Ninth Circuit: California Surcharge Law Unconstitutional

Financial Services Law

The U.S. Court of Appeals for the Ninth Circuit, following decisions from three other circuit courts and the Supreme Court, ruled that California’s statute banning surcharges on credit card purchases is unconstitutional.

What happened

California is one of 11 states that ban a merchant from imposing a surcharge on credit card sales. Consistent with the laws in the other states, the California law, Section 1748.1, enacted in 1985, provides: “No retailer in any sales, service, or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means.” However, the California statute permits a retailer to “offer discounts for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, provided that the discount is offered to all prospective buyers.”

Enforcement of the ban on surcharges was virtually nonexistent, primarily because for decades card network rules prohibited merchants from imposing surcharges on credit card sales. As a result of the settlement of the merchant “swipe fee” litigation in 2013, the prohibition on credit card surcharges was partially lifted, under certain conditions. This led to court challenges in four states that enacted laws prohibiting credit card surcharges: California, Florida, New York and Texas.

In California, five businesses claimed the statute violated both their First Amendment free speech rights and their due process rights under the Fourteenth Amendment, requesting that the law be declared unconstitutional. Each plaintiff represented that it would impose a credit card surcharge if it were legal to do so. The district court judge sided with the plaintiffs, declared the ban unconstitutional and permanently enjoined its enforcement.

The Ninth Circuit affirmed that ruling, albeit with a tweak to the remedy, citing the Supreme Court’s recent decision in Expressions Hair Design v. Schneiderman. In Expressions, the Supreme Court considered New York’s surcharge ban and held that the statute regulated “the communication of prices rather than prices themselves.” While the law told merchants nothing about the amount they are allowed to collect from a cash or credit card payer, it did regulate how sellers are allowed to communicate their prices, the Supreme Court explained.

“Like the plaintiffs in Expressions, plaintiffs in this case want to post a single sticker price and charge an extra fee for credit card use,” the Ninth Circuit wrote. “Section 1748.1 prohibits plaintiffs from expressing their prices in this way, but it does allow retailers to pose a single sticker price and offer discounts to customers paying with cash—despite the mathematical equivalency between surcharges and discounts. Thus, Section 1748.1, like New York’s surcharge ban, regulates commercial speech.”

While the California attorney general expressed concern about deceptive surcharges and bait-and-switch changes at the register, “nothing in the record suggests that plaintiffs desire to impose credit card surcharges in this way,” the court wrote. “To the contrary, plaintiffs’ declarations all state that plaintiffs want to communicate, not conceal, credit card surcharges.”

“Section 1748.1 prevents retailers like plaintiffs ‘from communicating with [their customers] in an effective and informative manner’ about the cost of credit card usage and why credit card customers are charged more than cash users,” the panel said. “We fail to see how a law that keeps truthful price information from customers increases the accuracy of information in the marketplace.”

Finding no reasonable fit between the broad scope of the statute and the asserted state interest of preventing deception, the court said California has “other, more narrowly tailored means of preventing consumer deception,” such as banning deceptive or misleading surcharges or requiring retailers to disclose their surcharges both before and at the point of sale. “These alternatives would restrict less speech and would more directly advance California’s asserted interest in preventing consumer deception,” the court said.

Although the Ninth Circuit agreed with the district court that Section 1748.1 is unconstitutional, because the five merchants pressed only an “as applied” challenge, the relief applies only to the plaintiffs and only with respect to the specific pricing practice that the plaintiffs—by express declaration—sought to employ, the court said.

To read the opinion in Italian Colors Restaurant v. Becerra, click here.

Why it matters

The opinion striking down California’s no surcharge law aligns the Ninth Circuit with the Eleventh Circuit’s ruling on Florida’s statute and the expected result from the courts in New York and Florida, which currently are reconsidering their decisions based on the Supreme Court’s ruling. Nevertheless, the surcharge question remains complicated due to the status of surcharges at the card network level. Although the swipe fee settlement signaled a change in the landscape by authorizing limited and conditional surcharges, that settlement has been voided by the court overseeing the case, and the ultimate position of the card networks remains unclear.