On January 3, 2018, in Italian Colors Restaurant v. Becerra, No. 15-15873, a three-judge panel of the U.S. Court of Appeals for the Ninth Circuit invalidated an application of a California law that would prohibit merchants from imposing a surcharge on credit card payments. The California law would allow offering discounts for payments by other means.

The case follows , 137 S.Ct. 1144 (2017), in which the U.S. Supreme Court held 8-0 that a similar New York law regulated speech rather than the conduct of price-setting. In that case, the Court remanded to the Second Circuit to evaluate the New York law under the First Amendment. The Ninth Circuit reached that constitutional issue in Italian Colors and concluded that the California surcharge ban, as applied, violated the First Amendment.

The Ninth Circuit panel held that Expressions Hair “foreclose[d]” California Attorney General Xavier Becerra’s argument that the California surcharge ban regulates conduct rather than speech. The panel then held that, as a restriction on commercial speech, the ban required examination under First Amendment intermediate scrutiny under the Supreme Court’s Central Hudson test. See Cent. Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557 (1980).

Under that test, the First Amendment allows commercial speech restrictions that concern unlawful activities or misleading speech or that “directly” advance a substantial government interest without being “more extensive than necessary.” The Ninth Circuit panel quickly dealt with the first prongs of the Central Hudson test, holding that characterizing a (legally permissible) price differential as a surcharge rather than a discount would not concern illegal activity and would not be misleading, although it conceded that the alternate framing could have significant behavioral effects on consumers.

The panel appeared to find a substantial interest in the statute’s stated goal of “promot[ing] the effective operation of the free market and protect[ing] consumers from deceptive price increases.” However, Judge Sarah Vance of the Eastern District of Louisiana, sitting by designation, wrote for the panel, “[w]e fail to see how a law that keeps truthful price information from customers increases the accuracy of information in the marketplace.” Indeed, the panel suggested that characterizing the price differential as a surcharge would be more accurate given that the higher cost for credit card transactions is the result of credit card fees. The panel also expressed skepticism that the statute “directly advanced” the stated government interest when it had a “swath” of exemptions, including for municipalities, public utilities, and the state itself.

The Ninth Circuit panel also held that the statute was more extensive than necessary – indeed, that there was “no reasonable fit between the broad scope of [the statute] . . . and the asserted state interest.” The court explained that more tailored approaches might include banning deceptive or misleading surcharges, requiring retailers to disclose surcharges before and at the point of sale, or enforcing existing laws banning unfair business practices and misleading advertising.

Although the panel’s decision was limited to the law as applied to the specific plaintiffs’ desired pricing scheme, its reasoning suggests a wider effect. As this decision opens the door to surcharges for using credit cards, credit card companies may revisit the possibility of pursuing contractual prohibitions on surcharges – an approach that has been litigated extensively, and inconclusively, on antitrust grounds.