The U.S. District Court, District of Kansas recently ruled in CardX, LLC v. Schmidt, that Kansas Statute Annotated § 16a-2-403, which prohibits merchants from imposing a surcharge on customers who elect to pay via credit card, violated the First Amendment rights of a payment processing technology company, but limited the scope of its ruling to the plaintiff technology company. This ruling is the latest in a string of court decisions and attorney general opinions foreshadowing the death knell of state no-surcharge statutes.
Background on Surcharges
Since 2013, U.S. merchants have been allowed to impose a surcharge on consumers who pay for goods or services with a credit card. A surcharge, also known as a “check-out fee,” allows merchants to charge customers a fee for the use of credit cards. Surcharging is used by merchants to offset interchange fees, or fees imposed on each transaction by credit card companies, by passing along the cost to consumers who elect to pay via credit card. As credit cards have become an increasingly popular means of paying for goods and services by consumers seeking rewards and incentives offered by card companies, the total fees imposed by credit card companies on merchants for processing these transactions have increased substantially. These fees often impact small businesses more than large retail businesses, which typically negotiate discounted fee arrangements with credit card companies because of their large transaction volume.
While merchants generally are permitted to impose a surcharge on credit card transactions so long as the merchant complies with the applicable operating guidelines and rules imposed by credit card companies like Visa and Mastercard, some states enacted statutes prohibiting or restricting merchants from surcharging customers who elect to pay via credit card. In those states where surcharging is prohibited, like Kansas, merchants are permitted to offer a discount to customers who elect to pay using cash or debit cards. This effectively results in a merchant increasing prices for its goods and services for all customers, whether that customer pays via credit card or with cash, as opposed to imposing the fee only on customers who pay via credit card.
The court in Schmidt found the distinction between an impermissible surcharge and permissible discount to be indistinguishable and disadvantageous for business and consumers as it could confuse what is or is not allowed and result in overall higher prices for consumers. The district court ultimately found that this inconsistency negated the argument by the State of Kansas that such statutes further a substantial state interest and thus did not survive First Amendment scrutiny.
The decision by the Kansas district court arises out of the ruling by the U.S. Supreme Court in Expressions Hair Design v. Schneiderman, in which the Court found that a New York no-surcharge statute does regulate speech and therefore is subject to First Amendment scrutiny. Because the issue was not considered by the U.S. Court of Appeals, Second Circuit, the Court declined to consider whether the New York law was a valid commercial speech regulation and remanded the case to the Second Circuit for further analysis.
The Second Circuit elected to certify to the New York Court of Appeals a question of state law: whether a merchant complies with the New York no-surcharge law so long as the merchant posts the total dollars-and-cents price charged to credit card users. The New York Court of Appeals concluded, in a divided decision, that a merchant complies with the New York law if and only if the merchant posts the total dollars-and-cents price charged to credit card users so consumers can see the highest possible price they must pay for credit card use. (For illustration, if a merchant charges $10.00 for a good and imposes a 3% surcharge, the merchant must either (1) list the price of the good as $10.30 and offer a discount for non-credit card payment methods, or (2) list both prices of the good as $10.00 for non-credit card payment options and $10.30 for credit card payment options.)
As of the date of this alert, the Second Circuit still has not considered whether the New York no-surcharge law survives First Amendment scrutiny and is a valid commercial speech regulation. Given the split among the circuits as to the legality of state laws prohibiting surcharges, it is likely that the U.S. Supreme Court eventually will consider this issue again.
Practical Takeaways for Merchants
In the meantime, merchants must continue to comply with the requirements of any state laws that may prohibit merchants from imposing a surcharge on customers who elect to pay for a transaction using a credit card. Following the Kansas district court’s decision, that list continues to dwindle. We will continue to monitor and provide updates regarding state no-surcharge statutes and any related court decisions or legislation as they develop. If you have any questions or any other concerns related to your organization, please contact the authors.
Below is a summary of the current status of the no-surcharge statutes in those states where such a statute previously was enacted.
|California||Cal. Civ. Code § 1748.1||Declared Unconstitutional
The U.S. Court of Appeals, Ninth Circuit affirmed district court ruling that California’s no-surcharge statute violates the First Amendment but declined to consider the issue of vagueness.
Italian Colors Rest. v. Becerra, 878 F.3d 1165 (9th Cir. 2018)
|Colorado||Colo. Rev. Stat. § 5-2-212||Still in Effect but Legislation to Repeal Pending
The Colorado General Assembly currently is considering legislation that would repeal Colorado’s no-surcharge statute but would limit the maximum surcharge merchants could impose on customers to 2% of the total cost paid for a good or service.
2021 Colo. S.B. 91, 73d General Assembly (Feb. 16, 2021).
|Connecticut||Conn. Gen. Stat. § 42-133ff||Still in Effect|
|Florida||Fla. Stat. § 501.0117||Declared Unconstitutional
The U.S. Court of Appeals, Eleventh Circuit reversed the district court ruling and found that Florida’s no-surcharge statute regulated speech and violated businesses’ commercial speech rights, and thus was unconstitutional.
Dana’s R.R. Supply v. Bondi, 807 F.3d 1235 (11th Cir. 2015), reh’g en banc denied 809 F.3d 1282 (11th Cir. 2016), denying cert. 137 S. Ct. 1452 (Apr. 3, 2017).
|Kansas||Kan. Stat. Ann. § 16a-2-403||Declared Unconstitutional by District Court
The U.S. District Court, District of Kansas held that Kansas’s no-surcharge statute regulated speech and violated a credit card processing company’s commercial speech rights, and thus was unconstitutional. The district court declined to consider the issue of vagueness.
CardX, LLC v. Schmidt, No. 2:20-cv-02274, 2021 WL 736322 (D. Kan. Feb. 25, 2021).
Legislation to Repeal Pending
The Kansas State Legislature is considering legislation to repeal the statute prohibiting merchants from imposing a surcharge on consumers who elect to pay via credit card.
2021 Kan. H.B. 2316, 89th Legislature (Feb. 10, 2021).
|Maine||Me. Rev. Stat. Ann. tit. 9-a, § 8-509||Still in Effect|
|Massachusetts||Mass. Gen. Laws Ann. ch. 140D, § 28A||Still in Effect but Legislation to Repeal Pending
The Massachusetts General Court is considering legislation to repeal the statute prohibiting merchants from imposing a surcharge on consumers who elect to pay via credit card.
2021 Mass. H.D. 2907, 192d General Court (Feb. 18, 2021).
|New York||N.Y. Gen. Bus. Law § 518||Still in Effect but Pending Further Review
The U.S. Court of Appeals, Second Circuit held that New York’s no-surcharge statute did not violate the First Amendment and vacated the judgment entered by the district court and remanded for dismissal. On appeal, the U.S. Supreme Court held that the statute does regulate speech and remanded the case to the Second Circuit for further analysis.
Expressions Hair Design v. Schneiderman, 808 F.3d 118 (2d Cir. 2015), vacated and remanded, 581 U.S. __, 137 S. Ct. 1144 (Mar. 29, 2017).
Legislation to Repeal Pending
The New York State Assembly currently is considering legislation that would repeal the state’s no-surcharge statute, 2021 N.Y. S.B. 4018, 244th Legislative Session (Feb. 1, 2021), as well as other forms of legislation that would repeal the existing law and replace it with one to comply with recent New York court decisions regarding how prices must be presented to consumers and limit the maximum surcharge merchants could impose on customers to 4% of the total cost paid for a good or service.
2021 N.Y. S.B. 4035, 244th Legislative Session (Feb. 1, 2021); 2021 N.Y. S.B. 1394, 244th Legislative Session (Jan. 11, 2021); and 2021 N.Y. A.B. 314, 244th Legislative Session (Jan. 6, 2021)
|Oklahoma||Okla. Stat. tit. 14A, § 2-211
Okla. Stat. tit. 14A, § 2-417
|Declared Unconstitutional by Attorney General Opinion
The Oklahoma Attorney General issued an opinion that Oklahoma’s no-surcharge statute does not facially violate the First Amendment but would not survive First Amendment scrutiny as it applies to commercial speech regulation, effectively stopping all enforcement of the statute.
Okla. Attn’y Gen. Op. 2019-12 (Dec. 17, 2019)
|Texas||Tex. Bus. & Com. Code Ann. § 604A.0021||Still in Effect but Pending Further Review
The U.S. Court of Appeals, Fifth Circuit held that Texas’s no-surcharge statute neither violates the First Amendment nor the Due Process Clause. The U.S. Supreme Court vacated the judgment and remanded the case to the Fifth Circuit (and subsequently further remanded to the district court) for further consideration in light of the ruling in Expressions Hair Designs. The matter is now pending before the U.S. District Court, Western District of Texas.
Rowell v. Pettijohn, 816 F.3d 73 (5th Cir. 2016), vacated and remanded, 137 S. Ct. 1431 (Apr. 3, 2017), remanded, 865 F.3d 237 (5th Cir. 2017).