A Texas law that prohibits merchants from imposing a surcharge on credit card purchases, but allows a discount for cash purchases, does not violate the First Amendment of the U.S. Constitution, a divided panel of the U.S. Court of Appeals for the Fifth Circuit has ruled.

Last year, the Second Circuit ruled that New York's ''no surcharge'' law does not violate the First Amendment because it only regulates conduct, not speech, while the 11th Circuit ruled that Florida’s "no surcharge" law is an unconstitutional abridgement of free speech. The growing circuit court split about whether such state laws are unconstitutional restrictions on speech could prompt the U.S. Supreme Court to take up the issue if a petition for certiorari is filed. (Petitions for rehearing en banc were denied by the Second and 11th Circuits on January 13, 2016. Under Supreme Court rules, a petition for certiorari must be filed within 90 days.)

In Rowell v. Pettijohn, the district court ruled that the Texas law does 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.'' On appeal, the merchants argued that "the law is not a permissible economic regulation, but instead requires them to convey their prices in a certain way: as "less" than the regular price [when paid with cash], rather than "more" when paid with a credit card." 

In affirming the district court, the Fifth Circuit agreed that the Texas law does not implicate the First Amendment but "ensures only that merchants do not impose an additional charge above the regular price for customers paying with credit cards." According to the Fifth Circuit, "simply speaking about the prices regulated by Texas' law does not transform it into a content-based speech restriction; the speech is merely incidental to the regulated conduct." The Fifth Circuit also agreed with the district court's ruling that the law is not unconstitutionally vague in violation of the Due Process Clause of the 14th Amendment, finding that "a plain reading of Texas' law shows it forbids a merchant from imposing an extra charge for a purchase with a credit card, and is completely silent as to any other form of pricing."

The dissenting Fifth Circuit judge noted that Texas' Office of Consumer Credit Commissioner had conceded that the Texas law permits ''dual-pricing" in which a merchant posts two different prices—one for credit-card customers and one for cash customers. He also observed that "the panel majority admits that [the Texas law] does not only regulate economic conduct but when applied to dual-pricing scheme, prohibits the use of words to convey a particular message." According to the dissenting judge, because when applied to dual-pricing, Texas' law "does not regulate the difference between prices" but only regulates "what merchants can tell customers about their prices," he "cannot see how such a restriction can avoid First Amendment scrutiny." (The dissenting judge contrasted the Texas law's impact on speech with that of New York's law which, according to the Second Circuit, did not "prohibit sellers from referring to credit-cash price differentials as credit-card surcharges.")

In addition to Texas, Florida, and New York, other states with “no surcharge” laws include California, Colorado, Connecticut, Kansas, Maine, Massachusetts, Minnesota, and Oklahoma. The California law has also been the subject of First and 14th Amendment challenges. A federal district court held that California's law was an unconstitutional restriction on speech and violated due process. An appeal of the California decision is currently pending in the Ninth Circuit.

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Copyright © 2016 by Ballard Spahr LLP.
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