Regulation II
Corner Post Inc. v. Board of Governors of the Federal Reserve System
Date: Aug. 6, 2025
Issue: Whether Regulation II’s standard for reasonable and proportional interchange fees exceeds the Federal Reserve’s (the Fed) statutory authority and contradicts the Durbin Amendment.
Case Summary: Judge Daniel M. Traynor of the U.S. District Court for the District of North Dakota vacated Reg. II, holding that the rule is contrary to law and the Fed exceeded its statutory authority.
Under the Durbin Amendment, the Fed must “distinguish between … the incremental cost incurred by an issuer for [its] role in the authorization, clearance, or settlement of a particular electronic debit transaction” and “other costs incurred by an issuer which are not specific to a particular electronic debit transaction.” The Fed also must consider the incremental costs incurred by an issuer for its role in the transaction when determining if an interchange fee is reasonable and proportional.
In 2011, the Fed promulgated Reg. II, which permits issuers to recoup not only incremental authorization, clearance or settlement (ACS) costs but also fixed ACS costs, fraud losses, transaction-monitoring expenses, and network processing fees. Reg. II also sets a universal fee cap of 21 cents plus five basis points of the value of the transaction (and allowed a one-cent adjustment if the issuer implements fraud prevention standards).
A different group of retailers first challenged Reg. II in D.C. federal court in 2013, which concluded Reg. II’s interchange fee provisions violated the Administrative Procedure Act (APA). On appeal, the D.C. Circuit reversed, applying Chevron deference that existed at the time. It concluded the Board’s consideration of fixed ACS costs, network processing fees, issuer fraud losses, and transactions-monitoring costs was permissible, and thus deferred to the Board’s interpretation.
On April 29, 2021, Corner Post filed a complaint in North Dakota federal court challenging Reg. II. The Board moved to dismiss as untimely under the six-year statute of limitations. Granting the motion, Judge Traynor ruled that Corner Post’s claims were time-barred because they first accrued in July 2011 when the Board published the rule in the Federal Register, rather than when Corner Post opened for business in 2018. The Eighth Circuit affirmed, but the U.S. Supreme Court reversed. In a 6-3 decision written by Justice Amy Coney Barrett, the U.S. Supreme Court ruled the APA’s six-year statute of limitations does not accrue until the plaintiff is injured by final agency action.
On remand, the parties agreed to a briefing schedule to address Corner Post’s claims on cross-motions for summary judgment. The Bank Policy Institute and The Clearing House (BPI & TCH) moved to intervene, and ABA filed an amicus brief in support. Countering the retailers, ABA argued that including certain cost categories in the interchange fee cap aligns with the Durbin Amendment’s text and purpose, and the retailers are wrong that Reg. II allows banks to achieve record profits and that merchants passed savings on to consumers.
Judge Traynor granted the retailers’ motion for summary judgment and vacated Reg. II. The court held that the Fed’s statutory interpretation did not qualify for deferential review. Relying on the U.S. Supreme Court’s decision in Loper Bright, the court rejected the Fed’s request for deference to its interpretation of Reg. II. In Loper Bright, the Supreme Court overturned the Chevron framework, ruling courts should exercise “independent judgment” to determine the “best reading” of statutory language without deferring to agencies’ interpretation.
Judge Traynor emphasized the court — not the Fed — must determine the “best” reading of the Durbin Amendment because courts alone wield ultimate statutory authority. Judge Traynor rejected the Fed’s cited Interstate Commerce Commission rate-making cases to argue that Congress had granted agencies broad discretion. The court, however, found those cases inapposite and even contrary to the Fed’s position, and it denied the agency the discretion it sought.
Moving to interpreting the Durbin Amendment, Judge Traynor analyzed the statute’s grammar and syntax and concluded its structure, and plain language created a bifurcated cost system: issuers could include only “incremental” ACS costs, while all other costs were excluded. While Congress permitted only incremental costs tied to a specific transaction, the Fed classified fixed ACS costs and fraud-related expenses as recoverable. The court explained the Durbin Amendment assigned transaction-monitoring costs solely to the fraud-prevention adjustment and that fraud losses functioned as insurance payouts rather than legitimate transaction costs. The court also explained that network processing fees compensated networks, not issuers, and that Congress explicitly prohibited their inclusion in interchange fees. By incorporating all four costs, the Fed exceeded its statutory authority and violated the Durbin Amendment.
Judge Traynor also rejected Reg. II’s universal cap. The retailers argued that Reg. II should tailor interchange fees to be issuer-specific and transaction-specific. The court agreed, stressing that Reg. II’s “one-size-fits-all standard does not comport with the Durbin Amendment’s text or logic,” and the Fed’s use of the “representative issuer” model rather than an issuer-specific and transaction-specific model is contrary to law.
Bottom Line: The Fed is expected to appeal to the Eighth Circuit. Meanwhile, Judge Traynor stayed the vacatur of Reg. II pending the resolution of the appeal “to prevent interchange transaction fees from becoming a completely unregulated market.” The stay does not impact a current pending proposal by Fed that would lower the current fee cap from 21 cents per transaction to 14.4 cents “based on the latest data reported to the [Fed] by large debit card issuers.”
Documents: Opinion
