U.S. Court of Appeals Rules in Favor of Durbin Amendment Rules

by Eversheds Sutherland (US) LLP

On March 21, 2014, in NACS, et. al. v. Board of Governors of the Federal Reserve System, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of the Federal Reserve’s interpretation of the Durbin Amendment.  NACS and other merchant groups challenged the regulations promulgated by the Federal Reserve to implement the Durbin Amendment and won summary judgment in District Court. The Court of Appeals, however, overruled the District Court’s summary judgment and, as a result, the Federal Reserve’s Durbin Amendment regulations should remain largely intact.

In order to implement the interchange fee restrictions under the Durbin Amendment, the Federal Reserve adopted regulations that limit the interchange fee for a debit card transaction to $0.21 plus five basis points (0.05%) of a transaction’s value, plus an additional $0.01 per transaction if the issuer implements certain fraud-prevention measures.1 In calculating this limit, the Federal Reserve determined that issuers should be able to recover through debit card interchange fees: (i) average variable costs incurred for authorizing, clearing and settling debit card transactions, (ii) costs incurred as a result of transaction-monitoring to prevent fraud, (iii) fraud losses, and (iv) network processing fees. 

The merchant groups objected to the Federal Reserve’s interchange fee rules, arguing that the Durbin Amendment allowed issuers to recover only average variable costs for authorizing, clearing and settling debit card transactions (Incremental ACS Costs), and not the other costs that were included in the Federal Reserve’s rulemaking analysis. The District Court agreed that the Federal Reserve could only consider Incremental ACS Costs of individual debit transactions and granted summary judgment against the Federal Reserve. The Court of Appeals overruled the District Court, based on a different interpretation of the statutory language. 

The Durbin Amendment requires the Federal Reserve to distinguish between “the incremental cost incurred by an issuer…in the authorization, clearance, or settlement of a particular electronic debit transaction, which costs shall be considered” in setting the interchange fee limits, and “other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered” in setting the interchange fee limits.2 The Federal Reserve interpreted this statutory language to create three relevant categories of costs: (i) Incremental ACS Costs, which issuers must be allowed to recover through interchange fees, (ii) costs specific to a particular electronic debit transaction other than Incremental ACS Costs, which the Federal Reserve may, but is not required to, allow issuers to recover, and (iii) costs not specific to a particular electronic debit transaction, which the Federal Reserve may not allow issuers to recover. 

The merchant groups, however, argued that the Durbin Amendment bifurcates the universe of costs into two categories: (1) Incremental ACS Costs, which could be considered in determining costs to be included in debit interchange fees, and (2) all other costs (including fixed authorization, clearing and settlement costs), which are prohibited from being recovered through debit interchange fees. The merchant groups claimed that the costs incurred as a result of transaction-monitoring to prevent fraud, fraud losses and network processing fees should not have been considered in setting the debit interchange cap.   

The Court of Appeals ruled that the “other costs incurred by an issuer which are not specific to a particular electronic debit transaction, which costs shall not be considered” (emphasis added) is a restrictive (rather than descriptive) clause because the language, “which are not specific to a particular electronic debit transaction,” is not preceded by a comma. The court acknowledged that restrictive clauses often use the word “that” rather than “which,” but “which” can still create a restrictive clause when the clause is not offset by a comma. After interpreting the clause as a restrictive clause, the Court of Appeals determined that the Federal Reserve was reasonable in concluding that it was only prohibited from including costs not specific to a particular transaction in the interchange fee cap calculation, and conversely, the Federal Reserve could consider the types of costs specific to a transaction, in addition to incremental costs, in determining the interchange fee cap. 

The court remanded to the Federal Reserve for additional investigation or explanation its determination to include transaction-monitoring costs in the types of costs recoverable by issuers through debit interchange fees in light of the penny-per-transaction fraud-prevention adjustment under the Durbin Amendment. Otherwise, the Federal Reserve’s debit interchange regulations were upheld by the court.

The NACS and the other merchant groups also claimed that the Durbin Amendment’s network exclusivity provisions require at least two unaffiliated PIN debit networks and two unaffiliated signature debit networks to be enabled for a debit card. The merchant groups objected to the Federal Reserve’s regulations, which only require two unaffiliated debit networks of either type to be enabled for any debit card. The Court of Appeals found that the Federal Reserve’s interpretation of the statute on this point complied with the statutory requirement.

112 C.F.R. §§ 235.3 and 235.4.

215 U.S.C. § 1693o-2(a)(4)(B).


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Eversheds Sutherland (US) LLP | Attorney Advertising

Written by:

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.