Does it violate the First Amendment for the state of California to force merchants who charge more to customers paying with credit cards to refer to that price difference as a "cash discount" rather than a "credit-card surcharge"? This question awaits resolution by the 9th U.S. Circuit Court of Appeals on Aug. 17, when the court will -- finally -- hear oral argument in Italian Colors Restaurant v. Becerra (15-15873). It should be an easy case, but the 9th Circuit has been reliably unpredictable in First Amendment matters lately, so commercial-free-speech devotees will be watching closely.
Chief Judge Morrison England of the U.S. District Court for the Eastern District of California already held that California's law violates the First Amendment, and he permanently enjoined enforcement of California Civil Code Section 1748.1 in March 2015. The delay in oral argument at the 9th Circuit occurred because the U.S. Supreme Court had a case posing the same question about a similar New York statute pending this past term. The 9th Circuit decided to await the outcome of Expressions Hair Design v. Schneiderman before proceeding with argument in Italian Colors.
It so happens, Expressions Hair did not decide the First Amendment question completely, but the Supreme Court did make the 9th Circuit's job easier by holding that "regulating the communication of prices rather than prices themselves ... regulates speech." As a result, the lead argument that the state of California made in its initial appeal (and to the federal district court below) will no longer fly. California contended that its law does not implicate the First Amendment at all, because the statute regulates conduct, not speech. But the Supreme Court recognized that so-called no-surcharge statutes do not regulate prices. Instead, such statutes seek to control what merchants can say about price differences. In so doing, these statutes trample free speech rights. Shortly after handing down the Expressions Hair decision, the Supreme Court denied certiorari in a Florida case holding that state's no-surcharge statute unconstitutional, perhaps giving a further hint to where the court would come down on this question.
California Civil Code Section 1748.1(a) states: "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." Because the statute explicitly permits discounts for paying with cash, which is functionally the same thing as exacting a surcharge for paying with credit, the only thing accomplished by prohibiting credit-card surcharges is policing how the retailer characterizes the price difference.
While it might not seem like a big deal to a layperson whether the 9th Circuit must analyze the no-surcharge statute as an economic regulation or a speech regulation, it makes a huge difference in how likely the statute is to be struck down. Economic regulations are subject to mere rational-basis review by courts. That is, so long as the state can show that a law is rationally related to a legitimate government interest, it will be upheld even if that rationale is weak or pretextual. A statute that regulates speech, on the other hand, must satisfy a much more rigorous level of scrutiny.
Because of the Supreme Court's ruling, the 9th Circuit has to evaluate the no-surcharge statute under the so-called Central Hudson test (named after the 1980 Central Hudson Gas & Electric Corp. v. Public Service Comm'n of N.Y. case in which the Supreme Court first propounded it). The first step in Central Hudson is to ask whether the particular speech concerns lawful activity and is not misleading. Since the Supreme Court essentially held that merchant speech calling a price difference a "credit-card surcharge" is lawful and not misleading, the 9th Circuit should skip straight to step two.
Central Hudson's second step asks whether the government's asserted interest in the regulation is substantial. As applied to a single-sticker pricing regime, it is hard to fathom what substantial interest the government has in insisting that merchants describe a price difference as a "discount" rather than a "surcharge." The California Civil Code simply says: "It is the intent of the Legislature to promote the effective operation of the free market and protect consumers from deceptive price increases for goods and services ... ." Cal. Civ. Code Section 1748.1(e). But courts tend to look askance at the need to protect consumers from truthful and nonmisleading speech. And there is nothing inherently misleading about charging a credit-card surcharge to customers (unless the surcharge was somehow hidden or else not disclosed until the customer's entire purchase was already rung up). The 9th Circuit should conclude that no substantial government interest exists here.
Central Hudson next inquires if the regulation directly advances the government's asserted interest. Here, whatever that interest might be, it would be served more directly by regulating prices rather than speech about prices. For example, to prevent profiteering, the state could cap the surcharge at the rate the merchant pays the credit-card company. Or, to protect consumers from deceptive price increases, the statute could require any credit-card surcharge to be prominently displayed at the cash register. As much more direct regulatory alternatives are available, the 9th Circuit should decide that Section 1748.1 fails this step too.
Finally, Central Hudson requires that speech regulations be no more extensive than necessary to serve the government's interest -- in other words that they be narrowly tailored. California cannot possibly satisfy this step because there are far too many alternatives to advance the government's interest that do not involve restricting disfavored speech. Because the government cannot demonstrate why it specifically needs to bar calling a credit-card surcharge a "surcharge" in order to serve its deception-prevention ends, the 9th Circuit should also find that Section 1748.1 fails Central Hudson's final step.
California's law only has to fail one step of Central Hudson to be struck down, and it appears to fail all four. In the event that the 9th Circuit should nonetheless decide that the no-surcharge statute survives Central Hudson review, the law would still not be in the clear. Although the Supreme Court continues to apply Central Hudson as an intermediate standard of review, the court has declared that laws that discriminate in a content- or speaker-based way must survive even more stringent "heightened scrutiny." The no-surcharge law quite clearly discriminates based on the content (it only proscribes negative speech about surcharges but favors "cash discounts") and just as clearly does so based on the speaker (it only prevents merchants, not others, from calling them surcharges). Hence, under the Sorrell v. IMS Health and Reed v. Town of Gilbert precedents, the 9th Circuit would still face an uphill battle to save the statute.
Nor could the 9th Circuit evaluate the no-surcharge statute as a mere disclosure regime. As Justice Ruth Bader Ginsburg recognized at oral argument in Expressions Hair, a statute that "suppress[es] the actual cost of the credit card purchase" hardly seems aimed at promoting disclosure.
California and the 9th Circuit have been a hotbed of First Amendment activity lately, with cases over digital ads in liquor stores (Retail Digital Network v. Prieto) and mandatory warnings on cellphones (CTIA v. City of Berkeley) receiving much press attention. Italian Colors presents the court with an easier and less controversial challenge, but -- as with the earlier cases -- there is no guarantee that the court will reach the right result.