The U.S. Court of Appeals for the Ninth Circuit has jumped into the fray over state surcharge laws, holding that California’s statute banning surcharges for credit card purchases is unconstitutional. There is now a multicircuit split, and the U.S. Supreme Court will likely take up a case in the next few years.

What happened

In 1985, California enacted a credit card surcharge ban. Section 1748.1 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 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 was virtually nonexistent, in part due to the standard provision in credit card issuers’ contracts that prohibited the use of surcharges. Over the past decade, however, as sellers began challenging these provisions, credit card issuers have dropped their contractual prohibitions on credit card surcharges. This has in turn led to court challenges in each of the 11 states that enacted laws prohibiting credit card surcharges: California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, New York, Oklahoma 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.

Ruling on cross motions for summary judgment, a district court judge sided with the plaintiffs, declared the ban unconstitutional and permanently enjoined its enforcement.

On appeal to the Ninth Circuit, the federal appellate panel affirmed, albeit with a tweak to the remedy. Citing the Supreme Court’s recent decision in Expressions Hair Design v. Schneiderman, the Ninth Circuit first rejected the Attorney General’s argument that the statute regulated conduct (the practice of imposing a surcharge for credit card users) and not speech.

In Expressions, the justices 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.”

Applying intermediate scrutiny to the California law (as a regulation of commercial speech), the panel found the plaintiffs’ speech concerned lawful activity and was not misleading, while enforcement of the statute does not directly advance the state’s asserted interest.

The plaintiffs “seek to communicate the difference in the form of a surcharge rather than a discount,” the court said. “[I]mposing a surcharge rather than offering a discount is no more misleading than calling the weather warmer in New Orleans rather than colder in San Francisco.”

While the 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, 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, it limited the remedy. Because the five merchants pressed only an as-applied challenge, the declaratory and injunctive relief applied 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 surcharge law aligns the Ninth Circuit with the Eleventh Circuit’s ruling on Florida’s statute and could signal a similar result from New York’s highest court, currently considering that state law on remand from the U.S. Supreme Court. But the Fifth Circuit upheld a similar ban as not encroaching on speech rights. The presence of a circuit split makes it more likely this issue will be back before the Supreme Court sometime soon.