Breaking News: Appeals Court Interchange Ruling a Big Win for Fed
The Federal Reserve Board has earned a major victory in its long-running legal battle with a group of merchants over its rules implementing the Durbin Amendment, including caps on interchange fees for debit card transactions (NACS v. Board of Governors of the Federal Reserve System). The U.S. Court of Appeals for the District of Columbia today reversed a lower court’s ruling that the Fed had set too high a cap on interchange fees in 2011, affirming the Fed’s existing caps, which remained in place during the court case. The court’s decision also overturned a network-routing rule requiring card issuers to provide merchants with up to four routing options for debit and prepaid cards.
The Fed’s 2011 rule capped interchange fees at around 21 cents per transaction, plus five basis points of the transaction value for fraud provisions. In the wake of that announcement, the National Retail Federation (NRF) and other merchant groups filed a lawsuit against the Fed in November 2011, claiming the agency didn’t follow the intent of the Durbin Amendment and that the interchange limit should be closer to the Fed’s proposed cap of 12 cents. In July 2013, U.S. District Court Judge Richard Leon ruled that the Fed had overreached in setting the higher limit. Soon after Leon’s verdict, the Fed announced its intention to file an appeal, kicking the case to the appellate court, where a three-judge panel heard arguments in January.
Today’s decision was “a significant win for the Federal Reserve Board,” Terry Maher, a partner at Baird Holm LLP, tells Paybefore. “The court held that all aspects of the rule were reasonable except for one aspect covering transaction monitoring costs.” Even that portion of the rule was not thrown out, Maher notes; the court gave the Fed the opportunity to clarify the section.
The appeals court also ruled in the Fed’s favor by throwing out a network-routing requirement that would require two unaffiliated routing options for each authorization method available on a debit or prepaid card. The requirement would be highly disruptive, according to many observers, forcing card issuers to offer up to four different routing options for each card; two each for signature and PIN transactions. “The decision on routing is indeed a victory not only for banks and payment networks but for consumers,” says Judith Rinearson, a partner with Bryan Cave LLP. “As the court’s decision rightly pointed out, the merchants’ position that they ought to have two options for each transaction—even if the merchants themselves have decided not to accept PIN debit, as many do—makes no sense, deprives consumers of their own choices, and will have a detrimental impact on costs and on product innovation.”
As the dust clears on the latest significant battle, the struggle is likely to continue, Maher adds. He predicts merchant groups will file for a rehearing by the entire D.C. appeals court. “Then, depending on what happened to that filing, one side or the other will appeal to the U.S. Supreme Court,” he says.