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Also in this Issue: The Battle Over Surcharge Fee Laws Simmers in the Courts (MAG Quarterly- Volume Five, Issue Three)

By Barrie VanBrackle, Partner, Orrick

September 7, 2017

As everyone is aware, the payment card networks charge a per-transaction fee for payment card processing services. Historically, the payment card networks have prohibited merchants to pass through to customers charges in addition to the sales price for goods and services (“surcharges”) if a customer pays with a credit card. (Interestingly, “discounts” for cash have been allowed).  Notwithstanding, due to the antitrust settlements with Visa and Mastercard (not American Express which did not settle the U.S. Department of Justice antitrust complaint against it), as of 2013, the payment card rules allowed for surcharging ONLY if the merchant provided notice and followed the payment card procedures and only if such surcharging was legal in the state in which the merchant was located (or where its customer was located). “Surcharging” credit card transactions has been declared illegal by 10 states (and the Commonwealth of Puerto Rico): California, Colorado, Connecticut, Florida, Georgia, Kansas, Maine, Massachusetts, New York, Oklahoma, and Texas. (Other states such as Georgia and Minnesota have limitations on the imposition of surcharging). As a general matter, these statutes prohibit merchants from charging two prices for products: a price for customers who pay cash, and a price reflecting an additional charge for customers who pay with credit card.  

Notwithstanding the state law prohibitions, merchants have argued that they should be able to communicate to their customers that an additional amount must be charged to customers due to credit card processing fees. They contend that expressing such information via a surcharge is the most effective way to do so and that laws prohibiting such pricing violate the First Amendment.  California’s statute was the first to be declared unconstitutional in Italian Colors Restaurant, et al. v. Harris, 99 F. Supp. 3d 1199 (E.D. Cal. 2015). There, the court held that California’s surcharge fee statute restrained retailers’ free speech rights in violation of the First Amendment.  Subsequently, Florida’s statute was also declared unconstitutional on First Amendment grounds in Dana’s Railroad Supply v. Bondi, 807 F.3d. 1235 (11th Cir. 2015).

The Supreme Court recently lent credence to the argument that state surcharge laws violate merchants’ First Amendment rights. In Expressions Hair Design v. Schneiderman, 137 S.Ct. 1144 (2017), Justice Roberts writing for the Court determined that the New York statute does, in fact, regulate speech.  The Court rejected the reasoning of the underlying 2nd Circuit decision that the New York statute amounts to a mere price regulation. On the contrary, “[s]ection 518 is different. The law tells merchants nothing about the amount they are allowed to collect from a cash or credit card payer.... What the law does regulate is how sellers may communicate their prices.” Id. at 1151. The Court remanded the case to the Second Circuit to determine if the statute is a permissible regulation of commercial speech under the First Amendment. Because the Second Circuit had decided that the New York surcharge fee statute did not regulate speech, the court had not reached the final issue of constitutional validity in its opinion.

The Fifth Circuit previously determined that the Texas state surcharge law is a regulation of conduct and not speech and, thus, does not implicate the First Amendment. Rowell v. Pettijohn, 816 F.3d 73 (5th Cir. 2016). Thus, the outcome of Italian Colors Restaurant and Expressions Hair Design (on remand) in the circuit courts will have serious implications for the future of surcharging. The Ninth Circuit heard argument on this issue in the Italian Colors Restaurant case on August 17.  

Of course, we will keep you apprised of any updates.