WASHINGTON — The appeals court panel evaluating a previousruling that tossed out much of the Federal Reserve's debitinterchange regulation appeared open Friday to leaving much of itin place.

The panel from the U.S. Court of Appeals for the D.C. Circuit –Judges David Tatel, Harry Edwards and Stephen Williams – heard fromlawyers representing financial institution debit card issuers, theFederal Reserve and merchants.

They were gathered to evaluate a biting July 31 decision in which U.S. District Court Judge Richard Leon threwout the regulation's cap on debit card interchange earned by cardsissued by financial institutions of more than $10 billion inassets, as well as how the Federal Reserve interpreted therequirements for how debit transactions should be processed.

The Fed created the regulations to implement the DurbinAmendment to the Dodd-Frank Act. It capped debit card interchangeearned by cards issued by financial institutions of more than $10billion in assets and dictated how many networks have to beavailable on each card for debit transaction processing.

At several points the judges, particularly Edwards, interruptedShannen Coffin, the lead attorney for the merchants in the case, tourge him not to continue to argue that the Federal Reserve ignoredCongress' intent when it issued its debit rule.

“I can tell you, none of us is buying that,” Edwards said at onepoint.

Tatel agreed. “You have a steep hill to climb if you continue toadvance that argument,” that judge said, “but you have the podiumand I won't tell you how to spend your time.”

Coffin, who is partner in the DC firm of Steptoe and Johnson,LLP, appeared nonplussed at several points and remained on thedefensive for much of the discussion with the panel.

Many of the panel's questions centered on which costs theFederal Reserve chose to include in its calculations to arrive atthe debit fee cap, including asking critical questions about thenotion that the agency had erred in including fixed costs in whatshould be considered incremental costs.

“Doesn't the definition of what is or is not an incremental costhave a lot to do with the time line you use,” Williams asked ofCoffin at one point, pointing out that over time, incremental coststurn into fixed costs.

Katherine Wheatley, associate general counsel for the FederalReserve, also had to field some difficult questions, but many ofthose had less to do with what the Federal Reserve had done indeveloping its regulation and more to do with why it chose onecourse over another.

At one point, Wheatley explained the Fed had not considered thecosts of issuing a card as one of the costs covered in the cap bypointing to the Durbin Amendment's analogy of debit cards andchecks.

Just as financial institutions are not reimbursed for the costsof producing checks, she said, the Federal Reserve had not thoughtit appropriate to reimburse financial institutions under the capfor the production of debit cards.

Lawyers with CUNA and NAFCU who observed the hearing said theythought it had gone better than they had expected, but cautionedthat it is impossible to predict how a ruling will go based on theoral argument discussion.

They also would not predict when the court might render a rulingon the case, but several said they would be surprised if it did notcome before the end of it current term in August.