On Tuesday, TCF National Bank filed a federal lawsuit challenging the constitutionality of the Durbin Amendment.  The Amendment, as part of the Dodd-Frank financial reform bill Congress passed in July, regulates debit card interchange beginning next year.  The Board of Governors of the Federal Reserve System (Fed) is mandated with implementing debit card interchange rules.

To help bring some clarity to the lawsuit, TSG discussed it with attorneys Holli Targan, a Partner at Jaffe, Raitt, Heuer & Weiss, as well as Kevin Kidd, a Partner at Waller Landsen and Chris Phillips, an Associate at  Waller Landsen. 

TCF’s Basis of the Lawsuit: Durbin is Unconstitutional

·         TCF’s argument draws from precedent rulings on a number of cases to argue the Amendment is unconstitutional, based on three allegations

1.        The Fed is inherently constrained by the language of the Amendment since it is mandated that it must implement “reasonable and proportional” debit card interchange; consequently, any rule set forth by the Fed is in violation of the Due Process Clause of the Fifth Amendment to the Constitution

2.       The Amendment’s targeting of only the largest 105 U.S. banks is an irrational distinction that denies the largest banks the equal protection of the laws, stated in the Equal Protection Clause of the Fourteenth Amendment, as applied through the Due Process Clause of the Fifth Amendment

3.       The legislative history of the Amendment does not reveal any rational for the adoption of the regulatory structure; additionally, it is contradictory to the purpose of the Dodd-Frank as it is likely to put additional strains on key banking institutions the Act was intended to shore up

What is TCF Seeking: To Stop Enforcement of the Amendment

·         Step #1: TCF is asking the court to issue a declaratory judgment, stopping enforcement of the Amendment – for this to occur, the court would have to rule that at its current face value, the Amendment is unconstitutional

o   This is unlikely to occur as consequences of the Amendment remain unclear

§  TCF says its debit card yield is 1.35% of the transaction ticket, and that after regulation, the yield will drop by 80% – since no rules have yet to be set, it is impossible to know the impact the rules might have

§  The draft of the rules will be released by January 2011, and the Fed must issue final rules no later than March 20, 2011, taking effect July 21, 2011

·         Step #2: Assuming declaratory judgment is denied, TCF simultaneously asked the court to issue a preliminary injunction, requesting the court to stop any enforcement of any Fed interchange rules until the merits of the law can be argued in a hearing

o   TCF states that they will be caused irreparable harm should the regulation be enforced and that maintaining the status quo until court hearings are completed and a judgment can be made is a prudent action for the court to take

o   The government has 60 days to respond to the complaint; TCF then has 60 days to counter the government’s response

Does TCF Have a Case: Too Early to Tell

·         The uncertainty to what kind of regulations the Fed will establish make it unclear if TCF has a case

o   The plaintiff must be able to show that they are disadvantaged to have a case; until regulations are clear, it is unknown how strong TCF’s case is

o   Should the Fed establish regulations that dictate debit interchange must be capped at a specific amount, TCF’s argument would be bolstered

o   For example, The Harkin Amendment, which was introduced but not included in the Dodd-Frank financial reform bill, set an upper limit of ATM processing fees at 50 cents per transaction – had it been included, this amendment may have likely been deemed unconstitutional

What’s Next: Status Quo Followed by Years of Litigation

·         Until the specifics of the regulation are established, banks will continue to operate as if the rules will in fact be issued

·         Once the rules are established, many other banks will initiate lawsuits against the validity of the Amendment

·         This litigation may go on for years; at this point, plaintiffs’ best hope for success may be via the appellate court system, with an ultimate decision made in the U.S. Supreme Court, where, with its current make-up, the ruling may be favorable

This case is groundbreaking – in its history, the Payments Industry has faced limited government regulation, and therefore, has never had to challenge the grounds of implementation of such rules