On January 3 2018 the US Court of Appeals for the Ninth Circuit held that California's statute prohibiting credit card surcharges, California Civil Code Section 1748.1, violated the First Amendment as applied to the proposed surcharge practices of the merchant-plaintiffs.(1)
In March 2017 the US Supreme Court in Expressions Hair Design v Schneiderman (137 S Ct 1144 (2017)) found that New York's no-surcharge law – which still allowed cash discounts – regulated how merchants could communicate their prices rather than the prices that merchants could charge. The Ninth Circuit used the same reasoning to hold that California's surcharge ban regulated speech rather than conduct, therefore posing First Amendment concerns. It then analysed the speech regulation under a two-part intermediate scrutiny test, asking:
- whether the regulated speech was misleading or related to illegal activity; and
- if not, whether the regulation directly advanced a substantial state interest and was not more extensive than necessary to serve that interest.
Under the first question, the Supreme Court concluded that the activity – imposing credit card surcharges – was not unlawful, as the statute permitted cash discounts. It found that California's attorney general did not articulate why the plaintiffs' 'single-sticker' pricing schemes would be misleading, pointing out that the plaintiffs were merely attempting to communicate the difference in prices as a surcharge rather than a discount. The Supreme Court recognised that while the surcharges could be deceptive if imposed surreptitiously at the point of sale, nothing in the record suggested that the plaintiffs intended to impose them in that way.
Under the second question, the Supreme Court rejected the attorney general's argument that the surcharge ban promoted the state's interest in protecting consumers from deceptive price increases. Conversely, it found that the statute did not promote more accurate information disclosures at the plaintiffs' places of business. It concluded that the statute prevented the merchants from communicating to customers the cost of credit card use and why credit card customers are charged more than cash customers. The Supreme Court also stated that the numerous exemptions from the surcharge ban, including payments to utilities and courts, undermined any positive effect that the statute might have. Finally, it found that California had more narrowly tailored means to prevent consumer deception at its disposal. For example, like Minnesota, it could require merchants to disclose surcharges both before and at the point of sale. The state could also enforce its existing laws banning unfair business practices and misleading advertising in pricing.
There are now four circuit courts, including the Ninth Circuit, that have analysed surcharge bans under the First Amendment. The Eleventh Circuit held that Florida's ban was unconstitutional in Dana's RR Supply v Attorney Gen, Florida (807 F3d 1235 (11th Cir 2015)); this decision stands after the Supreme Court declined to hear a further appeal. Following the Supreme Court's decision in Expressions, the Second Circuit is considering whether New York's ban survives First Amendment scrutiny. Also due to Expressions, the Fifth Circuit must reconsider its decision in Rowell v Pettijohn (816 F3d 73 (5th Cir 2016)), in which it held that Texas's surcharge ban did not regulate speech.
Even if state no-surcharge laws are invalidated, merchants may still be subject to limits on credit card surcharges under credit card network rules. In 2013 Mastercard and Visa loosened (but did not remove) limits on credit card surcharges as part of settling antitrust litigation over interchange fees. The Second Circuit reversed the lower court's approval of that settlement in 2016, but the networks' limits on surcharges remain effective. Those limits, as well as limits imposed by American Express and Discover, should be reviewed carefully to determine whether proposed surcharge practices are permissible.
In addition, Regulation Z provides that a credit card surcharge is a finance charge and a merchant imposing a surcharge is a creditor with disclosure obligations under the Truth in Lending Act. Merchants imposing credit card surcharges must therefore consider the manner in which they will comply with those disclosure obligations.
For further information on this topic please contact Joel D Feinberg, James A Huizinga, David E Teitelbaum or Cameron James Gibbs at Sidley Austin LLP by telephone (+1 202 736 8000) or email (firstname.lastname@example.org, email@example.com, firstname.lastname@example.org or email@example.com). The Sidley Austin website can be accessed at www.sidley.com.
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