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Court Overturns Regulation II Interchange & Routing Requirements

on Tuesday, 6 August 2013 in Banking Update

On July 31, 2013, the United States District Court for the District of Columbia issued an opinion granting summary judgment in a suit between various trade associations in the retail industry as well as some merchants (collectively referred to herein as “Plaintiffs”) and the Board of Governors of the Federal Reserve System (the “Board”).The suit was brought by Plaintiffs to overturn the Board’s Final Rule (designated as Regulation II) setting standards for debit card interchange and transaction fees (“Interchange Fees”) and network exclusivity prohibitions pursuant to the “Durbin Amendment” to the Dodd–Frank Wall Street Reform and Consumer Protection Act. Plaintiffs and the Board made cross-motions for summary judgment and the court granted Plaintiffs’ motion for the reasons set forth below.


II. Summary of Holding

A. Interchange Fees

Plaintiffs argued that the Board’s Interchange Fee standard constituted an unreasonable interpretation of the Durbin Amendment because it ignored Congress’ directives regarding Interchange Fees – namely, that only incremental cost for authorization, clearing and settlement (“ACS”) of a transaction may be considered. Thus, according to Plaintiffs, the Board exceeded its authority and under the Administrative Procedure Act (“APA”) the court must set aside the Board’s rule. The court agreed, finding that the Board’s Interchange Fee regulation was invalid under the APA.

The court’s held that the Board’s Interchange Fee rule violated the APA as the Durbin Amendment plainly limited the costs allowable in the Interchange Fee standard to incremental ACS costs. Specifically, the court reasoned that Congress’ requirement that the Board distinguish between incremental ACS costs and “other costs” in setting its Interchange Fee standard showed a clear intent by Congress to separate fees that must be included in the Interchange Fee standard and those that must be excluded.


B. The Board’s Network Non-Exclusivity Rule

According to the court, the key word in interpreting Congress’ requirement as to network non-exclusivity is “transaction.” Specifically, the court concluded that the plain language of the Durbin Amendment required merchants be given a choice between multiple unaffiliated networks not only for each card, but for each transaction on that card. Therefore, the Durbin Amendment requires two unaffiliated networks be available for each authentication method (e.g., signature and PIN) enabled on the card.


III. The Court’s Remedy

Because the court found that the Board’s rules on Interchange Fees and network non-exclusivity under the Durbin Amendment violated Congress’ clear intent, it is required under the APA to set aside those rules. The court thus vacated the rules and remanded back to the Board for appropriate action. The vacatur is stayed, however, to limit any disruptive effect. The length of the stay and whether the Board’s current standards will remain in place until valid regulations replace them will be determined after further briefing.

It is likely that the Board will appeal the court’s ruling to the Court of Appeals.

Terrence P. Maher

Eli A. Rosenberg

1 NACS v. Bd. Of Governors of the Fed. Reserve Sys., Civil Case No. 11-02075 (RJL) (D. D.C. July 31,2013).

Read the Full Newsletter: Banking Update August 6, 2013

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