8th Circuit Affirms Vacatur of Federal Reserve’s Debit Card Interchange Fee Reg

The U.S. Court of Appeals for the Eighth Circuit has affirmed a lower court’s order vacating the Federal Reserve Board of Governors’ Regulation II, which regulates debit card interchange fees, because its fee limit applied regardless of actual cost, and because the Board considered fixed costs in violation of the Dodd–Frank Act’s grant of regulatory authority to the Board.

By way of background, the Durbin Amendment (part of the Dodd–Frank Act) directed the Board to establish standards for assessing whether the amount of interchange fees on debit card transactions are “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.”  In establishing these standards, the Board may not consider fixed costs — costs that “are not specific to a particular electronic debit transaction.”  The Board promulgated Regulation II, which in relevant part limited debit card interchange fees to 21 cents (plus 0.05% of the transaction’s value).

A truck stop and convenience store sued the Board in North Dakota federal court, alleging that Regulation II exceeded the agency’s statutory authority under the Dodd–Frank Act, in violation of the Administrative Procedure Act (APA).  The lower court granted summary judgment in favor of the convenience store and vacated the 21-cent fee limit.  Regulation II was not in accordance with law (in violation of the APA), the court reasoned, because the 21-cent limit applied regardless of the actual cost of the transaction, and inappropriately considered fixed costs.  The Board appealed.

The Eighth Circuit affirmed and remanded for the Board to develop a new fee structure that complies with the statute’s plain language.  The court of appeals held that the Board disregarded Congress’ language instructing the Board to consider “incremental cost incurred.”  Relying on economic textbook and treatise definitions, the court of appeals defined “incremental cost” as “marginal cost,” which in this context means “the amount added to the cardholder bank’s total cost by one ‘additional’ electronic debit transaction, the ‘unit of output’ the statute covers.”  Because the Board did not consider the marginal cost incurred by each particular transaction, the court of appeals held that Regulation II was not in accordance with the statute.  Relatedly, the court of appeals held that the regulation’s blanket 21-cent limit improperly considered fixed costs.