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Bar on Swipe Fee is Unconstitutional

SACRAMENTO (CN) - A California law prohibiting a swipe fee surcharges for credit card purchases is unconstitutional, a federal judge ruled Thursday.

U.S. District Court Morrison England found that the law "is an unconstitutional restriction on plaintiffs' freedom of speech and is void for vagueness."

Italian Colors Restaurant and four other California businesses sued the state last year, 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 states that retailers cannot impose a surcharge on consumers who use a credit card instead of paying by cash or check, but the retailer can offer discounts to induce consumers to pay by cash.

"For example, a retailer could charge $102 for a product and give a $2 discount, but could not charge $100 and impose a $2 surcharge, despite the situations being mathematically equivalent. Thus, the statute restricts how this $2 price difference is presented to the consumer," England wrote.

The businesses claim that research has shown that customers are "loss averse" and will be more motivated by a "potential economic penalty" to change their behavior than by a "potential economic benefit."

Therefore, they say, the most effective way to encourage customers to switch from credit cards to cash would be to emphasize the penalty associated with using their credit cards.

"In one study, 74 percent of consumers had a negative or strongly negative reaction to credit surcharges, while fewer than half had a negative or strongly negative reaction to cash discounts," they said in their complaint.

Retailers prefer that customers use cash because credit card companies charge a swipe fee of 2 percent to 3 percent, and these fees can be incredibly expensive for small businesses.

Plaintiff Vincent Archer said that his business, Leon's Transmission Service, paid $300,000 on swipe fees to Visa alone in since 2004. He said the fees have been the largest nonpayroll-related expenses at his business.

"These fees are typically passed on to all consumers in the form of higher prices for goods and services. Both state and federal law, however, permit merchants to pass swipe fees on to only those consumers who pay with credit cards. Merchants may do so by charging two different prices depending on how the consumer pays: a higher price for using a credit card, and a lower price for using other payment methods (cash, a personal check, or a debit card)," the retailers' complaint states.

"But, in California, merchants may engage in dual pricing only if they communicate the difference between the cash price and the credit price using the right language."

Credit card companies used to have contracts with merchants that included no-surcharge rules, making California's law redundant. However, under terms of a national class action settlement in January 2013, Visa and MasterCard agreed to drop their contractual no-surcharge rules. In December 2013, American Express also agreed to drop its surcharge ban.

Businesses in California would like to impose surcharges now that they can do so under their contracts with the credit card companies, but they fear that doing so will be illegal under California's law.

The defendant attorney general argued that the law is in place to prevent merchants from charging a surprise surcharge at the cash register to an unaware customer.

The state also said that the law does not instruct retailers how to assign their prices or how to communicate their pricing or cost information to their customers, but rather prohibits economic activity - adding a surcharge - so the First Amendment is not implicated.

Retailers are allowed to tell their customers about merchant fees, the government pointed out.

Although the "prevention of consumer deception is certainly a noble goal," England found that the law regulates speech that conveys price information, which is protected by the First Amendment.

"Plaintiffs cannot frame their price how they would like, even though they are allowed to speak with their customers generally about the credit card industry and the merchant fees that the industry charges," the judge wrote.

If the purpose of the statute is to prevent the surprise extra charge at the cash register, the law could have been written more directly to state that merchants can impose a surcharge so long as they properly disclose it, England said.

In addition to being an unconstitutional restriction on speech, the law is unconstitutionally vague because it is not clear when a retailer is in violation, the judge said.

"(W)hat happens if the price is listed as a '$100+2 percent surcharge'? Does that scenario constitute an unlawful surcharge since the percentage is calculated at the cash register? Or what would be the result if the price is listed as $100, but there are large signs displayed throughout the establishment stating that a 2 percent surcharge will be applied for purchases made with credit cards? Does that cross the line into unlawful conduct because it could be perceived as a surprise addition to the price?" England wrote.

"The fact that retailers - even large national retailers with teams of in-house attorneys - do not use a dual-pricing system under the current law due to fear of enforcement is proof that the law is not clear."

England declared the law unconstitutional and permanently enjoined its enforcement.

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