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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.,
ARBYS RESTAURANT GROUP, INC., BROOKSHIRE
GROCERY COMPANY, CKE RESTAURANTS
HOLDINGS, INC., STARBUCKS CORPORATION,
AND THE WENDYS COMPANY
IN SUPPORT OF THE PETITIONER
255275
NACS (FORMERLY KNOWN AS NATIONAL
ASSOCIATION OF CONVENIENCE STORES),
NATIONAL RETAIL FEDERATION, FOOD
MARKETING INSTITUTE, MILLER OIL CO., INC.,
BOSCOVS DEPARTMENT STORE, LLC, AND
NATIONAL RESTAURANT ASSOCIATION,
Petitioners,
v.
BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM,
Respondent.
JEFFREY I. SHINDER
Counsel of Record
OWEN GLIST
Of Counsel
CONSTANTINE CANNON LLP
335 Madison Avenue
New York, New York 10017
(212) 350-2700
jshinder@constantinecannon.com
Attorneys for Amici Curiae
September 19, 2014
i
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 Market
Enabled Interchange Fees on Debit
Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
II. Merchants Have No Choice But to Pay
These Supracompetitive Fees . . . . . . . . . . . . . . .13
III. The Durbin Amendment . . . . . . . . . . . . . . . . . . .15
IV. The NPRM and Comments Regarding Costs
Not Specic to a Particular Transaction and
the Effects on Small-Ticket Transactions . . . . . 16
V. The Fi nal Rule and the Impact on
Small-Ticket Merchants . . . . . . . . . . . . . . . . . . . . 17
ARGUMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
I. The Final Rule Is Not Entitled to Deference. . . . .23
ii
Table of Contents
Page
A. The Final Rule Led to Substantial
Increases in Interchange Fees in
Conict 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. Assn v.
State Farm Mut. Auto. Ins. Co.,
463 U.S. 29 (1983). . . . . . . . . . . . . . . . . . . . . . . . . . . . .23
Natl 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), affd,
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
1
STATEMENT OF INTEREST OF AMICI
1
Anyone who has used plastic to pay for a cup of coffee
or a candy bar would not be surprised to learn that small-
ticket transactions make up the fastest growing segment
in the debit market. Small-ticket transactionsunder
$15have grown to 43% of debit transactions, and with
current growth rates, may soon become the majority of
all debit transactions.
2
After the Boards rulemaking at
issue in this Petition, fees for small-ticket transactions are
now much more expensive than they were before Congress
enacted reform of the debit-interchange system intended
to lower debit-interchange rates.
1. Counsel of record received timely notice of the intent to
le this brief under Rule 37.2(a), and the parties have consented
to its ling. No counsel for a party authored this brief in whole or
in part, and no counsel or party made a monetary contribution
intended to fund the preparation or submission of this brief. No
person other than amici curiae, their respective members, or
their counsel made a monetary contribution to its preparation or
submission.
2. According to research from the Federal Reserve Board
(the Board) released in July 2014, small-ticket transactions
accounted for 43% of all debit transactions in 2012, up from
41.4% in 2009. While debit transactions under $15 increased
by 28.7% from 2009 to 2012, debit transactions of $15 or more
increased 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/les/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/les/communications/pdf/research/2010_payments_study.pdf.
2
In 2012, there were more than 20 billion small-ticket
debit transactions. Hundreds of millions of these sales took
place at Amici 7-Eleven, Inc., Arbys Restaurant Group,
Inc., Brookshire Grocery Company, CKE Restaurants
Holdings, Inc. (Carls Jr. and Hardees), Starbucks
Corporation, and The Wendys Company (Amici).
Amici are at the center of this fastest-growing
merchant segment for debit transactions, as customers
increasingly convert small transactions from cash to
debit for convenience. Amicis operations include tens
of thousands of small business franchises and licensed
storesconvenience and grocery stores, quick-service
restaurants (QSRs), and specialty coffee shopsthat
accept 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
Amici , and al l si mi larly-situated smal l-ticket
merchants (including such widely-used services as transit
authorities, vending operators, and newsstands), have a
signicant stake in this case because of the substantial
nancial harm they are suffering from the rulemaking at
3. According to MasterCard, [t]he holy grail for increasing
debit card purchase volume is increasing small-ticket purchases
across a broad array of everyday expenditures. Kate Fitzgerald,
Despite Durbin, Debit Still Offers Issuers Many Benefits,
MasterCard Exec Says, PaymentsSource (May 1, 2012), District
Court Dkt. No. 30 at 42-43. And as Visa noted in comments
submitted to the Board, [t]oday, more than 30% of Visa Check
Card (or signature) transactions are at relatively small ticket
sizes. Comments of Visa Inc. at 7 n.16 (Feb. 22, 2011), available at
http://www.federalreserve.gov/SECRS/2011/March/20110304/R-
1404/R-1404_022211_67810_571316902268_1.pdf.
3
issue. The Boards Final Rule, Regulation II, Debit Card
Interchange Fees and Routing, Final Rule, 76 Fed. Reg.
43,394 (July 20, 2011) (Final Rule) enabled the dominant
debit networks to impose substantial price increases for
debit-interchange fees on small-ticket transactions
increases that have hit Amici, along with their franchisees
and licensees, especially hard during a time of economic
distress. 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 but
to pay these interchange fee increases because they must
accept debit cards to remain in business.
The exorbitant debit-interchange fees that Amici are
now being forced to pay are concrete examples of not only
the market failure that motivated Congress to regulate
debit interchange, but also the Boards failure to follow
Congresss clear directives to implement regulations
to prevent further exercises of market power by the
dominant debit networks.
In fact, rather than putting in place regulations that
would have restrained further exercises of market power
by the networks and the banks, the Board empowered
them to implement price increases that, depending on the
transaction amount, range from 15 percent to more than
200 percent on the vast majority of debit transactions
accepted by small-ticket merchants like Amici.
The Board enabled this abuse of market power even
though it received comments from some Amici and their
trade association representatives, advising the Board
that its initial proposalawed but better than the Final
Rulecould result in a substantial price increase on many
4
small-ticket transactions. The Board also disregarded
numerous submissions that explained that, given the
networks market power over merchants, the Board could
not assume that network competition for merchants would
prevent debit interchange from increasing after the Final
Rule went into effect.
Several Amici participated in proceedings at the
District Court and the Court of Appeals, submitting
brieng (cited by the District Court as the 7-Eleven
Amicus Br., Pet. App. 71a, 101a) and detailed declarations
in support of Petitioners.
7-Eleven, Inc. (7-Eleven) is the worlds largest
convenience retailer. 7-Eleven operates, franchises, or
licenses approximately 8,170 convenience stores in the
U.S. 7-Eleven has more than 5,800 franchisees operating
at 6,250 locations. A typical 7-Eleven franchisee owns a
single store and employs 8 to 10 people.
In 2013, some 76% of 7-Elevens 760 million payment-
card transactions were debit transactions. For sales inside
7-Eleven stores, debit represents 82% of payment-card
transactions, and the average debit-card transaction is
less than $10and of course, many transactions fall well
below that level.
4

Arbys Restaurant Group, Inc. (Arbys) is the
second largest quick-service sandwich chain in the U.S.,
with more than 3,200 restaurants system-wide. Arbys
4. According to data collected by Petitioner NACS, over the
last three years, average spend at convenience stores, excluding
fuel, ranged from $5.70 to $6.59.
5
currently operates approximately 940 quick service
restaurants and has approximately 360 franchisees
operating approximately 2,291 additional quick service
restaurant franchises in the U.S. Arbys payment-card
transactions represent 45% of all sales transactions
annually. Debit transactions represent 78% of overall card
transactions to date in 2014, and some 80% of Arbys debit
card transactions are small-ticket transactions under $15.
Arbys restaurants paid an average of approximately 20%
more in debit interchange fees after the Boards Final
Rule was adopted.
Brookshire Grocery Company (Brookshire) is a
Texas-based regional food chain that has been providing
families with quality foods since 1928. Brookshire
operates more than 150 store locations under the banners
of Brookshires Food Stores, Super 1 Foods Stores, and
FRESH by Brookshires. Brookshire processes some 30
million debit transactions each year. These transactions
cost nearly twice as much as they should because the
Board allowed banks to recover their xed costs under
the Final Rule.
CKE Restaurants Holdings, Inc. (CKE), through
its subsidiaries, owns, operates, and/or franchises over
3,500 quick-service restaurants world-wide, primarily
under the brand names Carls Jr. and Hardees. CKE has
over 2,000 domestic franchise restaurants owned by more
than 200 franchisees.
At Carls Jr., payment cards comprised approximately
45% of all transactions in scal year 2014. At Hardees,
payment-card transactions accounted for approximately
40% of sales during the same time frame. In the wake of
6
signature-debit interchange-fee increases after the Final
Rule at issue in this Petition, CKE as well as its Hardees
and Carls Jr. franchisees are together paying more than
$4 million annually in higher signature-debit-interchange
fees.
Starbucks Corporation (Starbucks) has more than
20,000 stores in 65 countries, and is the premier roaster
and retailer of specialty coffee in the world. In the U.S.,
Starbucks accepts payment cards across most aspects of
its business, including at nearly 11,000 company-owned
or licensed stores. The vast majority of transactions at
Starbucks are below $12. Debit transactions comprise
71% of non-cash, in-store debit and credit transactions,
including activations and reloads of Starbucks Cards.
The Wendys Company (Wendys) is the worlds
third largest quick-service hamburger company. There
are close to 5,700 Wendys restaurants in operation in
the U.S.nearly 4,900 operated by some 450 Wendys
franchisees. Because debit cards are used for the
vast majority of payment card transactions, Wendys
restaurants are paying an estimated $3,500 per store per
year in additional debit-interchange feesan increase of
approximately 25% in debit-interchange fees following the
Final Rule at issue in this Petition.
SUMMARY OF ARGUMENT
In July 2010, Congress responded to the persistent
failure of competition in the debit-card market and the
rapid rise of debit-card fees by enacting comprehensive
reform of the debit-card system. See Section 920 of the
Electronic Fund Transfer Act, codified at 15 U.S.C.
1693o-2 (the Durbin Amendment).
7
The text, structure, and underlying purpose of the
Durbin Amendment intended to restrain and eventually
reduce the market power that had crippled competition in
the debit-card industry for decades. Its principal author,
Senator Richard J. Durbin, made this clear on the Senate
oor:
For years, Visa and MasterCard, and their big
bank backers, have unilaterally xed prices
on the fees small businesses pay every time
they accept a debit card from a customer. The
two giant card networks control 80 percent
of the debit card marketthat is Visa and
MasterCard. And it is no surprise that debit
interchange fees have risen, even as the price
of processing the transaction has fallen. They
can impose these prices and say to the local
businessperson: Take it or leave it.
156 Cong. Rec. S5,802 (daily ed. July 14, 2010).
The Board ignored Congresss directive to restrain
the dominant networks ability to impose take it or leave
it pricing. After announcing a proposed rule limiting
banks to recover their incremental costs, the Board
reversed course in the face of an extraordinary lobbying
effort.
5
The Boards Final Rule allowed banks to recover
xed costs that are not specic to any particular
5. See generally Stephen Haber & Ross Levine, The Federal
Reserves 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 and
banks are spending huge sums lobbying against the 12-cent cap.).
8
transaction, as required by the statute. 76 Fed. Reg. at
43,427.
As the District Court held, the Board completely
misunderstood the Durbin Amendments statutory
directive and interpreted the law in ways that were clearly
foreclosed by Congress. Pet. App. 113a. There is no better
illustration of the Boards complete misunderstanding
of the Durbin Amendment and the implications of its
error than the impact of the Final Rule on small-ticket
merchants like Amici. Indeed, the District Court cited
the increase in fees on small-ticket transactions as a key
example of how the Board outed the will of Congress,
holding that Congress did not empower the Board to
make policy judgments that would result in signicantly
higher interchange rates. Pet. App. 101a.
Remarkably, at the Court of Appeals, the Board made
no attempt to justify the Final Rules impact on small-
ticket transactions, the fastest growing segment in the
debit-card marketthe holy grail of debit growth. Yet
the Court of Appeals ignored this issue and afford[ed]
the Board the special deference limited to agencies
engaged in ratemaking proceedingsauthority the Board
itself rejected in response to numerous comments urging
ratemaking jurisprudence upon the Board. See 76 Fed.
Reg. 43,434.
If the Final Rule is allowed to stand, the intensifying
growth in small-ticket debit transactionscurrently 43%
and perhaps soon a majority of all debit transactions
threatens to subvert the will of Congress to restrain the
rise of debit fees, as more and more debit transactions
each year will be more expensive with regulation than
they would have been without it.
9
The Board enabled this massive price increase in
this growing sector despite warnings from Amici and
others in detailed comments responding to the Boards
Notice of Proposed Rulemaking (Regulation II, Debit
Card Interchange Fees and Routing, 75 Fed. Reg. 81,722
(proposed Dec. 28, 2010)) (NPRM). These comments
urged the Board to reduce the inated caps proposed in
the NPRM to ensure that the Final Rule did not implicitly
endorse a price increase.
When the Final Rule increased the NPRMs cap on
interchange fees by approximately 100 to 243%, the Board
demonstrated its complete disregard for the purpose of
the Durbin Amendmentto restrain exercises of market
power in a failed market. The Board even admitted its
actions could cause a price increase, noting that [a]lthough
it is possible that merchants with a large proportion of
small-ticket transactions may experience an increase in
total interchange fees, the rule does not require networks
to 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 enacted
to impose, the dominant networks in the broken debit-
card market responded swiftly and predictably by raising
interchange 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 enacted
the Durbin Amendment to prevent, as each of the debit
networks quickly implemented the highest possible fees
for regulated small-ticket transactions. At the end of
the day, a statute designed to constrain market power
was somehow interpreted by the Board to empower
10
it. Against this backdrop, the District Court correctly
concluded that the Board clearly disregarded Congresss
statutory intent, Pet. App. 47a, by adopting a rule that
led to increased interchange fees in the fastest-growing
debit 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 product
of investments made by each of the systems primary
stakeholders, including merchants that invested in the
infrastructure necessary to accept debit-card payments,
issuers that issued the cards to cardholders, and the
networks and processors that built the infrastructure
that linked merchants and issuers and charged them for
such services. The system allows issuing banks to earn a
reasonable return on debit cards without any interchange
revenue. Pet. App. 52a, JA256 3, JA270-72 29-31,
JA318-21 60-68.
6
When banks in the U.S. began to issue debit cards
in the 1980s, they received no interchange revenue, and
in many cases paid reverse or negative interchange
to merchants. Pet. App. 51a-52a, JA258 7, JA304 21,
6. Citations to JA are to the Joint Appendix in the Court
of Appeals, USCA Case #13-5270 Doc. No. 1462209.
11
JA313 45. They did so because debit cards deepened
their relationships with customers, resulting in customers
carrying higher balances and/or purchasing other
services from banks. Pet. App. 52a, JA256 3, JA270-72
29-31. Debit cards also made banking more efcient
by replacing inefcient check and cash transactions. Pet.
App. 52a, JA256 3, JA272-73 32, JA304 21, JA313
45. Interchange was not necessary to motivate bank
issuance of debit cards in the U.S., and debit-card usage
has prevailed around the world without interchange for
the 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) model
prevailed 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 MasterCard
and their bank owner/members leveraged their power
in 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 a
strategy to require merchants to pay high ad valorem
debit interchange through Honor All Cards rules that
forced merchants to accept signature-debit cards as a
condition of accepting the networks dominant credit
cards. Pet. App. 55a, JA260-62 12-16, JA305 24. The
networks set the same or similar interchange rates for
debit-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 used
the lucrative interchange stream created by this practice
7. JA304 21, JA313 45, JA257-59 6-9, JA260 11,
JA261-62 14-16.
12
to reward their bank owners and entrench their own
dominance in the debit market.
8

The dominant networks reinforced the strategy by
eliminating routing options on debit cards. When debit
cards began to take hold in the 1980s and early 1990s,
they typically carried two or more PIN-debit networks
on the cards, JA306-07 30, giving merchants that
accepted PIN debit the ability to route transactions to
cheaper networks and thereby control pricing to some
degree. 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 MasterCard
also used exclusive deals with the large issuing banks to
eliminate the PIN-debit options that were once on many
debit cards. Pet. App. 56a, JA268-69 25-27, JA306-07
30, JA311 39, JA351-53 152-57. These exclusive deals
prevented merchants from responding to PIN-debit price
increases from Visas Interlink network by threatening
to drop the network, because that would only drive more
volume to signature debit. These arrangements shored
up the networks ability to increase debit interchange
because merchants could not use routing strategies to
reign in both signature- and PIN-debit interchange. Pet.
App. 56a. As banks became more accustomed to receiving
high interchange for both signature- and PIN-debit
transactions, 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 for
a complete rescission of the tying arrangement and $3 billion in
damages. In re Visa Check/MasterMoney Antitrust Litig., 297 F.
Supp. 2d 503 (E.D.N.Y. 2003).
13
to pay ever-increasing interchange rates to underwrite
the networks need to reward the banks became the norm
for this industry.
9
The result was constant price increases
throughout 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 cards
because 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 refused
to accept any Visa and MasterCard credit and signature
debit cardshardly a realistic option for most merchants
given the popularity of plastic.); Pet. App. 54(a).
The experience of Amici convenience-store, QSR,
grocery, and coffee-shop sectors highlights this market
failure. Because of their low margins and smaller tickets,
the majority of these merchants did not accept payment
cards until the early-to-mid 2000s, well after other
merchant 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. Wendys began accepting payment cards in 2004, and
today payment-card transactions account for 47% of overall sales
transactions. Hardees started in 2003 and, when the program was
fully rolled out, payment cards accounted for 2% of sales. Hardees
14
outset, the networks extended incentive interchange
rates to make acceptance cost-effective. Within a few
years after introducing plastic to their customers, many
small-ticket merchants experienced massive growth in
card-based transactions, with the vast majority of that
growth in debit cards.
11
With such volumes, convenience
stores, QSRs, and coffee shops (a nd other small-ticket
merchants) had no choice but to accept these transactions
to remain competitive, even when the incentive rates were
replaced with higher prices over time. This has happened
to every other merchant segment that widely accepts debit
cards. Once these cards gain widespread acceptance and
use, merchants cannot stop taking them without causing
significant harm to their businesses. That gives the
networks and the banks the power to raise interchange
fees to merchants, and they have wielded that power
liberally over the past twenty years, raising rates after
merchants begin acceptance at incentive rates and can
no longer stop taking plastic. The District Court and the
Court of Appeals were just the latest courts to recognize
this phenomenon; others have repeatedly found that the
leading networks have market power over merchants.
12
payment-card transactions now account for 40% of overall sales
transactions.
11. For example, at Arbys, 35% of all sales transactions
are by debit card. Debit comprised the vast majoritybetween
70 and 80 percentof all payment-card transactions at 7-Eleven,
Arbys, and Starbucks.
12. In United States v. Visa U.S.A. Inc., 163 F. Supp. 2d
322, 340 (S.D.N.Y. 2001), affd 344 F.3d 229 (2d Cir. 2003), the
court found that merchantscannot refuse to accept Visa and
MasterCard even in the face of signicant price increases because
the cards are such preferred payment methods that customers
15
III. The Durbin Amendment
The Durbin Amendment was passed as a direct
response to this persistent market failure. As Senator
Durbin stated:
The credit and debit card markets are not
normal. Visa and MasterCard unilaterally
set interchange fee rates that apply to all
banks within their card networks. There is no
negotiation between the banks and merchants
over reducing interchange rates. They set
the rules, they x the fees, take it or leave it.
What can businesses do to stop these rising
interchange fees? Almost nothing. Somevery
rarelybusinesses say they do not accept
credit or debit cards, but the vast overwhelming
number of businesses do. They have to. It is part
of doing business in America.
Visa and MasterCard have 80 percent of the
credit and debit market. Merchants have to use
them. They tell the merchants: If you want to
take 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 market
power 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. 96
Civ. 5238 (JG), 2003 WL 1712568, *4 (E.D.N.Y. Apr. 1, 2003).
16
that interchange fees shall be reasonable and proportional
to the cost incurred by the issuer with respect to the
transaction. 1693o-2(a)(2). The Durbin Amendment
requi res that the Board consider the functional
similarity between (i) electronic debit transactions; and (ii)
checking transactions that are requiredto clear at par.
1693o-2(a)(4)(A). Moreover, the statute requires the
Board to consider the incremental cost incurred by
an issuer for the role of the issuer in the authorization,
clearance, or settlement of a particular electronic debit
transaction, but not other costs incurred by an issuer
which are not specic to a particular electronic debit
transaction. 1693o-2(a)(4)(B)(i) and (ii).
IV. The NPRM and Comments Regarding Costs Not
Specic to a Particular Transaction and the Effects
on Small-Ticket Transactions
In December 2010, the Board released the NPRM
setting forth proposals regarding the regulation of debit
interchangeincluding interchange fees ranging from
$0.07 to $0.12and network routing restrictions.
The Board received detai led comments from
merchants stating that the nal rule should be limited to
authorization, clearance, and settlement costs specic to
a particular transaction in light of the clear language of
the statute and its purpose. These comments specically
urged the Board not to embrace an invented category of
issuer costs that were supposedly specic to debit card
transactions as a whole yet not related to authorization,
clearance, and settlement costs.
13
13. See, e.g., Correspondence f rom the Merchants
Payments Coalition at 4 (Dec. 1, 2010), available at http://
17
The Board also received detailed comments from
small-ticket merchants, such as Amicus Wendys, among
others, warning that the rules per-transaction caps
would actually increase prices for certain small-ticket
transactions.
14
These submissions advised that f lat
interchange fees can be especially harmful to this fastest-
growing debit segment because as transaction sizes
decrease, the cost per transaction increases.
V. The Final Rule and the Impact on Small-Ticket
Merchants
After being warned that a $0.12 cap would raise
interchange fees for debit transactions below $5, the Board
ultimately made things much worse by enabling higher
fees for transactions below $12 by increasing the maximum
interchange fee to $0.21 plus 5 basis points of the value
www. federal reserve.gov/newsevents/rr-commpubl ic/mpc_
correspondence_2010_20101130.pdf (responding to suggestions
of a third category of costs by Visa and Bank of America).
14. See, e.g., Wendys Comments (Feb. 22, 2011); McDonalds
Comments (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 Visa
admitted that the initial proposal would raise certain small-ticket
pricing, suggesting that merchants such as Amici may nd it
impossible or uneconomic to continue to accept transactions with
a $0.12 interchange fee. Visa Comment Letter at 7, available at
http://www.federalreserve.gov/SECRS/2011/March/20110304/R-
1404/R-1404_022211_67810_571316902268_1.pdf . Tellingly, Visas
prediction that small-ticket merchants would stop accepting
uneconomic small-ticket transactions did not come to pass because,
in the failed marketplace, small-ticket merchants must accept
these transactions to remain competitive.
18
of the transaction. This translates to an interchange fee
of 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 under
the Final Rule enabled price increases over pre-Durbin
rates on all small-ticket debit transactions under $12.
In conguring the Final Rule, the Board disregarded
the comments it received from small-ticket merchants and
their representatives. Instead, the Board noted weakly
that, [a]lthough it is possible that merchants with a large
proportion of small-ticket transactions may experience
an increase in total interchange fees, the rule does not
require networks to raise the current interchange fees
for very-small-value transactions. 76 Fed. Reg. at 43,462
(emphasis added). Against the backdrop of the well-
documented market failure that motivated the passage
of the Durbin Amendment, the Board did not need to
require the networks to raise price. Once the Board
enabled a price increase, the logic of a non-competitive
marketplace dictated that the networks would capitalize
on the improper windfall the Board gave them.
And they did. As predicted, within two months of the
Final Rule, the debit networks announced they would price
debit transactions at the cap.
15
As the chart below shows,
15. First, MasterCard raised rates to the cap, and after
announcing only a modest increase, Visa quickly matched
MasterCard by issuing a revised schedule replacing the small-
ticket rate announced in August [2011] with the Feds rate for
regulated issuers, no matter the size of the transaction. Applying
the Durbin Maximum, Visa and MasterCard Could Squash Small
Tickets, Digital Transactions News (Sept. 27, 2011), available at
http://www.digitaltransactions.net/news/story/3217.
19
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-ticket
transactions. Every year an increasing percentage of
debit volume in the U.S. is consummated at small-ticket
levels. As a result, all regulated debit transactions below
$12the holy grail of debit-card growthbecame
substantially more expensive than before the Final
Rule. As reected in the chart below, the interchange
fee on a $10 debit transaction is now 15% higher, whereas
the interchange fee on a $2 debit transaction is now a
whopping 211% more expensive than before the Durbin
Amendment.
20
In a few short years, debit cards have become the
fastest-growing tender type at small-ticket merchants,
often comprising more than 35 percent of their overall
sales transactions.
16
The vast majority of these merchants
debit-card volumes are consummated at transaction sizes
below $12 and, thus, they are now paying higher debit
interchange as a result of the Final Rule. Critically, these
percentages are poised to increase every year as more
and more consumers switch from cash to debit cards to
make small-ticket purchases.
These price increases for regulated debit transactions
perversely, after the Final Rule, unregulated transactions
are cheaperare harming hundreds of thousands of
small businesses across the country, in contrast to the
clear intent of Congress to protect these businesses. See
16. See supra note 11.
21
156 Cong. Rec. S5,802 (daily ed. July 14, 2010) ([A]sk a
restaurant, a business, a grocery store in Iowa, in Illinois,
or in New Mexico what is the biggest pain in the neck they
are running into, and they will tell you that on the short
list is the money they have to pay to Visa and MasterCard
and other credit card and debit card companies every time
a customer uses a card.). Amici often sell to consumers
through franchisees or licensees, which are almost always
small businesses.
17
For example:
Wendys stores are paying an average of $3,500
per store per year in additional debit-interchange
fees.
Hardees and Carls Jr.s restaurants are together
paying more than $4 million annually in higher
debit-interchange fees because of the Final Rule.
In 2012, there were more than 20 billion debit transactions
of less than $15, transactions which may soon become the
majority of all debit transactions. Amici alone account
for hundreds of millions of such transactions each year,
transactions now subject to even higher interchange fees
after the Boards contravention of the Durbin Amendment.
ARGUMENT
Confronted with Congresss clear directive to remedy
the failure of competition in the debit market, the Board
17. In the U.S., CKE Restaurants has some 2,000 franchises
owned by more than 200 franchisees; Wendys has approximately
4,900 franchises operated by about 450 franchisees; and 7-Eleven
has more than 5,800 franchisees operating 6,250 stores.
22
ignored the text of the Durbin Amendment and its
underlying purpose. Instead, it knowingly endorsed a
price increase ranging from 15% to more than 200% on
the fastest-growing segment of debit transactions. The
Boards egregious failure in this important area was not
lost on the District Court, which cited the increase in
fees on small-ticket transactions as a key example that
the Board outed the will of the Congress: Congress did
not empower the Board to make policy judgments that
would result in signicantly higher interchange rates.
Pet. App. 101a.
Notably, the Board did not attempt to justify the Final
Rules impact on small-ticket merchants on appeal, nor
address the merits of maintaining a Final Rule that will
result in higher prices for more and more debit transactions
due to the intense growth of this key sector that may soon
become the majority of all debit transactions. This result
cannot be squared with a statute unambiguously designed
to curb the networks ability to raise debit-interchange
rates. No rational interpretation of fees reasonable and
proportional to issuer costs would have resulted in a
substantial price increase on the fastest-growing segment
of debit transactions.
The Boards response to small-ticket merchants
concern that the Boards actions could result in higher
debit interchange is telling. The Board admitted that
a price increase was a distinct possibility, but weakly
defended itself by noting the Final Rule did not require
the networks to raise pricesin other words, trust the
dominant networks to keep prices from increasing. The
Board offered no support for this assumption because,
after two decades of failed competition in this industry,
23
there was none. Given the evidence of failed competition,
not to mention Senator Durbins oor statements about the
lack of competition, it is hard to imagine a more compelling
example of the Boards failure to properly implement the
Durbin 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 Boards Final Rule
directly contravened the plain language of the statute.
19

Judicial deference may only be accorded [i]f the agency
interpretation is not in conict with the plain language of
18. The Boards analysis of the impact of the Final Rule
on small-ticket transactions made no reference to the growing
importance of such transactions in the debit market. Nor did it
consider the overall statutory scheme, including the fact that
merchants could not counteract a price increase by imposing
a minimum transaction amount for debitwhich the Durbin
Amendment expressly allowed only for credit transactions. See,
e.g., Motor Vehicle Mfrs. Assn v. State Farm Mut. Auto. Ins. Co.,
463 U.S. 29, 43 (1983) (Agency actions are arbitrary and capricious
if agency entirely failed to consider an important aspect of the
problem, offered an explanation for its decision that runs counter
to the evidence before the agency, or is so implausible that it could
not be ascribed to a difference in view or the product of agency
expertise.).
19. As Amici argued below, even if this case is not decided at
Chevron step one, the Board acted unreasonably under Chevrons
second prong by ignoring detailed warnings from Amici and others
about the impact of its proposed rules. [T]he reviewing court
must consider whether the decision was based on a consideration
of the relevant factors and whether there has been a clear error
of judgment. Marsh v. Or. Natural Res. Council, 490 U.S. 360,
378 (1989) (citation omitted).
24
the statute. Natl 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 statutory
construction to ascertain whether Congress had an
intention on the precise question at issue Chevron
U.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 Conict with the Statute
The Boards interpretation of reasonable and
proportional to the cost incurred by the issuer is in
conict with the plain language of the statute. The Durbin
Amendment stipulates that the interchange-fee standard
must reect only the considerations outlined by Congress.
Signicantly, those considerations include the functional
similarity between debit transactions and checks, which
clear at par. In specifying the at-par pricing model that
was thriving in the debit industry until the market was
distorted by the dominant networks, Congress made clear
its intention to remedy the market failure that moved the
debit market toward high supracompetitive interchange
fees for debit transactions. With respect to costs, Congress
permitted only the consideration of the incremental
authorization, clearing and settlement costs associated
with a particular debit transaction. As the District Court
held in rejecting an invented third category of costs
adopted in the Final Rule, Thats it! Pet. App. 90a.
Limiting costs to such a standard would have restricted
debit-card interchange to levels below those proposed in
the NPRM and prevented the price increases that the
networks foisted on small-ticket merchants.
25
B. As the Board Acknowledged, It Was Not
Engaged in Ratemaking
The Court of Appeals committed serious legal error
in this case by giving the Board the special deference
reserved for agencies engaged in ratemaking proceedings.
Pet. App. 16a. This error is particularly egregious because
the 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 urged
the Board to see the Durbin Amendment as an exercise
in ratemaking, primarily because [f]ederal ratemaking
typically allows for a reasonable rate of return on
investment.
20
The American Bankers Association even
submitted a white paper to the Board entitled, Setting
Reasonable and Proportional Interchange Transaction
Fees and the Utility Rate Making Experience.
21

As the Board itself acknowledged, however, the
rulemaking here is not ratemaking. Public utility rate-
setting involves unique circumstances, none of which are
present in the case of setting standards for interchange
transaction fees. 75 Fed. Reg. at 81,733 n.44.
20. Comments of Visa Inc. at 16 (Nov. 8, 2010), available
at 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.
26
Thus, the ordinary Chevron test applies hereand
the Final Rule fails because it allows issuers to recover
costs that Congress clearly intended they should not
recover.
CONCLUSION
The Petition for a Writ of Certiorari should be granted.
Respectfully submitted,
September 19, 2014
JEFFREY I. SHINDER
Counsel of Record
OWEN GLIST
Of Counsel
CONSTANTINE CANNON LLP
335 Madison Avenue
New York, New York 10017
(212) 350-2700
jshinder@constantinecannon.com
Attorneys for Amici Curiae