On July 13, a merchant challenging the Fed’s Regulation II, which caps debit card interchange fees, completed briefing in its appeal before the U.S. Court of Appeals for the 6th Circuit, arguing that the Fed’s debit-card interchange fee standard exceeds the statutory authority granted under the Durbin Amendment and is arbitrary and capricious. As previously covered by InfoBytes, the lower court granted summary judgment for the Fed, and, in response, the merchant appealed to the 6th Circuit (covered here).

In its opening brief, the merchant argued that the Durbin Amendment requires the Fed to distinguish between two categories of costs when setting interchange fees: incremental costs tied to a particular transaction’s authorization, clearance, and settlement, which the statute permits the Fed to consider, and other costs not specific to a particular transaction, which the statute prohibits the Fed from considering. The merchant contended that Regulation II unlawfully created an “unwritten third category of recoverable costs”; improperly included fixed costs, transaction-monitoring costs, fraud losses, and network-processing fees; and imposed a uniform cap despite statutory language requiring issuer- and transaction-specific fees. The merchant further argued that the rule was arbitrary and capricious because the Fed failed to adequately consider the functional similarity between debit-card and checking transactions and failed to define key terms distinguishing permissible from prohibited costs.

In its response brief, the Fed defended Regulation II, arguing that the Durbin Amendment granted it “substantial discretion” to establish fee standards and that the statute did not prohibit it from considering costs, such as transaction-monitoring costs and network-processing fees, that are specific to a particular debit-card transaction. The Fed argued that the merchant’s interpretation would render the Fed’s role in implementing the statute “functionally ministerial,” contrary to Congress’s directive that the Fed exercise judgment in establishing fee standards. The Fed also argued that the statute permits a uniform fee cap and that its rulemaking process, including its consideration of similarities between debit-card and checking transactions, was not arbitrary or capricious, while alternatively suggesting that any errors in its analysis should result in a remand without vacatur rather than vacatur of the rule.

In its reply brief, the merchant countered that the Fed’s defense of its “delegated discretion” amounts to the same result courts previously reached by applying deference under the now-overruled Chevron doctrine, arguing that this court must independently determine the statute’s best reading and enforce the specific cost-consideration limits Congress imposed under the Durbin Amendment. The merchant also disputed the Fed’s characterization of its position as rendering the Fed’s role merely “ministerial,” arguing that the Fed retains discretion to determine what fee standards are reasonable and proportional once it has properly identified which costs the statute permits it to weigh.

On the statute’s use of differently worded provisions to describe permitted and prohibited costs, the merchant argued that the two provisions are complementary, not “non-interlocking,” describing a single dividing line between the two categories of costs from opposite directions rather than leaving room for a third, unwritten category. It further reiterated that network-processing fees and the uniform fee standard cannot be reconciled with the statute’s transaction-specific language, urging reversal of the district court’s judgment.