Federal Court Upholds Illinois Limitation on Swipe Fees

A federal district judge in Illinois, who had previously enjoined enforcement of the Illinois Interchange Fee Prohibition Act (IFPA), has now issued a decision upholding the challenged ban on swipe fees on taxes and tips, but enjoining the law’s limitation on the use of transaction data.  The IFPA contains two provisions that were challenged based on their impact on national banks under the National Bank Act:

• The interchange fee provision bans all parties involved in processing card transactions from charging merchants interchange fees on state and local sales taxes and tips.
• The data usage limitation provision prohibits any entity involved in a card transaction (except the merchant) from distributing, exchanging, transferring, disseminating, or using the transaction data for any purpose other than for processing the transaction. 

After explaining the complexity of the global card payment system and the various bank and non-bank parties involved in card transactions, the court reviewed both provisions to determine whether either prevents or significantly interferes with the exercise of a national bank’s powers such that it is preempted by the National Bank Act.

In upholding the interchange fee provision, the court found that although implementing the provision would be highly disruptive, requiring additional investments, hires, and new procedures to replace the current process for authorizing and settling debit and credit card transactions, preemption was not available with respect to the interchange fees charged by the non-bank payment card networks because in the court’s view third parties (and not the national banks) set the fees in question.

The court granted, however, a permanent injunction against enforcement of the IFPA’s data usage limitation provision as to nationally chartered banks and federal saving institutions.  While acknowledging that the Illinois legislature may have a legitimate interest in the privacy and usage of its citizens’ data, the court found that the data usage limitation directly constrains a national bank’s express power to process data, where data includes anything of value in banking and financial decisions.

The court further held that preemption preventing enforcement of the data usage limitation extends to out-of-state State banks under the Riegle-Neal Act, and to federal credit unions under incidental powers granted in the Federal Credit Union Act.  Importantly, the court also applied principles of equity to extend relief to participants in the payment system to the extent they are facilitating the preempted institutions’ powers implicated by the data usage limitation, in order to be able to grant full relief to the plaintiffs.