California’s Credit-Card Surcharge Law Held Unconstitutional

Credit-card companies charge retailers a small percentage of every transaction paid for with a credit card.  Understandably, retailers can before frustrated by these charges and want to pass on the charges to consumers who choose to pay with credit cards.

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California—concerned that some consumers might be deceived by retailers who don’t clearly notify consumers of such surcharges—enacted a law that prohibited retailers from imposing a surcharge on purchases made with credit cards.  That same law, however, permitted retailers to give discounts to those who pay with cash—which would accomplish effectively the same result for retailers.  But for a retailer to use these permitted cash discounts, the retailer would have to raise all its prices slightly.

Several restaurants and retailers in California sued the state and challenged the law on First Amendment grounds.  They argued that imposing credit-card surcharges is a more effective way of communicating to their customers the high costs that credit-card companies impose on them.  They also argued that raising all their prices and giving cash discounts makes it harder for them to compete because the slightly higher prices make their goods and services appear more expensive than they really are.

Earlier this year, the Ninth Circuit agreed and found that California could not enforce its law against these retailers.  First off, the Court found that the law did in fact regulate speech, not conduct.  (This was the subject of a Supreme Court case last year.)  Next, the Court found that the law did not directly promote consumer protection.  Had California been concerned about consumers being deceived, it could have passed a narrower law simply requiring clear notice to consumers of credit-card surcharges rather than imposing an outright ban on such surcharges.

The Court hinted that a narrower law, like ones in other states, would be constitutional.  It remains to be seen if the California legislature will pass such a law.

Case: Italian Colors Restaurant v. Becerra, No. 15-15873 (9th Cir. Jan. 3, 2018) (opinion here)

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