Linney's Pizza, LLC v. Bd. of Governors of the Fed. Reserve Sys.

1

LINNEY'S PIZZA, LLC, Plaintiffs, v. BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, Defendants.

CIVIL No. 3:22-cv-00071-GFVT

United States District Court, E.D. Kentucky, Central Division, Frankfort

September 15, 2023

OPINION & ORDER

GREGORY F. VAN TATENHOVE, UNITED STATES DISTRICT JUDGE

This matter is before the Court on the Board of Governors of the Federal Reserve System's Motion to Dismiss. [R. 7.] Linney's Pizza brought this action alleging that a debit card fee regulation which the Board issued is unlawful. [R 1.] The Board moves to dismiss because the Administrative Procedure Act's six-year statute of limitations has expired. [R. 7.] Linney's claim accrued on the date the regulation was published in 2011. Therefore, this action filed in December 2022, is beyond the six-year statute of limitations, the case is untimely, and the Board's Motion to Dismiss [R. 7] is GRANTED.

I

“This case is about debit cards.” [R. 1 at 1.] Specifically it is about a regulation governing Linney's Pizza, an LLC which operates a pizza shop in Frankfort, Kentucky. Id. at 9. Linney's accepts payment by debit cards. Id. The entities which issue those debit cards charge Linney's a fee for each transaction. Id. at 4. Regulation II, which Linney's challenges in this action, is rooted in congressional action intended to limit these fees. Id. at 5-6. In 2010, Congress passed the Dodd-Frank Act in response to the 2008 financial crisis. Part of that Act, the Durbin Amendment, governs “interchange fees.” Id. Merchants pay these fees to debit card issuers, through networks like Visa and Mastercard, “to compensate the issuers for their involvement in debit-card transactions.” [R. 1 at 13 (citing 76 Fed.Reg. 43,396).]

Linney's emphasizes that market forces encourage higher, not lower, fees because the networks have substantial market dominance and are incentivized to maximize fees by issuers. Id. at 14. Congress agreed with this perspective to some extent when it passed the Durbin Amendment. Id. at 15. That amendment limited interchange fees by covered issuers to an amount “reasonable and proportional” to the issuer's “incremental costs” from processing debit payments. Id. (citing 15 U.S.C. §§1693o-2(a)(2), (a)(4)(B)(i)). It directed the Board to establish standards to ensure that fees meet that requirement. Id. (citing 15 U.S.C. § 1693o-2(a)(3)(A)). In doing so, the Board could consider incremental costs but not other costs. Id. (citing § 1693o-2(a)(4)(B)). The Amendment defined incremental costs as costs that issuers incur for their role in “the authorization, clearance, or settlement of a particular debit transaction.” Id. (quoting § 1693o-2(a)(4)(B)(i)).

The Board issued a proposed rule which Linney's contends “hewed to the Durbin Amendment's statutory text.” [R. 1 at 17.] However, Linney's believes that the Board then “buckled under pressure from issuers and networks and reversed course in the final rule.” Id. at 19. The final rule, Regulation II, states:

Under the final rule, each issuer could receive interchange fees that do not exceed the sum of the permissible base component and the permissible ad valorem component. The standard's base amount per transaction is 21 cents, which corresponds to the per-transaction allowable cost, excluding fraud losses, of the issuer at the 80th percentile, based on data collected by the Board in a survey of covered issuers. The ad valorem amount is 5 basis points of the transaction's value, which corresponds to the average per-transaction fraud losses of the median issuer, based on the same survey data. Each issuer's supervisor is responsible for verifying that an issuer does not receive interchange fee revenue in excess of that permitted. See § 235.9. The Board recognizes that issuers' costs may change over time, and the Board anticipates that it will periodically conduct surveys of covered issuers in order to reexamine and potentially reset the fee standard.

76 Fed.Reg. at 43,422. In creating this Rule, the Board created a third category of costs-those not explicitly excluded from consideration by statute-and incorporated those costs into setting the fees. [R. 1 at 19-21.] Linney's believes that the final rule “exceeds the Board's authority, is contrary to law, and is arbitrary and capricious.” Id. at 26.

The Board moves to dismiss the complaint. It argues that “the Plaintiff's claims accrued in 2011 and are barred by the applicable six-year statute of limitations.” [R. 7-1 at 7.] It identifies prior litigation affirming the final rule and finding that recent challenges like Linney's are time-barred. Id. (citing NACS v. Bd. of Governors of the Fed. Reserve Sys., 746 F.3d 474 (D.C. Cir. 2014) and N.D. Retail Ass'n v. Bd. of Governors of the Fed. Reserve Sys., 55 F.4th 634 (8th Cir. 2022)). Ultimately, it argues that the “authorities make clear” that the claims in this matter are time-barred. Id. at 26.

II

A motion to dismiss pursuant to Rule 12(b)(6) tests the sufficiency of a plaintiff's complaint. In reviewing a Rule 12(b)(6) motion, the Court “construe[s] the complaint in the light most favorable to the plaintiff accept[s] its allegations as true, and draw[s] all inferences in favor of the plaintiff.” DirecTV, Inc. v. Treesh, 487 F.3d 471, 476 (6th Cir. 2007). The Court, however, “need not accept as true legal conclusions or unwarranted factual inference.” Id. (quoting Gregory v. Shelby Cnty., 220 F.3d 433, 446 (6th Cir. 2000)).

A

Claims under the APA are restricted by a six-year statute of limitations. 28 U.S.C. § 2401(a). Linney's recognizes as such. [R. 1 at 11 (citing id.) (“[C]laims under the Administrative Procedure Act are subject to a six-year statute of limitations.”).] But it believes that its claim did not accrue until July 2021. It argues that it did not begin to suffer adverse effects of the Rule until July 2021, when two brothers organized Linney's, purchased a pizza shop, began accepting payment by debit card, and started incurring the allegedly unlawful fees. Id. at 11-12. Linney's argues that its claim accrued at that time and is therefore timely. [See R. 14 at 15.]

The Board asserts that Linney's claim accrued when the regulation was published in 2011. [R. 7-1 at 18.] Accordingly, the statute of limitations expired in 2017 and Linney's claim is untimely. Id. at 18-21. The Board invokes a distinction drawn in numerous circuits between accrual of facial and as-applied APA challenges. Id. at 21-26. For example, the Eighth Circuit recently determined that an identical challenge to Regulation II was facial, accrued when the regulation was published, and was therefore untimely. NDRA, 55 F.4th at 641. It reached this result even though one of the plaintiffs came “into existence more than six years after the publication of a final agency action.” Id. at 639; see also Izaak Walton League of Am., Inc. v. Kimbell, 558 F.3d 751, 762 (8th Cir. 2009). As a result, the Board argues that Linney's claims “accrued in July 2011 when the Final Rule was published in the Federal Register and are time-barred as a result.” [R. 7-1 at 21.]

Linney's opposition to dismissal hinges on its argument that the Sixth Circuit does not distinguish between facial and as-applied challenges when determining the accrual date of an APA claim. [See R. 14 at 6-8.] It reaches this conclusion through Herr v. U.S. Forest Serv. 803 F.3d 809 (6th Cir. 2015). The Sixth Circuit observed in Herr that an APA claim accrues “[o]nce the challenged agency action becomes final and invades a party's legally protected interest.” Id. at 818-19. Linney's understands this to create a two-part test for accrual: final agency action and invasion of a party's protected interest. [ See R. 14 at 22.] It “first suffered injury” more than six years after the regulation was published-when it began operations in July 2021-so it believes its claim did not accrue until that date, making the action timely. Id.

Linney's claim accrued when Regulation II was published and is therefore untimely. Every circuit to have addressed the issue-the Fourth, Fifth, District of Columbia, and Ninth Circuits-has concluded that accrual dates differ between facial and as-applied APA claims. See NDRA, 55 F.4th at 640-41 (citing Hire Order Ltd. v. Marianos, 698 F.3d 168, 170 (4th Cir. 2012); Dunn-McCampbell Royalty Int. v. National Park Serv., 112 F.3d 1283, 1287 (5th Cir. 1997); Citizens Alert Regarding the Env't v. EPA, 102 Fed.Appx. 167, 168-69 (D.C. Cir. 2004); Wind River Mining Corp. v. United States, 946 F.2d 710, 715 (9th Cir. 1991)).

The Ninth Circuit persuasively explained the grounds for making this distinction in Wind River. 946 F.2d at 715. It reasoned that the distinction “strikes the correct balance between the government's interest in finality and a challenger's interest in contesting an agency's alleged overreaching.” Id. An agency decision “adversely] appli[ed] . . . to [a] particular challenger” accrues when the “application” occurs because “[s]uch challenges, by their nature, will often require a more ‘interested' person than generally will be found in the public at large.” Id. In contrast, a “policy-based facial challenge” or “mere procedural violation” accrues when the agency decision is reached because “[t]he grounds for such challenges will usually be apparent to any interested citizen within a six-year period following promulgation of the decision.” Id.

This well-established body of law is no different in the Sixth Circuit. Linney's primary case in support, Herr is consistent with this body of cases. While Herr does not explicitly distinguish between accrual in facial versus as-applied challenges, it is evident that it involved an as-applied challenge. 803 F.3d at 819. The Herrs did not claim that a regulation was ...