Nacs v. Bd. of Governors of the Fed. Reserve Sys.

746 F.3d 474

NACS, formerly known as National Association of Convenience Stores, et al., Appellees

v.BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Appellant.

No. 13–5270.

United States Court of Appeals, District of Columbia Circuit.

Argued Jan. 17, 2014.

Decided March 21, 2014.

Appeal from the United States District Court for the District of Columbia (No. 1:11–cv–02075).

Katherine H. Wheatley, Associate General Counsel, Board of Governors of the Federal Reserve System, argued the cause for appellant. With her on the briefs were Richard M. Ashton, Deputy General Counsel, Yvonne F. Mizusawa, Senior Counsel, and Joshua P. Chadwick, Counsel.

Seth P. Waxman argued the cause for amici curiae The Clearing House Association, L.L.C., et al. in support of neither party. With him on the brief were Albinas Prizgintas, Noah A. Levine, and Alan Schoenfeld.

Shannen W. Coffin argued the cause for appellees. With him on the brief was Linda C. Bailey.

Andrew G. Celli Jr., Ilann M. Maazel, and O. Andrew F. Wilson were on the brief for amicus curiae The Retail Litigation Center, Inc. in support of appellees.

Jeffrey I. Shinder was on the brief for amici curiae 7–Eleven, Inc., et al. in support of appellees.

David A. Balto was on the brief for amicus curiae United States Senator Richard J. Durbin in support of appellees.

Before: TATEL, Circuit Judge, and EDWARDS and WILLIAMS, Senior Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge:

Combining features of credit cards and checks, debit cards have become not just the most popular noncash payment method in the United States but also a source of substantial revenue for banks and companies like Visa and MasterCard that own and operate debit card networks. In 2009 alone, debit card holders used their cards 37.6 billion times, completing transactions worth over $1.4 trillion and yielding over $20 billion in fees for banks and networks. Concerned that these fees were excessive and that merchants, who pay the fees directly, and consumers, who pay a portion of the fees indirectly in the form of higher prices, lacked any ability to resist them, Congress included a provision in the Dodd–Frank financial reform act directing the Board of Governors of the Federal Reserve System to address this perceived market failure. In response, the Board issued regulations imposing a cap on the per-transaction fees banks receive and, in an effort to force networks to compete for merchants' business, requiring that at least two networks owned and operated by different companies be able to process transactions on each debit card. Merchant groups challenged the regulations, seeking lower fees and even more network competition. The district court granted summary judgment to the merchants, concluding that the rules violate the statute's plain language. We disagree. Applying traditional tools of statutory interpretation, we hold that the Board's rules generally rest on reasonable constructions of the statute, though we remand one minor issue—the Board's treatment of so-called transactions-monitoring costs—to the Board for further explanation.

I.

Understanding this case requires looking under the hood—or, more accurately, behind the teller's window—to see what really happens when customers use their debit cards. After providing some background about debit cards and the debit card marketplace, we outline Congress's effort to solve several perceived market failures, the Board's attempt to put Congress's directives into action, and the district court's rejection of the Board's approach.

A.

We start with the basics. For purposes of this case, the term “debit card” describes both traditional debit cards, which allow cardholders to deduct money directly from their bank accounts, and prepaid cards, which come loaded with a certain amount of money that cardholders can spend down and, in some cases, replenish. Debit card transactions are typically processed using what is often called a “four party system.” The four parties are the cardholder who makes the purchase, the merchant who accepts the debit card payment, the cardholder's bank (called the “issuer” because it issues the debit card to the cardholder), and the merchant's bank (called the “acquirer” because it acquires funds from the cardholder and deposits those funds in the merchant's account). In addition, each debit transaction is processed on a particular debit card “network,” often affiliated with MasterCard or Visa. The network transmits information between the cardholder/issuer side of the transaction and the merchant/acquirer side. Issuers activate certain networks on debit cards, and only activated networks can process transactions on those cards.

Virtually all debit card transactions fall into one of two categories: personal identification number (PIN) or signature. PIN and signature transactions employ different methods of “authentication”—a process that establishes that the cardholder, and not a thief, has actually initiated the transaction. In PIN authentication, the cardholder usually enters her PIN into a terminal. In signature authentication, the cardholder usually signs a copy of the receipt. Most networks can process either PIN transactions or signature transactions, but not both. Signature networks employ infrastructure used to process credit card payments, while PIN networks employ infrastructure used by ATMs. Only about one-quarter of merchants currently accept PIN debit. Some merchants have never acquired the terminals needed for customers to enter their PINs, while others believe that signature debit better suits their business needs. More about this later. And merchants who sell online generally refuse to accept PIN debit because customers worry about providing PINs over the Internet. Merchants who do accept both PIN and signature debit often allow customers to select whether to process particular transactions on a PIN network or a signature network.

Whether PIN or signature, a debit card transaction is processed in three stages: authorization, clearance, and settlement. Authorization begins when the cardholder swipes her debit card, which sends an electronic “authorization request” to the acquirer conveying the cardholder's account information and the transaction's value. The acquirer then forwards that request along the network to the issuer. Once the issuer has determined whether the cardholder has sufficient funds in her account to complete the transaction and whether the transaction appears fraudulent, it sends a response to the merchant along the network approving or rejecting the transaction. Even if the issuer approves the transaction, that transaction still must be cleared and settled before any money changes hands.

Clearance constitutes a formal request for payment sent from the merchant on the network to the issuer. PIN transactions are authorized and cleared simultaneously: because the cardholder generally enters her PIN immediately after swiping her card, the authorization request doubles as the clearance message. Signature transactions are first authorized and subsequently cleared: because the cardholder generally signs only after the issuer has approved the transaction, the merchant must send a separate clearance message. This difference between PIN and signature processing explains why certain businesses, including car rental companies, hotels, and sit-down restaurants, often refuse to accept PIN debit. Car rental companies authorize transactions at pick-up to ensure that customers have enough money in their accounts to pay but postpone clearance to allow for the possibility that the customer might damage the vehicle or return it without a full tank of gas. Hotels authorize transactions at check-in but postpone clearance to allow for the possibility that the guest might trash the room, order room service, or abscond with the towels and robes. And sit-down restaurants authorize transactions for the full amount of the meal but postpone clearance to give diners an opportunity to add a tip.

The final debit card payment processing step, settlement, involves the actual transfer of funds from the issuer to the acquirer. After settlement, the cardholder's account has been debited, the merchant's account has been credited, and the transaction has concluded. Rather than settle transactions one-by-one, banks generally employ companies that determine each bank's net debtor/creditor position over a large number of transactions and then settle those transactions simultaneously.

Along the way, and central to this case, the parties charge each other various fees. The issuer charges the acquirer an “interchange fee,” sometimes called a “swipe fee,” which compensates the issuer for its role in processing the transaction. The network charges both the issuer and the acquirer “network processing fees,” otherwise known as “switch fees,” which compensate the network for its role in processing the transaction. Finally, the acquirer charges the merchant a “merchant discount,” the difference between the transaction's face value and the amount the acquirer actually credits the merchant's account. Because the merchant discount includes the full value of the interchange fee, the acquirer's portion of the network processing fee, other acquirer and network costs, and a markup, merchants end up paying most of the costs acquirers and issuers incur. Merchants in turn pass some of these costs along to consumers in the form of higher prices. In contrast to credit card fees, which generally represent a set percentage of the value of a transaction, debit card fees change little as price increases. Thus, a bookstore might pay the same fees to sell a $25 hardcover that Mercedes would pay to sell a $75,000 car.

Before the Board promulgated the rules challenged in this case, networks and issuers took advantage of three quirks in the debit card market to increase fees without losing much business. First, issuers had...