(CN) - The Federal Reserve "clearly disregarded Congress's statutory intent by inappropriately inflating all debit card transaction fees by billions of dollars," a federal judge ruled.
NACS, formerly known as the National Association of Convenience Stores, led five other entities in the lawsuit over the Fed's response to U.S. Sen. Dick Durbin's amendment to the Dodd-Frank Wall Street Reform and Protection Act of 2010.
The Illinois Democrat's plan sought to provide relief from escalating merchant fees associated with debit card use, which had risen an astounding 234 percent between 1998 and 2006.
It ordered the Federal Reserve to set "a reasonable and proportional" standard for interchange fees, which Visa and Mastercard charge consumers' and merchants' banks for their role in every debit transaction. The law ordered the Fed's board of governors to consider the functional similarity between debit and checking transactions - which are already required to clear within the Federal Reserve bank system - and determine Visa and Mastercard's actual costs in each debit transaction.
Congress also ordered the Fed's governors to establish rules that would prevent the networks from entering into exclusivity arrangements or keep future new networks from entering the marketplace. Initially, the Fed planned to limit the interchange fee to only costs associated with the authorization, clearing and settlement, or ACS, of debit transactions, excluding overhead costs and even an anti-fraud fee allowed under the Durbin plan.
Merchants greeted the board's initial proposal with enthusiasm. Networks and card issuers balked, however, lobbying to expand the list of allowable costs for any adopted interchange fee standard.
The board ultimately adopted a plan that allowed issuers to charge as high as 21 cents per transaction plus .05 percent of the transaction's value.
In defending its decision, which became permanent last year, the Fed claimed that it had the discretion to consider additional costs for which the Durbin Amendment was silent. It also added a 1-cent anti-fraud charge and ordered that two unaffiliated networks be available for each debit card, though it ordered no such requirement for authorization methods.
Industry associations and retailers - the plaintiffs in this action - sued the Fed before its decision even became final, seeking a declaration that the interchange fees and network nonexclusivity provisions are arbitrary, capricious, an abuse of discretion and therefore illegal. They accused the board of exceeding its statutory authority by adding allowable costs to the interchange fee, and blatantly disregarding the plain language of the Durbin Amendment by requiring that all debit cards have access to two unaffiliated networks rather than all debit transactions.
U.S. District Judge for the District of Columbia Richard Leon granted the plaintiffs summary judgment Wednesday, finding that the Fed's decision violated the Administrative Procedures Act.
"I have no difficulty concluding that the statutory language evidences an intent by Congress to bifurcate the entire universe of costs associated with interchange fees," Leon wrote (emphasis in original).
"By using strategically placed 'shall' and 'shall not' terms - which plainly indicate the inclusion of the first category of costs and exclusion of the second - Congress expressed its clear intent to separate costs that must be included in the interchange transaction fee standard and 'other costs' that must be excluded," Leon added.
In a friend of the court brief on behalf of the plaintiff, Sen. Durbin also confirmed that only ACS costs could be passed on in the interchange fee, according to the ruling.