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U.S. appeals panel appears to side with Fed in 'swipe fee' suit

The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst
The sun rises to the east of the U.S. Federal Reserve building in Washington, July 31, 2013. REUTERS/Jonathan Ernst

WASHINGTON (Reuters) - U.S. appeals judges appeared on Friday to side with the Federal Reserve over a group of retailers who are disputing the level of fees set by the Fed on the use of debit cards.

Businesses pay "swipe fees" to banks when customers use debit cards to purchase goods or services to cover the costs of offering the cards. At the instruction of Congress, the Fed in 2011 limited those fees, and settled on 21 cents per transaction.

A U.S. district court agreed with the merchants that the agency set the cap higher than lawmakers intended and threw out the Fed's fee limits last year. The Fed appealed the ruling.

The three-member appeals panel on Friday pushed back against the retailers' argument that the Fed's fee cap could only incorporate certain costs to banks that were identified by Congress.

"You're climbing a really steep hill...none of us buy that," Judge Harry Edwards said to Shannen Coffin, an attorney with Steptoe & Johnson who was representing the retailers. The appeals panel did appear open to discussing whether each of the particular costs included by the Fed was appropriate.

At issue is a section of the 2010 Dodd-Frank law that directs the Fed to limit swipe fees, also known as interchange fees. Visa , MasterCard and other card networks set the levels, which averaged about 44 cents per transaction before Congress intervened.

Lawmakers hoped lower fees would trickle down to benefit consumers in the form of lower prices. They wanted the limits to account for reasonable costs of debit cards, but to exclude any costs that were not tied to specific debit transactions.

The Fed decided labor, software, network processing fees and allowances for fraud losses were relevant costs under the wording of Dodd-Frank and, in 2011, set the limit at 21 cents.

The National Retail Federation, National Restaurant Association and other groups sued in November 2011, arguing that those costs went beyond what was allowed under Dodd-Frank.

Judge Richard Leon of the U.S. District Court for the District of Columbia in July 2013 ordered the Fed to lower the fee cap. He said the Fed was "inappropriately inflating all debit card transaction fees by billions of dollars.

He allowed the Fed's current limit to remain in place while the agency appealed his ruling. The sides appeared before the U.S. Court of Appeals for the District of Columbia Circuit on Friday.

The lawsuit also involves a Fed rule related to networks that process debit card transactions. Retailers say the Fed did not do enough to promote competition among those networks, as required by Dodd-Frank.

But most of the hour-long session on Friday focused on the swipe fees. The appeals panel asked Katherine Wheatley, the Fed's associate general counsel, how the agency determined which costs it could consider. For instance, Judge David Tatel pointed out, the Fed did not include corporate overhead.

"Help me understand how the board distinguished between those it included and those it didn't," Tatel said.

Wheatley said the agency included only costs it could tie directly to debit card transactions.

(Reporting by Emily Stephenson; Editing by Stephen Powell)

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