The U.S. Court of Appeals for the District of Columbia Circuit recently reversed a lower court decision and upheld the interchange rules adopted by the Federal Reserve Board (FRB) under the so-called Durbin Amendment to the Dodd-Frank Act. The decision in NACS v. Board of Governors of the Federal Reserve System should save the banking industry billions of dollars and considerable practical difficulties.
The principal legal issue in NACS was whether the FRB adopted a reasonable (but not necessarily the best) construction of the Durbin Amendment's limits on debit card interchange fees and prohibitions on network exclusivity. Under the U.S. Supreme Court's governing Chevron standard, an agency's reading of a statute must typically be accepted by the courts, even if it is not their preferred interpretation, if the agency's reading is not utterly foreclosed.
The lower court concluded that Congress divided the universe of debit card costs into two categories:
Authorization, clearance, and settlement (ACS) costs particular to a single electronic transaction, which must be compensated
Other costs "which are not specific to a particular electronic transaction," which may not be compensated
It rejected the FRB's decision to allow issuers compensation for a third cost category perceived by the FRB—variable non-ACS costs.
In doing so, the court relied heavily on grammatical arguments and a floor statement by Senator Dick Durbin (D-IL) that described the intended effect of his Amendment. The Court of Appeals made no mention of the legislative history—apparently concluding that a statement of a single senator could not conclusively evidence the intent of the entire Congress—and it marshaled grammar and style books to show that the lower court's grammatical interpretation of the statute was not the only possible reading of the statute. The opinion represents a tour de force in graduate-level grammar, addressing the meaning of commas, the difference between the words "that" and "which," and descriptive versus restrictive clauses.
The lower court also rejected the FRB's position on network exclusivity—that it suffices if a debit card can operate on two unaffiliated networks, even if one is a signature network and the other is a PIN network. In doing so, the court argued that hotel and car rental transactions cannot be authenticated using the PIN method and that Internet, phone, and mail transactions are typically incompatible with PIN authorization technology.
By contrast, the Court of Appeals concluded that it was "merchants, not issuers and networks, [that] limit their own options when they refuse to accept PIN debit, and cardholders, not issuers or networks, [who] limit merchants' options when given the ability to choose how to process transactions."