California businesses may charge customers a fee for using a credit card, the U.S. Court of Appeals for the Ninth Circuit has ruled. The Court held that a California law (Cal. Civ. Code §1748.1) restricting surcharges on credit cards was unconstitutional as applied to the plaintiffs because it restricted the plaintiffs’ non-misleading commercial speech. In addition, the restriction did not directly advance the state’s asserted interest in preventing consumer deception, nor was it narrowly drawn to achieve that interest. The court affirmed the entry of a summary judgment in favor of five California businesses and their respective owners in an action brought against the California Attorney General in her official capacity (Italian Colors Restaurant v. Becerra, Jan. 3, 2018, Vance, S.).
Lower court. The five California businesses—a restaurant, gas station, dry cleaners, transmission repair business, and web design company—and their respective owners filed an action in federal court against the California Attorney General. The merchants alleged that California Civil Code provision violated the First Amendment to the U.S. Constitution as an unlawful restriction on commercial speech because the statute regulates how retailers can describe the price difference between cash and credit purchases. The businesses also contended that since a statute must clearly delineate the conduct it proscribes, in keeping with principles of due process, the California provision was unconstitutionally vague.
The district court agreed determining, among other things, that: (i) the California provision singled out “a specific class of speakers,” and involved a “content-based restriction”; (ii) as a restriction on commercial speech, the statute was subject to the “intermediate scrutiny” test and did not pass that test; and (iii) if the statute’s purported purpose was to prevent deception and “unfair surprise” to consumers at the cash register, then “a law mandating disclosure of surcharges would be the most direct way to prevent consumer deception” and would also “prevent any encroachment on the freedom of speech” (see Banking and Finance Law Daily, March 30, 2017).
Standing. On appeal, the Ninth Circuit first determined that the businesses had standing to sue. The court found that the businesses modified their speech and behavior based on a credible threat that the California Civil Code provision would be enforced against them.
Regulation of commercial speech. The court next found that the California Civil Code provision regulates commercial speech. In making that determination, the court relied on the U.S. Supreme Court’s decision in Expressions Hair Design v. Schneiderman in which the Court decided that New York’s no-surcharge law “regulates speech” under the First Amendment to the U.S. Constitution (see Banking and Finance Law Daily, Mar. 29, 2017). Section 1748.1 of the California Civil Code regulates commercial speech since it prohibits the businesses from expressing their prices by posting a single sticker price and charging an extra fee for credit card use, the court said.
Intermediate scrutiny. Restrictions on commercial speech must survive intermediate scrutiny, the court stated. “If the speech ‘is neither misleading nor related to unlawful activity,’ then ‘[t]he State must assert a substantial interest to be achieved by’ the regulation.” Moreover, “[t]he regulation must directly advance the asserted interest, and must not be ‘more extensive than is necessary to serve that interest.’”
Lawful activity. The businesses’ activity—charging credit card users more than cash users—is not unlawful, the court determined, as the California Civil Code provision permits cash discounts. In addition, since they can already charge credit card customers more than cash customers, their desire to communicate the difference in the form of a surcharge rather than a discount is not misleading.
State interest. Enforcing section 1748.1 of the California Civil Code against the businesses does not directly advance California’s asserted interest in preventing consumer deception, the court further found. “[T]he Attorney General must do more than merely identify a state interest served by the statute … [and] has pointed to no evidence that surcharges posed economic dangers that were in fact real before the enactment of Section 1748.1, or that Section 1748.1 actually alleviates these harms to a material degree.”
The California Civil Code provision also prevents businesses from effectively communicating and informing consumers about the cost of using a credit card and why credit card customers are charged more than customers paying with cash, according to the court. “We fail to see how a law that keeps truthful price information from customers increases the accuracy of information in the marketplace,” the court said.
Overly restrictive. “There is no reasonable fit between the broad scope of Section 1748.1—covering even plaintiffs’ non-misleading speech—and the asserted state interest.” According to the court, California could employ other, more narrowly tailored, means to prevent consumer deception, such as simply banning deceptive or misleading surcharges, or requiring businesses to disclose their surcharges both before and at the point of sale.
The court also noted that the many exemptions carved into the California Civil Code provision, including broad exemptions for the state and municipalities, undermine the state’s asserted interest in preventing consumer deception as justification for the provision. “That California exempted itself and its subdivisions from the asserted free market protections of Section 1748.1 suggests that this justification is thin,” the court said.
The case is No. 15-15873.
Attorneys: Deepak Gupta and Jonathan E. Taylor (Gupta Wessler PLLC), Mark Wendorf (Reinhardt Wendorf & Blanchfield), Kevin K. Eng (Markun Zusman Freniere & Compton LLP) for Italian Colors Restaurant, Family Life Corporation, Laurelwood Cleaners, LLC, Leon's Transmission Service, Inc., and Stonecrest Gas & Wash. John W. Killeen and Anthony R. Hakl, Deputy Attorneys General, Stepan A. Haytayan, Supervising Deputy Attorney General, Douglas J. Woods and Thomas S. Patterson, Senior Assistant Attorneys General, Xavier Becerra, Attorney General, for Xavier Becerra in her official capacity. Michael E. Chase (Boutin Jones Inc.) for Amicus Curiae Credit Union National Association. Richard A. Arnold, William J. Blechman, and James T. Almon (Kenny Nachwalter PA) for Amici Curiae Safeway Inc., The Kroger Co., Walgreen Co., Albertson’s LLC, and Hy-Vee Inc. Thomas S. Knox (Knox Lemmon & Anapolsky LLP) for Amicus Curiae California Retailers Association. Dale A. Stern (Downey Brand LLP) for Amicus Curiae California Grocers Association. Eric L. Bloom (Hangley Aronchick Segal Pudlin & Schiller) for Amicus Curiae Rite Aid Corporation. John J. McDermott, General Counsel, as and for Amicus Curiae National Apartment Association.
Companies: Family Life Corporation; Italian Colors Restaurant; Laurelwood Cleaners, LLC; Leon's Transmission Service, Inc.; Stonecrest Gas & Wash
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