A Florida law that prohibits merchants from imposing a surcharge on credit card purchases but allows a discount for cash purchases violates the First Amendment, a divided panel of the U.S. Court of Appeals for the 11th Circuit has ruled.

Last month, the Second Circuit ruled that New York’s “no surcharge” law does not violate the First Amendment because it only regulates conduct, not speech. With two circuit courts now having reached opposite conclusions about whether such state laws are unconstitutional restrictions on speech, the U.S. Supreme Court might be prompted to take up the issue if a petition for certiorari is filed.The lawsuit was filed by four businesses after they received cease and desist letters from the Florida Attorney General demanding that they stop certain practices that allegedly violated Florida’s “no surcharge” law. Each of the businesses charged credit card customers more than customers paying with cash. The price differential was characterized as a surcharge or additional fee for using a credit card rather than a lesser amount for paying with cash. The businesses alleged that Florida’s law violated the First Amendment as an unjustified restriction on speech. Like the plaintiffs in the Second Circuit case, the businesses claimed that labeling the price differential as a “surcharge” rather than a “discount” was more effective, transparent and accurate. (Florida’s law, as does New York’s, permits merchants to offer a discount to customers for not using credit.)

The district court granted the Florida AG’s motion to dismiss, ruling that the Florida law survived rational-basis review as a regulation of economic activity and, even if viewed as a restriction on commercial speech, did not violate the First Amendment.

In reversing the district court, the 11th Circuit ruled that Florida’s law was an abridgement of free speech that violated the First Amendment. The Court was unwilling to view the law merely as a ban on economic activity, namely dual pricing, because it did not prohibit merchants from charging different prices depending on the method of payment. It was also unwilling to view the law as merely a “prohibition on bait-and-switch schemes” that allows merchants to charge different prices based on the payment method but requires the higher price charged to credit card users to be announced before the transaction begins. In the Court’s view, that construction “would narrow the no-surcharge law into nothingness” because “all a merchant need do to avoid liability would be to announce to potential customers the price difference in advance of sale.” (The court noted that one of the businesses that received a cease and desist letter had posted a sign indicating that it would impose a credit card fee.)

The Court said the Florida law targeted “expression alone,” commenting that it should be a “‘surcharges-are-fine-just-don’t-call-them-that law.’” Analyzing the law under the intermediate scrutiny standard applicable to commercial speech, the Court concluded that the law did not regulate misleading speech or serve a substantial government interest (and noted that even if any of the rationales offered for the law formed such an interest, the law “proves too broad and too blunt a means to its ends.”)

The Court also highlighted “the modest scope” of its holding, which it deemed a ruling “only on a law that, although it purports to regulate commercial behavior, has the sole effect of banning merchants from uttering the word surcharge, criminalizing speech that is neither false nor misleading.” (emphasis supplied.) The Court commented that Florida “could simply prohibit dual pricing altogether,” cap the difference in price that can be charged to cash and credit card customers, or ban specific bait-and-switch tactics, or require merchants to disclose “the workings of their pricing policy.”

In the decision, the dissenting judge argued that because the law defines a “surcharge” as “any additional amount imposed at the time of sale,” it should be construed to allow a merchant “to speak in any way he chooses so long as he does not ambush the credit-card-using customer with a higher price at the register.” In the dissenting judge’s view, the law targets when a merchant adds an additional amount to a credit card purchase and not how the merchant describes that amount.  (The district court had also rejected the businesses’ argument that the law was unconstitutionally vague in violation of the Due Process Clause of the 14th Amendment. Although the majority did not reach that argument, the dissenting judge concluded that the statute was not impermissibly vague.)

In addition to Florida and New York, other states with “no surcharge” laws include California, Colorado, Connecticut, Kansas, Maine, Massachusetts, Minnesota, Oklahoma, and Texas. The California and Texas laws have also been the subject of First and 14th Amendment challenges.  A Texas federal district court ruled that the Texas law did not implicate First Amendment rights because it only regulated prices, while a California federal district court rejected a similar argument and held that that the law was an unconstitutional restriction on speech and violated Due Process. Appeals of the Texas and California decisions are currently pending with, respectively, the Fifth and Ninth Circuits.

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 Consumer Financial Services Group Practice Leader Alan S. Kaplinsky or John L. Culhane, Jr.


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