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

Author:Zywicki, Todd J.
Position:Evaluating Nudge: A Decade of Libertarian Paternalism

    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... [a no-surcharging law] burdens protected expression by "draw[ing] the line between prohibited 'surcharges' and permissible 'discounts' based on words and labels, rather than economic realities." (16) In Plaintiffs' view, credit-card surcharges and cash discounts must just be labels because consumers react differently to them: they react more negatively to credit-card surcharges than they react to cash discounts. (17) The plaintiff merchants, joined by amici briefs from a number of scholars, invoke BLE in support of these claims. ((18))

    The Supreme Court decision remanding the case for further proceedings did so on the basis that the Second Circuit erred in holding that the New York law does not implicate speech concerns; the Court did not determine whether the law actually violates the merchants' First Amendment rights. ((19)) Without guidance from the Court to constrain the lower court's consideration of the BLE claims, those claims will surely be pushed by the merchants and are likely to factor into subsequent decisions in the case assessing whether the law's speech restrictions are constitutionally permissible. Thus, despite the Court resolving the question whether, contrary to the state's argument, enforcement of the New York no-surcharge law implicates First Amendment issues, the question of BLE as a guide to judicial decision-making is still very much alive in the case--and, of course, may resurface again in other, unrelated cases. (20)

    Further, it is worth noting that the Court held that

    the Court of Appeals had no occasion to conduct a further inquiry into whether [section] 518, as a speech regulation, survived First Amendment scrutiny. On that question, the parties dispute whether [section] 518 is a valid commercial speech regulation... and whether the law can be upheld as a valid disclosure requirement under Zauderer v. Office of Disciplinary Counsel of Supreme Court of Ohio.... ... [W]e decline to consider those questions in the first instance. Instead, we remand for the Court of Appeals to analyze [section] 518 as a speech regulation. (21) The BLE arguments adduced in this case have been used to support (we believe inaptly) the contention that no-surcharge laws do not perform a valid consumer protection function. But, as we discuss at length below, a proper understanding of the consumer/merchant dynamics surrounding surcharging and discounting strongly suggests otherwise. (22) In Zauderer, in fact, the Court held that the state's regulation of speech was permissible to prevent deception in circumstances quite similar to those in this case, in which an "advertisement makes no mention of the distinction between '[] fees' and 'costs,' and to a layman..., the advertisement would suggest... a no-lose proposition." (23) Whether or not New York's statute meets the requirements of Zauderer (upon which we do not opine), it is virtually certain that the BLE arguments will be employed on remand to support the claim that it does not.

    The Trouble with the BLE Arguments in Expressions Hair Design

    Although behavioral law and economics has taken the legal academy by storm in the past decade, the effort to justify the plaintiffs' case with BLE analysis represents one of the highest-profile efforts to date to try to leverage behavioral economics for legal and policy change. (24) As such, this case is particularly important in that it represents the first major opportunity for the appellate courts to confront BLE, to evaluate the scientific validity of BLE arguments, and to determine how those arguments will be applied and interpreted in future cases. Thus, we believe that the arguments in this case are worthy of particular scrutiny.

    Because of the nature of the litigation, although the plaintiffs have offered these arguments in their case--indeed, they comprise the opening pages in the plaintiffs' petition for certiorari to the Supreme Court, permeate their Supreme Court merits' brief, (25) and constitute the focus of several amicus briefs in support of the plaintiffs (26)--the states that have defended the law in court have not addressed the BLE arguments that have been raised. Instead, the states have focused on the narrow, doctrinal aspects of the First Amendment and Due Process issues at stake. (27) As a result, although the plaintiffs and amicus supporters have invoked BLE arguments in support of their case, their assertions and representations have not yet been seriously scrutinized by courts, including the Supreme Court. (28)

    Moreover, judges in several of the cases have considered the plaintiffs' BLE arguments in a largely approving manner. (29) Even where courts have rejected the First Amendment challenges and upheld the laws, in some cases the judges have nevertheless uncritically accepted the accuracy of the BLE claims even if they ultimately considered them to be irrelevant to the core claims of the case or insufficient to strike down the state laws. (30)

    In this article, we take no position on the First Amendment questions regarding whether anti-surcharge laws represent impermissible restrictions on merchant speech or conduct; there may well be non-BLE, doctrinal bases for treating anti-surcharge laws as impermissible infringements on speech. But we do take issue with the manner in which BLE arguments have been used in Expressions Hair Design. And, to the extent that the First Amendment arguments turn on BLE and on the merchants' presentation of the BLE literature, we find them seriously wanting. Because of the significance of BLE to this case, and because this case may set a precedent for the future use of BLE by courts, those arguments demand deeper scrutiny to understand the nature and accuracy...

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