It might be unusual, but all sides in the Federal Reserve's debit interchange regulation battle have urged the court to leave the now-overturned regulation in place pending appeal.

U.S. District Court Judge Richard Leon dispatched two-thirds of the Federal Reserve's current debit interchange regulation on July 31, agreeing with the opinion of the case's merchant plaintiffs that the Fed had failed to follow the law in developing the regulation.

But Leon refrained from executing his decision until he heard from all parties to the case about what they believed the best course of action would be. 

The Fed appealed Leon's decision on Aug. 21. This week all sides urged him to leave the rules governing debit caps and provider networks in place until further appeals are exhausted.

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“The merchants fully support eventual (sic) vacatur of the existing Federal Reserve rules governing debit card interchange fees, but only when a replacement rule is in place properly limiting the interchange fee to the 'reasonable and proportional' amount actually contemplated by the Durbin Amendment,” the merchants requested in their brief to Leon.

Dropping the rule now would allow the credit card networks to jack up the interchange fees they charge on behalf of their bank clients, the merchants groups argued.

“Recent experience indicates that they likely would increase these fees substantially if left unregulated during the pendency of the appeal,” their brief argued.

“Thus, the plaintiffs vastly prefer the status quo – in which debit card interchange fees cannot be more than the 22-cent-plus-5-basis-point fee allowed by the current rule – to an unregulated 'free for all,' which would likely subject merchants to interchange fees well in excess of the Fed's current standard,” they concluded.

The merchants acknowledged that the court was surprised by their recommendation but maintained that recent experience has taught them that debit interchange rates almost always rise and never decline. 

“Thus, the only direction the fees would move if the existing rule is vacated before a new rule takes effect is up,” the merchants wrote.

Next Page: Doubts on Authority

Further, they doubted whether a court would have the authority to get the Federal Reserve to order any additional money they paid in debit interchange before a new rule was put into place be given back to them.

For its part, the Fed also supports keeping the existing rule in place, arguing first that doing so while it appealed Leon's decision meets the requirements of the Administrative Procedures Act and, secondarily, getting rid of the existing rule would leave in place the precise situation Congress sought to avoid in regulating debit interchange in the first place.

“These statutory provisions require the issuance of regulations by the (Fed) in order to effectuate the limitations the statute seeks to impose. Thus, if the regulations here were vacated by the district court, there would be no legally binding standards for determining the permissible amount of interchange fees an issuer could receive with respect to a debit card transaction and no limitations on exclusive routing restrictions imposed by issuers and payment networks on debit card transactions. Such a lack of restrictions would plainly frustrate the will of Congress and harm the Board, the plaintiffs, and the public,” the Federal Reserve contended.

In similar cases, the Fed argued, overturning an existing rule usually meant that a previous regulation that had been superseded would go into effect while litigation continued. 

But in this case, because this rule is the first one, there is no superseding rule to fall back upon, the Fed pointed out.

In a supplemental brief, the Fed also argued that the court lacked the authority to order the Fed to put a replacement debit rule into place while Leon's July 31 decision was being appealed.  

The Federal Reserve based its opinion on previous cases in which a district court was declared to have very limited jurisdiction over parts of a case that were being appealed. Further, even if a decision from the lower court were upheld, the lower court would have the authority to overturn the existing regulation and would not have the authority to require what would come next.

Although they had not been direct parties in the original case, Leon allowed a coalition of financial institutions and financial institution trade associations, including CUNA and NAFCU, to weigh in on the discussion since they issue debit cards. 

In its brief, the coalition agreed with the Fed that the court lacked the authority to require a new rule be put into place pending the appeal and also argued that issues which would need to be addressed would be complex and expensive for both the regulator and the industry.

“[S]eparate from the question of legal authority, the court should not require an

interim or expedited rule,” the coalition contended.  “A rush to issue a new rule will harm all affected interests, including consumers, and threaten the effective functioning, stability and security of the electronic debit card payments system.”