Tag Archives: Truth in Lending Act

Credit Card Surcharges Revisited

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Remember the Payment Card Interchange Fee Settlement?

Processing credit card payments is a fact of life for today’s law firm. So are costly surcharges – the fee assessed by your bank or credit card processor for the privilege of accepting this form of payment.

In 2015 – 2016, some Oregon law firms took the position that the Payment Card Interchange Fee Settlement (PCIFS) permitted them to pass on credit card surcharges to clients.  As a reminder, the PCIFS was a class action settlement among merchants, Visa, MasterCard, and other defendants. American Express and Discover were not part of the litigation.  Applying the conditions of the settlement to a service-based industry like the legal profession was always tenuous at best.

Regardless, using the PCIFS as a justification for passing on credit card surcharges became moot in mid-2016 when the Second Circuit Court of Appeals reversed and remanded approval of the settlement.

The Post-PCIFS Era

If you’ve read my blog before, you know I’m an ardent advocate of absorbing credit card surcharges as a cost of doing business. This doesn’t mean watching money fly out the door without recourse.  It does mean you shouldn’t pass on surcharges as a separate cost item to the client.  Consider:

  • 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.
  • Firms who want to charge for credit cards often bill clients for postage, faxing, scanning, and photocopying.  These items already rate high on the client annoyance scale.  Pass on surcharges and that scale may tip.
  • 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.
  • Fees can be adjusted to reflect this, and other, costs of doing business.
  • Surcharges are outright illegal in some states and capped in others.
  • Passing on surcharges may trigger compliance with Regulation Z of the Truth in Lending Act:

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).  OSB Legal Ethics Opinion No. 2005-172.

As Before: Proceed at Your Own Risk

If you want to assess surcharges, do your own research and proceed at your own risk.

I leave you with these words of wisdom from LawPay, a popular credit card processor serving the legal profession:

While your state may allow you to pass on transaction fees to clients, think carefully before doing so. Potential clients will not expect a higher fee simply because they use a different form of payment. In today’s market the best practice may be to simply absorb these fees yourself as the cost of doing business.

All Rights Reserved 2018 Beverly Michaelis

Passing on Credit Card Surcharges to Clients

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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:

  1. Inform Visa and MasterCard before you begin surcharging.
  2. Show the surcharge as a separate item on all transaction receipts.
  3. Display prominent signage at checkout advertising surcharge fees.
  4. 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).
  5. Limit surcharges to transactions in the domestic United States and US territories.
  6. Verify surcharges are not prohibited by state law.
  7. 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.

Just Say No to Charging Clients Merchant Fees

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Lawyers often ask if they may ethically charge clients for credit card merchant fees.credit card

There is no ethical barrier to passing on the merchant fee, or crediting the client for the net amount of the transaction only, if the client agrees. Therefore, the first step toward charging clients merchant fees would require updating your written fee agreement to include this cost. If you wish to modify existing agreements, remember that any modification in the lawyer’s favor “… requires client consent based on an explanation of the reason for the change and its effect on the client…. In addition, the modification must be objectively fair.”  OSB Formal Opinion 2005-97.

The real obstacle in passing on merchant fees is a little something called the Truth in Lending Act. (TILA).  As noted by the Oregon State Bar 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).

The bottom line: unless you are willing to immerse yourself in the TILA and create compliant disclosures, don’t try to pass on merchant fees.  The TILA is an extremely complex piece of legislation, as evidenced by this 61 page manual published by the FDIC (Federal Deposit Insurance Corporation).  Furthermore, the best practice is to build the cost of taking credit cards into your fee – what you charge for your services.  This is what the retail world does.  When we pay by credit card, retail merchants don’t say: “That will be $159.00 for the lamp (or spa services) and another $4.77 for our merchant fee.”  Clients do not like to be nickel and dimed to death.  Just say no!

For a further discussion about credit cards, including answers to FAQ, see this post.

For tips on flexible and inexpensive credit card processors for lawyers, check this out.

All Rights Reserved [2014] Beverly Michaelis

Why You Should Build the Cost of Doing Business Into Your Fee

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Credit card merchant fees (“check out” fees) are back in the news with the recent preliminary class action settlement between retailers and credit card giants Visa and MasterCard. Lawyers who accept credit cards often ask whether they can pass these fees on to their clients.  It is unlikely the settlement will change the landscape for lawyers, but I’d like to set that discussion aside for a moment and focus on something more fundamental: how should lawyers treat costs not related to a specific client matter?

I have long believed that most overhead costs, including postage, photocopies, faxing, and even merchant fees should be built into the lawyer’s fee structure.  Bundling the cost of doing business into your hourly rate or flat fee just makes sense.

For the lawyer, cost accounting becomes significantly easier.  Say goodbye to:

  • Inputting client codes or making a log entry every time postage is used or a document is scanned
  • Totaling charges for each billing cycle and incorporating them into the client’s bill
  • Allocating client payments to costs and fees – in your books, the client’s account receivable, and on the client’s billing statement

Avoiding this time suck can make a world of difference in a solo’s life – especially if he or she has no staff.  Time spent tracking, totaling, billing, and allocating these costs can be used more profitably working on a client matter.

From the client’s perspective, receiving a statement with every stamp, copy, and fax itemized and billed can be very unpleasant.  Clients often feel these costs should be included in your fee, regardless of your billing practices. Ask yourself: would you rather pay one flat rate to fly from Portland, Oregon to Chicago, Illinois, or incur separate charges for airfare, fees, taxes, booking, baggage, and food?  If you are aggravated by the latter, it becomes easier to understand why clients don’t like it when lawyers pass on every penny of overhead costs in an itemized bill.

Getting back to the original subject – merchant or “check out” fees – consider the real-world effect of the preliminary Visa/MasterCard settlement:

“We have discussed the settlement with many, many merchants, and not a single merchant we have spoken to plans to surcharge,” Craig Shearman, spokesman for the National Retail Federation (NRF), said in a statement….

NBC News contacted some of the country’s largest retailers. Wal-Mart, Target, Sears and Home Depot said they have no plans to add a credit card surcharge.

“The bottom line is that … the vast majority don’t want to surcharge even if they could,” the NRF’s Shearman said.

Ed Mierzwinski, Director of Consumer Programs at U.S. PIRG agrees.

“In the brick-and-mortar world, no one who does any sort of volume business is going to want to surcharge because it will drive their customer crazy and slow down transactions,” Mierzwinski said.

Is there a lesson here for those who provide professional services?

Lawyers can charge “check out” fees to clients who pay by credit card, but it requires jumping through hurdles no one bothers with (a signed fee agreement with the client consenting to the charge accompanied by compliance with Regulation Z of the Truth-in-Lending Act.)  If it should become easier to charge clients “check out” fees in the future – as a result of this settlement (when finalized) or for other reasons – I would continue to advocate lawyers build this cost of doing business into their charge for services.  In the words of Susan Cartier Liebel, “Don’t Nickel and Dime Your Clients. Just Don’t.”

For an excellent discussion of the philosophy and practices involved in billing costs, see Billing Costs, “Fee Agreement Compendium” (Oregon State Bar 2007) available online in BarBooks.

Copyright 2013

Beverly Michaelis