Dive Brief:
- A federal judge on Monday enjoined Illinois’ Interchange Fee Prohibition Act restricting interchange fees on the tax and tip portion on restaurant tabs for national banks and payment card networks..
- U.S. District Judge Virginia Kendall’s decision turned on a federal bank regulator’s move to preempt the law. The permanent injunction doesn’t apply to credit unions, savings banks or banks chartered in Illinois, possibly setting up further litigation at the 7th Circuit U.S. Court of Appeals.
- The ruling “recognizes that federal law protects critical elements of the national payments system from conflicting state requirements,” four banking trade group plaintiffs said in a joint statement Monday. “The decision will spare millions of Illinois businesses and citizens from payment chaos.”
Dive Insight:
Kendall’s ruling comes after the Office of the Comptroller of the Currency issued an interim final rule last month preempting the Illinois law.
The office of Illinois Attorney General Kwame Raoul declined to comment.
The OCC rule change – set to take effect June 30 – aims to clarify that national banks have the power to assess and collect interchange fees from credit and debit cards. That applies “even when such charges and fees are set by or in consultation with third parties” such as card networks, according to the revised rule.
“In a world where the national banks’ powers will include the discretion to have third parties set their fees for them, it is difficult to see how the IFPA is not ‘an obstacle to the accomplishment and execution of the full purposes and objectives’ of that power,” Kendall wrote in her order, citing a 1982 Supreme Court preemption ruling.
While Kendall found faults with the OCC rule’s timing and formulation process, she concluded that the agency had likely met its procedural requirements.
“Given the OCC’s reconceptualized articulation of the breadth of the limits of national banks’ legitimate powers, the IFPA requires a reconfiguration of banks’ utilization of that power in a way that not only turns the industry on its head, but also opens the door for national banks to accommodate the taxation schemes of hundreds of localities,” she wrote.
“While there is strong public interest for the people of Illinois to see their legislative determinations come to fruition, there is a stronger interest still in ensuring the Supremacy Clause is properly effectuated,” Kendall added, noting the constitutional mandate that federal laws preempt conflicting state measures.
Four trade associations – the Illinois Bankers Association, the American Bankers Association, America’s Credit Unions and Illinois Credit Union League – sued Illinois in August 2024 over the Interchange Fee Prohibition Act, two months after Gov. JB Pritzker, a Democrat, signed it.
“We will continue working through the courts and with policymakers to ensure that all participants in the payments system are treated consistently, so the customers they serve will also be protected from the harm IFPA will cause,” the financial institution plaintiffs said in their statement.
Nonetheless, Doug Kantor, general counsel for the National Association of Convenience Stores, contended that the court’s injunction is “based on a technicality.”
“The OCC wasn’t a party to that case and there hadn’t been a lawsuit filed to challenge the validity of the OCC’s flawed rule,” Kantor wrote Monday in an email. “As a result, the court had to accept the OCC rule.”
He predicted that courts will “invalidate” the OCC rule because the agency doesn’t have authority to preempt Illinois’ law and that the rule violated the Administrative Procedure Act. “That rule will be overturned and the Illinois law – and any other state laws on swipe fees – will be able to go into effect,” Kantor said.
Illinois Retail Merchants Association CEO Rob Karr said banks and card networks had gotten “an unprecedented rule change designed to undercut Illinois law and block financial relief for businesses and consumers” following the judge’s February ruling.
“While today’s ruling is a temporary setback, the judge’s opinion highlights serious procedural and substantive concerns about how the federal rule was adopted and its scope, so this issue is far from settled,” Karr added in an emailed statement Monday.
The Electronic Transactions Association applauded the court’s ruling but the legal fight will continue because the injunction doesn’t apply to credit unions and Illinois-chartered banks, Scott Talbott, an ETA executive vice president, said in an email.
“No participant in the payments system should be subject to the IFPA,” he wrote.
Kendall’s ruling came less than a month after the 7th Circuit remanded the case to her for further review, given the OCC’s rulemaking.
The Illinois law has inspired similar legislation in 11 other states, including a bill in Colorado that Gov. Jared Polis is assessing whether to sign into law.
Illinois state lawmakers this week voted to delay implementation of the law for a second time, by one year, to July 1, 2027, in light of the court challenges.
In her opinion, Kendall noted that the OCC rule “does little to establish why letting third parties manage interchange fee rates is critical to the national bank’s exercise of its federal powers.”
Much of the OCC’s order “perches atop the catch-all justification of this is how things are done around here,” Kendall wrote. She also called the agency’s decision to release its rule two months before the law’s effective date, and two years after its passage, “an unflattering one.”
