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Case 1:11-cv-02075-RJL Document 38 Filed 07/31/13 Page 1 of 58

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLUMBIA

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.

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) Civil Case No. 11-02075 (RJL)
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MEMORANDUM OPINION
July~' 2013 [Dkts. ##20, 23]

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

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Case 1:11-cv-02075-RJL Document 38 Filed 07/31/13 Page 2 of 58

debit card transaction fees by billions of dollars and failing to provide merchants with

multiple unaffiliated networks for each debit card transaction. Accordingly, the

plaintiffs' motion is GRANTED and defendant's motion is DENIED.

FACTUAL BACKGROUND

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. !d. , 17. FMI advocates for 1,500 food retailers and wholesalers, including

large multi-store chains, regional firms, and independent supermarkets. !d., 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." !d. , 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. !d. ,, 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. !d. , 21. Boscov's is an in(cid:173)

store and online retailer with a chain of forty full-service department stores located in five

states in the mid-Atlantic region. !d. , 22. Both accept debit cards. See id. ,, 21-22.

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Case 1:11-cv-02075-RJL Document 38 Filed 07/31/13 Page 3 of 58

The Board is a federal government agency responsible for the operation of the

Federal Reserve System and promulgation of our nation's banking regulations. !d.~ 26.

I.

Debit Cards and Networks

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. !d. Prior to debit cards, consumers had to use paper checks or make in(cid:173)

person withdrawals from human bank tellers in order to access their accounts. !d.

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. !d. at 43,395 & n.5. This upsurge in debit card usage continued into

the 2000s, reaching approximately 37.9 billion transactions in 2009. !d. at 43,395. By

2011, debit cards were "used in 3 5 percent of noncash payment transactions, and have

eclipsed checks as the most frequently used noncash payment method." !d.

Most debit card transactions involve four parties, in addition to the network that

processes the transaction. !d. at 43,395 & n.l4. 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

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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. !d. 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. See 15 U.S.C. § 1693o-2(c)(l1) (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. !d. 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. !d. 1 "Increasingly, however, cardholders

authorize 'signature' debit transactions without a signature and, sometimes, may

authorize a 'PIN' debit transaction without a PIN." 76 Fed. Reg. at 43,395 & n.lO.

1 See also Steven C. Salop et al., Economic Analysis of Debit Card Regulation Under
Section 920 ~ 20 (Oct. 27, 2010) [Dkt. #33] (Joint Appendix 0332-0460) ("Salop").

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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. !d. 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. !d. Internet,

telephone, and mail-based merchants also generally do not accept PIN transactions. !d.

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. !d.

II.

Debit Card Fees

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. !d. at 43,396; see also § 1693o-

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§ 1693o-2(c)(l0) (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.

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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 tum 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. See 76 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. I d.; 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

2 Stephen Craig Mott, Industry Facts Concerning Debit Card Regulation Under Section
920 ~ 7 (Oct. 27, 201 0) [Dkt. #33] (Joint Appendix 0292-0331) ("Mott"); Salop, supra
note 1, ~ 21.
3 Merchants Payments Coalition ("MPC"), Comments in Response to Notice of Proposed
Rulemaking on Debit Card Interchange Fees and Routing at 1 (Feb. 22, 2011) [Dkt. #33]
(Joint Appendix 0149-0238) ("MPC Comments"); Salop, supra note 1, ~ 21.

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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 acquirer (on behalf of merchants) to the issuer, perhaps

the best way to understand why such fees have skyrocketed over the past two decades is

to recognize the market dynamics among the networks, issuers, and merchants. Although

there are many debit card networks in the United States, networks under Visa's and

MasterCard's ownership account for roughly 83 percent of all debit transactions and

nearly 100 percent of signature transactions. 5 Visa also owns Interlink, the largest PIN

network. 6 Due to their hefty market share, Visa and MasterCard exercise considerable

market power over merchants with respect to debit card acceptance. See Salop, supra

note 1, ~ 35. Hundreds of millions of consumers use cards that operate on Visa's and

MasterCard's debit networks. !d. ~ 36. Merchants know that if they do not accept those

cards and networks, they risk losing sales, and "losing the sale would be costlier to the

merchant than accepting debit and paying the high interchange fee." !d.

At the same time, Visa, MasterCard, and other debit networks vie for issuers to

issue cards that run on their respective networks. !d. ~~ 33, 43. They can entice issuers

4 NACS, Comments in Response to Notice of Proposed Rulemaking on Debit Card
Interchange Fees and Routing at 1 (Feb. 22, 2011) [Dkt. #33] (Joint Appendix 0239-
0248) ("NACS Comments").
5 Salop, supra note 1, ~ 26; Senator Richard J. Durbin, Comments in Response to Notice
of Proposed Rule making on Debit Card Interchange Fees and Routing at 1 (Feb. 22,
2011) [Dkt. #33] (Joint Appendix 0125-0140) ("Durbin Comments").
6 Salop, supra note 1, ~ 26. Today, there are approximately 15 PIN debit networks, the
largest ofwhich are Interlink (owned by Visa), Star (owned by First Data Corp.), PULSE
(owned by Discover), and NYCE (owned by FIS). !d. ~ 22.

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by emphasizing their relative market power and ability to set interchange and other fees.

/d.; see also 76 Fed. Reg. at 43,396. Networks thus have an incentive to continuously

raise merchants' interchange fees-which, again, flow from merchants to issuers-as a

way to attract issuers to the network. 7 Visa, for instance, more than tripled the Interlink

interchange fee since the early-1990s, forcing small competitor PIN networks to increase

their fees as well. Mott, supra note 2, ~~ 23-24; Salop, supra note 1, ~~ 40, 46. Within

each network, issuers all receive the same interchange fee, regardless of their efficiency

in processing transactions or their efforts to prevent fraud. See Durbin Comments, supra

note 5, at 5, 9.

In addition, Visa's and MasterCard's "Honor All Cards" rules force merchants that

accept their networks' ubiquitous credit cards also to accept their signature debit cards

with their corresponding high signature transactions fees. 8 As a practical matter, then,

merchants cannot put downward pressure on interchange fees by rejecting network-

affiliated debit cards. Durbin Comments, supra note 5, at 2, 5. And issuers have

implemented reward programs, special promotions, and penalty fees to encourage debit

7 Salop, supra note 1, ~~ 34, 44; see also id. ~ 49 ("When debit networks raise their
interchange fee, they gain issuance and cardholders, but they do not lose merchant
acceptance."); Durbin Comments, supra note 5, at 5 ("[C]ompetition between networks
does not lead to downward pressure on interchange rates because networks compete to
attract issuers and do so by raising interchange fees."); MPC Comments, supra note 3, at
1 ("As banks became accustomed to receiving high interchange rates ... which bore no
relationship to costs ... a dynamic of merchants being forced to pay ever-increasing
interchange rates to underwrite network competition for issuers became the norm for the
industry.").
8 Mott, supra note 2, ~ 13; MPC Comments, supra note 3, at 1; NRF, Comments in
Response to Notice of Proposed Rulemaking on Debit Card Interchange Fees and
Routing at 4 (Feb. 22, 2011) [Dkt. #33] (Joint Appendix 0249-0256) ("NRF
Comments").

8

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(especially signature-debit) usage. Mott, supra note 2, ,-r,-r 16-18; Salop, supra note 1, ,-r

4 7. Merchants have responded by raising the price of goods and services to offset the

fees. See Durbin Comments, supra note 5, at 5, 9; NRF Comments, supra note 8, at 5.

The major card networks, not surprisingly, have also increased their own network

fees, facilitated in part by exclusivity deals between the leading networks and debit

issuers. Mott, supra note 2, ,-r,-r 26-27; Salop, supra note 1, ,-r,-r 30-31. Although there has

been some network competition for PIN transactions, Visa and MasterCard have long(cid:173)

standing operating rules that disallow any other network from handling signature

transactions on their cards. 76 Fed. Reg. at 43,396; Mott, supra note 2, ,-r,-r 26-27; Salop,

supra note 1, ,-r,-r 30-31. Within the PIN market, too, Visa has agreements with particular

issuers that create exclusivity via "volume commitments that are pegged to incentives

such as reduced fees" or require that Interlink be their sole PIN debit network. Salop,

supra note 1, ,-r 30. Thus, the dominant networks have been able to raise their network

fees on merchants without concern for lost transaction volume because merchants have

no other alternatives for routing transactions. !d. ,-r 31. According to information

collected by the Board, total network fees exceeded $4.1 billion in 2009, with networks

charging issuers and acquirers more than $2.3 billion and $1.8 billion, respectively. 76

Fed. Reg. at 43,397.

III. The Durbin Amendment

On July 21, 2010, Congress passed legislation to address the rise of debit card

fees. Coined the "Durbin Amendment" after its sponsor, Illinois Senator Richard J.

Durbin, the legislation seeks to implement Section 920 of the Electronic Fund Transfer

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Act ("EFTA"), 15 U.S.C. § 1693o-2, as enacted by Section 1075 ofthe Dodd-Frank Wall

Street Reform and Consumer Protection Act ("Dodd-Frank Act"), Pub. L. No. 111-203,

124 Stat. 1376, 2068-2074 (2010). The Durbin Amendment imposes various standards

and rules governing debit fees and transactions. See id.; 76 Fed. Reg. at 43,394. The

regulations apply only to issuers with assets exceeding $10 billion. § 1693o-2(a)(6)(A).

A. Interchange Fees

The Durbin Amendment first addresses interchange transaction fees, which are

defined as "any fee established, charged or received by a payment card network for the

purpose of compensating an issuer for its involvement in an electronic debit transaction."

§ 1693o-2(c)(8). It provides that the fee charged by the issuer "with respect to an

electronic debit transaction shall be reasonable and proportional to the cost incurred by

the issuer with respect to the transaction." !d. § 1693o-2(a)(2) (emphasis added). It then

directs the Board to establish standards to determine whether the amount of a debit card

interchange fee is "reasonable and proportional to the cost incurred by the issuer" with

respect to the transaction. !d. § 1693o-2(a)(3)(A). To promulgate these standards,

Congress instructs the Board that it:

shall-

(A)

consider the functional similarity between-

(i)

electronic debit transactions; and

checking transactions that are required within the

(ii)
Federal Reserve bank system to clear at par; [and]

(B)

distinguish between-

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the incremental cost incurred by an issuer for the role

(i)
of the issuer in the authorization, clearance, or settlement of a
particular electronic debit transaction, which cost shall be
considered under[§ 1693o-2(a)(2)]; and

other costs incurred by an issuer which are not specific

(ii)
to a particular electronic debit transaction, which costs shall
not be considered under[§ 1693o-2(a)(2)]

!d. § 1693o-2(a)(4)(A)-(B).

Once the Board establishes this interchange transaction fee standard, Congress

authorizes the Board to adjust the fee to allow for fraud-prevention costs, provided the

issuer complies with standards established by the Board relating to fraud prevention:

( 5)

Adjustment to interchange transaction fees for fraud prevention costs

(A) Adjustments. The Board may allow for an adjustment to the
fee amount received or charged by an issuer under[§ 1693o-2(a)(2)],
if-

such adjustment is reasonably necessary to make

(i)
allowance for costs incurred by the issuer in preventing fraud
in relation to electronic debit transactions involving that
issuer; and

the issuer complies with the fraud-related standards
(ii)
established by the Board under[§ 1693o-2(a)(5)(B)], which
standards shall-

be designed to ensure that any fraud-related

(I)
adjustment of the issuer is limited to the amount
described in clause (i) and takes into account any
fraud-related reimbursements (including amounts from
charge-backs) received from consumers, merchants, or
payment card networks in relation to electronic debit
transactions involving the issuer; and

require issuers to take effective steps to reduce
(II)
the occurrence of, and costs from, fraud in relation to
electronic debit transactions, including through the

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development and implementation of cost-effective
fraud prevention technology.

!d. § 1693o-2(a)(5)(A).9

B. Network Regulation

The Durbin Amendment also instructs the Board to regulate network fees by

prescribing rules related to network non-exclusivity for routing debit transactions. 76

Fed. Reg. at 43,394. Preferring a market-oriented approach to network fees, 10 the Durbin

Amendment provides that the Board may regulate such fees only as necessary to ensure

that they are not used to "directly or indirectly compensate an issuer with respect to an

electronic debit transaction" or "circumvent or evade the restrictions ... and regulations"

prescribed by the Board under this subsection. § 1693o-2(a)(8)(B)(i)-{ii). At the same

time, the Amendment requires the Board to adopt rules that prohibit issuers and networks

from entering into exclusivity arrangements or imposing restrictions on the networks

through which merchants may route a transaction. Specifically, Congress directs the

Board to promulgate regulations providing that issuers and networks "shall not directly or

through any agent ... restrict the number of payment card networks 11 on which an

9 This fraud-prevention cost adjustment was the subject of a separate rulemaking by the
Board. See Final Rule, Debit Card and Interchange Fees and Routing, 77 Fed. Reg.
46,258 (adopted Aug. 3, 2012) (codified at 12 C.F.R. § 235.4).
10 "The term 'network fee' means any fee charged and received by a payment card
network with respect to an electronic debit transaction, other than an interchange
transaction fee." § 1693o-2(c)(l0).
11 "Payment card network" is defined as "an entity that directly, or through licensed
members, processors, or agents, provides the proprietary services, infrastructure, and
software that route information and data to conduct debit card or credit card transaction
authorization, clearance, and settlement, and that a person uses in order to accept as a
form of payment a brand of debit card." § 1693o-2( c )(11 ).

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electronic debit transaction may be processed" to one such network or two or more

affiliated networks or "inhibit the ability of any person who accepts debit cards for

payments to direct the routing of electronic debit transactions for processing over any

payment card network that may process such transactions." § 1693o-2(b)(l)(A)-(B).

IV. The Board's Rule

After the enactment of the Dodd-Frank Act, the Board sought information from

various industry participants to assist the agency in its initial rulemaking. The Board met

with debit card issuers, payment card networks, merchant acquirers, consumer groups,

and industry trade associations on a number of occasions to discuss a host of issues

including debit transaction processing flows, transaction fee structures and levels, fraud-

prevention activities, fraud losses, routing restrictions, card-issuing arrangements, and

incentive programs. 12 In September 2010, the Board circulated surveys to financial

organizations with assets totaling $10 billion or more, networks that process debit card

transactions, and the largest nine merchant acquirers in order to collect data on PIN,

signature, and prepaid debit card operations and, for each card type, the costs associated

with interchange and other network fees, fraud losses, fraud-prevention and data-security

activities, network exclusivity arrangements, and debit-card routing restrictions. 75 Fed.

Reg. at 81,724-25. In both the proposed and final rulemaking, the Board provided a

12 Notice of Proposed Rulemaking, Debit Card Interchange Fees and Routing, 75 Fed.
Reg. 81,722, 81,724 (proposed Dec. 28, 2010) (to be codified at 12 C.P.R.§§ 235.1-
235.10) ("NPRM"); see also Durbin Comments, supra note 5, at 2 (describing Board's
"information-gathering process" as "notable for its transparency and thoroughness").

13

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detailed summary ofthe survey responses, see id. at 81,724-26; 76 Fed. Reg. at 43,397-

98, and upon issuing the Final Rule, it released a full report including survey statistics. 13

A. Proposed Rule

On December 28, 2010, the Board issued a NPRM implementing the Durbin

Amendment and requesting public comments. 75 Fed. Reg. at 81,722. Stemming from

its determination to include "only those costs that are specifically mentioned for

consideration in the statute," the Board proposed that the interchange transaction fee

standard be limited to the costs associated with the authorization, clearing, and settlement

("ACS") of an electronic debit transaction that vary with the number of transactions sent

to the issuer within the reporting period. !d. at 81,734-35, 81,739. The Board noted that,

by focusing on the issuer's variable, per-transaction ACS costs, it was carrying out

Congress's mandate to establish standards to assess whether an interchange fee is

reasonable and proportional to the cost incurred by the issuer with respect to the

transaction. !d. Consequently, in the NPRM, the Board suggested that network

processing fees, 14 as well as fixed 15 and overhead 16 costs common to all debit transactions

13 See generally Bd. of Governors of the Federal Reserve Sys., 2009 Interchange
Revenue, Covered Issuer Cost, and Covered Issuer and Merchant Fraud Loss Related to
Debit Card Transactions [Dkt. #33] (Joint Appendix 0261-0291), available at
http://www .federalreserve.gov/paymentsystems/files/debit fees_ costs.pdf.
14 75 Fed. Reg. at 81,735-36, 81,739; 76 Fed. Reg. at 43,424. The Board proposed in the
NPRM that network fees be excluded from the interchange fee standard. 7 5 Fed. Reg. at
81,73 5. Including them in allowable costs would risk putting merchants "in the position
of effectively paying all network fees associated with debit card transactions" because
"an acquirer would pay its own network processing fees directly to the network and
would indirectly pay the issuer's network processing fees through the allowable costs
included in the interchange fee standard." !d.

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and not attributable to the ACS of any one transaction, be excluded from recovery under

the interchange transaction fee standard. Fraud losses and the costs of fraud-prevention

and reward programs were also deemed unallowable because they are not attributable to

the variable ACS costs incurred by an issuer. 75 Fed. Reg. at 81,755, 81,760.

While merchants overwhelmingly supported the Board's plan to limit allowable

costs within the interchange transaction fee standard to only incremental ACS costs,

networks and issuers advocated expanding the proposed set of allowable costs. 76 Fed.

Reg. at 43,424-25. Indicating that its proposal was still subject to change, the Board

"request[ ed] comment on whether it should allow recovery through interchange fees of

the other costs of a particular transaction beyond authorization, clearing, and settlement"

and, if so, "on what other costs of a particular transaction, including network fees paid by

issuers for the processing of transactions, should be considered allowable costs." 75 Fed.

Reg. at 81,735.

15 The Board proposed that fixed costs-even if incurred for activities related to the ACS
of debit card transactions-not be factored into allowable costs within the interchange fee
calculus. 75 Fed. Reg. at 81,736 ("This [proposed] measure would not consider costs that
are common to all debit card transactions and could never be attributed to any particular
transaction [i.e., fixed costs], even ifthose costs are specific to debit transactions as a
whole."). Indeed, the Board specifically contemplated that costs that do not vary with the
number of transactions sent to the issuer over the calendar year, such as network
connectivity fees and fixed costs of production, would be excluded as "unallowable, fixed
costs," or "those costs that do not vary, up to existing capacity limits, with the number of
transactions sent to the issuer over the calendar year," under the interchange transaction
fee standard. !d. at 81,736, 81,739, 81,760.
16 In the NPRM, the Board recommended that the cost of an issuer's facilities, human
resources, and legal staff, as well as its costs in operating a branch office, be categorized
as common overhead costs that cannot be allocated for the purpose of calculating its
permissible interchange transaction fee. 75 Fed. Reg. at 81,735, 81,760.

15

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Drawing on its comprehensive survey data relating to debit transaction fees, the

Board proposed two alternative standards to govern interchange fees. The first, which

the Board called "Alternative 1," allowed each issuer to recover its actual incremental

ACS costs up to a safe harbor of seven cents ($.07) per transaction if the issuer chose not

to determine its individual allowable costs, and up to a cap of twelve cents ($.12) if it did.

75 Fed. Reg. at 81,736-38. The second, "Alternative 2," set a cap at a flat twelve cents

($.12) per transaction. !d. at 81,738.

With respect to network non-exclusivity for routing debit transactions, the Board

requested comment on two alternative methods for implementation. The first, called

"Alternative A," required at least two unaffiliated payment card networks active on each

debit card, even if one network processed only signature transactions and one handled

only PIN transactions. See 75 Fed. Reg. at 81,749. The second, "Alternative B" required

at least two active unaffiliated payment card networks for each type of authorization

method-i.e., at least two to process PIN transactions and two to process signature. 75

Fed. Reg. at 81,749. In either case, issuers and networks could not inhibit a merchant's

ability to direct the routing of an electronic debit transaction over any available network.

!d. at 81,751.

More than 11,500 commenters-including several of the named plaintiffs, as well

as various issuers, payment card networks, consumers, consumer advocates, trade

associations and members of Congress-replied to the Board's request for comment. 76

16

Case 1:11-cv-02075-RJL Document 38 Filed 07/31/13 Page 17 of 58

Fed. Reg. at 43,394. 17 In drafting the Final Rule, the Board relied on the voluminous

comments, the statutory provisions, the available cost data, its understanding of the debit

payment system, and other relevant information. 76 Fed. Reg. at 43,394.

B. Final Rule

The Board's Final Rule was published on July 20, 2011 and became effective on

October 1, 20 11. See id. As its standard for assessing whether the interchange fee for a

debit transaction is reasonable and proportional to the issuer's costs, the Board adopted "a

modified version of proposed Alternative 2." Id. at 43,404. It permits each issuer to

receive a fee as high as twenty-one cents ($.21) per transaction plus an ad valorem

amount of five basis points ofthe transaction's value (0.05%). 12 C.P.R. § 235.3(b).

The Board increased the allowable interchange fee (from twelve cents in

Alternative 2 to twenty-one cents in the Final Rule) after concluding that the language

and purpose of the Durbin Amendment allow the Board to consider additional costs not

explicitly excluded from consideration by the statute. !d. at 43,426-27. According to the

Board,§ 1693o-2(a)(4)(B) on the one hand requires the Board to consider incremental

ACS costs incurred by issuers, and on the other hand prohibits consideration of any

issuer costs that are not specific to a particular transaction; but it is silent with respect to

costs that fall into neither category (e.g., costs specific to a particular transaction but are

17 76 Fed. Reg. at 43,394; see generally Durbin Comments, supra note 5; FMI,
Comments in Response to Notice of Proposed Rulemaking on Debit Card Interchange
Fees and Routing (Feb. 22, 2011) [Dkt. #33] (Joint Appendix 0141-0148); NACS
Comments, supra note 4; NRF Comments, supra note 8.

17

Case 1:11-cv-02075-RJL Document 38 Filed 07/31/13 Page 18 of 58

not incremental ACS costs). !d. at 43,426. The Board concluded that it had discretion to

consider costs on which the statute is silent. !d.

In setting the final interchange transaction fee standard, the Board considered all

costs for which it had data, other than those prohibited under subsection (a)(4)(B). !d.

Based on survey data and public comments, the Board found that issuers incur transaction

costs other than the variable ACS costs that the Board originally proposed as the only

allowable costs in the interchange fee, and that "no electronic debit transaction can occur

without incurring these [non-variable ACS] costs, making them ... specific to each and

every electronic debit transaction" under the statute. !d. at 43,427; see also id. at 43,404.

Consequently, the Board amended its final interchange transaction fee standard to

include, in addition to variable ACS costs: (1) fixed costs related to processing a

particular transaction, such as network connectivity and software, hardware, equipment,

and labor; (2) transaction monitoring costs; (3) an allowance for fraud losses (the ad

valorem component); and (4) network processing fees. !d. at 43,404, 43,429-31. 18

As to the network non-exclusivity rule, the Board concluded that "[t]he plain

language of the statute does not require that there be two unaffiliated payment card

networks available to the merchant for each method of authentication." !d. at 43,44 7; see

also id. ("(T]he statute does not expressly require issuers to offer multiple unaffiliated

signature and multiple unaffiliated PIN debit card network choices on each card."

18 The Board still excluded from the final interchange transaction fee standard other costs
not incurred as a consequence of effecting a transaction, including costs related to
customer inquiries, reward programs, corporate overhead (e.g., executive compensation),
establishing the account relationship, card production and delivery, marketing, research
and development, and network membership fees. !d. at 43,404, 43,427-29.

18

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(emphasis added)). Hence, the Board adopted Alternative A, which requires only that

two unaffiliated networks be available for each debit card, not for each authorization

method. 12 C.F.R. § 235.7(a)(2) & Official Cmt. 1; 76 Fed. Reg. at 43,404.

On the same day that the Board adopted its Final Rule on debit card interchange

fees and network non-exclusivity, it also published a separate Interim Final Rule on a

proposed adjustment to the interchange fee for fraud-prevention costs under 15 U.S.C.

§ 1693o-2(a)(5). See 76 Fed. Reg. at 43,478. The Board has since finished that

rulemaking, and on August 2, 2012 it adopted a final rule governing the fraud-prevention

cost adjustment. See 77 Fed. Reg. 46,258; 12 C.F.R. § 235.4. 19

V.

This Litigation

On November 22, 2011, plaintiffs sued the Board, seeking a declaratory judgment

that the Final Rule's interchange fee and network non-exclusivity provisions (12 C.F.R.

§§ 253.3(b) and 235.7(a)(2)) are arbitrary, capricious, an abuse of discretion, and

otherwise not in accordance with the law. See generally Compl. [Dkt. #1]. Moreover,

plaintiffs seek costs and reasonable attorneys' fees pursuant to 28 U.S.C. § 2412, and

such other relief as the Court deems reasonable and proper. See generally Am. Compl.

Plaintiffs amended their complaint on March 2, 2012. !d.

19 The Board allows issuers to "receive or charge an amount of no more than 1 cent per
transaction in addition to any interchange transaction fee it receives or charges" if the
issuer "develop[ s] and implement[ s] policies and procedures reasonably designed to take
effective steps to reduce the occurrence of, and costs to all parties from, fraudulent
electronic debit transactions, including through the development and implementation of
cost-effective fraud-prevention technology." 12 C.F.R. § 235.4(a), (b)(l).

19

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As individual retailers that accept debit cards and trade associations comprised of

merchants, see supra p. 2, plaintiffs contend that the Final Rule is an unreasonable

interpretation of the Durbin Amendment because it ignores Congress's directives

regarding interchange fees and network exclusivity. See Am. Compl. ~~ 5, 11. As to the

former, plaintiffs assert that the Durbin Amendment limits the Board's consideration of

allowable costs to the "incremental cost" of "authorization, clearance and settlement of a

particular electronic debit transaction," and that, by including other costs in the fee

standard, the Board "acted unreasonably and in excess of its statutory authority." !d.~~

6, 70-73, 82-83. Regarding the latter, plaintiffs argue that the Board disregarded the

plain meaning of the Durbin Amendment and misconstrued the statute by adopting a

network non-exclusivity rule requiring all debit cards be interoperable with at least two

unaffiliated payment networks, rather than requiring that all debit transactions be able to

run over at least two unaffiliated networks. !d.~~ 9-10, 91-93.

Plaintiffs moved for summary judgment on March 2, 2012, arguing that the Final

Rule's interchange transaction fee and network non-exclusivity regulations should be

declared invalid under the Administrative Procedure Act ("APA"), 5 U.S.C. § 706(2),

because the Board impermissibly implemented the Durbin Amendment's statutory

command and thus exceeded its authority. Pls.' Mot. for Summ. J. ("Pls.'s Mot.") at I

[Dkt. #20]; Pis.' Mem. in Supp. ofPls.' Mot. for Summ. J. ("Pls.' Mem.") at 2 [Dkt.

#20]. The Court permitted amicus curiae briefs to be filed by three different parties: (1) a

consortium of major nationwide bank and credit union trade associations in the United

20

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States;20 (2) Senator Richard J. Durbin, a member of Congress and the primary author of

the Durbin Amendment;21 and (3) a group of convenience stores, quick-service

restaurants and specialty coffee shops that operate small business franchises and licensed

stores. 22 The latter two groups of amici filed briefs in support of plaintiffs' motion for

summary judgment; the bank and credit union amici supported neither party.

On Apri113, 2012, the Board filed a cross-motion for summary judgment.

contending that plaintiffs' claims lack merit and that the Board is entitled to judgment as

a matter oflaw. Def.'s Cross-Mot. for Summ. J. ("Def.'s Cross-Mot.") at 1 [Dkt. #23];

Def.'s Mem. in Supp. ofDef.'s Mot. for Summ. J. and in Opp'n to Pls.' Mot. for Summ.

J. ("Def.'s Mem.") at 1-2 [Dkt. #23]. On October 2, 2012, I heard oral argument from

the parties as well as the bank and credit union amici. See Civ. Case No. 11-2075,

Minute Entry, Oct. 2, 2012. For the reasons set forth below, I agree with the plaintiffs

and GRANT summary judgment in their favor.

20 See generally Amici Curiae Brief of The Clearing House Ass'n L.L.C. et al. ("Clearing
House Amicus Br.") [Dkt. #22]. Amici are The Clearing House Association L.L.C.,
American Bankers Association, Consumer Bankers Association, Credit Union National
Association, The Financial Services Roundtable, Independent Community Bankers of
America, Mid-Size Bank Coalition of America, National Association of Federal Credit
Unions, and National Bankers Association. !d.
21 See generally Amicus Curiae Brief of Senator Richard J. Durbin ("Durbin Amicus
Br.") [Dkt. #27].
22 See generally Amici Curiae Brief of 7-Eleven, Inc. et al. ("7-Eleven Amicus Br. ")
[Dkt. #30]. Amici are 7-Eleven, Inc., Auntie Anne's, Inc., Burger King Corporation,
CKE Restaurants, Inc., International Dairy Queen, Inc., Jack in the Box Inc., Starbucks
Corporation, and The Wendy's Company. !d.

21

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STANDARD OF REVIEW

I.

Summary Judgment

Summary judgment is appropriate when the record evidence demonstrates that

"there is no genuine dispute as to any material fact and the movant is entitled to judgment

as a matter of law." Fed. R. Civ. P. 56( a); see also Celotex Corp. v. Catrett, 477 U.S.

317, 322 ( 1986). The burden is on the moving party to demonstrate an "absence of a

genuine issue of material fact" in dispute. Celotex, 477 U.S. at 323. In a case involving

judicial review of final agency action under the APA, however, "the Court's role is

limited to reviewing the administrative record." Air Transp. Ass 'n of Am. v. Nat 'l

Mediation Bd., 719 F. Supp. 2d 26, 32 (D.D.C. 201 0) (citations omitted). "[T]he function

of the district court is to determine whether or not as a matter of law the evidence in the

administrative record permitted the agency to made the decision it did." Select Specialty

Hosp.-Bloomington, Inc. v. Sebelius, No. 09-2362, 2012 WL 4165570, at *2 (D.D.C.

Sept. 19, 2012) (citations and internal quotation marks omitted).

II.

Administrative Procedure Act

Under the APA, the Court must set aside agency action that exceeds the agency's

"statutory jurisdiction, authority, or limitations." 5 U.S.C. § 706(2)(C). To determine

whether an agency has acted outside its authority, I must apply the two-step framework

under Chevron, USA., Inc. v. Natural Res. Def Council, Inc., 467 U.S. 837 (1984). See

Ass'n of Private Sector Colts. & Univs. v. Duncan, 681 F.3d 427,441 (D.C. Cir. 2012).

A Chevron analysis first requires the reviewing court to determine "whether

Congress has directly spoken to the precise question at issue." Chevron, 467 U.S. at 842.

22

Case 1:11-cv-02075-RJL Document 38 Filed 07/31/13 Page 23 of 58

To resolve whether "the intent of Congress is clear" under this first step, id., the court

must exhaust the "traditional tools of statutory construction," including textual analysis,

structural analysis, and (when appropriate) legislative history, id. at 843 n.9; Bell At!. Tel.

Cos. v. FCC, 131 F.3d 1044, 1047 (D.C. Cir. 1997). "Ifthe intent of Congress is clear,

that is the end of the matter; for the court, as well as the agency, must give effect to the

unambiguously expressed intent of Congress." Chevron, 467 U.S. at 842-43.

If after employing these tools, however, the Court concludes that the statute is

silent or ambiguous on the specific issue, the Court moves on to step two and defers to

any agency interpretation that is based on a permissible construction of the statute. !d. at

843. An agency's construction is permissible "unless it is arbitrary or capricious in

substance, or manifestly contrary to the statute." Mayo Found. forMed. Educ. &

Research v. United States, 131 S. Ct. 704, 711 (2011) (citations and internal quotation

marks omitted). "[T]he whole point of Chevron is to leave the discretion provided by the

ambiguities of a statute with the implementing agency." Ass 'n of Private Sector Colts.,

681 F .3d at 441 (citations and internal quotation marks omitted).

ANALYSIS

I.

Plaintiffs Have Met Their Burden of Production for Article III Standing.

Curiously, the Board contends in a footnote that plaintiffs have failed to establish

Article III standing because they failed in their opening brief to provide affidavits or

other evidence that set forth specific facts demonstrating standing. See Def.'s Mem. at 13

n.7 (citing Sierra Club v. EPA, 292 F.3d 895, 899 (D.C. Cir. 2002)). But reading on, the

Sierra Club court explicitly recognized that:

23

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In many if not most cases the petitioner's standing to seek review of
administrative action is self-evident; no evidence outside the administrative
record is necessary for the court to be sure of it. In particular, if the
complainant is an object of the action (or forgone action) at issue-as is the
case usually in review of a rulemaking ... -there should be little question
that the action or inaction has caused him injury, and that a judgment
preventing or requiring the action will redress it.

292 F .3d at 899-900 (citation and internal quotation marks omitted).

Indeed, our Court of Appeals has expressly rejected the use of the Sierra Club rule

as a procedural "gotcha" in cases where standing was reasonably thought to be self-

evident. See Am. Library Ass 'n v. FCC, 401 F.3d 489, 493-95 (D.C. Cir. 2005); see also

Fundfor Animals, Inc. v. Norton, 322 F.3d 728, 733 (D.C. Cir. 2003) ("Sierra Club,

however, does not require parties to file evidentiary submissions in support of standing in

every case. To the contrary, our decision made clear that '[i]n many if not most cases the

petitioner's standing to seek review of administrative action is self-evident."'). For

instance, in American Library Association, our Circuit Court explained that interpreting

Sierra Club as requiring long jurisdictional statements in opening briefs was inconsistent

with precedent, a waste of judicial resources, and an unnecessary burden on litigants.

401 F.3d at 494. Indeed, the court went on to clarify that Sierra Club need only

"remind[] petitioners challenging administrative actions that, when they have good

reason to know that their standing is not self-evident, they should explain the basis for

their standing at the earliest appropriate stage in the litigation." !d. at 493.

Here, plaintiffs had every reason to believe that their standing was self-evident and

no cause to suspect that standing would be challenged in this court at all, much less in a

24

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footnote on summary judgment! 23 Moreover, the administrative record contains

countless examples of how plaintiffs are injured by the Board's interchange transaction

fee and network non-exclusivity regulations. 24 Cf Am. Chemistry Council v. Dep 't of

Transp., 468 F.3d 810, 822, 824 (D.C. Cir. 2006) (standing can be "self-evident" from

the administrative record). The Board's own rulemaking recognizes that it is merchants

that pay interchange and network fees and are thus directly affected by the Board's Final

Rule regulating both. 25 See Fund for Animals, 322 F.3d at 734 ("[F]or the purpose of

determining whether standing is self-evident, we see no meaningful distinction between a

regulation that directly regulates a party and one that directly regulates the disposition of

a party's property."). Accordingly, it was reasonable for each plaintiff to assume that it

(or in the case of the trade associations, one of its members) would suffer an Article III

injury when the Board's Final Rule was implemented. And in their reply brief, plaintiffs

submitted declarations demonstrating what was already self-evident: that they will suffer

cognizable harms as a result of the Board's regulations. See Pls.' Reply at 7-9; cf Cmtys.

23 The Board chose not to file a motion to dismiss for lack of standing and gave plaintiffs
no indication that it would challenge their claims on justiciability grounds. See Pis.'
Reply Mem. in Supp. ofPls.' Mot. for Summ. J. and in Opp'n to Def.'s Mot. for Summ.
J. ("Pls.' Reply") [Dkt. #26] at 7 n.3.
24 See, e.g., 76 Fed. Reg. at 43,462 ("[I]it is possible that merchants with a large
proportion of small-ticket transactions may experience an increase in total interchange
fees .... "); id. at 43,448 ("Alternative A provides merchants fewer routing options with
respect to certain electronic debit transaction compared to Alternative B.").
25 See, e.g., 76 Fed. Reg. at 43,396 ("The interchange fee is set by the relevant network
and paid by the [merchant] acquirer to the issuer .... [T]he [merchant] acquirer charges
the merchant a merchant discount ... that includes the interchange fee"); 75 Fed. Reg. at
81,727 ("[I]n point-of-sale transactions, these [network-exclusivity prohibition and
routing] provisions improve the ability of a merchant to select the network that minimizes
its cost ... and otherwise provides the most advantageous terms.").

25

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Against Runway Expansion, Inc. v. FAA, 355 F.3d 678, 684-85 (D.C. Cir. 2004)

(affidavits submitted with reply brief are sufficient under Sierra Club because they made

associational standing "patently obvious" and respondent was not prejudiced). In short,

plaintiffs have easily met their burden of production with regard to Article III standing

here, and this Court will thus proceed to the merits.

II.

The Interchange Transaction Fee Regulation Is Invalid Under the APA.

Plaintiffs contend that the Final Rule's interchange transaction fee standard, 12

C.F.R. § 235.3(b), is plainly foreclosed by the text, structure, and purpose ofthe Durbin

Amendment and is arbitrary, capricious, and contrary to law. According to plaintiffs, the

plain language and legislative history of the statute make clear which issuer costs may be

included in the interchange transaction fee standard, and the Board's inclusion of other

costs cannot survive scrutiny under Chevron's first step. The Board, meanwhile, takes

the position that the Durbin Amendment is silent, and therefore ambiguous, with respect

to issuer costs not explicitly addressed in the statute. And because the final interchange

fee provision is a reasonable construction of the statute, says the Board, it is entitled to

Chevron deference. For the following reasons, I agree with the plaintiffs.

A. The Durbin Amendment Plainly Limits the Costs Allowable Within the
Interchange Transaction Fee Standard to Those Identified in 15 U.S.C.
§ 1693o-2(a)( 4)(B)(i).

Determining whether Congress has spoken to the precise question at issue through

"the [statutory] language itself, the specific context in which that language is used, and

the broader context of the statute as a whole" is, of course, this Court's first task.

Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997). Our Court of Appeals has directed

26

Case 1:11-cv-02075-RJL Document 38 Filed 07/31/13 Page 27 of 58

this Court to use "all traditional tools of statutory interpretation, including text, structure,

purpose, and legislative history, to ascertain Congress's intent at Chevron step one."

Nat'l Cable & Telecomms. Ass 'n v. FCC, 567 F.3d 659, 663 (D.C. Cir. 2009) (citation

and internal quotation marks omitted). If this examination yields a clear result, "then

Congress has expressed its intention as to the question, and deference is not appropriate."

Natural Res. Def Council, Inc. v. Daley, 209 F.3d 747, 752 (D.C. Cir. 2000).

To discern the text's plain meaning, the Court is to look to "the language of the

statute itself." Caraco Pharm. Labs., Ltd. v. Novo Nordisk A/S, 132 S. Ct. 1670, 1680

(2012) (citation omitted). "[W]hen the statute's language is plain, the sole function of the

courts-at least where the disposition required by the text is not absurd-is to enforce it

according to its terms." Hartford Underwriters Ins. Co. v. Union Planters Bank, 530

U.S. 1, 6 (2000) (citation and internal quotation marks omitted). "Unless otherwise

defined, statutory terms are generally interpreted in accordance with their ordinary

meaning." BP Am. Prod. Co. v. Burton, 549 U.S. 84, 91 (2006); see also FCC v. AT & T

Inc., 131 S. Ct. 1177, 1182 (2011).

An analysis of the statutory text, however "does not end here, but must continue to

'the language and design of the statute as a whole."' Am. Scholastic TV Programming

Found. v. FCC, 46 F.3d 1173, 1178 (D.C. Cir. 1995) (quoting Fort Stewart Sch. v. FLRA,

495 U.S. 641,645 (1990)). 26 The Court must also "exhaust the traditional tools of

26 See also Roberts v. Sea-Land Servs., Inc., 132 S. Ct. 1350, 1357 (2012) ("It is a
fundamental canon of statutory construction that the words of a statute must be read in
their context and with a view to their place in the overall statutory scheme." (citation
omitted)); Bell Atl. Tel. Cos., 131 F.3d at 1047 ("The literal language of a provision taken

27

Case 1:11-cv-02075-RJL Document 38 Filed 07/31/13 Page 28 of 58

statutory construction, including examining the statute's legislative history to shed new

light on congressional intent, notwithstanding statutory language that appears

superficially clear." Sierra Club v. EPA, 551 F.3d 1019, 1027 (D.C. Cir. 2008) (citations

omitted); see also AFL-C/0 v. FEC, 333 FJd 168, 172 (D.C. Cir. 2003) ("We consider

the provisions at issue in context, using traditional tools of statutory construction and

legislative history.").

i. Subsection (a)(4)(B) Bifurcates the Universe of Electronic Debit

Transaction Costs into the Allowable and the Impermissible.

The Durbin Amendment instructs the Board to ensure that any interchange fee

charged by an issuer "is reasonable and proportional to the cost incurred by the issuer

with respect to the transaction," § 1693o-2(a)(3), and in so doing it must "distinguish

between" two categories of costs. !d. § 1693o-2(a)( 4)(B)(i)-(ii). Plaintiffs contend that

these categories bifurcate the entire universe of costs into two, and only two, groups:

( 1) costs that are "incremental" or variable, incurred by an issuer for its role in the

"authorization, clearance, or settlement," and that relate to a "particular" or single

electronic debit transaction, which "shall be considered,"§ 1693o-2(a)(4)(B)(i)

(emphasis added); and (2) "other costs" "incurred by an issuer which are not specific to a

particular electronic debit transaction," which "shall not be considered," § 1693o-

2(a)(4)(B)(ii) (emphasis added). The Board disagrees, arguing that subsection (a)(4)(B)

is silent when it comes to costs that are specific to a particular electronic debit transaction

but that are not incremental ACS costs, as those costs do not fit into either subsection

out of context cannot provide conclusive proof of congressional intent, any more than a
word can have meaning