U.S. Appeals Court Panel Hears Arguments on Interchange Rate-Cap Dispute (Jan. 21, 2014)

Three judges for the U.S. Court of Appeals in D.C. convened last Friday to ask questions of lawyers representing debit card issuers, the Federal Reserve and merchants, as the panel weighs the Fed’s appeal of a lawsuit vacating its rule capping debit interchange rates at 21 cents in 2011, in accordance with the Durbin Amendment in the Dodd-Frank Act. U.S. District Judge Richard Leon threw out the Fed’s debit-cap rule in a July 31, 2013, ruling, which said the Fed had included too many factors in setting the cost of handling a debit transaction. Judge Leon wrote that the debit interchange cap should be closer to 12 cents per transaction. The Fed in August filed an expedited appeal of the ruling and requested a stay of Judge Leon’s decision, which was granted. The legal wrangling began when the National Retail Federation (NRF) and other merchant groups in November 2011 sued the Federal Reserve, challenging its formula for determining a “fair and reasonable” cost for supporting debit transactions.

In oral arguments before the appeals court panel, consisting of Judges David Tatel, Harry Edwards and Stephen Williams, discussion centered on how the Fed interpreted the Durbin Amendment and what costs should be considered in the Fed’s rulemaking to cap debit interchange. The core of the debate is whether only narrow debit transaction costs explicitly mentioned in the Durbin Amendment could be considered in setting debit interchange rates, or whether other costs must be considered, such as computers, software and labor. “We think there are non-incremental costs that are transaction-specific that can be included,” Judge Tatel said during the hearing, according to a report in Business Week. Another question the appeals panel is examining is whether there should be at least two competing networks available for both signature and PIN transactions. The debit network-routing requirement could be highly disruptive, forcing card issuers to offer four different routing options on each card, while also posing serious complications to the U.S. plan to adopt EMV chip cards by October 2015.

In addition to last week’s oral arguments, the appeals panel is analyzing legal briefs from all parties. Next the panel will write an opinion and issue the decision to the public, a process that could take months, observers say. It is too soon to guess which way the appeals court may rule, Doug Kantor, an attorney for the NRF, tells Paybefore. “Everybody answered questions, but it’s a dubious thing to try to read into oral arguments how a case went,” he said, noting that the judges’ questions only aimed to get deeper information.

Could this case go all the way to the Supreme Court? Unlikely, says K. Craig Wildfang, a partner with Minneapolis-based Robins, Kaplan, Miller & Ciresi LLP, who was the plaintiffs’ attorney in the merchants’ antitrust case against Visa and MasterCard. “The best way to get the Supreme Court to review a case is to point out a split between circuits in the court of appeals, but this Fed interchange suit involves a single statute with one jurisdiction, so that would be a long shot,” Wildfang tells Paybefore.

Another possibility is that someone unhappy with the final ruling here could ask the entire set of judges for the court of appeals in D.C. to hear the case as a group, or “en banc,” but that option is denied more often than not, Kantor said.