- Key insight: A federal judge reverses course on Illinois swipe fee ban, finding that the Office of the Comptroller of the Currency's new rule on federal preemption in interchange bolstered the plaintiffs' case that federal law preempts the state ban.
- Supporting data: The court permanently enjoined enforcement against national banks, federal savings associations, covered out-of-state banks and payment networks; merchant trade groups vowed to continue fighting for the state ban in court.
- Forward look: Litigation over the state ban will likely continue, as credit unions and Illinois-chartered institutions remain subject to the law.
A district court judge on Monday evening ruled that federal law preempts portions of an Illinois ban on swipe fees on taxes and tips, siding with bank trade groups and card networks that brought
Chief District Judge Virginia M. Kendall's opinion represents something of a departure from an earlier ruling, after the judge found the Office of the Comptroller of the Currency's decision to issue preemption determinations exempting national banks from the law materially altered the facts of the case.
The Illinois Interchange Fee Prohibition Act would ban firms from charging swipe fees on sales tax and gratuity portions of charges. The law has pitted trade groups representing merchants and the financial industry against each other and comes as a growing number of states move to block interchange on portions of transactions. Banks say those interchange fees are necessary to pay for fraud prevention, the cost of processing the transaction and offsetting the costs of credit card rewards. The fees are set by the card networks like Visa or Mastercard and often are around 2% to 3% of a transaction. Merchants paid nearly $200 billion in such fees last year.
A federal judge
While the OCC argued in its preemption determination that the matter was settled, Judge Kendall disagreed. She argued that the issue "remains the province of this Court."
"[Determining whether the law is preempted] includes assessing the impact of the OCC's assertions on the legal question at hand, separate and apart from an action (again, not currently in front of this Court) to challenge the methods by which the agency came to its decision," she wrote in the opinion. "The OCC's absence from the suit does not prevent the Court from according complete relief between the existing parties on the question in front of it — specifically, whether the IFPA is preempted by federal law."
The judge also expressed skepticism that the OCC's methods were above-board, criticizing the agency's use of emergency procedures to issue its preemption determination.
"The OCC's choice to release this Interim Final Order two months before the IFPA's effective date, approximately two years after its passage, is an unflattering one," she wrote.
Even so, Kendall ultimately found that the OCC's actions did change the legal analysis. In a February ruling, the judge found that interchange fees were set by payment networks, not banks, which weakened the plaintiff's preemption arguments. The OCC's determination extended national banks' authority to fees collected through these third parties, strengthening the case for preemption.
"In a world where the national banks' powers will include the discretion to have third parties set their fees for them, it is difficult to see how the IFPA is not 'an obstacle to the accomplishment and execution of the full purposes and objectives' of that power," the judge wrote. "While that possibility did not emerge since the February Ruling, the new rule changes its role in the analysis. In that sense, in light of the new regulation, the IFPA does 'impose an undue burden on the performance of the banks' functions…' and thus is invalid with regard to national banks, federal savings associations, and out-of-state State banks."
The court extended the preemption to payments networks, permanently blocking the state from enforcing the law against such firms. Entities not covered by federal banking preemption, including federal credit unions and some state-chartered banks, could remain subject to the law.
The judge's ruling came only hours after the Illinois legislature voted to
The American Bankers Association, Illinois Bankers Association, America's Credit Unions and Illinois Credit Union League — who are co-plaintiffs in the suit — celebrated the ruling on Monday evening, while indicating support for further action to relieve state banks and credit unions from the law's requirements.
"We welcome today's ruling, which recognizes that federal law protects critical elements of the national payments system from conflicting state requirements," they wrote in a release. ""This decision is an important step toward preserving a consistent, nationwide framework for electronic payments. At the same time, it does not fully resolve the challenges created by this law. Even with this decision, credit unions and Illinois-chartered banks remain subject to IFPA, creating ongoing uncertainty and the risk of inconsistent treatment for parties in the same transaction."
The Illinois Retail Merchants Association called the ruling a "temporary setback," calling the matter "far from settled."
"After the Interchange Fee Prohibition Act was initially upheld, banks, credit card companies, and processors turned to the Trump Administration to secure an unprecedented rule change designed to undercut Illinois law and block financial relief for businesses and consumers," said Rob Karr, president and CEO of the Illinois Retail Merchants Association in a press release. "We remain committed to pursuing meaningful swipe fee relief for consumers, neighborhood retailers, restaurants, and bars, and are actively evaluating additional legal avenues to protect them."
The Merchants Payments Coalition issued a statement on Tuesday expressing support for challenging the OCC's determination, which could lead to reconsideration of the ban. The OCC wasn't a party to the current case and the courts couldn't consider the preemption determination itself without a separate lawsuit.
"As a result, the court had to accept the OCC rule," MPC Executive Committee member Doug Kantor said in a press release. "Soon, the courts will have the opportunity to invalidate that rule and we are confident they will do so."
"The OCC has the law wrong on preemption, doesn't have the power to do what it is trying to do, and violated the Administrative Procedure Act," Kantor continued. "That rule will be overturned and the Illinois law — and any other state laws on swipe fees — will be able to go into effect."
The Colorado House of Representatives
