A California law that prohibits merchants from imposing a surcharge on credit card purchases violates the First Amendment of the U.S. Constitution, a unanimous panel of the U.S. Court of Appeals for the Ninth Circuit has ruled.

In Italian Colors Restaurant v. Becerra, five California businesses and their owners alleged that the law violated their First Amendment right to free speech by restricting how they can communicate that an additional amount is charged for credit card purchases. Although the California statute does not prohibit merchants from charging credit card customers more than cash customers, it allows them to do so by offering a discount to cash customers and not by charging a "surcharge" for credit card use.

The district court had granted summary judgment in favor of the plaintiffs, ruling that the statute was both an unconstitutional restriction of speech and unconstitutionally vague and permanently enjoined enforcement. Agreeing with the district court, the Ninth Circuit rejected the California Attorney General's argument that the law does not implicate First Amendment rights because it only restricts a merchant's conduct—namely the practice of imposing a surcharge on credit card purchases. The Ninth Circuit concluded that the California law does regulate commercial speech because it prohibits a merchant from expressing its prices by communicating that an extra charge is imposed for credit card use.

To determine whether the California law unconstitutionally restricts commercial speech, the Ninth Circuit—as did the district court—applied the intermediate scrutiny standard set forth by the U.S. Supreme Court in Central Hudson Gas & Electric Corp. v Public Service Commission of New York. The Ninth Circuit agreed with the district court's conclusion that the law did not survive intermediate scrutiny under Central Hudsonbecause:

• the plaintiffs' desired speech concerned lawful activity (i.e., charging credit card users more than cash users) and their desire to communicate the price difference as an extra amount rather than a discount was not misleading;
• enforcement of the law against the plaintiffs does not directly advance California's stated interest of preventing consumer deception (with the Ninth Circuit observing that it "fail[ed] to see how a law that keeps truthful price information from customers [(i.e. that the higher cost results from credit card fees) increases the accuracy of information in the marketplace")]; and
• the law's scope is broader than necessary to prevent consumer deception (with the Ninth Circuit suggesting California could ban deceptive or misleading surcharges or require surcharges to be disclosed both before and at the point of sale).

While affirming the district court's grant of summary judgment for the plaintiffs, the Ninth Circuit modified the district court's declaratory and injunctive relief to apply only to the plaintiffs and only with respect to the specific practice they sought to follow (i.e., posting a single price and charging an extra fee to credit card users). According to the Ninth Circuit, because the plaintiffs' First Amendment challenge was an "as-applied" rather than a "facial" challenge, it was inappropriate for the district court to enjoin the law in its entirety. (Because the plaintiffs were successful on First Amendment grounds, the Ninth Circuit found it unnecessary to reach their vagueness challenge.)

Since the Ninth Circuit only enjoined enforcement of the law as applied to the plaintiffs, the possibility remains that the law could still be enforced consistent with the First Amendment against a merchant who imposed surcharges in a manner that was different from the plaintiffs' desired practice, particularly if such manner was deemed deceptive.

As support for its conclusion that the California law restricts commercial speech, the Ninth Circuit cited the U.S. Supreme Court's decision in Expressions Hair Design v. Schneiderman, which held that New York's "no credit card surcharge" law was subject to First Amendment scrutiny as a regulation of speech. The U.S. Court of Appeals for the Second Circuit had concluded that the law did not violate the First Amendment because it only regulates pricing, not speech.

The Supreme Court vacated that decision and remanded the case to the Second Circuit to assess the law's constitutionality as a regulation of commercial speech. On remand, in a decision issued last month, the Second Circuit certified a question to the New York Court of Appeals intended to clarify how a merchant seeking to charge more to credit card users can do so in compliance with the New York law.

In 2015, a divided panel of the U.S. Court of Appeals for the 11th Circuit ruled that Florida's "no surcharge" law was an unconstitutional regulation of speech, and in 2016, a divided panel of the U.S. Court of Appeals for the Fifth Circuit rejected a First Amendment challenge to Texas's "no surcharge" law on the grounds that it regulated pricing and only incidentally implicated speech. The Supreme Court vacated the Fifth Circuit's decision and denied certiorari in the 11th Circuit case. In addition to California, New York, Florida, and Texas, other states with "no surcharge" laws are Colorado, Connecticut, Kansas, Maine, Massachusetts, and Oklahoma.