By Patti Murphy
Payments has become a litigious business, and that doesn't bode well for the card brands or banks. Two recent judicial actions demonstrate this. First a federal district court judge rejected a proposal that would have settled the decades-long feud between the card brands and merchants regarding interchange and related issues.
Then the U.S. Supreme Court opened the floodgates to litigation over Federal Reserve regulations when it sided with a merchant looking to challenge the debit card interchange cap imposed by the Fed in accordance with the Durbin Amendment to the Dodd-Frank Act.
[The ruling was separate from the so-called Chevron decision, handed down by the Supreme Court in June, which curtailed the power of federal agencies to interpret the laws they administer, shifting that job to the courts. But it had the same effect; it was just specific to the Fed.]
Here's the really scary thing about the Supreme Court decision on debit card caps: the merchant, a North Dakota truck stop, didn't even open for business until after the presumed statute of limitations on such legal challenges had run its course. The statute of limitations is six years.
After the Durbin Amendment became law, the Fed capped debit card interchange at 21 cents per transaction plus 5 basis points (0.05 percent) and an extra penny for meeting certain fraud prevention criteria. The cap applies to financial institutions with $10 billion or more in assets. Previously, debit card interchange averaged about 45 cents.
Nobody was happy about the new cap. FIs complained it was too low; merchants countered it was too high.
Last year the Fed laid out a plan to slash the cap to 14.4 percent plus 4 basis points (0.04 percent) and 1.3 cents for fraud prevention beginning in 2025. That proposal spurred an avalanche of comment letters to the Fed, most in opposition. Even one member of the Board of Governors, Governor Michelle Bowman, opposed the plan.
And at least one member of Congress has taken a stand. Senator Ted Budd, R-N.C., introduced legislation in June that would require the Fed to hit the pause button on the proposal until it completes a full quantitative impact assessment of the effect on consumer costs and the economy.
The National Retail Federation stated that it wants the Fed to lower the cap to 10.5 cents, and to ditch the fraud prevention component since the adoption of EMV shifted fraud costs to merchants.
The Supreme Court's ruling (issued on July 1, 2024) clearly favors merchants. That's because it ruled the statute of limitations for suing a federal agency (like the Fed) regarding a regulation (like Reg II which implements the Durbin Amendment) does not commence until a suing party (in this case Corner Post, a truck stop) opens for business. The Fed had argued that the statute of limitations commenced when the cap took effect in 2011 and ended in 2017. Corner Post opened for business in 2018 and joined a class-action lawsuit challenging the Fed-imposed cap in 2021.
"Logically, this limitations period makes sense because the business has not been injured by the regulation until it begins paying the [interchange] fees, but it is significant because the business likely knew of the damages it was about to incur upon opening and opened the business anyway," Matthew Luciani of Global Legal Law Firm explained.
"Since it opened, Corner Post has paid hundreds of thousands of dollars in interchange fees – which has meant higher prices for customers," Justice Amy Comer Barrett wrote in an opinion laying out the court's ruling. "The [Fed] Board raises several arguments to support its position, but none work," she added.
Luciani commented "the effect of this decision could be sweeping because it could open the hypothetical 'floodgates' of litigation" not just over interchange, but regarding any government regulation.
The NRF applauded the Supreme Court's ruling. "The bottom line is that a small business harmed by a faulty regulation should not be denied its day in court based on a technicality," said Stephanie Martz, NRF's chief administrative officer and general counsel. That technicality being when it opened for business.
The NRF is one of a handful of groups that has been battling with the card brands and FIs over interchange. It helped coin the phrase "swipe fee" rendering interchange more relatable to the general public.
The federation was also a lead litigant in a class-action lawsuit, filed in 2005, alleging the card brands colluded to keep interchange rates high, in effect violating antitrust laws. Visa, Mastercard and the banks settled a portion of that lawsuit in 2018, resulting in interchange rebates to merchants totaling about $6 billion for interchange paid between 2004 and 2019. The deadline for claiming a slice of that money is Aug. 31.
It is unclear how many merchants have done the work to claim their share of the kitty. But Louis Teplis, CEO of Collectively, a firm that helps consumers and businesses collect monies from class action suits, said in a recent Merchant Sales Podcast that only about 35 percent of merchants have filed claims for their share money. He estimated that those claims represent about 60 percent of the settlement funds.
(I can't help but wonder how many merchants received letters informing them they could claim a share of the settlement and threw them in the trash thinking they were junk mail.)
The remaining aspects of that lawsuit appeared to be on the verge of finally being settled in March when the parties hammered out a proposed settlement that would have lowered interchange by four basis points and put the brakes on interchange hikes for four years. It also would've eliminated anti-steering rules and simplified rules around dual pricing (surcharging specifically).
But Chief Justice Margo K. Brodie of the U.S. District Court for the Eastern District of New York torpedoed the plan, asserting that it favored the card brands over merchants, and didn't treat large and small merchants "equitably" in terms of lower interchange and surcharging rights.
The NRF welcomed the judge's decision, asserting the settlement had "effectively frozen us out" of the negotiations, instead working with attorneys for a small group of merchants. According to court documents, those attorneys represented Target, Grubhub, and a handful of smaller merchants.
Now the case seems headed for trial, although a revised settlement is possible. My guess is that it will end up going to trial, as the card brands seem ready to dig in and fight it out.
"We continue to believe that the proposed settlement agreement was the appropriate resolution resulting from lengthy and thoughtful discussions with the merchant class," a representative for Visa wrote in an email to The Green Sheet.
"We believe the settlement presented a fair resolution of this long-standing dispute, most notably by giving business owners more flexibility in how they manage their card activities," added a Mastercard representative in an email. 
Patti Murphy, self-described payments maven of the fourth estate, is senior editor at the Green Sheet. She also co-hosts the Merchant Sales Podcast, and is president of ProScribes Ink.
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