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
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
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.
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
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
S. Knox, Knox Lemmon & Anapolsky LLP, Sacramento,
California, for Amicus Curiae California Retailers
A. Stern, Downey Brand LLP, Sacramento, California, for
Amicus Curiae California Grocers Association.
L. Bloom, Hangley Aronchick Segal Pudlin & Schiller,
Harrisburg, Pennsylvania, for Amicus Curiae Rite Aid
J. McDermott, General Counsel, Arlington, Virginia, as and
for Amicus Curiae National Apartment Association.
Diarmuid F. O'Scannlain and Johnnie B. Rawlinson, Circuit
Judges, and Sarah S. Vance, [*] District Judge.
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.
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.
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.
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.
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.
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.
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
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.
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
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 ...