Recent federal court rulings have placed a cloud over state laws regulating credit card surcharging. In March 2015, a federal district court in California ruled that a California law prohibiting retailers from surcharging credit card payments was an unconstitutional restriction of merchant freedom of speech. That followed a February decision handed down by a federal district court in Texas rejecting similar arguments presented by a group of merchants in The Lone Star State, and two other states have weighed in as well.
Italian Colors Restaurant v. Harris pitted five California retailers against that state's attorney general. The merchants argued that a California law restricted their First Amendment right to free speech by regulating how retailers describe price differences between cash and credit card payments. Plaintiffs also argued that the law exempts government speakers from restrictions that apply to retailers.
The law in question permits merchants to offer customers discounts for not paying with credit cards, but prohibits merchants from surcharging payments made by credit card. The state had argued that the law did not dictate how merchants communicate pricing, but rather regulated economic activity (adding surcharges at the checkout).
Morrison C. England, Chief Judge, U.S. District Court, Eastern District of California, rejected the state's argument. "Here, what is regulated is how those prices are conveyed to customers, not the prices themselves," England wrote. He went on to declare the law unconstitutional and permanently enjoined its enforcement.
A month earlier, in Powell v. Pettijohn, Judge Lee Yeakel of the U.S. District Court for the Western District of Texas took a different stance on the matter. He rejected claims similar to those at issue in the California case that were made by a group of Texas merchants opposing that state's no-surcharging law.
"This court finds and concludes that the Texas Anti-Surcharging law regulates only prices charged and economic activity that is within the state's police power, and does not implicate First Amendment speech rights," Yeakel wrote.
Also in February, Florida's attorney general defended that state's law preventing merchants from imposing credit card surcharges, claiming the statute is intended to protect consumers from unfair pricing and does not restrict constitutional free speech rights. In 2014, merchants in New York successfully challenged that state's no-surcharge law as unconstitutional and are now awaiting an appeals court decision.
"All of these things are going to be appealed and depending upon how the various appeals courts decide in each of these four cases, if they remain split, then it might end up going to the higher court, the Supreme Court," said Gerritt Kerkstra, Senior Management Consultant at The Strawhecker Group. "Merchants want the ability to characterize their ability to surcharge on their own terms and not have them dictated to them by the state."
The debate over surcharges receded in 1976 when Congress enacted a temporary federal ban on surcharges, which it twice extended before allowing the ban to lapse. At that point, the card brands advocated for similar legislation at the state level. The settlement of a class action against Visa Inc. and MasterCard Worldwide later removed contractual provisions prohibiting retailers from imposing surcharges starting Jan. 27, 2013.
In the interim, California, Florida, New York and Texas were among a group of states to adopt anti-surcharging laws. Colorado, Connecticut, Kansas, Maine, Massachusetts, Minnesota and Oklahoma enacted similar statutes.
But the current ruling in California may shift the tide. "I think it's a turning point in the country," said Ed Levene, President of CardCharge, whose company developed a patent-pending technology that calculates surcharge transactions in real-time. He noted that processors are beginning to update their rails to handle surcharges.
Kerkstra said he has heard California "is a little hotter" than other markets. "There's an interest in it, but what merchants need to consider if they're going to be imposing surcharges is what are their competitors going to do," he said, adding that consumers will vote with their feet, and retailers with a dominant market position might stand a better chance.
Whether to surcharge remains a strategic decision. "I think there is some reluctance by some of the big-box retailers that they're going to alienate their customers, but I think what's going to happen is merchants are going to start doing it," said H. Laddie Montague Jr., President and shareholder of Berger & Montague P.C. "I just hope they do it responsibly. By that I mean abiding by the rules so that any cost will be born by those being surcharged and not by others."
Montague, whose firm was one of three selected to serve as lead counsel in the Visa and MasterCard settlement, believes court rulings like the one in California may exert pressure on the card brands to reduce fees and could potentially stimulate regulators to act, as has been the case in other countries.
In Australia, for example, surcharging has been available to retailers for over a decade. "I've been advised that about half of the merchants in Australia post their cash price and charge the cost of the credit card," Levene said. "It's a democratic, free society and that's a very reasonable, really similar situation to what's probable in the United States."
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