A Washington, D.C., federal district court has declared that the interchange fee and network non-exclusivity provisions of the Federal Reserve Board’s final debit card interchange fee rule are invalid.

The rule implemented the debit card provisions of the Dodd-Frank Act, generally referred to as the Durbin Amendment. In NACS et al. v. Board of Governors of the Federal Reserve System, the court agreed with the two retailers and four retail trade groups who filed the lawsuit that the Fed had exceeded its statutory authority in adopting the provisions of the final rule that set standards for debit card interchange fees and network non-exclusivity. As a result, the court declared those provisions invalid under the Administrative Procedure Act. (See our prior legal alert for a summary of the final rule and the banking industry’s unsuccessful lawsuit challenging the Durbin Amendment that was filed before the final rule’s adoption.)

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

According to the court, for purposes of setting the interchange fee standard, the Durbin Amendment’s plain language required the Fed to restrict the relevant costs to incremental costs incurred by an issuer for authorizing, clearing, and settling (ACS) each debit card transaction. The court found that because it accounted for “costs that are unambiguously foreclosed from consideration by Congress,” the Fed’s interchange fee standard was invalid. 

The impermissible costs consisted of ACS fixed costs, transaction monitoring costs, network fees, and fraud losses (for which the additional five basis points were permitted as an allowance). The court ruled that fraud losses could not be considered because they were not ACS costs themselves and instead were costs that result from ACS. (The lawsuit did not challenge the separate provision of the Fed’s rule that allows an adjustment for recovery of fraud-related prevention costs.)

The Durbin Amendment also required debit cards to be functional on at least two unaffiliated payment card networks. In its final rule, the Fed allowed 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 court found that the Fed’s interpretation could not “be reconciled with the plain meaning or spirit of the statute because it still allows networks and issuers to make only one network available for many transactions.” In the court’s view, to satisfy the Durbin Amendment, merchants must be able to run each debit card transaction over at least two unaffiliated networks.

Having concluded that the challenged provisions of the Fed’s rule were invalid, the court granted the plaintiffs’ motion for summary judgment and indicated that it would vacate the provisions and remand to the Fed. Acknowledging the “disruptive effect of vacatur,” however, the court stated that it would stay vacatur to allow supplemental briefing on the appropriate length of the stay and whether “current standards should remain in place until they are replaced by valid regulations or the Board should develop interim standards sufficient to allow the Court to lift the stay.” The court nevertheless cautioned that it was “inclined toward a stay of vacatur ‘for months, not years.’”

Ballard Spahr’s Consumer Financial Services 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, 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 at 215.864.8544 or kaplinsky@ballardspahr.com, Practice Leader Jeremy T. Rosenblum at 215.864.8505 or rosenblum@ballardspahr.com, or Mark J. Furletti at 215.864.8138 or furlettim@ballardspahr.com.



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