California Ban on Credit Card Surcharges Is Illegal, 9th Circuit Says

SAN FRANCISCO (CN) – A Ninth Circuit panel on Wednesday agreed a California law banning surcharges for credit card purchases is unconstitutional and modified an injunction barring its enforcement, but cautioned the ruling only applies to the handful of businesses that had challenged it.

The three-judge panel affirmed a lower court finding that the 1985 law banning retailers from imposing the surcharge violates the First Amendment, concluding the law restricts commercial speech and does not advance California’s stated interest of preventing consumer deception.

But the panel specified the First Amendment finding applies only to the five plaintiffs. Modifying the injunction to apply only to them, the panel specified the plaintiffs can only post a single price and charge an extra fee to customers who use credit cards.

“Even if there were evidence of consumer deception, or other harm to the free market, the statute’s broad swath of exemptions would undermine any ameliorative effect,” U.S. District Judge Sarah Vance, sitting by designation from the Eastern District of Louisiana, wrote for the panel. “Thus enforcing Section 1748.1 against plaintiffs does not directly advance the state’s interest in preventing consumer deception.”

California Civil Code Section 1748.1(a) prohibits retailers from imposing a surcharge on customers who pay with a credit card, but allows them to offer discounts for cash or check.

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

Retailers prefer 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.

The plaintiffs argued customers are loss-averse and more likely to change their behavior due to a financial penalty than a financial benefit. They claimed 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 single price and charging an extra fee for credit card purchases.

The state countered the law didn’t violate the First Amendment because it regulated economic conduct, not speech.

But in 2015, U.S. District Judge Morrison England Jr. in Sacramento granted summary judgment to the plaintiffs, declaring the law unconstitutional and permanently enjoining its enforcement.

England concluded the law does regulate speech by controlling how prices are presented to customers, not the prices themselves. Applying intermediate scrutiny under Central Hudson Gas & Elec. Corp. v. Public Service Commission of New York, decided by the U.S. Supreme Court in 1980, England found the surcharges the plaintiffs wanted to post were neither misleading nor related to illegal activity; that the consumer-protection law did not advance California’s interest in preventing consumer deception, and that there was a disconnect between that interest and the law’s scope.

The Ninth Circuit agreed, suggesting California use less restrictive options for preventing consumer deception, including requiring retailers to disclose their surcharges both before and at the point of sale like Minnesota, or enforcing its existing laws against unfair business practices and misleading advertising in pricing.

“We fail to see how a law that keeps truthful price information from customers increases the accuracy of information in the marketplace,” Vance wrote.

Deepak Gupta with Gupta Wessler in Washington, representing the plaintiffs, welcomed the decision in an email Wednesday.

“The court’s decision today is a First Amendment victory for consumers and merchants alike,” he said. “It means that consumers can’t be kept in the dark about the hidden cost of credit-card swipe fees, which funnel vast amounts of money from consumers to large banks and credit-card companies every day.”

But the panel also ruled the law violates the First Amendment only as applied to the plaintiffs because they brought an as-applied challenge. Enjoining the law entirely as England did would only have been appropriate if the plaintiffs had prevailed on a facial challenge, Vance said.

The plaintiffs had suggested the panel modify the injunction, Gupta said.

“As a practical matter, it gives California merchants everything they could reasonably ask for because it means that any merchant can truthfully disclose the cost of credit,” he said.

Senior Circuit Judge Diarmuid O’Scannlain and Circuit Judge Johnnie B. Rawlinson also sat on the panel.

California Deputy Attorney General John Killeen represented the state. His office said by email it is evaluating its options.

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