WASHINGTON – On July 31, Judge Richard Leon of the U.S. District Court for the District of Columbia ruled that the Federal Reserve ’s regulation implementing the Durbin Amendment violated the Administrative Procedure Act (i.e., the Fed misapplied the intent of Congress when it implemented required swipe fee reforms) in a case brought by NACS, the Food Marketing Institute (FMI), National Restaurant Association (NRA), National Retail Federation (NRF), Miller Oil Co. and Boscov's Department Store LCC. 

The Fed’s regulation departed from the language of the law in two key respects. First, the Fed included costs in its calculation of allowable interchange fee that were not allowed to be included by Congress. The only costs to be included, according to the court, are the incremental costs incurred by the issuing bank in authorizing, clearing, and settling a debit transaction. Second, the court found that the Fed did not allow for network competition on every debit transaction as required by the law. Instead, the Fed merely required that two debit networks be active on each debit card — even though those networks could be limited to PIN or signature transactions such that the two networks would never compete for any actual debit transaction. 

What Now?

What happens now is not entirely clear. The Fed could appeal the decision to the Circuit Court of Appeals for the District of Columbia. If that were to happen, the current rule is likely to remain in place while the appeal is pending. 

If the Fed does not appeal, Judge Leon has asked for the plaintiffs’ and the Fed’s views of what should happen next. Open questions include:
• How long it should take the Fed to correct the problems with the current rule,
• Whether there should be an interim rule put in place while the Fed does its work, and
• Whether the current regulations should remain in effect while the Fed comes up with a new rule. 

Many of these questions could get sorted out when the court holds a status conference on August 14. The Judge, however, indicated in the decision that he expected corrections to the regulations to take “months, not years.” 

If the Fed does decide to appeal the decision, that process could take a year or more to get resolved.  Following the appeal, if the District Court decision (or part of it) is upheld, then the same questions about the process and timing for correcting the rule will be before the District Court.

NACS and others initially filed the lawsuit against the Fed in November 2011. Stay tuned for more on following the August 14 status conference. If you have any questions about the ruling, contact Lyle Beckwith, NACS senior vice president of government relations.