On March 21, 2014, in NACS, et. al. v. Board of Governors of the Federal Reserve System, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of the Federal Reserve’s interpretation of the Durbin Amendment. NACS and other merchant groups challenged the regulations promulgated by the Federal Reserve to implement the Durbin Amendment and won summary judgment in District Court. The Court of Appeals, however, overruled the District Court’s summary judgment and, as a result, the Federal Reserve’s Durbin Amendment regulations should remain largely intact.
In order to implement the interchange fee restrictions under the Durbin Amendment, the Federal Reserve adopted regulations that limit the interchange fee for a debit card transaction to $0.21 plus five basis points (0.05%) of a transaction’s value, plus an additional $0.01 per transaction if the issuer implements certain fraud-prevention measures.1 In calculating this limit, the Federal Reserve determined that issuers should be able to recover through debit card interchange fees: (i) average variable costs incurred for authorizing, clearing and settling debit card transactions, (ii) costs incurred as a result of transaction-monitoring to prevent fraud, (iii) fraud losses, and (iv) network processing fees.
The merchant groups objected to the Federal Reserve’s interchange fee rules, arguing that the Durbin Amendment allowed issuers to recover only average variable costs for authorizing, clearing and settling debit card transactions (Incremental ACS Costs), and not the other costs that were included in the Federal Reserve’s rulemaking analysis. The District Court agreed that the Federal Reserve could only consider Incremental ACS Costs of individual debit transactions and granted summary judgment against the Federal Reserve. The Court of Appeals overruled the District Court, based on a different interpretation of the statutory language.
The Durbin Amendment requires the Federal Reserve to distinguish between “the incremental cost incurred by an issuer…in the authorization, clearance, or settlement of a particular electronic debit transaction, which costs shall be considered” in setting the interchange fee limits, and “other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered” in setting the interchange fee limits.2 The Federal Reserve interpreted this statutory language to create three relevant categories of costs: (i) Incremental ACS Costs, which issuers must be allowed to recover through interchange fees, (ii) costs specific to a particular electronic debit transaction other than Incremental ACS Costs, which the Federal Reserve may, but is not required to, allow issuers to recover, and (iii) costs not specific to a particular electronic debit transaction, which the Federal Reserve may not allow issuers to recover.
The merchant groups, however, argued that the Durbin Amendment bifurcates the universe of costs into two categories: (1) Incremental ACS Costs, which could be considered in determining costs to be included in debit interchange fees, and (2) all other costs (including fixed authorization, clearing and settlement costs), which are prohibited from being recovered through debit interchange fees. The merchant groups claimed that the costs incurred as a result of transaction-monitoring to prevent fraud, fraud losses and network processing fees should not have been considered in setting the debit interchange cap.
The Court of Appeals ruled that the “other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered” (emphasis added) is a restrictive (rather than descriptive) clause because the language, “which are not specific to a particular electronic debit transaction,” is not preceded by a comma. The court acknowledged that restrictive clauses often use the word “that” rather than “which,” but “which” can still create a restrictive clause when the clause is not offset by a comma. After interpreting the clause as a restrictive clause, the Court of Appeals determined that the Federal Reserve was reasonable in concluding that it was only prohibited from including costs not specific to a particular transaction in the interchange fee cap calculation, and conversely, the Federal Reserve could consider the types of costs specific to a transaction, in addition to incremental costs, in determining the interchange fee cap.
The court remanded to the Federal Reserve for additional investigation or explanation its determination to include transaction-monitoring costs in the types of costs recoverable by issuers through debit interchange fees in light of the penny-per-transaction fraud-prevention adjustment under the Durbin Amendment. Otherwise, the Federal Reserve’s debit interchange regulations were upheld by the court.
The NACS and the other merchant groups also claimed that the Durbin Amendment’s network exclusivity provisions require at least two unaffiliated PIN debit networks and two unaffiliated signature debit networks to be enabled for a debit card. The merchant groups objected to the Federal Reserve’s regulations, which only require two unaffiliated debit networks of either type to be enabled for any debit card. The Court of Appeals found that the Federal Reserve’s interpretation of the statute on this point complied with the statutory requirement.