Court lifts surcharge ban for handful of merchants

A U.S. appeals court upheld most of a 2017 lower court ruling that called into question a decades-old California ban on surcharging customers paying by credit card. But the move applies only to five businesses that challenged the law's constitutionality.

In a decision handed down on Jan. 3, 2018, a panel of judges for the Ninth Circuit U.S. Court of Appeals, in San Francisco, ruled that a 1985 California law banning credit card surcharges violates the First Amendment of the U.S. Constitution by restricting commercial free speech. In doing so, the appeals court partially affirmed a district court ruling declaring the California statute "unconstitutional," but it stopped short of permanently enjoining enforcement of the law, as the lower court had ruled.

Free speech versus economic conduct

The California Civil Code prohibits retailers from imposing surcharges on customers who pay with credit cards, although it permits discounts for payments made by cash or checks. The state attorney general's office defended the law by arguing it regulated economic conduct, not speech. The state also argued the law was needed to "promote the effective operation of the free market and protect consumers from deceptive practices."

The appeals court rejected both claims, concluding that "there was no reasonable fit between the broad scope [of the law] and the asserted state interest," according to the written ruling handed down by the three-judge panel.

"We hold that the statute as applied to these plaintiffs violates the First Amendment," the judges stated. "Thus, we affirm the district court's judgment. We also narrow the scope of the district court's relief to apply only to plaintiffs." The five plaintiffs include a dry cleaner, a small restaurant, a graphics firm, a gas station and an auto repair service. The ruling means they are free to add surcharges to posted prices for payments made by credit card.

The California attorney general's office stated it is considering its options and has not yet ruled out additional appeals.

Surcharge debate rages on

Credit card surcharging has been a hot-button issue for decades. The practice was prohibited under the federal Truth-in-Lending Act for nearly 20 years. After the federal ban expired, in 1984, several states (including California, Florida and New York) legislated their own bans on surcharging. Last year, a legal challenge to New York's law landed in the U.S. Supreme Court, which sent the case back to an appeals court for a determination of whether the law infringes on free speech rights.

Meanwhile, the European Union has banned surcharges on credit and debit cards effective this year, leaving it up to individual member nations to pass specific laws. The United Kingdom, which is preparing to exit the EU, appears to be the first to implement the ban. A ban on surcharging takes effect there on Jan. 13 and applies to online and off-line payments involving UK merchants and citizens. The UK government estimated that consumers there pay about 500 million British Pounds ($678 million) in surcharge fees annually.

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