In a victory for small retailers, a federal court in New York has ruled that merchants in the state may add swipe-fee surcharges on purchases made by credit card instead of cash.

New York is one of several states that prohibits retailers from assessing a surcharge on card transactions to offset the swipe fees they pay to card networks. On Thursday, a judge for the U.S. District Court for New York's Southern District sided with a group of five New York businesses who opposed the state's law, which permits businesses to offer a discount for cash transactions but not to charge a surcharge for credit-card transactions.

In his opinion, Judge Jed Rakoff ridiculed a provision in the law that forbids a merchant from telling a customer if it is adding a surcharge. "This virtually incomprehensible distinction between what a vendor can and cannot tell its customers offends the First Amendment and renders section 518 [the surcharge law] unconstitutional," he wrote.

Rakoff further argued that the law adds confusion about pricing. The law was enacted, Rakoff wrote, to ensure that customers do not find themselves paying more for their purchases than they expect. But the retailers argued that requiring discounts for cash rather than surcharge for card payments made their prices appear higher than they are.

"Absent surcharges, consumers may be unaware that when they use a credit card, the relevant credit-card company charges the retailer a fee," Rakoff wrote. Permitting surcharges, he argues, "will place downward pressure on swipe fees, which credit-card companies will be forced to reduce in order to prevent more and more consumers from switching to cash."

From 1976 through 1984, federal law prohibited merchants from adding surcharges for card transactions. Since 1984, 10 states, including New York, have enacted laws prohibiting the surcharges. The New York law calls for penalties of up to $500 and potential prison terms for business owners who add a charge for credit-card transactions.

At the same time that states began banning surcharges, credit card companies began to contractually forbid retailers they worked with from adding surcharges. But earlier this year, Visa and MasterCard agreed to cease the practice of including anti-surcharge clauses as part of a $7.25 billion settlement to an antitrust complaint filed by a group of retailers over the card companies' swipe charges. A New York District Court judge is currently considering whether to approve the settlement.

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