Regulation II
Linney’s Pizza LLC. v. Board of Governors of the Federal Reserve System
Date: March 26, 2025
Issue: Whether Regulation II’s standard for reasonable and proportional interchange fees exceeds the Federal Reserve Board’s statutory authority and contradicts the Durbin Amendment.
Case Summary: ABA filed an amicus brief urging the Eastern District of Kentucky to grant the Bank Policy Institute and the Clearing House Association LLC’s (the intervenors) motion for summary judgment in Linney’s Pizza LLC’s (plaintiffs) lawsuit challenging Regulation II.
On Dec. 9, 2022, plaintiffs 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.
The district court dismissed, ruling the suit was untimely under the APA’s six-year statute of limitations. The court explained the clock started running when the Board issued the regulation rather than when plaintiffs were injured. During plaintiffs’ appeal, the U.S. Supreme Court held in Corner Post that an APA claim only “accrues” once a plaintiff is injured by final agency action.
On Jan. 27, 2025, the Bank Policy Institute and the Clearing House Association LLC filed a motion to intervene and defend Regulation II against the retailers’ challenge. Then, on March 19, 2025, the intervenors moved for summary judgment. The intervenors urged the court to uphold Regulation II, claiming that striking down the rule would harm issuers and consumers while giving merchants an unfair financial gain.
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. ABA asserted that the retailers misunderstood the rule requiring fees to be reasonable and proportional to the actual costs an issuer pays for each transaction. In the retailers’ view, the Federal Reserve violated the Durbin Amendment by setting a universal cap based on averages, creating a third cost category, and giving itself broad power to include all costs. The retailers also claimed that Regulation II includes banned costs, imposes a one-size-fits-all cap, and ignores the amendment’s focus on issuer-specific and transaction-specific fees.
But ABA pointed out that the Durbin Amendment requires interchange fees to reflect the actual costs an issuer incurs for a transaction and to remain reasonable and proportional. The amendment directs the Fed to set standards based on specific costs such as authorization, clearance, and settlement, while prohibiting the inclusion of unrelated expenses. However, Congress did not mention a third category — transaction-specific costs. ABA argued that this omission limits the Fed’s ability to define fair interchange fees as Congress intended. ABA also pointed out that issuers face higher costs for electronic debit transactions than the amendment recognizes. If Congress wanted to restrict cost recovery, it would have declared this explicitly. Instead, the Durbin Amendment allows the Fed to consider all costs an issuer faces for a debit transaction when setting a reasonable and proportional fee. Therefore, the Durbin Amendment ensures that interchange fees fully reflect the costs issuers bear.
ABA also argued that the Durbin Amendment permits all four cost categories the retailers challenged. The Fed correctly determined that the baseline covers these categories: fixed authorization, clearing and settlement costs; transaction-monitoring costs; network processing fees; and fraud-loss adjustments based on transaction value. The Fed included these costs in the interchange fee because issuers incur them for specific transactions, which the amendment allows.
ABA argued that a uniform standard for all issuers complies with the Durbin Amendment. In response to the retailers’ claim that the law requires issuer-specific caps, ABA explained that such a system would be nearly impossible to implement. ABA urged the court to reject the argument, stressing that Congress does not intend to pass unworkable or absurd laws.
Finally, ABA argued that the retailers’ brief made false and misleading claims. ABA pointed out that the retailers wrongly claimed Regulation II let banks earn record profits and that merchants shared savings with consumers. ABA also noted that the brief ignored key issues, including the costs of other payment methods, how covering actual costs makes debit cards safe and efficient, and how Regulation II affects community banks and credit unions.
Bottom Line: In February, ABA also filed an amicus brief in Corner Post Inc.’s lawsuit challenging Regulation II.
Documents: Brief
