brief amici curiae of 7-eleven, inc., et al. in support

8/11/2019 Brief Amici Curiae of 7-Eleven, Inc., Et Al. in Support

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No. 14-200

IN THE

Supreme Court of the United States

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE

DISTRICT OF COLUMBIA CIRCUIT

BRIEF AMICI CURIAE OF 7-ELEVEN, INC.,

ARBY’S RESTAURANT GROUP, INC., BROOKSHIRE

GROCERY COMPANY, CKE RESTAURANTS

HOLDINGS, INC., STARBUCKS CORPORATION,AND THE WENDY’S COMPANY

IN SUPPORT OF THE PETITIONER

255275

NACS (FORMERLY KNOWN AS NATIONAL ASSOCIATION OF CONVENIENCE STORES),

NATIONAL RETAIL FEDERATION, FOODMARKETING INSTITUTE, MILLER OIL CO., INC.,

BOSCOV’S DEPARTMENT STORE, LLC, ANDNATIONAL RESTAURANT ASSOCIATION,

Petitioners,v.

BOARD OF GOVERNORS OF THE FEDERALRESERVE SYSTEM, Respondent.

JEFFREY I. SHINDER

Counsel of RecordO WEN GLIST

Of CounselCONSTANTINE C ANNON LLP335 Madison Avenue

New York, New York 10017(212) 350-2700 [email protected]

Attorneys for Amici Curiae

September 19, 2014



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TABLE OF CONTENTS

Page

TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . i

TABLE OF CITED AUTHORITIES . . . . . . . . . . . . . . iii

STATEMENT OF INTEREST OF AMICI. . . . . . . . . .1

SUMMARY OF ARGUMENT . . . . . . . . . . . . . . . . . . . . .6

BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

I. Market Failure in the Debit-Card MarketEnabled Interchange Fees on DebitTransactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10

II. Merchants Have No Choice But to PayThese Supracompetitive Fees . . . . . . . . . . . . . . .13

III. The Durbin Amendment . . . . . . . . . . . . . . . . . . .15

IV. The NPRM and Comments Regarding CostsNot Specific to a Particular Transaction andthe Effects on Small-Ticket Transactions . . . . . 16

V. The Final Ru le and the Impact onSmall-Ticket Merchants . . . . . . . . . . . . . . . . . . . .17

ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

I. The Final Rule Is Not Entitled to Deference . . . . .23



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Table of Contents

Page

A. The Final Rule Led to SubstantialIncreases in Interchange Fees inConflict with the Statute . . . . . . . . . . . . . . .24

B. As the Board Acknowledged, It Was Not Engaged in Ratemaking. . . . . . . . . . . .25

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26



iii

TABLE OF CITED AUTHORITIES

Page

CASES

Chevron U.S.A., Inc. v. NRDC ,467 U.S. 837 (1984). . . . . . . . . . . . . . . . . . . . . 23, 24, 26

In re Visa Check/MasterMoney Antitrust Litig.,

297 F. Supp. 2d 503 (E.D.N.Y. 2003) . . . . . . . . . . . . .12

In re Visa Check/MasterMoney Antitrust Litig.,No. 96 Civ. 5238 (JG), 2003 WL 1712568(E.D.N.Y. Apr. 1, 2003) . . . . . . . . . . . . . . . . . . . . . . . .15

Marsh v. Or. Natural Res. Council,490 U.S. 360 (1989). . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,

463 U.S. 29 (1983). . . . . . . . . . . . . . . . . . . . . . . . . . . . .23

Nat’l R.R. Passenger Corp. v. Boston & Me. Corp.,503 U.S. 407 (1992). . . . . . . . . . . . . . . . . . . . . . . . . . . .24

United States v. Visa U.S.A. Inc.,163 F. Supp. 2d 322 (S.D.N.Y. 2001), aff’d,344 F.3d 229 (2d Cir. 2003) . . . . . . . . . . . . . . . . . . . . .14



iv

Cited Authorities

Page

STATUTES

15 U.S.C. § 1693o-2 . . . . . . . . . . . . . . . . . . . . . . . . . passim

15 U.S.C. § 1693o-2(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . .16

15 U.S.C. § 1693o-2(a)(4)(A) . . . . . . . . . . . . . . . . . . . . . . .16

15 U.S.C. § 1693o-2(a)(4)(B)(i) . . . . . . . . . . . . . . . . . . . . .16

15 U.S.C. § 1693o-2(a)(4)(B)(ii) . . . . . . . . . . . . . . . . . . . . .16

OTHER AUTHORITIES

75 Fed. Reg. 81,722 . . . . . . . . . . . . . . . . . . . . . .9, 16, 18, 24

75 Fed. Reg. 81,733 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

76 Fed. Reg. 43,394 . . . . . . . . . . . . . . . . . . . . . . . . . passim

76 Fed. Reg. 43,427 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

76 Fed. Reg. 43,434 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

76 Fed. Reg. 43,462 . . . . . . . . . . . . . . . . . . . . . . . . . . . .9, 18

156 Cong. Rec. S3,696 (daily ed. May 13, 2010) . . . . . . . 15

156 Cong. Rec. S5,802 (daily ed. July 14, 2010) . . . . .7, 21



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STATEMENT OF INTEREST OF AMICI1

Anyone who has used plastic to pay for a cup of coffeeor a candy bar would not be surprised to learn that small-ticket transactions make up the fastest growing segmentin the debit market. Small-ticket transactions—under$15—have grown to 43% of debit transactions, and withcurrent growth rates, may soon become the majority ofall debit transactions.2 After the Board’s rulemaking at

issue in this Petition, fees for small-ticket transactions arenow much more expensive than they were before Congressenacted reform of the debit-interchange system intendedto lower debit-interchange rates.

1. Counsel of record received timely notice of the intent tofile this brief under Rule 37.2(a), and the parties have consentedto its filing. No counsel for a party authored this brief in whole orin part, and no counsel or party made a monetary contributionintended to fund the preparation or submission of this brief. No

person other than amici curiae, their respective members, ortheir counsel made a monetary contribution to its preparation orsubmission.

2. According to research from the Federal Reserve Board(the “Board”) released in July 2014, small-ticket transactionsaccounted for 43% of all debit transactions in 2012, up from41.4% in 2009. While debit transactions under $15 increasedby 28.7% from 2009 to 2012, debit transactions of $15 or moreincreased by only 20.7% during the same period. The 2013 Federal Reserve Payments Study (July 2014) at 26 (Exhibit 7) and 28-29, available at http://www.frbservices.org/ files/communications/ pdf/general/2013_fed_res_paymt_study_detailed_rpt.pdf; The 2010 Federal Reserve Payments Study (Released April 5, 2011)at 58-59, 71 (Exhibit 103), available at https://www.frbservices.org/ files/communications/pdf/research/2010_payments_study.pdf.



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In 2012, there were more than 20 billion small-ticketdebit transactions. Hundreds of millions of these sales tookplace at Amici 7-Eleven, Inc., Arby’s Restaurant Group,Inc., Brookshire Grocery Company, CKE RestaurantsHoldings, Inc. (Carl’s Jr. and Hardee’s), StarbucksCorporation, and The Wendy’s Company (“Amici”).

Amici are at the center of this fastest-growingmerchant segment for debit transactions, as customers

increasingly convert small transactions from cash todebit for convenience. Amici’s operations include tensof thousands of small business franchises and licensedstores—convenience and grocery stores, quick-servicerestaurants (“QSRs”), and specialty coffee shops—thataccept high volumes of small ticket debit transactions.These transactions are the “holy grail” of debit growth,as their volumes have tripled in less than a decade.3

Amic i, and all similarly- sit uated small-ticketmerchants (including such widely-used services as transit

authorities, vending operators, and newsstands), have asignificant stake in this case because of the substantialfinancial harm they are suffering from the rulemaking at

3. According to MasterCard, “‘[t]he holy grail’ for increasingdebit card purchase volume is increasing small-ticket purchasesacross a broad array of everyday expenditures.” Kate Fitzgerald, Despite Durbin, Debit Sti ll Of fers Issuers Many Benefi ts , MasterCard Exec Says, PaymentsSource (May 1, 2012), DistrictCourt Dkt. No. 30 at 42-43. And as Visa noted in commentssubmitted to the Board, “[t]oday, more than 30% of Visa Check

Card (or signature) transactions are at relatively small ticketsizes.” Comments of Visa Inc. at 7 n.16 (Feb. 22, 2011), available athttp://www.federalreserve.gov/SECRS/2011/March/20110304/R-1404/R-1404_022211_67810_571316902268_1.pdf.



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issue. The Board’s Final Rule, Regulation II, Debit Card Interchange Fees and Routing, Final Rule, 76 Fed. Reg.43,394 (July 20, 2011) (“Final Rule”) enabled the dominantdebit networks to impose substantial price increases fordebit-interchange fees on small-ticket transactions—increases that have hit Amici, along with their franchiseesand licensees, especially hard during a time of economicdistress. The harm to Amici caused by these increases will only intensify over time because Amici are in the

fastest-growing debit segment. Amici have no choice butto pay these interchange fee increases because they mustaccept debit cards to remain in business.

The exorbitant debit-interchange fees that Amici arenow being forced to pay are concrete examples of not onlythe market failure that motivated Congress to regulatedebit interchange, but also the Board’s failure to followCongress’s clear directives to implement regulationsto prevent further exercises of market power by thedominant debit networks.

In fact, rather than putting in place regulations that would have restrained further exercises of market powerby the networks and the banks, the Board empoweredthem to implement price increases that, depending on thetransaction amount, range from 15 percent to more than200 percent on the vast majority of debit transactionsaccepted by small-ticket merchants like Amici.

The Board enabled this abuse of market power eventhough it received comments from some Amici and their

trade association representatives, advising the Boardthat its initial proposal—flawed but better than the FinalRule—could result in a substantial price increase on many



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small-ticket transactions. The Board also disregardednumerous submissions that explained that, given thenetworks’ market power over merchants, the Board couldnot assume that network competition for merchants wouldprevent debit interchange from increasing after the FinalRule went into effect.

Several Amici participated in proceedings at theDistrict Court and the Court of Appeals, submitting

briefing (cited by the District Court as the “7-Eleven Amicus Br.,” Pet. App. 71a, 101a) and detailed declarationsin support of Petitioners.

7-Eleven, Inc. (“7-Eleven”) is the world’s largestconvenience retailer. 7-Eleven operates, franchises, orlicenses approximately 8,170 convenience stores in theU.S. 7-Eleven has more than 5,800 franchisees operatingat 6,250 locations. A typical 7-Eleven franchisee owns asingle store and employs 8 to 10 people.

In 2013, some 76% of 7-Eleven’s 760 million payment-card transactions were debit transactions. For sales inside7-Eleven stores, debit represents 82% of payment-cardtransactions, and the average debit-card transaction isless than $10—and of course, many transactions fall wellbelow that level.4

Arby ’s Restaurant Group, Inc. (“Arby’s”) is thesecond largest quick-service sandwich chain in the U.S., with more than 3,200 restaurants system-wide. Arby’s

4. According to data collected by Petitioner NACS, over thelast three years, average spend at convenience stores, excludingfuel, ranged from $5.70 to $6.59.



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currently operates approximately 940 quick servicerestaurants and has approximately 360 franchiseesoperating approximately 2,291 additional quick servicerestaurant franchises in the U.S. Arby’s payment-cardtransactions represent 45% of all sales transactionsannually. Debit transactions represent 78% of overall cardtransactions to date in 2014, and some 80% of Arby’s debitcard transactions are small-ticket transactions under $15. Arby’s restaurants paid an average of approximately 20%

more in debit interchange fees after the Board’s FinalRule was adopted.

Brookshire Grocery Company (“Brookshire”) is aTexas-based regional food chain that has been providingfamilies with quality foods since 1928. Brookshireoperates more than 150 store locations under the bannersof Brookshire’s Food Stores, Super 1 Foods Stores, andFRESH by Brookshire’s. Brookshire processes some 30million debit transactions each year. These transactionscost nearly twice as much as they should because the

Board allowed banks to recover their fi xed costs underthe Final Rule.

CKE Restaurants Holdings, Inc. (“CKE”), throughits subsidiaries, owns, operates, and/or franchises over3,500 quick-service restaurants world-wide, primarilyunder the brand names Carl’s Jr. and Hardee’s. CKE hasover 2,000 domestic franchise restaurants owned by morethan 200 franchisees.

At Carl’s Jr., payment cards comprised approximately

45% of all transactions in fiscal year 2014. At Hardee’s,payment-card transactions accounted for approximately40% of sales during the same time frame. In the wake of



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signature-debit interchange-fee increases after the FinalRule at issue in this Petition, CKE as well as its Hardee’sand Carl’s Jr. franchisees are together paying more than$4 million annually in higher signature-debit-interchangefees.

Starbucks Corporation (“Starbucks”) has more than20,000 stores in 65 countries, and is the premier roasterand retailer of specialty coffee in the world. In the U.S.,

Starbucks accepts payment cards across most aspects ofits business, including at nearly 11,000 company-ownedor licensed stores. The vast majority of transactions atStarbucks are below $12. Debit transactions comprise71% of non-cash, in-store debit and credit transactions,including activations and reloads of Starbucks Cards.

The Wendy’s Company (“Wendy’s”) is the world’sthird largest quick-service hamburger company. Thereare close to 5,700 Wendy’s restaurants in operation inthe U.S.—nearly 4,900 operated by some 450 Wendy’s

franchisees. Because debit cards are used for the vast majority of payment card transactions, Wendy’srestaurants are paying an estimated $3,500 per store peryear in additional debit-interchange fees—an increase ofapproximately 25% in debit-interchange fees following theFinal Rule at issue in this Petition.

SUMMARY OF ARGUMENT

In July 2010, Congress responded to the persistentfailure of competition in the debit-card market and the

rapid rise of debit-card fees by enacting comprehensivereform of the debit-card system. See Section 920 of theElectronic Fund Transfer Act, codified at 15 U.S.C.§ 1693o-2 (the “Durbin Amendment”).



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The text, structure, and underlying purpose of theDurbin Amendment intended to restrain and eventuallyreduce the market power that had crippled competition inthe debit-card industry for decades. Its principal author,Senator Richard J. Durbin, made this clear on the Senatefloor:

For years, Visa and MasterCard, and their bigbank backers, have unilaterally fi xed prices

on the fees small businesses pay every timethey accept a debit card from a customer. Thetwo giant card networks control 80 percentof the debit card market—that is Visa andMasterCard. And it is no surprise that debitinterchange fees have risen, even as the priceof processing the transaction has fallen. Theycan impose these prices and say to the localbusinessperson: Take it or leave it.…

156 Cong. Rec. S5,802 (daily ed. July 14, 2010).

The Board ignored Congress’s directive to restrainthe dominant networks’ ability to impose “take it or leaveit” pricing. After announcing a proposed rule limitingbanks to recover their “incremental costs,” the Boardreversed course in the face of an extraordinary lobbyingeffort.5 The Board’s Final Rule allowed banks to recoverfi xed costs that are not “specific” to any “particular”

5. See generally Stephen Haber & Ross Levine, The Federal Reserve’s Too Cozy Relations With Banks, Wall St. J. (Sept. 9,

2014); see also Blake Ellis, Why Banks Are Fighting Over 12 Cents,CNN Money (Mar. 11, 2011), http://money.cnn.com/2011/03/11/ pf/debit_interchange_fees/ (“[T]he battle is getting pitched andbanks are spending huge sums lobbying against” the 12-cent cap.).



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transaction, as required by the statute. 76 Fed. Reg. at43,427.

As the District Court held, the Board “completelymisunderstood the Durbin Amendment’s statutorydirective and interpreted the law in ways that were clearlyforeclosed by Congress.” Pet. App. 113a. There is no betterillustration of the Board’s complete misunderstandingof the Durbin Amendment and the implications of its

error than the impact of the Final Rule on small-ticketmerchants like Amici. Indeed, the District Court citedthe increase in fees on small-ticket transactions as a keyexample of how the Board flouted the will of Congress,holding that “Congress did not empower the Board tomake policy judgments that would result in significantlyhigher interchange rates.” Pet. App. 101a.

Remarkably, at the Court of Appeals, the Board madeno attempt to justify the Final Rule’s impact on small-ticket transactions, the fastest growing segment in the

debit-card market—the “holy grail” of debit growth. Yetthe Court of Appeals ignored this issue and “afford[ed]”the Board the “special deference” limited to agenciesengaged in ratemaking proceedings—authority the Boarditself rejected in response to numerous comments urgingratemaking jurisprudence upon the Board. See 76 Fed.Reg. 43,434.

If the Final Rule is allowed to stand, the intensifyinggrowth in small-ticket debit transactions—currently 43%and perhaps soon a majority of all debit transactions—

threatens to subvert the will of Congress to restrain therise of debit fees, as more and more debit transactionseach year will be more expensive with regulation thanthey would have been without it.



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The Board enabled this massive price increase inthis growing sector despite warnings from Amici andothers in detailed comments responding to the Board’sNotice of Proposed Rulemaking ( Regulation II, DebitCard Interchange Fees and Routing, 75 Fed. Reg. 81,722(proposed Dec. 28, 2010)) (“NPRM”). These commentsurged the Board to reduce the inflated caps proposed inthe NPRM to ensure that the Final Rule did not implicitlyendorse a price increase.

When the Final Rule increased the NPRM’s cap oninterchange fees by approximately 100 to 243%, the Boarddemonstrated its complete disregard for the purpose ofthe Durbin Amendment—to restrain exercises of marketpower in a failed market. The Board even admitted itsactions could cause a price increase, noting that “[a]lthoughit is possible that merchants with a large proportion ofsmall-ticket transactions may experience an increase intotal interchange fees, the rule does not require networksto raise the current interchange fees for very-small-value

transactions.” 76 Fed. Reg. at 43,462 (emphasis added). Without the restraint the Durbin Amendment was enactedto impose, the dominant networks in the broken debit-card market responded swiftly and predictably by raisinginterchange prices to the cap for small-ticket transactions.

The Final Rule thus resulted in the imposition on Amici and similarly-situated small-ticket merchants of the very “take it or leave it” pricing that Congress enactedthe Durbin Amendment to prevent, as each of the debitnetworks quickly implemented the highest possible fees

for regulated small-ticket transactions. At the end ofthe day, a statute designed to constrain market power was somehow interpreted by the Board to empower



10

it. Against this backdrop, the District Court correctlyconcluded that the Board “clearly disregarded Congress’sstatutory intent,” Pet. App. 47a, by adopting a rule thatled to increased interchange fees in the fastest-growingdebit sector.

BACKGROUND

Amici focus on the facts most germane to the market

failures that motivated the passage of the Durbin Amendment.

I. Market Failure in the Debit-Card Market Enabled

Interchange Fees on Debit Transactions

The debit-card system in the U.S. is the productof investments made by each of the system’s primarystakeholders, including merchants that invested in theinfrastructure necessary to accept debit-card payments,issuers that issued the cards to cardholders, and the

networks and processors that built the infrastructurethat linked merchants and issuers and charged them forsuch services. The system allows issuing banks to earn areasonable return on debit cards without any interchangerevenue. Pet. App. 52a, JA256 ¶ 3, JA270-72 ¶¶ 29-31,JA318-21 ¶¶ 60-68.6

When banks in the U.S. began to issue debit cardsin the 1980s, they received no interchange revenue, andin many cases paid “reverse” or “negative” interchangeto merchants. Pet. App. 51a-52a, JA258 ¶ 7, JA304 ¶ 21,

6. Citations to “JA” are to the Joint Appendix in the Courtof Appeals, USCA Case #13-5270 Doc. No. 1462209.



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JA313 ¶ 45. They did so because debit cards deepenedtheir relationships with customers, resulting in customerscarrying higher balances and/or purchasing otherservices from banks. Pet. App. 52a, JA256 ¶ 3, JA270-72¶¶ 29-31. Debit cards also made banking more ef ficientby replacing inef ficient check and cash transactions. Pet. App. 52a, JA256 ¶ 3, JA272-73 ¶ 32, JA304 ¶ 21, JA313¶ 45. Interchange was not necessary to motivate bankissuance of debit cards in the U.S., and debit-card usage

has prevailed around the world without interchange forthe same reasons it was initially successful here. Pet. App.52a, JA270-72 ¶¶ 29-31, JA318-21 ¶¶ 60-68.

In the U.S., the no-interchange (i.e., at-par) modelprevailed until the early 1990s, a period that saw widespread expansion of debit-card services in the U.S.7 At-par pricing was the norm until Visa and MasterCardand their bank owner/members leveraged their powerin the credit-card market to dominate the debit market.JA260-62 ¶¶ 12-16. Beginning in the early 1990s, the

dominant networks began to implement and enforce astrategy to require merchants to pay high ad valoremdebit interchange through “Honor All Cards” rules thatforced merchants to accept signature-debit cards as acondition of accepting the networks’ dominant creditcards. Pet. App. 55a, JA260-62 ¶¶ 12-16, JA305 ¶ 24. Thenetworks set the same or similar interchange rates fordebit-card transactions as for credit-card transactions,and merchants had to pay these fees. Pet. App. 52a,JA260-62 ¶¶ 12-16, JA304 ¶ 23. The networks then usedthe lucrative interchange stream created by this practice

7. JA304 ¶ 21, JA313 ¶ 45, JA257-59 ¶¶ 6-9, JA260 ¶ 11,JA261-62 ¶¶ 14-16.



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to reward their bank owners and entrench their owndominance in the debit market.8

The dominant networks reinforced the strategy byeliminating routing options on debit cards. When debitcards began to take hold in the 1980s and early 1990s,they typically carried two or more PIN-debit networkson the cards, JA306-07 ¶ 30, giving merchants thataccepted PIN debit the ability to route transactions to

cheaper networks and thereby control pricing to somedegree. Visa and MasterCard rules barred (and still bar)competing signature-debit functionality on the card and,thus, they deprived the much larger universe of signature-accepting merchants from having such options. Pet. App.56a, JA306-07 ¶ 30, JA352 ¶ 153. Visa and MasterCardalso used exclusive deals with the large issuing banks toeliminate the PIN-debit options that were once on manydebit cards. Pet. App. 56a, JA268-69 ¶¶ 25-27, JA306-07¶ 30, JA311 ¶ 39, JA351-53 ¶¶ 152-57. These exclusive dealsprevented merchants from responding to PIN-debit price

increases from Visa’s Interlink network by threateningto drop the network, because that would only drive more volume to signature debit. These arrangements shoredup the networks’ ability to increase debit interchangebecause merchants could not use routing strategies toreign in both signature- and PIN-debit interchange. Pet. App. 56a. As banks became more accustomed to receivinghigh interchange for both signature- and PIN-debittransactions, the dynamic of merchants being required

8. Tying debit-card acceptance to credit-card acceptance

ended in 2004 as a result of an antitrust lawsuit that settled fora complete rescission of the tying arrangement and $3 billion indamages. In re Visa Check/MasterMoney Antitrust Litig., 297 F.Supp. 2d 503 (E.D.N.Y. 2003).



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to pay ever-increasing interchange rates to underwritethe networks’ need to reward the banks became the normfor this industry.9 The result was constant price increasesthroughout the 2000s, primarily in PIN debit, Pet. App.53a, 55a, JA266-70 ¶¶ 22-28, until Congress stepped in with the Durbin Amendment.

II. Merchants Have No Choice But to Pay These

Supracompetitive Fees

Merchants have no choice but to accept debit cardsbecause rejecting them would severely harm merchants’operations. Both the District Court and the Court of Appeals acknowledged this basic fact. See Pet. App. 8a(“Merchants were therefore stuck paying whatever fees Visa and MasterCard chose to set, unless they refusedto accept any Visa and MasterCard credit and signaturedebit cards—hardly a realistic option for most merchantsgiven the popularity of plastic.”); Pet. App. 54(a).

The experience of Amici convenience-store, QSR,grocery, and coffee-shop sectors highlights this marketfailure. Because of their low margins and smaller tickets,the majority of these merchants did not accept paymentcards until the early-to-mid 2000s, well after othermerchant segments began to accept plastic.10 At the

9. See Pet. App. 54a and n.7, JA260-70 ¶¶ 12-28, JA296-97 ¶ 4,JA301 ¶ 11, JA305 ¶ 24, JA308 ¶ 33, JA312-13 ¶¶ 43-44, JA316-17¶ 55, JA347 ¶ 139, JA349-50 ¶ 145.

10. Wendy’s began accepting payment cards in 2004, andtoday payment-card transactions account for 47% of overall salestransactions. Hardee’s started in 2003 and, when the program wasfully rolled out, payment cards accounted for 2% of sales. Hardee’s



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outset, the networks extended “incentive” interchangerates to make acceptance cost-effective. Within a fewyears after introducing plastic to their customers, manysmall-ticket merchants experienced massive growth incard-based transactions, with the vast majority of thatgrowth in debit cards.11 With such volumes, conveniencestores, QSRs, and coffee shops (and other small-ticketmerchants) had no choice but to accept these transactionsto remain competitive, even when the incentive rates were

replaced with higher prices over time. This has happenedto every other merchant segment that widely accepts debitcards. Once these cards gain widespread acceptance anduse, merchants cannot stop taking them without causingsignificant harm to their businesses. That gives thenetworks and the banks the power to raise interchangefees to merchants, and they have wielded that powerliberally over the past twenty years, raising rates aftermerchants begin acceptance at incentive rates and canno longer stop taking plastic. The District Court and theCourt of Appeals were just the latest courts to recognize

this phenomenon; others have repeatedly found that theleading networks have market power over merchants.12

payment-card transactions now account for 40% of overall salestransactions.

11. For example, at Arby’s, 35% of all sales transactionsare by debit card. Debit comprised the vast majority—between70 and 80 percent—of all payment-card transactions at 7-Eleven, Arby’s, and Starbucks.

12. In United States v. Visa U.S.A. Inc., 163 F. Supp. 2d

322, 340 (S.D.N.Y. 2001), aff’d 344 F.3d 229 (2d Cir. 2003), thecourt found that “merchants…cannot refuse to accept Visa andMasterCard even in the face of significant price increases becausethe cards are such preferred payment methods that customers



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III. The Durbin Amendment

The Durbin Amendment was passed as a directresponse to this persistent market failure. As SenatorDurbin stated:

The credit and debit card markets are notnormal. Visa and MasterCard unilaterallyset interchange fee rates that apply to all

banks within their card networks. There is nonegotiation between the banks and merchantsover reducing interchange rates…. They setthe rules, they fi x the fees, take it or leave it.…

What can businesses do to stop these risinginterchange fees? Almost nothing. Some—veryrarely—businesses say they do not acceptcredit or debit cards, but the vast overwhelmingnumber of businesses do. They have to. It is partof doing business in America.

Visa and MasterCard have 80 percent of thecredit and debit market. Merchants have to usethem. They tell the merchants: If you want totake our card, you live with the fees we charge.That is not a competitive situation at all.

156 Cong. Rec. S3,696 (daily ed. May 13, 2010).

To restrain the networks from exercising marketpower going forward, the Durbin Amendment requires

would choose not to shop at merchants who do not accept them.” See also In re Visa Check/MasterMoney Antitrust Litig., No. 96Civ. 5238 (JG), 2003 WL 1712568, *4 (E.D.N.Y. Apr. 1, 2003).



16

that interchange fees “shall be reasonable and proportionalto the cost incurred by the issuer with respect to thetransaction.” § 1693o-2(a)(2). The Durbin Amendmentrequires that the Board consider the “functionalsimilarity between (i) electronic debit transactions; and (ii)checking transactions that are required…to clear at par.”§ 1693o-2(a)(4)(A). Moreover, the statute requires theBoard to consider “the incremental cost incurred byan issuer for the role of the issuer in the authorization,

clearance, or settlement of a particular electronic debittransaction,” but not “other costs incurred by an issuer which are not specific to a particular electronic debittransaction.” § 1693o-2(a)(4)(B)(i) and (ii).

IV. The NPRM and Comments Regarding Costs Not

Specific to a Particular Transaction and the Effects

on Small-Ticket Transactions

In December 2010, the Board released the NPRMsetting forth proposals regarding the regulation of debit

interchange—including interchange fees ranging from$0.07 to $0.12—and network routing restrictions.

The Board received detailed comments frommerchants stating that the final rule should be limited toauthorization, clearance, and settlement costs “specific toa particular transaction” in light of the clear language ofthe statute and its purpose. These comments specificallyurged the Board not to embrace an invented category ofissuer costs that were supposedly “specific to debit cardtransactions” as a whole yet not related to authorization,

clearance, and settlement costs.13

13. Se e , e .g ., Correspondence from the MerchantsPayments Coalition at 4 (Dec. 1, 2010), available at http://



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The Board also received detailed comments fromsmall-ticket merchants, such as Amicus Wendy’s, amongothers, warning that the rule’s per-transaction caps would actually increase prices for certain small-tickettransactions. 14 These submissions advised that flatinterchange fees can be especially harmful to this fastest-growing debit segment because as transaction sizesdecrease, the cost per transaction increases.

V. The Final Rule and the Impact on Small-TicketMerchants

After being warned that a $0.12 cap would raiseinterchange fees for debit transactions below $5, the Boardultimately made things much worse by enabling higherfees for transactions below $12 by increasing the maximuminterchange fee to $0.21 plus 5 basis points of the value

www.federa lre serve .g ov/new sevents/r r-commpublic /mpc_correspondence_2010_20101130.pdf (responding to suggestionsof a third category of costs by Visa and Bank of America).

14. See, e.g., Wendy’s Comments (Feb. 22, 2011); McDonald’sComments (Feb. 22, 2011); International Franchise Association/ National Council of Chain Restaurants Comments (Feb. 22, 2011)at 6; National Restaurant Association Comments at 2-3. Even Visaadmitted that the initial proposal would raise certain small-ticketpricing, suggesting that merchants such as Amici “may find itimpossible or uneconomic to continue to accept transactions witha $0.12 interchange fee.” Visa Comment Letter at 7, available athttp://www.federalreserve.gov/SECRS/2011/March/20110304/R-1404/R-1404_022211_67810_571316902268_1.pdf . Tellingly, Visa’s

prediction that small-ticket merchants would stop acceptinguneconomic small-ticket transactions did not come to pass because,in the failed marketplace, small-ticket merchants must acceptthese transactions to remain competitive.



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of the transaction. This translates to an interchange feeof up to about $0.24 for the average debit transaction (of$38), an increase of 200 to 343% to fees under the NPRM.Importantly, the range of allowable interchange fees underthe Final Rule enabled price increases over pre-Durbinrates on all small-ticket debit transactions under $12.

In configuring the Final Rule, the Board disregardedthe comments it received from small-ticket merchants and

their representatives. Instead, the Board noted weaklythat, “[a]lthough it is possible that merchants with a largeproportion of small-ticket transactions may experiencean increase in total interchange fees, the rule does notrequire networks to raise the current interchange feesfor very-small-value transactions.” 76 Fed. Reg. at 43,462(emphasis added). Against the backdrop of the well-documented market failure that motivated the passageof the Durbin Amendment, the Board did not need to“require” the networks to raise price. Once the Boardenabled a price increase, the logic of a non-competitive

marketplace dictated that the networks would capitalizeon the improper windfall the Board gave them.

And they did. As predicted, within two months of theFinal Rule, the debit networks announced they would pricedebit transactions at the cap.15 As the chart below shows,

15. First, MasterCard raised rates to the cap, and afterannouncing only a modest increase, Visa quickly “matchedMasterCard by issuing a revised schedule replacing the small-ticket rate announced in August [2011] with the Fed’s rate for

regulated issuers, no matter the size of the transaction.” Applyingthe Durbin Maximum, Visa and MasterCard Could Squash SmallTickets, Digital Transactions News (Sept. 27, 2011), available at http://www.digitaltransactions.net/news/story/3217.



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as a result of the Final Rule, the vast majority of small-ticket debit transactions now incur higher fees.

These price increases threaten to swallow the Durbin

Amendment due to the rapid growth of small-tickettransactions. Every year an increasing percentage ofdebit volume in the U.S. is consummated at small-ticketlevels. As a result, all regulated debit transactions below$12—the “holy grail” of debit-card growth—becamesubstantially more expensive than before the FinalRule. As reflected in the chart below, the interchangefee on a $10 debit transaction is now 15% higher, whereasthe interchange fee on a $2 debit transaction is now a whopping 211% more expensive than before the Durbin Amendment.



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In a few short years, debit cards have become thefastest-growing tender type at small-ticket merchants,often comprising more than 35 percent of their overallsales transactions.16 The vast majority of these merchants’

debit-card volumes are consummated at transaction sizesbelow $12 and, thus, they are now paying higher debitinterchange as a result of the Final Rule. Critically, thesepercentages are poised to increase every year as moreand more consumers switch from cash to debit cards tomake small-ticket purchases.

These price increases for regulated debit transactions—perversely, after the Final Rule, unregulated transactionsare cheaper—are harming hundreds of thousands ofsmall businesses across the country, in contrast to theclear intent of Congress to protect these businesses. See

16. See supra note 11.



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156 Cong. Rec. S5,802 (daily ed. July 14, 2010) (“[A]sk arestaurant, a business, a grocery store in Iowa, in Illinois,or in New Mexico what is the biggest pain in the neck theyare running into, and they will tell you that on the shortlist is the money they have to pay to Visa and MasterCardand other credit card and debit card companies every timea customer uses a card.”). Amici often sell to consumersthrough franchisees or licensees, which are almost alwayssmall businesses.17 For example:

Wendy’s stores are paying an average of $3,500per store per year in additional debit-interchangefees.

Hardee’s and Carl’s Jr.’s restaurants are togetherpaying more than $4 million annually in higherdebit-interchange fees because of the Final Rule.

In 2012, there were more than 20 billion debit transactionsof less than $15, transactions which may soon become the

majority of all debit transactions. Amici alone accountfor hundreds of millions of such transactions each year,transactions now subject to even higher interchange feesafter the Board’s contravention of the Durbin Amendment.

ARGUMENT

Confronted with Congress’s clear directive to remedythe failure of competition in the debit market, the Board

17. In the U.S., CKE Restaurants has some 2,000 franchisesowned by more than 200 franchisees; Wendy’s has approximately4,900 franchises operated by about 450 franchisees; and 7-Elevenhas more than 5,800 franchisees operating 6,250 stores.



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ignored the text of the Durbin Amendment and itsunderlying purpose. Instead, it knowingly endorsed aprice increase ranging from 15% to more than 200% onthe fastest-growing segment of debit transactions. TheBoard’s egregious failure in this important area was notlost on the District Court, which cited the increase infees on small-ticket transactions as a key example thatthe Board flouted the will of the Congress: “Congress didnot empower the Board to make policy judgments that

would result in significantly higher interchange rates.”Pet. App. 101a.

Notably, the Board did not attempt to justify the FinalRule’s impact on small-ticket merchants on appeal, noraddress the merits of maintaining a Final Rule that willresult in higher prices for more and more debit transactionsdue to the intense growth of this key sector that may soonbecome the majority of all debit transactions. This resultcannot be squared with a statute unambiguously designedto curb the networks’ ability to raise debit-interchange

rates. No rational interpretation of fees “reasonable andproportional” to issuer costs would have resulted in asubstantial price increase on the fastest-growing segmentof debit transactions.

The Board’s response to small-ticket merchants’concern that the Board’s actions could result in higherdebit interchange is telling. The Board admitted thata price increase was a distinct possibility, but weaklydefended itself by noting the Final Rule did not “require”the networks to raise prices—in other words, trust the

dominant networks to keep prices from increasing. TheBoard offered no support for this assumption because,after two decades of failed competition in this industry,



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there was none. Given the evidence of failed competition,not to mention Senator Durbin’sfloor statements about thelack of competition, it is hard to imagine a more compellingexample of the Board’s failure to properly implement theDurbin Amendment than its mishandling of the small-ticket issue.18

I. The Final Rule Is Not Entitled to Deference

As the District Court held, the Board’s Final Ruledirectly contravened the plain language of the statute.19 Judicial deference may only be accorded “[i]f the agencyinterpretation is not in conflict with the plain language of

18. The Board’s analysis of the impact of the Final Ruleon small-ticket transactions made no reference to the growingimportance of such transactions in the debit market. Nor did itconsider the overall statutory scheme, including the fact thatmerchants could not counteract a price increase by imposinga minimum transaction amount for debit—which the Durbin Amendment expressly allowed only for credit transactions. See,e.g., Motor Vehicle Mfrs. Ass’n v. State Farm Mut. Auto. Ins. Co.,463 U.S. 29, 43 (1983) (Agency actions are arbitrary and capriciousif agency “entirely failed to consider an important aspect of theproblem, offered an explanation for its decision that runs counterto the evidence before the agency, or is so implausible that it couldnot be ascribed to a difference in view or the product of agencyexpertise.”).

19. As Amici argued below, even if this case is not decided atChevron step one, the Board acted unreasonably under Chevron’ssecond prong by ignoring detailed warnings from Amici and othersabout the impact of its proposed rules. “[T]he reviewing court

‘must consider whether the decision was based on a considerationof the relevant factors and whether there has been a clear errorof judgment.’” Marsh v. Or. Natural Res. Council , 490 U.S. 360,378 (1989) (citation omitted).



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the statute.” Nat’l R.R. Passenger Corp. v. Boston & Me.Corp., 503 U.S. 407, 417 (1992). In evaluating this question,the Court must “employ[] traditional tools of statutoryconstruction” to ascertain whether “Congress had anintention on the precise question at issue…” ChevronU.S.A., Inc. v. NRDC , 467 U.S. 837, 843 n.9 (1984).

A. The Final Rule Led to Substantial Increases in

Interchange Fees in Conflict with the Statute

The Board’s interpretation of “reasonable andproportional to the cost incurred by the issuer” is inconflict with the plain language of the statute. The Durbin Amendment stipulates that the interchange-fee standardmust reflect only the considerations outlined by Congress.Significantly, those considerations include the functionalsimilarity between debit transactions and checks, whichclear at par. In specifying the at-par pricing model that was thriving in the debit industry until the market wasdistorted by the dominant networks, Congress made clear

its intention to remedy the market failure that moved thedebit market toward high supracompetitive interchangefees for debit transactions. With respect to costs, Congresspermitted only the consideration of the incrementalauthorization, clearing and settlement costs associated with a particular debit transaction. As the District Courtheld in rejecting an invented “third category of costs”adopted in the Final Rule, “That’s it!” Pet. App. 90a.Limiting costs to such a standard would have restricteddebit-card interchange to levels below those proposed inthe NPRM and prevented the price increases that the

networks foisted on small-ticket merchants.



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B. As the Board Acknowledged, It Was Not

Engaged in Ratemaking

The Court of Appeals committed serious legal errorin this case by giving the Board the “special deference”reserved for agencies engaged in ratemaking proceedings.Pet. App. 16a. This error is particularly egregious becausethe Board itself expressly rejected calls to engage in a“ratemaking” inquiry during its rulemaking process. See

76 Fed. Reg. 43,434.

Visa, banks, and various banking groups all urgedthe Board to see the Durbin Amendment as an exercisein “ratemaking,” primarily because “[f]ederal ratemakingtypically allows for a reasonable rate of return oninvestment.”20 The American Bankers Association evensubmitted a white paper to the Board entitled, “SettingReasonable and Proportional Interchange TransactionFees and the Utility Rate Making Experience.”21

As the Board itself acknowledged, however, therulemaking here is not ratemaking. “Public utility rate-setting involves unique circumstances, none of which arepresent in the case of setting standards for interchangetransaction fees.” 75 Fed. Reg. at 81,733 n.44.

20. Comments of Visa Inc. at 16 (Nov. 8, 2010), availableat http://www.federalreserve.gov/newsevents/rr-commpublic/ visa_comment_letter_20101108.pdf.

21. Am. Bankers Assoc. Comments at 1 (Nov. 17, 2010),available at http://www.federalreserve.gov/newsevents/rr-commpublic/ABA_comment_letter_20101117.pdf.



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Thus, the ordinary Chevron test applies here—andthe Final Rule fails because it allows issuers to recovercosts that Congress clearly intended they should notrecover.

CONCLUSION

The Petition for a Writ of Certiorari should be granted.

Respectfully submitted,

September 19, 2014

JEFFREY I. SHINDER

Counsel of RecordO WEN GLIST

Of CounselCONSTANTINE C ANNON LLP335 Madison AvenueNew York, New York 10017(212) 350-2700

[email protected]

Attorneys for Amici Curiae

brief amici curiae of 7-eleven, inc., et al. in support

Documents