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Our latest column from Professor Richard Epstein:
The Improbable Fate of the Durbin Amendment in the Circuit Court of Appeals for the District of Columbia
A Learned Court Makes Intellectual Hash of an Ill-Conceived Statute
The 2010 enactment of the Durbin Amendment as part of the Dodd-Frank Act set into motion an extensive round of administrative rulemaking and litigation that may well have run its course with the recent unanimous opinion of the Circuit Court for the District of Columbia, written by Judge David Tatel for himself and Senior Judges Harry Edwards and Steven Williams in NACS (formerly National Association of Convenience Stores) v. Board of Governors of the Federal Reserve. The outcome of the case was to sustain the decision of the Federal Reserve to allow the banks that issue debit cards to recover $0.21 cent on average in debit card transitions. In so doing, the Court reversed the decision below by Judge Richard Leon, which was openly contemptuous of the arguments of the Fed that carried undue weight in the Court of Appeal. It is a long saga in which no one is covered with glory. To set this in context, it is therefore regrettably necessary to review some of Durbin's tangled history.
The Durbin Amendment The debit card was one of the great commercial innovations in American banking. Starting from a standing start in 1995, it managed by 2009 to become the dominant form of payment in the United States, eclipsing the venerable credit card both in number of transactions and in dollars transferred. One might have thought that this enviable record of success would have won plaudits across the board, for no program can enjoy such success if it does not create net gains to all the parties who contribute to the system.
In this case, those parties numbered five. In the middle of the picture lay the credit card companies, chiefly Visa and MasterCard, which orchestrate transactions between two sides of the market. On the one side lie the credit card holders who received their cards from issuing banks. The key feature of the pre-Durbin arrangement was that the debit card holder paid no monthly or swipe fee for the use of the card. Instead the cost of servicing and recruiting the debit card holders was funded by an interchange fee that was paid to the issuing banks from the retail merchants who accepted the cards. These merchants also paid a fee to the acquiring banks that serviced their accounts, and a smaller fee to the credit card companies that orchestrated the transaction from the middle.
In NACS, Judge Tatel accepted the Durbin fairy tale that this entire arrangement reeked of market failure because of the high level of interchange fee charged for the occasion. But at no point does he explain what the correct fee ought to be, for his only account of market failure is that merchants discovered that they could not do without the card, from which, however, it does not follow that they will pay anything to get it. Rather, what happened was that the credit card companies in discharge of their contractual obligations set the interchange fees at a level that allowed all parties to prosper. The use of that payment in these two-sided markets in effect put the cost of running the system on the parties for whom demand was inelastic (i.e., relatively unresponsive to price changes). The lower prices offered to cardholders thus increased the number of card users, which in turn allowed the fixed costs of running the system to be amortized over a larger customer base. And those interchange dollars funded the special benefit packages that kept debit cardholders coming into the system. In a word, the system was not broken, and the Durbin Amendment did not fix it.
More specifically, the Amendment introduced its own novel inefficiencies by its government command. The relevant text has to be set out in full in order to understand the bizarre nature of the Circuit Court's decision. It reads as follows:
Section 920 (2) Reasonable interchange transaction fees
The amount of any interchange transaction fee that an issuer may receive or charge with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.
In prescribing regulations under paragraph (3)(A), the Board shall--
(4) (B) distinguish between--
(i) 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, which cost shall be considered under paragraph (2); and
(ii) other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered under paragraph (2).
The correct reaction to this sorry provision is that it is both clear and misguided. The initial material in subsection (2) is deeply uninformative because setting fees that are "reasonable and proportional to the cost incurred by the issuer with respect to the transaction" gives no hint of the horror to come. That capacious phrase clearly covers all costs, both variable and fixed, associated with the transaction. On this view, the provision does not put any constraint on the fees that could be charged above and beyond those found in a competitive market, which would lead to that result.
The entire sense of the provision takes on a darker meaning in the light of Section (4)(B), which gives a definition that is far more restrictive than the general statement above. It divides the world into two kinds of costs and makes it clear that only the "authorization, clearance, or settlement" costs for a particular electronic transaction should be considered under paragraph (2) while all other costs are removed.
Judicial Obscurantism in the Court of Appeals It does not take a genius to conclude that the listing of these three transaction-specific costs excludes all the overall costs needed to design, operate and maintain the system. By design, those were to be cast back on the issuing banks to recover from their own debit card customers. Try as one might, it is not possible to see any gaps in the statutory structure. The only way in which this could have been made clearer is to have inserted the word "all" before "other costs" in paragraph (ii). But it is hard to resist the conclusion that Senator Durbin, perverse though he be, knew exactly what he was doing with his own Amendment. The Senator was devoted beyond all measure to Walgreen's and other retailers and equally intransigent with respect to the banks, so it is a virtual certainty that he meant what he said--and said what he meant. The retailers had excellent lawyers to help Senator Durbin along his appointed path. Judge Tatel called the Durbin Amendment a badly drafted statute, but that charge is surely wrong. Incompetently conceived, surely, but accurately drafted, regrettably, is a much better account of Durbin's regulatory calamity.
At this point, the contrast between the learned obscurity of Judge Tatel and the blunt clarity of Judge Leon's opinion below is a sight to behold. The key argument of Judge Tatel is that this text could "easily" be regarded as ambiguous so that it is correct for the Board to allow "issuers to recover, equipment, hardware, software and labor costs since [e]ach transaction uses the equipment, hardware, software and associated labor, and no particular transaction can occur without incurring these costs." Judge Leon rightly dismissed that claim in one word: "Please."
Leon's terse view of statutory interpretation makes infinitely more sense than the tendentious reading Judge Tatel, who relied on this identical passage to incorporate the semiotics of Jacques Derrida or the post-structuralism of Michel Foucault into modern administrative law. Finding, or inventing, ambiguity where none existed, he gave the views of the Federal Reserve undeserved prominence under the regrettable Chevron doctrine that has courts defer to agencies when statutes are found ambiguous.
To conjure up that needed ambiguity, Judge Tatel launches into an extended, prolix, and tedious discussion of restrictive and nonrestrictive clauses, which, he claims, allows the Fed to infer this third class of expenses lurking in the shadows that the Fed by rule recover through debit interchange.
We are in an ethereal world. These unspecified objects might be called "fixed, variable costs". But suppose that these costs, like the Loch Ness monster, do exist. It nonetheless remains true that the impatient Judge Leon offers the only tenable reading of the Durbin Amendment: these fixed costs of running the computer network were excluded along with every other business cost needed to keep the program going, without which any particular transactions would not happen.
Economic Redemption, of Sorts As a matter of statutory interpretation, Judge Tatel's opinion is an intellectual train wreck. But functionally, it supplies a most welcome result, because of the hopelessly confiscatory nature of the Durbin Amendment, which on its face would have make made it impossible for the banks to recover their extensive invested costs in their operational system through interchange, without supplying them any alternative. To be sure, there was extensive talk of how banks should charge their own customers monthly or swipe fees. But those were never collected, after they were buried in an avalanche of abuse, starring the ubiquitous Senator Durbin who wrote the heads of Bank of America and Well-Fargo gratuitously nasty letters asking that they rescind the fees that only months before were supposed to be their salvation.
The net result was that the banks could not recover their invested capital sunk in these debit card systems. This whole statutory system borders on the farcical because it overlooks its long-term stability and success. In many places I have urged that the entire statute should be struck down as a confiscatory taking. That decision was resisted in the earlier and misguided 2011 decision of the Eighth Circuit in TCF National Bank v. Bernanke (on which I worked as a consultant to TCF through the trial stage) that suggested that the issuing banks could make up their lost revenue somehow by charging their own customers, which never happened.
As an economic matter, it is clear that the higher the allowable debit interchange fees, the less disruptive the Durbin Amendment is to the operation of the debit card interchange market, and in that sense at least the decision in NACS performs a useful public service that was no part of its intention. Indeed, I suspect--or just hope--that Judge Tatel's misguided bit of statutory interpretation will not be challenged down the road.
Remember that the panel decision was unanimous, and it may prove unlikely that either the entire District of Columbia Court of Appeal or the Supreme Court will have any appetite to untangle the tortured arguments that persuaded so distinguished a panel of the Court of Appeals. And if they did look at this statute, they should start by revisiting the constitutional issues from TCF, which were decided on an assumption that has proved false, namely, that the debit card companies can recover their lost fees from their own customers.
That seems highly unlikely at present, so at present the best achievable resolution for this issue is a large dose intellectual bed rest after all the legal twists and turns of the past four years. But who am I to say? I thought that the chances that Judge Leon's decision would be overturned were close to zero. And never in my most fevered moment could I have imagined the grotesque and improbable way in which the Court of Appeals saved the bacon of the Federal Reserve, and yes, of the issuing banks. Wonders never cease.
Legal Intern, Manhattan Institute's Center for Legal Policy
Ever so often, the Supreme Court hears a case that has ramifications for our very constitutional structure.These cases reach into the heart of our government to see what strictures remain between the founding generation and our own.
The Court is currently hearing oral arguments in Bond v. United States, a case dealing with fundamental issues of federalism and separation of powers. Specifically, the issue deals with the extent to which Congress can abrogate state police powers pursuant to the mandates of Congress's treaty obligations.
But in a larger sense, this case speaks to the validity of the framework of analysis the Court has employed since its inception. The presumption of constitutional analysis has always begun on the side of federalism and separation of powers; that is, the Constitution created certain enumerated powers to delegate to the federal government and left the majority to the states, so we begin our analysis from where the nexus of the power was meant to lie. In other words, our underlying premise is always to begin with federalism, and inch towards increasing federal power as circumstances might necessitate.
The Bond court has a chance to take another step towards maintaining the presumption of our Constitution by reaffirming the states' role in criminal prosecutions.
The Wall Street Journal has further details on the salient issues here, and the New York Times has more on the oral arguments here.
Legal Intern, Manhattan Institute's Center for Legal Policy
This week, the Supreme Court is considering a potentially-transformative case that could alter the range of free speech protection granted under the First Amendment. In McCutcheon v. FEC, the Court must decide whether aggregate limits on the amount a person ($48,600 for direct contributions to candidates; $74,600 for donations to non candidate-affiliated political committees) can donate during an election cycle is constitutionally permissible.
Specifically, the Court's constitutionally-relevant precursor here is Buckley v. Valeo, which held that contributions could be limited due to the fear of perpetuating corruption by allowing a donor to make unlimited donations to a single candidate in exchange for political favors. Ostensibly, this appears to be a legitimate concern, possibly even to the extent of allowing for a qualified restriction on political free speech.
But in a larger sense, the specific principle laid out in Buckley cannot been extended out to encompass an area in which the Court's reasoning does not logically extend. The end as stated in Buckley is to subvert potential political corruption, through the means of restricting the amount an individual can donate to candidates for federal office. If we extend this logic to McCutcheon, the stated proposition would stand as: If we restrict the amount of money an individual can give as an aggregate to various candidates, then we are furthering the end of subverting potential political corruption.
Now, the Federal Election Campaign Act already restricts individual donations to a single candidate to $5,200 ($2,600 for primary; $2,600 for general election). Using the Buckley logic, these means can seem to be tailored towards preventing political corruption by preventing a candidate from being beholden to a donor rather than an idea. However, this logic falls apart when we try to say that a limit on the aggregate amount a donor can make furthers this same end. By this extension, a donor could be restricted from donating even nominal amounts to a candidate if the donor has already hit the aggregate ceiling. In oral arguments, Chief Justice Roberts addressed this exact point:
"The concern," Chief Justice John Roberts noted, "is you have somebody who is very interested, say, in environmental regulation, and very interested in gun control. The current system, the way the anti-aggregation system works, is he's got to choose. Is he going to express his belief in environmental regulation by donating to more than nine people there? Or is he going to choose the gun control issue?"
An aggregate cap stands as a forced rationing of political thought as expressed, ironically, through the Buckley proposition that money in service of political speech is protected by the First Amendment. Because the latter statement is a long-standing legal fact, the logical disconnect becomes more apparent.
Moreover, because we are dealing with First Amendment protections, the means must be given "strict scrutiny" examination. The Buckley court seemingly found donor limits to individual candidates to be narrowly-tailored means to the end of rooting out potential quid pro quos.
In order to extend that to McCutcheon, the Court would have to say that the additional burden on political speech created by aggregation caps is either 1) still narrowly-tailored to the anti-corruption end or 2) come up with a new justification for the aggregation caps that can pass strict scrutiny.
Finally, because Super PACs are largely funded by wealthier donors, the aggregate caps would destroy the influence and impact of smaller donors in a variety of political arenas, while allowing larger donors to increase their influence in the political process; this would abrogate the intention of campaign finance laws in the first place. Considering these legal and policy implications, the Court should take this opportunity to clear the way for free expression of political thought.
Summer Intern, Manhattan Institute's Center for Legal Policy
A third federal appeals court declared President Obama's recess appointments to the National Labor Relations Board (NLRB), a 5-member board which referees labor-management disputes and oversees union elections, to be unconstitutional, on the grounds that the Senate was not officially in recess during the extended holiday break in January 2012 when these three contentious vacancies were filled. The significance of the ruling was depicted on Wednesday, as the Fourth Circuit refused to enforce two NLRB decisions, together with the dissent in federal appeals courts in both Philadelphia and the District of Columbia. Subsequently, the U.S. Supreme Court has granted cert. to hear the D.C. case.
Significantly however, Obama may have achieved a political resolution to this legal dispute, as the president has nominated two new NLRB appointees to replace those opposed by the Senate Republicans, namely union lawyer Richard Griffin and Deputy Labor Secretary Sharon Block, to be replaced by former AFL-CIO lawyer Nancy Schiffer and Kent Hirozawa. Obama has thereby (tactically) cleared the way for a confirmation vote next week and perhaps rendered the Supreme Court's appraisal moot.
Crucially, this was not the only controversy to preoccupy the Senate this week, as the appointment of Richard Cordray as director of the Consumer Financial Protection Bureau, was confirmed on Tuesday afternoon with a vote of 66 in favor and 34 opposed. Cordray's appointment too occurred during the questioned January recess of 2012. Moreover, a series of compromises are to proceed this week, as it is reported that Senate Republicans will allow votes to proceed for President Obama's top choices to run the Labor Department, Environmental Protection Agency, and Export-Import Bank of the United States.
Senate Majority Leader Harry Reid [D-Nev] said "I think we get what we want, they get what they want. Not a bad deal."
Please visit our past discussions on recess appointments for a history of the arguments that preceded this latest compromise.
Summer Intern, Manhattan Institute's Center for Legal Policy
In February, the Tennessee legislature approved a constitutional amendment (subject to voter approval in 2014) to end the state's use of the Missouri Plan to select state judges. Under the existing plan, a non-partisan Judicial Nominating Commission reviews and recommends judicial candidates for the governor's selection. The Commission was allowed to expire at the end of June and the legislature's amendment, if passed by voters, would make that change permanent. Thereby, the governor will have the independent duty and discretion to appoint appellate court judges. The transition is consistent with Tennessee's intention to move to a federal model of judicial appointment, whereby the governor's appointments are to be subject to confirmation by the legislature.
The amendment has generated backlash from advocates of the Missouri Plan, especially with a vacancy looming in the Tennessee Supreme Court, as Justice Janice Holder is retiring in August 2014. According to Colin Levy, Democrats and trial lawyers are claiming the absence of a Commission, renders the state without a method to fill the vacancy. Yet crucially, Levy declares that these groups are "angling to get the Missouri Plan reinstated on a 'temporary' basis" in the hopes of achieving its permanent restoration. Vanderbilt University law professor, Brian Fitzpatrick, points out that there has been an effective appointment process since 2009 and the governor is authorized to act independently when the Commission fails to submit a list of candidates. Fitzpatrick cites:
[I]f the judicial nominating commission does not furnish a list of three (3) nominees to the governor within sixty (60) days after receipt of written notice from the governor that vacancy has occurred, then the governor may fill the vacancy by appointing any person who is duly licensed to practice in this state and who is fully qualified under the constitution and statutes of this state to fill the office.
The one thing that was clear during yesterday's Supreme Court argument in Fisher v. University of Texas -- a case involving affirmative action -- was that the Court's liberal bloc is terrified at the prospect of overruling Grutter v. Bollinger, a 2003 precedent holding that public universities can use racial preferences in admissions (a blatant violation of the Equal Protection Clause) because "diversity" is a "compelling state interest."
A substantial diversity industry has been built upon Grutter, which explains why liberal justices, the media, and college deans' offices are desperate to see it upheld. But what emerged from yesterday's oral argument is that Grutter is an incoherent mess. Trying to shoehorn the Texas system into Grutter's "logic," the university's lawyer argued that the university had not achieved a "critical mass" of minorities -- then refused to say what a critical mass would constitute. My full analysis of yesterday's oral argument and why Grutter must go is posted here at NRO Bench Memos.
The Supreme Court kicked off the October Term on Monday - the first Monday of October. Here's a quick roundup of the big issues up before the Court.
Affirmative action: The court will revisit its 2003 ruling (Grutter v. Bollinger) which upheld certain affirmative-action programs at universities. In the new case, Fisher v. University of Texas, the Court will consider a white student's challenge to the admissions policy at UT Austin that allows race to trump other merit-based factors. As John Yoo recently argued, the Court should overturn Grutter as a "blemish" on our constitutional law.
Gay Marriage: It's considered likely that the Court will address gay marriage, although the Justices have not made an announcement yet. Actually, there are two distinct issues: (1) can Congress define "marriage" for federal law purposes? and (2) can states define marriage as the union of one man and one woman?
The first issue relates to the Defense of Marriage Act (DOMA). There is at least a decent Tenth Amendment argument that DOMA is unconstitutional. If the federal government wants to make certain benefits contingent on being married, so be it, but the feds have to defer to the states to supply the definition of marriage.
The second issue, which relates to California's Proposition 8, presents a much greater threat to our constitutional order. The liberal argument is that the Constitution requires state recognition of same-sex marriage and, therefore, divests states of their historic power over the definition of marriage. According to the liberal spin, as the Washington Post's Robert Barnes reports in typically unbiased fashion, the question is "whether society's growing acceptance of same-sex unions warrants constitutional protection." I guess society's "growing acceptance" is somehow reflected by the 37 states that have passed laws defining marriage as limited to a union between one man and one woman. As I have said before, the liberal argument here is pure judicial activism.
ObamaCare, Part II? There is at least a possibility that the Affordable Care Act will come back to the Court this term. The Court is considering a petition by Liberty University to reconsider the university's challenge to ACA's employer mandate on religious freedom grounds, but also as exceeding Congress's power. Although the Court often summarily rejects such petitions, it has kept this one under advisement all summer, and now has asked the Obama administration to respond - raising the likelihood that the Court will agree to revisit this law.
Takings. The case is Arkansas Game and Fish Comm. v. United States. The issue is whether government regulations that impose recurring flood invasions constitute a "taking" within the meaning of the Takings Clause, even if the flooding isn't permanent.
Voting rights. Overlapping with the recent Voter ID controversies are a series of cases challenging Section 5 of the Civil Rights Act, which requires states and localities with a history of discrimination to get federal approval of any changes in their voting laws. In a 2009 ruling, the Supreme Court expressed concern about "serious constitutional questions raised by Section 5's intrusion on state sovereignty." Clearly this is the case for state and local elections. But even for federal elections, the Constitution gives states the power to define "the times, places, and manner" of choosing congressmen. Granted, Congress has the power to amend such regulations, but that's very different from forcing states to ask Congress's permission before changing their voting laws.
Alien Torts. On Monday, the Court heard argument on the scope of the Alien Tort Statute (ATS), a venerable 1798 law that allows aliens to bring lawsuits in federal court for violations "of the law of nations or a treaty of the United States." As far as we know, it was enacted to cover very minor gaps in the law, like the assault of a diplomat in the U.S., or piracy committed by Americans in international waters. The law was virtually unused until the 1980s, when it was revived as a nifty way to use American courts to pursue alleged human rights abusers.
In the new frontier, the international rights bar is arguing that the ATS gives courts jurisdiction over suits that have no connection to the US; that is, cases in which foreign plaintiffs sue foreign defendants over conduct that occurred outside of the U.S. The case is Kiobel v. Royal Dutch Petroleum.
In Monday's argument, the Justices showed skepticism of the expansion of the ATS and their questions sought some principle to limit ATS. Justice Sotomayor seemed inclined to endorse an interpretation put forth by the European Union in an amicus brief, which argues that US courts should allow ATS lawsuits with no connection to the US, provided the parties have exhausted all other remedies. As a matter of policy, that might or might not be sensible, but it is disturbing that even one Supreme Court Justice believes that a 214-year-old American law should be interpreted according to a policy formula dreamed up in Brussels.
Over at Ricochet
, we've launched a new podcast series on the Constitution, hosted by yours truly. It's called "The Naked Constitution" because our goal is to discuss the original public meaning of the framers' words without the "help" of later academic encrustations. Episode One is: The Living Constitution vs. The Naked Constitution
. I'm joined by Ed Whelan, the president of the Ethics and Public Policy Center
, and host of NRO's Bench Memos Blog
, and by James Poulos, producer at HuffPost Live and a contributor to Forbes
and Vice. In this wide-ranging discussion, the danger of the Living Constitution is exposed with references to Napoleon Bonaparte, flogging, and the "metaphysical aromatherapy" of Planned Parenthood v. Casey
. You can subscribe to this podcast through iTunes here
. Direct link here
As I wrote yesterday, the outcome of the 2012 election is likely to set the future course of the Supreme Court for a decade or more. A second-term Obama will have the opportunity to turn the Court decisively to the left. But there's more to the judiciary than the Supreme Court. Most cases don't make it to the high court. As a result the lower federal courts, especially the appellate ("circuit") courts end up making much of the law that we live with.
There are 874 federal judgeships in total. So far, Obama has appointed 126 judges, but given a second term the number will no doubt be closer to W's total of 328 judges or even Clinton's 379 (good statistics at the US Courts website).
On inauguration day 2013, the next president will start out with 92 judicial vacancies to fill (assuming that nobody else gets confirmed between now and election day). This includes three, count 'em, three, vacancies on the all-important DC Circuit: the court that hears most appeals from the decisions of federal agencies and which is very often the warm-up bench for future SCOTUS justices. The ability to appoint three new judges to the DC Circuit will help determine whether the so-called "independent agencies" will continue to operate as a rogue fourth branch of government without judicial check.
Incidentally, the high number of judicial vacancies is not necessarily due to Republican "obstructionism" (contrary to the mainstream media), but is at least partly due to the administration's incompetence. As Ed Whelan of NRO Bench Memos has pointed out, Obama let two years go by without nominating anyone to the then-existing two open slots on the DC Circuit. And now there are three open slots. Moreover, there have been a "significant number" of Obama's potential judicial nominees who couldn't even get a thumbs-up from the strongly liberal American Bar Association. But given four more years, Obama will eventually get his way.
Since at least the 1984 nomination of Frank Easterbrook, the Senate has used the summer of a presidential election year to refuse to confirm nominations to the appellate branch, and this Senate is no different. The American Bar Association, however, for the third straight year, is lobbying Congress to confirm specific judicial nominees, something they never did during the Bush administration, giving some confirmation to the accusations of the Bush administration that the ABA judicial-nominee rating process was highly partisan and biased. [Kerr; Whelan]