Plaintiffs' Memorandum in Support of Motion for a Preliminary Injunction

INTRODUCTION

For the consumer, a credit or debit card transaction is seamless: the consumer taps or swipes a card at a terminal (or enters card information online) and instantaneously completes a purchase. But each seemingly simple transaction relies on an intricate system that knits together multiple participants, including the cardholder, the cardholder’s bank (sometimes called the “Issuing Bank” or “Issuer”), a Card Network (e.g., Visa or Mastercard), the merchant’s bank (sometimes called the “Acquiring Bank” or “Acquirer”), and the merchant itself. These participants must develop and maintain hardware, software, and staffing to ensure that they can play their respective roles in processing transactions accurately, protecting consumers from fraud, and facilitating instantaneous access to funds to power the national and state economies. It is hard to overstate credit and debit card transactions’ role as an engine of economic activity. In 2021, for example, over 150 billion credit and debit card transactions worth almost $9.5 trillion were processed in the United States. 1 With approximately 4% of the country’s population and economy, Illinois sees billions of transactions worth tens of billions of dollars annually. None of this would be possible without the coordinated involvement of all players in the payment system. 

These various participants all receive compensation for the roles they play in processing the entire amount paid by the cardholder. Relevant here, Issuers—which administer the cardholder’s account, take on risks of non-payment and fraud, and provide popular programs like cardholder rewards—have long been paid an “interchange fee” as compensation for these services based in part on the entire amount that the cardholder pays for the goods or services. 

In the recently enacted Illinois Interchange Fee Prohibition Act, 815 ILCS 151/150-1 et seq. (“IFPA” or the “Act”), however, Illinois has prohibited charging or receiving interchange fees on the portion of a transaction attributable to gratuities or Illinois state and local taxes (the “Interchange Fee Prohibition”). The Act forbids charging an interchange fee at all on those portions of a transaction if the merchant transmits the tax and gratuity information to the Acquiring Bank at the time of payment. Id. § 150-10(a). And even where a merchant does not do so, if it submits the information to the Acquirer within 180 days, the Issuer must “credit” the merchant that portion of the interchange fee within 30 days. Id. § 150-10(b). 

The potential penalties for failure to comply are enormous: civil penalties of $1000 per transaction. Id. § 150-15(a). For perspective, one national bank Acquirer processed over 400 million credit and debit card transactions for Illinois merchants last year alone. Ex. 9, ¶ 5. If it erroneously charged interchange on some amount of tax or gratuity in only 0.01% of those transactions in a given year, it could conceivably be exposed to $40 million in civil penalties. 

The IFPA also places extraordinary limitations on card transaction data. Specifically, the Act makes it unlawful for “[a]n entity, other than the merchant” involved in a transaction to “distribute, exchange, transfer, disseminate, or use” the associated data “except to facilitate or process the electronic payment transaction or as required by law” (the “Data Usage Limitation”). 815 ILCS 151/150-15(b). Under the statute’s plain terms, for example, participants in the system could not use aggregated transaction data to detect fraud or administer rewards programs. 

To the extent that compliance is even possible by the Act’s July 1, 2025 effective date, both of the IFPA’s provisions will impose staggering costs and technical and operational challenges on large and small banks, savings associations, and credit unions alike. Start with the Interchange Fee Prohibition. Even preparing to track the amount of tax on each transaction is immensely complicated, given Illinois’s hundreds of different taxing jurisdictions with varying rates and a range of taxes including some, like gas taxes, that are excise taxes bundled into the price of a product, rather than charged separately at checkout. The current payments infrastructure does not support separating the total transaction amount into subparts such as tax or gratuity in the way that would be required to allow such information to be sent and interchange fees to be adjusted at the moment of the transaction (the “Automatic Process”). Nor would such disaggregation be easy to implement. The process would start with Card Networks implementing new specifications, which take significant time and resources to develop. Issuers and Acquirers would then have to adopt those specifications at significant cost. Merchants, too, would likely have to purchase new point-of-sale terminals and new software to run them. In the past, the timeframe for implementing far simpler changes across the payment system has run to several years. But Illinois has dictated that tax and gratuity be exempted from interchange fees by  . There is simply not time to overhaul the automated payment system to accurately process real-time transactions in compliance with the Act.

What happens, then, if the Act becomes effective? In the near term, the Interchange Fee Prohibition would most likely be implemented through post hoc credit requests by merchants (the “Manual Process”). But the IFPA does not specify the universe of “tax documentation” merchants must submit to receive a refund of interchange fees previously charged; a merchant might be able to simply drop off a shoebox of receipts at its Acquirer. That means that banks and other financial institutions will have to develop procedures, hire new staff, and train existing employees to receive, evaluate, and audit the documentation they may receive from the immense number of merchants at which cardholders might make IFPA-covered purchases. Again, there are billions of credit and debit card transactions in Illinois worth tens of billions of dollars annually, the overwhelming majority of which include state or local tax or gratuity. Each one would have to be separately processed if a merchant seeks a refund. What’s more, it is ultimately the Issuer’s responsibility t“credit” the merchant within 30 days of when the Acquirer receives the “tax documentation.” Issuers and Acquirers—which generally do not have direct contractual relationships—will have to work out processes for transmitting “tax documentation”; Issuers will then have to figure out how to “credit” merchants—with whom, again, they generally have no direct contractual relationship. The burden on banks and other financial institutions, from the largest to the smallest, would be staggering. And while meeting the statute’s July 1, 2025 effective date will be difficult or even impossible, to even have a hope of doing so, each participant in the payment system would have to commit resources immediately—costs so extreme that some of Plaintiffs’ members are considering exiting the Issuing or Acquiring business altogether. 

The Data Usage Limitation would impose similarly overwhelming operational challenges. Banks and other financial institutions use transaction data for an array of key purposes including— but far from limited to—preventing fraud, administering rewards programs, and determining credit limits. Arbitrarily restricting such data’s use will make many of these activities economically or operationally infeasible, to the detriment of consumers, merchants, and financial institutions alike. 

In sum, Illinois’s hastily adopted statute would blow a hole in the nation’s uniform payment processing system. But the IFPA is not only bad policy; it is also unlawful and should be enjoined. 

First, Plaintiffs are likely to prevail on the merits of their claims that federal law preempts the IFPA. National banks and other federally chartered financial institutions possess federally granted powers to engage in nationwide business. That includes making loans through credit cards, offering deposit accounts and the debit cards that come with them, processing credit and debit card transactions, receiving fees for all of those services, and using banking or financial information. As the Supreme Court clarified just this past Term, federal law preempts any state law that “prevents or significantly interferes with the exercise by [a] national bank of its powers.” Cantero v. Bank of Am., N.A., 144 S. Ct. 1290, 1294 (2024). Similar standards apply to other federally chartered financial institutions. The IFPA transgresses those limits both by directly forbidding or limiting actions, like receiving fees and using data, that federal law authorizes, and by impairing the efficient exercise of other powers, like processing card transactions. If Illinois can implement its unique law, other states will likely enact variations, transforming a functional, uniform system into an unworkable patchwork—exactly what preemption in this area of law is designed to prevent.

The IFPA therefore cannot be applied to federally chartered financial institutions such as national banks. And because state and federal law entitles state-chartered financial entities to parity of treatment with their federal counterparts, the IFPA cannot be applied to them either.

With respect to debit card transactions, the IFPA also conflicts with, and is thus preempted by, the uniform federal standard for the permissible amount of interchange fees found in the Durbin Amendment to the Electronic Fund Transfer Act (“EFTA”) and its implementing Regulation II. 

Second, the remaining requirements for preliminary injunctive relief are also readily met. Absent a preliminary injunction, Illinois’s attempt to impose such a drastic change in the payment system on such an abnormally short timeframe will produce chaos as the system’s various participants scramble to hire and train new employees and pour millions of dollars into developing new systems—all despite a strong likelihood that the law will ultimately be held preempted. That harm, which for some smaller financial institutions far outpaces their anticipated net income for 2024, will be irreparable, since the costs of those rushed attempts at compliance will be unrecoverable (as will interchange revenue forgone if the IFPA goes into effect). Given the difficulties and costs that attempts to comply would impose on all payment-system participants— including merchants and cardholders—the balance of equities and public interest also decidedly support an injunction. This Court should thus preliminarily enjoin enforcement of the IFPA. 

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