[374] Edward W. Ciolko, Joseph H. Meltzer, Donna S. Moffa, Peter A. Muhic, (Argued), Amanda R. Trask, Kessler, Topaz, Meltzer & Check, Radnor, PA, Kevin M. Costello, Roddy Klein & Ryan, Boston, MA, Andrew S. Friedman, Wendy J. Harrison, Bonnett, Fairbourn, Friedman & Balint, Phoenix, AZ, Jeffrey L. Taren, Kinoy Taren & Geraghty, Chicago, IL, for Petitioners.

Sarah R. Breitlander, Hinshaw & Culbertson, Chicago, IL, Martin C. Bryce, Jr., Ballard Spahr, Philadelphia, PA, Diane M. Kehl, Chad A. Schiefelbein, Vedder Price, Chicago, IL, for Respondents, National City Bank and National City Corp.

David H. Pittinsky, (Argued), Ballard Spahr, Philadelphia, PA, for Respondents, National City Bank, National City Corp., and The PNC Financial Services Group, Inc.

Before: SCIRICA, FISHER and JORDAN, Circuit Judges.

OPINION OF THE COURT

JORDAN, Circuit Judge.

In this mortgage loan discrimination case, a putative class of minority borrowers seeks permission under Rule 23(f) of the Federal Rules of Civil Procedure to appeal the denial of final approval by the United States District Court for the Eastern District of Pennsylvania of the parties' proposed settlement and certification of the settlement class. We will grant the petition for permission to appeal and, for the reasons that follow, will affirm the order of the District Court.

I. Background

Named plaintiffs John Rodriguez, Jennifer Worthington, Bobby Crouther, Jesus Conchas, and Rosa Maria Conchas (collectively, "Plaintiffs") are African-American and Hispanic borrowers who obtained mortgage loans from Defendant National City Bank in 2006 or 2007. On May 1, 2008, they filed a class action complaint against National City Bank and its parent company, National City Corporation (collectively, "National City"),^[1] alleging that National City had an established pattern or practice of racial discrimination in the financing of residential home purchases, in violation of the Fair Housing Act, 42 U.S.C. § 3605, and the Equal Credit Opportunity Act, 15 U.S.C. § 1691. Specifically, Plaintiffs asserted that National City issued them loans pursuant to a "Discretionary Pricing Policy" that allowed individual brokers and loan officers to add a subjective surcharge of additional points, fees, and credit costs to an otherwise objective, risk-based financing rate. According to Plaintiffs, as a result of that policy, minority applicants for home mortgage loans were "charged a disproportionately [375] greater amount in non-risk-related charges than similarly-situated Caucasian persons." (J.A. at 117.) In other words, the policy allegedly produced a discriminatory disparate impact.

After the District Court denied National City's motion to dismiss,^[2] the parties engaged in extensive discovery. National City provided Plaintiffs with data on each of the more than two million loans it issued from 2001 to 2008. That data included, among other things, the annual percentage rate, the term of the loan, the interest rate, the prepayment terms, the origination fee, and the amortization type, as well as information about the borrower, including income, ethnicity, race, and debt-to-income ratio. While discovery was still proceeding, the parties met to explore the possibility of a negotiated settlement. Plaintiffs presented National City with preliminary statistical analyses of the loan data they had received. Although those analyses were shared confidentially and are thus not in the record, the parties agree that they included regression analyses of National City's loan data.^[3] Plaintiffs say that those regression analyses revealed that, overall, "Blacks and Hispanics paid more for their loans than similarly situated Caucasians (a `disparate impact') that amounted to damages ... of at least $350 and up to $1,100 per loan." (Petitioners' Opening Br. at 5.) Plaintiffs further contend that, because they controlled for "all objective credit and risk factors impacting loan pricing" (Id. at 12), those analyses prove that National City's Discretionary Pricing Policy produced the disparate impact.

After participating in two days of mediation, the parties arrived at a proposed settlement agreement. Under its terms, the class would include "[a]ll African-American and Hispanic persons who obtained a Mortgage Loan" from National City, its affiliates, or its successor-in-interest, PNC, from January 1, 2004, through the date of the settlement's preliminary approval. (J.A. at 250.) National City did not concede any wrongdoing, but it agreed to pay $7,000,000 for the benefit of the settlement class in exchange for a release of claims. Specifically, the agreement provided a service award of $7,500 to each of the named plaintiffs, $200 to each class payee, $75,000 to two organizations that would provide counseling and other services to the settlement class, and $2,100,000 in attorneys' fees. The agreement also included a provision barring either party from attempting to void the agreement, except in the event of an appeal.

On July 21, 2010, the District Court granted preliminary approval of the settlement and preliminarily certified the proposed class under Federal Rule of Civil Procedure 23(b)(3). Notice was then sent to the more than 153,000 members of the putative class. In response to that notice, six people objected to the proposed agreement, 66 opted out of the settlement, and 24,631 sought to take part in it by submitting claim forms. On December 9, 2010, Plaintiffs filed an unopposed motion requesting final approval of the settlement agreement, final certification of the settlement class, and attorneys' fees. In January 2011, after holding an initial fairness [376] hearing, the District Court ordered additional briefing regarding certain aspects of the settlement agreement. Before the Court reached a final determination in light of that briefing, the Supreme Court issued its now well-known opinion in Wal-Mart Stores, Inc. v. Dukes, ___ U.S. ___, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011). The District Court ordered another round of supplemental briefing, this time asking the parties to discuss the impact of Dukes on class certification. In that briefing, both parties continued to support class certification, as they had promised in their settlement agreement.

The District Court, however, read Dukes as preventing certification, and, on September 8, 2011, it issued an order to that effect, denying at the same time Plaintiffs' motion for final settlement approval. In its memorandum opinion, the Court held that the settlement class failed to meet Rule 23(a)'s commonality and typicality requirements.^[4] It explained that Dukes had clarified the standard for establishing commonality, and that, under that standard, "Plaintiffs would likely have to show the disparate impact and analysis for each loan officer or at a minimum each group of loan officers working for a specific supervisor" in order to demonstrate commonality. Rodriguez v. Nat'l City Bank, 277 F.R.D. 148, 155 (E.D.Pa.2011). The regression analyses' demonstration of an overall race-based disparity was inadequate, the Court said, because, even if the analyses "remove[d] all credit related reasoning, there may be non-credit related reasoning that individual loan officers contemplated that is not based on race." Id. Accordingly, the Court decided that Plaintiffs had "fail[ed] to show that the class could be certified," and it denied their motion. Id. This timely appeal followed.

II. Jurisdiction and Standard of Review

The District Court had jurisdiction under 28 U.S.C. § 1331. The matter is before us on Plaintiffs' petition for leave to appeal, filed in accordance with Rule 23(f) of the Federal Rules of Civil Procedure, which allows us to "permit an appeal from an order granting or denying class-action certification ... if a petition for permission to appeal is filed with the circuit clerk within 14 days after the order is entered."

We have "very broad discretion in deciding whether to grant permission to pursue a Rule 23(f) appeal." Gutierrez v. Johnson & Johnson, 523 F.3d 187, 192 (3d Cir.2008); see also Fed.R.Civ.P. 23(f) advisory committee's note ("Appeal from an order granting or denying class certification is permitted in the sole discretion of the court of appeals."). In Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154 (3d Cir.2001), we identified several circumstances in which appellate review is appropriate, including: (1) "when denial of certification effectively terminates the litigation because the value of each plaintiff's claim is outweighed by the costs of stand-alone litigation"; (2) when class certification risks placing "inordinate... pressure on defendants to settle"; [377] (3) "when an appeal implicates novel or unsettled questions of law"; (4) when the district court's class certification determination was erroneous; and (5) when the appeal might "facilitate development of the law on class certification." Id. at 164-65. By contrast, review is discouraged when the natural course of litigation will provide the moving party with an adequate remedy, or when the certification decision was routine and easily resolved. Id.

Permitting this appeal facilitates the development of the law on class certification by allowing us to consider the nature of the commonality inquiry in light of the Supreme Court's important instruction in Dukes. We therefore will grant Plaintiffs' petition and exercise our jurisdiction pursuant to Rule 23(f) and 28 U.S.C. § 1292(e).

We review a district court's decision to approve or reject a class action settlement agreement for abuse of discretion. Newton, 259 F.3d at 165; see also In re Hydrogen Peroxide Antitrust Litig., 552 F.3d 305, 310 (3d Cir.2008) ("The trial court, well-positioned to decide which facts and legal arguments are most important to each Rule 23 requirement, possesses broad discretion to control proceedings and frame issues for consideration under Rule 23.") A district court abuses its discretion if its decision "rests upon a clearly erroneous finding of fact, an errant conclusion of law or an improper application of law to fact." Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 590 (3d Cir.2012) (internal quotation marks omitted). "Whether an incorrect legal standard has been used is an issue of law to be reviewed de novo." Id. (internal quotation marks omitted).

III. Discussion

Plaintiffs argue that the District Court abused its discretion in two ways: it contravened the "limited role" a court should occupy when deciding whether to certify a settlement class, and it based its commonality determination on an erroneous application of Dukes. National City, now free under the terms of the settlement agreement to object to class certification,^[5] contends that the Court occupied its prescribed role and reached the correct result under Dukes. We address those competing arguments in turn and conclude that the scope of the District Court's inquiry was fully consistent with Dukes, as well as with our own precedent and Rule 23, and that the Court rightly concluded that the putative class lacks commonality.

A. Certification of a Settlement Class

Federal Rule of Civil Procedure 23(a) requires that the members of a proposed class share a common question of law or fact. Fed.R.Civ.P. 23(a)(2). That commonality requirement is, along with numerosity, typicality, and adequacy of representation, one of Rule 23(a)'s four "threshold requirements" for class certification, Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 613, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997), which are intended to "limit the class claims to those fairly encompassed by the named plaintiff's claims," Dukes, 131 S.Ct. at 2550 (quoting Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 156, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982)) (internal quotation marks omitted).^[6] Although they apply to all putative [378] classes, those requirements are of "vital importance" in the settlement context because they protect absent class members "by blocking unwarranted or overbroad class definitions." Amchem, 521 U.S. at 620, 117 S.Ct. 2231. For that reason, the Supreme Court held in Amchem that, although certain Rule 23 considerations, such as "whether the case, if tried, would present intractable management problems," are not applicable in the settlement class context, the Rule's other requirements "demand undiluted, even heightened, attention" when class action representatives are seeking certification for the purpose of settlement. Id. at 620, 117 S.Ct. 2231. Thus, in addition to determining whether a proposed settlement is "fair, reasonable, and adequate," Fed.R.Civ.P. 23(e), district courts must ensure that each of Rule 23(a)'s requirements, including commonality, is satisfied before certifying a class and approving a class settlement agreement.^[7]See Sullivan v. DB Invs., Inc., 667 F.3d 273, 296 (3d Cir.2011) (en banc) ("[B]efore approving a class settlement agreement, a district court first must determine that the requirements for class certification under Rule 23(a) and (b) are met." (internal quotation marks omitted)); In re Cmty. Bank of N. Va., 418 F.3d 277, 300 (3d Cir.2005) ("[R]egardless of whether a district court certifies a class for trial or for settlement, it must first find that the class satisfies all the requirements of Rule 23.").

Plaintiffs agree that the requirements of Rule 23(a) remain intact in the settlement context, but they maintain that, "when a settlement class ... is presented for consideration," those requirements "operate in tandem with a strong presumption in favor of voluntary settlement agreements." (Petitioners' Opening Br. at 25-26.) They say the District Court disregarded that presumption and "undermin[ed] the well-established policy interest in promoting settlements" (id. at 28), by "delving into the merits of Class Members' claims" (id. at 24) and "speculat[ing] regarding evidence not on the record" (id. at 28). They argue that the Court should have occupied a more "limited" role in conducting its Rule 23 inquiry — one that respected the bargain the parties had struck in reaching a negotiated settlement.

Laying particular emphasis on Sullivan v. DB Investments, Inc., 667 F.3d 273 (3d Cir.2011) (en banc), and Ehrheart v. Verizon Wireless, 609 F.3d 590 (3d Cir.2010), Plaintiffs correctly assert that we have, on several occasions, articulated a policy preference favoring voluntary settlement in class actions. Sullivan instructed that assessing whether individual class members have viable claims is inappropriate in the context of reviewing a proposed settlement class because such an inquiry would "seriously [379] undermine" our strong preference for settlement agreements. 667 F.3d at 311; see id. at 305 (explaining that "[a]n analysis into the legal viability of asserted claims is properly considered through a motion to dismiss ... or summary judgment..., not as part of a Rule 23 certification process"). In Ehrheart, we refused to vacate a settlement despite an intervening change in the law that eliminated the plaintiffs' underlying cause of action. 609 F.3d at 595-96. We concluded that the settlement agreement was a binding contract, and that permitting a party to "back out of an agreement at any time before court approval" would render the settlement process "meaningless." Id. at 594. Thus, we held the parties to their bargain, upholding our "strong judicial policy in favor of class action settlement." Id. at 595.

But while that policy is indeed strong, it cannot alter the strictures of Rule 23. The Supreme Court explained in Amchem that courts must be "mindful that the Rule as now composed sets the requirements they are bound to enforce," as the Federal Rules of Civil Procedure may be amended only through the "extensive deliberative process" Congress prescribed. 521 U.S. at 620, 117 S.Ct. 2231. Rule 23 has been amended to provide for settlement classes, but solely to add the additional hurdle of Rule 23(e), which mandates that the reviewing court find the settlement to be "fair, reasonable, and adequate." Fed. R.Civ.P. 23(e)(2). That amendment "was designed to function as an additional requirement, not a superseding direction" respecting the class-qualifying criteria of Rule 23(a) and (b). Amchem, 521 U.S. at 621, 117 S.Ct. 2231. The "dominant concern" of Rule 23 — that "a proposed class has sufficient unity so that absent members can fairly be bound by decisions of class representatives" — "persists when settlement, rather than trial, is proposed." Id. Therefore, whether class action representatives are seeking certification for the purpose of settlement or with the intent to litigate, the members of the proposed class must meet the threshold requirements of Rule 23(a), and our policy preference for voluntary settlement cannot and does not alter that demand.

In Sullivan and Ehrheart, we recognized the constant applicability of Rule 23. We said in Sullivan that, although settlement is clearly favored, "global settlements may nevertheless be rejected for failing to meet the requirements of Rule 23." 667 F.3d at 311 n. 40. In Ehrheart too we acknowledged that district courts have a responsibility to review settlements, and we reversed the district court not for any Rule 23 determination but for granting judgment on the pleadings after the parties had entered into a binding contract. 609 F.3d at 593 (describing the district court's role and explaining that the court in that case "never considered whether to approve the settlement"). In neither case did we excuse a failure to establish commonality, nor did we bar the district court from exercising its independent judgment in deciding whether the Rule 23 requirements were met. See In re Cmty. Bank of N. Va., 418 F.3d at 301 (requiring that a district court "exercise[] independent judgment" in the Rule 23 determination).

Furthermore, neither case lessened the burden required to demonstrate that putative class members share a common question of law or fact. As we have repeatedly stated, the Rule 23(a) requirements are "not mere pleading rules." Marcus, 687 F.3d at 591 (quoting In re Hydrogen Peroxide, 552 F.3d at 316) (internal quotation marks omitted). Rather, at the threshold, "[t]he party seeking certification bears the burden of establishing each element of Rule 23 by a preponderance of the evidence," which requires demonstrating [380] "actual, not presumed, conformance" with the Rule. Id. (alterations and internal quotation marks omitted). The district court "must conduct a `rigorous analysis' of the evidence and arguments put forth," id. (quoting In re Hydrogen Peroxide, 552 F.3d at 316), a task that sometimes involves "a preliminary inquiry into the merits" of the plaintiffs' claims to ensure they can be "properly resolved as a class action," Newton, 259 F.3d at 168; see also Dukes, 131 S.Ct. at 2551 ("Frequently that rigorous analysis will entail some overlap with the merits of the plaintiff's underlying claim." (internal quotation marks omitted)).

Relying on Sullivan, Plaintiffs imply that a "rigorous analysis" is inappropriate in the context of a class action settlement. They note that Sullivan instructed courts not to delve into the underlying merits to determine if individual claims are viable. See Sullivan, 667 F.3d at 306 ("[T]he merits inquiry is particularly unwarranted in the settlement context...."). Ehrheart made similar statements, emphasizing the "restricted, tightly focused role that Rule 23 prescribes for district courts," 609 F.3d at 593, and holding that the district court abused its discretion by rescinding the parties' settlement agreement due to a change in the law that made plaintiffs' claims nonviable, id. at 595-96. But while both decisions advised courts not to assess whether plaintiffs' claims would be capable of succeeding if the case were to go to trial, neither limited the ability of district courts to consider the merits of a case when necessary for a Rule 23 determination. In fact, Sullivan specifically explained that "an examination of the elements of plaintiffs' claim is sometimes necessary, not in order to determine whether each class member states a valid claim, but instead to determine whether the requirements of Rule 23 ... are met." 667 F.3d at 306. Put more simply, our policy in favor of voluntary settlement does not alter the "rigorous analysis" needed to ensure that the Rule 23 requirements are satisfied. Dukes, 131 S.Ct. at 2551; see also Sullivan, 667 F.3d at 335 ("The same analytical rigor is required for litigation and settlement certification....") (Scirica, J., concurring).

Plaintiffs' other arguments regarding the proper role of the district court in settlement certification are similarly unavailing. They take particular issue with the District Court's alleged "conjecture" regarding evidence not in the record. (Petitioners' Opening Br. at 34.) Noting that "the parties in this case agreed to a settlement before the record was as developed as it would have been in a fully contested motion on class certification" (id. at 29), they argue that the District Court should not have "quibble[d] with and concentrate[d] on the quantity of evidence at settlement" because "[s]uch considerations do not apply in a settlement class" (id. at 30). They contend that by "speculat[ing]" about nondiscriminatory explanations for individual loan officers' decisions (id. at 28), the District Court improperly elevated the evidentiary showing needed for certification of a settlement class.

That argument misunderstands the burden of proof required for class certification. It is not enough that the parties agreed to settle and believed that "a more fully developed record would show that there were questions of law and fact common to all Class Members." (Id. at 29-30.) One cannot say, in effect, "we could show commonality, if we had to." The short answer is, "you do have to." See Marcus, 687 F.3d at 591 (holding that the party seeking class certification must demonstrate the putative class's conformance with Rule 23). That burden is not onerous. It does, however, require an affirmative showing that the class members share a common question of law or fact. Sullivan, 667 F.3d at 306. The mere possibility [381] that evidence of commonality could have been produced does not satisfy that burden. Therefore, the District Court did not err by requiring actual evidence that the putative class satisfies the requirements of Rule 23(a).

Plaintiffs further contend that the District Court erred by "fail[ing] to fulfill its fiduciary role" to protect the interests of the unnamed members of the class. (Petitioners' Opening Br. at 26.) They argue that that role defines the scope of a district court's responsibilities in certifying a settlement class, and they imply that the District Court here acted beyond the scope of those responsibilities by denying class certification. Both contentions are incorrect. Although we have indeed highlighted the district court's role as a protector of absent members of the plaintiff class, see Sullivan, 667 F.3d at 319 ("[A] district court acts as a fiduciary for absent class members[.]" (internal quotation marks omitted)), our emphasis on that role has never been meant as a substitute for the requirements of Rule 23. Rule 23(a) explicitly requires that a putative class possess commonality, and courts are bound to enforce that requirement regardless of whether it benefits plaintiffs or defendants. In any event, there is no indication that the District Court's decision to decertify the class here failed to protect the interests of absent class members. When a class of plaintiffs does not share a common question of law or fact, it may well include individuals who did not actually experience the harm allegedly caused by the defendants. If that class is certified, those individuals will nonetheless partake in the recovery, which diminishes the relief for class members who actually were harmed. The Supreme Court stated in Amchem that the Rule 23(a) requirements are of "vital importance" in the settlement context precisely because they are "designed to protect absentees by blocking unwarranted or overbroad class definitions." 521 U.S. at 620, 117 S.Ct. 2231 (emphasis added). Thus, denial of certification to a class that lacks commonality falls squarely within the district court's prescribed role in considering the propriety of a settlement class.

Finally, Plaintiffs argue that the parties entered into their agreement knowing that Dukes might alter the legal landscape, and the District Court should have respected their decision "to settle and achieve certainty" rather than gamble on what the Supreme Court would decide. (Petitioners' Opening Br. at 33.) They again cite Ehrheart and Sullivan, this time for the proposition that the "choice to settle implicitly acknowledges calculated risks and, in the end, reflects deliberate decisions of both parties to opt for certainty in terminating their litigation." (Id. (quoting Ehrheart, 609 F.3d at 594) (internal quotation marks omitted).) See also Sullivan, 667 F.3d at 312 ("[A] district court's certification of a settlement simply recognizes the parties' deliberate decision to bind themselves according to mutually agreed-upon terms...."). According to Plaintiffs, "[t]he District Court's decision does ... injustice to the Parties' bargain" by "render[ing][the] settlement void, seemingly because the Parties had agreed to put a halt to this litigation before class, expert, factual and merits issues were fully litigated, an eventuality that the Parties consciously chose to avoid...."^[8] (Petitioners' Opening Br. at 35-36.)

[382] Yet again, that argument fails because, as much as they might like to, parties cannot choose to avoid the judicial scrutiny demanded by Rule 23. Before approving the settlement of a class action, a district court must certify that the settlement comports with Rule 23 and is "fair, reasonable, and adequate." Fed.R.Civ.P. 23(e). Nothing less will suffice. It is true that we have advised courts not to "intrude upon the parties' bargain" after a settlement agreement is reached, Ehrheart, 609 F.3d at 593, but a denial of class certification does not constitute such an intrusion, as it is the result of a required inquiry that both parties had to have contemplated from the outset of their agreement. The parties in this case may well have considered in their bargaining that the Supreme Court had granted certiorari in Dukes, but that consideration does not insulate them from the District Court's responsibilities under Rule 23.

At base, Plaintiffs' argument regarding the proper role of the District Court seems to be that the Court was required to conduct its commonality review in a manner that did not upset the parties' settlement agreement. Such a review, though, is no review at all. The Rule 23 inquiry is certainly not meant to discourage settlement, but it is more than a rubber stamp, and thus it will sometimes result in the undoing of a settlement. The fact that it did so in this instance is therefore not in itself a basis for reversing the denial of class certification. The District Court stayed fully within its prescribed role and conducted the inquiry required of it by our precedent, by the Supreme Court, and by the Federal Rules of Civil Procedure.

B. The Commonality Determination

Because we conclude that the District Court properly fulfilled its prescribed role in conducting a Rule 23 review, we turn to the question of whether the Court rightly concluded that commonality is lacking in the class proposed in this case. A putative class satisfies Rule 23(a)'s commonality requirement if "the named plaintiffs share at least one question of fact or law with the grievances of the prospective class." Baby Neal v. Casey, 43 F.3d 48, 56 (3d Cir.1994). Again, that bar is not a high one. We have acknowledged commonality to be present even when not all plaintiffs suffered an actual injury, id., when plaintiffs did not bring identical claims, In re Prudential, 148 F.3d at 311, and, most dramatically, when some plaintiffs' claims may not have been legally viable, Sullivan, 667 F.3d at 305-07. In reaching those conclusions, we explained that the focus of the commonality inquiry is not on the strength of each plaintiff's claim, but instead is "on whether the defendant's conduct was common as to all of the class members." Id. at 299; see also In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 528 (3d Cir.2004) (focusing the commonality inquiry on the defendant's conduct, not "on the conduct of [383] individual class members"); Newton, 259 F.3d at 183 (identifying common questions regarding the defendant's conduct); Baby Neal, 43 F.3d at 57 (considering whether the defendant "engag[ed] in a common course of conduct toward" the class members). In other words, there may be many legal and factual differences among the members of a class, as long as all were subjected to the same harmful conduct by the defendant. Baby Neal, 43 F.3d at 56.

In Dukes, the Supreme Court explained how the commonality standard applies when the complained-of conduct is a discretionary corporate policy that allegedly has a discriminatory effect. The putative class in that case consisted of "all women employed at any Wal-Mart domestic retail store at any time since December 26, 1998, who have been or may be subjected to Wal-Mart's challenged pay and management track promotions policies and practices." 131 S.Ct. at 2549 (alteration and internal quotation marks omitted). That enormous class of about 1.5 million women alleged that Wal-Mart's policy "allowing discretion by local supervisors over employment matters" produced a disparate discriminatory impact, evidenced by a statistical analysis of the company's employment information.^[9]Id. at 2547, 2554 (emphasis omitted). The Supreme Court concluded that that evidence was insufficient to establish commonality. While acknowledging that "giving discretion to lower-level supervisors can," in some circumstances, "be the basis of Title VII liability under a disparate impact theory," id. at 2554, the Court quoted Watson v. Fort Worth Bank & Trust, 487 U.S. 977, 994, 108 S.Ct. 2777, 101 L.Ed.2d 827 (1988), to emphasize that such claims must do more than "merely prov[e] that the discretionary system has produced a racial or sexual disparity" — they must also identify "the specific employment practice that is challenged," id. at 2555 (internal quotation marks omitted).^[10] Moreover, to bring a case as a class action, the named plaintiffs must show that each class member was subjected to the specific challenged practice in roughly the same manner. Dukes, 131 S.Ct. at 2555-56. The Dukes plaintiffs were all subjected to the discretion of their supervisors, but they had not demonstrated "a common mode of exercising discretion that pervades the entire company," id. at 2554-55, such that the policy could be considered a "uniform employment practice" that all members of the putative class had experienced, id. at 2554. Rather, the Dukes plaintiffs encountered different managers making different types of employment decisions for different reasons, many of them likely nondiscriminatory in nature. They therefore had not been subjected to a common harm, and the proposed class lacked commonality. Id. at 2555.

[384] This case bears a striking resemblance to Dukes. Here, the class proposed by the Plaintiffs consists of "[a]ll African-American and Hispanic persons who obtained a Mortgage Loan" from National City between January 1, 2004 and the date the class was preliminarily certified. (J.A. at 250.) On behalf of those 153,000 class members, the named plaintiffs allege that National City's "Discretionary Pricing Policy" had the effect of charging African-American and Hispanic borrowers "a disproportionately greater amount in non-risk-related charges than similarly-situated Caucasian persons." (J.A. at 102, 117.) More specifically, Plaintiffs argue that National City granted brokers and loan officers the discretion to increase or decrease loan prices after an objective determination of loan eligibility, which discretion produced an overall disparate discriminatory impact. Therefore, in order to demonstrate that they have suffered a common harm, the putative class here must show that National City's grant of discretion to individual loan officers constitutes a "specific practice" that affected all the class members in the same general fashion. In other words, Plaintiffs must identify some "common mode" in which those brokers exercised their discretion. 131 S.Ct. at 2554.

Plaintiffs claim they have done so. They conducted regression analyses of National City's loan data, which they say demonstrate the Discretionary Pricing Policy's disparate impact even after controlling for legitimate factors affecting the price of loans.^[11] From what Plaintiffs characterize as "the objective nature of a loan pricing decision," they argue that, by "eliminat[ing] all objective credit and risk factors impacting loan pricing," they have shown that the only function the discretionary policy served was to produce a discriminatory effect. (Petitioners' Opening Br. at 12.) Therefore, they say, the regression analyses show that the loan officers' "common mode of exercising discretion," Dukes, 131 S.Ct. at 2554, was discriminatory.

But that conclusion is simply unsupported by the evidence. Even if Plaintiffs had succeeded in controlling for every objective credit-related variable — something no court could have reviewed because the analyses are not of record — the regression analyses do not even purport to control for individual, subjective considerations. A loan officer may have set an individual borrower's interest rate and fees based on any number of non-discriminatory reasons, such as whether the mortgage loans were intended to benefit other family members who were not borrowers, whether borrowers misrepresented their income or assets, whether borrowers were seeking or had previously been given favorable loan-to-value terms not warranted by their credit status, whether the loans were part of a beneficial debt consolidation, or even concerns the loan officer may have had at the time for the financial institution irrespective of the borrower.^[12] While those possibilities [385] do not necessarily rebut the argument that the Discretionary Pricing Policy opened the door to biases that individual loan officers could have harbored, they do undermine the assertion that there was a common and unlawful mode by which the officers exercised their discretion.

Even assuming, however, that Plaintiffs had succeeded in identifying a specific employment policy that could be sufficiently distinguished from the discretionary policy in Dukes, they still have not shown that it affected all class members in all regions and bank branches in a common way. Another significant problem with the proposed class in Dukes was that the statistical disparity was based on an average of national data that was not necessarily representative of regional or store disparities. The Court explained that "a regional pay disparity ... may be attributable to only a small set of Wal-Mart stores, and cannot by itself establish the uniform, store-by-store disparity upon which plaintiffs' theory of commonality depends." Id. at 2555.

The proposed class in this case is also national, with 153,000 plaintiffs who obtained loans at more than 1,400 bank branches. As in Dukes, the application of the Discretionary Pricing Policy may have resulted in a disparity in some regions or branches but not at all in others. Accordingly, a very significant disparity in one branch or region could skew the average, producing results that indicate a national disparity, when the problem may be more localized. If the national disparity is not reflective of regional or even individual branch data, the putative class cannot show the policy affected each individual plaintiff in the same general fashion.

Plaintiffs contend that they controlled for regional differences in their regression analyses, but they must show that the putative class meets the commonality requirement by a preponderance of the evidence. In re Hydrogen Peroxide, 552 F.3d at 320. They did not introduce their data, regression analyses, or any other evidence to support a finding of commonality. Although Plaintiffs moved for class certification before the Supreme Court issued the Dukes opinion, the District Court requested the parties to submit briefs on class certification in light of the guidance given in that decision, and still Plaintiffs did not give the District Court a factual foundation for a commonality finding in their favor.^[13]

Whether an appropriate foundation could be laid in a case like this is a question we leave for another day.^[14] We note, however, that, when faulting the Dukes plaintiffs for failing to account for regional differences that could undermine their claim of commonality, the Supreme Court went on to say: "There is another, more fundamental, respect in which respondents' statistical proof fails. Even if it established (as it does not) a pay or promotion pattern that differs from the nationwide figures or the regional figures in all of Wal-Mart's 3,400 stores, that would [386] still not demonstrate that commonality of issue exists." Dukes, 131 S.Ct. at 2555. The Court then explained why, emphasizing that, as we have already noted, Watson requires that "the plaintiff must begin by indentifying the specific employment practice that is challenged." Id. (quoting Watson, 487 U.S. at 994, 108 S.Ct. 2777) (internal quotation marks and alteration omitted). "Other than the bare existence of delegated discretion," the Court observed, "respondents have identified no `specific employment practice' — much less one that ties all their 1.5 million claims together. Merely showing that Wal-Mart's policy of discretion has produced an overall sex-based disparity does not suffice." Id. at 2555-56.

Here, as in Dukes, the exercise of broad discretion by an untold number of unique decision-makers in the making of thousands upon thousands of individual decisions undermines the attempt to claim, on the basis of statistics alone, that the decisions are bound together by a common discriminatory mode.^[15] Plaintiffs therefore have not met their burden of demonstrating that the "defendant's conduct was common as to all of the class members," Sullivan, 667 F.3d at 299, and thus the District Court was correct to conclude that they do not share a common question of law or fact.^[16]

IV. Conclusion

Because the putative class lacks commonality, the District Court did not abuse its discretion by denying the Plaintiffs' motion for final approval of the settlement and certification of the settlement class. Accordingly, we will affirm the Court's order.

[1] On October 24, 2008, The PNC Financial Services Group, Inc. ("PNC"), acquired National City, and Plaintiffs subsequently filed a second amended complaint that added PNC as a defendant, as successor-in-interest to National City.

[2] More precisely, the District Court granted National City's motion to strike from the complaint certain paragraphs that would have "require[d] Defendants to undertake substantial investigation before filing a responsive pleading" (J.A. at 149), but denied the motion "to the extent that it [sought] to dismiss Plaintiffs' amended complaint in whole or in part" (id. at 150).

[3] Plaintiffs describe a regression analysis as "a statistical tool which determines the relationship between a variable to be studied and one or more potentially explanatory variables." (Petitioners' Opening Br. at 4 n. 3.).

[4] As more fully described herein, infra Part III.B, "commonality" demands that the members of a prospective class share at least one question of fact or law common to their claims. Baby Neal v. Casey, 43 F.3d 48, 56 (3d Cir.1994). The "typicality" requirement instructs courts "to assess whether the class representatives themselves present [the] common issues of law and fact that justify class treatment...." Eisenberg v. Gagnon, 766 F.2d 770, 786 (3d Cir.1985). As the District Court rightly noted, see Rodriguez, 277 F.R.D. at 154 n. 5, we have said that the commonality and typicality requirements "tend to merge," such that if commonality is not satisfied, typicality is likely not satisfied for the same reason. In re Cmty. Bank of N. Va., 418 F.3d 277, 300 (3d Cir.2005) (quoting Baby Neal, 43 F.3d at 56) (internal quotation marks omitted).

[5] The settlement agreement provides that, "[i]n the event any court disapproves or sets aside this Settlement Agreement" and the "Parties do not agree jointly to appeal such ruling," the parties are released from their obligations under the agreement. (J.A. at 265.).

[6] Specifically, Rule 23(a) provides that:

[o]ne or more members of a class may sue or be sued as representative parties on behalf of all members only if:

(1) the class is so numerous that joinder of all members is impracticable;

(2) there are questions of law or fact common to the class;

(3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and

(4) the representative parties will fairly and adequately protect the interests of the class.

Fed.R.Civ.P. 23(a).

[7] Parties seeking certification must also show that "the action is maintainable under Rule 23(b)(1), (2), or (3)." In re Warfarin Sodium Antitrust Litig., 391 F.3d 516, 527 (3d Cir. 2004). Plaintiffs here brought their case under both Rule 23(b)(2) and Rule 23(b)(3), and the District Court preliminarily certified the class pursuant to Rule 23(b)(3). Rule 23(b)(3) imposes two additional requirements: (1) common questions must "predominate over any questions affecting only individual members" and (2) class resolution must be "superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3). Because of its Rule 23(a) determination, the District Court in its final review of the proposed settlement did not reach the issue of whether those Rule 23(b) requirements were satisfied.

[8] To the extent that Plaintiffs are arguing that the District Court was wrong to even consider Dukes in its Rule 23 review because it is a "change[] in the law after settlement," see Ehrheart, 609 F.3d at 595, that argument lacks merit. Although the Supreme Court's decision in Dukes is an intervening and pointedly clear explication of the law, it did not announce any change in the test for determining commonality. It relied on existing precedent to emphasize the necessity of meeting the commonality standard under Rule 23(a). Dukes, 131 S.Ct. at 2556-57; id. at 2554 (applying existing precedent to reach its conclusion). That standard — both before and after Dukes — requires that a putative class of plaintiffs share a common question of law or fact. Compare Baby Neal, 43 F.3d at 56 ("The commonality requirement will be satisfied if the named plaintiffs share at least one question of fact or law with the grievances of the prospective class."), with Sullivan, 667 F.3d at 297 ("[A] proposed class must share a common question of law or fact...."). Indeed, Dukes specifically stated that "for purposes of Rule 23(a)(2) even a single common question will do," 131 S.Ct. at 2556 (alterations omitted) (internal quotation marks omitted), making clear that it did not alter the standard for assessing commonality. Ehrheart's admonition that "changes in the law after settlement ... do not provide a legitimate basis for rescinding [a] settlement," 609 F.3d at 595, therefore has no bearing on this case.

[9] The plaintiffs in Dukes also brought a disparate treatment claim, which alleged that Wal-Mart had a corporate culture of bias against women. Dukes, 131 S.Ct. at 2548. They attempted to demonstrate that culture of bias through a sociologist's analysis, affidavits recounting individual plaintiffs' experiences, and a regression analysis purporting to show gender-based disparities that "can be explained only by gender discrimination." Id. at 2555 (internal quotation marks omitted). Plaintiffs here bring only a disparate impact claim, and they do not allege any intentional discrimination or "culture of bias" on the part of National City. (See Petitioners' Opening Br. at 50 ("[T]his is a disparate impact case and not a disparate treatment case....").).

[10] The plaintiffs in Dukes failed to do that, the Supreme Court said, because "Wal-Mart's `policy' of allowing discretion by local supervisors.... is just the opposite of a uniform employment practice that would provide the commonality needed for a class action." Id. at 2554.

[11] Notably, those analyses were not included in the record before the District Court, although they were presented to National City during settlement negotiations.

[12] Plaintiffs argue that contemplating such subjective-yet-not-discriminatory reasons for individual loan pricing decisions involves impermissible "speculation and conjecture." (Petitioners' Opening Br. at 2.) Far more speculative, we believe, are the Plaintiffs' unsupported presumptions that a loan pricing determination is a purely objective matter and that an average racial disparity indicates that each minority borrower experienced National City's policy in a discriminatory way. More to the point, though, the burden is on the Plaintiffs to establish the threshold Rule 23(a) requirements. Marcus, 687 F.3d at 591; see also supra, Section III.A. If the District Court engaged in speculation, it is because the Plaintiffs failed to provide enough evidence to demonstrate commonality.

[13] Had the District Court found commonality to be present, it might have been guilty of simply accepting the parties' assertions at face value, which we have explicitly stated is improper in a final Rule 23 determination. In re Cmty. Bank of N. Va., 418 F.3d at 300 (reversing the district court because it simply adopted "a party's proposed findings" without exercising its own independent judgment).

[14] We likewise do not attempt to sort out here how the issues discussed in Dukes may play out differently, if at all, in a disparate treatment case as opposed to a disparate impact case. As previously noted, see supra note 9, we are dealing here solely with the claim as the plaintiffs have chosen to frame it.

[15] That is not to say that statistics could never be a viable element of proof of commonality in a disparate impact case. Indeed, several post-Dukes cases have relied on statistical analyses in their commonality determinations. See, e.g., Floyd v. City of New York, 283 F.R.D. 153, 166-68 (S.D.N.Y.2012) (relying in part on statistical evidence that demonstrated racial disparities in the implementation of New York's "stop and frisk" policy); Morrow v. Washington, 277 F.R.D. 172, 193 (E.D.Tex. 2011) (concluding that "statistical evidence that the number of racial and ethnic minorities stopped in and around [the city] increased dramatically when the [challenged program] was implemented" helped demonstrate that the city's program "operates as a `general policy of discrimination'").

[16] That conclusion is not, as Plaintiffs imply, the death knell for all disparate impact class actions. When a challenged policy affects class members in roughly the same manner, that class can likely establish commonality. In fact, Mt. Holly Garden's Citizens in Action, Inc. v. Township of Mt. Holly, a case that Plaintiffs claim is effectively overruled by the District Court's reading of Dukes, provides an example of a disparate impact case that could survive the commonality inquiry. 658 F.3d 375 (3d Cir.2011). In that case, African-American and Hispanic residents of a low-income neighborhood brought a lawsuit contending that the city's proposed redevelopment plan had produced a disparate discriminatory impact. Id. at 377-81. The contested policy in that case is readily apparent, and it was applied to each resident in a common manner. Id. The Mt. Holly plaintiffs therefore shared a common question, and, although they chose not to bring their claims as a class action, Dukes would fully support a finding of commonality in cases like theirs.

AMENDED MEMORANDUM OPINION

(November 7, 2014) [Dkt. ##16, 20]

RICHARD J. LEON, United States District Judge

Plaintiffs American Insurance Association ("AIA") and National Association of Mutual Insurance Companies ("NAMIC") (together "plaintiffs")^[1] brought this action against the United States Department of Housing and Urban Development ("HUD") and Julian Castro^[2]—in his official capacity as Secretary of the United States Department Housing and Urban Development—("Secretary") (together "defendants") on June 26, 2013, see Complaint ("Compl.") [Dkt. #1], challenging defendants' promulgation of a final rule, seeImplementation of the Fair Housing Act's Discriminatory Effects Standard, 78 Fed.Reg. 11,460 (Feb. 15, 2013) (codified at 24 C.F.R. § 100.500) ("Disparate–Impact Rule" or "Rule"), providing for liability based on disparate impact under the Fair Housing Act ("FHA" or the "Act"), Pub.L. No. 90–284, 82 Stat. 81 (1968) (codified at 42 U.S.C. § 3601 et seq.). Plaintiffs claim that defendants violated the Administrative Procedure Act ("APA"), 5 U.S.C. § 551 et seq., by exceeding its statutory authority when it expanded the scope of the FHA to recognize not only disparate-treatment claims (i.e. intentional discrimination) but also disparate-impact claims (i.e. facially neutral practices with discriminatory effects). See Plaintiffs' Memorandum in Support of Motion for Summary Judgment ("Pls.' Mem.") [Dkt. 16–1] at 8–9. Now before the Court are plaintiffs' Motion for Summary Judgment ("Pls.' Mot.") [Dkt. #16] and defendants' Motion to Dismiss or, in the Alternative, for Summary Judgment ("Defs.' Mot.") [Dkt. #20]. After due consideration of the parties' pleadings, the arguments of counsel, the relevant law, and the entire record in this case, the Court agrees with plaintiffs that the FHA prohibits disparate treatment only, and that the defendants, therefore, exceeded their authority under the APA. Accordingly the plaintiffs' Motion for Summary Judgment is GRANTED, the defendants' Motion to Dismiss or, in the Alternative, for Summary Judgment is DENIED, and the Disparate–Impact Rule is VACATED.

BACKGROUND

I. Statutory Background

Congress enacted Title VIII of the Civil Rights Act of 1968—commonly known as the Fair Housing Act—"following urban unrest of the mid 1960s and in the aftermath of the assassination of the Rev. Dr. Martin Luther King, Jr." H.R.Rep. No. 711, 100th Cong., 2d Sess. 15 (1988). Congress's goal in enacting the Fair Housing Act was to "provide, within constitutional limitations, for fair housing throughout the United States." 42 U.S.C. § 3601. To accomplish this purpose, the FHA made it unlawful to "refuse to sell or rent after the making of a bona fide offer, or to refuse to negotiate for the sale or rental of, or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, or national origin." Id. § 3604(a). Moreover, the FHA made it unlawful "[t]o discriminate against any person in the terms, conditions, or privileges of sale or rental of a dwelling, or in the provision of services or facilities in connection therewith," because of those same protected characteristics. Id. § 3604(b).

Twenty years later, Congress amended the FHA, see Fair Housing Amendments Act of 1988, Pub.L. No. 100–430, 102 Stat. 1619("1988 Amendments"), to include sex, familial status, and handicap as protected characteristics. See 42 U.S.C. §§ 3604(a) (sex and familial status), (f)(1) (handicap); see also id. §§ 3604(f)(2), 3605, 3606. The 1988 Amendments further vested HUD with the authority to engage in formal adjudications of housing discrimination claims, see id. § 3612, as well as the authority to issue rules—following a notice and comment period—to effectuate the goals of the FHA, see id. § 3614a. The 1988 Amendments did not, however, make any changes to the operative language of § 3604(a) & (b) or § 3606. See Pub.L. No. 100–430, 102 Stat. 1619.

II. Promulgation of the Disparate–Impact Rule

In the absence of explicit language providing for disparate-impact liability when it was enacted in 1968, it is not surprising that there has been a difference of opinion along ideological/political lines—since at least the Supreme Court's decision in Griggs v. Duke Power Co.,401 U.S. 424, 432 (1971)—as to whether or not such claims were cognizable under the FHA.^[3] To date, the Supreme Court has not had the opportunity to answer this particular question.^[4] And, while eleven Circuit Courts of Appeals have found that disparate–impact claims are cognizable under the FHA,^[5] the overwhelming majority of these opinions preceded the Supreme Court's decision in Smith v. City of Jackson, 544 U.S. 228 (2005), which set forth the appropriate analytical framework when a court is attempting to discern whether disparate-impact liability arises in a particular statutory context. As for our Circuit, to date it too has never addressed this issue.See, e.g., Greater New Orleans Fair Hous. Action Ctr. v. U.S. Dep't of Hous. and Urban Dev., 639 F.3d 1078, 1085 (D.C.Cir.2011) ("We have not decided whether [the FHA] permits disparate impact claims."); 2922 Sherman Avenue Tenants' Ass'n v. District of Columbia,444 F.3d 673, 679 (D.C.Cir.2006). However, on November 16, 2011—just nine days after the Supreme Court granted certiorari inMagner v. Gallagher to address this very issue, see Magner, 132 S.Ct. 548 (2011)—HUD, calculatingly, proposed a rule that would specifically provide for disparate-impact liability under the FHA. See Implementation of the Fair Housing Act's Discriminatory Effects Standard, 76 Fed.Reg. 70,921, 70,921 (Nov. 16, 2011) (HUD proposed "to prohibit housing practices with a discriminatory effect, even where there has been no intent to discriminate").

Following HUD's notice of the proposed rule, plaintiffs submitted comments explaining their numerous concerns about the harmful effects the Rule was likely to cause.^[6] See JA at 372–383, 455–59. Despite these concerns—and those raised by many others—HUD promulgated the final Rule without substantial changes on February 15, 2013.^[7] See 78 Fed.Reg. 11,460. Not surprisingly, the preamble to the Disparate–Impact Rule expressly extended the availability of disparate-impact liability to the provision and pricing of homeowner's insurance for the first time. See id. at 11,475. So much for any contention that the FHA unambiguously provided for such liability!

The Disparate–Impact Rule itself states that "[l]iability may be established under the Fair Housing Act based on a practice's discriminatory effect ... even if the practice was not motivated by a discriminatory intent." 24 C.F.R. § 100.500. The Rule defines a practice as having a "discriminatory effect" where "it actually or predictably results in a disparate impact on a group of persons or creates, increases, reinforces, or perpetuates segregated housing patterns because of race, color, religion, sex, handicap, familial status, or national origin." Id. § 100.500(a). A practice shown to have a discriminatory effect may still be legal if it is supported by a legally sufficient justification. See id. § 100.500. "A legally sufficient justification exists where the challenged practice ... [i]s necessary to achieve one or more substantial, legitimate, nondiscriminatory interests ... [and] [t]hose interests could not be served by another practice that has a less discriminatory effect." Id. § 100.500(b)(1)(i)–(ii).

The Disparate–Impact Rule employs a burden-shifting framework for assessing disparate-impact liability under the FHA. See id. § 100.500(c)(1)-(3). Initially, "the charging party ... has the burden of proving that a challenged practice caused or predictably will cause a discriminatory effect." Id. § 100.500(c)(1). If the plaintiff or charging party meets this burden, "the respondent or defendant has the burden of proving that the challenged practice is necessary to achieve one or more [of their] substantial, legitimate, nondiscriminatory interests." Id. § 100.500(c)(2). Finally, if the respondent or defendant satisfies its burden, the plaintiff or charging party "may still prevail upon proving that the substantial, legitimate, nondiscriminatory interests supporting the challenged practice could be served by another practice that has a less discriminatory effect." Id. § 100.500(c)(3).

Importantly here, the Rule expressly applies to entities that provide homeowner's insurance, such as plaintiffs' members. See 78 Fed.Reg. 11,460, 11,475. Indeed, the proposed notice of rule-making explicitly listed the "provision and pricing of homeowner's insurance" as an example of a "housing policy or practice" that may have a disparate impact on a class of persons, 76 Fed.Reg. 70,921, 70,924, and in the final rule-making, HUD directly considered some of the very concerns that were raised by insurers during the notice-and-comment period, but did not meaningfully alter the substance of the Rule in response to those concerns, see 78 Fed.Reg. 11,460, 11,475.

III. Procedural History

Plaintiffs commenced this action on June 26, 2013. On August 15, 2013, however, defendants filed an Unopposed Motion to Stay Proceedings ("Motion to Stay") [Dkt. #12] because the Supreme Court had recently granted certiorari in Mount Holly^[8] (June 17, 2013) to resolve the precise statutory question at issue in this case, and a stay of proceedings—pending the Supreme Court's decision—would "at a minimum streamline the proceedings in this case, if not eliminate the need for litigation entirely." See Mot. to Stay at 1. I granted the motion by minute order on August 29, 2013.

On November 15, 2013 the Supreme Court dismissed the writ of certiorari in Mount Holly because the parties had reached a settlement. On December 16, 2013, the parties tiled a joint status report and motion, informing me of the Mount Holly dismissal, and seeking a lift of the stay in this case. See Joint Mot. to Lift the Stay and Status Report [Dkt. #14]. I granted the parties' motion on December 20, 2013, and set a briefing schedule for dispositive motions. See Order (Dec. 20, 2013) [Dkt. #15]. That same day, plaintiffs filed their Motion for Summary Judgment. See Pls.' Mot. Defendants then filed their Motion to Dismiss or, in the Alternative, for Summary Judgment on February 3, 2014. See Defs.' Mot. Following full briefing of the issues,^[9] I heard oral argument on the parties' motions on July 22, 2014.^[10]

STANDARD OF REVIEW

I. Rule 12(b) Dismissal

The court may dismiss a complaint or any portion of it for lack of subject-matter jurisdiction or for failure to state a claim upon which relief may be granted. See Fed.R.Civ.P. 12(b)(1), (6). In considering a motion to dismiss, the court may only consider "the facts alleged in the complaint, any documents either attached to or incorporated in the complaint and matters of which [the court] may take judicial notice." E.E.O.C v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624 (D.C.Cir.1997). To survive a motion to dismiss, a plaintiff must plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). On a motion to dismiss for lack of standing, a trial court may allow the plaintiff to supplement the complaint with affidavits to demonstrate standing. See Warth v. Seldin, 422 U.S. 490, 501–02 (1975); see alsoRainbow/PUSH Coal. v. FCC, 396 F.3d 1235, 1239 (D.C.Cir.2005) (permitting affidavits in response to a motion to dismiss for want of standing).

In considering a motion under Rule 12(b), the court must construe the complaint "in favor of the plaintiff, who must be granted the benefit of all inferences that can be derived from the facts alleged." Schuler v. United States, 617 F.2d 605, 608 (D.C.Cir.1979) (internal quotation marks and citation omitted). However, factual allegations—even though assumed to be true—must still "be enough to raise a right to relief above the speculative level." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 545 (2007). Moreover, the court need not "accept legal conclusions cast in the form of factual allegations," nor "inferences drawn by plaintiffs if such inferences are unsupported by the facts set out in the complaint." Kowal v. MCI Commc'ns Corp., 16 F.3d 1271, 1276 (D.C.Cir.1994).

II. Rule 56(a) Summary Judgment

Under Federal Rule of Civil Procedure 56(a), summary judgment is appropriate when the evidence in the record demonstrates that "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); see, e.g., Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). When evaluating cross motions for summary judgment, "the court shall grant summary judgment only if one of the moving parties is entitled to judgment as a matter of law upon material facts that are not genuinely disputed." Select Specialty Hosp.–Bloomington, Inc. v. Sebelius, 744 F.Supp.2d 332, 338 (D.D.C.2011) (internal quotation marks and citation omitted). The court must accept as true the evidence of, and draw "all justifiable inferences" in favor of, the party opposing summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986) (citation omitted). A genuine issue exists only where "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. at 248. The nonmoving party may not rely solely on unsubstantiated allegations or conclusory statements. See Greene v. Dalton, 164 F.3d 671, 675 (D.C.Cir.1999).

ANALYSIS

I. Standing

A plaintiff establishes Article III standing by demonstrating that he or she has suffered an injury–in–fact, traceable to the defendant's actions, that a favorable judgment would redress. See, e.g., Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61 (1992). As trade associations proceeding on their members' behalf, plaintiffs have standing as long as one of their members has standing, the suit is germane to the plaintiffs' purpose, and the suit does not require the participation of the plaintiffs' individual members. See, e.g., Hunt v. Washington State Apple Advertising Comm'n, 432 U.S. 333, 343 (1977). The Government does not challenge that the plaintiffs satisfy the last two requirements of associational standing. The issue, then, is whether any of plaintiffs' members have standing under Article III. Unfortunately for the defendants, they do.

A. Plaintiffs' Standing is Self–Evident

When, as here, the plaintiffs are "an object of the action (or foregone action) at issue," the Supreme Court has explained that "there is ordinarily little question that the action or inaction has caused him injury, and that a judgment preventing or requiring the action will redress it." Lujan, 504 U.S. at 561–62 (emphasis added). Indeed, our Court of Appeals has stated that when "the complainant is 'an object of the [agency] action ... at issue,' " such as a rulemaking, the complainant's "standing to seek review of administrative action is self-evident." Sierra Club v. EPA, 292 F.3d 895, 899–900 (D.C. Cir.2002) (quoting Lujan, 504 U.S. at 561–62). In such a case, there "should be 'little question that the action or inaction has caused [the plaintiff] injury, and that a judgment preventing or requiring the action will redress it.' " Id. at 900 (quoting Lujan, 504 U.S. at 561–62),

Our Circuit Court has affirmed this principle of self–evident standing on numerous occasions in a wide variety of circumstances, and various members of our Court have so ruled. See, e.g., Affum v. United States, 566 F.3d 1150, 1158 (D.C.Cir.2009) (store owner challenging regulations implementing penalties for trafficking in food stamp benefits); South Coast Air Quality Mgmt. Dist. v. EPA, 472 F.3d 882, 895–96 (D.C.Cir.2006) (association of petrochemical refiners challenging a pollution regulation scheme); Fund for Animals, Inc. v. Norton, 322 F.3d 728, 733–34 (D.C.Cir.2003) (environmental group challenging endangered species designation); Int'l Fabricare Inst. v. EPA, 972 F.2d 384, 390 (D.C.Cir.1992) (public water systems operators challenging water standards); Fla. Bankers Ass'n v. U.S. Dep't of Treasury, –––F.Supp.2d ––––, Civ. No. 13–529 (JEB), 2014 WL 114519, at *5–*6 (D.D.C. Jan. 13, 2014) (bank association challenging bank regulations); Banner Health v. Sebelius, 797 F.Supp.2d 97, 107–08(CKK) (D.D.C.2011) (hospitals challenging Medicare reimbursement regulations); Russell–Murray Hospice v. Sebelius, 724 F.Supp.2d 43, 53(RMU) (D.D.C.2010) (hospice care provider challenging Medicare reimbursement regulations); Am. Petroleum Inst. v. Johnson, 541 F.Supp.2d 165, 176–77(PLF) (D.D.C.2008) (companies engaged in natural gas industry challenging definition of navigable waters); Nat'l Ass'n of Mfrs. v. Taylor, 549 F.Supp.2d 33, 48 n.8 (CKK) (D.D.C.2008) (manufacturers challenging statutory lobbying restrictions).

As described above, the Disparate–Impact Rule was clearly intended to apply to the "provision and pricing of homeowner's insurance," which is precisely the business engaged in by plaintiffs' members. See supra pp. 6–8.^[11] As such, I easily find that the plaintiffs' standing to challenge the Rule is self-evident and that the plaintiffs are not required to submit any additional evidence. See Sierra Club,292 F.3d at 900 (explaining that when standing is self-evident, the plaintiff or its members need not bring forward additional evidence).

However, even assuming, arguendo, that standing was not self–evident, the plaintiffs have already submitted additional evidence^[12]demonstrating injury–in–fact to their members that further cements their standing to bring this case.^[13] And, with respect to traceability and redressability, plaintiffs have additionally, and easily, satisfied those requirements as well.^[14] Finally, with regard to whether this agency action is ripe for review, the question presented here—whether disparate-impact claims are cognizable under the FHA—is a purely legal question of statutory interpretation that does not depend on the application of the Rule to any particular facts. As such, I find that plaintiffs' claims are over ripe for judicial review!

II. Administrative Procedure Act

Because the issue before me is whether disparate-impact claims are cognizable under the Fair Housing Act, I must, in the final analysis, determine whether the text of the FHA unambiguously evidences Congress's intent for such claims to be cognizable under the Act. Plaintiffs argue, in essence, that only disparate-treatment (intentional discrimination) claims are unambiguously cognizable under the plain text of the FHA. See Pls.' Mem. at 10. Unfortunately for the defendants, I agree.

Pursuant to the APA, courts must set aside any agency action that is in excess of that agency's "statutory jurisdiction, authority, or limitations." 5 U.S.C. § 706(2)(C). Courts must also set aside agency action that is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Id. at § 706(2)(A). Judicial review of an agency's interpretation of a statute that it administers^[15]is governed by the framework laid out by the Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837 (1984). In Chevron, the Court held that "[i]f the intent of Congress is clear [as to a specific issue], that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress."^[16] Id. at 842–43; see also Conn. Nat'l Bank v. Germain, 503 U.S. 249, 253–54 (1992) (noting that "courts must presume that a legislature says in a statute what it means and means in a statute what it says there"). If the court determines, however, that "the statute is silent or ambiguous with respect to the specific issue," the court must advance to step-two of the Chevron analysis and determine "whether the agency's answer is based on a permissible construction of the statute."^[17] Chevron, 467 U.S. at 843.

Here, however, an analysis under Chevron step-two is unnecessary. For the following reasons, I agree with the plaintiffs that the FHA unambiguously prohibits only intentional discrimination. Accordingly, the Disparate–Impact Rule exceeds HUD's "statutory jurisdiction, authority, or limitations," 5 U.S.C. § 706(2)(C), and thereby violates the APA.

A. Statutory Language

The Supreme Court has made clear that statutes will only prohibit practices resulting in a disparate impact—in the absence of any discriminatory intent—when they contain clear language to that effect. See Smith v. City of Jackson, 544 U.S. 228, 235–36 (2005)(plurality opinion); Bd. of Educ. of the City Sch. Dist. of the City of New York v. Harris, 444 U.S. 130, 138–39 (1979) (Harris ); see alsoWashington v. Davis, 426 U.S. 229, 239 (1976). Defendants contend, nevertheless, that Congress's intent to recognize claims based on disparate impact under the FHA can somehow be found in the language of three particular sections of the Act. See Defs.' Mem. at 23–24; see also 42 U.S.C. § 3604 (prohibiting refusal to sell or rent property "because of" a protected characteristic); id. § 3605 (prohibiting discrimination in real estate-related transactions "because of" a protected characteristic; id. § 3606 (prohibiting discrimination in the provision of brokerage services "on account of" a protected characteristic).^[18] An analysis of the ordinary meaning of the words used by Congress in those sections, however, compels me to disagree. How so?

The operative verbs in § 3604 are "refuse," "make," "deny," and—of course—"discriminate." 42 U.S.C. § 3604(a). The ordinary meaning of "refuse" is "to show or express a positive unwillingness to do or comply with." Webster's Third New International Dictionary1910 (1966) ("Webster's Third "). The ordinary meaning of "make"—as used in the phrase "make unavailable"—is "to produce as a result of action, effort, or behavior" or "to cause to happen to or be experienced by someone." Webster's Third 1363. The plain meaning of "deny" is "to refuse to grant" or "to turn down or give a negative answer to." Webster's Third 603. Finally, the plain meaning of "discriminate"^[19] is "to make a difference in treatment or favor on a class or categorical basis in disregard of individual merit." Webster's Third 648 (emphasis added).

The use of these particular verbs is telling, and indicates that the statute is meant to prohibit intentional discrimination only. When Congress intends to expand liability to claims of discrimination based on disparate impact, it uses language focused on the result or effect of particular conduct, rather than the conduct itself. See, e.g., 42 U.S.C. § 2000e–2(a)(2) (employer shall not "limit, segregate, or classify his employees ... in any way which would deprive or tend to deprive any individual of employment opportunities" or "otherwise adversely affect his status as an employee" (emphasis added)); 29 U.S.C. § 623(a)(2) (same); see also Smith, 544 U.S. at 235–36. Indeed, Congress drafted the disparate-impact provision of the ADEA with "key textual differences" from the provision prohibiting disparate-treatment. See Smith, 544 U.S. at 236 n.6; compare 29 U.S.C. § 623(a)(1), with 29 U.S.C. § 623(a)(2),

In the FHA, Congress has included no such effects-based language. Each of the FHA's operative terms' definitions describe intentional acts, which are—more often than not—motivated by specific factors. The FHA lists its prohibited motivations for these intentional acts following the "because of"^[20] and "on account of" clauses in §§ 3604, 3605, and 3606.^[21] However, the FHA contains no prohibitions on conduct that "tends to" cause a particular result. The focus of these sections is clearly not the effect of conduct, but rather the motivation for the conduct itself.

Defendants, nevertheless, contend that § 3604(a)'s prohibition on discrimination is analogous to the language contained in the sections of Title VII and the ADEA that provide for claims based on disparate impact. See Defs.' Mem. at 22–23; see also 42 U.S.C. § 2000e–2(a)(2); 29 U.S.C. § 623(a)(2); Griggs, 401 U.S. at 432; Smith, 544 U.S. at 235–36. Plaintiffs, not surprisingly, argue that § 3604(a)'s language is far more analogous to the sections of Title VII and the ADEA that provide for claims based on disparate treatment only. See Pls.' Mem. at 14–16; see also 42 U.S.C. § 2000e–2(a)(1) (Title VII prohibition on disparate treatment); 29 U.S.C. § 623(a)(1)(ADEA prohibition on disparate treatment); Ricci v. DeStefano, 557 U.S. 557, 577 (2009) (noting that 42 U.S.C. § 2000e–2(a)(1)provides for disparate treatment only); Smith, 544 U.S. at 236 n.6 (stating that 29 U.S.C. § 623(a)(1) "does not encompass disparate-impact liability"). I believe the plaintiffs' analysis is far superior.

The statutory language in § 3604(a) is materially identical to the statutory language used in the disparate-treatment prohibitions in Title VII and the ADEA. Compare 42 U.S.C. § 3604(a), with 42 U.S.C. § 2000e–2(a)(1), and 29 U.S.C. § 623(a)(1). Indeed, just as Title VII and the ADEA make it unlawful to "refuse to hire or to discharge any individual, or otherwise to discriminate against any individual ... because of such individual's" protected characteristic, 42 U.S.C. § 2000e–2(a)(1) (emphasis added); 29 U.S.C. § 623(a)(1), so too does the FHA make it unlawful to "refuse to sell or rent ... or to refuse to negotiate ... or otherwise make unavailable or deny, a dwelling to any person because of race, color, religion, sex, familial status, or national origin," 42 U.S.C. § 3604(a) (emphasis added). It takes hutzpah (bordering on desperation) for defendants to argue that § 3604(a) more closely resembles the statutory language in the disparate-impact provisions of Title VII and the ADEA,^[22] both of which contain explicit effects-focused language that is conspicuously lacking in § 3604(a).

In addition to the clear meaning of the FHA's plain text, the striking similarities between the statutory language of § 3604(a) and the disparate-treatment provisions of Title VII and the ADEA leave this Court with no doubt that Congress intended the FHA to prohibit intentional discrimination only. Put simply, Congress knows full well how to provide for disparate-impact liability, c.f. Conn. Nat'l Bank,503 U.S. at 253–54, and has made its intent to do so known in the past by including clear effects–based language when it so chooses, see Smith, 544 U.S. at 235–36. The fact that this type of effects-based language appears nowhere in the text of the FHA is, to say the least, an insurmountable obstacle to the defendants' position regarding the plain meaning of the Fair Housing Act.

B. Congressional Intent

Even assuming, arguendo, that the plain text of the Fair Housing Act did not unambiguously provide for disparate-treatment claims only, Congress's intent to so limit the FHA would still be readily discernable. How so?

1. Statutory Scheme

When Congress amended the FHA in 1988, it did not make any changes to the operative language of §§ 3604 and 3606. See generally Pub.L. No. 100–430, 102 Stat. 1619 (1988 Amendments). Soon thereafter, however, Congress enacted two other anti–discrimination statutes that explicitly provide for disparate–impact claims by using clear effects-based language. In 1990, Congress enacted the Americans with Disabilities Act ("ADA"), which authorizes claims of disparate impact upon a showing that a particular practice "adversely affects" a disabled employee. See 42 U.S.C. § 12112(b); see also Raytheon Co. v. Hernandez, 540 U.S. 44, 53 (2003)(noting disparate–impact claims are cognizable under the ADA). Indeed, the ADA contains numerous examples of explicit effects-based language, clearly indicating Congress's intent to provide for liability, even in the absence of discriminatory intent. See, e.g., 42 U.S.C. § 12112(b)(1) ("in a way that adversely affects"); id. at § 12112(b)(2) ("that has the effect of subjecting"); id. at § 12112(b)(3)(A) ("that have the effect of discrimination").

The same is true of Title VII. In order to codify the Supreme Court's holding in Griggs, Congress amended Title VII in 1991 to include language expressly authorizing claims based on disparate impact. See Civil Rights Act of 1991, Pub.L. No. 102–166, 105 Stat. 1071 (1991) (codified at 42 U.S.C. § 2000e–2(k)(1)(A) ("[a]n unlawful employment practice based on disparate impact is established under this subchapter only if ....")); see also Griggs, 401 U.S. at 431. These two statutes powerfully demonstrate that Congress knows how to craft statutory language providing for disparate-impact liability when it intends to do so. C.f. Conn. Nat'l Bank, 503 U.S. at 253–54. As such, the fact that Congress chose not to amend the FHA in 1988 to include clear effects–based language—while doing so at the same time for two similar anti-discrimination statutes—clearly illustrates that it never intended for claims of disparate impact to be cognizable under the FHA.

Defendants further contend that three "exemptions from liability"^[23] added to the FHA in the 1988 Amendments—like the "reasonable factor other than age" ("RFOA")^[24] exemption in the ADEA, see 29 U.S.C. § 623(f)(1)—"presuppose the availability of disparate impact claims" under the FHA. See Defs.' Mem. at 29; see also Smith, 544 U.S. at 238–39 (discussing RFOA exemption in ADEA). I disagree. The RFOA exemption specifically authorizes conduct that is "otherwise prohibited [by the ADEA]," when that conduct is based on a reasonable factor other than age. See 29 U.S.C. § 623(f)(1). Unfortunately for defendants, however, the three provisions they cite in the FHA merely provide safe-harbors, clarifying that nothing in the FHA prohibits the specific conduct discussed. These provisions make no mention of conduct "otherwise prohibited" under the FHA. See 42 U.S.C § 3605(c); id. § 3607(b)(1); id. § 3607(b)(4). Rather, they describe conduct that Congress intended to protect with a "complete exemption from FHA scrutiny." City of Edmonds v. Oxford House, Inc., 514 U.S. 725, 728 (1995). Moreover, under the burden-shifting framework applied to claims of disparate-treatment by many jurisdictions, see, e.g., 2922 Sherman Avenue Tenants' Ass'n, 444 F.3d at 682, these safe-harbor provisions provide per se legitimate bases as defenses to claims of disparate treatment. Considering the unambiguous meaning of the FHA's plain text, and the lack of any language referencing conduct otherwise prohibited under the FHA, defendants' contention that the cited provisions presuppose the presence of disparate-impact liability appears to be nothing more than wishful thinking on steroids!

2. The McCarran–Ferguson Act

Congressional intent to provide only for FHA claims based on intentional discrimination is evident for yet another reason: the expansion of the FHA to include disparate–impact liability against insurers would run afoul of previously enacted federal legislation.^[25] Congress enacted the McCarran–Ferguson Act ("McCarran–Ferguson"), 59 Stat. 33 (1945) (codified at 15 U.S.C. §§ 1011 et seq.), to ensure the primacy of state law in the realm of insurance regulation. See id. § 1012(a) ("The business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business."); see alsoAmbrose v. Blue Cross & Blue Shield of Va., Inc., 891 F.Supp. 1153, 1167 (E.D.Va.1995) ("Congress declared the primacy of state law in the regulation of the business of insurance."). McCarran–Ferguson states that "[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance." 15 U.S.C. § 1012(b);^[26] see also Nationwide Mut. Ins. Co. v. Cisneros, 52 F.3d 1351, 1360–61 (6th Cir.1995) ("[B]ecause the [FHA] does not mention insurance, it is covered by the McCarran–Ferguson Act and cannot be construed in such a way as to invalidate, impair, or supersede any state law enacted to regulate the business of insurance.").

The expansion of the FHA to include disparate-impact liability would not only have a wide-ranging disruptive effect on the pricing and provision of homeowner's insurance, but would also require insurers to collect and analyze certain types of race–based data on their clients and prospective clients.^[27] See Essman Affidavit ¶¶ 5–9 (describing steps required before one of plaintiffs' members will be able to collect and analyze data on its customers' protected characteristics in order to ensure compliance with Disparate–Impact Rule). These practices—expressly prohibited in many states^[28]—will regularly result in the FHA being "reverse-preempted" McCarran–Ferguson. See Ojo v. Farmers Group, Inc., 600 F.3d 1205, 1209 (9th Cir.2010) (en banc) (stating that application of the FHA may be reverse-preempted if it "invalidate[s], impair[s], or supersede[s] the provisions of the Texas Insurance Code"). Indeed, recognition of disparate-impact liability under the FHA additionally raises serious concerns regarding widespread federal encroachment upon state insurance regulation. See Saunders v. Farmers Ins. Exchange, 537 F.3d 961, 967 (8th Cir.2008) (noting that suits "challenging the racially disparate impact of industry-wide rate classifications may usurp core rate-making functions of the State's administrative regime").^[29]

Moreover, in order to ensure that their facially neutral underwriting practices do not result in any disparate outcomes amongst protected groups, insurers would be required to turn a blind eye to established actuarial principles in favor of race-based insurance decisions. SeeRudolph Affidavit ¶¶ 11–15; see also Michael J. Miller, Disparate Impact and Unfairly Discriminatory Insurance Rates, Casualty Actuarial Society E–Forum 276, 277 (2009) (describing risk-based pricing decisions as being in "inevitable and irreconcilable conflict" with disparate-impact liability).^[30] Indeed, insurers "would have to use the newly-acquired data to adjust outcomes for individual insureds based solely on this data—i.e. adjusting (upward or downward) the premium charged to achieve parity of 'impact.' " Rudolph Affidavit ¶ 15; see also Christy Affidavit ¶¶ 5–6; Doto Affidavit ¶¶ 5–6; McCarthy Affidavit ¶¶ 6–7. No reasonable interpretation of Congress's intent would conclude that it intended for the FHA to act in such a way as to "invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance." 15 U.S.C. § 1012(b); c.f. Ricci, 557 U.S. at 581("Allowing employers to violate the disparate–treatment prohibition [of Title VII] based on a mere good-faith fear of disparate-impact liability would encourage race–based action at the slightest hint of disparate impact."); id. at 594 (Scalia, J., concurring) ("[I]t is clear that Title VII not only permits but affirmatively requires [remedial race-based actions] when a disparate–impact violation would otherwise result." (emphasis in original)). To the contrary, it is utterly incomprehensible that Congress would intentionally provide for disparate-impact liability against insurers in the FHA, where doing so would require those same insurers to collect and evaluate race-based data, thereby engaging in conduct expressly proscribed by state law. See supra note 28.

C. Judicial Treatment

Finally, defendants contend that previous holdings of other Federal Circuit Courts that recognized disparate-impact liability under the FHA, preclude this Court from finding that the FHA unambiguously prohibits disparate treatment only. See Defs.' Mem. at 20–21. Please! The Supreme Court itself has made clear that a statute is not ambiguous simply because there is a lack of judicial consensus as to its proper meaning, see Reno v. Koray, 515 U.S. 50, 64–65 (1995),^[31] and "judges cannot cause a clear text to become ambiguous by ignoring it," Deal v. United States, 508 U.S. 129, 136 (1993).

And as I noted previously, our own Circuit Court has never ruled on the specific question of whether disparate-impact liability is cognizable under the FHA.^[32] While eleven Circuit Courts of Appeals to date have addressed this question in the affirmative,^[33] those decisions are not only not binding upon this Court, but more importantly were—for the most part—decided before the Supreme Court's decision in Smith v. City of Jackson, where the Supreme Court made it clear that an inquiry into the availability of disparate-impact liability turns on the presence, or absence, of effects-based language. See Smith, 544 U.S. at 235–36; see also supra note 5.

Moreover, it is remarkable that none of the Circuit Courts that have recognized claims of disparate impact subsequent to the Supreme Court's decision in Smith have either discussed Smith in any detail, or reconsidered their Circuit precedent in light of its holding. See, e.g., Inclusive Cmtys. Project, Inc. v. Tex. Dep't of Hous. and Cmty. Affairs, 747 F.3d 275, 280 (5th Cir.2014), cert. granted, No. 13–1371, 2014 WL 4916193 (U.S. Oct. 2, 2014); Affordable Hous. Dev. Corp. v. City of Fresno, 433 F.3d 1182, 1194–95 (9th Cir.2006);Darst–Webbe Tenant Ass'n Bd. v. St. Louis Hous. Auth., 417 F.3d 898, 902 (8th Cir.2005). Indeed, Circuit Judge Steven Colloton of the Eighth Circuit appropriately, but unsuccessfully, cautioned his colleagues that "there has been little consideration ... and virtually no discussion of [the textual basis for disparate-impact liability under the FHA] since the Court in Smith explained how the text of Title VII justified the decision in Griggs," and "recent developments in the law suggest that the issue is appropriate for careful review." See Gallagher v. Magner, 636 F.3d 380, 383 (8th Cir.2010) (Colloton, J., dissenting from denial of rehearing en banc).

In short, Smith represents a sea change in approach to the analysis of statutory provisions with respect to disparate-impact liability,compare Smith, 544 U.S. at 235–36, with Griggs, 401 U.S. at 432–35, and thus, defendants' reliance on pre-Smith case law as supporting their position is, to say the least, unavailing.

CONCLUSION

This is, yet another example of an Administrative Agency trying desperately to write into law that which Congress never intended to sanction.^[34] While doing so might have been more understandable—and less troubling—prior to the Supreme Court's decision in Smith,in its aftermath it is nothing less than an artful misinterpretation of Congress's intent that is, frankly, too clever by half. Defendants, of course, were somehow hoping that a favorable Chevron analysis would muster the judicial deference necessary to salvage their much desired Rule. But alas, it did not. Fortunately for us all, however, the Supreme Court is now perfectly positioned in Texas Department of Housing to finally address this issue in the not-too-distant future. In the meantime, for all of the foregoing reasons, the Court GRANTS plaintiffs' Motion for Summary Judgment and DENIES defendants' Motion to Dismiss or, in the Alternative, for Summary Judgment. Accordingly, the United States Departments of Housing and Urban Development's Disparate Impact Rule, promulgated in 78 Fed.Reg. 11,460–11,482, and codified at 24 C.F.R. § 100.500, is hereby VACATED. An Order consistent with this decision accompanies this Memorandum Opinion.

[1] Plaintiffs are two non-profit trade associations whose members sell homeowner's insurance in every state and territory of the United States. See Compl. ¶¶ 7–8.

[2] Plaintiffs originally named Shaun Donovan—in his official capacity as Secretary of HUD—as a defendant in this case. SeeCompl. ¶ 10. However, on July 28, 2014, Julian Castro assumed office as the 16th United States Secretary of Housing and Urban Development, replacing Secretary Donovan. Accordingly, pursuant to Federal Rule of Civil Procedure 25(d), Secretary Castro shall be, and hereby is, substituted for Shaun Donovan as a named defendant in this action. SeeFed.R.Civ.P. 25(d).

[3] Compare, e.g., Remarks on Signing the Fair Housing Amendments Act of 1988, 24 Weekly Comp. Pres. Doc. 1140, 1141 (Sept. 13, 1988) (President Reagan stating that 1988 FHA amendments did "not represent any congressional or executive branch endorsement of the notion, expressed in some judicial opinions, that [T]itle 8 violations may be established by a showing of disparate impact ... without discriminatory intent.... Title 8 speaks only to intentional discrimination"), with 134 Cong. Reg. 23,711 (Sen.Kennedy) (describing President Reagan's statement as "flatly inconsistent with Congress's understanding of the law").

[4] Since 2011, the Supreme Court has granted certiorari three times on the issue of whether disparate-impact liability is cognizable under the FHA, most recently last month in Texas Department of Housing and Community Affairs v. Inclusive Communities Project. See No. 13–1371, 2014 WL 4916193 (U.S. Oct. 2, 2014) (Texas Department of Housing ); Twp. of Mount Holly v. Mt. Holly Gardens Citizens in Action, Inc. (Mount Holly ), 133 S.Ct. 2824 (2013); Magner v. Gallagher, 132 S.Ct. 548 (2011). While Texas Department of Housing is currently before the Court, and likely to be decided this term, both Mount Holly and Magner were settled before the Court could decide the issue. The circumstances behind theMagner settlement, however, are particularly troubling. Indeed, a Congressional Joint Staff Report found that—in negotiating a quid pro quo deal that facilitated Magner's settlement—then–Assistant Attorney General Thomas Perez "exert[ed] arbitrary authority" to settle the case and "placed ideology over objectivity and politics over the rule of law.... Rather than allowing the Supreme Court to freely and impartially adjudicate an appeal that the Court had affirmatively chosen to hear, [Perez] openly worked to get the appeal off of the Court's docket." Staff of H. Comm. On Oversight and Gov't Reform et al., 113th Cong., DOJ's "Quid Pro Quo" with St. Paul: How Assistant Attorney General Thomas Perez Manipulated Justice and Ignored the Rule of Law 64 (Comm.Rep.2013).

[5] See, e.g., Langlois v. Abington Hous. Auth., 207 F.3d 43, 49–50 (1st Cir.2000); Huntington Branch, NAACP v. Town of Huntington, 844 F.2d 926, 935–36 (2d Cir.1988); Resident Advisory Bd. v. Rizzo, 564 F.2d 126, 146–47 (3d Cir.1977);Smith v. Town of Clarkton, 682 F.2d 1055, 1065 (4th Cir.1982); Hanson v. Veterans Admin., 800 F.2d 1381, 1386 (5th Cir.1986); Arthur v. City of Toledo, 782 F.2d 565, 574–75 (6th Cir.1986); Metro. Hous. Dev. Corp. v. Vill. of Arlington Heights, 558 F.2d 1283, 1290 (7th Cir.1977); United States v. City of Black Jack, 508 F.2d 1179, 1184–85 (8th Cir.1974);Halet v. Wend Inv. Co., 672 F.2d 1305, 1311 (9th Cir.1982); Mountain Side Mobile Estates P'ship v. U.S. Dep't of Hous. and Urban Dev., 56 F.3d 1243, 1250–51 (10th Cir.1995); United States v. Marengo Cnty. Comm'n, 731 F.2d 1546, 1559 n.20 (11th Cir.1984).

[6] Plaintiffs' concerns included, inter alia, (1) the statutory language of the FHA did not provide a cause of action for disparate-impact liability; (2) in many states, the application of the rule would result in reverse-preemption of the FHA pursuant to the McCarran–Ferguson Act, 15 U.S.C. §§ 1011 et seq.; (3) the rule was premature given the fact that the Supreme Court had recently granted certiorari in Magner, and was poised to determine this very issue; (4) the analytic framework for determining the validity of a disparate-impact claim was at variance with the burden-of-proof framework laid out in Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989), for disparate-impact claims in non-Title VII cases; and (5) the application of disparate-impact liability to the provision and pricing of homeowner's insurance would require a disastrous departure from long-established risk-based underwriting practices. See Plaintiffs' Joint Appendix of Administrative Record Materials ("JA") [Dkt. #36] at 372–383, Comments from the National Association of Mutual Insurance Companies on the Proposed Rule (January 17, 2012); see id. at 455–59, Comments from the American Insurance Association on the Proposed Rule (January 17, 2012).

[7] Notably, in a recent decision from the United States District Court for the Northern District of Illinois, Judge Amy St. Eve ruled that "HUD's response to the insurance industry's concerns [regarding the Disparate Impact Rule] was arbitrary and capricious," and remanded the case to HUD "for further explanation." Property Cas. Insurers Ass'n of Am. v. Donovan,No. 13 C 8564, at 46–47 (N.D.Ill. Sept. 3, 2014). Judge St. Eve found that HUD failed to adequately address the insurance industry's concerns or explain its decisions regarding application of the Disparate–Impact Rule to the provision and pricing of homeowner's insurance. See id.

[8] Petitioners in Mount Holly filed their Petition for a Writ of Certiorari on June 11, 2012. See Petition for a Writ of Certiorari,Mount Holly, No. 11–1507 (June 11, 2012), available at http:// sblog.s3.amazonaws.com/wp–content/uploads/2012/07/11–1507–Mount–Holly–v.–Mount–Holly–Gardens–Citizens–in–Action–Petition.pdf. The Supreme Court granted certiorari on June 17, 2013, solely on the issue of whether "disparate impact claims [are] cognizable under the Fair Housing Act." See Mount Holly, 133 S.Ct. 2824 (2013); see also supra note 4.

[9] See Plaintiffs' Opposition to Defendants' Motion to Dismiss or for Summary Judgment and Reply in Support of Plaintiffs' Motion for Summary Judgment ("Pls.' Reply") (Feb. 24, 2014) [Dkt. #27]; Defendants' Reply Memorandum in Support of Their Motion to Dismiss or, in the Alternative, for Summary Judgment ("Defs.' Reply") (Mar. 18, 2014) [Dkt. #31].

[10] At the conclusion of oral argument, I invited the parties to submit supplemental briefs on any issues raised during the arguments. See Transcript of Oral Argument at 49:3–24, American Insurance Ass'n v. U.S. Dep't of Hous. and Urban Dev., No. 1:13–cv–00966 (D.D.C. July 22, 2014). The parties submitted their supplemental briefs on August 5, 2014. SeeSupplemental Memorandum to Plaintiffs' Motion for Summary Judgment ("Pls.' Supp'l Mem.") (Aug. 5, 2014) [Dkt. #38]; Supplemental Memorandum to Defendants' Motion to Dismiss or, in the Alternative, for Summary Judgment ("Defs.' Supp'l Mem.") (Aug. 5, 2014) [Dkt. #39].

[11] The notion that insurers are an object of the Rule is made even more obvious by the fact that certain disparate-impact complaints against plaintiffs' members, including the complaint initiated by HUD itself, were filed only after HUD issued the Rule. See infra n.13.

[12] Plaintiffs include with their Reply affidavits and a declaration of six insurance industry professionals, each of whom details the unreasonably harmful effects the Disparate–Impact Rule will have on the business of homeowner's insurance. SeePls.' Reply, Ex. 1 (Declaration of Peter Schwartz) ("Schwartz Decl.") [Dkt. #27–1]; Pls.' Reply, Ex. 2 (Affidavit of Bill Essman) ("Essman Affidavit") [Dkt. #27–2]; Pls.' Reply, Ex. 3 (Affidavit of Kathleen Rudolph) ("Rudolph Affidavit") [Dkt. #27–3]; Pls.' Reply, Ex. 4 (Affidavit of Kevin J. Christy) ("Christy Affidavit") [Dkt. #27–4]; Pls.' Reply, Ex. 5 (Affidavit of Martin M. Doto) ("Doto Affidavit") [Dkt. #27–5]; Pls.' Reply, Ex. 6 (Affidavit of Victoria L. McCarthy) ("McCarthy Affidavit") [Dkt. #27–6]; see also Rainbow/PUSHCoal, 396 F.3d at 1239 (explaining that the evidence to establish standing may take the form of affidavits submitted in response to a motion to dismiss).

[13] At least one of plaintiffs' members has already been subject to three HUD complaints since promulgation of the Rule, including one initiated by HUD itself. See Schwartz Decl. ¶¶ 4–12. In light of these pending complaints, it is beyond dispute that plaintiffs' members face a significant threat of litigation and agency enforcement actions as a result of the Rule, which is sufficient injury. See, e.g., Chamber of Commerce v. Fed. Election Comm'n, 69 F.3d 600, 603 (D.C.Cir.1995). Furthermore, plaintiffs have averred significant compliance costs as a result of the Rule. See Compl. ¶ 26; Essman Affidavit ¶ 4; Rudolph Affidavit ¶¶ 9, 13; Christy Affidavit ¶ 5; Doto Affidavit ¶ 5; McCarthy Affidavit ¶ 6. Where an agency rule "influences [plaintiffs'] business decisions such that they have incurred and likely will incur substantial costs as a result of the new [rule], those declarations are sufficient to establish that plaintiffs have been 'injured' for purposes of the standing analysis." Am. Petroleum Inst. v. Johnson, 541 F.Supp.2d at 176–77.

[14] The pre–Rule question of disparate-impact liability under the statutory language of the FHA has never been resolved conclusively in our Circuit, see Greater New Orleans Fair Hous. Action Ctr., 639 F.3d at 1085 (assuming, without deciding, that disparate-impact liability is available), and judges in this District have reached differing results. CompareNat'l Cmt.y Reinvestment Coal. v. Accredited Home Lenders Holding Co., 573 F.Supp.2d 70, 77–79(EGS) (D.D.C.2008) (holding, without explanation, that the FHA permits disparate-impact claims), with Brown v, Artery Org, Inc., 654 F.Supp. 1106, 1115–16(HHG) (D.D.C.1987) (holding that it does not, at least against private defendants). More importantly, the question of disparate-impact liability for insurers under the Fair Housing Act was a much more uncertain question prior to the Rule, and the Rule purports to resolve the question in favor of insurer liability. See Saunders v. Farmers Ins. Exchange, 537 F.3d 961, 964 (8th Cir.2008) (stating that "we have recognized a disparate impact Fair Housing Act claim against private actors in another context," but acknowledging that, "at least with respect to insurers, the question is not free from doubt") (emphasis in original); Mackey v. Nationwide Ins. Cos., 724 F.2d 419, 423–25 (4th Cir.1984) (holding that the FHA does not apply to insurance); but see Ojo v. Farmers Group, Inc., 600 F.3d 1205, 1208 (9th Cir.2010)(applying FHA prohibition on racial discrimination to denial and pricing of homeowner's insurance); Nat'l Fair Hous. Alliance, Inc. v. Prudential Ins. Co. of Am., 208 F.Supp.2d 46, 59–60(EGS) (D.D.C.2002). At a minimum, the Rule resolves whatever uncertainty existed as to the availability of disparate-impact liability. Because the Rule changed the law, it is traceable to plaintiffs' alleged injuries, and an order enjoining enforcement of the Rule would redress those injuries.

[15] Congress has vested the Secretary of HUD with "[t]he authority and responsibility for administering [the FHA]." 42 U.S.C. § 3608(a).

[16] In attempting to ascertain the intent of Congress, the court is not limited to analysis of an enabling statute's text alone. Indeed, the court may consider "the text, structure, purpose, and history of an agency's authorizing statute to determine whether a statutory provision admits of congressional intent on the precise question at issue." Hearth, Patio & Barbecue Ass'n v. Dep't of Energy, 706 F.3d 499, 503 (D.C.Cir.2013).

[17] To uphold an agency's interpretation of an enabling statute, the court need not find that the interpretation is "the best interpretation of the statute," United States v. Haggar Apparel Co., 526 U.S. 380, 394 (1999) (citation omitted), or that it is the "most natural one by grammatical or other standards," Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 702 (1991)(citing EEOC v. Commercial Office Products Co., 486 U.S. 107, 115 (1988)).

[18] Defendants further argue that similarities between the language contained in § 3604(a) and the language contained in two provisions of Title VII of the Civil Rights Act of 1964 ("Title VII") and the Age Discrimination in Employment Act ("ADEA")—both of which provide for claims based on disparate impact—indicate that disparate-impact claims should also be cognizable under the FHA. See Defs.' Mem. at 22–23; see also 42 U.S.C. § 2000e–2(a)(2); 29 U.S.C. § 623(a)(2). Because the FHA fails to include definitions of the operative terms in §§ 3604, 3505, and 3606, the analysis must begin with the words' ordinary meanings. See Schindler Elevator Corp. v. United States ex rel. Kirk, 131 S.Ct. 1885, 1891 (2011) (citing Gross v. FBL Financial Servs., Inc., 557 U.S. 167, 175 (2009) ("Statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose." (internal quotation marks and citation omitted))).

[19] HUD contends that the term "discriminate"—as it is used in the FHA—"may encompass actions that have a discriminatory effect but not a discriminatory intent." 78 Fed.Reg. 11,460, 11,466. Please! HUD bases this position on the Supreme Court's interpretation of the now repealed Emergency School Aid Act ("ESAA"). See id. n.49. Under the ESAA, schools were ineligible to receive further federal funding if they employed any practice "which results in the disproportionate demotion or dismissal of ... personnel from minority groups" or "otherwise engage[s] in discrimination ... in the hiring, promotion, or assignment of employees." Harris, 444 U.S. at 138 (quoting § 706(d)(1)(B) of the ESAA). In Harris, the Supreme Court held—despite its acknowledgment that "discriminate," standing alone suggests intentional discrimination—that a discriminatory-impact test should apply to § 706(d)(1)(B). See id. at 139, 141. In reaching its conclusion, however, the Court relied heavily on the fact that the discrimination clause was closely linked with the clause containing clear effects–based language. See id. at 143. Here, because there is no such linkage to any effects–based language,Harris is inapposite, and the term "discriminate" retains its plain meaning as an intentional act.

[20] The plain meaning of the term "because"—as used in the preposition "because of"—is "for the reason that" or "on account of the cause that." Webster's Third 194. Thus, the terms following the "because of" clauses in the FHA supply the prohibited motivations for the intentional acts—i.e. to refuse to sell rent or otherwise make unavailable or deny—that the Act makes unlawful. See 42 U.S.C. §§ 3604, 3605.

[21] The FHA prohibits discrimination motivated by the following protected characteristics: race, color, religion, sex, handicap, familial status, and national origin. See 42 U.S.C. §§ 3604, 3605, 3606.

[22] Specifically, Title VII and the ADEA's prohibitions on disparate impact state that it is unlawful for an employer "to limit, segregate, or classify his employees ... in any way which would deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his status as an employee, because of such individual's" protected characteristics. 42 U.S.C. § 2000e–2(a)(2); 29 U.S.C. § 623(a)(2).

[23] See 42 U.S.C § 3605(c) ("Nothing in this subchapter prohibits a person engaged in the business of furnishing appraisals of real property to take into consideration factors other than [protected characteristics]."); id. § 3607(b)(1) ("Nothing in this subchapter limits the applicability of any reasonable local, State, or Federal restrictions regarding the maximum number of occupants permitted to occupy a dwelling."); id. § 3607(b)(4) ("Nothing in this subchapter prohibits conduct against a person because such person has been convicted by any court of competent jurisdiction of the illegal manufacture or distribution of a controlled substance.").

[24] The RFOA exemption in the ADEA states—in pertinent part—that

It shall not be unlawful for an employer, employment agency, or labor organization ... to take any action otherwise prohibited under [this act] where age is a bona fide occupational qualification reasonably necessary to the normal operation of the particular business, or where the differentiation is based on reasonable factors other than age.

29 U.S.C. § 623(f)(1) (emphasis added).

[25] It would simply defy logic for Congress to intentionally draft legislation in such a way as to contradict previously enacted federal statutes. Cf. FDA v. Brown & Williamson Tobacco Corp., 529 U.S. 120, 137–39 (2000) (observing that Congress could not have intended to grant the FDA authority to regulate tobacco products, where doing so would run afoul of previously established congressional policy); Smoking Everywhere, Inc. v. FDA, 680 F.Supp.2d 62, 70(RJL) (D.D.C.2010) ("Because this result would effectively dismantle the existing regulatory wall Congress erected between tobacco products and drug-device combinations, I can easily infer that Congress did not intend tobacco products to be drugs merely because they deliver nicotine." (emphasis in original)).

[26] Cf. Humana Inc. v. Forsyth, 525 U.S. 299, 310 (1999) ("When federal law does not directly conflict with state regulation, and when application of the federal law would not frustrate any declared state policy or interfere with a State's administrative regime, the McCarran–Ferguson Act does not preclude its application.").

[27] Insurers would, of course, also be required to collect and analyze data on their clients' and prospective clients' other protected characteristics, including color, religion, sex, familial status, national origin, and handicap as well.

[28] State insurance regulations ordinarily prohibit the consideration of protected characteristics in the evaluation and pooling of risk, and at least one state prohibits even the collection of such data. See Md.Code Ann. Ins. § 27–501(c)(1) ("[A]n insurer or insurance producer may not make an inquiry about race, creed, color, or national origin in an insurance form, questionnaire, or other manner of requesting general information that relates to an application for insurance."); see also, e.g., 215 Ill. Comp. Stat. 5/424(3); Alaska Stat. § 21.36.090; Ky.Rev.Stat. Ann. § 304.12–085; Mass Gen. Laws Ann. ch. 175 § 4C; Me.Rev.Stat. tit. 24–A, § 2303(1)(G); Okla. Stat. Ann. tit. 36, § 985; S.C.Code Ann. § 38–75–1210(B)(1); Tenn.Code Ann. § 56–5–303(a)(2)(d); Tex. Ins.Code Ann. § 544.002.

[29] See also NAACP v. Am. Family Mut. Ins. Co., 978 F.2d 287, 290–91 (7th Cir.1992) ("Risk discrimination is not race discrimination.... No insurer openly uses race as a ground of ratemaking, but is a higher rate per $1,000 of coverage for fire insurance in an inner city neighborhood attributable to risks of arson or to racial animus?").

[30] Kathleen Rudolph, a Vice President of Business Compliance at one of plaintiffs' member organizations clarifies that—if the FHA provides for disparate-impact liability against providers of homeowner's insurance—her employer will be forced to

undertake three steps to assure effective compliance with the HUD rule, and each of those steps would mark departures from [the company's] current business practices. The three-step process would comprise: (1) collecting data on characteristics of [the company's] insureds of interest to HUD (including race, religion, gender and national origin); (2) cross-referencing this newly-collected data against the pricing determined by the current risk assessment and differentiation model ...; and (3) making corrective underwriting, rating and pricing adjustments to recalibrate away from risk and towards parity of 'impact.' Each of these steps would create fundamental conflicts with [the company's] existing State regulatory obligations.

Rudolph Affidavit ¶ 12.

[31] See also Hoffman v. Blaski, 363 U.S. 335, 358 (1960) ( Frankfurter, J., dissenting) (noting that the Court's interpretation of the statute at issue was "contrary to the rulings of every Court of Appeals but one which has considered the problem, and is contrary to the view of more than half the District Courts as well").

[32] One district judge in this Circuit, however, did rule on this very issue in the aftermath of the Supreme Court's decision in Smith. See Nat'l Cmty. Reinvestment Coal. v. Accredited Home Lenders Holding Co., 573 F.Supp.2d 70(EGS)(D.D.C.2008). After referencing the parties' arguments—both for and against recognition of disparate–impact liability under the FHA—the judge ruled that "Smith does not preclude disparate impact claims pursuant to the FHA." Id. at 79. Unfortunately, however, he did not choose to explain in his opinion the reasoning behind his conclusion. Accordingly, it was of no assistance to this Court in resolving this case.

[33] Interestingly, the Second Circuit reached its conclusion in Huntington Branch, NAACP v. Town of Huntington only to have the Solicitor General argue to the contrary in its amicus brief before the Supreme Court. See Huntington Branch, NAACP, 844 F.2d at 935–36; Brief for United States as Amicus Curiae at 10, 14, 16, Town of Huntington v. Huntington Branch, NAACP, 109 S.Ct. 276 (1989) (No. 87–1961).

[34] See, e.g., Brown & Williamson Tobacco Corp., 529 U.S. at 137–39 (attempted FDA regulation of tobacco products); Avenal Power Center v. EPA, 787 F.Supp.2d 1, 4(RJL) (D.D.C.2011) (self-serving EPA misinterpretation of Clean Air Act time requirements); Smoking Everywhere, Inc., 680 F.Supp.2d at 70(RJL) (attempted FDA regulation of e-cigarettes).

Katherine H. Wheatley, Associate General Counsel, Board of Governors of the Federal Reserve System, argued the cause for appellant. With her on the briefs were Richard M. Ashton, Deputy General Counsel, Yvonne F. Mizusawa, Senior Counsel, and Joshua P. Chadwick, Counsel.

Seth P. Waxman argued the cause for amici curiae The Clearing House Association, L.L.C., et al. in support of neither party. With him on the brief were Albinas Prizgintas, Noah A. Levine, and Alan Schoenfeld.

Shannen W. Coffin argued the cause for appellees. With him on the brief was Linda C. Bailey.

Andrew G. Celli Jr., Ilann M. Maazel, and O. Andrew F. Wilson were on the brief for amicus curiae The Retail Litigation Center, Inc. in support of appellees.

Jeffrey I. Shinder was on the brief for amici curiae 7-Eleven, Inc., et al. in support of appellees.

David A. Balto was on the brief for amicus curiae United States Senator Richard J. Durbin in support of appellees.

Before: TATEL, Circuit Judge, and EDWARDS and WILLIAMS, Senior Circuit Judges.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge.

Combining features of credit cards and checks, debit cards have become not just the most popular noncash payment method in the United States but also a source of substantial revenue for banks and companies like Visa and MasterCard that own and operate debit card networks. In 2009 alone, debit card holders used their cards 37.6 billion times, completing transactions worth over $1.4 trillion and yielding over $20 billion in fees for banks and networks. Concerned that these fees were excessive and that merchants, who pay the fees directly, and consumers, who pay a portion of the fees indirectly in the form of higher prices, lacked any ability to resist them, Congress included a provision in the Dodd-Frank financial reform act directing the Board of Governors of the Federal Reserve System to address this perceived market failure. In response, the Board issued regulations imposing a cap on the per-transaction fees banks receive and, in an effort to force networks to compete for merchants' business, requiring that at least two networks owned and operated by different companies be able to process transactions on each debit card. Merchant groups challenged the regulations, seeking lower fees and even more network competition. The district court granted summary judgment to the merchants, concluding that the rules violate the statute's plain language. We disagree. Applying traditional tools of statutory interpretation, we hold that the Board's rules generally rest on reasonable constructions of the statute, though we remand one minor issue—the Board's treatment of so-called transactions-monitoring costs—to the Board for further explanation.

I.

Understanding this case requires looking under the hood— or, more accurately, behind the teller's window—to see what really happens when customers use their debit cards. After providing some background about debit cards and the debit card marketplace, we outline Congress's effort to solve several perceived market failures, the Board's attempt to put Congress's directives into action, and the district court's rejection of the Board's approach.

A.

We start with the basics. For purposes of this case, the term "debit card" describes both traditional debit cards, which allow cardholders to deduct money directly from their bank accounts, and prepaid cards, which come loaded with a certain amount of money that cardholders can spend down and, in some cases, replenish. Debit card transactions are typically processed using what is often called a "four party system." The four parties are the cardholder who makes the purchase, the merchant who accepts the debit card payment, the cardholder's bank (called the "issuer" because it issues the debit card to the cardholder), and the merchant's bank (called the "acquirer" because it acquires funds from the cardholder and deposits those funds in the merchant's account). In addition, each debit transaction is processed on a particular debit card "network," often affiliated with MasterCard or Visa. The network transmits information between the cardholder/issuer side of the transaction and the merchant/acquirer side. Issuers activate certain networks on debit cards, and only activated networks can process transactions on those cards.

Virtually all debit card transactions fall into one of two categories: personal identification number (PIN) or signature. PIN and signature transactions employ different methods of "authentication"—a process that establishes that the cardholder, and not a thief, has actually initiated the transaction. In PIN authentication, the cardholder usually enters her PIN into a terminal. In signature authentication, the cardholder usually signs a copy of the receipt. Most networks can process either PIN transactions or signature transactions, but not both. Signature networks employ infrastructure used to process credit card payments, while PIN networks employ infrastructure used by ATMs. Only about one-quarter of merchants currently accept PIN debit. Some merchants have never acquired the terminals needed for customers to enter their PINs, while others believe that signature debit better suits their business needs. More about this later. And merchants who sell online generally refuse to accept PIN debit because customers worry about providing PINs over the Internet. Merchants who do accept both PIN and signature debit often allow customers to select whether to process particular transactions on a PIN network or a signature network.

Whether PIN or signature, a debit card transaction is processed in three stages: authorization, clearance, and settlement. Authorization begins when the cardholder swipes her debit card, which sends an electronic "authorization request" to the acquirer conveying the cardholder's account information and the transaction's value. The acquirer then forwards that request along the network to the issuer. Once the issuer has determined whether the cardholder has sufficient funds in her account to complete the transaction and whether the transaction appears fraudulent, it sends a response to the merchant along the network approving or rejecting the transaction. Even if the issuer approves the transaction, that transaction still must be cleared and settled before any money changes hands.

Clearance constitutes a formal request for payment sent from the merchant on the network to the issuer. PIN transactions are authorized and cleared simultaneously: because the cardholder generally enters her PIN immediately after swiping her card, the authorization request doubles as the clearance message. Signature transactions are first authorized and subsequently cleared: because the cardholder generally signs only after the issuer has approved the transaction, the merchant must send a separate clearance message. This difference between PIN and signature processing explains why certain businesses, including car rental companies, hotels, and sit-down restaurants, often refuse to accept PIN debit. Car rental companies authorize transactions at pick-up to ensure that customers have enough money in their accounts to pay but postpone clearance to allow for the possibility that the customer might damage the vehicle or return it without a full tank of gas. Hotels authorize transactions at check-in but postpone clearance to allow for the possibility that the guest might trash the room, order room service, or abscond with the towels and robes. And sit-down restaurants authorize transactions for the full amount of the meal but postpone clearance to give diners an opportunity to add a tip.

The final debit card payment processing step, settlement, involves the actual transfer of funds from the issuer to the acquirer. After settlement, the cardholder's account has been debited, the merchant's account has been credited, and the transaction has concluded. Rather than settle transactions one-by-one, banks generally employ companies that determine each bank's net debtor/creditor position over a large number of transactions and then settle those transactions simultaneously.

Along the way, and central to this case, the parties charge each other various fees. The issuer charges the acquirer an "interchange fee," sometimes called a "swipe fee," which compensates the issuer for its role in processing the transaction. The network charges both the issuer and the acquirer "network processing fees," otherwise known as "switch fees," which compensate the network for its role in processing the transaction. Finally, the acquirer charges the merchant a "merchant discount," the difference between the transaction's face value and the amount the acquirer actually credits the merchant's account. Because the merchant discount includes the full value of the interchange fee, the acquirer's portion of the network processing fee, other acquirer and network costs, and a markup, merchants end up paying most of the costs acquirers and issuers incur. Merchants in turn pass some of these costs along to consumers in the form of higher prices. In contrast to credit card fees, which generally represent a set percentage of the value of a transaction, debit card fees change little as price increases. Thus, a bookstore might pay the same fees to sell a $25 hardcover that Mercedes would pay to sell a $75,000 car.

Before the Board promulgated the rules challenged in this case, networks and issuers took advantage of three quirks in the debit card market to increase fees without losing much business. First, issuers had complete discretion to decide whether to activate certain networks on their cards. For instance, an issuer could limit payment processing to one Visa signature network, a Visa signature network and a Visa PIN network, or Visa and MasterCard signature and PIN networks. Second, networks had complete discretion to set the level of interchange and network processing fees. Finally, Visa and MasterCard controlled most of the debit card market. According to one study entered into the record, in 2009 networks affiliated with Visa or MasterCard processed over eighty percent of all debit transactions. Steven C. Salop, et al., Economic Analysis of Debit Card Regulation Under Section 920, Paper for the Board of Governors of the Federal Reserve System 10 (Oct. 27, 2010). Making things worse for merchants, these companies imposed "Honor All Cards" rules that prohibited merchants from accepting some but not all of their credit cards and signature debit cards. 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 cards—hardly a realistic option for most merchants given the popularity of plastic.

Exercising this market power, issuers and networks often entered into mutually beneficial agreements under which issuers required merchants to route transactions on certain networks that generally charged high processing fees so long as those networks also set high interchange fees. Many of these agreements were exclusive, meaning that issuers agreed to activate only one network or only networks affiliated with one company. Networks and issuers also negotiated routing priority agreements, which forced merchants to process transactions on certain activated networks rather than others. By 2009, interchange and network processing fees had reached, on average, 55.5 cents per transaction, including a 44 cent interchange fee, a 6.5 cent network processing fee charged to the issuer, and a 5 cent network processing fee charged to the acquirer. Debit Card Interchange Fees and Routing, Notice of Proposed Rulemaking ("NPRM"), 75 Fed. Reg. 81,722, 81,725 (Dec. 28, 2010).

B.

Seeking to correct the market defects that were contributing to high and escalating fees, Congress passed the Durbin Amendment as part of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). The amendment, which modified the Electronic Funds Transfer Act (EFTA), Pub. L. No. 95-630, 92 Stat. 3641 (1978), contains two key provisions. The first, EFTA section 920(a), restricts the amount of the interchange fee. Specifically, it instructs the Board of Governors of the Federal Reserve System to promulgate regulations ensuring that "the amount of any interchange transaction fee . . . is reasonable and proportional to the cost incurred by the issuer with respect to the transaction." 15 U.S.C. § 1693o-2(a)(3)(A); see also id. § 1693o-2(a)(6)-(7)(A) (exempting debit cards issued by banks that, combined with all affiliates, have assets of less than $10 billion and debit cards affiliated with certain government payment programs from interchange fee regulations). To this end, section 920(a)(4)(B), in language the parties hotly debate, requires the Board to "distinguish between . . . the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular debit transaction, which cost shall be considered . . ., [and] other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered." Id. § 1693o-2(a)(4)(B)(i)-(ii). Like the parties, we shall refer to the costs of "authorization, clearance, and settlement" as "ACS costs." In addition, section 920(a) "allow[s] for an adjustment to the fee amount received or charged by an issuer" to compensate for "costs incurred by the issuer in preventing fraud in relation to electronic debit transactions involving that issuer," so long as the issuer "complies with the fraud-related standards established by the Board." Id. § 1693o-2(a)(5)(A).

The second key provision, EFTA section 920(b), prohibits certain exclusivity and routing priority agreements. Specifically, it instructs the Board to promulgate regulations preventing any "issuer or payment card network" from "restrict[ing] the number of payment card networks on which an electronic debit transaction may be processed to . . . 1 such network; or . . . 2 or more [affiliated networks]." Id. § 1693o-2(b)(1)(A). It also directs the Board to prescribe regulations that prohibit issuers and networks from "inhibit[ing] the ability of any person who accepts debit cards for payments to direct the routing of electronic debit transactions for processing over any payment card network that may process such transactions." Id. § 1693o-2(b)(1)(B). Congress anticipated that these prohibitions would force networks to compete for merchants' business, thus driving down fees.

C.

In late 2010, the Board proposed rules to implement sections 920(a) and (b). As for section 920(a), the Board proposed allowing issuers to recover only "incremental" ACS costs and interpreted "incremental" ACS costs to mean costs that "vary with the number of transactions" an issuer processes over the course of a year. NPRM, 75 Fed. Reg. at 81,735. Issuers would thus be unable to recover "costs that are common to all debit card transactions and could never be attributed to any particular transaction (i.e., fixed costs), even if those costs are specific to debit card transactions as a whole." Id. at 81,736. The Board "recognize[d]" that this definition would "impose[] a burden on issuers by requiring issuers to segregate costs that vary with the number of transactions from those that are largely invariant to the number of transactions" and "that excluding fixed costs may prevent issuers from recovering through interchange fees some costs associated with debit card transactions." Id. The Board nonetheless determined that other definitions of "incremental cost" "do not appropriately reflect the incremental cost of a particular transaction to which the statute refers." Id. at 81,735. Limiting the interchange fee to average variable ACS costs, the Board proposed allowing issuers to recover at most 12 cents per transaction—considerably less than the 44 cents issuers had previously received on average. Id. at 81,736-39.

After evaluating thousands of comments, the Board issued a Final Rule that almost doubled the proposed cap. The Board abandoned its proposal to define "incremental" ACS costs to mean average variable ACS costs, deciding instead not to define the term "incremental costs" at all. Debit Card Interchange Fees and Routing, Final Rule ("Final Rule"), 76 Fed. Reg. 43,394, 43,426-27 (July 20, 2011). Observing that "the requirement that one set of costs be considered and another set of costs be excluded suggests that Congress left to the implementing agency discretion to consider costs that fall into neither category to the extent necessary and appropriate to fulfill the purposes of the statute," the Board allowed issuers to recover all costs "other than prohibited costs." Id. Thus, in addition to average variable ACS costs, issuers could recover: (1) what the proposed rule had referred to as "fixed" ACS costs; (2) costs issuers incur as a result of transactions-monitoring to prevent fraud; (3) fraud losses, which are costs issuers incur as a result of settling fraudulent transactions; and (4) network processing fees. Id. at 43,429-31. The Board prohibited issuers from recovering other costs, such as corporate overhead and debit card production and delivery costs, that the Board determined were not incurred to process specific transactions. Id. at 43,427-29. Accounting for all permissible costs, the Board raised the interchange fee cap to 21 cents plus an ad valorem component of 5 basis points (.05 percent of a transaction's value) to compensate issuers for fraud losses. Id. at 43,404.

In response to section 920(b), the Board's proposed rule outlined two possible approaches. Under "Alternative A," issuers would have to activate at least two unaffiliated networks on each debit card regardless of method of authentication. NPRM, 75 Fed. Reg. at 81,749. For example, an issuer could activate a Visa signature network and a MasterCard PIN network. Under "Alternative B," issuers would have to activate at least two unaffiliated networks for each method of authentication. Id. at 81,749-50. For example, an issuer could activate both Visa and MasterCard signature and PIN networks.

In the Final Rule the Board chose Alternative A. Acknowledging that "Alternative A provides merchants fewer routing options," the Board reasoned that it satisfied statutory requirements and advanced Congress's desire to enhance competition among networks without excessively undermining the ability of cardholders to route transactions on their preferred networks or "potentially limit[ing] the development and introduction of new authentication methods." Final Rule, 76 Fed. Reg. at 43,448.

D.

Upset that the Board had nearly doubled the interchange fee cap (as compared to the proposed rule) and had selected the less restrictive anti-exclusivity option, several merchant groups, including NACS, the organization formerly known as the National Association of Convenience Stores, filed suit in district court. The merchants argued that both rules violate the plain terms of the Durbin Amendment: the interchange fee cap because the statute allows issuers to recover only average variable ACS costs, not "fixed" ACS costs, transactions-monitoring costs, fraud losses, or network processing fees; and the anti-exclusivity rule because the statute requires that all merchants—even those who refuse to accept PIN debit—be able to route each debit transaction on multiple unaffiliated networks. Several financial services industry groups, which during rulemaking had urged the Board to set an even higher interchange fee cap and adopt an even less restrictive anti-exclusivity rule, participated as amici curiae in support of neither party.

The district court granted summary judgment to the merchants. The court began by observing that "[a]ccording to the Board, [the statute contains] ambiguity that the Board has discretion to resolve. How convenient." NACS v. Board of Governors of the Federal Reserve System, 958 F. Supp. 2d 85, 101 (D.D.C. 2013). Rejecting this view, the district court determined that the Durbin Amendment is "clear with regard to what costs the Board may consider in setting the interchange fee standard: Incremental ACS costs of individual transactions incurred by issuers may be considered. That's it!" Id. at 105. The district court thus concluded that the Board had erred in allowing issuers to recover "fixed" ACS costs, transactions-monitoring costs, fraud losses, and network processing fees. Id. at 105-09. The court also agreed with the merchants that section 920(b) unambiguously requires that all merchants be able to route every transaction on at least two unaffiliated networks. Id. at 109-14. The Board's final anti-exclusivity rule, the district court held, "not only fails to carry out Congress's intention; it effectively countermands it!" Id. at 112. Concluding that "the Board completely misunderstood the Durbin Amendment's statutory directive and interpreted the law in ways that were clearly foreclosed by Congress," the district court vacated and remanded both the interchange fee rule and the anti-exclusivity rule. Id. at 114. But because regulated parties had already "made extensive commitments" in reliance on the Board's rules, the district court stayed vacatur to provide the Board a short period of time in which to promulgate new rules consistent with the statute. Id. at 115. Subsequently, the district court granted a stay pending appeal.

The Board now appeals, arguing that both rules rest on reasonable constructions of ambiguous statutory language. Financial services amici, urging reversal but still ostensibly appearing in support of neither party, filed a brief and participated in oral argument—though we have considered only those arguments that at least one party has not disavowed. See Eldred v. Reno, 239 F.3d 372, 378 (D.C. Cir. 2001) (noting that arguments "rejected by the actual parties to this case" are "not properly before us"); Eldred v. Ashcroft, 255 F.3d 849, 854 (D.C. Cir. 2001) (Sentelle, J., dissenting from denial of rehearing en banc) ("Under the panel's holding, it is now the law of this circuit that amici are precluded both from raising new issues and from raising new arguments."). In a case like this, "in which the District Court reviewed an agency action under the [Administrative Procedures Act], we review the administrative action directly, according no particular deference to the judgment of the District Court." In re Polar Bear Endangered Species Act Listing and Section 4(d) Rule Litigation, 720 F.3d 354, 358 (D.C. Cir. 2013) (internal quotation marks omitted). Because the Board has sole discretion to administer the Durbin Amendment, we apply the familiar two-step framework set forth in Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). At Chevron's first step, we consider whether, as the district court concluded, Congress has "directly spoken to the precise question at issue." Id. at 842. If not, we proceed to Chevron's second step where we determine whether the Board's rules rest on "reasonable" interpretations of the Durbin Amendment. Id. at 844.

Before addressing the parties' arguments, we think it worth emphasizing that Congress put the Board, the district court, and us in a real bind. Perhaps unsurprising given that the Durbin Amendment was crafted in conference committee at the eleventh hour, its language is confusing and its structure convoluted. But because neither agencies nor courts have authority to disregard the demands of even poorly drafted legislation, we must do our best to discern Congress's intent and to determine whether the Board's regulations are faithful to it.

II.

We begin with the interchange fee. Recall that section 920(a)(4)(B)(i) requires the Board to include "incremental cost[s] incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular electronic debit transaction," and that section 920(a)(4)(B)(ii) prohibits the Board from including "other costs incurred by an issuer which are not specific to a particular electronic debit transaction." Echoing the district court, the merchants argue that the two sections unambiguously permit issuers to recover only "incremental" ACS costs. "The plain language of the Durbin Amendment," the merchants insist, "does not grant the Board the discretion it claims to consider costs beyond those delineated in Section 920(a)(4)(B)." Appellees' Br. 26; see also NACS, 958 F. Supp. 2d at 100 (noting that the district court had "no difficulty concluding that the statutory language evidences an intent by Congress to bifurcate the entire universe of costs associated with interchange fees"). Alternatively, the merchants briefly argue that even if section 920(a)(4)(B) is ambiguous, the Board's resolution of that ambiguity was unreasonable—though they acknowledge that this argument essentially rehashes their Chevron step one argument. See Appellees' Br. 44 ("Many of the same arguments discussed above also demonstrate the unreasonableness of the interchange fee standard."). The Board also thinks the Durbin Amendment is unambiguous, though it argues that the statute clearly establishes a third category of costs: those that are not "incremental" ACS costs but are specific to a particular transaction. See Final Rule, 76 Fed. Reg. at 43,426 ("[T]here exist costs that are not encompassed in either the set of costs the Board must consider under Section 920(a)(4)(B)(i), or the set of costs the Board may not consider under Section 920(a)(4)(B)(ii)."). Relying on the requirement that the interchange transaction fee be "reasonable and proportional to the cost incurred by the issuer with respect to the transaction," 15 U.S.C. § 1693o-2(a)(2), (a)(3)(A), the Board concludes that it may but need not allow issuers to recover costs falling within this third category, subject of course to other statutory constraints. Like the merchants, the Board also offers a Chevron step two argument. See Appellant's Br. 71 ("Even assuming for the sake of argument that the district court offered a possible reading, the statute does not unambiguously foreclose the Board's construction. . . .").

The parties' competing arguments present us with two options. Were we to agree with the merchants that the statute allows recovery only of "incremental" ACS costs, we would have to invalidate the rule without considering the particular categories of costs the merchants challenge given that the Board expressly declined to define the ambiguous statutory term "incremental," let alone determine whether those particular types of costs qualify as "incremental" ACS costs. See Securities & Exchange Commission v. Chenery Corp., 318 U.S. 80, 87 (1943) ("The grounds upon which an administrative order must be judged are those upon which the record discloses that its action was based."). Were we to determine that the Board's reading of section 920(a)(4)(B) is either compelled by the statute or reasonable, we would have to go on to consider whether the statute allows recovery of "fixed" ACS costs, transactions-monitoring costs, fraud losses, and network processing fees. We must therefore first decide whether section 920(a)(4)(B) bifurcates the entire universe of costs the Board may consider, or whether the statute allows for the existence of a third category of costs that falls outside the two categories specifically listed.

A.

The Board may well have been able to interpret section 920(a)(4)(B) as the merchants urge. Such a reading could rely on the statutory mandate to "distinguish between" one set of costs and "other costs," and could interpret section 920(a)(4)(B)(i) as referring to variable costs and section 920(a)(4)(B)(ii) as referring to fixed costs. But contrary to the merchants' position, and consistent with the Board's Chevron step two argument, we certainly see nothing in the statute's language compelling that result. The merchants' preferred reading requires assuming that the phrase "incremental cost incurred by the issuer for the role of the issuer in the authorization, clearance, and settlement of a particular electronic debit transaction" describes all issuer costs "specific to a particular electronic debit transaction." For several reasons, however, we believe that phrase could just as easily, if not more easily, be read to qualify the language of section 920(a)(4)(B)(i) such that it encompasses a subset of costs specific to a particular transaction, leaving other costs specific to a particular transaction unmentioned.

To begin with, as the Board pointed out in the Final Rule, the phrase "incremental cost" has a several possible definitions, including marginal cost, variable cost, "the cost of producing some increment of output greater than a single unit but less than the entire production run," and "the difference between the cost incurred by a firm if it produces a particular quantity of a good and the cost incurred by the firm if it does not produce the good at all." Final Rule, 76 Fed. Reg. at 43,426-27. As a result, depending on how these terms are defined, the category of "incremental" costs would not necessarily encompass all costs that are "specific to a particular electronic debit transaction." See infra at 26 (noting the parties' agreement that the "specific to a particular electronic debit transaction" phrase should not be read to limit issuers to recovering only the marginal cost of each particular transaction).

Second, the phrase "incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular electronic debit transaction" limits the class of "incremental" costs the Board must consider. So even if the word "incremental" were read to include all costs specific to a particular transaction, Congress left unmentioned incremental costs other than incremental ACS costs. See Final Rule, 76 Fed. Reg. at 43,426 n.116 ("The reference in Section 920(a)(4)(B)(i) requiring consideration of the incremental costs incurred in the `authorization, clearance, or settlement of a particular transaction' and the reference in section 920(a)(4)(B)(ii) prohibiting consideration of costs that are `not specific to a particular electronic debit transaction,' read together, recognize that there may be costs that are specific to a particular electronic debit transaction that are not incurred in the authorization, clearance, or settlement of that transaction."). For example, in the proposed rule the Board determined that "cardholder rewards that are paid by the issuer to the cardholder for each transaction" and "costs associated with providing customer service to cardholders for particular transactions" are "associated with a particular transaction" but "are not incurred by the issuer for its role in authorization, clearing, and settlement of that transaction." NPRM, 75 Fed. Reg. at 81,735. Moreover, in the Final Rule the Board explained that fraud losses "are specific to a particular transaction" because they result from the settlement of particular fraudulent transactions, but are not incurred by the issuer for the role of the issuer in the authorization, clearance, or settlement of particular transactions. Final Rule, 76 Fed. Reg. at 43,431 (describing fraud losses as "the result of an issuer's authorization, clearance, or settlement of a particular electronic debit transaction that the cardholder later identifies as fraudulent"); see also Appellant's Br. 67 (defending the Board's decision to allow issuers to recover some fraud losses on the ground that fraud losses fall outside section 920(a)(4)(B)).

Third, as the Board pointed out, had Congress wanted to allow issuers to recover only incremental ACS costs, it could have done so directly. See Final Rule, 76 Fed. Reg. at 43,426. For instance, in section 920(a)(3)(A) Congress could have instructed the Board to "promulgate regulations ensuring that interchange fees are reasonable and proportional to the incremental costs of authorization, clearance, and settlement that an issuer incurs with respect to a particular electronic debit transaction." Instead, in section 920(a)(3)(A) Congress required the Board to promulgate regulations ensuring that interchange fees are "reasonable and proportional to the cost incurred by the issuer with respect to the transaction" and separately instructed the Board, when determining issuer costs, to "distinguish between" incremental ACS costs, which the Board must consider, 15 U.S.C. § 1693o-2(a)(4)(B)(i), and "other costs . . . which are not specific to a particular electronic debit transaction," which the Board must not consider, id. § 1693o-2(a)(4)(B)(ii).

The merchants advance several arguments in support of the opposite conclusion. They first assert that the "which" clause in the phrase "other costs incurred by an issuer which are not specific to a particular electronic debit transaction" should be read descriptively rather than restrictively. As their labels suggest, descriptive clauses explain, while restrictive clauses define. To illustrate, consider a simple sentence: "the cars which are blue have sunroofs." Read descriptively, the clause "which are blue" states a fact about the entire class of cars, which also happen to have sunroofs. Read restrictively, the clause defines a particular class of cars—blue cars—all of which have sunroofs. Although often subtle, the distinction between descriptive and restrictive clauses makes all the difference in this case. Here's why.

We have thus far assumed that section 920(a)(4)(B)(ii)'s "which" clause should be read restrictively. On this reading (the Board's), the clause defines the class of "other costs" issuers are precluded from recovering. As explained above, based on this restrictive reading the Board reasonably concluded that the statute establishes three categories of costs. But if the clause should instead be read descriptively, then it would describe a characteristic of "other costs" without limiting the meaning of "other costs." On this reading (the merchants'), the statute bifurcates the entire universe of costs, requiring the Board to define the statutory term "incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular electronic debit transaction" as including all costs other than costs "not specific to a particular electronic debit transaction."

Normally, writers distinguish between descriptive and restrictive clauses by setting the former but not the latter aside with commas and by introducing the former with "which" and the latter with "that." Here, Congress introduced the clause at issue with the word "which" but failed to set it aside with commas. Word choice thus suggests a descriptive reading of the clause, while punctuation suggests a restrictive reading. In support of a descriptive reading, the merchants rely on a ninety-year-old Supreme Court case for the proposition that "[p]unctuation is a minor, and not a controlling, element in interpretation." Barrett v. Van Pelt, 268 U.S. 86, 91 (1925); see also NACS, 958 F. Supp. 2d at 102 (calling Congress's failure to use commas a "red herring"). This decision provides the merchants little help. Not only was it written long before the development of modern approaches to statutory interpretation, see U.S. National Bank of Oregon v. Independent Insurance Agents of America, Inc., 508 U.S. 439, 454-55 (1993) (noting that although reliance on punctuation must not "distort[] a statute's true meaning," "[a] statute's plain meaning must be enforced, of course, and the meaning of a statute will typically heed the commands of its punctuation"), but it addressed statutory language that, unlike here, contained a clearly misplaced comma, Barrett, 268 U.S. at 88 (interpreting a statute "so inapt and defective that it is difficult to give it a construction that is wholly satisfactory" without ignoring its comma).

The idea that we should entirely ignore punctuation would make English teachers cringe. Even if punctuation is sometimes a minor element in interpreting the meaning of language, punctuation is often crucial—a reader might appropriately gloss over a comma mistakenly inserted between a noun and a verb yet pay extra attention to a comma or semicolon setting off separate items in a list. Following the merchants' advice and stuffing punctuation to the bottom of the interpretive toolbox would run the risk of distorting the meaning of statutory language. After all, Congress communicates through written language, and one component of written language is grammar, including punctuation. As Strunk and White puts it, "the best writers sometimes disregard the rules of rhetoric. When they do so, however, the reader will usually find in the sentence some compensating merit, attained at the cost of the violation. Unless he is certain of doing as well, he will probably do best to follow the rules." WILLIAM STRUNK, JR. & E.B. WHITE, THE ELEMENTS OF STYLE xvii-xviii (4th ed. 2000) (internal quotation marks omitted). Put another way, "all our thoughts can be rendered with absolute clarity if we bother to put the right dots and squiggles between the words in the right places." LYNN TRUSS, EATS, SHOOTS & LEAVES 201-02 (2003).

In this instance, the absence of commas matters far more than Congress's use of the word "which" rather than "that." Widely-respected style guides expressly require that commas set off descriptive clauses, but refer to descriptive "which" and restrictive "that" as a style preference rather than an ironclad grammatical rule. As The Chicago Manual of Style explains:

A relative clause that is restrictive—that is, essential to the meaning of the sentence—is neither preceded nor followed by a comma. But a relative clause that could be omitted without essential loss of meaning (a nonrestrictive clause) should be both preceded and (if the sentence continues) followed by a comma. Although which can be used restrictively, many careful writers preserve the distinction between restrictive that (no commas) and descriptive which (commas).

THE CHICAGO MANUAL OF STYLE 250 (14th ed. 2003). Compare STRUNK & WHITE at 3-4 ("Nonrestrictive relative clauses are parenthetic. . . . Commas are therefore needed."), and WILSON FOLLETT, MODERN AMERICAN USAGE: A GUIDE 69 (Erik Wensberg ed., 1998) (same), with STRUNK & WHITE at 59 ("The use of which for that is common in written and spoken language.. . . Occasionally which seems preferable to that . . . But it would be a convenience to all if these two pronouns were used with precision."), and FOLLETT at 293 ("The alert reader will notice that quite a few excellent authors decline to use that and which in precisely the ways that late-twentieth-century grammar books recommend.").

In fact, elsewhere in the Durbin Amendment Congress demonstrated that it is among those writers who ignore the distinction between descriptive "which" and restrictive "that." In section 920(b)(1)(A), for example, Congress instructed the Board to prevent networks and issuers from activating on a debit card only one network or "2 or more such networks which are owned, controlled, or otherwise operated by" the same company. 15 U.S.C. § 1693o-2(b)(1)(A)(i)-(ii) (emphasis added). Even though Congress used the word "which" to introduce this clause, the clause is clearly restrictive. A descriptive reading would require that the Board prevent issuers and networks from ever activating "one network" or "2 or more such networks." In other words, a descriptive reading would prevent the activation of any networks at all, rendering debit cards useless chunks of plastic. Cf. Barnhart v. Thomas, 540 U.S. 20, 24 (2003) (finding a restrictive clause in the statutory phrase "any other kind of substantial gainful work which exists in the national economy"). By contrast, in the Durbin Amendment Congress set aside every clearly descriptive clause with commas. See, e.g., 15 U.S.C. § 1693o-2(a)(4)(B)(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)" (emphasis added)).

The merchants also emphasize Congress's use of the terms "distinguish between," 15 U.S.C. § 1693o-2(a)(4)(B), and "other costs," id. § 1693o-2(a)(4)(B)(ii). According to the merchants, the term "distinguish between" suggests that Congress required the Board to "differentiate [between] the two categories of costs," and "the very use of the term `other costs'—as opposed to simply `costs'—indicates the entire universe of costs that is remaining after consideration of includable costs." Appellees' Br. 28. As noted above, these terms might provide some textual support for the merchants' preferred reading of the statute. But given the Board's reasonable determination that issuers incur costs, other than incremental ACS costs, that are "specific to a particular transaction," the terms "distinguish between" and "other costs" hardly compel the conclusion that the Board must interpret section 920(a)(4)(B) as encompassing all costs that issuers incur. Imagine that you make a deal to hand over part of your baseball card collection and to distinguish between rookie cards, which you must hand over, and other cards less than five years old, which you must not. Although it would probably make little financial sense, you could certainly hand over a 1960 Harmon Killebrew Topps card without violating the terms of the deal.

Next, the merchants assert that the Board, by inferring the existence of a third category of costs, improperly reads a delegation of authority into congressional silence. According to the merchants, "Congress would not delineate with specificity the characteristics of includable costs (e.g., incremental) if it intended, by its silence, to allow the Board to consider and include their opposite (e.g., nonincremental)." Appellees' Br. 31; accord American Petroleum Institute v. Environmental Protection Agency, 198 F.3d 275, 278 (D.C. Cir. 2000) ("[I]f Congress makes an explicit provision for apples, oranges and bananas, it is most unlikely to have meant grapefruit."). But section 920(a)(3)(A) clearly grants the Board authority to promulgate regulations ensuring that interchange fees are reasonable and proportional to costs issuers incur. The question then is how section 920(a)(4)(B) limits the Board's discretion to define the statutory term "cost incurred by the issuer with respect to the transaction," not whether that section affirmatively grants the Board authority to allow issuers to recover certain costs.

Finally, in a footnote the merchants point to section 920(a)(3)(B)'s requirement that the Board disclose certain ACS cost information and to section 920(a)(4)(A)'s requirement that the Board "consider the functional similarity between electronic debit transactions and checking transactions that are required within the Federal Reserve bank system to clear at par." The district court relied heavily on these provisions, concluding that Congress's decisions to limit disclosure "to the same costs specified in section (a)(4)(B)(i)" and to direct the Board to consider similarities, but not differences, between checks and debit cards support the merchants' interpretation of the statute. NACS, 958 F. Supp. 2d at 103-04. But even assuming the disclosure provision mirrors section 920(a)(4)(B)(i)'s reference to incremental ACS costs—the word "incremental" appears nowhere in the disclosure provision—the statute also allows the Board to collect "such information as may be necessary to carry out the provisions of this section," not just information about incremental ACS costs. 15 U.S.C. § 1693o-2(a)(3)(B). Similarly, Congress's instruction to the Board to "consider the functional similarity between electronic debit transactions and checking transactions" hardly precludes the Board from considering differences as well. Doing just that, the Board decided that it could allow banks to recover some costs in the debit card context that they are unable to recover in the checking context.

Given the Durbin Amendment's ambiguity as to the existence of a third category of costs, we must defer to the Board's reasonable determination that the statute splits costs into three categories: (1) incremental ACS costs, which the Board must allow issuers to recover; (2) costs specific to a particular transaction, other than incremental ACS costs, which the Board may, but need not, allow issuers to recover; and (3) costs not specific to a particular transaction, which the Board may not allow issuers to recover. See Chevron, 467 U.S. at 843 ("Sometimes the legislative delegation to an agency on a particular question is implicit rather than explicit. In such a case, a court may not substitute its own construction of a statutory provision for a reasonable interpretation made by the administrator of an agency.").

B.

Because the Board reasonably interpreted the Durbin Amendment as allowing issuers to recover some costs in addition to incremental ACS costs, we must now determine whether the Board reasonably concluded that issuers can recover the four specific types of costs the merchants challenge: "fixed" ACS costs, network processing fees, fraud losses, and transactions-monitoring costs. Much like agency ratemaking, determining whether issuers or merchants should bear certain costs is "far from an exact science and involves policy determinations in which the [Board] is acknowledged to have expertise." Time Warner Entertainment Co. v. Federal Communications Commission, 56 F.3d 151, 163 (D.C. Cir. 1995) (internal quotation marks omitted). We afford agencies special deference when they make these sorts of determinations. See, e.g., BNSF Railway Co. v. Surface Transportation Board, 526 F.3d 770, 774 (D.C. Cir. 2008) ("In the rate-making area, our review is particularly deferential, as the Board is the expert body Congress has designated to weigh the many factors at issue when assessing whether a rate is just and reasonable."); Time Warner, 56 F.3d at 163. With that caution in mind, we address each category of costs.

"Fixed" ACS Costs

Microeconomics textbooks draw a clear distinction between "fixed" and "variable" costs: fixed costs are incurred regardless of transaction volume, whereas variable costs change as transaction volume increases. E.g., N. GREGORY MANKIW, PRINCIPLES OF MICROECONOMICS 276-77 (3d ed. 2004). The merchants, noting that the statute precludes recovery of costs "not specific to a particular . . . transaction," 15 U.S.C. § 1693o-2(a)(4)(B)(ii), argue that the Board's Final Rule improperly allows recovery of fixed costs such as "equipment, hardware and software." Appellees' Br. 35. "By definition," the merchants declare, "fixed costs are not `specific' to any `particular' transaction and fall squarely within the statute's excludable costs provision." Id. at 39. The merchants therefore urge us to require the Board to return to something along the lines of its proposed rule, under which merchants could only recover average variable ACS costs.

The merchants' argument certainly has some persuasive power. One might think it a stretch if a shoe store claimed that the rent it pays its landlord is somehow "specific" to a "particular" shoe sale. But the merchants have never argued that issuers should be allowed to recover only costs incurred as a result of processing individual, isolated transactions. See NPRM, 75 Fed. Reg. at 81,736 (requesting comment about whether "costs should be limited to the marginal cost of a transaction"); Final Rule, 76 Fed. Reg. at 43,427 n.118 (noting that "[t]he Board did not receive comments regarding the use of marginal cost"). Indeed, the Board's proposed rule, which the merchants seem to endorse, would have allowed recovery of costs that are variable over the course of a year but could not be traced to any one particular transaction.

We think the Board reasonably declined to read section 920(a)(4)(B) as preventing issuers from recovering "fixed" costs. As the Board pointed out, the distinction the merchants urge between what they refer to as non-includable "fixed" costs and includable "variable" costs depends entirely on whether, on an issuer-by-issuer basis, certain costs happen to vary based on transaction volume in a particular year. For example, in any given year one issuer might classify labor as an includable cost because labor costs happened to vary based on transaction volume over that year, while another issuer might classify labor as a non-includable cost because such costs happened to remain fixed over that year. See Final Rule, 76 Fed. Reg. at 43,427. Moreover, the Board pointed out, the distinction between variable and fixed ACS costs depends in some instances on whether an issuer "performs its transactions processing in-house" or "outsource[s] its debit card operations to a third-party processor that charge[s] issuers a per-transaction fee based on its entire cost." Id. In any event, the Board concluded, requiring issuers to segregate includable "variable" costs from excludable "fixed" costs on a year-by-year basis would prove "exceedingly difficult for issuers . . . [because] even if a clear line could be drawn between an issuer's costs that are variable and those that are fixed, issuers' cost-accounting systems are not generally set up to differentiate between fixed and variable costs." Id. The Board therefore determined that any distinction between fixed and variable costs would prove artificial and unworkable.

Instead, pointing out that the statute requires interchange fees to be "reasonable and proportional" to issuer costs, the Board interpreted section 920(a)(4)(B) as allowing issuers to recover costs they must incur in order to effectuate particular electronic debit card transactions but precluding them from recovering other costs too remote from the processing of actual transactions. "This reading interpret[s] costs that `are not specific to a particular electronic debit transaction,' and . . . cannot be considered by the Board, to mean those costs that are not incurred in the course of effecting any electronic debit transaction." Id. at 43,426. In our view, the Board reasonably distinguished between costs issuers could recover and those they could not recover on the basis of whether those costs are "incurred in the course of effecting" transactions. Id. For instance, the Board's rule allows 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." Id. at 43,430. By contrast, the rule precludes issuers from recovering the costs of producing and distributing debit cards because "an issuer's card production and delivery costs . . . are incurred without regard to whether, how often, or in what way an electronic debit transaction will occur." Id. at 43,428. Given the Board's expertise, we see no basis for upsetting its reasonable line-drawing. See ExxonMobil Gas Marketing Co. v. Federal Energy Regulatory Commission, 297 F.3d 1071, 1085 (D.C. Cir. 2002) ("We are generally unwilling to review line-drawing. . . unless a petitioner can demonstrate that lines drawn. . . are patently unreasonable, having no relationship to the underlying regulatory problem." (internal quotation marks omitted)).

Network Processing Fees

This is easy. Network processing fees, which issuers pay on a per-transaction basis, are obviously specific to particular transactions. The merchants argue that allowing issuers to recover network processing fees through the interchange fee would run afoul of section 920(a)(8)(B), which requires the Board to ensure that "a network fee is not used to directly or indirectly compensate an issuer with respect to an electronic debit transaction." Perhaps signaling that even the merchants are not entirely confident about this argument, they present it only in a footnote. The merchants should have left it out entirely. As the Board points out, section 920(a)(8)(B) is designed to prevent issuers and networks from circumventing the Board's interchange fee rules, not to prevent issuers from recovering reasonable network processing fees through the interchange fee. Final Rule, 76 Fed. Reg. at 43,442 ("[Section 920(a)(8)(B)] authorizes the Board to prescribe rules to prevent circumvention or evasion of the interchange transaction fee standards.").

Fraud Losses

The merchants nowhere challenge the Board's conclusion that fraud losses, which result from the settlement of particular fraudulent transactions, are specific to those transactions. The only question is whether a separate provision of the Durbin Amendment—section 920(a)(5)'s fraud-prevention adjustment, which allows issuers to recover fraud-prevention costs if those issuers comply with the Board's fraud-prevention standards— precludes the Board from allowing issuers to recover fraud losses as part of section 920(a)(2)'s "reasonable and proportional" interchange fee. The merchants claim that it does.

First, noting that Congress intended the fraud-prevention adjustment to be the only "fraud-related adjustment of the issuer," 15 U.S.C. § 1693o-2(a)(5)(A)(ii)(I), the merchants argue that the Board should have allowed issuers to recover fraud-related costs only through the fraud-prevention adjustment. We disagree. The Board determined—reasonably in our view—that because fraud losses result from the failure of fraud-prevention, they do not themselves qualify as fraud-prevention costs. See Final Rule, 76 Fed. Reg. at 43,431 ("An issuer may experience losses for fraud that it cannot prevent and cannot charge back to the acquirer or recoup from the cardholder."). And nothing in the statute suggests that Congress used the word "adjustment" to describe the process of determining which costs issuers should be allowed to recover directly through the interchange fee. Rather, when discussing the fraud-prevention adjustment, Congress empowered the Board to "allow for an adjustment to the fee amount received or charged by an issuer under paragraph (2)." 15 U.S.C. § 1693o-2(a)(5)(A). Paragraph (2), in turn, requires that the interchange fee be "reasonable and proportional" to costs incurred by issuers. Id. § 1693o-2(a)(2). Thus, Congress used the word "adjustment" to describe a bonus over and above the "reasonable and proportional" interchange fee.

The merchants next maintain that allowing issuers to recover fraud losses through the interchange fee "irrespective of any particular bank's efforts to reduce fraud" would undermine Congress's decision to condition receipt of the fraud-prevention adjustment on compliance with the Board's fraud-prevention standards. Appellees' Br. 43. Even assuming the merchants' policy argument has some merit—allowing recovery of fraud losses regardless of compliance with fraud-prevention standards might well decrease issuers' incentives to invest in fraud prevention—the Board rejected it, reasoning that "[i]ssuers will continue to bear the cost of some fraud losses and cardholders will continue to demand protection against fraud." Final Rule, 76 Fed. Reg. at 43,431. Such policy judgments are the province of the Board, not this Court. See Village of Barrington, Illinois v. Surface Transportation Board, 636 F.3d 650, 666 (D.C. Cir. 2011) ("As long as the agency stays within [Congress's] delegation, it is free to make policy choices in interpreting the statute, and such interpretations are entitled to deference." (internal quotation marks omitted) (alterations in original)).

Transactions-Monitoring Costs

The Board acknowledged in the Final Rule that transactions-monitoring costs, unlike fraud losses, are the paradigmatic example of fraud-prevention costs. Final Rule, 76 Fed. Reg. at 43,397 ("The most commonly reported fraud prevention activity was transaction monitoring."). The Board then distinguished between "[t]ransactions monitoring systems [that] assist in the authorization process by providing information to the issuer before the issuer decides to approve or decline the transaction," which the Board placed outside the fraud-prevention adjustment, and "fraud-prevention activities . . . that prevent fraud with respect to transactions at times other than when the issuer is effecting the transaction"—for instance the cost of sending "cardholder alerts . . . inquir[ing] about suspicious activity"—which the Board determined should be "considered in connection with the fraud-prevention adjustment." Id. at 43,430-31. Challenging this distinction, the merchants think it "preposterous to suggest that Congress would specifically address the costs associated with fraud prevention in a separate provision of the statute, condition the recovery of those costs on an issuer's compliance with fraud prevention measures, and then . . . permit recovery of those very same costs" whether or not an issuer complies with fraud-prevention standards. Appellees' Br. 41.

As an initial matter, we agree with the Board that transactions-monitoring costs can reasonably qualify both as costs "specific to a particular . . . transaction" (section 920(a)(4)(B)) and as fraud-prevention costs (section 920(a)(5)). Thus, the Board may have discretion either to allow issuers to recover transactions-monitoring costs through the interchange fee regardless of compliance with fraud-prevention standards or to preclude issuers from recovering transactions-monitoring costs unless those issuers comply with fraud-prevention standards. That said, "an agency must cogently explain why it has exercised its discretion in a given manner." Motor Vehicle Manufacturers Association of the United States v. State Farm Mutual Automobile Insurance Co., 463 U.S. 29, 48 (1983). We agree with the merchants that the Board has fallen short of that standard.

The Board insists that the distinction it drew between fraud-prevention costs falling outside the fraud-prevention adjustment and fraud-prevention costs falling within it reflects the distinction between, on the one hand, section 920(a)(4)(B)'s focus on a single transaction and, on the other, section 920(a)(5)(A)(i)'s focus on "electronic debit transactions involving that issuer." According to the Board, Congress "intended the . . . fraud-prevention adjustment to take into account an issuer's fraud prevention costs over a broad spectrum of transactions that are not linked to a particular transaction." Appellant's Br. 66-67. But as noted above, the Board interpreted the term "specific to a particular . . . transaction" as in fact allowing recovery of many costs not literally "specific" to any one "particular" transaction. See supra at 26-28. The costs of hardware, software, and labor seem no more "specific" to one "particular" transaction than many of the fraud-prevention costs the Board determined fall within the fraud prevention adjustment. The Board's own interpretation of the statute thus undermines its justification for concluding that Congress established a fraud-prevention adjustment, conditioned receipt of that adjustment on compliance with fraud-prevention standards, yet allowed issuers to recover the paradigmatic example of fraud-prevention costs—transactions-monitoring costs—whether or not issuers comply with those standards.

All that said, the Board may well be able to articulate a reasonable justification for determining that transactions-monitoring costs properly fall outside the fraud-prevention adjustment. But the Board has yet to do so. "If the record before the agency does not support the agency action, if the agency has not considered all relevant factors, or if the reviewing court simply cannot evaluate the challenged agency action on the basis of the record before it, the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation." Florida Power & Light Co. v. Lorion, 470 U.S. 729, 744 (1985) (emphasis added). We shall do so here. Because the interchange fee rule generally rests on a reasonable interpretation of the statute, because the Board may well be able to articulate a sufficient explanation for its treatment of fraud-prevention costs, and because vacatur of the rule would be disruptive—the merchants seek an even lower interchange fee cap, but vacating the Board's rule would lead to an entirely unregulated market, allowing the average interchange fee to once again reach or exceed 44 cents per transaction—we see no need to vacate. See Heartland Regional Medical Center v. Sebelius, 566 F.3d 193, 198 (D.C. Cir. 2009) (noting that remand without vacatur is warranted "[w]hen an agency may be able readily to cure a defect in its explanation of a decision" and the "disruptive effect of vacatur" is high); see also, e.g., Environmental Defense Fund v. Environmental Protection Agency, 898 F.2d 183, 190 (D.C. Cir. 1990) (instructing that courts should ordinarily remand without vacatur when vacatur would "at least temporarily defeat" the interests of the party successfully seeking remand).

III.

Having resolved the merchants' challenges to the interchange fee rule, we turn to the anti-exclusivity rule. As explained above, see supra at 9, section 920(b) requires the Board to promulgate regulations preventing "an issuer or payment card network" from "restrict[ing] the number of payment card networks on which an electronic debit transaction may be processed" to a single network, or to networks affiliated with one another. In the proposed rule, the Board outlined two alternatives: require issuers and networks to activate two unaffiliated networks or two unaffiliated networks for each method of authentication. In the Final Rule, the Board chose the former, requiring activation of two unaffiliated networks on each debit card regardless of method of authentication.

The merchants believe that the Durbin Amendment unambiguously requires that all merchants have multiple unaffiliated network routing options for each debit transaction. See NACS, 958 F. Supp. 2d at 109-12 (accepting this argument). Arguing that the Board's rule flunks this requirement, the merchants emphasize two undisputed facts. First, given that most merchants refuse to accept PIN debit, many transactions can currently be processed only on signature debit. Second, cardholders, not merchants, often have the ability to select whether to process transactions on signature networks or PIN networks. As a result, the merchants emphasize, under the Board's rule many merchants will still lack the ability to choose between unaffiliated networks when deciding how to process particular transactions. Disputing none of this, the Board points out that all merchants could accept PIN debit even if some choose not to and emphasizes that the statute is silent about "restrictions imposed by merchants or consumers that limit routing choice." Appellant's Br. 22. Given the parties' agreement that under the Board's rule some merchants will lack routing choice for particular transactions, we must determine whether the statute requires that all merchants—even those who voluntarily choose not to accept PIN debit—have the ability to decide between unaffiliated networks when routing transactions.

The merchants have a steep hill to climb. Congress directed the Board to issue rules that would accomplish a particular objective, leaving it to the Board to decide how best to do so, and the Board's rule seems to comply perfectly with Congress's command. Under the rule, "issuer[s] and payment card network[s]" cannot "restrict the number of payment card networks on which an electronic debit transaction may be processed" to only affiliated networks—exactly what the statute requires. 15 U.S.C. § 1693o-2(b)(1)(A).

Undaunted, the merchants emphasize one largely conclusory textual argument and allude to another. First, relying on the statutory phrase "electronic debit transaction," id. § 1693o-2(b)(1)(A), they maintain that the statute plainly "requires the Board to ensure that merchants be afforded a choice of networks for each debit transaction." Appellees' Br. 45. But context matters. Relying on the statute's reference to "issuer[s] and payment card network[s]," the Board reasonably read the "electronic debit transactions" phrase to prevent issuers and networks, prior to instigation of any particular debit transaction, from limiting the number of networks "on which an electronic debit transaction may be processed" to only affiliated networks. 15 U.S.C. § 1693o-2(b)(1)(A) (emphasis added).

In a footnote, the merchants repeat, though they seem not to embrace, a textual argument on which the district court relied. Looking to the statutory definitions of "electronic debit transaction" ("a transaction in which a person uses a debit card") and of "debit card" ("any card . . . issued or approved for use through a payment card network to debit an asset account . . . whether authorization is based on signature, PIN, or other means"), id. § 1693o-2(c)(2), (c)(5), the district court ruled that the statutory term "electronic debit transaction" requires that issuers and networks activate multiple unaffiliated networks for each transaction "whether authorization is based on signature, PIN, or other means," NACS, 958 F. Supp. 2d at 110-11. But we think it quite implausible that Congress engaged in a high-stakes game of hide-and-seek with the Board, writing a provision that seems to require one thing but embedding a substantially different and, according to financial services amici, much more costly requirement in the statute's definitions section. Cf. Whitman v. American Trucking Association, 531 U.S. 457, 468 (2001) ("Congress . . . does not . . . hide elephants in mouseholes.").

The merchants also argue that the Board's rule runs afoul of the Durbin Amendment's purpose. Pointing out that Congress intended network competition to drive down network processing fees, the merchants insist that the Board has undermined this competitive market because "merchants will be deprived of network choice for a substantial segment of debit transactions in the marketplace today." Appellees' Br. 47. But the Board thought differently. As it explained in the Final Rule, "merchants that currently accept PIN debit would have routing choice with respect to PIN debit transactions in many cases where an issuer chooses to participate in multiple PIN debit networks." Final Rule, 76 Fed. Reg. at 43,448. Indeed, the Board presents uncontested evidence demonstrating that its rule has, as predicted, substantially increased network competition. According to the Board, as a result of the rule over 100 million debit cards were activated on new networks, and "[Visa], which had previously accounted for approximately 50-60% of the [PIN debit] market, lost roughly half that share." Appellant's Br. 37 & n.6 (internal quotation marks omitted).

Of course, as the Board acknowledges, the merchants' preferred rule would result in more competition. But in its Final Rule the Board explained the policy considerations that led it to reject that approach. For one thing, cardholders might prefer to route transactions over certain networks, perhaps because they believe those networks to have better fraud-prevention policies. Final Rule, 76 Fed. Reg. at 43,447-48. Also, the merchants' preferred rule "could potentially limit the development and introduction of new authentication methods" since issuers would be unable to compel merchants to accept new authentication techniques. Final Rule, 76 Fed. Reg. at 43,448. The merchants ignore these reasonable concerns. Given that the Board's rule advances the Durbin Amendment's purpose, we decline to second-guess its reasoned decision to reject an alternative option that might have further advanced that purpose.

Next, the merchants emphasize the interaction between section 920(b)'s two key components: the anti-exclusivity and routing priority provisions. According to the merchants, the Board's anti-exclusivity rule renders the routing priority provision meaningless, since merchants will often lack the ability to choose between multiple unaffiliated routing options. But as the Board points out, the merchants misunderstand the routing priority provision. Recall that it prohibits issuers and networks from requiring merchants to process transactions over certain activated networks rather than others. Far from rendering the routing priority provision a nullity, the Board's anti-exclusivity provision would be ineffective without it. Absent the routing priority provision, issuers and networks could, for instance, activate two PIN networks and a signature network affiliated with one of the PIN networks and then require merchants to route transactions over the PIN network affiliated with the signature network rather than over the other PIN network.

Finally, the merchants question the Board's premise that it is they, not issuers and networks, who restrict routing options for transactions under the Board's Final Rule. To this end, they assert that issuer and network rules arbitrarily prevent merchants from processing PIN transactions on signature networks and vice versa, suggesting that the Board could comply with the statute by eliminating the distinction between PIN and signature debit. But even if issuers and networks are responsible for maintaining this distinction—a point they strongly dispute—merchants, not issuers or networks, limit their own options when they refuse to accept PIN debit, and cardholders, not issuers or networks, limit merchants' options when given the ability to choose how to process transactions. "The principal fallacy with the Merchants' argument," the Board aptly explains, "is that they selectively view transactions only from their own perspective and only after the point at which the merchant itself or the consumer may have elected to restrict certain routing options," whereas "section 920(b) speaks only in terms of issuer and payment card network restrictions" imposed prior to initiation of any particular debit card transaction. Reply Br. 2-3.

In sum, far from summiting the steep hill, the merchants have barely left basecamp. We therefore defer to the Board's reasonable interpretation of section 920(b) and reject the merchants' challenges to the anti-exclusivity rule.

IV.

For the foregoing reasons, we reverse the district court's grant of summary judgment to the merchants and remand for further proceedings consistent with this opinion.

So ordered.