9th Circuit May Revive Fight Over Credit Card Surcharge Ban

SAN FRANCISCO (CN) – The Ninth Circuit indicated Thursday it would order a lower court to narrow a finding that a decades-old California law banning surcharges for credit card purchases is unconstitutional.

Seeming to side with five California businesses who sued over the consumer-protection law, two of the three judges on the Ninth Circuit panel said there was no facial challenge to the statute, and that the case should be remanded for an as-applied challenge with instructions to narrow the injunction.

However, they also indicated they would affirm the trial court’s ruling that the law is an unconstitutional restriction on commercial speech. The state contends it is solely a restriction on retailer conduct designed to protect consumers from “deceptive price increases” at the cash register.

“But does that justify trampling on a First Amendment right, though?” Circuit Judge Johnnie Rawlinson asked at the hearing in downtown San Francisco.

Italian Colors Restaurant and four other businesses sued California in 2014, claiming the law violates the First Amendment by restricting commercial speech because it regulates how retailers can describe the price difference between cash and credit purchases.

The 1985 law says retailers can’t levy a surcharge on customers who use a credit card instead of paying with cash or a check. But the retailer can offer discounts to encourage consumers to pay with cash.

Retailers prefer that customers use cash because credit card companies charge a swipe fee of up to 3 percent, and the fees can be expensive for small businesses.

Italian Colors and its co-plaintiffs claim research shows that customers are loss-averse and are more likely change their behavior because of a financial penalty rather than a financial benefit.

Therefore, they say, the most effective way to encourage customers to switch from credit cards to cash is to emphasize the penalty associated with using credit cards by displaying a price for cash and an additional price indicating a surcharge for using their credit card. 

The state had argued that its no-surcharge law doesn’t violate the First Amendment because it is an economic regulation, not a speech regulation.

But U.S. District Judge Morrison England found in 2015 that the law is in fact a speech regulation because it regulates how prices are presented to customers, not the prices themselves.

Ruling on cross-motions for summary judgment, England struck down the law as unconstitutional under the First Amendment and void for vagueness under the 14th Amendment, and permanently enjoined its enforcement.

On Thursday, California Assistant Attorney General John Killeen asked the court to reverse England’s facial ruling, and initially insisted there was no as-applied case for the lower court to consider on remand.

U.S. District Judge Sarah Vance, sitting by designation from the Eastern District of Louisiana, repeatedly questioned Killeen on the facial issue. She forcefully signaled her intention to remand the case for an as-applied challenge and order England to narrow the injunction.

On rebuttal, Killeen told the panel that they were “all on the same page in terms of there not being a cognizable facial challenge,” and asked that the case be remanded for an as-applied challenge.

Killeen maintained, however, that the statute isn’t an unconstitutional restriction on speech. He said it would survive constitutional scrutiny under the First Amendment test established in Central Hudson Gas & Elec. Corp. v. Public Service Commission of New York, which the Supreme Court decided in 1980.

Under Central Hudson’s four-part test, a statute regulating commercial speech must advance the government’s interests, and must not be more restrictive than necessary to serve that interest.

Killeen said California’s prohibition against credit card surcharges advances the state’s interest in protecting consumers and reaches no further than necessary to accomplish that.

“The agency charged with protecting consumers worried that if surcharges were allowed there would be a tremendous amount of complaints to all levels of government by parties claiming ignorance of the charges and/or false advertising,” he said, referring to the California Department of Consumer Affairs. “So there was a real concern for abuse at the time.”

Plaintiff attorney Deepak Gupta with Gupta Wessler in Washington countered that the statute was never about consumer protection, but instead had been “championed by the credit card industry from the beginning as a way of hiding the cost of credit from consumers.”

“This has never been legitimate consumer protection legislation,” he said, asking the panel to affirm Morrison’s Central Hudson analysis. “If the state was legitimately concerned about consumer deception, it could have drafted a statute, which we would support, that would require prominent disclosure. It didn’t do that.”

Gupta also told the panel his clients hadn’t mounted a facial challenge in the lower court, suggesting they would welcome remand with instructions to narrow England’s injunction.

Senior Circuit Judge Diarmuid O’Scannlain joined Rawlinson and Vance on the panel.


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