Illinois Interchange Fee Prohibition Act: Federal Court Remand in Interchange Fee Preemption Dispute
A federal appeals panel set aside a prior district court decision on Illinois’s rule barring card-transaction charges on sales tax and gratuities, sending the case back after recent action by the Office of the Comptroller of the Currency raised fresh questions about federal preemption. The panel did not decide whether the statute is currently enforceable, leaving any stay or injunction issues to be addressed on remand.
Federal Court Case Snapshot
- On Friday, the 7th Circuit vacated the lower court’s ruling on the state’s fee ban covering the tax-and-tip portion of transactions, pointing to a preemption step initiated by the Office of the Comptroller of the Currency during the Trump administration as grounds for additional proceedings. The dispute was remanded to the United States District Court for the Northern District of Illinois.
- The Illinois attorney general argued the Office of the Comptroller of the Currency’s interim final order was procedurally defective and does not affect the underlying merits. Bank and credit union plaintiffs, joined by the regulator, urged the court to invalidate the state law based on the agency’s action.
- “The district court should address these matters, and any related issues, before this court attempts to do so,” the appeals court wrote, canceling the oral argument previously set for May 13.
Interchange Fee Ban Context and Reactions
- Trade groups representing banks and credit unions sued Illinois over the Interchange Fee Prohibition Act in August 2024.
- The Interchange Fee Prohibition Act was signed two months earlier by Gov. J.B. Pritzker.
- In February, United States District Judge Virginia Kendall in Chicago upheld the law’s core provision, finding it does not directly regulate banks or violate federal banking requirements.
The Interchange Fee Prohibition Act is an Illinois statute aimed at limiting interchange fees tied to specific components of card transactions. Its purpose is to prevent interchange from being assessed on certain pass-through amounts, such as sales tax and gratuities, that merchants say inflate processing costs without reflecting the price of goods or services.
Charging a customer a separate fee for using a debit card is not what the Interchange Fee Prohibition Act targets; the measure focuses on interchange assessed in the merchant-side card-payment system, and the court dispute centers on that interchange restriction rather than a general statewide ban on customer-facing debit-card fees.
The statute was slated to take effect on July 1. Last month, the Office of the Comptroller of the Currency revised a rule permitting national banks to receive interchange through intermediaries, partners, payment networks, interchanges, or other third parties.
Businesses are operating in a gray area where the compliance playbook can shift quickly as preemption arguments and procedural challenges move between agencies and the courts.
Scott Talbott, executive vice president at the Electronic Transactions Association, said the appeals court’s move underscores the strength of the Office of the Comptroller of the Currency’s position that the measure is preempted by the National Bank Act. Opponents of the statute argue it unlawfully interferes with federally authorized banking powers and conflicts with federal banking rules governing how national banks participate in card-payment networks and receive interchange.
Rob Karr, chief executive officer of the Illinois Retail Merchants Association, described the order as routine given what he called an attempt by card companies to add a new issue at the appellate stage.
Karr added that the association looks forward to briefing the new issue before the lower federal court.
| Organization | Position on the Interchange Fee Prohibition Act | Key Arguments |
|---|---|---|
| Illinois Bankers Association | Opposes; seeks to invalidate | Conflicts with federal law; recent federal regulatory steps support preemption. |
| Illinois Credit Union League | Opposes; seeks to invalidate | Conflicts with federal law; recent federal regulatory steps support preemption. |
| American Bankers Association | Opposes; seeks to invalidate | Conflicts with federal law; recent federal regulatory steps support preemption. |
| America’s Credit Unions | Opposes; seeks to invalidate | Conflicts with federal law; recent federal regulatory steps support preemption. |
Illinois was the first state to adopt a measure of this type, which prompted similar efforts in other legislatures seeking to rein in swipe fees.
- Reduce processing costs for merchants.
- Encourage card payments.
- Limit interchange fees on sales tax and gratuities.
Separately this week, the Colorado General Assembly advanced a comparable bill, with the House following earlier Senate action to bar interchange assessment on sales taxes for debit and credit transactions.
The measure has been sent to Colorado Gov. Jared Polis, who has not indicated his position.
A central question for these initiatives is whether the National Bank Act preempts state law in this area. If a court concludes federal law preempts the Illinois statute, the state would be unable to enforce the interchange restriction to the extent it conflicts with federal banking authority.
In a brief filed last week, Illinois officials said the Office of the Comptroller of the Currency failed to comply with the Administrative Procedure Act, rendering both its rule change and order invalid.
In a brief submitted Wednesday, a merchant coalition supporting the state law argued the Office of the Comptroller of the Currency’s preemption order and rulemaking were substantively flawed and relied on arbitrary and capricious reasoning.
The merchants’ lawyers wrote that the agency’s actions leaned on the banks’ arguments while disregarding points advanced by the attorney general and supporting amici.
Doug Kantor, general counsel for the National Association of Convenience Stores, said the Office of the Comptroller of the Currency went to unusual lengths to avoid having the court decide the matter in the normal course.
Kantor added that the Office of the Comptroller of the Currency has treated itself more as a bank advocate than a regulator; he also serves on the Merchants Payments Coalition’s executive committee.
| Organization | Position on the Interchange Fee Prohibition Act | Key Arguments |
|---|---|---|
| National Retail Federation | Supports; backed the law in an amicus brief | Supports limiting interchange on covered transaction amounts and defending the statute against preemption arguments. |
| Food Industry Association | Supports; backed the law in an amicus brief | Supports limiting interchange on covered transaction amounts and defending the statute against preemption arguments. |
| National Association of Convenience Stores | Supports; backed the law in an amicus brief | Supports limiting interchange on covered transaction amounts and defending the statute against preemption arguments. |
| Illinois Retail Merchants Association | Supports; backed the law in an amicus brief | Supports limiting interchange on covered transaction amounts and defending the statute against preemption arguments. |
| Illinois Fuel and Retail Association | Supports; backed the law in an amicus brief | Supports limiting interchange on covered transaction amounts and defending the statute against preemption arguments. |
Businesses watching the case have been weighing practical steps such as monitoring court filings for any stay requests or enforcement guidance, reviewing processor and network terms for how interchange is calculated, and confirming whether point-of-sale systems can separately track taxes and tips in the event compliance obligations shift.
Separately, the “7-year fence law” in Illinois is a property-law concept sometimes referenced in boundary disputes, generally describing situations where a fence line can become legally significant over time under certain possession-related circumstances; it is unrelated to the interchange-fee litigation.
Correction: This story has been updated to clarify that it is the ruling being vacated and remanded.