Appellate Court Upholds the Fed’s Rule Implementing the Durbin Amendment

In an unsurprising ruling, a three-judge panel on the federal appeals court in Washington, D.C., upheld the Federal Reserve Board’s controversial rule implementing the Durbin Amendment’s debit card provisions in 2010’s Dodd-Frank Act. A federal district judge last July overturned the rule, saying the Fed hadn’t followed Congress’s intent.

Judges on the U.S. Court of Appeals for the District of Columbia first indicated skepticism about U.S. District Judge Richard Leon’s line of reasoning during oral arguments in January. In today’s ruling, the appellate court panel rejected claims by retail trade groups and some individual merchants who sued the Fed that it had strayed too far afield from the interchange pricing cap and transaction-routing requirements spelled out in the law.

“The district court granted summary judgment to the merchants, concluding that the rules violate the statute’s plain language,” says the decision written by appellate judge David S. Tatel. “We disagree. Applying traditional tools of statutory interpretation, we hold that the Board’s rules generally rest on reasonable constructions of the statute.”

The appellate court did question “one minor issue” about transaction-monitoring costs and asked the Fed for further explanation.

The Fed, which filed the appeal after Leon’s decision, had not issued a statement about its reaction the ruling as of Friday afternoon. Not unexpectedly, the ruling dismayed merchant groups such as the National Retail Federation, but banks and the card networks were happy.

“NRF is disappointed and remains confident that the Federal Reserve erred when it set the swipe fee cap far higher than intended by Congress,” NRF senior vice president and general counsel Mallory Duncan said in a statement. “The Fed ignored Congressional intent and worked to shield debit card companies and big banks. A self-described victory for the banks usually results in higher costs for consumers.”

Duncan added that the Washington-based NRF is “reviewing the decision and will determine whether to appeal.”

The Merchants Payments Coalition weighed in, too. “We are disappointed the court did not get it right on the language of the law or Congress’ intent,” the retailer group said in a statement. “We will take a hard look at the next steps that make sense in light of the problems with this opinion and the obvious deficiencies in the Fed's rule. The fact that the rule let swipe fees increase on many small-dollar transactions makes no sense and is a deficiency that needs to be addressed.”

Financial services companies, however, are pleased with the decision. The Independent Community Bankers of America was satisfied with the ruling, it said in a statement. “Considering what would have happened if the lower court ruling stood, this is a reasonably good result for consumers,” said ICBA chairman John H. Buhrmaster, president of 1st National Bank of Scotia, N.Y. “But we shouldn’t lose sight of the fact that the Durbin price caps and the Fed’s interpretation hurt consumers, hand billions of dollars to the biggest merchants, and do absolutely nothing to lower prices.”

And card brand MasterCard Inc. liked the decision. “This decision helps clarify that the existing rules will remain in place and allows the industry to move forward with the implementation of EMV on debit cards in the U.S.,” MasterCard said in a statement. Visa Inc. had not issued a statement Friday afternoon.

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EMV has been an issue for debit cards because the chip-card payment scheme is not designed to work with multiple debit networks, as stipulated by the Durbin Amendment.

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Judge Leon’s ruling last summer cast a pall of uncertainty over debit routing. The federal court decision threw out the Fed’s interpretation of the Durbin routing rule, arguing the rule actually calls for debit transactions to allow merchants to choose among at least two unrelated networks for each authentication method, PIN or signature.

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The appellate court’s decision today rejected that assertion.

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“To this end, they assert that issuer and network rules arbitrarily prevent merchants from processing PIN transactions on signature networks and vice versa, suggesting that the [Federal Reserve] Board could comply with the statute by eliminating the distinction between PIN and signature debit,” Tatel wrote in today’s opinion. “But even if issuers and networks are responsible for maintaining this distinction—a point they strongly dispute—merchants, not issuers or networks, limit their own options when they refuse to accept PIN debit, and cardholders, not issuers or networks, limit merchants’ options when given the ability to choose how to process transactions.”

The appellate court’s ruling overturns Leon’s ruling, backed by his 58-page opinion. Leon said the Fed misread the Durbin Amendment. The Fed set a debit interchange price cap of about 23 cents per transaction for regulated issuers, those with more than $10 billion in assets, but proponents of a strict reading of the amendment said the cap should have been about 7 cents or even lower. Plus, the Fed should have required each debit card to access more unaffiliated debit networks than the minimum of two it settled on, some merchants argued.