On June 1, 2012, The Federal Reserve Board responded to plaintiffs' latest court filings in a November 2011 federal lawsuit brought against the board by a group of retailers headed by the National Retail Federation. Both the plaintiffs and the defendant had previously filed motions for summary judgment in the case.
The NRF complaint claimed the board had exceeded its authority in its final regulations for enactment of the Durbin Amendment to the Dodd-Frank Act of 2010. In its latest response, the Fed asserted that the Federal District Court for Washington should overrule retailers' objections and sanction the new debit interchange rates.
The Durbin Amendment directed the Federal Reserve Board to limit debit card interchange fees to "reasonable and proportional" issuer costs. And in its court filing, the Fed stated that is exactly what its final rule did. The rule, which went into effect Oct. 1, 2011, limited the debit card interchange fee to 21 cents plus a small allowance for fraud prevention.
The NRF lawsuit seeks to cut debit interchange rates even further. The retailers argued that the Fed adopted an unreasonable interpretation of the amendment, included fees and directives in its calculations it had no authority to include, and that it attempted to get around the amendment's prohibition against network exclusivity agreements. A reasonable interpretation
The Fed's brief presents its debit interchange final rule as a reasonable interpretation of congressional intent that must be upheld by the court.
The board said it is well established by courts that when Congress directs an agency to interpret its intention, as it did when it directed the board to set a "reasonable and proportional" debit interchange rate, the agency's regulations are controlling unless they are found to be "arbitrary, capricious or manifestly contrary to the statute."
Retailers argued that floor statements from Sen. Richard Durbin, D-Ill., when he offered his amendment on debit interchange regulation, along with his brief filed in support of the retailers' lawsuit, are evidence of congressional intent. The Fed countered, "The floor statement of the sponsor cannot trump a statute's text." The Fed also stated that what Sen. Durbin has to say about his intent when he proposed the amendment has no bearing on Congress' intent in enacting the amendment.
The board told the court that the congressional language gave it direction on some costs to include and direction on some costs not to include, but it "is silent as to costs that don't fall into either category."
Examples of costs Congress did not address, but the Fed considered legitimate costs to include when setting interchange fees, include fixed costs (such as authorization, clearance and settlement), transaction monitoring costs, fraud losses, and network processing fees.
The board said that without specific direction from Congress not to include those fees, it had the implied authority to include costs not specifically mentioned as legitimate costs of a transaction.
The Fed also defended its decision to require merchants be given the choice of at least two unaffiliated card networks for transactions. The rule demands at least one network must be a signature debit provider and one a PIN debit provider.
The board said this rule does not limit the number of networks a merchant may be offered and, therefore, is a reasonable interpretation of the Durbin Amendment that should be upheld.
In addition, the Fed took note of the retailers' complaint that their costs have gone up for small transactions since the final debit interchange rule went into effect.
The agency called the decision to raise interchange fees that were lower prior to the enactment of the final rule "an independent business decision by the networks."
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