United States: Ninth Circuit Holds That A Prohibition On Credit Card Surcharges Abridges Merchants' Freedom Of Speech In Violation Of First Amendment

Last Updated: January 26 2018
Article by Erik F. Benny

The Ninth Circuit's recent decision in Italian Colors Rest. v. Becerra ("Italian Colors"),1 upheld an as-applied constitutional challenge to a California law prohibiting retailers from imposing a surcharge on customers paying with a credit card. In a unanimous decision, a three-judge panel for the Ninth Circuit agreed with the district court that an over 30-year-old statutory law violated the merchant plaintiffs' First Amendment rights by prohibiting them from posting a single "sticker price" and then charging an extra fee for consumers who chose to use a credit card to make payment. The Ninth Circuit thus set the stage for similar challenges pending across the country.

Background

California Civil Code Section 1748.1 prohibits retailers from imposing a surcharge on customers who make payments with credit cards, but permits retailers to offer discounts for payments by cash or other means (i.e., check or credit card). The law stems from a now lapsed provision in the federal Truth-in-Lending Act (TILA), which prohibited retailers from imposing a charge on a consumer who chose to use a credit card instead of paying with cash. When the federal ban expired in 1984, California and other states passed similar statutes seeking to continue to bar businesses from imposing a surcharge on a customer who uses a credit card instead of other forms of payment.

On March 5, 2015, a group of five California businesses—a restaurant, gas station, dry cleaners, transmission repair business, and web design company—and their respective owners sued the Attorney General of California seeking a declaration that Civil Code Section 1748.1 is unconstitutional and requesting a permanent injunction against its enforcement. Plaintiffs claimed to have paid thousands of dollars in credit card fees each year based on a 2-3% fee per transaction. To account for these fees, the plaintiffs increased the sticker price for their products and some then offered a discount to customers who paid with cash, check, or debit card. Plaintiffs explained that they were prohibited under Section 1784.1 from posting a single sticker price for an item and then charging the consumer a credit card fee to recover their costs. According to the plaintiffs, they would prefer to charge this surcharge for using credit cards rather than offer a discount for cash purchases because their customers would better understand that credit card fees are responsible for a portion of the price. Plaintiffs argued that this prohibition violated their First Amendment rights and was unconstitutionally vague under the Due Process Clause of the Fourteenth Amendment.

The district court agreed with plaintiffs and, on March 25, 2015, declared that Section 1748.1 was an unconstitutional restriction of speech because it was a content-based commercial speech restriction that could not survive intermediate scrutiny.2 The court permanently enjoined Section 1748.1 from being enforced against plaintiffs and the Attorney General appealed the decision to the Ninth Circuit.

Ninth Circuit Decision

On appeal, the Ninth Circuit disposed of the threshold issue of whether plaintiffs had standing to bring their claim, finding that plaintiffs modified their behavior based on the statute and the threat of enforcement.3 The court then broke down the remaining inquiry into two questions: 1) whether Section 1748.1 restricts plaintiffs' commercial speech; and 2) whether Section 1748.1 survives intermediate scrutiny.

The court relied heavily on a recent United States Supreme Court decision in Expressions Hair Design v. Schneiderman (Expressions), which examined a nearly identical New York surcharge statute, in analyzing whether California Civil Code Section 1748.1 regulates commercial speech.4 In Expressions, the Supreme Court reviewed a Second Circuit ruling that the New York surcharge law did not regulate speech and therefore could not violate the First Amendment. The Supreme Court reversed, concluding that the statute regulated "how sellers may communicate their prices" rather than the prices themselves.5 The Ninth Circuit noted that the Italian Colors plaintiffs wished to pursue the same course of action in the face of the same law as the plaintiffs in Expressions and, therefore, found that Section 1748.1 also regulates commercial speech.

Once the Ninth Circuit determined that Section 1748.1 was a restriction on commercial speech, the next question was whether it could survive intermediate scrutiny. Under this test, a court must first determine whether the speech is misleading or illegal and, if it is not, then determine whether the state has met its burden of showing that the regulation "directly advances" and is narrowly tailored to the state's "substantial interest."6 Here, the court concluded that the Italian Colors plaintiffs' desired action—charging more for credit card transactions—was not misleading or illegal because Section 1784.1 already permitted credit card customers to be charged more than cash customers, it just required such charges to be in the form of a discount for cash transactions.7

Next, the court concluded that Section 1748.1 did not advance the state's interest of "promot[ing] the operation of the free market and protect[ing] consumers from deceptive price increases." In fact, the court found that the statute had the opposite effect. Specifically, by preventing retailers from communicating the cost of credit card usage, their customers were less informed than they would otherwise be regarding why they can receive a discount for cash transactions.8 Moreover, the court noted that several key exemptions in the statute—including for the state and its subdivisions—indicated that the stated justifications for the statute were illusory. Finally, the court determined that even if the statute advanced California's asserted interest, it was not narrowly tailored to this interest because preventing consumer deception could be achieved in far more direct ways, such as banning deceptive or misleading surcharges, enforcing other statutes that ban unfair business practices, or requiring retailer to disclose their surcharges both before and at the point of sale.9

All told, the Ninth Circuit held that, as applied to the plaintiffs, Section 1748.1 restricted non-misleading commercial speech in a manner that did not directly advance the state's interest. Therefore, it upheld the district court's ruling and permanently enjoined enforcement of Civil Code Section 1748.1 against plaintiffs. Although the lower court went further and struck down the law in its entirety, the Ninth Circuit limited its decision to only the plaintiffs in this case.

Moving Forward

The Ninth Circuit's opinion in Italian Colors appears to be a big win for California businesses, and it may very well be, but Section 1748.1 was just one aspect of a much larger battle regarding surcharge fees that continues to play out across the country. For example, California is one of 10 states that have laws on the books prohibiting credit card surcharges.10 At least three other such states have faced constitutional challenges similar to the one here, with varying degrees of success.11 However, as Italian Colors makes clear, the Supreme Court's 2017 decision in Expressions has likely opened the door to more successful challenges.12

In addition, even if the surcharge laws are universally deemed to violate the First Amendment, similar prohibitions could survive as contractual provisions in merchants' agreements with major credit card companies. While such provisions are being challenged in class action lawsuits,13 it does not appear imminently likely to result in a ban of such provisions. In an action against American Express, for example, the plaintiff challenged several contractual provisions but actually ignored the provision most closely resembling a surcharge restriction.14 Moreover, while Visa and MasterCard recently reached a proposed class action settlement in which they agreed to remove surcharge restrictions from their agreements, the settlement was rejected by the Second Circuit.15 It is unclear whether a similar settlement opportunity is on the horizon in this case or any others.16 In short, while the Italian Colors decision resolves the statutory surcharge debate within the Ninth Circuit, other courts will still get their chance to analyze the issue from both a statutory and contractual angle going forward.

Footnotes

1 See Italian Colors Rest. v. Becerra, No. 15-15873, 2018 U.S. App. LEXIS 150 (9th Cir. Jan. 3, 2018).

2 Italian Colors Rest. v. Harris, 99 F. Supp. 3d 1199 (E.D. Cal. 2015). The district court also found that Section 1748.1 was unconstitutionally vague. This part of the district court's ruling was not addressed by the Ninth Circuit.

3 Italian Colors, at 14-19.

4 137 S. Ct. 1144 (2017); Italian Colors, at 21-22.

5 Italian Colors, at 21 (citing Expressions, 137 S. Ct. at 1151).

6 Id. at 22, 27.

7 Id. at 24.

8 Id. at 25-16.

9 Id. at 28.

10 Id. at 8.

11 Dana's R.R. Supply v. AG, 807 F.3d 1235, 1246 (11th Cir. 2015) (striking down a Florida surcharge statute nearly identical to California's Section 1748.1 as an unconstitutional abridgment of free speech), cert denied, 137 S. Ct. 1452 (2017); Expressions, 137 S. Ct. 1144 (vacating Second Circuit ruling that New York surcharge statute did not violate the First Amendment because it did not regulate speech and remanding for further proceedings); Rowell v. Pettijohn, 816 F.3d 73 (5th Cir. 2016) (affirming the dismissal of challenge to Texas' surcharge statute, because it did not implicate the First Amendment's free-speech protections), overturned by 865 F.3d 237, 238 (5th Cir. 2017) (remanding matter to district court based on Supreme Court decision in Expressions).

12 Expressions, 137 S. Ct. at 1150-51.

13 See e.g., id. at 1147-48 (noting that "merchants have brought antitrust challenges to contractual no-surcharge provisions"); In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., 827 F.3d 223 (2d Cir. 2016).

14 United States v. Am. Express Co., 838 F.3d 179, 191 n.38 (2d Cir. 2016) (noting that plaintiffs did not challenge the provisions that "prohibit merchants from imposing fees when accepting Amex cards that are not 'imposed equally on all Other Payment Products'").

15 In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., 827 F.3d at 236 (rejecting settlement because of a conflict between Federal Rule of Civil Procedure 23(b)(2) and 23(b)(3) classes, which rendered the representation inadequate). The settlement also had a "most-favored-nation" provision, which prohibited merchants that accepted American Express from taken advantage of the surcharge portion of the settlement agreement. Id. at 230.

16 See In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig., No. 05-MD-1720, 2017 U.S. Dist. LEXIS 160045 (E.D.N.Y. Sept. 27, 2017) (seeking to amend complaints after proposed settlement was rejected).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions