State Statute Prohibiting Surcharges on Credit Card Purchases Held Unconstitutional

On February 25, 2021, the United States District Court for the District of Kansas issued an opinion granting summary judgment in favor of CardX, LLC (CardX), and found unconstitutional “a Kansas law that prohibits sellers from imposing a ‘surcharge’ at the time of sale on consumers who pay by credit card rather than by cash.”  CardX “is a technology company with software that allows merchants to display prices, including cost surcharges on purchases made by credit card, … thereby allow[ing] consumers to comparison shop among payment types.”  The Kansas no-surcharge statute at issue states that:

No seller or lessor in any sales or lease transaction or any credit or debit card issuer may impose a surcharge on a card holder who elects to use a credit or debit card in lieu of payment by cash, check or similar means. A surcharge is any additional amount imposed at the time of the sales or lease transaction by the merchant, seller or lessor that increases the charge to the buyer or lessee for the privilege of using a credit or debit card.

K.S.A. 16a-2-403.  Accordingly, the statute allows cash “discounts” but prohibits credit card “surcharges.”  CardX argued that the no-surcharge statute “is an unconstitutional restriction on commercial speech in violation of its First Amendment rights.”  The Court explained that the legality of the statute turns on “(1) whether the State’s interests in proscribing the commercial speech are substantial; (2) whether the challenged regulation advances those interests in a direct and material way; and (3) whether the extent of the restriction on protected speech is in reasonable proportion to the interests served.”

First, the State defended the no-surcharge statute on the grounds that it encouraged businesses to charge lower prices to cash-paying customers.  The Court rejected this argument both because Kansas could not explain why the State had a “substantial interest” in encouraging cash payments.  Even if it did, the Court was also not convinced that allowing CardX to display prices which clearly indicated a surcharge for paying by card would actually “discourage people from making cash purchases.”

Second, the State defended the no-surcharge statute on the grounds that it encouraged cash payments, thereby lowering consumer debt and reducing merchants’ credit card costs.  The Court rejected this argument as well because CardX’s practice of displaying a lower price for cash payments provides identical incentives to pay by cash, so “the speech restriction serves no real purpose.”

Finally, the State defended the no-surcharge statute on the grounds that it prevented consumers from bearing the brunt of the cost of doing business.  The Court rejected this argument as counter-factual, because it was uncontroverted that credit card processing fees are typically built into the costs of goods and services when a surcharge cannot be charged.  In fact, the Court explained, the statute actually “results in merchants spreading the cost of using credit cards among all purchasers, cash and credit, thereby somewhat reducing the cost to credit card users but shifting those costs to cash purchasers.”

For all of these reasons, the Court found that the no-surcharge statute infringed upon CardX’s First Amendment right to freedom of commercial speech, and invalidated the statute as applied to CardX’s price display technology.  No-surcharge laws remain on the books in three states: Colorado, Connecticut and Massachusetts.  In the wake of the decision, CardX vowed to “continue to push the regulatory movement forward until CardX is available in all 50 states.”