Court Rulings Cast Doubt on Card Surcharge Bans

Credit-card companies have the First Amendment to blame for their latest loss to merchants.

A handful of California businesses, with the support of major retail advocacy groups, succeeded Thursday in getting a state law banning credit-card surcharges struck down on the grounds that the ban violated the merchants' freedom of speech. California is the second state, after New York, to have its surcharge laws overturned by the novel legal strategy.

Merchants argued in their lawsuits that anti-surcharge laws restrict how retailers convey information to customers. The laws permit merchants to advertise "discounts" for using cash, but not "surcharges" for using cards, even when the transactions are financially equivalent. That's an unfair limitation on free speech, the merchants claimed.

Judge Morrison England in the U.S. District Court for the Eastern District of California was sold on the argument, striking down the state's surcharge law as "an unconstitutional restriction" on First Amendment rights.

"The court finds that this is not an economic regulation that controls what is charged or paid for something," England wrote in his decision. "Here, what is regulated is how those prices are conveyed to customers, not the prices themselves."

England's ruling, combined with the decision in New York, are the latest step in a lengthy erosion of restrictions on how merchants charge for credit card use. Lawyers are divided as to whether these decisions will change overall business practices.

For nearly two decades, surcharges were prohibited by card companies' contracts with retailers, but a major federal settlement in 2012 removed those restrictions. The settlement, which resulted from a prolonged legal battle between card issuers and retailers, allowed surcharges under some circumstances — if retailers give proper disclosure to customers.

When that settlement took effect, at least ten states still prohibited credit card surcharges, mostly through laws that had been on the books since the 1980s. Merchants and retail groups have gradually challenged those rules, filing lawsuits in four states using the First Amendment argument.

Not all the litigation has proven successful. Texas and Florida rejected the free-speech argument, while New York Attorney Eric Schneiderman appealed his state's loss. A spokeswoman for California Attorney General Kamala Harris said her office is reviewing the court's decision, declining to say whether an appeal is planned.

All four lawsuits were filed by Deepak Gupta, a lawyer at Gupta Beck in Washington, who said he views the victories as significant steps toward changing unfair rules.

"The New York and California decisions are two very big chinks in the armor of the surcharge restrictions," Gupta said. "This is a fantastic boost to our efforts nationally, because it means that these laws are not enforceable in the two most economically significant states."

Not all industry observers agree that the rulings will alter the landscape. Some consider the state-level legal fights to be a sideshow to the 2012 settlement, which some merchants have appealed, arguing that it imposes too many practical barriers to applying surcharges.

Financial industry lobbyists having avoided taking an active role in the state-level disputes, preferring instead to concentrate on the federal rules.

The American Bankers Association did not weigh in on the California lawsuit as it was being litigated, a spokesman said. The Electronic Payments Coalition, which represents major card issuers as well as banks, also stayed above the fray, focusing its efforts on making sure the federal settlement is properly implemented, a spokesman said.

"Our focus is to make sure that consumers know their rights, and that merchants know their responsibilities, which include clearly disclosing the fees and not charging fees that exceed their costs," a spokesman for payments group wrote in an email.

It's easy to see why card companies have not been overly concerned about the state laws. Even with 40 states allowing surcharges, very few merchants — if any — have started charging them. Douglas Kantor, a lawyer at Steptoe & Johnson who has represented merchants in card litigation, said he has not found a single retailer that imposes surcharges.

The problem is that the 2012 settlement added a confusing array of limitations and requires complex disclosure requirements before retailers can charge for using credit cards, Kantor said. Those hurdles make surcharges "unworkable" in practice, he said, so it's very unlikely that retailers will impose them even if the state laws are overturned.

Kantor said he thinks the First Amendment argument is an interesting one that resonates with many merchants, though the lawsuits will ultimately have little effect unless the federal settlement is overturned on appeal. "Unless that settlement is overturned, these cases are really an academic exercise," he said.

Gupta said he disagrees, arguing that state-level restrictions are a significant barrier, especially for nationwide companies. "If you run any national chain or a business on the internet, you're going to be very skittish about labeling something as a surcharge until the rules are clear," he said.

When state laws fall, retailers can start to "test the waters," Gupta said. "Our strategy was that if we can knock these out in the big states, the rest would follow."

That remains to be seen — and it will depend on how appeals courts in Texas, Florida and New York rule. For now, the victory in California represents a vindication of a creative strategy for fighting an unfair rule, Gupta said, which he hopes will help make card pricing more transparent.

"It's really wonderful to see that the strategy actually works," he said.