Debit Card Fees Rule ‘Clearly Disregarded’ Congress’ Intent, Judge Finds

Debit Card Fees Rule ‘Clearly Disregarded’ Congress’ Intent, Judge Finds

WASHINGTON, D.C. — (Mealey’s) A federal judge in the District of Columbia on July 31 ordered that a rule governing debit card transaction fees be rewritten, saying that the Board of Governors of the Federal Reserve System has “clearly disregarded Congress’ statutory intent by inappropriately inflating” the fees by billions of dollars and by failing to provide merchants with multiple networks for each transaction (NACS, et al. v. Board Of Governors Of The Federal Reserve System, No. 11-2075, D. D.C.; 2013 U.S. Dist. LEXIS 107581) [an enhanced version of this opinion is available to subscribers].

U.S. Judge Richard J. Leon of the District of Columbia granted summary judgment to NACS (formerly the National Association of Convenience Stores), National Retail Federation (NRF), Food Marketing Institute (FMI), Miller Oil Co. Inc., Boscov’s Department Store LLC and National Restaurant Association (NRA), which sued the board to overturn its final rule setting standards for debit card interchange transaction fees and network exclusivity prohibitions.  The judge also denied the board’s motion for summary judgment.

Durbin Amendment

On July 21, 2010, Congress passed the “Durbin Amendment,” named after its sponsor Sen. Richard J. Durbin of Illinois, implementing Section 920 of the Electronic Fund Transfer Act (EFTA), as enacted by Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  The Durbin Amendment imposes various standards and rules governing debit fees and transactions; the regulations apply only to issuers with assets exceeding $10 billion.  The Durbin Amendment provides that interchange fees charged by issuers “with respect to an electronic debit transaction shall be reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”  The amendment directed the board to establish standards to determine whether the amount of a debit card interchange fee is “reasonable and proportional” with respect to the transaction.  The Durbin Amendment also instructed the board to regulate network fees by prescribing rules related to network nonexclusivity for routing debit transactions.

The board’s final rule became effective on Oct. 1, 2011, permitting each issuer to receive a fee as high as 21 cents per transaction plus an ad valorem amount of five basis points of the transaction’s value (0.05 percent).  The board increased the allowable interchange fee from 12 cents in its proposed rule to 21 cents after concluding that the language and purpose of the Durbin Amendment allow the board to consider additional costs not explicitly excluded from consideration by the statute.

The plaintiffs filed the suit on Nov. 22, 2011, seeking a declaratory judgment that the final rule’s interchange fee and network nonexclusivity provisions are arbitrary, capricious, an abuse of discretion and otherwise not in accordance with the law.  The plaintiffs alleged that the final rule is an unreasonable interpretation of the Durbin Amendment because it ignores Congress’ directives regarding interchange fees and network exclusivity.

‘Completely Misunderstood’

“It appears that the Board completely misunderstood the Durbin Amendment’s statutory directive and interpreted the law in ways that were clearly foreclosed by Congress,” Judge Leon said.

Judge Leon found that the interchange transaction fee regulation is invalid under the Administrative Procedure Act (APA).  The judge said the plain text of the Durbin Amendment “makes clear that the incremental ACS [authorization, clearing and settling] cost of a particular electronic debit transaction is the only cost the Board was expressly authorized to consider in its interchange transaction fee standard.”  The board’s counterargument, that Congress directed it not to consider “other costs incurred by an issuer which are not specific to a particular electronic debit transaction,” is “wholly unpersuasive,” the judge said.

Judge Leon also found that the network nonexclusivity regulation is invalid under the APA.  He agreed with the plaintiffs’ argument that the board’s interpretation of 15 U.S. Code Section 1693o-2(b)(1)(B) disregards the statute’s language and purpose, which require that merchants be given a choice between multiple unaffiliated networks not only for each card, but for each transaction.  He added that “the Durbin Amendment’s legislative history confirms my reading of the statute.”  Judge Leon said “it defies both the letter and purpose of the Durbin Amendment to read the statute as allowing networks and insures to continue restricting the number of networks on which an electronic debt transaction may be processed to fewer than two per transaction.”

“The Board further defends its network non-exclusivity regulation by pointing out that it is not ‘the most aggressively pro-merchant position’ that the Board could have taken,” Judge Leon continued.  “The Board obviously misses the point!  Where a court concludes that a statute is unambiguous, an agency's interpretation must be rejected if it is inconsistent with clearly expressed legislative intent.  . . .  It is not about whether the rule favors merchants or issuers; rather, it is about whether the rule implements Congress’s will.  And Congress’s use of clear, defined language in the network non-exclusivity and routing provisions leaves no ambiguity or statutory gap for the agency to fill.”

Amici Curiae

Durbin and 7-Eleven Inc., Auntie Anne’s Inc., Burger King Corp., CKE Restaurants Inc., International Dairy Queen Inc., Jack In The Box Inc., Starbucks Corp. and Wendy’s Co. (collectively, the merchant amici) filed amicus curiae briefs in support of the plaintiffs.  The Clearing House Association LLC, American Bankers Association, Consumer Bankers Association, Credit Union National Association, Financial Services Roundtable, Independent Community Bankers of America, Mid-Size Bank Coalition of America, National Association of Federal Credit Unions and National Bankers Association (collectively, the bank and credit union amici) filed an amicus brief in support of neither party.


The plaintiffs are represented by Linda C. Bailey and Shannen W. Coffin of Steptoe & Johnson. 

The board is represented by Joshua P. Chadwick, Katherine H. Wheatley and Yvonne F. Mizusawa of the board.

Durbin is represented by David Alan Balto.

The merchant amici are represented by David D. Golden of Constantine Cannon.  The bank and credit union amici are represented by Seth P. Waxman of Wilmer Cutler Pickering Hale & Dorr.

All are in Washington.

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