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WASHINGTON, D.C. – U.S. District Judge Richard Leon ruled today that the Federal Reserve disregarded Congress' intent when it decided how much banks can charge retailers to process debit-card transactions.
In his 58-page ruling, which rejected regulations imposed by the Durbin Amendment of the Dodd-Frank Wall Street Reform Act, Leon stated that the Fed did not have the authority to set the 21-cent cap that has been in effect since October 2011. The cap, though, will remain in place until new regulations or interim standards are set.
"Upon consideration of the pleadings, oral argument and the entire record therein, the Court concludes that the Board has clearly disregarded Congress' statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars and failing to provide merchants with multiple unaffiliated networks for each debit card transaction. Accordingly, the plaintiffs' motion is GRANTED and defendant's motion is DENIED," Leon stated in his ruling.
A group of retail associations, including NACS, the Association for Convenience & Fuel Retailing, the Food Marketing Institute, the National Restaurant Association and the National Retail Federation, filed suit in November 2011, claiming they would be "substantially harmed" by the fees set by the Fed. All of the associations are members of the Merchants Payments Coalition, a group of retailers and organizations concerned about the rising costs of swipe fees on both debit and credit cards.
The plaintiffs had argued in their complaint that "the board's final rule permits banks to recover significantly more costs than permitted by the plain language of the Durbin Amendment and deprives plaintiffs of the benefits of the statute's anti-exclusivity provisions." The case is NACS v. Board of Governors of the Federal Reserve System.
Numerous retail groups, including NACS, applauded today's ruling.
NACS said the plaintiff group fundamentally won on all counts. "The Court has vindicated our position that the final Federal Reserve rules on the implantation of the Durbin Amendment were flawed," said NACS Senior Vice President of Government Relations Lyle Beckwith. "We look forward to the Fed revisiting their initial analysis that concluded the actual cost of a debit transaction was actually 4 cents. By following the law and using their own data, the Fed should produce a debit card rule that lowers these outrageous fees paid by merchants and ultimately consumers."
The National Retail Federation (NRF) also praised Judge Leon's decision.
"From the very beginning, retailers and restaurants knew the Federal Reserve Board of Governors had grossly misapplied the swipe fee law, also known as the Durbin Amendment. They failed to heed Congress' call to set fee standards that were 'reasonable' and 'proportional' to the actual cost of a transaction," said NRF Senior Vice President and General Counsel Mallory Duncan. "Instead, the Board manufactured a standard that was two to three times higher than the Fed staff recommended. As a result, small ticket transactions such as those imposed on convenience stores and restaurants skyrocketed under the misapplied law."
Duncan noted that Congress clearly told the Fed to introduce competition and transparency into the debit card marketplace by making multiple networks available, so as to reduce swipe fees for merchants and their customers. However, the Fed failed to do so.
"The court rightly ruled against them as a result. Today's decision is the first step in setting these initial wrongs right and will ensure that swipe fee reform is done correctly," Duncan said in a released statement.
The Retail Industry Leaders Association (RILA), which was not a party to the case, also issued a statement of support. "Retailers welcome today's ruling and the opportunity to ensure the law is finally implemented as intended," said Bill Hughes, RILA's senior vice president for government affairs. "The flawed Federal Reserve rules have muted the law's intended benefits to merchants and consumers and resulted in further distortions in the already broken electronic payments market."
The Food Marketing Institute, meanwhile, predicted a reduction in overall costs.
"We are delighted that the court agreed that the Federal Reserve Board exceeded its authority under the law in nearly doubling the interchange fees banks are allowed to charge merchants for debit transactions," the organization said in a statement. "This ruling marks a major victory for supermarket shoppers and will ultimately result in lower costs at the checkout line by billions."