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From Banking and Finance Law Daily, January 20, 2015

Supreme Court won’t hear challenge to Fed’s debit card rules

By Richard A. Roth, J.D.

The Supreme Court has declined to review a decision that upholds the Federal Reserve Board regulation setting debit card interchange fees and restricting network exclusivity requirements. The denial of a petition for review filed by two retail businesses and four industry associations means the decision of the U.S. Court of Appeals for the District of Columbia Circuit in NACS v. Board of Governors of the Federal Reserve System will stand and the regulation will be effective.

The regulation being challenged was adopted by the Fed to implement a section of the Dodd-Frank Act known as the “Durbin Amendment,” after its sponsor, Sen. Richard Durbin (D-Ill). The Durbin Amendment (15 U.S.C. 1693o-2) attempted to remedy two problems encountered by merchants that accept debit cards—the imposition of what were seen as excessive interchange fees, also known as “swipe fees,” and the lack of choice over which networks could be used to route debit card transactions. It instructed the Fed to set limits that would make swipe fees “reasonable and proportional to the cost incurred by the issuer with respect to the transaction” and also to ensure that merchants had some choice about which card network would be used to route a transaction.

Issues in suit. The suit asserted that when the Fed adopted Reg. II—Debit Card Interchange Fees and Routing (12 CFR Part 235), it failed to comply with the Durbin Amendment in two ways:

  • it considered impermissible issuer costs when it set the swipe fee limit; and

  • it required that merchants be given a choice of networks for each debit card, while the Dodd-Frank Act required that there be a choice for each debit card transaction.

As a result, swipe fees would be too high and routing choices would be too narrow, the suit claimed.

The Fed defended Reg. II by relying heavily on the assertion that the Dodd-Frank Act provisions were ambiguous. Because of that, reasonable interpretations of the agency entrusted with implementing the act were entitled to judicial deference, the Fed said.

Ambiguities. The D.C. Circuit agreed with the Fed that the regulation was a reasonable interpretation of an unclear law (see Banking and Finance Law Daily, March 21, 2014). In doing so, the appellate court reversed a contrary opinion by a federal district court judge who decided that the Fed had disregarded clear statutory mandates (see Banking and Finance Law Daily, July 31, 2013).

Specifically, the appellate court said that the Durbin Amendment had not made clear which issuer costs were to be considered and which were to be ignored by the Fed when it set the swipe fee limits. This ambiguity gave the Fed leeway to interpret the law in light of its own expertise.

The Fed’s network exclusivity proposal had offered two alternatives, according to the appellate court: requiring debit card issuers and networks to activate two unaffiliated networks for each card or requiring them to activate two unaffiliated networks for each debit card transaction. By choosing the first alternative for Reg. II, the Fed reasonably interpreted the Durbin Amendment in a way that carried out the law’s goal of increasing competition, the court said.

One remaining issue. The D.C. Circuit did determine that the Fed had not adequately justified its decision on how to consider debit card issuers’ fraud-monitoring costs, and it ordered a further explanation. However, saying that Reg. II generally is based on a reasonable interpretation of the Durbin Amendment and the Fed might be able to justify its decision, the Eighth Circuit did not vacate the regulation. Instead, the court left the regulation in effect pending the Fed’s further actions, in order to avoid the disruptions that could be caused by an unregulated market.

The petition was No. 14-200.

Supreme Court docket. For details about this and other petitions and cases pending before the Supreme Court, please consult this list of selected banking and finance law cases awaiting decision in the 2014 term.

Attorneys: Shannon W. Coffin (Steptoe & Johnson, LLP) for NACS, formerly known as the National Association of Convenience Stores, et al. David B. Verrilli Jr., Solicitor General. Richard Alan Arnold (Kenny Nachwalter, P.A.) for Ahold U.S.A., Inc. David A. Balto (Law Offices of David A. Balto) for Senator Richard J. Durbin. James F. Bennett (Dowd Bennett LLP) for Wal-Mart Stores, Inc. Debra L. Greenberger (Emery Celli Brinckerhoff & Abayd, LLP) for Retail Litigation Center, Inc. Jeffrey Isaac Shinder (Constantin Cannon LLP) for 7-Eleven, Inc, et al.

Companies: Boscov’s Department Store, LLC; Food Marketing Institute; Miller Oil Co.; NACS; National Restaurant Association; National Retail Federation

MainStory: TopStory CreditDebitGiftCards DoddFrankAct FederalReserveSystem

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