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Federal Reserve’s Regulation II Thrown Out by Federal Judge

As many of you are aware, in 2012 several merchants and merchant trade associations filed a lawsuit challenging the Federal Reserve’s implementation of Regulation II, pursuant to the Durbin Amendment. In the litigation the merchants and associations alleged that the Federal Reserve, in establishing its debit card interchange fee standards, included costs prohibited by the statute and that the Federal Reserve failed to provide merchants with adequate routing options.

On July 31 of this year the District of Columbia District Court issued a scathing opinion, finding for the plaintiffs on both counts. In the opinion, the court stated that the Federal Reserve “clearly disregarded Congress’s statutory intent by inappropriately inflating all debit card transaction fees by billions of dollar and failing to provide merchants with multiple unaffiliated networks for each debit card transaction.” The court went on to state that the Federal Reserve’s regulations were “utterly indefensible”. As a result, he has ordered the Federal Reserve to rewrite Regulation II to better comport with the statutory intent of Congress.

Unfortunately, rather than comply with the district court’s order, the Federal Reserve has elected to appeal the decision to the DC Circuit Court of Appeals. While both parties have agreed to an expedited schedule, the appeal is likely to delay any changes in the rules by at least one year. If the Federal Reserve’s appeal is unsuccessful, it would then be required to publish a rule that would dramatically reduce the amounts that merchants pay for debit transactions.

John Drechny, Board Member, Merchant Advisory Group