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On September 12, the U.S. District Court for the Eastern District of Kentucky upheld the Federal Reserve Board's Regulation II cap on debit-card interchange fees, rejecting a merchant's Administrative Procedure Act challenge. The court concluded the rule is neither "contrary to law" nor "arbitrary and capricious," interpreting the Dodd-Frank Act's Durbin Amendment under the Electronic Fund Transfer Act to permit consideration of certain transaction-related costs when setting the cap.
The court explained that while the statute requires the Board to separate costs that must be included from those that must not, it does not prohibit consideration of other transaction-specific costs. Judge Van Tatenhove held that Regulation II permissibly accounted for items such as fixed authorization expenses, fraud losses, monitoring systems, and network processing fees, and that adopting a uniform standard was reasonable given the scale of debit-card transactions.
Putting It Into Practice: The Kentucky ruling comes shortly after a North Dakota federal court reached the opposite conclusion and vacated Regulation II, though that order is stayed pending appeal (previously discussed here). With courts now split, the regulatory environment is increasingly unsettled. Merchants and processors should evaluate how fee structures and contractual terms might be affected if appellate courts modify or invalidate the rule.
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