A federal district court in Texas has dismissed a lawsuit brought by several merchants challenging the constitutionality of a state law that prohibits merchants from imposing a surcharge on credit card purchases.

In Rowell v. Pettijohn, the merchants alleged that the Texas law violates their First Amendment right to free speech because it does not allow them to tell customers that goods or services will cost more if paid for with a credit card rather than cash. The statute allowed the merchants to offer customers a discount for not paying with a credit card. However, it did not allow them to charge a “cash price” for customers not paying with credit and add a “surcharge” for customers using a credit card. The merchants also alleged that the law was unconstitutionally vague in violation of the Due Process Clause.

The court found that the law did not implicate First Amendment rights and instead “regulates only prices charged,” which it characterized as “an economic activity that is within the state’s police power.” According to the court, the law “effectively sets the maximum price for credit-card purchases as the posted price” by prohibiting merchants from charging an additional amount to customers using credit cards.

In the court’s view, by permitting discounts for cash purchases and prohibiting surcharges on credit card purchases, the law did not involve protected speech but simply permitted one pricing practice while prohibiting another. The court also commented that any burden the law placed on speech did not offend the First Amendment because Texas merchants “remain free to discuss and convey otherwise lawful information about their prices and pricing activity in general.”

The court also rejected the merchants’ due process claim, finding the law to be explicit about the prohibited activity for enforcement purposes “which is the tacking of an additional charge to the price for a credit-card payment.” The court further observed that even if some confusion existed over what the Texas law prohibits, the merchants could obtain clarification from the Texas Consumer Credit Commissioner.

In dismissing the merchants’ complaint, the court expressly declined to follow an October 2013 decision by a New York federal district court in a case involving a similar constitutional challenge to that state’s “no surcharge” law. In the New York case, the court agreed with the merchants that the law violated the First Amendment by prohibiting them from advertising their pricing in a manner that characterized the difference between the cash and credit price as a surcharge for a customer’s use of credit, instead of paying with cash or by another method.

Additionally, the court concluded that the law was unconstitutionally vague and entered a preliminary injunction prohibiting the New York Attorney General from enforcing the law. The New York AG appealed to the U.S. Court of Appeals for the Second Circuit, which has scheduled oral argument for March 5, 2015.

In addition to Texas and New York, other states with “no surcharge” laws include California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Minnesota, and Oklahoma.

Ballard Spahr’s Consumer Financial Services Group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws, and its skill in litigation defense and avoidance.

If you have questions, please contact CFS Practice Leader Alan S. Kaplinsky at 215.864.8544 or kaplinsky@ballardspahr.com, CFS Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, John L. Culhane, Jr., at 215.864.8535 or culhane@ballardspahr.com, or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.


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