California Federal Court Rules ‘No Surcharge’ Law Unconstitutional

Case: Italian Colors Restaurant v. Harris

Issue: Whether a California law prohibiting retailers from imposing a surcharge on credit card purchases violates the First and Fourteenth Amendments of the U.S. Constitution.

Case Summary: A California federal district court ruled that the state’s “no-surcharge” law prohibiting retailers from imposing a surcharge on credit card purchases was unconstitutional because the law unlawfully restricted the retailers’ freedom of speech and was overly vague.

Plaintiffs, a group of California retailers, brought the suit against the California Attorney General (State) alleging that California’s “no surcharge” law violated the First Amendment because the law improperly regulated their speech in how they could describe the price difference between cash and credit purchases; and the Fourteenth Amendment because the law was overly vague in not “clearly defining the line between a permissible surcharge and a mathematically equivalent but illegal discount.” Under the “no surcharge” law, the retailers could offer customers a discount for not paying with a credit card, but they could not offer a “cash price” for customers not paying with credit and add a surcharge for customers using a credit card.

In response, the State argued that the law does not restrict the retailers in communicating with their customers the pricing information and the merchant fees that the industry charges. The State also argued that the law is an unambiguous economic regulation apprising retailers that they may not impose a surcharge on credit card sales, but may offer a discount to induce payment by cash.

In rejecting the State’s First Amendment arguments, the district court ruled that the law is not a valid economic regulation because it regulates how the prices are conveyed to customers rather than the prices themselves. The court explained that although the retailers were permitted to communicate with their customers generally about the credit card industry and merchant fees, the law unjustifiably burdened the retailers in conveying how they would like to frame their prices and therefore violated their right to commercial speech. The court reasoned that if the purpose of the law was to prevent unfair surprise to consumers when they made a credit card purchase, the law should mandate the disclosure of surcharges to prevent improper speech regulation.

The district court also ruled that the law was unconstitutionally vague in violation of the Fourteenth Amendment because it did not clearly define what constituted an unlawful surcharge. As a result, the court explained that retailers operated with uncertainty and “fear of inadvertently describing a dual-pricing policy in an illegal way.”

Bottom Line: There is no uniformity among the federal district courts regarding the constitutionality of the “no surcharge” law. California joins New York in ruling that their respective “no surcharge” laws were unconstitutional; in contrast, Texas recently ruled that its “no surcharge” law did not violate the First Amendment and only regulated economic activity.

About Thomas Pinder

Thomas Pinder
Thomas Pinder is senior vice president and senior counsel for litigation in the office of ABA's general counsel.
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