So wow, right? Who could have guessed that the Federal Reserve Board (“FRB”) regulation implementing the Durbin Amendment would be completely eviscerated. In 2011 a group of merchants filed suit arguing that the regulation issued by the FRB (“Rule”) did not interpret the statute correctly. On July 31, 2013 Judge Leon of the US District Court for the District of Columbia agreed. The twists and turns relating to that pricing structure we all know and love as interchange, and those involving debit card routing options, just keep coming. Yesterday the FRB announced that it will appeal the Court decision.
Here is the bottom line on what the Court ruled:
1. The interchange fee cap adopted by the FRB (21 cents plus .05% of volume) violates the statutory language of the law, and is void.
2. The routing option mandating that two unaffiliated networks be available on each debit card also violates the law, and was struck down.
Judge Leon declared that the Rule is an unreasonable interpretation of the Durbin Amendment statute because it ignores Congress’ directives regarding interchange fees and network exclusivity.
With regard to interchange, the Court decided that the plain language and legislative history of the statute make clear exactly which issuer costs may be included in the interchange transaction fee standard, and that the inclusion of other costs violates the law. The decision opined that the only amounts that could be considered in setting the fee cap are the incremental authorization, clearing and settlement costs of a particular transaction. Judge Leon believes that the law did not allow the FRB to consider any additional costs, including fixed costs, transaction monitoring costs, an allowance for an issuer’s fraud losses, or network processing fees.
Similarly, the Court found that the non-exclusivity provisions of the Rule contravene both the letter and spirit of the statute. Judge Leon stated that Congress intended that each transaction must be routed over at least two competing networks for each authorization (PIN and signature) method. The Rule requires at least two unaffiliated networks be enabled on each debit card, not each debit transaction. Currently issuers may make only one network available for many transactions, since certain transactions, such as Internet transactions, cannot be authorized via PIN. Thus, because two signature networks are not available on every card for every type of debit transaction, the law is violated.
So technically the Rule has been overturned. But where does that leave things? The Court originally “stayed” its ruling, to enable the FRB and the plaintiffs to present arguments on why the Rule should not be immediately overturned. Invalidating the Rule means no regulation would be in place guiding industry action.
The FRB announced yesterday that it will appeal the decision to a higher court, and will ask the appeals court to continue to stay Judge Leon’s ruling pending that appeal. In the meanwhile, the US District Court again stayed its decision. So for now, the existing Rule is still effective. Stay tuned.
–Holli Targan, Partner, Jaffe, Raitt, Heuer & Weiss, P.C.