In briefs filed August 28, all parties to a recent decisionoverturning the Federal Reserve's debit interchange regulationurged U.S. District Court Judge Richard Leon to leave it in placeuntil further appeals of his July 31 decision are exhausted.

Leon dispatched two thirds of the Federal Reserve's currentdebit interchange regulation on July 31, agreeing with the case'smerchant plaintiffs that the Fed had failed to follow the law indeveloping the regulation.

The Federal Reserve appealed Leon's decision August 21.

“The merchants fully support eventual vacatur of the existingFederal Reserve rules governing debit card interchange fees, butonly when a replacement rule is in place properly limiting theinterchange fee to the 'reasonable and proportional' amountactually contemplated by the Durbin Amendment,” the merchants saidin their brief.

An immediate vacatur in the absence of a replacement rule wouldsubject the successful plaintiffs to substantial harm during thependency of the appeal, the merchants said. In the absence of astay, Visa and MasterCard would be free to dramatically increasethe interchange fees that they centrally fix on behalf of theirbanks, they continued.

Recent experience indicates that the networks would likelyincrease these fees substantially if left unregulated during thependency of the appeal. Thus, the plaintiffs said they vastlyprefer the status quo cap of 22 cents plus 5 basis points allowedby the current rule to an unregulated free-for-all, which wouldlikely subject them to higher fees.

The merchants acknowledged in the brief that the court wassurprised by their position, but maintained that recent experiencehas taught them that debit interchange rates almost always rise andnever decline.

“Thus, the only direction the fees would move if the existingrule is vacated before a new rule takes effect is up,” themerchants wrote.

Further, they said they doubted whether a court would have theauthority to get the Federal Reserve to refund any additional moneythey paid in debit interchange before a new rule was put intoplace.

“Merchants are unaware of any explicit statutory authorityelsewhere that would permit the Federal Reserve to make areplacement rule effective retroactively,” they added.

For its part, the Fed also supported keeping the existing rulein place, arguing first that doing so while it appealed Leon'sdecision met the standard requirements required by theAdministrative Procedures Act; and secondarily, getting rid of theexisting rule would leave in place the precise situation Congresssought to avoid in regulating debit interchange in the firstplace.

“These statutory provisions require the issuance of regulationsby the Board in order to effectuate the limitations the statuteseeks to impose,” the Fed said in its brief. “Thus, if theregulations here were vacated by the district court, there would beno legally binding standards for determining the permissible amountof interchange fees an issuer could receive with respect to a debitcard transaction and no limitations on exclusive routingrestrictions imposed by issuers and payment networks on debit cardtransactions.”

In similar cases involving other matters or other regulations,the Fed argued, overturning an existing rule usually meant that aprevious regulation that had been superseded would go into effectwhile litigation continued. But in this case, because this rule isthe first one, there is no superseding rule to fall back upon, theFed pointed out.

In a supplemental brief, the Federal Reserve also argued thatthe court lacked the authority to order it to put a replacementdebit rule into place while Leon's July 31 decision was beingappealed. The Fed said it based its opinion on previous cases inwhich a District Court was declared to have very limitedjurisdiction over parts of a case that were being appealed.Further, even if a decision from the lower court were upheld, thelower court would have the authority to overturn the existingregulation and would not have the authority to require what wouldcome next.

Although they had not been direct parties in the original case,Leon allowed a coalition of financial institutions and their tradeassociations, including CUNA and NAFCU, to weigh in on thediscussion since they issue debit cards.

“Interchange is an enormous issue for credit unions and aninterim or expedited rule could have devastating effects on creditunions ability to serve their 96 million members,” said NAFCUSenior Vice President of Government Affairs and General CounselCarrie Hunt. “Ultimately, consumers will pay the price if there isunpredictability in the marketplace. “

In its brief, the coalition agreed with the Federal Reserve thatthe court lacked the authority to require a new rule be put intoplace pending the appeal and also argued that issues which wouldneed to be addressed would be complex and expensive for both theregulator and the industry.

“[S]eparate from the question of legal authority, the Courtshould not require an interim or expedited rule,” the coalitionwrote. “A rush to issue a new rule will harm all affectedinterests, including consumers, and threaten the effectivefunctioning, stability, and security of the electronic debit cardpayments system. As the Board told this Court at the Aug. 21hearing, any new rulemaking would be far from simple, given thenumber 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, andmerchants. And haste will compromise the quality of the result,with the negative impacts extending to consumers and the electronicdebit card payments system.”