A district court judge on Monday evening ruled that federal law preempts portions of an Illinois ban on swipe fees on taxes and tips, siding with bank trade groups and card networks that brought the suit shortly after the law’s passage in 2024.
Chief District Judge Virginia M. Kendall’s opinion represents something of a departure from an earlier ruling, after the judge found the Office of the Comptroller of the Currency’s decision to issue preemption determinations exempting national banks from the law materially altered the facts of the case.
The Illinois Interchange Fee Prohibition Act would ban firms from charging swipe fees on sales tax and gratuity portions of charges. The law has pitted trade groups representing merchants and the financial industry against each other and comes as a growing number of states move to block interchange on portions of transactions. Banks say those interchange fees are necessary to pay for fraud prevention, the cost of processing the transaction and offsetting the costs of credit card rewards. The fees are set by the card networks like Visa or Mastercard and often are around 2% to 3% of a transaction. Merchants paid nearly $200 billion in such fees last year.
A federal judge ruled in February to uphold the Illinois law. The OCC then moved to preempt Illinois’ ban last month, issuing two interim final rules affirming banks’ authority to charge fees set by third parties and explicitly preempting Illinois’ swipe fee ban as of June 30, 2026.
While the OCC argued in its preemption determination that the matter was settled, Judge Kendall disagreed. She argued that the issue “remains the province of this Court.”
“[Determining whether the law is preempted] includes assessing the impact of the OCC’s assertions on the legal question at hand, separate and apart from an action (again, not currently in front of this Court) to challenge the methods by which the agency came to its decision,” she wrote in the opinion. “The OCC’s absence from the suit does not prevent the Court from according complete relief between the existing parties on the question in front of it — specifically, whether the IFPA is preempted by federal law.”
The judge also expressed skepticism that the OCC’s methods were above-board, criticizing the agency’s use of emergency procedures to issue its preemption determination.
“The OCC’s choice to release this Interim Final Order two months before the IFPA’s effective date, approximately two years after its passage, is an unflattering one,” she wrote.
Even so, Kendall ultimately found that the OCC’s actions did change the legal analysis. In a February ruling, the judge found that interchange fees were set by payment networks, not banks, which weakened the plaintiff’s preemption arguments. The OCC’s determination extended national banks’ authority to fees collected through these third parties, strengthening the case for preemption.
“In a world where the national banks’ powers will include the discretion to have third parties set their fees for them, it is difficult to see how the IFPA is not ‘an obstacle to the accomplishment and execution of the full purposes and objectives’ of that power,” the judge wrote. “While that possibility did not emerge since the February Ruling, the new rule changes its role in the analysis. In that sense, in light of the new regulation, the IFPA does ‘impose an undue burden on the performance of the banks’ functions…’ and thus is invalid with regard to national banks, federal savings associations, and out-of-state State banks.”
The court extended the preemption to payments networks, permanently blocking the state from enforcing the law against such firms. Entities not covered by federal banking preemption, including federal credit unions and some state-chartered banks, could remain subject to the law.
The judge’s ruling came only hours after the Illinois legislature voted to delay the implementation date for the law by one year, driven in part by the ongoing litigation.
The American Bankers Association, Illinois Bankers Association, America’s Credit Unions and Illinois Credit Union League — who are co-plaintiffs in the suit — celebrated the ruling on Monday evening, while indicating support for further action to relieve state banks and credit unions from the law’s requirements.
The Illinois Retail Merchants Association called the ruling a “temporary setback,” calling the matter “far from settled.”
The Merchants Payments Coalition issued a statement on Tuesday expressing support for challenging the OCC’s determination, which could lead to reconsideration of the ban. The OCC wasn’t a party to the current case and the courts couldn’t consider the preemption determination itself without a separate lawsuit.
The Colorado House of Representatives passed a similar measure last month, banning banks from charging interchange fees on the sales-tax component of transactions. The bill was sent to Democratic Governor Jared Polis’ desk, where it remains for his consideration. If enacted, it would be the second such law to be enacted on the state level.