SACRAMENTO (CN) – Retailers sued California, Texas and Florida this week, claiming state laws prohibiting “swipe fee” surcharges for credit card purchases are unconstitutional, as they have the same effect as offering a “discount” for using cash: the only difference is in the speech.
Small businesses in California, Texas and Florida filed separate federal complaints against their states, claiming that laws prohibiting credit card surcharges violate the First Amendment and are unconstitutionally vague.
The plaintiffs claim that a federal judge already has struck down as unconstitutional a similar law in New York.
The separate lawsuits filed this week in Sacramento, Austin and Tallahassee federal courts make similar claims.
“Every time a consumer uses a credit card to make a purchase, the merchant incurs a fee – known colloquially as a ‘swipe fee,'” lead plaintiff Italian Colors Restaurant says in its lawsuit against California Attorney General Kamala Harris. “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). 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: A California law allows merchants to offer ‘discounts’ for using cash or a debit card, yet makes it illegal to impose ‘surcharges’ for using a credit card – even though the conduct in both cases (the use of dual pricing) is the same.
“That ‘virtually incomprehensible distinction between what a vendor can and cannot tell its customers’ has already caused one federal court to strike down New York’s indistinguishable statute as an impermissible restriction on free speech and as unconstitutionally vague. Expressions Hair Design v. Schneiderman, – F. Supp. 2d -, 2013 WL 5477607, *1 (S.D.N.Y. Oct. 3, 2013). And the only other federal court to consider state no-surcharge laws has signaled its agreement, calling the statutes ‘anti-consumer’ and ‘irrational,’ and finding ‘good reason to believe'” that the remaining no-surcharge laws will be overturned. In re Payment Card Interchange Fee & Merchant Discount Antitrust Litig., – F. Supp. 2d -, 2013 WL 6510737, *19-*20 (E.D.N.Y. Dec. 13, 2013).
“California’s no-surcharge law, CAL. CIV. CODE § 1748.1, is no different. Like New York’s, it violates the First Amendment to the U.S. Constitution and is unconstitutionally vague. The plaintiffs are merchants who seek a declaration that the law is unconstitutional and an injunction preventing the State of California from enforcing the law against them.”
A credit surcharge and a cash discount are “identical in every way except one: the label that the merchant uses to communicate that price difference,” the law suit states.
The retailers and small businesses say these labels matter because consumers react differently to surcharges and discounts, even if the ultimate pricing information is the same.
“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. That difference – the difference in how the same pricing information is understood by consumers – influences their behavior, making ‘surcharges’ a much more effective way to communicate the costs of credit to consumers,” the complaint states.
Italian Colors Restaurant, a family business in Oakland, has found that patrons are generally sympathetic when they learn about the high cost of swipe fees on small businesses and may take that information into account when buying goods and services elsewhere, the lawsuit states.
California’s no-surcharge law was enacted in 1985, at the urging of the credit card industry. Around the same time, the major credit card companies changed their contracts with merchants to include no-surcharge rules, according to the complaint.
However, under the terms of a national class action settlement in January 2013, Visa and MasterCard agreed to drop their contractual no-surcharge rules. In December 2013, in response to a class action lawsuit initiated by Italian Colors Restaurant, American Express also agreed to drop its surcharge ban.
“As a result, state no-surcharge laws – previously redundant because of contractual no-surcharge rules – have now gained added importance. And as they did in the 1980s, credit-card companies are once again seeking to discourage dual pricing by pushing state legislation that dictates the labels that merchants can use for such systems,” the complaint states.
Small businesses in California cannot take full advantage of the victories against the credit card companies because they are still not allowed to label the cost differences between credit and cash purchases as a surcharge under California’s no-surcharge law, the lawsuit states.
Although the law allows dual pricing, it does not convey the costs of credit to consumers and is so vague that many businesses are afraid to have any dual pricing at all for fear of running afoul of the law, the lawsuit states.
“The upshot, then, is that merchants end up passing on swipe fees to all consumers by raising the prices of goods and services across the board. This means that consumers are unaware of how much they pay for credit and have no incentive to reduce their credit-card use because they will pay the same price regardless. As a result, swipe fees have soared.
“Swipe fees thus function as an invisible tax, channeling vast amounts of money from consumers to some of the nation’s largest banks and credit-card companies,” the complaint states.
Plaintiffs in all three states seek declarations that each state’s no-surcharge law is unconstitutional and an injunction enjoining enforcement.
The California businesses are represented by Edward S. Zusman with Markun Zusman Freniere & Compton.
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