Nacs v. Bd. of Governors of the Fed. Reserve Sys.
| Decision Date | 31 July 2013 |
| Docket Number | Civil Case No. 11–02075 (RJL). |
| Citation | 958 F.Supp.2d 85 |
| Parties | NACS; National Retail Federation; Food Marketing Institute; Miller Oil Co.; Boscov's Department Store, LLC; and National Restaurant Association, Plaintiffs, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Defendant. |
| Court | U.S. District Court — District of Columbia |
OPINION TEXT STARTS HERE
Linda C. Bailey, Shannen W. Coffin, Steptoe & Johnson LLP, Washington, DC, for Plaintiffs.
Joshua P. Chadwick, Board of Governors of the Federal Reserve System, Katherine H. Wheatley, Yvonne F. Mizusawa, Federal Reserve Board, Washington, DC, for Defendant.
Plaintiffs NACS (formerly, the National Association of Convenience Stores), National Retail Federation (“NRF”), Food Marketing Institute (“FMI”), Miller Oil Co., Inc. (“Miller”), Boscov's Department Store, LLC (“Boscov's”) and National Restaurant Association (“NRA”) (collectively, “plaintiffs”) bring this action against the Board of Governors of the Federal Reserve System (“defendant” or “the Board”) to overturn the Board's Final Rule setting standards for debit card interchange transaction fees (“interchange fees”) and network exclusivity prohibitions. Before the Court are the parties' cross-motions for summary judgment [Dkts. 20, 23]. Upon consideration of the pleadings, oral argument, and the entire record therein, the Court concludes that the Board has clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multipleunaffiliated networks for each debit card transaction. Accordingly, the plaintiffs' motion is GRANTED and defendant's motion is DENIED.
Four of the six plaintiffs in this case are major trade associations in the retail industry. NACS is an international trade association comprised of more than 2,100 retail members and 1,600 supplier members in the convenience store industry, most located in the United States. Am. Compl. ¶ 15 [Dkt. # 18]. NRF is “the world's largest retail trade association,” representing department, specialty, discount, catalog, Internet, and independent stores, as well as chain restaurants, drug stores, and grocery stores in over 45 countries. Id. ¶ 17. FMI advocates for 1,500 food retailers and wholesalers, including large multi-store chains, regional firms, and independent supermarkets. Id. ¶ 19. NRA is the “leading national association representing th[e] [restaurant and food-service] industry, and its members account for over one-third of the industry's retail locations.” Id. ¶ 23. According to plaintiffs, these trade associations and their members accept debit card payments and therefore are directly affected by the Board's interchange fee and network non-exclusivity regulations. Id. ¶¶ 16, 18, 20, 23–25.
The remaining plaintiffs are individual retail operations. Miller is a convenience store and gasoline retailer that also sells heating oil, heating and air-conditioning service, and commercial and wholesale fuels in the United States. Id. ¶ 21. Boscov's is an in-store and online retailer with a chain of forty full-service department stores located in five states in the mid-Atlantic region. Id. ¶ 22. Both accept debit cards. See id. ¶¶ 21–22.
The Board is a federal government agency responsible for the operation of the Federal Reserve System and promulgation of our nation's banking regulations. Id. ¶ 26.
Although now ubiquitous, debit cards were first introduced as a form of payment in the United States in only the late–1960s and early–1970s. See Final Rule, Debit Card and Interchange Fees and Routing, 76 Fed.Reg. 43,394, 43,395 (July 20, 2011) (codified at 12 C.F.R. §§ 235.1–235.10) (“Final Rule”). Unlike other payment options, debit cards allow consumers to pay for goods and services at the point of sale using cash drawn directly from their bank accounts, and to withdraw and receive cash back as part of the transaction. Id. Prior to debit cards, consumers had to use paper checks or make in-person withdrawals from human bank tellers in order to access their accounts. Id.
After decades of slow growth, the volume of debit card transactions increased rapidly in the mid–1990s, as did transactions involving other forms of electronic payment such as credit cards. Id. at 43,395 & n. 5. This upsurge in debit card usage continued into the 2000s, reaching approximately 37.9 billion transactions in 2009. Id. at 43,395. By 2011, debit cards were “used in 35 percent of noncash payment transactions, and have eclipsed checks as the most frequently used noncash payment method.” Id.
Most debit card transactions involve four parties, in addition to the network that processes the transaction. Id. at 43,395 & n. 14. These parties are: (1) the cardholder (or consumer), who provides the debit card as a method of payment to a merchant; (2) the issuer (or issuing bank), which holds the consumer's account and issues the debit card to the consumer; (3) the merchant, who accepts the consumer's debit card as a method of payment; and (4) the acquirer (or acquiring bank), which receives the debit card transaction information from the merchant and facilitates the authorization, clearance, and settlement of the transaction on behalf of the merchant. Id. at 43,395–96. The network provides the software and infrastructure needed to route debit transactions; it transmits consumer account information and electronic authorization requests from the acquirer to the issuer; and it returns a message to the acquirer either authorizing or declining the transaction. See15 U.S.C. § 1693 o–2(c)(11) (defining “payment card network”); 76 Fed.Reg. at 43,396. In addition, “[b]ased on all clearing messages received in one day, the network calculates and communicates to each issuer and acquirer its net debit ... position for settlement.” 76 Fed.Reg. at 43,396.
There are two types of debit card transactions—PIN (or “personal identification number”) and signature—each of which requires its own infrastructure. In a PIN transaction, the consumer enters a number to authorize the transaction, and the data is carried in a single message over a system evolved from automated teller machine (“ATM”) networks. Id. at 43,395. In a signature transaction, the consumer authenticates the transaction by signing something (like a receipt), and the data is routed over a dual-message system utilizing credit card networks. Id.1 “Increasingly, however, cardholders authorize ‘signature’ debit transactions without a signature and, sometimes, may authorize a TIN' debit transaction without a PIN.” 76 Fed.Reg. at 43,395 & n. 10.
The vast majority of debit cards (excluding prepaid cards) support authentication by both PIN and signature, but which one is used in a given transaction depends in large part on the nature of the transaction and the merchant's acceptance policy. Id. at 43,395. For instance, hotel stays and car rentals are not easily processed on PIN-based systems because the transaction amount is unknown at the time of authorization. Id. Internet, telephone, and mail-based merchants also generally do not accept PIN transactions. Id. Of the eight million merchants in the United States that accept debit cards, the Board estimates that only one-quarter have the ability to accept PIN transactions. Id.
There are several fees associated with debit card transactions. The largest is the interchange fee, which is set by the network and paid by the acquirer to the issuer to compensate the latter for its role in the transaction. Id. at 43,396; see also§ 1693 o–2(c)(8) (defining “interchange transaction fee”). The network also charges acquirers and issuers a switch fee to cover its own transaction-processing costs. 76 Fed.Reg. at 43,396;see also§ 1693 o–2(c)(10) (defining “network fee”). Once these fees are assessed, the acquirer credits the merchant's account for the value of its transactions, less a “merchant discount,” which includes the interchange fee, network switch fees charged to the acquirer, other acquirer costs, and a markup. 76 Fed.Reg. at 43, 396.
When PIN debit cards were first introduced, most regional networks set their interchange rates at “par,” offering no cost subsidization to either merchants or issuers.2 Some networks, however, implemented “reverse” interchange fees, which issuers paid to acquirers to offset the cost to merchants of installing terminals and other infrastructure needed to accept PIN at the point of sale. 76 Fed.Reg. at 43,396; Salop, supra note 1, ¶ 21; Mott, supra note 2, ¶ 7. Because this model eliminated the costs associated with paper checks and human bank tellers, issuers could provide debit services at a profit, even without collecting interchange fees.3 Furthermore, issuers touted the convenience of PIN-debit to their customers, and customers in turn maintained higher account balances, which issuers could loan out at a profit. Mott, supra note 2, ¶ 3.
As debit cards became more popular, interchange fee rates and the direction in which the fees flowed began to shift. See76 Fed.Reg. at 43,396. By the early–2000s, acquirers were paying issuers ever-increasing interchange fees for PIN transactions. See id. Interchange fees for signature transactions, meanwhile, were modeled on credit card fees and were even higher than for PIN. Id.; Salop, supra note 1, ¶ 23.
In recent years, interchange fees have climbed sharply with PIN outpacing signature debit fees. From 1998 to 2006, merchants faced a 234 percent increase in interchange fees for PIN transactions, Mott, supra note 2, ¶ 24, and by 2009, interchange fee revenue for debit cards totaled $16.2 billion, 76 Fed.Reg. at 43,396. For most retailers, debit card fees represent the single largest operating expense behind payroll.4
Because debit card transaction fees, including interchange fees, are set by the relevant network and paid by the...
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