Illinois Interchange Fee Prohibition Act
Illinois Bankers Association v. Kwame Raoul, in his official capacity as Illinois attorney general
Date: Dec. 20, 2024
Issue: Whether the Illinois Interchange Prohibition Act (IFPA) is preempted by the National Bank Act (NBA), Home Owners’ Loan Act (HOLA), Federal Credit Union Act (FCUA), and Electronic Fund Transfer Act (EFTA).
Case Summary: Judge Virginia Kendall of the Northern District of Illinois partially granted ABA’s motion for a preliminary injunction in its lawsuit challenging the IFPA.
As background, on June 7, 2024, the state of Illinois enacted the IFPA, banning banks, payment card networks, and other entities involved in processing debit or credit card transactions from charging or receiving “interchange fees” in Illinois on the portion of a transaction attributable to taxes or gratuities (the interchange fee prohibition). The IFPA also mandates a “data usage limitation” that prohibits “any entity, other than the merchant” involved in an electronic payment transaction to “distribute, exchange, transfer, disseminate, or use” the associated data “except to facilitate or process the transaction or as required by law.”
ABA and its co-plaintiffs (collectively ABA) sued Kwame Raoul in his official capacity as Illinois attorney general and moved for a preliminary injunction challenging the IFPA. In the complaint, ABA argued the NBA, HOLA, and FCUA preempt the IFPA, and the IFPA conflicts with the EFTA. In its motion for a preliminary injunction, ABA further advanced its preemption arguments, arguing it would likely succeed on the merits and that its members would suffer irreparable harm absent a preliminary injunction.
On Oct. 4, 2024, the Illinois AG filed a combined motion in opposition to ABA’s motion for a preliminary injunction and motion to dismiss. The Illinois AG argued: ABA has no right to sue because the legislature did not authorize the Illinois AG to enforce the limit on interchange fees; Illinois’ sovereign immunity bars ABA from challenging the Illinois law in federal court; a preliminary injunction is not required because banks need to prepare for the interchange law to take effect on July 1, 2025; and the NBA does not preempt the state law because the law does not meaningfully interfere with the ability of national banks to receive fees or process card transactions. On Oct. 11, 2024, ABA filed a reply brief arguing its claims are likely to succeed on the merits because the Illinois AG’s threshold arguments are misguided. ABA also argued that the Illinois AG’s merits arguments are baseless, reiterating the NBA, HOLA, FCUA, and EFTA preempt the IFPA.
Before deciding on the motion for a preliminary injunction, the court concluded that ABA has standing. The Illinois AG argued that ABA did not meet the redressability requirement for standing because he lacked authority to enforce the IFPA, and that even with enforcement authority, an injunction would not stop the 102 state’s attorneys from pursuing civil penalties for violating the statute. However, the court determined the Illinois AG has common law authority to enforce the IFPA and found no language in the interchange fee prohibition requiring enforcement by anyone outside the attorney general’s office. While the court acknowledged that the Illinois AG cannot control the prosecution activities of the 102 state attorneys, it concluded the redressability requirement was satisfied because the requested relief would “reduce the probability of injury.”
The court also rejected the Illinois AG’s argument to dismiss the suit for failure to state a claim under Rule 12(b)(6). As the court observed, the Eleventh Amendment provides immunity from the suit. Sovereign immunity protects the government from lawsuits unless it consents to being sued. Although Rule 12(b)(6) requires dismissal when sovereign immunity applies, the court found that the Illinois Attorney General’s authority to enforce the IFPA eliminated sovereign immunity for ABA’s federal law claims. However, the court clarified that the Illinois AG did not waive sovereign immunity for ABA’s state law claims. As a result, the court dismissed ABA’s state law claims.
Judge Kendall granted a preliminary injunction for national banks, ruling ABA would likely succeed on the merits of its NBA preemption claims, its members face irreparable harm without an injunction, and the balance of equities and public interest favor granting a preliminary injunction. In Barnett Bank, the U.S. Supreme Court ruled that national banking laws and regulations preempt state consumer financial laws if the state law “prevents or significantly interferes with the exercise by the national bank of its [enumerated or incidental] powers.” In Cantero, the Supreme Court clarified that courts must “make a practical assessment of the nature and degree of the interference caused by a state law,” considering “the text and structure of the laws, comparisons to other precedents, and common sense.”
Analyzing the Interchange Fee Prohibition, the Court described the “clear tension” between the plain language of the IFPA and the NBA. The court explained the IFPA “directly constrains the express powers provided for in the NBA’s implementing regulation” (12 C.F.R. § 7.4002) that provides for a national bank to “charge its customers non-interest charges and fees, including deposit account service charges.” The court pointed out that Illinois was directly regulating credit and debit card transactions by dictating to issuers how much they may charge for a given transaction.
Turning to the “nuanced comparative analysis” per Cantero, Judge Kendall examined the Supreme Court’s preemption precedent. The two principal cases the court relied on were Franklin National Bank of Franklin Square v. New York (1954) and Fidelity Federal Savings & Loan Association v. De la Cuesta, (1982). First, the court noted the IFPA “appears even more directly at odds with the federal statute” than Franklin, in which the Supreme Court held that the NBA preempted a state law limiting the manner in which banks could advertise savings accounts. The court ruled that a restriction on banks’ advertising was a lesser limitation than “whether the state may restrict … the non-interest fees national banks charge for their services.” The court then explained that “a national bank’s authority to provide a banking service necessarily carries with it the authority to charge for that service.” Second, the district found that the interchange fee prohibition “also more dramatically limits national banking powers than the state law did in De la Cuesta.” In De la Cuesta, the Supreme Court held that a California state law limiting the ability of federal savings and loan associations to enforce due-on-sale clauses in some cases was preempted. The court found that the interchange fee prohibition “goes further” than the law in De la Cuesta “because it applies in all instances.” More generally, the court found that the interchange fee prohibition “is facially more extreme than the sort of state laws that the Supreme Court intended for national banks to be subject to.”
Analyzing the data usage limitation, the court ruled that NBA preemption applies. In Cantero, the Supreme Court ruled that “A national bank has the express federal power to provide data processing, data transmission services… and access to such services… for itself and for others” with respect to “banking, financial, or economic data.” Judge Kendall reasoned that the IFPA’s data usage limitation is more intrusive than the interchange fee prohibition because it would completely restrict the data processing function. Since both the interchange fee prohibition and the data usage limitation significantly interfere with national banks’ powers, the court concluded that the NBA preempts the IFPA.
Next, Judge Kendall then examined whether ABA demonstrated a likelihood of success on their claims that injunctive relief applies to other participants in the payment network.
Debit transactions. The court dismissed ABA’s argument that the IFPA, as applied to debit card transactions, is preempted under the EFTA because it conflicts with the Durbin Amendment to the Dodd-Frank Act. The Durbin Amendment and its implementing regulation, Regulation II, sets a federal standard for permissible interchange fees: 21 cents per transaction plus 0.05% of the transaction’s value. The Durbin Amendment provides that it “does not annul, alter, or affect the laws of any state relating to electronic fund transfers … service fees … except to the extent that those laws are inconsistent with the provisions of this subchapter, and then only to the extent of the inconsistency.” The court determined no “inconsistency” exists between the IFPA and the Durbin Amendment, because the Durbin Amendment and its regulation only establish a ceiling for interchange fees. As a result, the court concluded that ABA did not demonstrate a likelihood of success on the merits of its claim that EFTA preemption applies.
Federal savings associations. The court granted injunctive relief to federal savings associations, ruling that ABA demonstrated a likelihood of success on its claim that HOLA preempts the IFPA. The court explained that the preemption standard for the NBA, and the HOLA is the same and that the HOLA grants federal associations powers similar to those the NBA grants national banks. For this reason, the court determined that ABA would likely succeed in its claim that the HOLA preempts the IFPA.
Federal credit unions. Judge Kendall raised a threshold question whether a private right of action exists in the FCUA and ordered additional briefing on this issue; ABA’s brief is due Jan. 15, 2025, and the Illinois AG’s response is due Jan. 22, 2025.
Illinois-chartered financial institutions. ABA argued that under Illinois wildcard statutes, state financial institutions receive the same protections as their federal counterparts. However, because the court dismissed ABA’s state law claims based on sovereign immunity under the Eleventh Amendment, these institutions were not granted injunctive relief.
Out-of-state financial institutions.
- Dormant Commerce Clause. ABA argued that Illinois wildcard statutes, read alongside the dormant Commerce Clause, requires that out-of-state financial institutions “receive the same follow-on preemption as in-state state banks.” Otherwise, ABA argued the wildcard statutes would be discriminating against the out-of-state institutions. The court concluded that ABA did not carry its burden on this claim. The court reasoned the wildcard laws apply to all entities doing business and Illinois, and in effect, “makes it difficult to find that the wildcard statute advantages in-state firms or disadvantages out-of-state rivals.” Accordingly, Judge Kendall concluded ABA did not demonstrate a likelihood of success on its dormant commerce clause claim.
- Riegle–Neal Act. ABA argued that Riegle-Neil preempts the IFPA for out-of-state chartered banks. Under Riegle Neil, “the laws of a host State … shall apply to any branch in the host state of an out-of-state state bank to the same extent as such state laws apply to a branch in the host State of an out-of-state national bank.” Judge Kendall observed that “on its face, the statute seems to protect out-of-state state banks, located in Illinois.” However, like the FCUA, she posited that “there does not appear to be a private right of action under this statute.” In effect, she ordered additional briefing on this issue; ABA’s brief is due Jan. 15, 2025, and the Illinois AG’s response is due Jan. 22, 2025.
Card networks. The court did not grant injunctive relief to the card networks, ruling the preemptive effect of the NBA does not extend to the card networks. ABA argued that to effectuate federal preemption, the IFPA cannot be applied to card networks or others involved in the payment process. However, the court observed that Congress revised Dodd-Frank to reconcile the Supreme Court’s ruling in Watters v. Wachovia, which held that the NBA preempts state licensing and registration requirements as applied to operating subsidiaries of national banks. After Watters, Congress revised Dodd-Frank, adding “No provision of title 62 of the revised statutes or section 371 of this title shall be construed as preempting, annulling, or affecting the applicability of state law to any subsidiary, affiliate, or agent of a national bank.” The court was not persuaded by ABA’s argument that this amendment prevents third parties from claiming NBA preemption for their own activities in the first instance. Accordingly, Judge Kendall concluded ABA did not demonstrate a likelihood of success on its claim that NBA preemption extends to the card networks.
Bottom Line: The court scheduled a conference for Jan. 15, 2025. The court has also not ruled on the retailers’ motion to intervene.
Documents: Opinion
