The Back Story
In 2013, the U.S. District Court for the Eastern District of New York approved a Class Settlement among merchants, Visa, MasterCard, and other defendants. Allegedly, the defendants conspired to collect excessive “surcharges,” also called merchant fees, transaction fees, or convenience fees.
The class action litigation was drawn out over 8 years and involved 400 depositions, 80 million pages of documents, 17 expert reports, and 32 days of expert deposition testimony.
On September 28, 2015, the Second Circuit Court of Appeals held a hearing regarding an appeal of the settlement. The matter has now been submitted to the Court for decision. It is not known when the Second Circuit will issue its decision.
Why should Oregon lawyers care about the Payment Card Interchange Fee Settlement?
Because it’s all about the money. Or more precisely, the cost of getting paid.
Can Law Firms Pass On Credit Card Surcharges?
Some lawyers are taking the position that the Payment Card Interchange Fee Settlement permits them to pass on credit card surcharges to clients.
Depending on the situation, these fees can add up to real money:
- Jane Client owes her law firm $7,000. A fan of frequent flyer miles and other perks, she charges her legal bill to her Visa card. Surcharge to the firm: $210.* Net amount collected by the firm: $6,790.
If the firm has five “Jane’s” in a month, it ends up losing over $1,000 in billed fees.
- Corporate client Oregon, Inc. informs its law firm that henceforth it will pay only by credit card. A typical monthly invoice for Oregon, Inc. is $10,000. Over a 12 month span, the law firm will eat $3,600 or more in legal fees – the cost of absorbing surcharges each time Oregon, Inc. pays its bill by credit card.* Bottom line: taking credit cards isn’t cheap.
You Might Say a $10,000 Client Payment is a Good Problem to Have
Agreed. It may not be easy to sympathize with or relate to either of these scenarios. But most lawyers do take credit cards, and by year-end the surcharge fees add up.
What to do?
If you’ve read my blog before, you know I’m an advocate of building the cost of taking credit cards into your fee – what you charge for services. This continues to be a valid approach for the following reasons:
- Assessing surcharges [or crediting clients for the net amount less fees] involves extra administrative and bookkeeping steps. If you get the math wrong and the transaction involves trust account funds, you could face disciplinary action.
- Passing on surcharges is unpopular. Clients don’t like to be “nickel and dimed” to death.
- Ethically, clients are not obliged to pay any cost to which they did not agree. If you did not include the right to assess surcharges in your fee agreement, you cannot unilaterally pass on the cost after the fact. [Granted, you can fix this by modifying your fee agreement – but it isn’t necessarily advisable and may not be successful.] See OSB Formal Opinion 2005-97.
- Legally, there are more than a few barriers.
Legal Implications of Passing on Surcharges
A bit of research reveals that passing on surcharges may be acceptable under the Payment Card Interchange Fee Settlement, provided you:
- Inform Visa and MasterCard before you begin surcharging.
- Show the surcharge as a separate item on all transaction receipts.
- Display prominent signage at checkout advertising surcharge fees.
- Apply surcharges only to credit card purchases – you cannot legally add a surcharge to a pre-paid card or debit card (even if you run it as a credit card transaction).
- Limit surcharges to transactions in the domestic United States and US territories.
- Verify surcharges are not prohibited by state law.
- Assess no surcharges to clients using American Express or Discover, as they are not part of the Payment Card Interchange Fee Settlement.
How Do These Requirements Translate to the Legal Profession?
Good question! Assuming the Payment Card Interchange Fee Settlement gives you the right to begin surcharging:
- Step two might require you to change your credit card processing practices. When a card is swiped, a receipt is generated. Assuming it shows the surcharge as a separate item, and you provide the receipt to the client, you have complied with this step. But what about “card not present” transactions where the card is not available to swipe? These are far more common in a law firm. Do you currently email a contemporaneous receipt? Maybe you should. Will you list surcharges as a separate line item on billing statements? Maybe you should do that too.
- Step three may mean displaying a sign in your office, drawing prominent attention to the fees in your written fee agreement, including information on your intake form, discussing surcharges during the initial client interview, etc.
- Step six would require vigilance when working with out-of-state clients. Surcharges are illegal in California and nine other states. Some predict this number will grow.
Can I Do it or Not?
I can’t give you the unequivocal green light.
While some law firms are surcharging now, please remember the settlement is under appeal.
Additionally, consider this comment in OSB Legal Ethics Opinion No. 2005-172:
Passing the merchant fee on to the client or crediting the client for the net amount of the transaction only … may implicate Regulation Z of the Truth in Lending Act,
12 CFR §226. As a result, you may be compelled to offer cash discounts to all clients and make specified disclosures to your clients who pay by credit card.
See CONSUMER LAW IN OREGON ch 14 (Oregon CLE 1996 & Supp 2000).
While the language is “may implicate Regulation Z,” the safe harbor has always been to assume the Truth in Lending Act applies to these transactions. [The Ethics Committee added this substantive law caveat to alert practitioners to the possibility.]
I’ve read the Orders and other documents posted at the Payment Card Interchange Fee Settlement in an effort to wrap my head around this. I’ve never seen any source that fully reconciles the issues in the class action with the requirements set out in Regulation Z – not that I’m an expert.
Assuming the appeal doesn’t upset the apple cart, my suggestions on how the Payment Card Interchange Fee Settlement would translate to lawyers are only best guesses. There is no authoritative source to guide us on applying point-of-sale retail transaction requirements to a law firm setting. For example, how does a law firm “display prominent signage at checkout?”
Proceed at Your Own Risk
If you want to assess surcharges, do your own substantive legal research and proceed at your own risk. Before taking the plunge, consider these words of wisdom from LawPay, a popular credit card processor serving the legal profession:
Many law firms simply build the additional cost [of accepting credit cards] into their fees as a standard business expense. This is generally recommended as the proper and more professional way to handle the business expense of processing payments.
[All Rights Reserved 2016 Beverly Michaelis]
*Based on a surcharge of 3% per transaction – transaction rates vary.