United States – Advertising, Marketing & Branding

One of the questions that remains uncertain among looming
federal and state “junk fee” and “drip pricing”
bans in 2024 concerns the impact these rules will have on credit
card surcharges. Surcharges are added to sale transactions by some
retailers when the buyer uses a credit card to make a purchase. Is
this a mandatory fee that must be incorporated in the total price
under the new laws? Or does the consumer’s choice to use a
credit card to pay make the convenience of paying by credit card an
optional service or feature that need not be included in the
advertised price?

We may need to wait for further clarification from regulators or
a lawsuit to know how junk fee bans impact surcharging, but
understanding the possible arguments and pitfalls may help you
decide how you will address this question in the short-term.
Contact us if you need guidance or advice on these junk fee bans or
surcharge rules.

Credit Card Surcharging

A surcharge is generally defined to mean any increase in the
price or cost of goods or services that is imposed on a customer
paying by credit card that is not imposed on a customer paying by
cash, check, debit card or other means. Where permitted, some
retailers use surcharges to help defray the transaction processing
costs for accepting payment by credit card. Visa and Mastercard
have strict rules for surcharging. For example, the card networks
require surcharges to be disclosed at the point of entry, along
with the exact amount or percentage of surcharge. Currently, the
maximum allowable surcharge under the Visa rules is three percent,
whereas Mastercard’s limit is four percent.

Federal law does not prohibit surcharging, and only a handful of
states have enforceable laws that prohibit surcharging in their
states. However, surcharging is tricky in some states unless done
in accordance with the state or the prevailing court’s
interpretation of what is permissible.

A recent trend in state law is to impose more restrictions on
surcharging in consumer transactions. For example, in February
2024, New York enacted a new law requiring that, if a surcharge is
imposed, the seller must, “clearly and conspicuously post the
total price for using a credit card inclusive of [the]
surcharge[.]” A reference guide published by
the New York Department of State shows examples of what is legal
and not legal, including dual pricing (legal) and bare notice of
the surcharge (not legal).

Junk Fees and Drip Pricing

More broadly, the California “Honest Pricing Law” or
“Hidden Fees Statute” (SB 478) takes effect on July 1,
2024, and prohibits businesses from, “[a]dvertising,
displaying, or offering a price for a good or service that does not
include all mandatory fees or charges,” except for government
imposed taxes or fees or, “postage or carriage charges that
will be reasonably and actually incurred to ship the
physical good to the consumer” (emphasis added).

FAQs recently released by the California Office of the Attorney
General, discussed in a previous post, make it clear
that the law is not intended to limit how much a business can
charge for a good or service, or the types of fees a business may
want to charge, but the price listed to the consumer must be the
full price that the consumer is required to pay. Businesses cannot
wait to reveal additional required charges later as the consumer
goes through the buying process (a practice known as drip pricing).
The FAQ also makes clear that the law is broad and sweeping in its
application, applying to the sale or lease of most goods and
services that are for a consumer’s personal use, such as
restaurants, hotels, event tickets and food delivery, just to name
a few.

At the federal level, the Federal Trade Commission’s
forthcoming “Junk Fee Rule” also aims to require that
mandatory charges and fees be included in the advertised price of
goods or services (referred to as a “Total Price”
disclosure) and would prohibit businesses from misrepresenting the
nature and purpose of any charges or fees. Similar to California
law, shipping charges and government charges may be excluded from
Total Price. The FTC has collected comments on the proposed rule
and held a hearing on the rulemaking last month, but the rule has
not yet been finalized.

Must Surcharges Be Included in Total Price Disclosures?

The California law and the proposed FTC Junk Fee ban beg the
question: Is a surcharge a mandatory fee or charge that must be
disclosed in the Total Price under broad consumer protection laws
banning junk fees and drip pricing? On the one hand, surcharge fees
are arguably not mandatory, as they would only be assessed in
circumstances where the customer pays with a credit card, and
customers have the option of paying by cash, debit card, ACH or
other means to avoid the surcharge. However, for many customers,
paying by credit card may be their only option to complete a
purchase. Does that effectively make the surcharge a mandatory
charge?

If the view is that a surcharge must be disclosed in Total Price
— which is the view that New York’s surcharge law takes
— then how a retailer should incorporate the surcharge into
Total Price is also a challenging compliance question. One solution
may be to increase the sticker price of all goods or services sold
by the amount of the surcharge and then offer a discount to those
paying by cash or other means. In effect, this turns the surcharge
into a cash-discount applying to all non-credit payment methods.
The New York Department of State gives this practice the green
light.

The problem with the New York cash discounting solution is that
the allowable surcharge percentage may vary across the payment card
networks and even across the states. Perhaps equally unhelpful, the
California FAQ states that if businesses do not know how much it
will charge a customer at the beginning of a transaction, they,
“should wait to display a price until they know how much they
will charge.” But is that really feasible in practice?

Potential Legal Challenges to Total Price Laws?

Many businesses are struggling to comply with Total Price laws
while retaining their ability to advertise price and maintain
flexibility on charging additional fees that may vary based on
details about the sale learned later in the transaction —
such as the customer’s location, the weight of an order or the
level of customer support needed to fulfill an order. For
surcharging, where the surcharge fee is generally charged to recoup
with payment processing costs, interchange and other costs to
process the transaction may not be known until the consumer swipes
(or inputs) a card, and cards associated loyalty programs, for
example, incur higher interchange.

In the past few years, surcharge prohibitions in California,
Florida, Kansas, New York and Texas were challenged on the basis
that the prohibitions unconstitutionally restrict merchants’
freedom to choose how to communicate their prices. For example, in
Italian Colors Rest. v. Becerra, 878 F.3d 1165 (9th Cir.
2018), the Ninth Circuit held that California’s surcharge law
violated the merchant plaintiffs’ First Amendment rights by
prohibiting single-sticker pricing, which is the practice of
listing the price of a good or service and an additional charge for
using a credit card (as either an amount or percentage), for
example, listing a price as $10, with a three percent credit card
surcharge or $10 plus $0.30 for credit. The court found that the
law restricted non-misleading commercial speech in a manner that
did not directly advance the state’s interest. Could there be a
similar argument here with California’s Honest Pricing Law or
the FTC’s proposed Total Price rules? In other words, if
informing a consumer that a surcharge, service fee, handling fee,
processing fee or any other additional fee amounting to three
percent of the purchase price will be added to their purchase is
not misleading, then how can the government mandate that this three
percent be included in the upfront advertised Total Price —
especially given the challenges many retailers face in knowing how
much they will add on to the charge? We will be watching to see if
any challenges develop and are prepared to engage in these complex
issues.