NACS v. Board of Governors of Federal Reserve System

746 F.3d 474 (2014)

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NACS v. Board of Governors of Federal Reserve System

United States Court of Appeals for the District of Columbia Circuit
746 F.3d 474 (2014)

Facts

The term “debit card” referred to cards that allowed cardholders to deduct money directly from their bank accounts and to prepaid cards that were loaded with set amounts of money. Debit card transactions typically involved (1) a cardholder, (2) a merchant who accepted a debit card as payment, (3) an issuing bank (a bank that issued the debit card), and (4) an acquiring bank (a bank that acquired money from the cardholder and provided the money to the merchant). Debit card transactions were processed via networks that usually were affiliated with either Visa or Mastercard. Almost all debit card transactions were authenticated either by the cardholder’s personal identification number (PIN) or signature. Most merchants used either a PIN or signature for verification, but some merchants provided cardholders with the option of choosing which verification method to use. All debit card transactions involved authorization, clearance, and settlement. At the authorization stage, the cardholder’s use of the card triggered a request to the acquiring bank, which forwarded the request to the issuing bank. Upon confirming that the cardholder’s account had enough money to pay the charge and screening for possible fraud, the issuing bank either approved or rejected the transaction. At the clearance stage (which occurred simultaneously with authorization for PIN transactions), the merchant formally requested payment from the issuing bank. At the settlement stage, the issuing bank transferred the necessary funds to the acquiring bank. Congress enacted the Electronic Fund Transfer Act (EFTA) in 1978 to protect consumers. The Board of Governors of the Federal Reserve System (board) (defendant) initially administered the EFTA, but the Consumer Financial Protection Bureau (CFPB) took over that role in 2010. The EFTA’s guiding principle was disclosure. Thus, pursuant to the EFTA and the CFPB’s regulations, a financial institution had to disclose, in readily understandable language, its electronic fund transfer (EFT) terms and conditions and to update its disclosure and give sufficient notice if the terms and conditions changed in certain ways. Disclosure was an ongoing obligation, meaning that financial institutions were required to (1) make available to consumers written documentation of all EFTs, (2) notify consumers about preauthorized EFTs’ scheduled payments or nonpayments, and (3) provide periodic account statements. In addition, the EFTA generally required that consumers request or apply for EFT cards before issuance, required written consumer authorization for preauthorized EFTs, and imposed certain investigation obligations regarding alleged EFT errors. Finally, the EFTA limited consumer liability for unauthorized EFTs to the lesser of $50 or the value of the property or services obtained via the unauthorized EFT prior to the consumer’s provision of notice of the problem to the financial institution. If a financial institution failed to make an authorized EFT as instructed by the consumer, it was liable to the consumer for all proximately caused damages. Debit card transactions involved numerous fees, including interchange fees that issuing banks charged acquiring banks. In 2010, Congress passed the Durbin Amendment, which amended the EFTA to require the board to promulgate regulations limiting interchange fees to issuers’ authorization, clearance, and settlement (ACS) costs. Congress forbade the board from considering nontransaction-specific issuer costs but did not expressly address whether the board could consider non-ACS transaction-specific costs. In regulating increasing interchange fees, the board considered transaction-specific, non-ACS costs. Additionally, the board required that all debit cards be interoperable with at least two unaffiliated payment networks (nonexclusivity rule). NACS (plaintiff) was an association of convenience stores that sought vacatur of the rules, asserting that (1) the board exceeded its authority by considering transaction-specific, non-ACS costs and (2) the nonexclusivity rule contravened the Durbin Amendment because the Durbin Amendment required that all debit transactions, rather than just all debit cards, be capable of running over at least two unaffiliated networks. The district court granted summary judgment to NACS. The board appealed.

Rule of Law

Issue

Holding and Reasoning (Tatel, J.)

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