Dive Brief:

• A federal appeals court on Friday vacated and remanded an Illinois law prohibiting interchange fees on the tax and tip portion of bills, arguing that a move by the Trump administration to preempt the law warrants further litigation at the District Court level.
• The Illinois Attorney General’s office argued that an “interim final order” by the Office of the Comptroller of the Currency last month preempting the law was invalid due to procedural flaws and did not affect the merits of the case. Bank and credit union plaintiffs in the case, along with the OCC, argued that the court should strike down the law because of the regulator’s action.
• “The district court should address these matters, and any related issues, before this court attempts to do so,” the 7th Circuit U.S. Court of Appeals said in the order Friday. The court canceled oral arguments that had been scheduled for May 13.

Dive Insight:

Four trade associations for banks and credit unions sued Illinois in August 2024 over the Interchange Fee Prohibition Act, two months after Gov. JB Pritzker signed it. In February, U.S. District Judge Virginia Kendall in Chicago upheld the law’s central part, ruling that the measure doesn’t directly regulate banks or infringe upon U.S. banking law.

The law was set to take effect on July 1. Last month, the OCC amended a rule allowing national banks to obtain interchange fees through “intermediaries, partners, payment networks, interchanges or other third parties.” 

The court’s decision Friday “demonstrates the strength of the OCC’s actions” in determining that the law is preempted by the National Bank Act, Scott Talbott, executive vice president of the Electronic Transactions Association, said in an email.

Rob Karr, CEO of the Illinois Retail Merchants Association, called the decision “standard operating procedure given the credit card companies’ attempt to insert a new issue at the appellate level.”

“We look forward to addressing this new issue before the lower federal court,” Karr said Friday in an email.

Spokespeople for the Illinois Bankers Association and the American Bankers Association, two of the plaintiffs, did not immediately respond to messages seeking comment on Friday.

Illinois was the first state to enact such a law, which inspired similar efforts in other states, where legislators have sought to rein in card-swipe fees. Restaurant and retail groups promoted the Illinois law as their members sought ways to curb the fees they pay when a consumer pays with a card. 

Separately this week, the Colorado General Assembly advanced a similar measure on Wednesday, with the House of Representatives following earlier Senate action on the bill to ban interchange assessment on sales taxes when consumers pay with a credit or debit card.

The bill has been sent to Colorado Gov. Jared Polis, who has not indicated his intentions.

One major question looming over these efforts to curb merchants’ card swipe fees is whether the National Bank Act preempts such state legislation.

In a brief with the appeals court filed last week, Illinois officials argued that the OCC “made no effort to comply” with the Administrative Procedure Act, rendering the agency’s rule change and order invalid.

In a brief filed Wednesday, a coalition of merchants supporting the state law said that the OCC’s preemption order and rule action were “substantively flawed because they rely on textbook arbitrary and capricious reasoning.”

“The rule and order rely on the banks’ arguments asserted in this case but entirely fail to consider the contentions advanced by the Attorney General and his supporting amici,” the merchants’ lawyers wrote.

Doug Kantor, general counsel for the National Association of Convenience Stores, said Friday that the OCC “has gone to extreme lengths to try to avoid having the court decide this in the normal course of business.” 

“The OCC has long seen itself as a bank advocate and not as a regulator – and that’s a problem,” said Kantor, who is also an executive committee member of the Merchants Payments Coalition.

The National Retail Federation, the Food Industry Association, the National Association of Convenience Stores, the Illinois Retail Merchants Association and the Illinois Fuel and Retail Association have filed amicus briefs supporting the law.