This Freeman Law Insights blog discusses Chapter 604A of the Texas Business and Commerce Code (“Chapter 604A”) which, as written, prohibits merchants from imposing a surcharge on a buyer who uses a debit card or a credit card instead of paying with cash or other similar means of payment. As applied, Chapter 604A may be unconstitutional, in some contexts, but the road to that determination may be long, expensive, and continually burdened by outcome-unknowns.
Merchant and Surcharge
Under Chapter 604A, a “merchant” is defined as “a person in the business of selling or leasing goods or services.” Tex. Bus. & Com. Code § 604A.001(3). A “surcharge” is defined as “an increase in the price charged for goods or services imposed on a buyer who pays with a credit, debit, or stored value card that is not imposed on a buyer who pays by other means.” Id. at § 604A.001(5).
Debit Card Purchases
Under Chapter 604A, “[i]n a sale of goods or services, a merchant may not impose a surcharge on a buyer who uses a debit or stored value card instead of cash, a check, credit card, or a similar means of payment.” Id. at § 604A.002.
Credit Card Purchases
Section 604A.0021 prohibits a merchant from imposing a surcharge on a buyer who uses a credit card for an extension of credit instead of cash, a check, or a similar means of payment.
Civil Penalty
Under Chapter 604A, a person who knowingly violates Section 604A.0021 is liable to the state for a civil penalty in the amount of $500 for each violation. Id. at § 604A.003(a). Before the Texas Attorney General can bring an action to recover this penalty, the Attorney General must provide notice of the person’s noncompliance and liability for the civil penalty. If the person complies with Section 604A.0021 within 30 days after the date of the notice, the violation is cured and the person is not liable for the civil penalty. Id. at § 604A.003(b).
Constitutionality
As a general rule, anti-surcharge statutes restrict only commercial speech, being an expression related solely to the economic interests of the speaker and its audience. See Central Hudson Gas & Elec. v. Public Svc. Comm’n, 447 U.S. 557, 561 (1980). The First Amendment of the United States Constitution, as applied to the States through the Fourteenth Amendment, protects commercial speech from unwarranted governmental regulation. See id. In Central Hudson Gas, the United States Supreme Court Courts described four questions to determine whether a State has met its burden to justify a commercial-speech regulation:
- whether the speech concerns lawful activity and is not misleading;
- whether the asserted governmental interest justifying the regulation is substantial;
- whether the regulation directly advances the governmental interest asserted; and
- whether the regulation is more extensive than necessary to serve that interest.
No judicial opinion has cited or discussed the application or constitutionality of section 604A.002 which prohibits a surcharge on debit card purchases. However, in the event a merchant or other interested party challenges the constitutionality of section 604A.002, the State will bear the burden of proof as to each of the above judicially-created questions or factors as applied to the facts of the surcharge in issue.
As for section 604A.0021 which prohibits a surcharge on credit card purchases, the United States District Court for the Western District of Texas in the case of Rowell v. Paxton, 336 F. Supp. 3d 724 (W.D. Tex. 2018), ruled that section 604A.0021 is unconstitutional as applied to the merchants in that case. The court found that the law violated the merchant’s First Amendment speech rights since the law prohibited the merchant from “speaking” to its customers regarding the merchant’s surcharge applied to payments made by credit card in an amount necessary to cover – but not to exceed – the swipe fees charged to the merchant by the third-party credit card processing company.
The Rowell opinion was the result of a years’-long judicial proceeding that began in the District Court in 2014, circled up through the Fifth Circuit Court of Appeals, then to the United State Supreme Court, and then back down to the District Court for its final ruling in 2018. No appeal followed the District Court’s final ruling, and no substantive ruling on the subject has been handed down since by any other court in Texas, federal or state (at least none that I could find as of this blog post).
Texas Attorney General
After the Rowell decision, the Texas Attorney General opined that the judicial opinion in Rowell only affects the litigants in that case and that circumstances may still exist where, as applied, section 604A.0021 operates to prohibit a credit card surcharge fee. See Tex. Att’y Gen. Op. No. KP-0257 (June 14, 2019) (noting that, “When a court determines that a statute is unconstitutional as applied, it normally invalidates the statute only as applied to the litigant in question and does not render the statute unenforceable with regard to other litigants or different factual circumstances.”).
As alluded in Rowell, the Attorney General’s Opinion suggests that an unlawful surcharge may apply when the merchant’s surcharge is more than the processing fee charged to the merchant, but the Attorney General’s opinion does not limit the section’s application to those situations. Thus, if a merchant incurs no swipe fee for a purchase made by debit card or other similar means of payment, the application of a surcharge to that purchase may be unlawful under Chapter 604A and also in the guardrails of constitutionality, provided the State is able to carry the burden of proof on the factors set forth by the U.S. Supreme Court in Central Hudson Gas & Electric and its progeny which now includes Rowell.
In all circumstances, the merchant is wise to adequately and conspicuously disclose the applicable surcharge (whether called a convenience fee or other name) in advance of or at the time of purchase to avoid allegations of a deceptive trade practice and to potentially provide ammunition to support First Amendment defenses relative to the applicable commercial-related speech.
[View source.]
