California Civil Code Section 1748.1 provides: “(a) No retailer in any sales, service, or lease transaction with a consumer may impose a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means. A retailer may, however, offer discounts for the purpose of inducing payment by cash, check, or other means not involving the use of a credit card, provided that the discount is offered to all prospective buyers.” Until March 2015, this provision of California law prohibited retailers from legally adding any “surcharge” to a purchase made by any consumer using a credit card.

On March 16, 2015, the United States District Court for the Eastern District of California issued a Memorandum Opinion in Italian Colors Restaurant, et al. v. Kamala D. Harris, etc., United States District Court, Eastern District of California, No. 2-14-cv-00604-MCD-DAD, holding that California’s law against the imposition of surcharges is unconstitutional because it imposes an unconstitutional restriction on the First Amendment right to freedom of speech for merchants and is void because it is vague under the Fourteenth Amendment. As a result, the Court’s Memorandum Order permanently enjoined the enforcement of California Civil Code Section 1748.1.

The Italian Colors decision grew out of a lawsuit brought by five California business: “a restaurant, gas station, dry cleaners, transmission repair business, and web design company and their owners.” Memorandum Opinion in Italian Colors Restaurant, et al. v. Kamala D. Harris, etc., United States District Court, Eastern District of California, No. 2-14-cv-00604-MCD-DAD. In their suit, the plaintiffs alleged that California Civil Code Section 1748.1 “violates the First Amendment as an unlawful restriction on commercial speech because the statute regulates how retailers can describe the price difference between cash and credit purchases. For example, a retailer could charge $102 for a product and give a $2 discount, but could not charge $100 and impose a $2 surcharge, despite the situations being mathematically equivalent.  Thus, the statute restricts how this $2 price difference is presented to the consumer.  Plaintiffs also allege that the statute violates the Due Process Clause of the Fourteenth Amendment because the law is void for vagueness.”

The Italian Colors follows on the heels of a case from New York, entitled Expressions Hairdesign et al. v. Schneiderman in which the United States District Court for the Southern District of New York, Case No. 13 Civ. 3775 (JSR). In its Preliminary Injunction, Opinion and Order, the Southern District of New York, held a similar New York law unconstitutional on First Amendment and Fourteenth Amendment grounds. While the Attorney General of California, Kamala Harris, has expressed her belief that Italian Colors “is wrong” (see Credit Cards, State of California, Department of Justice – Office of the Attorney General) and has appealed the decision, at least for the time being, it would appear the current trend is that state laws prohibiting the imposition of surcharges for the use of credit cards is entering a period of disfavor with at least the Federal District Courts.

When deciding how to price your goods and what charges can be passed on to your customers to cover the costs of their use of credit cards, a number of obstacles may stand in your way. Before deciding on how to recover your costs through pricing, you must consult with a knowledgeable and experienced business attorney. Michael Leonard, Esq. of San Diego Corporate Law is that attorney. To schedule a consultation with Mr. Leonard to discuss when any business-related matter, you can contact him by visiting San Diego Corporate Law or by telephone at (858) 483-9200.