A federal district court in California has ruled that a state law prohibiting retailers from imposing a surcharge on credit card purchases placed an unconstitutional restriction on the retailers’ freedom of speech and is unconstitutionally vague.

In Italian Colors Restaurant v. Harris, five California businesses and their owners alleged that the law violated their First Amendment right to free speech by regulating how retailers can describe the price difference between cash and credit purchases. According to the plaintiffs, the law prohibited merchants from telling customers that there was an additional cost for paying with credit rather than cash. The statute allowed merchants to offer customers a discount for not paying with a credit card. However, it prohibited them from charging a “cash price” to a customer paying cash and adding a “surcharge” when the customer paid with a credit card, even though the final amount paid in either instance would not be different if a discount was offered. The plaintiffs also alleged that the law was unconstitutionally vague.

The court rejected the California Attorney General’s argument that the law did not implicate First Amendment rights. The Attorney General asserted that the law did not instruct retailers how to communicate pricing information to their customers and instead only regulated economic activity, namely adding a surcharge at the cash register. The court concluded that the law was not an economic regulation that controlled prices but instead regulated how prices were conveyed to customers.

The court also rejected the Attorney General’s attempt to justify the statute as a permitted restriction on commercial speech because of the government’s interest in preventing harm or deception to consumers. According to the Attorney General, consumers choosing to pay by credit card would be misled by the addition of a “surprise” surcharge at the cash register. Observing that the state’s argument that surcharges present a “real harm” to consumers was undermined by the statute’s exemption of government agencies, the court found that the statute was much broader than necessary. In the court’s view, the state could prevent consumer deception by requiring a retailer that imposed a surcharge to post information about surcharges throughout the store.

The court also agreed with the plaintiffs that the law was unconstitutionally vague because it did not clearly define what constituted an unlawful surcharge. According to the court, the state’s interpretation that the term “surcharge” meant only an additional charge added at the cash register was not clear from the statute’s text. As a result, retailers had no certainty as to how they could lawfully use a dual-pricing system.

In its opinion, the court cited decisions by New York and Texas federal courts involving similar constitutional challenge to those states’ “no surcharge” laws. In the New York case, the court agreed with the merchant plaintiffs that the New York 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 Attorney General appealed to the Second Circuit, which heard oral argument on March 5, 2015.

In contrast, the Texas federal court found that the Texas law did not implicate First Amendment rights and instead only regulated economic activity. It also rejected the merchant plaintiffs’ vagueness claim, finding the law to be explicit about the prohibited activity for enforcement purposes. The plaintiffs have filed an appeal with the Fifth Circuit. (For more information on the Texas case, see our prior legal alert.)

In addition to California, Texas, and New York, other states with “no surcharge” laws include 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, Scott M. Pearson at 424.204.4323 or pearsons@ballardspahr.com, or Denise L. Plunkett at 646.346.8036 or plunkettd@ballardspahr.com.

Copyright © 2015 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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