WASHINGTON — The appeals court panel evaluating a previous ruling that tossed out much of the Federal Reserve's debit interchange regulation appeared open Friday to leaving much of it in place.

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

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

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

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

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

Tatel agreed. “You have a steep hill to climb if you continue to advance that argument,” that judge said, “but you have the podium and 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 the defensive for much of the discussion with the panel.

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

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

Katherine Wheatley, associate general counsel for the Federal Reserve, also had to field some difficult questions, but many of those had less to do with what the Federal Reserve had done in developing its regulation and more to do with why it chose one course over another.

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

Just as financial institutions are not reimbursed for the costs of producing checks, she said, the Federal Reserve had not thought it appropriate to reimburse financial institutions under the cap for the production of debit cards.

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

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

Instant Insights /

Appeals Panel Skeptical of Merchant Debit Claims: On-Site Coverage

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