Franchise Industry Sees Victory in Debit Card Fee Lawsuit

U.S. District Court Judge Richard Leon struck down Federal Reserve regulations on debit-card transaction fees on July 31, a victory for retailers that process high numbers of low-ticket transactions. Leon found that the Fed adopted rules that “inappropriately” inflated fees by billions of dollars. See, NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia.

The decision was a win for retailers and retail trade associations that challenged the debit-transaction regulations adopted by the Fed in 2011. According to the retailers, the Fed ignored Congressional directives to consider only certain costs in setting the fee standard and, as a result, set fees too high.

However, in a hearing before Judge Leon on Aug. 21 (the second hearing after the decision), Fed General Counsel Scott G. Alvarez told the judge that the Fed will appeal the decision.

Among the six plaintiffs were the National Association of Convenience Stores and the National Retail Federation (NRF) and the National Restaurant Association (NRA) ' each of which include many franchised businesses affected by the rules. The International Franchise Association (IFA) did not join the lawsuit, but supported it through participation in the Merchants Payment Coalition, according to Jay Perron, IFA's vice president, government affairs and public policy. “We're very happy with the result,” he told FBLA. “It's a big win for retailers who have low-price transactions, like $15 or less.”

When the Fed set the fees, franchises saw the fees they were charged on low-ticket transactions rise significantly, said Perron. The rule that has been struck down allowed financial institutions that issued debit cards to receive up to 21 cents per transaction. “It's anecdotal ' we didn't conduct a study ' but we heard a lot of stories from our members,” Perron said. “The uptick was significant when the rules went into effect.”

Reduced Fees?

If Leon's opinion is upheld, the Fed will be required to rewrite rules it already wrote under a provision of the Dodd-Frank Act known as the Durbin Amendment. The amendment tasked the Fed with developing a new standard for debit-transaction fees and regulated how they are routed over networks. The 21-cent fee covered costs related to the “authorization, clearance, or settlement” of a debit transaction, and other costs related to a transaction (software or hardware), transaction monitoring, and network processing fees. In addition to the 21 cents, the issuers could recover a certain percentage of the transaction's value to cover losses from fraud.

In suing in November 2010, the plaintiffs argued that Congress only intended the Fed to consider costs related to the “authorization, clearance, or settlement” of a debit transaction and barred the agency from considering “other costs.” The Fed said the Durbin Amendment was silent on whether the agency could consider other costs specific to a transaction but not “authorization, clearance, or settlement” costs ' meaning that it had discretion to decide.

The judge rejected the Fed's position, saying he had ” no difficulty” (emphasis in the original) finding Congress explicitly divided the costs associated with debit-card transaction fees into the “authorization, clearance, or settlement” costs, which the Fed could consider in setting the fee standard, and all “other costs,” which it could not. “Ultimately, the Board asserts that it was given broad discretion to fill statutory gaps in establishing the interchange transaction fee standard,” Leon wrote. “But even if this were true, which it is not, such discretion does not give the Board the authority to ignore the expressed will of Congress.”

It's Not Over

At the time he announced his decision, Leon ordered the Fed to vacate the rules, but he stayed the order to give the independent government agency time to come up with a solution. At an Aug. 14 status meeting, Leon gave the Fed until Aug. 21 to present a timetable for the new rules. That timetable has been upended by the Fed's decision to appeal.

“We are very disappointed to see the Fed giving in to the banks,” said J. Craig Shearman, issuing a written statement on behalf of the NRF. “The Fed has taken a position that will drag this out while retailers and their customers continue to pay billions of dollars in inflated fees.”

Representatives of banks reacted differently. “The Federal Reserve's decision to appeal is the right thing to do for consumers who value debit cards and the financial institutions that serve them,” said Frank Keating, president of the American Bankers Association, in a prepared statement.

Banks have argued that reduced fees will not enable them to cover the cost of handling transactions, maintaining their networks and preventing fraud. They attempted in late 2011 to recoup some of their costs by charging consumers monthly fees for using debit cards, but that plan sparked a nationwide furor, and the banks dropped their plans. Given the importance of the issue to banks, lobbying in Congress is likely to continue alongside the legal appeal. “Congress ought to save families from this uncertainty by repealing this government mandated price-fixing,” said Richard Hunt, president and CEO of the Consumer Bankers Association, when the court's opinion was first released.

Zoe Tillman is a Reporter with The National Law Journal, an ALM affiliate of FBLA. Kevin Adler is Associate Editor of FBLA. Information from the Associated Press also was used in this article.

U.S. District Court Judge Richard Leon struck down Federal Reserve regulations on debit-card transaction fees on July 31, a victory for retailers that process high numbers of low-ticket transactions. Leon found that the Fed adopted rules that “inappropriately” inflated fees by billions of dollars. See, NACS v. Board of Governors of the Federal Reserve System, 11-cv-02075, U.S. District Court, District of Columbia.

The decision was a win for retailers and retail trade associations that challenged the debit-transaction regulations adopted by the Fed in 2011. According to the retailers, the Fed ignored Congressional directives to consider only certain costs in setting the fee standard and, as a result, set fees too high.

However, in a hearing before Judge Leon on Aug. 21 (the second hearing after the decision), Fed General Counsel Scott G. Alvarez told the judge that the Fed will appeal the decision.

Among the six plaintiffs were the National Association of Convenience Stores and the National Retail Federation (NRF) and the National Restaurant Association (NRA) ' each of which include many franchised businesses affected by the rules. The International Franchise Association (IFA) did not join the lawsuit, but supported it through participation in the Merchants Payment Coalition, according to Jay Perron, IFA's vice president, government affairs and public policy. “We're very happy with the result,” he told FBLA. “It's a big win for retailers who have low-price transactions, like $15 or less.”

When the Fed set the fees, franchises saw the fees they were charged on low-ticket transactions rise significantly, said Perron. The rule that has been struck down allowed financial institutions that issued debit cards to receive up to 21 cents per transaction. “It's anecdotal ' we didn't conduct a study ' but we heard a lot of stories from our members,” Perron said. “The uptick was significant when the rules went into effect.”

Reduced Fees?

If Leon's opinion is upheld, the Fed will be required to rewrite rules it already wrote under a provision of the Dodd-Frank Act known as the Durbin Amendment. The amendment tasked the Fed with developing a new standard for debit-transaction fees and regulated how they are routed over networks. The 21-cent fee covered costs related to the “authorization, clearance, or settlement” of a debit transaction, and other costs related to a transaction (software or hardware), transaction monitoring, and network processing fees. In addition to the 21 cents, the issuers could recover a certain percentage of the transaction's value to cover losses from fraud.

In suing in November 2010, the plaintiffs argued that Congress only intended the Fed to consider costs related to the “authorization, clearance, or settlement” of a debit transaction and barred the agency from considering “other costs.” The Fed said the Durbin Amendment was silent on whether the agency could consider other costs specific to a transaction but not “authorization, clearance, or settlement” costs ' meaning that it had discretion to decide.

The judge rejected the Fed's position, saying he had ” no difficulty” (emphasis in the original) finding Congress explicitly divided the costs associated with debit-card transaction fees into the “authorization, clearance, or settlement” costs, which the Fed could consider in setting the fee standard, and all “other costs,” which it could not. “Ultimately, the Board asserts that it was given broad discretion to fill statutory gaps in establishing the interchange transaction fee standard,” Leon wrote. “But even if this were true, which it is not, such discretion does not give the Board the authority to ignore the expressed will of Congress.”

It's Not Over

At the time he announced his decision, Leon ordered the Fed to vacate the rules, but he stayed the order to give the independent government agency time to come up with a solution. At an Aug. 14 status meeting, Leon gave the Fed until Aug. 21 to present a timetable for the new rules. That timetable has been upended by the Fed's decision to appeal.

“We are very disappointed to see the Fed giving in to the banks,” said J. Craig Shearman, issuing a written statement on behalf of the NRF. “The Fed has taken a position that will drag this out while retailers and their customers continue to pay billions of dollars in inflated fees.”

Representatives of banks reacted differently. “The Federal Reserve's decision to appeal is the right thing to do for consumers who value debit cards and the financial institutions that serve them,” said Frank Keating, president of the American Bankers Association, in a prepared statement.

Banks have argued that reduced fees will not enable them to cover the cost of handling transactions, maintaining their networks and preventing fraud. They attempted in late 2011 to recoup some of their costs by charging consumers monthly fees for using debit cards, but that plan sparked a nationwide furor, and the banks dropped their plans. Given the importance of the issue to banks, lobbying in Congress is likely to continue alongside the legal appeal. “Congress ought to save families from this uncertainty by repealing this government mandated price-fixing,” said Richard Hunt, president and CEO of the Consumer Bankers Association, when the court's opinion was first released.

Zoe Tillman is a Reporter with The National Law Journal, an ALM affiliate of FBLA. Kevin Adler is Associate Editor of FBLA. Information from the Associated Press also was used in this article.