Appellate Court Sides With Merchants Challenging California’s Credit Card Surcharge Ban

A group of California small businesses won a victory Wednesday when a three-judge panel of a federal appellate court upheld their challenge to California’s ban on credit card surcharges, but a key aspect of the ruling applies only to the merchants who sued the state.

Still, the ruling represents at least a partial win by merchant groups seeking to overturn state bans on surcharges, especially when such laws attempt to regulate how merchants communicate different prices for cardholders and cash users. A case involving New York’s surcharge ban went to the Supreme Court and is now back for further adjudication in lower courts.

California enacted its surcharge prohibition in 1985 after Congress let a federal surcharge ban expire the year before. Nine other states also imposed similar bans. The California law does permit discounts for cash, checks, or other non-credit card means of payment. The purpose of the law, as stated in the statute, is “to promote the effective operation of the free market and protect consumers from deceptive price increases for goods and services by prohibiting credit card surcharges and encouraging the availability of discounts by those retailers who wish to offer a lower price for goods and services.”

In March 2014, the five California plaintiffs, led by an Italian restaurant in Oakland, sued the state’s attorney general in U.S. District Court in Sacramento in an effort to get the ban overturned, alleging the law restricted their free-speech rights under the First Amendment. The plaintiffs claimed that in order to offer one price for goods and services and charge credit card holders more for using cards, California merchants must express a lower price as a discount rather than stating that the higher price for card payments is the result of a surcharge. Consumers would understand better that businesses incur costs to accept cards if they could expressly surcharge for such payments, the merchant plaintiffs argued.

A year later, the district court ruled that the First Amendment did apply to their case, and that the law was unconstitutionally vague. The court then issued an injunction barring its enforcement, leading to an appeal to the Ninth U.S. Circuit Court of Appeals in San Francisco.

In a 3-0 ruling, the appellate panel agreed that, in regard to different prices for card and non-card payments, “the higher cost is a result of credit card fees, and referring to the price differential as a discount prevents retailers from accurately conveying that causal relationship.” Thus, like New York’s surcharge ban, California’s surcharge ban regulates commercial speech, the panel said.

The panel said, however, that the free-speech aspect applies only to the plaintiffs. Still, a lawyer for the merchants, Deepak Gupta of Washington, D.C., said that while the ruling bans the state from enforcing the surcharge ban only against the plaintiffs, other California merchants can rely on the decision as a legal precedent.

“It means that consumers can’t be kept in the dark about the hidden cost of credit card swipe fees, which funnel vast amounts of money from consumers to large banks and credit card companies,” Gupta, who represented merchants in the New York case, told the San Francisco Chronicle.

It was not immediately clear if the California attorney general’s office would appeal the panel’s decision.