For the past 35 years, merchants in Kansas have been prohibited from charging a surcharge to customers on purchases made by credit card. With a recent court decision and pending legislation, that ban is almost surely to be lifted in the near future.
Passed in 1986, the Kansas “no-surcharge” statute provided 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.” K.S.A. 16-a-2-403.
In February 2021, the United States District Court for the District of Kansas granted summary judgment in favor of CardX, LLC against the State of Kansas, declaring the state’s ban on credit card surcharges to be unconstitutional. In CardX, LLC v. Schmidt, the Court held that the no-surcharge statute was a violation of the plaintiff’s First Amendment right to commercial speech. In so doing, the Court applied United States Supreme Court precedent from Central Hudson Gas & Elec. Corp. v. Pub. Serv. Comm’n of New York, 447 U.S. 557, 561 (1980). In Hudson, the Supreme Court set forth a three-factor test to determine the constitutionality of a statute that restricts commercial speech: (1) Does the State have a substantial interest in restricting commercial speech? (2) Does the challenged statute advance those interests in a direct and material way, and (3) Is the restriction of reasonable proportion to the interests served? Applying the Hudson test, the Court for the District of Kansas found the Kansas no-surcharge statute failed on all three bases.
The Court also cited to the need for surcharges to protect businesses with small profit margins from bearing the cost and burden of transaction fees imposed by credit card providers. The Court further reasoned that the restriction on surcharges placed an undue burden on merchants in light of the heightened demand for credit card transactions in the era of COVID, where consumers have insisted on contact-free transactions.
The CardX decision was limited to the plaintiff and transactions at issue in that case. However, during the time the CardX opinion was written, HB 2316 was introduced, which would statutorily lift the surcharge ban. The bill swiftly passed in the Kansas House of Representatives and has been referred to committee in the Senate. In the unlikely event that the bill does not pass, additional challenges to the existing no-surcharge statute can be expected.
On March 23, 2021, Illinois Governor J.B. Pritzker signed into effect the Predatory Loan Prevention Act (the “PLPA”), which caps interest on consumer loan transactions at a rate of 36 percent. The PLPA essentially expands the interest rate caps set forth in the Military Lending Act, which is a federal law that protects active service members from usurious interest rates, to apply to all consumer loan transactions taking place in Illinois. Illinois is now one of eighteen jurisdictions to implement such a cap.
The PLPA is part of an omnibus economic equity reform bill introduced by the Illinois Legislative Black Caucus. Other aspects of the bill include cannabis and agriculture equity reforms, as well as changes in how criminal convictions may be used in housing and employment decisions.
Prior to passage of the PLPA, the average APR for payday loans in Illinois was 297%, and 179% for car title loans. Illinois residents were estimated to have paid more than $500 million per year in payday and title loan fees, and advocates of the PLPA state that these high-interest loans targeted communities of color, as well as the elderly.
Critics of the PLPA argue that the law will eliminate jobs and make credit less accessible to Illinois citizens. Proponents of the Act counter that increased consumer spending on goods and services will actually grow jobs. The true economic impact of the new law remains to be seen.
Lenders and financial service providers who provide credit in Illinois must take caution under the PLPA. The new law has teeth. Failure to comply with the PLPA carries statutory penalties of up to $10,000, renders the loan null and void, and requires the return of payments made toward the principal, interest, fees, or charges related to the loan. Furthermore, a violation of the PLPA may also give rise to a private right of action under the Illinois Consumer Fraud and Deceptive Business Practices Act, subjecting lenders to liability for actual damages, punitive damages, and attorney’s fees.
In passing the PLPA, Illinois joins seventeen other states and the District in Columbia that have passed similar interest rate caps on consumer transactions.
The United States Supreme Court recently granted certiorari to TransUnion on a multimillion-dollar jury verdict arising out of a class action in the Ninth Circuit.
In Ramirez v. TransUnion, a case filed in the Northern District of California,the jury assessed $60 million in damages against TransUnion for three FCRA violations: (1) willful failure to follow reasonable procedures to assure accuracy of terrorist alerts in violation of 15 U.S.C. § 1681e(b); (2) willful failure to disclose to class members their entire credit reports by excluding the alerts from the reports in violation of § 1681g(a)(1); and (3) willful failure to provide a summary of rights in violation of § 1681g(c)(2). The facts relating to the alleged injury suffered by the named class member are compelling. When applying for a car loan, Mr. Ramirez was denied financing by the dealership because he was incorrectly listed a match on an OFAC Advisor “terrorist list” alert that came up when his credit report was pulled, based on information obtained through a third party vendor. Notably, the dealership did not conduct any further independent investigation to determine whether Mr. Ramirez was in fact a match but instead sold the car to Mr. Ramirez’ wife.
Mr. Ramirez thereafter requested and obtained his credit report from TransUnion, which did not contain the OFAC alert. However, a letter he received from TransUnion a day later notified him that he was listed as a “prohibited SDN (Specially Designated National)”. After speaking with an attorney, Mr. Ramirez learned of the procedure to dispute the OFAC data associated with his credit file and did so. The alert was removed. The record revealed that more than 8,000 other consumers’ credit files had also been falsely labeled as prohibited SDNs from January and July 2011 and that they received a letter similar to Mr. Ramirez’ when they requested their credit reports during that time. Mr. Ramirez subsequently brought the above class action on behalf of himself and those other consumers, who apparently did not suffer any actual injury for which damages could be awarded. The jury verdict amounted to roughly $1,000 in statutory damages per class member and $6,300 each in punitive damages.
After the jury verdict, TransUnion appealed to the Ninth Circuit Court of Appeals. The Ninth Circuit held that the class members had standing sufficient to be certified as a class under Rule 23, but found that the punitive damages award was excessive and cut the punitive damage award in half.
On review, the U.S. Supreme Court must consider and rule upon two critical issues: (1) Whether either Article III or Rule 23 permits a damages class action where the vast majority of the class suffered no actual injury, and (2) whether a punitive damages award violates a defendant’s due process rights where it is exponentially larger than any class-wide actual damages and multiples greater than the statutory damages awarded for the defendant’s violations.
The Ramirez case comes before the High Court at the end of another record-setting year for FCRA claims. But its implications far exceed FCRA litigation. With a historically conservative Court hearing this case, there is at least a possibility that class actions may be more heavily scrutinized in the future.
Baker Sterchi will continue to monitor the Ramirez case for important updates.
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The BSCR Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry. This blog will inform readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph, and our Financial Services practice.
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