Fed Files Appeal on Court's Interchange Ruling

WASHINGTON — Lawyers for the Federal Reserve Board filed an appeal Monday against a judgment that invalidated its 2011 rule placing a cap on debit interchange fees.

In a 113-page brief filed with the U.S. Court of Appeals, the Fed argued it had followed congressional intent in drafting the provision required under the Dodd-Frank Act, which mandated that the central bank establish how much banks can charge merchants in interchange fees for debit cards.

"The board exercised its rulemaking authority in complete fealty to the text and the purpose of the statue notwithstanding congressional silence on important issues," according to the brief. "This is precisely what Congress expects when it delegates rulemaking authority to federal agencies, and the board's interpretations are entitled to deference as a result."

In July, U.S. District Judge Richard Leon invalidated the Fed's final rule in an order, concluding that regulators had ignored congressional intent by setting the ceiling for interchange fees too high.

The Fed's 24-cent cap was the result of an amendment to the Dodd-Frank Act — authored by Sen. Richard Durbin, D-Ill. — requiring the central bank to ensure debt swipe fees were commensurate with card issuers' costs for processing electronic payments.

The Fed has said it is taken into account four specific items, such as fraud losses and network processing fees, when considering the costs of the fees.

Leon's ruling was a blow to the Fed and bankers, who had come to reluctantly accept the cap, but a victory for retailers that had protested the final rule.

At a hearing in late August before Leon, Scott Alvarez, the Fed's top lawyer, said the central bank would ask the court to stay its rule pending an appeal. By doing so, the Fed would be allowed to keep fees at the current level while an appeal's court considers the challenge.

The Fed argued in its brief that the central bank had "reasonably interpreted" the network exclusivity provisions of the law and had "applied a straightforward reading of the statute."

"The board put an end to so-called 'network exclusivity' agreements and enhanced network competition by requiring card issuers to enable at least two unaffiliated networks on every debit card and prohibiting issuers and networks from directing which of those networks must process a given transaction," according to the brief.

Competing networks, the Fed argued, were also added to millions of debit cards as a result, ultimately a benefit to merchants.

The central bank also said that while the merchant's view represents "one possible interpretation, it is not the best — and is certainly not the only — reading of the statute." The Fed pointed out that Congress was silent on certain aspects of the law, including limitations caused by merchants or consumers.

Additionally, the Fed said it had established a standard for assessing whether interchange fees were "reasonable and proportional," and pointed out the fact it had slashed fees to roughly half of their pre-rule levels.

The central bank also stood by its judgment to not allow a single floor statement by the bill's sponsor to outweigh statutory language agreed by all of Congress.

Merchants had been successful in persuading the District Court to give more weight to a floor statement made by Durbin. The Fed argued in its brief that the court "seized upon a portion of this statement as conclusive proof that 'Congress wanted…to ensure the availability of at least two competing networks for each method of cardholder authentication.'"