Card surcharge ban laws take another blow in California court

Ruling could open door to more surcharges, raising cost of paying with credit

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations

California credit card surcharge ruling

Extra charges for using a credit card at the cash register took another step forward this week, as a California appeals court ruled against the state’s no-surcharge law.

The 9th Circuit Court of Appeals said in its Jan. 3 decision that the state’s ban on surcharges conflicts with merchants’ constitutional rights to recover the costs of card transactions.

“We hold that the statute as applied to these plaintiffs violates the First Amendment,” the opinion by the three-judge panel stated.

Credit card fees and free speech

What do fees have to do with free speech? Since discounts for using cash are allowed, and the resulting price is identical to a surcharge, banning surcharges is a restriction on how the price is communicated, the court ruled. The reasoning echoed a U.S. Supreme Court decision against New York’s no-surcharge law in 2017.

The California decision was limited to the small businesses who filed the lawsuit – including a restaurant, dry cleaner and web designer – but opened the door to broader surcharging by other merchants who use the same method. The companies may post a single price, then charge an extra fee when you pay with a credit card.

California had suspended enforcement of the no-surcharge law during the court challenge. Attorney General Xavier Becerra’s office did not respond to a question on whether the state will fight the decision or drop its defense of the law.

The state of no-surcharge laws

  • Credit card users could wind up paying higher costs, or switch to cash and debit more often if surcharges on credit cards become common.
  • Merchants say surcharges allow them to recover the 2 percent to 3 percent transaction fees that card networks charge.
  • The ruling against California’s surcharge law adds to court decisions that rattle no-surcharge laws in 10 states and Puerto Rico, which together amount for more than 40 percent of the U.S. population.
  • Large card networks have dropped rules that blocked merchants from imposing surcharges to cover swipe fees since 2013, leaving state laws as the chief deterrent to surcharges.

Rulings pile up against surcharge bans

The ruling piles on to other court decisions against no-surcharge laws in Florida and New York, making some experts conclude that the bans are on the way out.

“There’s some cleanup work to do, but I think the writing is on the wall,” said Deepak Gupta, a Washington, D.C., consumer rights attorney who represents small businesses in California, New York and other states who oppose surcharge bans.

Since 2013, large card networks have dropped rules that blocked merchants from imposing surcharges to cover swipe fees. That has left the state laws as one of the last bulwarks against surcharging.

The court decisions rattle no-surcharge laws that exist in 10 states and Puerto Rico, which together account for more than 40 percent of the U.S. population. In addition to California, the states with no-surcharge laws are Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, New York, Oklahoma and Texas, according to the National Conference of State Legislatures.

The decisions “make it much more likely we’re going to see surcharging in all 50 states,” said Jonathan Razi, CEO of CardX, a transaction processor that facilitates surcharge transactions. Some large retailers have held off on surcharging in states where it is permitted because it would disrupt their nationwide pricing systems, he said in an interview.

"[The decisions] make it much more likely we’re going to see surcharging in all 50 states."

Consumers ultimately pay for swipe fees

What’s at stake for consumers? Credit card users could wind up paying higher costs, or switch to cash and debit more often if surcharges on credit cards become common. That could undermine card rewards, which are funded from the swipe fees retailers pay. But pricing should become fairer for everyone – especially cash customers who are currently subsidizing credit card users, consumer advocates say.

Ed Mierzwinski, program director at U.S. Public Interest Research Group, called the California ruling a “good win” for store customers on Twitter.

How swipe fees work

  • Each time a credit card is used, retailers pay an interchange fee – commonly called a swipe fee –  to card networks averaging 2 percent to 3 percent of the purchase price. 
  • That adds up to tens of billions of dollars a year, the National Retail Federation estimates. 
  • The costs – much higher than for debit cards, checks or cash transactions – ultimately get baked into the prices that consumers pay, economists and retailers say. 
  • That makes merchandise more expensive than it would be.

Card fees costly to small businesses

Alan Carlson, owner of Italian Colors restaurant in Oakland, California, the lead plaintiff against California’s no-surcharge law, estimates that card transactions cost his business $5,000 to $6,000 a year. Some of the most expensive cards, with the highest services for cardholders, cost more than 5 percent per transaction, he has said.

But while the costs are steep, many businesses are reluctant to alienate credit card users, an important source of revenue.

“We’re happy to see the ruling establish what can and can’t be done legally,” said J. Craig Shearman, spokesman for the National Retail Federation. “But by and large the retail industry has no interest in surcharging. We’re trying to get swipe fees reduced so prices that consumers pay would be lower.”

In fact, No. 1 retailer Walmart is suing Visa over swipe fees, after a similar court action by multiple retailers stalled out.

"We’re happy to see the ruling establish what can and can’t be done legally. But by and large the retail industry has no interest in surcharging."

Pros and cons of surcharges

Consumers and their advocates don’t like it when retailers slap you with a fee at the register that wasn’t included in the price tag. Surprise costs make it hard to know what you’re really paying – which supports the rationale behind state no-surcharge laws.

But card surcharges that reflect the cost of card use are different from gotcha add-on fees, supporters say. Debit card transactions, which are regulated according to their actual cost under the Durbin Amendment, cost a fraction of credit cards swipe fees.

For a $100 purchase, debit swipe fees are about 26 or 27 cents, versus $2 or $3 commonly for the same purchase on a credit card. Surcharges would pressure the card networks to reduce swipe fees, or face lower usage by customers.

Consumers: No to card surcharges, yes to cash discounts

“Plaintiffs point to one study in which 74 percent of consumers reacted negatively to a credit card surcharge, while only 22 percent reacted positively to cash discounts,” the 9th Circuit’s ruling stated.

People are more likely to avoid a surcharge than to seek out a discount, even if the difference in cost is the same, the study by Georgetown University law professor Adam Levitin found.

Levitin hailed the ruling as an “important victory for merchants and consumers” on Twitter.

A 2012 poll by CreditCards.com found that about two-thirds of card users would switch to cash or debit to avoid surcharges.

“Having the legal ability to surcharge could be a powerful negotiating tool with the card industry,” Shearman of the retail federation said. “Swipe fees have gone nowhere but up for the better part of 20 years now.”

Representatives of Visa said they had no comments in response to the appeals court ruling. Representatives of Mastercard did not respond to a request for comment.

Courts swipe at no-surcharge laws

  • Florida: 11th U.S. Circuit Court of Appeals ruling in 2015 says law barring surcharges on credit card purchases is unconstitutional. Majority opinion states that the law doesn’t merely regulate economic conduct, but interferes with speech rights.
  • New York: U.S. Supreme Court rules in 2017 that state surcharge ban affects speech rights, contradicting lower court’s ruling. Sends the case back to 2nd Circuit Court of Appeals for further consideration. The lower court had found that speech was not affected and did not consider that aspect of the plaintiffs’ legal challenge.
  • California: 9th Circuit Court of Appeals on Jan. 3, 2018, upholds lower court decision that California’s no-surcharge law is unconstitutional. Limits ruling “as-applied,” meaning merchants must follow certain procedures when communicating the surcharge to customers.

See related:Supreme Court inflicts blow on credit card surcharge ban, More merchants adding credit card surcharges


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Updated: 01-21-2018