appeals, the Second Circuit makes a number of statements that seem to suggest, clearly to me at least, where the Court stands on the retailer’s First Amendment challenge.  For instance, when explaining how the Court of Appeals’ interpretation could affect the Zauderer test, the Second Circuit explains how section 518 could survive scrutiny under that test, and then, with a conspicuous caveat that it isn’t deciding the merits, basically rejects the retailers’ arguments on the merits. I wouldn’t be too encouraged if I was one of the retailers.

Another interesting point from the Second Circuit’s certification decision is that it explains that it is choosing between the Central Hudson and Zauderer tests without much, if any, guidance from the Supreme Court on when each applies. It is conceivable that this case could go to the Court of Appeals for resolution of the scope of section 518, come back to the Second Circuit for which test applies and whether section 518 withstands the retailers’ First Amendment challenges, and then head back to the Supreme Court for the second time. An appellate geek like me can only dream!

The Second Circuit’s certification opinion can be found here.

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