A new lawsuit is under way challenging Congress’s attempt to restrict interchange fees charged on debit card transactions. In June, the law survived a challenge by the banking industry. This time, the retail industry has filed a lawsuit and the target is the Federal Reserve Board and its final rule.

In the lawsuit, two retailers and three retail trade groups claim the Fed exceeded its statutory authority when it published the final rule implementing the debit card provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, generally referred to as the Durbin Amendment.

Filed on November 22, 2011, in the U.S. District Court for the District of Columbia, the complaint alleges that the final rule’s implementation of the Durbin Amendment’s interchange fee and network non-exclusivity provisions should be declared invalid under the Administrative Procedure Act.

The Durbin Amendment provides that interchange fees charged by non-exempt debit card issuers must be “reasonable and proportional” to the issuer’s costs. The final rule’s fee limit, which became effective on October 1, 2011, allows issuers to recover an interchange fee on each transaction equal to the sum of: (1) 21 cents; plus (2) five basis points (0.05 percent) times the transaction amount. This limit was more than double the Fed’s initial proposal of a 12 cents maximum fee.

According to the complaint, for purposes of setting its proposed lower interchange fee limit, the Fed had properly restricted the relevant costs to those for authorizing, clearing, and settling debit card transactions. In adopting the final rule’s higher limit, the lawsuit alleges, the Fed included multiple impermissible costs, such as transaction and chargeback processing costs, network fees, and transaction monitoring fees.

Taking specific aim at the additional five basis points permitted by the final rule as an allowance for fraud losses, the complaint alleges that while the Fed had discretion to allow recovery for fraud-related prevention costs, it had no authority to include fraud losses.

Under the Durbin Amendment, debit cards must be functional on at least two unaffiliated payment card networks. Effective April 1, 2012, the final rule allows issuers to satisfy the non-exclusivity requirement by providing, for each debit card, one payment card network for signature transactions and a second unaffiliated payment card network for PIN transactions.

The complaint interprets the Durbin Amendment’s non-exclusivity requirement to mean that merchants must be able to run each debit card transaction over at least two unaffiliated networks. It alleges that because the final rule could result in a merchant’s being limited to only one network for processing a transaction—depending on whether the consumer chooses a signature or PIN transaction or the merchant’s point-of-sale capabilities—the final rule represents an impermissible interpretation of the Durbin Amendment.

In a prior Ballard legal alert, we summarized the Fed’s final rule and the banking industry’s challenge to the Durbin Amendment—leveled before the final rule’s adoption. We will be closely following this new attack from the retail industry.

Ballard Spahr’s Consumer Financial Services Group produces the CFPB Monitor, a blog that focuses exclusively on important Consumer Financial Protection Bureau developments. To subscribe, use the link provided to the right. The group is nationally recognized for its guidance in structuring and documenting new consumer financial services products, its experience with the full range of federal and state consumer credit laws throughout the country, and its skill in litigation defense and avoidance (including pioneering work in pre-dispute arbitration programs).

For more information, please contact Practice Leader Alan S. Kaplinsky, 215.864.8544 or kaplinsky@ballardspahr.com; Practice Leader Jeremy T. Rosenblum, 215.864.8505 or rosenblum@ballardspahr.com; John L. Culhane, Jr., 215.864.8535 or culhane@ballardspahr.com; Barbara S. Mishkin, 215.864.8528 or mishkinb@ballardspahr.com; or Mark J. Furletti, 215.864.8138 or furlettim@ballardspahr.com. 

 


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