WASHINGTON — The Federal Reserve Board on Wednesday sought help from an appeals court to overturn a judge's ruling invalidating its 2011 rule placing a cap on debit interchange fees, as the central bank also found support from merchant groups in seeking to delay the lower court ruling from taking effect.

Scott Alvarez, the Fed's general counsel, told Judge Richard Leon that the agency preferred to appeal his ruling to a higher court before it considers redrafting the interchange rule that Leon threw out last month. Alvarez said the Fed also plans to ask Leon for a longer stay of his ruling to allow the current swipe fee rule to remain in place until the legal process plays out.

Alvarez said issuing a new interim rule sooner — which Leon supports — could get too far ahead of the appeals process. He suggested that writing a rule satisfying the court would be a lengthy procedure considering the breadth of Leon's ruling.

"Your ruling is very broad in its effect," Alvarez said at the hearing Wednesday.

Leon, a U.S. District Court judge for the District of Columbia, said even though he was "not inclined" to extend the stay, he would "keep an open mind" since the retailer groups that originally challenged the Fed's interchange rule also support a longer stay. If the stay was lifted, that means the Fed's 2011 interchange rule will no longer be in effect, removing the current cap of roughly 24 cents per transaction. Merchant groups originally sued the Fed two years ago arguing that the cap was too high.

"I'm actually surprised at the position that the merchants" have "taken today," Leon said of the retailers supporting the longer stay.

The hearing was yet another chapter in the drama that has followed enactment of the swipe fee cap. 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 debit swipe fees were commensurate with card issuers' costs for processing electronic payments.

In his July ruling, Leon agreed with plaintiffs in the case — including the National Retail Federation, the National Association of Convenience Stores and the Food Marketing Institute — that 24 cents was too high. Leon's ruling said the Fed — which had originally proposed a 12-cent limit — ignored congressional intent in setting the cap.

At a hearing last week, the judge demanded that Alvarez show up in person to inform him whether it would make changes to its interchange rule while the court battle continued to play out. He was visibly angry that the Fed had not yet come to a decision.

"The board is not going to have the luxury of sitting around for weeks," said Leon. "They have to make a decision and move expeditiously. I thought it would be done by now."

But Alvarez said if the Fed moved too quickly in redrafting the rule — in advance of a higher court's decision — that could "vitiate" the effects of a successful appeal that left the 2011 rule in place. The central bank intends to pursue an "expedited" appeal in order to speed up resolution of the matter. (The Fed's notice of appeal was officially filed on Wednesday.)

Furthermore, Alvarez added, if both Leon and the appeals court do not stay the lower court's decision invalidating the rule, merchants could face the pre-Dodd-Frank fee levels, which reached as high as 50 cents per transaction.

"That would be the state of play" if neither court granted a stay, said Alvarez, who sought to reassure Leon that the Fed will "work expeditiously" in seeking the appeal.

Alvarez was supported by the plaintiffs, who agreed that lifting the stay would be a mistake.

Shannen Coffin, a partner at Steptoe & Johnson representing the merchant groups, said while the Fed has the authority to move quickly with a new interim rule, imposing Leon's ruling immediately — leaving no fee cap in place — could be disastrous.

"The harm to us of removing any protection is substantial," Coffin said at the hearing. He added, "I would say that the plaintiff's interest in the" stay remaining in place "is stronger than that of the federal government."

Coffin, meanwhile, also raised doubts over the legal authority Leon has to require reimbursements of debit swipe fees that have already been charged that would be invalidated by the judge's ruling. Last week, the judge suggested such reimbursements could be ordered.

"We haven't asked for that, but [the high level of fees charged] emphasizes" why it's important "to get a proper rule in place," Coffin said. "I'm not certain where it is that this court would have that authority."

News of the Fed's appeal triggered immediate cheers from banks and industry representatives, while merchant groups protested the decision.

The appeal "is the right thing to do for consumers who value debit cards and the financial institutions that serve them," Frank Keating, chief executive of the American Bankers Association, said in a press release. "We're encouraged that all parties have asked for a stay and will seek an expedited appeal, which would avoid the market disruption and consumer harm that other alternatives would cause."

Richard Hunt, head of the Consumer Bankers Association, also applauded the move, saying Leon's "original decision left consumers in a sea of uncertainty, with the added insult of potentially losing the services they deeply value."

But J. Craig Shearman, vice president of government affairs and public relations at the National Retail Federation, said in a statement that the Fed's decision to file an appeal amounted to "giving in to the banks."

"The facts are very clear that the Fed set the cap far higher than intended by Congress, and the court has insisted that the mistake be fixed as soon as possible," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.