The Fed Will Appeal Judge’s Decision To Overturn Its Durbin-Amendment Rule

By Jim Daly

The Federal Reserve on Wednesday said it would appeal the July 31 decision by a federal judge overturning the board’s rule implementing the Durbin Amendment, the section of 2010’s Dodd-Frank Act that regulates debit cards.

The news came from Scott Alvarez, the Fed’s general counsel, at a status hearing before U.S. District Judge Richard J. Leon in Washington, D.C. For now, Leon is continuing the stay he put on his July ruling and ordered parties in the case to file pleadings by Aug. 28.

In a blistering 58-page opinion, Leon criticized the Fed for failing to follow Congress’s intent in implementing the debit card interchange cap and transaction-routing requirements called for by the Durbin Amendment. Last week, he gave the Fed a week to indicate what it planned to do next.

The appeal will be heard by the U.S. Circuit Court of Appeals for the District of Columbia. The Fed wants its appeal heard on an expedited basis.

Attorneys familiar with the payments industry weren’t surprised by today’s news. “Given the fact that the district court totally rejected the Federal Reserve’s entire rule-making, it could be expected that they would appeal,” says Anita Boomstein, a partner at Hughes Hubbard & Reed LLP in New York.

The tumult is the result of a lawsuit against the Fed brought by several merchant groups and retailers, including the Washington-based National Retail Federation, which rejoiced when Leon issued his decision three weeks ago. Merchants pay interchange to card issuers, and in the pre-Durbin era their network choices were often limited by network and issuer agreements.

“We are very disappointed to see the Fed giving in to the banks,” the NRF said in a statement issued after Wednesday’s hearing. “The facts are very clear that the Fed set the cap far higher than intended by Congress, and the [district] court has insisted that the mistake be fixed as soon as possible. Instead, the Fed has taken a position that will drag this out while retailers and their customers continue to pay billions of dollars in inflated fees that harm that U.S. economy.”

But Carrie Hunt, senior vice president and general counsel for the National Association of Federal Credit Unions, issued a statement saying her association “is pleased that the Federal Reserve Board has decided to appeal this decision because letting it stand would have a detrimental effect on our credit-union members and the consumers they serve. We continue to be concerned about existing arbitrary price caps.”

In his July decision, Leon faulted the Fed for considering costs not allowed by the Dodd-Frank statute in setting its interchange cap of 21 cents and 0.05% of the sale, plus another possible cent for fraud prevention, for issuers with $10 billion or more in assets. He indicated that the Fed’s original proposal of a 7-to-12-cent cap was closer to the mark set by Congress. Leon also said the transaction-routing provisions didn’t follow Congress’s intent, which he said was that each debit card transaction allow the merchant access to two competing signature networks as well as two unrelated PIN-debit networks.