On October 26, the U.S. Court of Appeals for the 8th Circuit affirmed a district court decision vacating the Fed’s 21-cent per-transaction cap on debit card interchange fees under Regulation II. The 8th Circuit stated that the Durbin Amendment requires the Fed to consider the “incremental cost” of a particular transaction, which the court read as marginal cost, and not fixed costs. The statute directs the Fed to distinguish between the incremental cost incurred in authorizing, clearing or settling “a particular electronic debit transaction,” which “shall be considered,” and other costs “not specific to a particular electronic debit transaction,” which “shall not be.” In adopting Regulation II, the Fed treated that language as ambiguous and included certain fixed costs in the cap. After the Supreme Court held in 2024 that a merchant’s APA challenge to the rule was timely (previously covered by InfoBytes here), the district court found that the Fed had improperly considered costs that were not transaction-specific. The district court ordered vacatur but stayed its decision pending the Fed’s appeal in the 8th Circuit.

Reviewing the case de novo, the panel declined to defer to the Fed’s interpretation of the Durbin Amendment, citing the Supreme Court’s 2024 decision overturning the Chevron doctrine (covered by InfoBytes here) and noting that the Durbin Amendment itself does not alter that analysis. The court stated that Regulation II did not define “incremental cost,” the only cost the statute directs the Fed to consider, and, relying in part on the statute’s reference to “a particular” transaction, concluded that the term means the cost of a single transaction. Although an expense such as fraud-detection software may be fixed for one bank and charged per transaction for another, the court said the statute draws the line regardless and the Fed may not “revise Congress’s work.”

The court emphasized that fees need not precisely track marginal cost and that the Fed may use a proxy, “perhaps even average variable cost,” if it bears a “reasonable” relationship to banks’ marginal costs, but said the Fed must at a minimum separate transaction-specific costs from those that are not. Having set aside the rule on this ground, the court did not reach the merchant’s other arguments and remanded the issue to the Fed to develop a fee structure consistent with the statute. The decision takes effect only when the court issues its mandate, seven days after either the 45-day deadline to seek rehearing expires or the court enters an order denying rehearing. As previously covered by InfoBytes, a separate challenge to Regulation II is pending before the 6th Circuit after a federal district court in Kentucky upheld the rule (covered here).