Regulation II
Linney’s Pizza LLC. v. Board of Governors of the Federal Reserve System
Date: Sept. 15, 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: Judge Gregory Van Tatenhove of the Eastern District of Kentucky upheld Reg. II, creating a split from Judge Daniel M. Traynor of the U.S. District Court for the District of North Dakota’s decision to vacate the rule.
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 (ACS) 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 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 transaction value (and allows a one-cent adjustment if the issuer implements fraud prevention standards).
On Dec. 9, 2022, Linney’s Pizza sued the Fed in the Eastern District of Kentucky to invalidate Reg. II’s standard for reasonable and proportional interchange fees. 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 (the intervenors) LLC filed a motion to intervene and defend Reg. II against the retailers’ challenge. Then, on March 19, 2025, the intervenors moved for summary judgment. ABA also filed an amicus brief urging the court to grant the intervenors’ motion for summary judgment, arguing Reg. II aligns with the Durbin Amendment’s text and purpose, and that the retailers ignore the impact of Reg. II on community banks and credit unions.
Judge Van Tatenhove granted the Fed’s motion for summary judgment. The court first addressed deference and the major questions doctrine. The Fed argued that the Durbin Amendment empowered it to “fill in the details” of interchange fee rules, even after Loper Bright overturned Chevron. Linney’s Pizza countered that Durbin imposed strict “guardrails” barring the Fed from considering certain costs. The court noted that Durbin includes broad, discretionary language empowering the Fed to make decisions on the interchange fee cap. At the same time, the court concluded post-Loper Bright, it would examine the guardrails independently without automatic deference. Linney’s Pizza also argued Reg. II raised a “major question” because debit card fees involve billions of dollars, but the court rejected that claim. Citing West Virginia v. EPA, it ruled the major questions doctrine applies only when an agency asserts sweeping new power, not when carrying out a direct congressional mandate. The court concluded that Reg. II validly implements the Durbin Amendment and must be reviewed under ordinary statutory interpretation.
The court rejected Linney’s Pizza’s claim that Reg. II violated the Durbin Amendment. Linney’s Pizza argued the statute allowed only two cost categories — those the Fed must consider and those it must not — and that Reg. II unlawfully added a third. The Fed, however, interpreted the statute as allowing three categories: incremental ACS costs that must be considered, non-transaction-specific costs that must not, and non-incremental ACS costs tied to a transaction that may be considered. The court agreed with the Fed, finding that “distinguish” does not mean only two groups and that the statute’s context supports a broader reading, permitting the Fed to consider additional costs within statutory limits.
The court also rejected Linney’s Pizza’s challenges to four cost categories — fixed ACS costs, transaction-monitoring costs, fraud-loss adjustments, and network processing fees—as well as its claim against a uniform fee cap. It held that fixed ACS costs are inherent to every transaction, transaction-monitoring costs are integral to authorization, fraud losses tied to specific transactions qualify as costs without conflicting with the fraud-prevention adjustment, and network processing fees are transaction-specific and necessary for ACS.
Additionally, the court rejected Linney Pizza’s argument that the Fed unlawfully sets a “one-size-fits-all cap” when the Durbin Amendment requires the fee standard to be transaction- and issuer-specific. Linney’s Pizza argued that the statute requires interchange fees to be calculated on an issuer-specific and transaction-specific basis, pointing to the definite article “the.” It claimed that “the issuer” and “the transaction” must mean that specific issuer and that particular transaction, not a generalized or representative version. The Fed countered that “the” functions generically, not literally, and argued that only this interpretation keeps the statute coherent. It stressed that transaction-specific fee calculations would be virtually impossible to implement across billions of debit transactions. The court acknowledged that both sides presented plausible textual arguments but sided with the Fed. The court held that practical realities, statutory purpose, and regulatory history support a representative approach to issuers and transactions rather than individualized fee calculations. The court therefore concluded that the Durbin Amendment does not mandate issuer- or transaction-specific interchange fees and upheld the Fed’s uniform approach as reasonable.
Finally, the court concluded that Reg. II was not arbitrary and capricious. The court explained that a rule is arbitrary and capricious if an agency relies on improper factors, ignores key issues, contradicts the evidence, or offers an implausible explanation. Linney’s Pizza argued that the Fed failed to consider the similarity between debit-card and checking transactions as required by the Durbin Amendment. The court rejected this claim, finding that the Fed complied with the statute and adequately compared debit-card transactions to checking transactions. In Reg. II, the Fed noted that debit and check transactions share traits like account debits, electronic processing, merchant-paid fees, and similar settlement timelines, but differ because debit cards require real-time authorization, impose issuer costs, and operate outside par clearance. The court held that even Linney’s Pizza’s examples, such as network fees, showed the Fed had thoroughly considered both similarities and differences.
Bottom Line: Judge Van Tatenhove’s decision created a split from Judge Traynor’s Corner Post decision to vacate the rule.
Document: Opinion
