Valley Bank v. Plus System, Inc. (914 F.2d 1186, 1990)

FLETCHER, Circuit Judge:

Plus System, Inc. (“Plus”) appeals the district court’s grant of summary judgment to Valley Bank of Nevada (“Valley”) on Plus’s claim that a Nevada statute violates the commerce clause of the United States Constitution. Under the statute, ATM networks may not prohibit a Nevada bank from charging transaction fees to an automated teller machine (ATM) cardholder who withdraws funds from the Nevada bank’s ATM but whose account is with another bank. We affirm.

FACTS

Valley is a Nevada bank with branches throughout the state. Plus is a shared automated teller machine (ATM) network, of which Valley is a founding member. In a shared ATM network, account holders can use their own bank’s ATM card to withdraw cash from another bank’s ATM (a “foreign” transaction). Banks would not be willing to permit foreign cardholder withdrawals without assurances that the cardholder’s home bank will reimburse the withdrawal. Through shared ATM networks, banks subscribe to one set of rules governing the entire membership so that the banks need not contract separately with each other for reimbursement, which would be cost prohibitive.

Under the Plus network rules, the “acquirer bank” (the bank whose ATM machine disburses the money) charges the “issuing bank” (the bank holding the consumer’s account) 50$ (the “interchange fee”) and the network 10$ for each withdrawal. The issuing bank can charge its account holder whatever it wants for providing the card service. Frequently, the issuing bank charges an additional “foreign fee” to its account holder for a withdrawal from a foreign bank (any bank other than the issuing bank). The Plus rules, however, prohibit acquirer banks from charging foreign cardholders (those who hold accounts with another bank) a separate “transaction fee” on withdrawals. Plus rules limit them to the 50$ charged to the foreign bank and 10$ charged to the network.

Valley decided in September 1988 that it wanted to charge a separate transaction fee. It argued its case to Plus, but Plus ultimately decided, in early 1989, to table the issue for further study. Valley filed an antitrust suit against Plus in March. While the suit was ongoing, a Nevada act, SB 404, went into effect on June 16, providing that an agreement to share ATMs “may not prohibit, limit or restrict the right of a financial institution to charge a customer any fees allowed by state or federal law, or require a financial institution to limit or waive its rights or obligations under this chapter.” Codified at Nev.Rev. Stat. § 660.095(3) (1989). Valley supplied the impetus to the legislature to pass SB 404 (“the Act”).

In addition to promoting competition, the Act’s ostensible purpose is to enable Nevada banks to deploy more ATMs by permitting them to charge the transaction fee, providing more revenue for deployment. Deploying more machines provides better service to tourists visiting Nevada, espe-daily its casinos, who need cash at all hours of the day. More machines would also benefit Nevada residents in the state’s many less populous locales where a bank could not afford to place a machine without extra revenue. ATMs’ initial installation and subsequent maintenance, repair, and security are very expensive. Maintenance and security are more costly for “off-premises” machines than for on-premises machines because they are geographically distant from the bank. Furthermore, a bank cannot be sure that the volume at an off-premises machine will be high enough to warrant its installation. The bank’s own customers ensure high volume at on-premises machines. The costs of off-premises machines are therefore higher while the volume is usually lower.

Soon after the Act became law, Valley announced its intention to begin charging a transaction fee at its off-premises ATMs, most of which were at casinos, but a few of which were at airports and the Hoover Dam. Plus informed Valley that it believed SB 404 violates the commerce clause. Valley amended its complaint in the pending lawsuit to ask for a declaratory judgment that the statute is constitutional.

The parties agreed to join issue on the constitutionality question and filed motions for summary judgment. The district court granted Valley’s and denied Plus’s motion, finding that the statute does not directly regulate or discriminate against interstate commerce. The statute applies evenhandedly and promotes legitimate state interests while burdening interstate commerce only incidentally. Plus appeals. We have jurisdiction under 28 U.S.C. § 1291.

STANDARD OF REVIEW

We review de novo a district court’s construction of a statute and grant of summary judgment, as well as its resolution of constitutional issues. In re Armstrong, 840 F.2d 651, 652 (9th Cir.1988) (construction of statute); Paulson v. Bowen, 836 F.2d 1249, 1250 (9th Cir.1988) (summary judgment); Actmedia, Inc. v. Stroh, 830 F.2d 957, 962 (9th Cir.1986) (constitutional issues). Summary judgment is appropriate if the evidence viewed in the light most favorable to the nonmoving party reveals no remaining genuine issues of material fact and the district court applied the relevant substantive law. Tzung v. State Farm Fire & Casualty Co., 873 F.2d 1338, 1339-40 (9th Cir.1989).

DISCUSSION

The Supreme Court has outlined a “two-tiered approach to analyzing state economic regulation under the Commerce Clause.” Brown-Forman Distillers Corp. v. New York State Liquor Auth., 476 U.S. 573, 578-79, 106 S.Ct. 2080, 2083-84, 90 L.Ed.2d 552 (1986).

When a statute directly regulates or discriminates against interstate commerce, or when its effect is to favor in-state economic interests over out-of-state interests, we have generally struck down the statute without further inquiry. When, however, a statute has only indirect effects on interstate commerce and regulates evenhandedly, we have examined whether the State’s interest is legitimate and whether the burden on interstate commerce clearly exceeds the local benefits.

Id. at 579, 106 S.Ct. at 2084 (citations omitted). Under either the per se or the balancing inquiry, “the critical consideration is the overall effect of the statute on both local and interstate activity.” Id.

Plus argues that because SB 404 directly regulates and discriminates in favor of Nevada and against interstate commerce, the court should find it per se invalid. Alternatively, Plus argues that SB 404 excessively burdens interstate commerce in spite of any state interests legitimating the statute.

I. PER SE INQUIRY

A. Direct Regulation

“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.

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.

1. Network rules and interdependent economic relationships in networks.

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. 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 dis-bursals 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.

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. 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.

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.

2. Non-Nevada banks.

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.

The request for funds as sent to the issuing bank through the switch includes the actual consumer-requested cash amount plus the 60c charged to the issuing bank, of which 50$ goes to the acquirer bank and 10