Maryland Legal Alert for Financial Services

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Credit Card Surcharges and Merchant Fees

The credit card market is essentially a two-sided transaction platform where the major card associations (like MasterCard, Visa, and American Express) control both sides of the platform. Card associations issue credit cards to consumers, who can then use the credit cards to obtain loans and make purchases. Card associations also control the networks on which the consumer transactions are processed, so that merchants that wish to sell goods/services to consumers using particular credit card types must agree to the transaction platform rules established by the card associations. Card associations charge participating merchants a fee for each consumer credit card transaction and the fee varies based on card association and credit card type. Historically, card association merchant rules have contained anti-steering provisions and “no surcharge” provisions. The anti-steering provisions prohibit merchants from encouraging consumers to use a form of payment other than a credit card. The “no surcharge” provisions prohibit merchants from adding a surcharge to a transaction to cover some or all of the fee the merchants pay to the card associations.

In 2005, merchants joined together and filed suit in the United States District Court for the District of New York against MasterCard and Visa challenging certain anti-steering and “no surcharge” merchant provisions. The lawsuit alleged various antitrust violations, including price fixing, monopolization, and stifling competition. The lawsuit was settled in 2012 and the settlement was approved by the court in 2013. As a part of the settlement, MasterCard and Visa changed their respective merchant rules to permit surcharges, subject to certain limits (including notices to consumers and a cap on the surcharge amount). American Express also changed its surcharge rules to permit merchants to impose a surcharge subject to certain limits. Despite the MasterCard and Visa surcharge changes, several large merchants opposed the settlement and appealed the court’s approval of the settlement agreement. The Second Circuit Court of Appeals overturned the approval of the settlement in 2016, and the United States Supreme Court then denied certiorari. In September of 2018, the parties reached a “Superseding and Amended Definitive” settlement, which is pending court approval. The most recent settlement includes the surcharge rule changes implemented in 2013 and provides for payment of more than $6 billion to merchants that accepted MasterCard and Visa transactions starting in 2004. Many large merchants opted out of the first settlement and, despite the revised settlement concerning monetary damages and surcharges, a large group of merchants is continuing to fight for changes to the MasterCard and Visa anti-steering merchant rules. 

On the state level, after the card association surcharge changes in 2013, ten states enacted surcharge restrictions that limit or restrict merchants from imposing surcharges in connection with credit card transactions (CA, CO, CT, FL, KS, MA, ME, NY, OK, and TX). There have been several challenges to state surcharge restrictions, including a United States Supreme Court decision in March of 2017 that held that New York’s credit card surcharge prohibition implicated the First Amendment of the United States Constitution because it regulated commercial speech (the law permits merchants to offer discounts to consumers for payments in cash but restricts how merchants communicate with consumers). The Supreme Court remanded the case to the United States Court of Appeals for the Second Circuit to determine if the regulation was a permissible regulation of commercial speech under the First Amendment. The Second Circuit then certified a question concerning the New York law to the New York Court of Appeals (asking if the New York law prohibited merchants from posting disclosures of different prices for credit card and cash transactions). In October of 2018, the New York Court of Appeals answered the question noting that a merchant would be in compliance with the New York law if it posts the total “dollar and cents” price charged to credit card users. The Second Circuit will now need to determine whether the New York law impermissibly regulates commercial speech under the First Amendment.

The United States Supreme Court has also addressed the Texas “no surcharge” law, remanding a case to the United States Court of Appeals for the Fifth Circuit to determine if the Texas law impermissibly regulates commercial speech under the First Amendment. The Fifth Circuit, in turn, remanded the case to the United States District Court for the Western District of Texas for a determination as to whether the Texas statute impermissibly limits how merchants communicate pricing to customers. Additionally, in January of 2018, the United States Court of Appeals for the Ninth Circuit held that California’s “no surcharge” statute violated the First Amendment. The Ninth Circuit held that the law impermissibly restricted commercial speech in the way and to the extent that it limits how merchants communicate with customers about pricing.

Separate from the MasterCard and Visa anti-steering challenges that arose out of the 2005 anti-trust litigation, American Express’ merchant rules have also been subject to challenge. Overall, the merchant fees charged by American Express have been higher than the merchant fees charged by MasterCard and Visa. American Express asserts that it assesses higher merchant fees to fund the generous reward programs associated with the credit cards that it issues.  In 2015, the United States and several states filed suit in the United States District Court for the Eastern District of New York against American Express, claiming that anti-steering provisions in its merchant rules violated provisions of the federal Sherman Act. Section 1 of the Sherman Act prohibits unreasonable restraints of trade. Restraints of trade may be unreasonable either “per se” or as judged under the “rule of reason.” The District Court evaluated American Express’ anti-steering rules under the “rule of reason” and treated the credit card market not as a single, two-sided market, but as two separate markets (a market involving the consumer side of the credit card platform and a separate market involving the merchant processing services). The District Court found that the anti-steering rules violated the Sherman Act because they resulted in higher merchant fees (ignoring the benefits to consumers in the form of robust reward program benefits). The United States Court of Appeals for the Second Circuit disagreed and reversed the District Court. The United States Supreme Court granted certiorari in October of 2017.

The Supreme Court affirmed the decision of the Second Circuit and issued a 5-4 decision in favor of American Express in June of 2018. The Ohio v. American Express majority opinion held that the credit card market must be evaluated as a single market, not as two separate markets and that the benefits to consumers that result from the higher merchant fees are part of the equation. The Supreme Court applied the “rule of reason” and held that evidence of a price increase on one side of a two-sided transaction platform cannot alone show “an anticompetitive exercise of market power.” The Supreme Court held that the plaintiffs had the burden of showing that not only were merchant fees higher than those charged by MasterCard and Visa, but that the anti-steering provisions increased the cost of merchant transactions above “a competitive level, reduced the number of credit card transactions, or otherwise stifled competition in the two-sided credit card market.” The Supreme Court held that the plaintiffs failed to meet this burden because they offered no evidence that the merchant fees were higher than would be expected in a competitive two-sided credit card market. The Supreme Court reasoned that American Express’ higher merchant fees reflected “increases in the value of its services and the cost of its transactions, not an ability to charge above a competitive price.” The Supreme Court also held that the plaintiffs failed to show that the anti-steering provisions stifled competition among credit card associations, because the evidence showed increased competition between the rival card associations, overall decreases in all merchant fees, and more robust consumer reward programs across all three card associations.

The majority’s opinion was authored by Justice Thomas and is indicative of the pro-business posture of the current conservative majority. A strong dissent, authored by Justice Breyer (with Justices Ginsburg, Sotomayor, and Kagan), argued that the District Court was correct and that the analysis should have been focused only on the merchant side of the two-sided platform. The dissent argued that the record supported a finding that the American Express anti-steering provision did unreasonably restrain trade because American Express had been able to raise merchant fees without impacting its share of card transactions and without a corresponding increase in reward program benefits for consumers.

As a result of this recent Supreme Court decision and the current composition of the Supreme Court, anti-steering restrictions for merchants remain in place and are likely to stay in place for the foreseeable future. The large merchants that continue to press for MasterCard and Visa merchant rule changes will have an uphill battle. Even if pressure continues in the effort to eradicate state “no surcharge” laws, merchants will likely be at a competitive disadvantage if they impose surcharges where permissible and under card association limits, because not all merchants are likely to impose surcharges and customers may choose merchants that do not do so. This leaves merchants in the uncomfortable position of continuing to fund consumer credit card reward programs. Because of this, to the extent merchants have not already done so, merchants are likely to increase the prices they charge everyone to make up for the card association processing fees. For more information concerning this topic, please contact Christopher Rahl.


February 06, 2019




Rahl, Christopher R.


Financial Services