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Italian Colors Restaurant v. Becerra

United States Court of Appeals, Ninth Circuit

January 3, 2018

Italian Colors Restaurant, a California Business Entity; Alan Carlson, Owner, Italian Colors Restaurant; Laurelwood Cleaners, LLC, DBA Laurelwood Cleaners and Laundry, DBA Milo's Cleaners and Laundry, a California Limited Liability Company; Jonathan Ebrahimian, Owner, Laurelwood Cleaners, LLC; Family Life Corporation, DBA Family Graphics, a California Corporation; Toshio Chino, Owner, Family Life Corporation; Stonecrest Gas & Wash, a California Business Entity; Salam Razuki, Co-owner, Stonecrest Gas & Wash; Leon's Transmission Service, Inc., a California Corporation; Vincent Archer, Administrator/Controller, Leon's Transmission Service, Inc., Plaintiffs-Appellees,
Xavier Becerra, Attorney General, State of California, Defendant-Appellant.

          Submitted August 17, 2017 San Francisco, California

         Appeal from the United States District Court for the Eastern District of California Morrison C. England, Jr., District Judge, Presiding Argued and D.C. No. 2:14-cv-00604-MCE-DAD

          John W. Killeen (argued) and Anthony R. Hakl, Deputy Attorneys General; Stepan A. Haytayan, Supervising Deputy Attorney General; Douglas J. Woods and Thomas S. Patterson, Senior Assistant Attorneys General; Xavier Becerra, Attorney General; Office of the Attorney General, Sacramento, California; for Defendant-Appellant.

          Deepak Gupta (argued) and Jonathan E. Taylor, Gupta Wessler PLLC, Washington, D.C.; Mark Wendorf, Reinhardt Wendorf & Blanchfield, St. Paul, Minnesota; Kevin K. Eng, Markun Zusman Freniere & Compton LLP, San Francisco, California; for Plaintiffs-Appellees.

          Michael E. Chase, Boutin Jones Inc., Sacramento, California, for Amicus Curiae Credit Union National Association.

          Richard A. Arnold, William J. Blechman, and James T. Almon, Kenny Nachwalter PA, Miami, Florida, for Amici Curiae Safeway Inc., The Kroger Co., Walgreen Co., Albertson's LLC, and Hy-Vee Inc.

          Thomas S. Knox, Knox Lemmon & Anapolsky LLP, Sacramento, California, for Amicus Curiae California Retailers Association.

          Dale A. Stern, Downey Brand LLP, Sacramento, California, for Amicus Curiae California Grocers Association.

          Eric L. Bloom, Hangley Aronchick Segal Pudlin & Schiller, Harrisburg, Pennsylvania, for Amicus Curiae Rite Aid Corporation.

          John J. McDermott, General Counsel, Arlington, Virginia, as and for Amicus Curiae National Apartment Association.

          Before Diarmuid F. O'Scannlain and Johnnie B. Rawlinson, Circuit Judges, and Sarah S. Vance, [*] District Judge.

         SUMMARY [**]

         Civil Rights

         The panel affirmed the district court's summary judgment in favor of plaintiffs in an action challenging the constitutionality of California Civil Code Section 1748.1(a), which prohibits retailers from imposing a surcharge on customers who make payments with credit cards, but permits discounts for payments by cash or other means.

         The panel first held that it was satisfied that plaintiffs had modified their speech and behavior based on a credible threat of Section 1748.1's enforcement. Plaintiffs therefore satisfied their burden of establishing standing.

         The panel limited its review of the surcharge law to a First Amendment as-applied challenge based on plaintiffs' representation that they were not bringing a facial challenge. The panel further held that Section 1748.1 regulated speech and rejected the Attorney General's argument that the Section instead regulated conduct.

         Applying intermediate scrutiny, the panel held that the activity to which plaintiffs' desired speech was directed - charging credit card users more than cash users - was not unlawful or misleading. The panel held that enforcing section 1748.1 against plaintiffs did not directly advance California's asserted interest in preventing consumer deception. Finally, the panel held that there was no reasonable fit between the broad scope of Section 1748.1 and the asserted state interest, and therefore the statute was more extensive than necessary. The panel therefore agreed with the district court that Section 1748.1 violated the First Amendment, but only as applied to plaintiffs.



         Plaintiffs challenge the constitutionality of California Civil Code Section 1748.1(a). This statute prohibits retailers from imposing a surcharge on customers who make payments with credit cards, but permits discounts for payments by cash or other means. The district court granted summary judgment in favor of plaintiffs, declared the statute both an unconstitutional restriction of speech and unconstitutionally vague, and permanently enjoined its enforcement. We hold that the statute as applied to these plaintiffs violates the First Amendment. Thus, we affirm the district court's judgment. We also narrow the scope of the district court's relief to apply only to plaintiffs.

         I. BACKGROUND

         A. Factual Background

         Plaintiffs are five California businesses and their owners or managers: Italian Colors Restaurant and owner Alan Carlson; Laurelwood Cleaners and owner Jonathan Ebrahimian; Family Graphics and owner Toshio Chino; Stonecrest Gas & Wash and owner Salam Razuki; and Leon's Transmission Service and administrator Vincent Archer. Plaintiffs pay thousands of dollars every year in credit card fees, which are typically 2-3% of the cost of each transaction. With the exception of Stonecrest, each plaintiff charges a single price for goods, with prices slightly higher than they would be otherwise to compensate for the credit card fees. Stonecrest currently offers discounts to customers who use cash or debit cards.

         Each plaintiff represents that it would impose a credit card surcharge if it were legal to do so. Stonecrest, which already offers different prices for cash customers and credit card customers, would describe this difference as a surcharge rather than a discount. Italian Colors would also charge different prices and label the difference as a surcharge. Laurelwood would charge different prices and "express the price difference as an additional percentage fee, or surcharge, that [customers] will pay if they decide to use credit." Likewise, Family Graphics "would have two different prices, " and "would express that difference as a percentage fee that is incurred for using a credit card." And Leon's Transmission would "charge a fee for credit-card transactions, " i.e., offer a base price and impose an additional surcharge for using a credit card. Plaintiffs have not imposed credit card surcharges for fear of violating Section 1748.1.

         Plaintiffs put forth several reasons why they desire to impose credit card surcharges rather than offer cash discounts. First, they contend that credit card surcharges are a more effective way of conveying to customers the high cost of credit card fees. Second, plaintiffs state that their current practice forces them to raise their prices slightly to compensate for the credit card fees, making their goods and services appear more expensive than they would be otherwise.

         Third, plaintiffs believe that imposing a credit card surcharge would be more effective than offering a cash discount in encouraging buyers to use cash. Scholars have posited that credit card companies prefer cash discounts over credit card surcharges for precisely this reason. See Amos Tversky & Daniel Kahneman, Rational Choice and the Framing of Decisions, 59 J. Bus. S251, S261 (1986). Although mathematically equivalent, surcharges may be more effective than discounts because "the frame within which information is presented can significantly alter one's perception of that information, especially when one can perceive the information as a gain or a loss." Jon D. Hanson & Douglas A. Kysar, Taking Behavioralism Seriously: Some Evidence of Market Manipulation, 112 Harv. L. Rev. 1420, 1441 (1999). Indeed, research has shown that economic actors are more likely to change their behavior if they are presented with a potential loss than with a potential gain. Plaintiffs point to one study in which 74% of consumers reacted negatively to a credit card surcharge, while only 22% reacted positively to cash discounts. See Adam J. Levitin, The Antitrust Super Bowl: America's Payment Systems, No-Surcharge Rules, and the Hidden Costs of Credit, 3 Berkeley Bus. L.J. 265, 280-81 (2005).

         B. Statutory Background

         Section 1748.1 succeeded a now-lapsed federal surcharge ban. In 1974, Congress amended the Truth in Lending Act (TILA) to provide that credit card companies "may not, by contract or otherwise, prohibit any [retailer] from offering a discount to a cardholder to induce the cardholder to pay by cash, check, or similar means rather than use a credit card." Act of Oct. 28, 1974, Pub. L. No. 93-495, § 167, 88 Stat. 1500 (codified at 15 U.S.C. § 1666f(a)). Two years later, Congress again amended TILA to prohibit retailers from "impos[ing] a surcharge on a cardholder who elects to use a credit card in lieu of payment by cash, check, or similar means." Act of Feb. 27, 1976, Pub. L. No. 94-222, § 3(c)(1), 90 Stat. 197 (formerly codified at 15 U.S.C. § 1666f(a)(2)). This amendment also added definitions to the statute, defining "discount" as "a reduction made from the regular price, " and "surcharge" as "any means ...

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