Why Merchants Lost The Durbin Appeal (And Billions)
In a swift decision, a three-judge panel of the D.C. Circuit Court of Appeals upheld the Federal Reserve Board’s final rules on debit card swipe fees and routing, reversing Judge Leon’s stinging decision in favor of retailers. It turns out that if only Congress had used “that” instead of “which” the merchants might have billions more.
The D.C. Circuit Court of Appeals sided with the Federal Reserve Board in upholding virtually all aspects of the board’s interpretation of the Durbin Amendment and its final rules concerning interchange fees and routing. In a 38-page decision, it sent one minor issue concerning the inclusion of transaction-monitoring costs in the interchange fee back to Judge Leon. Otherwise, it reversed Judge Leon’s lower court decision in favor of the merchants. The court concluded that the Federal Reserve Board deserved a lot of deference in interpreting the Durbin Amendment.
The court started by taking a swipe at the sloppy drafting by Congress. “Perhaps unsurprising given that the Durbin Amendment was crafted in conference committee at the eleventh hour, its language is confusing and its structure convoluted.” As it turns out, English grammar more so than economics was central to the court’s analysis.
The Multibillion Dollar ‘That’
The court’s interchange fee analysis, on which billions of dollars of bank revenue and merchant costs depend, examined the use of “which” rather than “that” and the ramifications of not including a comma before the which. By concluding that the “which” in Congress’ “other costs incurred by an issuer which are not specific to a particular electronic debit transaction” as a restrictive clause. The court concluded, crucially, that the Federal Reserve Board had properly concluded that there was a third category of costs that it could consider if it wanted to. According to the court’s analysis, if Congress had used “that” instead of “which,” the merchants might have saved billions of dollars in interchange fees.
Deference to the Fed
The court decided that the Federal Reserve Board did a reasonable job of interpreting a piece of legislation that was not artfully crafted. It followed precedence in giving great deference to regulators who are asked to implement Congressional legislation.
The court’s decision isn’t necessarily the end of the battle between the merchants, the banks, and the Fed. The merchants can appeal the three-judge decision to the full Court of Appeals. The appeals court can decide whether to take them up on that. The merchants also can ask the Supreme Court to review it.
For now, though, the Federal Reserve Board rules on debit interchange fees and routing stand.