• Federal Court Strikes Down Anti-Surcharge Law

  • Federal Court Strikes Down Anti-Surcharge Law

    Since the 1980s, Texas and several other states prohibited merchants from imposing a surcharge for customers who paid with a credit card by passing an Anti-Surcharge law. That law said that “a seller may not impose a surcharge on a buyer who uses a credit card for an extension of credit instead of cash, a check, or a similar means of payment.” Conveniently for the state, the Anti-Surcharge Law didn’t apply to “a state agency, county, local governmental entity, or other governmental entity that accepts a credit card for the payment of fees, taxes, or other charges[.]” A “surcharge” is an amount above the sales price of an item often to cover the credit card processing fees charged by credit card companies. It was neither the customer nor the credit card company who was paying the price for credit card use; it was the merchant who chose to offer customers the convenience of credit card pay who bore the burden. Charging the same price for cash and credit meant that the merchant would make less profit on a credit card sale.

    Those days may now be ending.

    Recently, the U.S. District Court for the Western District of Texas issued an opinion in the Cook v. Paxton case which addressed the unfavorable-for-merchants surcharge law. In this case, a group of Texas merchants challenged the Texas Anti-Surcharge Law—Texas Business and Commerce Code § 604A.0021. The plaintiffs in Cook claimed that this law was unconstitutional—it violated their free-speech rights under the United States Constitution.
    Wait, what? How is a surcharge speech?

    Well, the Cook plaintiffs argued that as merchants, they would like to tell their customers that there is a surcharge if the customer pays with a credit card and that there is no additional charge if the customer pays with cash or a check. But more than anything, those plaintiffs wanted to tell customers that the surcharge is assessed because of the credit-card processing fees the credit card companies charge. The merchants in Cook didn’t want to charge their customers any more than the processing fee they paid on the purchase. But because of the Texas Anti-Surcharge Law, their lips were sealed. And that is how a surcharge involves protected speech.

    And the Cook plaintiffs were not alone.

    Merchants from other states launched free-speech challenges elsewhere. Similar anti-surcharge laws in California, New York, and Florida—along with the Texas Anti-Surcharge Law—fell under the scrutiny of the U.S. Supreme Court in the Expressions Hair Design v. Schneiderman case.

    Guess what happened?

    The U.S. Supreme Court held that these anti-surcharge laws were unconstitutional. The laws violated the merchants’ free-speech rights. The Supreme Court then remanded each individual case to the court where it was filed. Cook went back to the Western District of Texas.

    In trying to save the law, the state of Texas argued that the greedy merchants would be deceiving customers by charging a surcharge in excess of the processing fees charged and pocketing the extra money. That, however, was never the intent of the Cook plaintiffs who rejected the claim that they wanted to charge more. The court threw out the state’s argument, noting that “A state may not justify a law on the grounds that consumers ‘would make bad decisions if given truthful information.’”
    So, the Cook court followed the Supreme Court’s reasoning, handing a victory to Texas merchants. Concluding that the Texas Anti-Surcharge law neither advanced a substantial governmental interest nor was the minimum necessary to serve the state’s interest, the court granted summary judgment in favor of the merchants.

    Should you start surcharging now?

    Don’t jump the gun! Essential to the court’s ruling was that it was speech being protected, and that the amount the Cook plaintiffs wanted to charge didn’t exceed the actual processing fee the merchant was charged by the credit card companies. Keep these things in mind when making your business decisions regarding pricing and communications.

    Also remember that the law is still “on the books” in a way—courts have declared that it is unconstitutional, but remember what Evelle J. Younger, California’s attorney general said in 1971, “An incompetent attorney can delay a trial for years or months. A competent attorney can delay one even longer.” In other words, the case isn’t over yet, so proceed with caution, although thanks to the efforts of the Cook merchants, their lawyers, and their counterparts in other states, things are looking positive for business

    Donald H. Grissom, Esq.
    Grissom & Thompson, LLP
    509 W. 12th Street
    Austin, Texas 78701
    (512) 478-4059
    (512) 482-8410 fax
    Disclaimer: The information and material in this article is for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of information in this article does not create an attorney-client relationship. The opinions expressed herein are the opinions of the individual author and do not reflect the opinions of the Texas Food and Fuel Association.