Opinion ID: 548444
Heading Depth: 3
Heading Rank: 1

Heading: Direct Regulation

Text: 13 Direct regulation occurs when a state law directly affects transactions that take place across state lines or entirely outside of the state's borders. Edgar v. MITE Corp., 457 U.S. 624, 641, 102 S.Ct. 2629, 2640, 73 L.Ed.2d 269 (1982) (plurality opinion). Such a statute is invalid per se, regardless of whether the state intended to inhibit interstate commerce. Id. at 642, 102 S.Ct. at 2640-41; Shafer v. Farmers Grain Co., 268 U.S. 189, 199, 45 S.Ct. 481, 485, 69 L.Ed. 909 (1925). A court must therefore consider the practical effect of the state law on interstate commerce in evaluating its validity under the commerce clause. Healy v. Beer Inst., Inc., --- U.S. ----, 109 S.Ct. 2491, 2499, 105 L.Ed.2d 275 (1989); Brown-Forman, 476 U.S. at 579, 106 S.Ct. at 2084. 14 Plus argues that SB 404 regulates commerce outside Nevada by regulating the rules and interdependent economic relationships in shared ATM networks and regulating the operations of network member banks. Plus also argues that SB 404 violates the commerce clause as direct regulation because it thwarts the regulatory uniformity and consistency essential to an activity like a shared ATM network. 15
16 Plus first alleges that SB 404 is direct regulation of interstate commerce because, through SB 404, Nevada, rather than the network, makes the network rules and directly regulates the interdependent economic relationships in networks. 5 Plus correctly asserts that a network must have rules that all members agree to follow. Without such rules, the network would fall apart. Member banks must know in particular that they will be reimbursed for disbursals to foreign bank cardholders and that they will be paid enough for this service to justify their costs. Plus argues that its no-transaction-fee rule is necessary to the network's efficient operation. The rule helps allocate risks and benefits incurred by the members, essential to the network's survival. SB 404 takes away its power to make such rules. 17 This argument goes too far. Plus is claiming essentially that no state can prohibit companies from contracting in certain ways when one of the companies is from another state. At the extreme, this argument would mean that a state could make no rules to which commercial contracts with non-state-resident parties must conform. On the contrary, Plus's ability to make its own rules has always been subject to legitimate federal and state regulation. Even the Plus member agreement recognizes this. 6 Furthermore, the no-transaction-fee rule is not inherently necessary to an ATM network's existence. Other networks exist without it, for example, Star and In-Nevada, two other networks operating in Nevada. 7 18 Plus's interdependence argument tries to dress up a basic, unadorned characteristic of all commerce. All commerce and all contracts allocate risks and benefits. A network's allocation is usually more complex given its size and number of contracting parties. States and the federal government nevertheless may enact legislation that affects the interdependent relationships constituting commercial activity. See, e.g., Northwest Cent. Pipeline Corp. v. State Corp. Comm'n, 489 U.S. 493, 109 S.Ct. 1262, 1280-82, 103 L.Ed.2d 509 (1989) (Kansas regulation governing production of Kansas natural gas purchased by interstate gas pipeline); Goldberg v. Sweet, 488 U.S. 252, 109 S.Ct. 582, 102 L.Ed.2d 607 (1989) (Illinois tax on Illinois phone service subscribers for long distance phone calls originating or terminating in Illinois); CTS Corp. v. Dynamics Corp. of Am., 481 U.S. 69, 107 S.Ct. 1637, 95 L.Ed.2d 67 (1987) (Indiana Act regulating takeovers of Indiana corporations). A network is not per se exempt from such governmental action. 19
20 Plus also asserts that SB 404 directly affects the operations of member banks not located in Nevada. The ATM transaction involves four entities: the issuing bank, the acquirer bank, the customer, and the central computer switch, which processes the transactions. When the customer requests the cash, the request passes through the switch to the issuing bank. The issuing bank then sends back a message through the switch telling the acquirer bank whether the issuing bank approves the transaction (in essence, whether the customer has funds in her account sufficient to cover the withdrawal). The acquirer bank then either delivers the cash or cancels the transaction. Each day, the Plus network settles accounts and the issuing bank transfers the withdrawn funds to the acquirer bank. 8 21 The request for funds as sent to the issuing bank through the switch includes the actual consumer-requested cash amount plus the 60cents charged to the issuing bank, of which 50cents goes to the acquirer bank and 10cents to Plus. If the acquirer bank could charge a transaction fee, the fee amount would be added to the funds request. The request itself, however, does not itemize the fees; it includes only the total amount needed to complete the transaction. If the customer asks for $100 and there is no transaction fee, the automated funds request will be for $100.60. If there is a $1 transaction fee, the request will be for $101.60. 22 Plus argues that such transactions require the involuntary participation of the issuing banks. Although the customer must respond to the ATM's query whether she wants to pay the charge, and she receives her cash in Nevada, the transaction fee is actually imposed on her at her home bank where it is deducted from her account. The issuing bank must impose and collect the transaction fee and then pay it to the acquirer bank. According to Plus, therefore, for non-Nevada bank cardholders, the fund request and payment take place outside of Nevada's borders, but Nevada nevertheless can dictate terms governing the out-of-state transaction. 23 Contrary to Plus's assertion, the customer making an ATM withdrawal purchases the service while at the ATM in Nevada. A sign on the ATM and the ATM screen both tell her of the transaction fee and that Valley imposes it. 9 She must respond affirmatively that she will pay the fee before the machine will continue with the transaction. 10 Under Plus's argument, the cost of a tackle box bought in Carson City with a check drawn on Grace National Bank in Cherokee, Oklahoma is actually imposed on the purchaser in Cherokee. A Nevada law requiring two forms of identification from customers who write checks would set the conditions under which Grace may let its account holders write checks. This would be a commerce clause violation under Plus's reasoning. Plus's argument fails. By paying the ATM transaction fee from the customer's account, the bank simply disburses funds as requested by the customer in Nevada, analogous to honoring a customer's check. 24
25 Plus argues that shared ATM networks, as interdependent economic entities, are the kind of activity that the Supreme Court has recognized are not suited to diverse regulation by the states. Under the Supreme Court's most recent instruction, 26 the practical effect of the statute must be evaluated not only by considering the consequences of the statute itself, but also by considering how the challenged statute may interact with the legitimate regulatory regimes of other States and what effect would arise if not one, but many or every State adopted similar legislation. Generally speaking, the Commerce Clause protects against inconsistent legislation arising from the projection of one state regulatory regime into the jurisdiction of another State. 27 Healy, 109 S.Ct. at 2499. 28 The cases Plus cites as examples of courts finding uniformity necessary fall within either the sports or transportation categories. The transportation cases are distinguishable from the one before us. State transportation laws pose different obstacles to entities engaged in interstate commerce than does SB 404. In Southern Pacific Co. v. Arizona ex rel. Sullivan, 325 U.S. 761, 775, 65 S.Ct. 1515, 1523, 89 L.Ed. 1915 (1945), inconsistent state laws often required railroad companies to change a train's length when it crossed a state border or else to run shorter trains. The same was true of trucks in Raymond Motor Transp. Co. v. Rice, 434 U.S. 429, 98 S.Ct. 787, 54 L.Ed.2d 664 (1978). In Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520, 79 S.Ct. 962, 3 L.Ed.2d 1003 (1959), different states required or prohibited different kinds of mudguards, requiring truckers to change when crossing borders. 29 A state law permitting its banks to charge an ATM transaction fee does not pose the same kind of barrier to the ATM network. Only the amount requested from the issuing bank changes. The network does not have to retool machines; the transaction takes no more time; there is little if any additional paperwork. Although the law prevents a network from enforcing its rule, the commerce clause does not exist to protect a business's right to do business according to whatever rules it wants. Plus speculates that other states will pass similar but inconsistent legislation, but inconsistent state laws on transaction fees can coexist without conflict as long as each state regulates only its own banks. 11 30 The sports cases involve challenges under antitrust laws and the commerce clause to professional sports league rules. 12 Professional sports leagues have a limited number of teams, 13 with no more than a few and rarely more than two teams in any state. The challenged state legislation in each case would have had significant impact on the whole league fabric, not just on the state's one or two teams. Decisions in sports cases thus deal with the unique entity of the national professional sports league and have not been applied in other factual settings. 31 Neither is the shared ATM network factually similar to a professional sports league. Plus repeats over and over that the no-transaction-fee rule is necessary to the network's efficient operation, making uniformity of state laws necessary to its interstate commerce. The success of other networks that permit their member institutions to charge such fees demonstrates that uniformity is unnecessary to a shared ATM network's survival. Plus's argument is more a jealous defense of its own particular rules and its own concept of how it wants to do business than a serious attack on SB 404's chilling effect on interstate commerce. The commerce clause does not prevent states from taking action that may be inconsistent with Plus's concept of business efficiency; the Constitution does not protect any particular economic structure or approach. Exxon Corp. v. Governor of Md., 437 U.S. 117, 127, 98 S.Ct. 2207, 2214-15, 57 L.Ed.2d 91 (1978) (commerce clause does not protect the particular structure or methods of operation in a retail market). In particular, the commerce clause does not give an interstate business the right to conduct its business in what it considers the most efficient manner; the Constitution protects the interstate market, not particular interstate firms. Id. at 127-28, 98 S.Ct. at 2214-15. 32