Bank and Credit Union Groups File Motion for Summary Judgment in Lawsuit Challenging Illinois Interchange Fee Prohibition Act

INTRODUCTION

The Illinois Interchange Fee Prohibition Act (“IFPA”) threatens to upend the nationally integrated card payment system by imposing drastic restrictions and draconian penalties on its participants. Its Interchange Fee Prohibition would force Issuers to forgo a portion of the revenue that compensates them for taking on credit risk, monitoring for fraud, providing benefits to cardholders, and otherwise greasing the wheels of the state and national economy. It threatens penalties of $1,000 per transaction, a staggering sum that could expose even small institutions with only a few thousand debit-card holders to ruinous liability. Plaintiffs’ Rule 56.1 Statement (“SOUF”), ¶ 17 (3,800 cardholders of one Issuer engage in approximately 900,000 transactions per year). And its Data Usage Limitation’s near-total ban on using transaction data would make fraud prevention and other critical operations far more difficult and less effective. But the IFPA is not only bad policy, it is also preempted by federal law. The Court should grant Plaintiffs summary judgment and permanently enjoin Attorney General enforcement of the IFPA.

Indeed, the Court has already concluded that Plaintiffs are likely to succeed on most of their preemption claims. As to the national banks that serve as both Issuers and Acquirers for most Illinois (and national) card transactions, the Court has already explained that both IFPA provisions prevent or significantly interfere with their exercise of powers the National Bank Act (“NBA”) grants. For example, federal law gives national banks the power to process card transactions and charge fees for doing so, and to use and process data—the very things that the IFPA expressly curtails or prohibits. The Court was likewise correct that 12 U.S.C. § 1831a(j) extends the effect of NBA preemption to out-of-state banks, and that the Home Owner’s Loan Act (“HOLA”) preempts the IFPA as to Federal savings associations. For substantially the reasons underpinning its preliminary injunction orders on these statutes, the Court should now enter summary judgment that each of these provisions preempts the IFPA and a corresponding permanent injunction.

At the same time, Plaintiffs respectfully request that the Court revisit the question of preemption under the Federal Credit Union Act (“FCUA”). Federal credit unions, like national banks and Federal savings associations, are federal instrumentalities to which the same Barnett Bank standard for assessing preemption applies. Under that standard, the IFPA prevents or significantly interferes with the exercise of FCUA powers in the same ways it does the exercise of NBA and HOLA powers. Even if Barnett Bank did not apply, the IFPA would still stand as an obstacle to the FCUA’s purpose of ensuring that credit unions can serve their members. As undisputed evidence demonstrates, application of the IFPA—especially only to credit unions and not also their competitors—will increase costs to members or force credit unions to stop offering valuable services altogether, as the costs of compliance could exceed their total net income. See SOUF ¶ 49. Moreover, as the Court expressly recognized, if “interchange fees are directly tied to loan interest or repayment terms,” that “would implicate [a] regulation” that expressly preempts contrary state law. Dkt. 115 at 6. That is what will happen here, because credit unions’ members will necessarily be charged higher interest or fees once the IFPA deprives credit unions of interchange revenue, which the IFPA expressly forbids credit unions from recovering from merchants in any other way. The Data Usage Limitation’s near total ban on processing data likewise facially conflicts with credit unions’ acknowledged incidental power to do precisely that.

The Court should also revisit Plaintiffs’ dormant Commerce Clause arguments. The Court’s decision not to grant preliminary injunctive relief on this issue turned on its conclusion, based in part on its understanding of the Attorney General’s briefing, that Illinois’ wildcard statutes apply to all entities, not just those that Illinois charters. That briefing, however, made that point only about the IFPA, not about the wildcard statutes. The dormant Commerce Clause thus requires extending the wildcard statutes’ effect to out-of-state state institutions too. 

Finally—and crucially—the Court should enter a permanent injunction that covers not only federal and out-of-state banks, savings banks, and credit unions, but also other participants in the tightly intertwined payment system when they perform functions necessary to those institutions’ federally protected payment businesses. As the more developed—and undisputed—record shows, absent this relief, the IFPA would continue to indirectly (and improperly) restrict federally protected institutions in ways the Court has already determined the State cannot do directly.

The Court declined to enter a broader preliminary injunction based on the Dodd-Frank Act’s provision respecting “subsidiar[ies], affiliate[s], and agent[s].” Dkt. 104 at 27-28 (citing 12 U.S.C. § 25b(h)(2)). But Plaintiffs are not seeking preemption for any such entities in their own right—which is all that the provision forbids. Illinois may not use the regulation of other entities to indirectly accomplish what it could not do directly: forbid the exercise of federally guaranteed powers. And in any event, many of the participants in the payment system fall outside any of the categories that provision of Dodd-Frank addresses, including Card Networks such as Visa and Mastercard (which are service providers under applicable federal law).

Bedrock equitable principles also compel a broader injunction. An “injunction must … be broad enough to be effective.” Russian Media Grp., LLC v. Cable Am., Inc., 598 F.3d 302, 307 (7th Cir. 2010). And a court can “impose the equitable relief necessary to render complete relief to the plaintiff, even if that relief extends incidentally to non-parties.” City of Chi. v. Barr, 961 F.3d 882, 920-21 (7th Cir. 2020). Here, federally protected financial institutions depend on others to carry out their business. Unless those others are covered by a permanent injunction to the extent they are integral to collection of interchange and processing of debit, credit, and prepaid card transactions, Issuers and Acquirers will be denied the federal-law protection to which this Court has held they are likely entitled. Equity does not demand, or even permit, this inequitable result.

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