WASHINGTON (3/6/12)--A group of retailers and merchants organizations have filed a motion for summary judgment in a Washington, D.C. federal court, challenging as invalid the Federal Reserve Board's interchange transaction fee regulation and network non-exclusivity regulation mandated by the Dodd Frank Act.
NACS, National Retail Federation, Food Marketing Institute, Miller Oil Co. Inc., Boscov's Department Store LLC, and the National Restaurant Association--a group of merchants and trade associations that represent them--filed the motion Friday in the U.S. District Court for the District of Columbia, seeking a summary judgment declaring the interchange rule and a network non-exclusivity regulation invalid.
The motion for summary judgment claims the rules exceed the authority granted to the Fed by Congress, and that the final rule is "arbitrary, capricious, an abuse of process and otherwise not in accordance with the law in violation of the Administrative Procedure Act," said the motion filed.
The merchants' motion for summary judgment argues that the statute directs the [Federal Reserve] Board to adopt regulations limiting interchange transaction fees, and the specific amendment required "that debit card interchange fees be reasonable and proportional to the cost incurred by the issuing bank (the 'issuer') with respect to the debit card transaction."
The statute directed the board to take into account certain statutory considerations, the motion said. "Chief among them, the board must distinguish between two categories of costs associated with debit card transactions: (a) the incremental cost incurred by an issuer for its role in the authorization, clearance or settlement of a particular electronic debit transaction, which must be included in the board's interchange fee standard; and (b) other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which must be excluded from consideration."
"After receiving significant pushback from the banking community in the comment process, the board reversed course and adopted a final rule that greatly expanded the costs allowed in the interchange fee standard" and "invented a third category of costs over which it claimed unbridled discretion to consider in its standard," the document alleged. The rule "doubled or even tripled the interchange fees allowable," which resulted in "shifting billions of dollars in additional costs from the issuing banks to merchants that accept debit cards."
The board--"in willful disregard of the plain text and purpose of key statutory provisions," said the complaint--created "a third category of costs found nowhere in the statute's plain text--costs 'that are specific to a particular electronic debit transaction but that are not incremental costs related to the issuer's role in authorization, clearance and settlement.'"
As for network fees--the fees charged by Visa, MasterCard and other debit card networks for their role in processing those transactions--"the board is required to adopt regulations prohibiting debit card networks and issuing banks from 'restricting the number of payment card networks on which an electronic debit transaction may be processed' to fewer than two unaffiliated networks."
The final rule "improperly implements this network non-exclusivity provision by requiring issuers to maintain two unaffiliated networks on each debit card issued to consumers. By focusing on the debit card, the board loses sight of the statute's requirement of network choice as to each electronic debit transaction.
The motion noted that "because of technological limitations and prevailing practices in the market, the majority of merchants are not enabled to accept both signature and PIN transactions." The final rule would mean "entire categories of debit card transactions--such as internet and telephone transactions, hotel stays and car rentals--are not afforded the competitive network choice required by statute," said the merchants group.
The interpretation "deprives nearly 75% of merchants that accept debit cards but that are not enabled for PIN transactions of any competitive network choice." Thus, said the merchants, "the network non-exclusivity rule contravenes both the letter and the purpose of the Durbin Amendment and cannot survive judicial review."