A pizza shop wants lower debit-card fees. Fair enough. But if it wins, the tab may not land where diners expect. It could reshape administrative law, narrow the Federal Reserve’s discretion, and make ordinary checking accounts more expensive.
That is what is at stake in Linney’s Pizza, LLC v. Board of Governors of the Federal Reserve System, now before the 6th U.S. Circuit Court of Appeals.
In an amicus brief, the International Center for Law & Economics (ICLE) argues that forcing the Federal Reserve to push debit-card interchange fees below what the Durbin Amendment’s text requires would ultimately backfire on everyday consumers.
Someone Has to Pay for the Airline Miles
To understand interchange fees, it helps to understand that payment-card networks operate as “two-sided platforms.” They must attract both consumers and merchants, and the value they provide to each group depends on participation by the other. As the Supreme Court explained in Ohio v. American Express:
Sometimes indirect network effects require two-sided platforms to charge one side much more than the other… The optimal price might require charging the side with more elastic demand a below-cost (or even negative) price. With credit cards, for example, networks often charge cardholders a lower fee than merchants because cardholders are more price sensitive. In fact, the network might well lose money on the cardholder side by offering rewards such as cash back, airline miles, or gift cards. The network can do this because increasing the number of cardholders increases the value of accepting the card to merchants and, thus, increases the number of merchants who accept it. Networks can then charge those merchants a fee for every transaction (typically a percentage of the purchase price). Striking the optimal balance of the prices charged on each side of the platform is essential for two-sided platforms to maximize the value of their services and to compete with their rivals. [citations omitted].
In other words, payment-card networks must balance the prices charged to consumers and merchants in order to maximize value and compete effectively. Historically, interchange fees charged to merchants helped issuing banks subsidize consumer benefits, including debit-card rewards, free checking accounts, and lower minimum-balance requirements.
When Congress Tilted the Scales
The Durbin Amendment and the Federal Reserve’s implementing rule, Regulation II, disrupted that balance by capping debit-card interchange fees. Merchants benefited from lower transaction costs, but a growing body of research—including studies by Federal Reserve economists—found significant unintended consequences.
Covered banks responded to the lost revenue in predictable ways. They raised account fees, increased minimum-balance requirements, and reduced access to free checking. Those changes fell hardest on lower-income households, contributing to increases in the number of unbanked and underbanked consumers. Meanwhile, there is little evidence that merchants passed their savings on to consumers through lower retail prices.
The appellants in Linney’s Pizza now seek to push those fee caps even lower. They argue that the Durbin Amendment permits the Fed to consider only the incremental costs directly associated with authorizing, clearing, and settling a debit-card transaction when setting interchange-fee caps.
Chevron Is Gone. Agency Discretion Isn’t.
The timing of Linney’s Pizza matters because it arrives amid a major shift in administrative law. In Loper Bright Enterprises v. Raimondo, the Supreme Court overturned Chevron deference, holding that courts must exercise independent judgment when interpreting statutes rather than deferring to an agency’s reading of the law.
That does not mean agencies have lost all discretion. As ICLE’s amicus brief notes, Loper Bright expressly recognized that Congress sometimes delegates policymaking authority to agencies through broadly worded statutes. The Durbin Amendment is a textbook example.
The statute directs the Federal Reserve to “establish standards” for determining whether an interchange fee is “reasonable and proportional to the cost incurred by the issuer with respect to the transaction.” The central dispute in Linney’s Pizza is what Congress meant by “cost.”
The Durbin Amendment requires the Fed to distinguish between two categories of costs. It says the Fed “shall” consider “the incremental cost incurred by an issuer for the role of the issuer in the authorization, clearance, or settlement of a particular electronic debit transaction.” It also says the Fed “shall not” consider costs that are not specific to a particular transaction.
In Regulation II, the Fed concluded that the statute leaves room for a third category: costs that are specific to individual transactions, but are not merely incremental authorization, clearance, and settlement (ACS) costs. The agency therefore included fixed ACS costs, transaction-monitoring costs, issuer fraud losses, and network-processing fees when setting the interchange-fee cap.
Linney’s Pizza argues that the Fed lacked authority to recognize this third category and that an earlier challenge to Regulation II succeeded only because courts then applied Chevron deference.
But even after Loper Bright, the better reading of the statute supports the Fed. Linney’s Pizza’s interpretation would run afoul of the canon against surplusage, which instructs courts to avoid reading statutory language in a way that renders portions of a law unnecessary. If Congress wanted interchange fees to equal only incremental ACS costs, it could simply have said so. Instead, it directed the Fed to establish a fee standard that is “reasonable and proportional” to an issuer’s costs.
As the district court explained:
If the statute were as restrictive and mechanical as Linney’s Pizza suggests, then there would be no need to require the fee standard to be “reasonable and proportional” as it “would merely equal the incremental ACS costs…”
In short, the Durbin Amendment gives the Fed substantial latitude to determine which transaction-specific costs may be reflected in interchange fees. The agency exercised that authority by including fixed ACS costs, transaction-monitoring costs, network-processing fees, and fraud losses—not just bare incremental ACS costs.
The Argument the Court Hasn’t Heard
The most distinctive aspect of ICLE’s brief is that it argues the Federal Reserve could have gone much further under the Durbin Amendment’s text, consistent with the economics of two-sided markets:
In recognition of the benefits to consumers enabled by interchange fees, the Board could have determined that a higher interchange fee is justified because it is “reasonable and proportional” to the cost incurred by the issuer in a specific transaction. The Board could have even published standards, enforceable ex post, for what a reasonable percentage for an interchange fee could be, considering consumer benefits that they enable, rather than setting any percentage themselves. Cf. Linney’s Pizza, 804 F. Supp. 3d at 731 (“[T]he Board’s role in implementing [the statute] involves more than mere calculation and cost-sorting drudgery.”).
The key statutory phrase is “reasonable and proportional.” Those words suggest that the Fed’s job involves more than mechanically tallying costs. After all, determining whether a fee is “reasonable” makes little economic sense without considering what that fee accomplishes.
In a two-sided market, interchange fees help fund benefits for consumers on the other side of the platform. If those fees enable banks to offer rewards, free checking, or other services that benefit consumers, the Fed could reasonably conclude that a higher fee remains “reasonable and proportional” to the costs associated with the transaction. The statute gives the agency room to make that judgment.
Notably, the Supreme Court’s analysis of two-sided markets in Ohio v. American Express has remained largely confined to antitrust law. There, the Court held that “[e]valuating both sides of a two-sided transaction platform is… necessary to accurately assess competition.”
Linney’s Pizza presents an opportunity to apply that same economic insight in a different context. If evaluating both sides of a payment-card network is necessary to understand competition, it is also necessary to understand consumer welfare when regulating interchange fees. The 6th U.S. Circuit Court of Appeals should therefore recognize that the Fed has discretion to consider the consumer benefits that interchange fees make possible when determining whether those fees are “reasonable and proportional.”
Otherwise, a statute intended to help consumers risks doing the opposite. As the evidence discussed above suggests, Regulation II’s interchange-fee cap is already far too low—not too high, as the appellants contend.
Further choking off debit-card interchange fees will not make your next pizza cheaper. It will more likely make your checking account more expensive.
There is no such thing as a free lunch—even at Linney’s Pizza.
