Legality of credit card surcharges affirmed on appeal

By Angela Underwood | Jan 11, 2018

The 9th U.S. Circuit Court of Appeals has affirmed summary judgment for commerce credit card surcharges.

Congress modified the Truth in Lending Act in 1974.   File photo

The 9th U.S. Circuit Court of Appeals has affirmed summary judgment for commerce credit card surcharges. 

Judges Diarmuid O’Scannlain, Johnnie Rawlinson and Sarah Vance affirmed a summary judgment appeal for five California businesses that challenged the constitutionality of California Civil Code Section that bars retailers from implementing a surcharge for credit card paying customers.  

Plaintiffs and appellees Italian Colors Restaurant, Laurelwood Cleaners, Family Graphics, Stonecrest Gas & Wash, and Leon’s Transmission Service filed suit against defendant and appellant California Attorney General Xavier Becerra in 2014 for charging them more for credit card paying customers opposed to cash paying customers.

Plaintiffs contend credit card surcharges cause them to raise their commerce prices to compensate for 2 to 3 percent of the cost of each plastic transaction, which then violates their First Amendment rights and sweeping restrictions on speech.

Citing Dombrowski v. Pfister 1965, plaintiffs showed the “Supreme Court has endorsed what might be called a ‘hold your tongue and challenge now’ approach rather than requiring litigants to speak first and take their chances with the consequences,” according to the appeal.

Additionally to back up their argument, plaintiffs cited “The Antitrust Super Bowl: America’s Payment Systems, NoSurcharge Rules, and the Hidden Costs of Credit,” research study, which shows customers are more likely to alter their buying habits if they see a potential loss.

To compensate for credit card use, Congress amended the Truth in Lending Act in 1974 so that credit card companies were barred from offering a discount to for cash or check payments opposed to credit cards. However, the federal ban expired in 1984 and California adopted statewide supplement bans of their own.

According to the appeal, “plaintiffs concede that California has not communicated any threat or warning of impending proceedings against them,” and “assert that they have avoided posting credit card surcharges for fear of an enforcement action against them.”

Authoring Judge Vance stated that some conditions do, in fact, show that fear is rational. To prove her point, Vance used the weather for instance.

“The Attorney General does not articulate why plaintiffs’ desired pricing scheme would be misleading. Plaintiffs can already charge credit card customers more than cash customers,” Vance wrote in the appeal. “They seek to communicate the difference in the form of a surcharge rather than a discount. To paraphrase the 11th Circuit, imposing a surcharge rather than offering a discount is no more misleading than calling the weather warmer in New Orleans rather than colder in San Francisco.”

Concluding her analysis, Vance narrowed the ruling only to plaintiffs.

“For the foregoing reasons, we affirm the district court’s grant of summary judgment for plaintiffs on the First Amendment claim,” Vance wrote in the appeal. “Because a successful as-applied challenge invalidates only a particular application of the challenged law,  we modify the district court’s declaratory and injunctive relief to apply only to plaintiffs, and only with respect to the specific pricing practice that plaintiffs, by express declaration, seek to employ.”

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