Regulation II
Corner Post Inc. v. Board of Governors of the Federal Reserve System
Date: Jan. 17, 2025
Issue: Whether Regulation II’s standard for reasonable and proportional interchange fees exceeds the Board of Governors of the Federal Reserve’s (the Fed) statutory authority and contradicts the Durbin Amendment.
Case Summary: ABA filed an amicus brief urging the Northern District of North Dakota to grant the Bank Policy Institute and the Clearing House Association LLC’s (the intervenors) motion for summary judgment in Corner Post Inc.’s lawsuit challenging Regulation II.
The North Dakota Retail Association, North Dakota Petroleum Marketers Association, and Corner Post (the retailers) sued the Fed, seeking to invalidate Regulation II’s standard for reasonable and proportional interchange fees. Regulation II capped the interchange fee received by large issuers ($10 billion or more in assets) to 21 cents plus 0.05% of the transaction. It also allowed a one-cent adjustment if the issuer implements fraud-prevention standards. In 2014, in National Association of Convenience Stores v. Board of Governors of the Federal Reserve System, the D.C. Circuit reversed a lower court decision determining Regulation II violated the APA. However, the D.C. Circuit remanded the issue of the Fed’s treatment of transactions-monitoring costs, concluding the Fed must clarify its exercise of discretion. On Aug. 14, 2015, the Fed published the clarification for transactions-monitoring costs in the interchange fee standard (the clarification).
On April 29, 2021, the retailers filed a complaint alleging Regulation II is contrary to law and arbitrary and capricious under the Administrative Procedure Act (APA). The Fed moved to dismiss based on the APA statute of limitations. The district court dismissed, finding the clarification did not constitute a final agency action to renew the statute of limitations; the statute of limitations began to run with the publication of Regulation II in 2011; and the retailers’ claims did not warrant equitable tolling. An Eighth Circuit panel affirmed on appeal, ruling the statute of limitations barred the claims. In a 6-3 decision, the U.S. Supreme Court reversed and remanded the case holding that an APA claim only “accrues” once a plaintiff is injured by final agency action. The six-year statute of limitations for APA claims runs from that accrual.
On Oct. 16, 2024, the Bank Policy Institute and the Clearing House Association LLC filed a motion to intervene to defend against the retailers’ challenge to Regulation II. On Jan. 10, 2025, the intervenors filed a motion for summary judgment, arguing that the Durbin Amendment requires the Fed to establish regulations ensuring interchange fees remain reasonable and proportional to an issuer’s transaction-related costs. The intervenors also argued the Durbin Amendment permits the Fed to consider the costs that the retailers dispute and does not mandate tailoring interchange fee caps to the specific costs of individual issuers. Additionally, the intervenors argued that the retailers’ arbitrary and capricious challenge fails for the same reasons and warned that a successful challenge would harm issuers and consumers while unfairly benefiting merchants.
In its brief, ABA argued that including specific cost categories in the interchange fee cap aligns with the text and purpose of the Durbin Amendment. Countering the retailers, ABA emphasized that the retailers misunderstood the mandate requiring fees to be reasonable and proportional to the actual costs an issuer incurs for a specific transaction. In the retailers’ view, the Fed violated the Durbin Amendment by adopting an average-based universal cap, creating a third cost category, and allowing sweeping discretion to include all costs. They also asserted that Regulation II includes prohibited costs, sets a one-size-fits-all cap, and ignores the amendment’s issuer-specific and transaction-specific fee standard.
However, ABA pointed out that the Durbin Amendment requires interchange fees to be reasonable and proportional to the issuer’s costs for a transaction. The amendment directs the Fed to create standards assessing compliance with this mandate and to consider specific costs, such as those related to authorization, clearance, or settlement. Congress also prohibited the Fed from considering costs unrelated to a specific transaction, leaving a third category — transaction-specific costs — unaddressed. ABA emphasized this category was essential for fulfilling Congress’s instruction to establish standards for reasonable and proportional interchange fees. ABA highlighted that issuers incur more costs for an electronic debit transaction than the Durbin Amendment recognizes. If Congress intended issuers to recover only part of the costs incurred for a transaction, it would have stated this explicitly. Instead, the Durbin Amendment allows consideration of the full cost incurred by an issuer for an electronic debit transaction when determining a “reasonable and proportional” interchange fee. Thus, the Durbin Amendment ensures interchange fees cover all costs issuers incur for such transactions.
Additionally, ABA argued the Durbin Amendment allows the inclusion of all four cost categories the retailers challenged. The Fed correctly determined that the baseline covers these categories: fixed ACS costs, transaction-monitoring costs, network processing fees, and fraud-loss adjustments based on transaction value. The Fed included these costs in the interchange fee calculation because issuers incur costs for specific transactions, making them allowable under the amendment.
ABA also explained that adopting a uniform standard for all issuers complies with the Durbin Amendment. The retailers argued that the amendment requires different interchange fee caps for each issuer, based on the specific costs of their transactions. ABA countered that implementing such a system would be nearly impossible and urged the court to reject this argument. ABA emphasized that the retailers’ suggestion would be “virtually impossible to implement” and must be rejected by the court as it is a foundational principle of statutory interpretation that Congress does not intend to enact absurd statutes.
ABA also argued the retailers’ brief makes incorrect and misleading claims. ABA highlighted that the retailers wrongly asserted that Regulation II allowed banks to achieve record profits and that merchants passed savings on to consumers. ABA further contended that the retailers’ brief ignored key points, such as the costs of other payment methods, the fact that inclusion of actual costs ensures that debit cards are a safe, efficient, and effective payment method, and the impact of Regulation II on community banks and credit unions.
Bottom Line: The retailers’ reply supporting its motion for summary judgment is due Feb. 7, 2025.
Documents: Brief
