Credit card surcharges free speech, court rules

A California law prohibiting retailers from charging customers extra for using credit cards violates the businesses’ right to free speech, a federal appeals court ruled Wednesday.

The law, passed in 1985, doesn’t prohibit charging less to those who pay by cash or check, as long as the seller calls it a discount rather than a credit card surcharge. Such a description is preferred by credit card companies but opposed by retailers, who say the prospect of avoiding a surcharge is more attractive to customers than getting a discount, even if the price is the same.

As a result, the state is regulating speech and not conduct, said the Ninth U.S. Circuit Court of Appeals in San Francisco.

“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,” the three-judge panel said.

“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.”

The 3-0 ruling was written by Sarah Vance, a federal judge from Louisiana temporarily assigned to the appeals court. It largely upheld a 2015 ruling by a federal judge in Sacramento.

“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,” said Deepak Gupta, a lawyer for five companies that challenged the law.

He acknowledged that the law doesn’t prohibit businesses from explaining their discounts, but said they might have risked enforcement if they attributed the price difference to credit card fees. And although the ruling was limited on its face, banning enforcement of the law against only the five companies that filed the suit, Gupta said it was a legal precedent that any California retailer could rely on.

Attorney General Xavier Becerra’s office, which defended the law in court, did not respond to a request for comment. Legal filings by the office under Becerra’s predecessor, Kamala Harris, argued that the 1985 law regulated only an “economic practice” and left retailers “free to say whatever they want to their customers.”

But the court said the legal landscape changed last May when the U.S. Supreme Court ruled that a similar state law in New York was an attempt to regulate “how sellers may communicate their prices.” The Supreme Court told lower courts to decide whether the law was constitutional, a decision that is still pending.

California and several other states passed bans on credit card surcharges after Congress in 1984 refused to extend a federal ban that it had passed 10 years earlier.

But the appeals court noted that the California ban does not apply to state or local government agencies or to state-regulated utilities, which remained free to charge fees for using credit cards.

Responding to the state’s argument that the law against surcharges protected customers from deceptive practices, Vance said the state’s self-exemption “suggests that this justification is thin.”

“Consumers can’t be kept in the dark about the hidden cost of credit card swipe fees.” Deepak Gupta, attorney