CardX, LLC v. Schmidt
| Decision Date | 25 February 2021 |
| Docket Number | Case No. 20-2274-JWB |
| Citation | 522 F.Supp.3d 929 |
| Court | U.S. District Court — District of Kansas |
| Parties | CARDX, LLC, Plaintiff, v. Derek SCHMIDT, in his official capacity as Kansas Attorney General, Defendant. |
Bernard Nash, Pro Hac Vice, Keturah Taylor, Pro Hac Vice, Sean J. Riley, Pro Hac Vice, Cozen O'Connor, Washington, DC, Timothy J. Sear, Polsinelli PC, Kansas City, MO, for Plaintiff.
Shon D. Qualseth, Office of Attorney General, Topeka, KS, for Defendant.
This case is before the court on the parties’ cross-motions for summary judgment. (Docs. 15, 17.) The issues raised in the motion have been fully briefed. (Docs. 16, 17, 18.) On February 2, 2021, the court held a telephonic hearing at which it raised a question concerning Plaintiff's standing to asserts its claims. The parties have now filed supplemental briefs addressing the standing issue (Docs. 22, 23), making the motion ripe for decision. For the reasons stated herein, Plaintiff's motion for summary judgment and Defendant's motion for summary judgment are each GRANTED IN PART and DENIED IN PART.
Plaintiff is a technology company with software that allows merchants to display prices, including cost surcharges on purchases made by credit card, and thereby allows consumers to comparison shop among payment types. Plaintiff filed this action challenging K.S.A. 16a-2-403, 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. Although this provision prohibits a surcharge, it permits sellers to offer a discount to consumers who pay by cash. As a result, the law effectively limits what Plaintiff (and merchants) can treat as the "regular price" of an item and the corresponding information about prices and credit card fees that can be conveyed to consumers. Plaintiff argues the Kansas law is an unconstitutional restriction on commercial speech in violation of its First Amendment rights. It also argues the law is unconstitutionally vague and violates Plaintiff's right to due process of law. Plaintiff seeks relief under 42 U.S.C. § 1983 in the form of a declaration that K.S.A. 16a-2-403 is unconstitutional as applied to Plaintiff. (Doc. 1 at 16.)
The following facts are uncontroverted for purposes of summary judgment. (Doc. 17 at 1.)
K.S.A. 16a-2-403 (the "Kansas no-surcharge statute") states as follows:
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.
The Kansas no-surcharge statute allows cash "discounts" but prohibits credit card "surcharges." See The Hon. Ken Francisco, Kan. Att'y Gen. Op. No. 86-115 (1986).
The no-surcharge statute provides exemptions for educational boards and institutions, and state and county entities. See e.g. , K.S.A. 72-1176 ; 19-122; 75-30.100.
Violators of the statute are subject to, among other things, administrative investigations, cease and desist orders, administrative fines, civil liability for consumer restitution, and civil penalties. Defendant Derek Schmidt is the Kansas Attorney General and has the authority in his official capacity to enforce the Kansas no-surcharge statute. (Doc. 16 at 10.) He has recently enforced the no-surcharge statute. (Id. )
On credit card transactions, merchants are typically charged interchange fees of two to three percent of the purchase price for goods and services, and those fees are increasing. A study by the U.S. Government Accountability Office determined that between 2005 and 2009, interchange fees charged for certain premium rewards credit cards rose by 24%. Consumers now use rewards credit cards, which are more expensive to accept than standard credit cards, for more than 80% of their credit card purchases. These rising fees disproportionately affect small businesses, as large retailers are able to negotiate discounted fee arrangements with credit card companies due to their large transaction volumes. (Id. at 10-11.)
Visa reportedly will implement fee structure changes in 2021 that will increase fees for certain transactions, including purchases on e-commerce sites or other "card-not-present" transactions. (Id. at 11.)
In Kansas, merchants remain obligated to absorb the costs of a consumer's choice to use a credit card because the no-surcharge statute makes it illegal to communicate differential pricing as a surcharge. When businesses are unable to pass on the cost of a credit card acceptance as a surcharge, that cost is often built into the costs of all goods and services sold by that business, which in turn raises prices for all customers regardless of whether they use credit or non-credit payment options. This results in a "cross-subsidy" from non-credit payers to the customers who pay by credit card. For the average credit card user, this amounts to over $1,100 per year. (Id. at 12.)
Credit card surcharges allow businesses to allocate the costs of credit card acceptance to only those customers who choose to use credit cards. Expressing price differential as a cash "discount," as permitted by the Kansas no-surcharge statute, is inaccurate and disadvantages both businesses and consumers. Describing a price differential as a cash "discount" necessitates higher advertised prices to customers than the actual base price of a good or service, which may competitively disadvantage that business. Businesses often find it difficult to explain the difference between a "surcharge" and a "discount" to employees or representatives, and consequently worry that an employee or representative will inadvertently violate a no-surcharge law by incorrectly describing a price differential. Business owners are placed in limbo, not knowing whether they will incur legal liability for conveying truthful information to customers. (Id. )
No-surcharge statutes prevent businesses from communicating price differentials to their customers as transparently as possible – i.e., informing them that paying by credit card creates a cost and, if they elect to use a credit card, they will bear this cost in the form of an additional fee. Confusing representations of price differentials can cause distrust or lead to a negative customer experience. (Id. )
Allowing credit card surcharges benefits businesses and consumers. Some businesses – particularly in industries such as wholesale distribution, construction, and professional services – operate on profit margins so narrow that they are unable to accept payment via credit card unless they are permitted to pass on the cost of credit card acceptance to cardholders. (Id. at 13.) If allowed to pass on the cost of credit card acceptance, such businesses are able to offer their goods and services to the significant portion of the consumer base that prefers or needs to pay with credit. In these industries and across the economy, credit card surcharges expand consumer choice. Simply choosing not to accept credit cards is not a viable option for most businesses, because most consumers prefer to pay with credit or debit cards. Some businesses are also wary of advertising a cash discount or encouraging consumers to pay with cash due to stigmas associating cash transactions with tax avoidance. (Id. )
Following the onset of the coronavirus pandemic, the pressure on merchants to accept credit card payments has become even greater as consumers are increasingly reluctant to use cash; they seek contact-free and online payment options instead. At the same time, merchants that are struggling to remain economically viable are pursuing all available options to reduce expenses, including their credit card costs. (Id. )
Plaintiff is a financial technology company headquartered in Illinois and incorporated in Delaware. Plaintiff was founded in 2013 on the heels of the settlement reached in In re Payment Card Interchange Fee & Merch. Disc. Antitrust Litig. , 986 F. Supp. 2d 207 (E.D. N.Y. 2013), rev'd and , 827 F.3d 223 (2d Cir. 2016), which resulted in major credit card companies changing their rules to allow merchants to apply credit card surcharges. (Doc. 16 at 13-14.) These new rules enabled businesses in the United States to pass on the transaction fee when customers choose credit cards (often for their convenience or rewards). The new rules imposed numerous contractual requirements on businesses that seek to surcharge. These requirements mandate that, in order to impose a surcharge, merchants must:
(Id. at 14.)
Since 2003, Plaintiff has contracted with more than 5,000 merchants, ranging from small businesses to public companies, in the 46 states (and in the District of Columbia) where credit surcharges are currently permitted. (Id. ) Plaintiff's patent-pending payment processing software allows merchants to display and process price differentials in compliance with all applicable credit card company requirements. The standard pricing model of Plaintiff's software displays the price of the good or service, plus the cost associated with credit card use both as a percentage of the price and...
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