Durbin Judge May Allow Merchant Reimbursement; More Retailers Sue over Interchange

A judge in Washington, D.C., on Wednesday gave the Federal Reserve Board a week to indicate its position about a possible interim rule for implementing the Durbin Amendment, the part of 2010’s Dodd-Frank Act that regulates debit cards, after ruling late last month that the Fed’s current regulations do not reflect Congress’s intent. U.S. District Judge Richard Leon also raised the possibility that merchants will be reimbursed for some of the debit card interchange they’ve paid since April 2011, an amount that could total more than $3 billion.

And in Texas, Delta Air Lines, online travel service Travelocity, and nearly 180 other merchants on Tuesday filed yet another federal lawsuit challenging Visa Inc.’s and MasterCard Inc.’s interchange policies and merchant rules as anti-competitive. That lawsuit joins others pending in New York and comes less than a month before a so-called fairness hearing for the proposed settlement of separate, long-standing interchange litigation.

For now, however, the Durbin Amendment case pending before Judge Leon has taken center stage. Leon today postponed canceling the Fed’s price cap of 21 cents plus 0.05% of the sale on transactions from regulated card issuers, but said he wanted to know if the Fed plans on instituting an interim rule as it works on a permanent rule in accordance with his July 31 decision, according to news reports. Leon wants interim regulations in place by October while he takes comments on a final rule. A lawyer for the Fed, which has 60 days to appeal, could not provide details at the hearing about the board’s next move.

In any case, it looks like the current rule, which besides the price cap for issuers with more than $10 billion in assets includes transaction-routing provisions, is not long for this world. In a stinging rejection of the rule, which took effect in stages in October 2011 and April 2012, Leon said the Fed’s interchange cap was too high in light of the statutory language that spawned it. He also indicated the Fed’s transaction-routing provisions should have forced debit cards to provide merchants with access to more networks.

“The court wants to see action, and immediately wants to see a plan on what they [the Fed] are going do,” says payments attorney Anita Boomstein, a partner at Hughes Hubbard & Reed LLP in New York. “To me it’s a very strong signal that the court means business.”

Plaintiffs in the case are the National Retail Federation trade group; NACS, the convenience-store association; the Food Marketing Institute; Miller Oil Co.; Boscov’s Department Store LLC; and the National Restaurant Association. The Fed is the sole defendant.

“We’re very pleased to see the court light a fire under the Fed,” National Retail Federation senior vice president and general counsel Mallory Duncan said in a statement. “These [card-acceptance] fees have been driving up prices for merchants and their customers for years, and every day that it continues is one day too long.”

Leon also gave attorneys for both sides a Sept. 16 deadline to file briefs on whether merchants should be reimbursed for the excess debit card interchange they’ve paid since October 2011, when the price cap took effect.

In light of what the Dodd-Frank statute said were permissible costs that large issuers, who account for about two-thirds of the debit market, could recover through interchange, the Fed originally proposed a cap for regulated issuers of 7 to 12 cents per transaction. The board, however, raised the cap to the 21-cent range after heavy bank and network lobbying. Based on charge-volume numbers and data the Fed provided during the original rule-making process, Digital Transactions News estimates the spread between the current cap and the original proposal is about $3 billion a year.

Meanwhile, the new merchant lawsuit filed in U.S. District Court in Marshall, Texas, asserts that Visa and MasterCard rules amount to “competitive restraints” that eliminate competition by their issuer members for acceptance of their cards, thereby raising merchants’ costs. The networks set interchange, which technically is paid by merchant acquirers to issuers, but acquirers pass the expense to their merchants.

The Texas lawsuit comes in the wake of others pending in Manhattan and Brooklyn, N.Y., involving merchants that opted out of accepting damages in the controversial interchange settlement pending before U.S. District Judge John Gleeson in Brooklyn. That case, which named Visa, MasterCard, and some major banks as defendants, would have class merchants receive about $6 billion in damages and more than $1 billion in temporary interchange relief, and loosen network anti-surcharging rules. In return the merchants are to agree not to file future suits over interchange and acceptance rules.

“Looks like the retailers are going for the full monty now, and the interchange war is just now getting started—rather than receding, as the banking industry was told by Visa/MasterCard,” payments consultant Steve Mott of Stamford, Conn.-based BetterBuyDesign, says by e-mail.

Visa declined to comment and a MasterCard spokesperson did not respond to a Digital Transactions News request for comment.

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