In briefs filed August 28, all parties to a recent decision overturning the Federal Reserve’s debit interchange regulation urged U.S. District Court Judge Richard Leon to leave it in place until further appeals of his July 31 decision are exhausted.
Leon dispatched two thirds of the Federal Reserve’s current debit interchange regulation on July 31, agreeing with the case’s merchant plaintiffs that the Fed had failed to follow the law in developing the regulation.
The Federal Reserve appealed Leon’s decision August 21.
“The merchants fully support eventual vacatur of the existing Federal Reserve rules governing debit card interchange fees, but only when a replacement rule is in place properly limiting the interchange fee to the ‘reasonable and proportional’ amount actually contemplated by the Durbin Amendment,” the merchants said in their brief.
An immediate vacatur in the absence of a replacement rule would subject the successful plaintiffs to substantial harm during the pendency of the appeal, the merchants said. In the absence of a stay, Visa and MasterCard would be free to dramatically increase the interchange fees that they centrally fix on behalf of their banks, they continued.
Recent experience indicates that the networks would likely increase these fees substantially if left unregulated during the pendency of the appeal. Thus, the plaintiffs said they vastly prefer the status quo cap of 22 cents plus 5 basis points allowed by the current rule to an unregulated free-for-all, which would likely subject them to higher fees.
The merchants acknowledged in the brief that the court was surprised by their position, but maintained that recent experience has taught them that debit interchange rates almost always rise and never decline.
“Thus, the only direction the fees would move if the existing rule is vacated before a new rule takes effect is up,” the merchants wrote.
Further, they said they doubted whether a court would have the authority to get the Federal Reserve to refund any additional money they paid in debit interchange before a new rule was put into place.
“Merchants are unaware of any explicit statutory authority elsewhere that would permit the Federal Reserve to make a replacement rule effective retroactively,” they added.
For its part, the Fed also supported keeping the existing rule in place, arguing first that doing so while it appealed Leon’s decision met the standard requirements required by the Administrative Procedures Act; and secondarily, getting rid of the existing rule would leave in place the precise situation Congress sought to avoid in regulating debit interchange in the first place.
“These statutory provisions require the issuance of regulations by the Board in order to effectuate the limitations the statute seeks to impose,” the Fed said in its brief. “Thus, if the regulations here were vacated by the district court, there would be no legally binding standards for determining the permissible amount of interchange fees an issuer could receive with respect to a debit card transaction and no limitations on exclusive routing restrictions imposed by issuers and payment networks on debit card transactions.”
In similar cases involving other matters or other regulations, the Fed argued, overturning an existing rule usually meant that a previous regulation that had been superseded would go into effect while litigation continued. But in this case, because this rule is the first one, there is no superseding rule to fall back upon, the Fed pointed out.
In a supplemental brief, the Federal Reserve also argued that the court lacked the authority to order it to put a replacement debit rule into place while Leon’s July 31 decision was being appealed. The Fed said it based its opinion on previous cases in which a District Court was declared to have very limited jurisdiction over parts of a case that were being appealed. Further, even if a decision from the lower court were upheld, the lower court would have the authority to overturn the existing regulation and would not have the authority to require what would come next.
Although they had not been direct parties in the original case, Leon allowed a coalition of financial institutions and their trade associations, including CUNA and NAFCU, to weigh in on the discussion since they issue debit cards.
“Interchange is an enormous issue for credit unions and an interim or expedited rule could have devastating effects on credit unions ability to serve their 96 million members,” said NAFCU Senior Vice President of Government Affairs and General Counsel Carrie Hunt. “Ultimately, consumers will pay the price if there is unpredictability in the marketplace. “
In its brief, the coalition agreed with the Federal Reserve that the court lacked the authority to require a new rule be put into place pending the appeal and also argued that issues which would need to be addressed would be complex and expensive for both the regulator and the industry.
“[S]eparate from the question of legal authority, the Court should not require an interim or expedited rule,” the coalition wrote. “A rush to issue a new rule will harm all affected interests, including consumers, and threaten the effective functioning, stability, and security of the electronic debit card payments system. As the Board told this Court at the Aug. 21 hearing, any new rulemaking would be far from simple, given the number of complicated issues the Board will need to address. Industry implementation of an interim rule would also be difficult, requiring complex undertakings by networks, issuers, acquirers, and merchants. And haste will compromise the quality of the result, with the negative impacts extending to consumers and the electronic debit card payments system.”