On July 31, Judge Richard Leon of the Federal District Court of the District of Columbia ordered the Board of Governors of the Federal Reserve (the “Federal Reserve”) to go back to the drawing board on its rule governing debit card transaction fees. Judge Leon found that the fees permitted under the Federal Reserve’s rule were invalid under the Administrative Procedures Act (“APA”) because they were not a correct interpretation of the statute the rule was intended to implement. In his order, Judge Leon stated that the Federal Reserve “clearly disregarded Congress’ statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction.”
In his ruling, Judge Leon granted summary judgment in favor of the plaintiffs, consisting of NACS (formerly the National Association of Convenience Stores), National Retail Federation, Food Marketing Institute, Miller Oil Co. Inc., Boscov’s Department Store LLC and the National Restaurant Association. In the suit, this group of retailers sued the Federal Reserve to overturn its rule that sets guidelines for debit card interchange transaction fees and prohibitions on network exclusivity prohibitions.
Background – The Durbin Amendment
The Federal Reserve’s final rule was adopted pursuant to Congress’ 2010 “Durbin Amendment,” which was a last-minute addition to the Dodd-Frank Wall Street Reform and Consumer Protection Act that added provisions to the Electronic Funds Transfer Act. The Durbin Amendment imposed new requirements for debit fees and transactions. The Federal Reserve’s rule, which was intended to implement the Durbin Amendment, applied only to card issuers with assets in excess of $10 billion.
The relevant text of the Durbin Amendment states that that interchange fees charged “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 Durban Amendment charged the Federal Reserve with establishing guidelines for determining whether the amount of a debit card interchange fee is “reasonable and proportional” to the related transaction. The Durbin Amendment also directed the Federal Reserve to adopt rules providing for network nonexclusivity for routing debit transactions.
The Federal Reserve’s final rule, which was effective on October 1, 2011, permitted each card issuer to receive a fee as high as 21 cents per transaction plus an ad valorem amount of five basis points (or 0.05%) of the transaction’s value. In setting the fee cap at 21 cents, the Federal Reserve concluded that the Durbin Amendment allowed it to consider costs (such as fixed costs, fraud prevention costs, fraud losses and network fees) that were not expressly considered by the Durbin Amendment.
In November of 2011, the plaintiff group filed suit in the Federal District Court seeking a declaratory judgment that the final rule’s interchange fee and network nonexclusivity provisions were arbitrary, capricious, an abuse of discretion and otherwise not in accordance with the law. The plaintiff group stated that Federal Reserve’s rule was an “unreasonable interpretation” of the Durbin Amendment because it ignored Congress’ direction regarding interchange fees and network exclusivity.
Ruling in Favor of the Plaintiffs
As stated above, Judge Leon found that the Federal Reserve’s interchange rule is invalid under the APA. In so ruling, Judge Leon stated that 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 Federal Reserve’s response—that Congress directed it not to consider only those other costs incurred by an issuer which are not specific to a particular electronic debit transaction—was determined to be “wholly unpersuasive.”
In his ruling, Judge Leon also found that the Federal Reserve’s network nonexclusivity rule promulgated in response to the Durbin Amendment is invalid under the APA. Again, he found that the Federal Reserve’s interpretation ignored 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. In so ruling, Judge Leon stated that “it defies both the letter and purpose of the Durbin Amendment to read the statute as allowing networks and issuers to continue restricting the number of networks on which an electronic debit transaction may be processed to fewer than two per transaction.”
If banks are not permitted to recoup the costs associated with debit card transactions through interchange fees, they will have to recoup them somewhere. The probable result of a ruling like this will be increases in the direct fees to consumers for debit card and other banking transactions. Judge Leon’s ruling is generally viewed by the industry as a disappointing defeat. Banker associations and other industry advocates will be working diligently to support the Federal Reserve in seeking a reversal of this decision. Bankers are urged to add their support to this effort.