By Thomas G. Wolfe, J.D.
Recently, the U.S. District Court for the Eastern District of California ruled that a California law restricting surcharges on credit cards was unconstitutional. In the March 25, 2015, Italian Colors Restaurant v. Harris case, Chief Judge Morrison C. England determined that the California statutory provision not only placed an impermissible burden on commercial speech in violation of the First Amendment to the U.S. Constitution, but also was unconstitutionally vague.
Similarly, in October 2013, in the case of Expressions Hair Design v. Schneiderman, the U.S. District Court for the Southern District of New York ruled that New York’s credit card “no surcharge” law was unconstitutionally vague and violated the plaintiffs’ right to “free speech” protected by the First Amendment. In each case, various merchants challenged the constitutionality of the “no surcharge” laws in actions brought against the state’s attorney general.
In both the Italian Colors case and the Expressions case, injunctive relief was granted to prevent enforcement of the California and New York laws. While the California law was permanently enjoined, the New York law was subject to a preliminary injunction while the New York federal trial court addresses whether New York’s “no surcharge” law is preempted by the federal Sherman Antitrust Act after further factual development in the case.
In the Italian Colors case interpreting the California statute (Cal. Civ. Code §1748.1(a)), the court depicted the operation of the California statutory provision, stating “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.”
Likewise, in the Expressions case construing New York’s “no surcharge” statute (N.Y. Gen. Bus. Law Article 29-A, sec. 518), the court related that the law provided that “no seller in any sales transaction may impose a surcharge on a holder who elects to use a credit card in lieu of payment by cash, check, or similar means.” In both the California and New York situations, the pertinent merchant plaintiffs claimed that the applicable state law restricted their protected free-speech rights because the state law required them to only use the “right language” to communicate the difference to purchasers of their products or services; the state law permitted them to refer to a cash “discount” but prevented them from referring to a credit “surcharge.”
As the Italian Colors court pointed out, until fairly recently, “state ‘no surcharge’ statutes were redundant because credit card companies had contractual provisions that prohibited retailers from imposing surcharges. However, in 2013, a nationwide settlement agreement with the credit card companies resulted in the removal of these contractual provisions…Instead, retailers are now required to engage in truthful and prominent disclosure of surcharge information to consumers and cannot recoup more than the cost of the merchant fees [also known as swipe fees] as a surcharge.” In light of the 2013 nationwide settlement with the credit card companies, the plaintiff merchants in the action were “contractually permitted” to impose surcharges, but prohibited to do so by the California law. Consequently, as observed by the court, the merchants initiated the lawsuit, at least in part, to ensure that doing so would not be considered a violation of the California law.
Another interesting highlight was presented in the Italian Colors decision on the merchants’ claim that the California statute was unconstitutionally vague. The merchants successfully maintained that the California law did not “clearly define the line between a permissible ‘surcharge’ and a mathematically equivalent but illegal ‘discount.’” In rejecting the California Attorney General’s argument that many of the merchants’ contentions about the vagueness of the California statute were “hypothetical,” the court emphasized that “[t]hese retailers would like to have a pricing system where a surcharge is imposed for credit card purchases, but do not feel confident that they could do so lawfully. 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.”
Now that two federal district courts, one in New York and one in California, have discerned constitutional problems with state “no surcharge” laws, will a trend begin to develop for other states as well? Apparently, that remains to be seen. As observed by the Italian Colors court, two other federal district courts, one in Florida and the other in Texas, came to a different conclusion. In examining Florida and Texas laws respectively, those courts upheld state statutes restricting credit card surcharges as a regulation of “economic activity.”
Notably, both the Florida and Texas federal district courts applied a “rational basis” test in upholding the state laws restricting credit card surcharges. In contrast, the New York and California federal district courts that found the state statutes restricting credit card surcharges to be unconstitutional applied an “intermediate scrutiny” test.
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