In a 37 page order, Chief Judge Virginia M. Kendall in the Northern District of Illinois determined that the Illinois Bankers Association, American Bankers Association, America’s Credit Unions, and Illinois Credit Union League have standing to bring their claims challenging the Illinois Interchange Fee Prohibition Act (the “IFPA”) and sovereign immunity does not apply to the federal claims. The Court granted the request for a preliminary injunction only for national banks and federal savings associations and reserved judgment for federal credit unions and state banks and credit unions.

Effective July 1, 2025, the IFPA prohibits the collection of debit and credit card interchange fees for sales taxes, excise taxes and gratuities if the merchant informs the acquiring bank of the amount of these taxes and gratuities. The merchant can either provide the amount of taxes and gratuities to the merchant bank at the time of the transaction authorization or settlement or seek reimbursement within 180 days of the transaction date from the issuer. Issuers, payment card networks, acquiring banks and processors cannot increase the rate or amount of fees on the portion of the transaction subject to interchange to circumvent the effect of the law. The IFPA also prohibits participants involved in an electronic payment transaction (except the merchant) from transferring or using data from that transaction except to facilitate or process the transaction, or as required by law. Violations of the foregoing subject the entity to a civil penalty of $1,000 per transaction and the issuer must refund the merchant any interchange fee collected on taxes or gratuities.

On August 15, 2024, the Illinois Bankers Association, American Bankers Association, America’s Credit Unions, and Illinois Credit Union League filed a complaint against the Illinois Attorney General challenging the enactment of the IFPA and sought a declaratory judgment that the IFPA is preempted by federal laws, unconstitutional, and invalid as applied to any participant in the payment system, and to permanently enjoin the state from taking any investigatory or enforcement actions under the IFPA.

Article III Standing

The State argues that Plaintiffs lacked standing to challenge the IFPA because the plaintiffs (1) failed to meet standing’s redressability requirement because (i) the Illinois Attorney General lacks authority to enforce the IFPA; and (ii) even if he had enforcement authority other state attorneys general would be able to seek civil penalties and (2) plaintiffs failed to show how the IFPA’s data usage limitation covers plaintiffs’ members conduct. With respect to the redressability requirement, the Court found that that Attorney General had the duty to enforce both the interchange fee prohibition and data usage limitation of the IFPA because “the Interchange Fee Prohibition is fairly read as creating a public right with respect to interchange fees, which the common law empowers the Attorney General to enforce.” The court further concluded that enjoining the Illinois Attorney General “certainly would reduce the probability of the injury,” even though some rogue enforcement officers may try to enforce. With respect to the data usage limitation, the Court found that the threat of enforcement is causing substantial investment in compliance now.

Preliminary Injunction

To obtain a preliminary injunction, the plaintiffs must establish (1) that they are likely to succeed on the merits, (2) that they are likely to suffer irreparable harm in the absence of preliminary relief, (3) that the balance of equities tips in their favor, and (4) that an injunction is in the public interest. The Court found that plaintiffs demonstrated a likelihood of success on the merits as to the National Bank Act (NBA) and Homeowners Loan Act (HOLA) preemption claims applying the Barnett Bank standard (recently upheld in the Supreme Court’s Cantero decision) that state laws are preempted if the law “prevents or significantly interferes with the exercise by the national bank of its [enumerated or incidental] powers.” The Court applied the Cantero “practical assessment of the nature and degree of the interference caused by” the IFPA in reviewing each of the plaintiffs’ claims by looking at other Supreme Court precedent favorable to national banks and federal savings associations, comparing the Interchange Fee Prohibition to the prohibitions on national banks using the words “saving” and “savings” in advertising which the Supreme Court held to be preempted (Franklin National Bank decision) and the prohibition on federal savings associations using due on sale clauses which the Supreme Court held to be preempted (Fidelity Federal Savings Association decision), and comparing the Data Usage Limitation Provision to the prohibition on the sale of insurance which the Supreme Court held to be preempted (Barnett Bank decision). 

The Court determined that the Interchange Fee Prohibition significantly interfered with a national banks’ powers to charge fees, regulate credit and debit card transactions, and provide data processing and transmission services by dictating to credit and debit card issuers how much they may charge for a given transaction and how to best structure their non-interest fee arrangement with merchants. The Court commented that the “Interchange Fee Prohibition seems to be the state’s effort to substitute its own judgment for the judgment of the banks, which federal law empowers banks to exercise according to ‘sound banking principles.’” Likewise, the Court found that the Data Usage Limitation Provision aligns closely with other state laws the Supreme Court has found to be preempted by the NBA and directly constrains, or may eliminate, a national bank’s powers as the OCC described in an interpretative letter to “transcribe, process, analyze, and store for itself and others banking, financial, or economic data.” Plaintiffs demonstrated a likelihood of success on the merits of their claim that the IFPA violates the federal rights of national banks and is preempted by the NBA. The Court found that since the preemption standard governing HOLA is that same as NBA, plaintiffs also demonstrated a likelihood of success on the merits of their claim that the IFPA violates the federal rights of federal savings associations and is preempted by HOLA.

The Court reserved judgment as to Federal Credit Union Act (FCUA) preemption claim pending supplemental briefing on whether a private right of action exists under that Act. The briefing will be completed in January.

The Court found that plaintiffs did not demonstrate the likelihood of success on their arguments under the Commerce Clause that out of state banks were entitled to the same protections as the federal counterparts and that if the NBA preempts the IFPA as to federal entities, then the Illinois wildcard statute requires that the NBA’s preemptive effect also applies to out-of-state state banks. Since the IFPA applies to all entities doing business in Illinois, there is no advantage to in-state issuers or disadvantage to out-of-state issuers. Like the FCUA claim, the Court requested additional briefing as to whether the plaintiffs have a private right of action for this claim. This Commerce Claim will determine whether the preliminary injunction should extend to state banks and credit unions.

The Court found that the irreparable harm would be suffered if the Court denies the injunction because the issuers presented substantial evidence to establish the crippling compliance costs, which costs are non-recoverable from the state if the plaintiffs ultimately prevail. The Court concluded that the balance of equities and public interest considerations weighs in favor of plaintiffs as the financial institutions can redirect resources to cardholder program for fraud prevention and rewards and the public interest would not be served by allowing the financial institutions to invest non-recoverable assets.

The plaintiffs were unsuccessful in persuading the Court to extend the preliminary injunction to the card networks. The Court also determined that the IFPA was not preempted by Regulation II, which regulates the maximum permissible interchange transaction fee that an issuer may receive for debit card transactions. The card networks, who were excluded from the preliminary injunction, will need to begin the costly compliance efforts to meet the July 1, 2025 deadline. Federal credit unions and state banks and credit unions must await the ruling from the January briefings to the Court to determine next steps.