On January 3, the Ninth Circuit Court of Appeals found that Section 1748.1 of the California Civil Code – which bars sellers from imposing surcharges for credit card payments, while still permitting discounts for payment by cash or other means – was an impermissible content-based restriction under the First Amendment of the United States Constitution as specifically applied to the plaintiffs.

The plaintiffs in Italian Colors Restaurant et al. v. Becerra, No. 15-15873, 2018 WL 266332 (9th Cir. Jan. 3, 2018) were five California businesses and their owners or managers that “pay thousands of dollars annually in credit card fees.” Although it is in their interest to collect cash payments to avoid credit card fees, Section 1748.1 prevented them from imposing credit card surcharges, which they contended would be more effective than discounts to encourage buyers to use cash. Despite there being no apparent measurable difference between consumers’ response to the two approaches, research indicates that surcharges may be more effective because “economic actors are more likely to change their behavior if they are presented with a potential loss than with a potential gain.”

The Ninth Circuit deferred to the recent Supreme Court decision in Expressions Hair Design v. Schneiderman, 137 S. Ct. 1144 (2017), in which the Court held that New York’s surcharge ban tells merchants nothing about the amount they are allowed to collect from a cash or credit card payer, but does regulate how sellers may communicate their prices. The Ninth Circuit reasoned that Section 1748.1 regulates commercial speech because it regulates how sellers can communicate their prices rather than how much sellers can charge. As a result, the restriction implicated the First Amendment. The Court conducted a two-prong intermediate scrutiny test, finding that: (1) the regulated speech (namely, imposing credit card surcharges) was not misleading or related to unlawful activity; and (2) the law did not further the state’s interest in protecting consumers from deceptive price increases and was not narrowly tailored to achieve the state’s interest.

For these reasons, the Court found the law violated the First Amendment only as applied to the plaintiffs, with respect to the specific pricing practice that the plaintiffs wanted to use. This ruling is the latest in a series of other appellate decisions analyzing state law surcharge bans under the First Amendment, indicating that such restrictions may continue to be challenged in court.