An Illinois federal judge ruled Friday that credit card companies like Visa and Mastercard must comply with Illinois' landmark law restricting certain credit card fees. However, she also held that national banks and federal savings associations are not subject to the law, at least for now.

U.S. District Judge Virginia M. Kendall partially granted a preliminary injunction temporarily halting enforcement of the Illinois Interchange Fee Prohibition Act against the banks and savings associations. She found that they are likely to prevail with their argument that the National Banking Act preempts the law's interchange fee prohibition and its data usage limitation provision.

Similarly, the judge said they demonstrated a likelihood of success on the merits of their argument that the law's data usage limitation "violates the rights of national banks and is preempted by the NBA."

However, Judge Kendall ruled that the preemptive effect of the National Banking Act's provision of rights to national banks "does not extend to other, non-national bank or savings associations participants in credit and debit card transactions, including card networks like Visa or Mastercard."

She largely rejected the Illinois attorney general's request to throw out the suit, only agreeing to dismiss the banking trade groups' state law claims.

The first-of-its-kind law bans the collection of interchange fees to compensate for the cost of processing card transactions on any sales taxes, excise taxes, and gratuities included in a consumer's credit or debit card transaction with a merchant in the state.

Merchants argue that the measure would save them millions in fees for handling tax and tip money that belongs to others, such as the government or employees. However, banking industry groups contend the law violates multiple federal laws and cannot be enforced against federal and state-chartered financial institutions or their payment card networks and service providers.

The suit was filed in August by the American Bankers Association, Illinois Bankers Association, America's Credit Unions, and the Illinois Credit Union League. It names Illinois Attorney General Kwame Raoul as the defendant.

Notably, Judge Kendall said Friday that the state law appears at odds with federal statutes, saying the interchange fee prohibition "threatens to undermine Congress's creation of a national banking system."

"A state law — which imposes such a limitation on a national bank's power — is also at odds with how Congress intended the NBA would operate, according to its legislative history," the judge said.

She also agreed with the groups that the Federal Credit Union Act likely preempts the Illinois law.

"There is a threshold question, however, which neither party explicitly raised, pertaining to the FCUA — whether a private right of action exists for Illinois Bankers to bring their FCUA claim," she said.

The judge ordered supplemental briefing on that question.

Overall, Judge Kendall said the trade groups have sufficiently, at this stage, established that they'll suffer irreparable harm without a preliminary injunction.

"The alleged cost of compliance would likely be more crippling for some Illinois financial institutions than the state claims," Judge Kendall said. She added that, likewise, "leadership from the American Bankers Association, which represents over 1,100 branches in Illinois, explained that some of their members would likely cease providing credit and debit card services and no longer be able to serve as acquiring banks to merchants, as they prepare for the July 1 deadline."

Judge Kendall also rejected Illinois' argument that the trade groups lack standing to bring their claims. For one, the attorney general does have the authority and the duty to enforce the law, contrary to Raoul's argument, Judge Kendall said.

"The Illinois attorney general has common law authority to enforce the IFPA, and there is no language in the Interchange Fee Prohibition [that] mandates that an official outside the attorney general's office is tasked with enforcing it," she stated.

Raoul also argued that the suit should be dismissed because the Eleventh Amendment immunizes the attorney general. But Judge Kendall said because the groups have established that the attorney general does have the authority to enforce the law, the state isn't entitled to sovereign immunity, at least with respect to the trade groups' federal law claims.

Still, Judge Kendall threw out the groups' state law claims, finding that the state hasn't waived its sovereign immunity with respect to those allegations.

The Illinois Retail Merchants Association said Friday that it's "heartened" by the ruling.

Rob Karr, the association's president and CEO, said in a statement that "the judge clearly states credit card networks like Visa and Mastercard must comply with this law, which will provide tangible relief to Illinois families and retailers by limiting the fees that can be charged on the tax and tips portion of transactions."

"This is a win for consumers and Main Street businesses, and we thank Gov. JB Pritzker, Senate President Don Harmon, House Speaker Emanuel 'Chris' Welch and lawmakers for recognizing that out-of-control swipe fees are unfair and unjust," Karr said.

Meanwhile, the American Bankers Association, Illinois Bankers Association, America's Credit Unions, and the Illinois Credit Union League said in a joint statement that they "welcome" the ruling.

"The injunction means that many Illinois consumers will be spared the chaos this law threatens to inflict on our modern payments system until the case can be heard, and that the court recognizes our 'demonstrated likelihood of success' on the merits of our National Bank Act claims," the groups said Friday.

They added, "We look forward to answering the judge's questions to ensure that this relief applies to all financial institutions involved in the Illinois payment system, so the customers they serve will also be protected from the harm IFPA will cause if it is allowed to move forward."

The Merchants Payments Coalition also issued a statement celebrating the ruling Friday and noting that three of its member associations have asked to join the suit. MPC Executive Committee member Doug Kantor said in the statement, "Illinois small businesses and their customers, along with workers who depend on tips, will benefit from protection against Visa and Mastercard's abusive swipe fees under this law."

"The judge agreed that Visa and Mastercard cannot burden businesses and consumers with fees on taxes and tips," said Kantor, who's also the general counsel for the National Association of Convenience Stores. "The card industry will still collect billions in swipe fees in Illinois alone under this law, but it is a key first step in bringing swipe fees under control. We look forward to the law taking effect against Visa and Mastercard in July."

The banking trade groups' suit has garnered the support of the Office of the Comptroller of the Currency, a top federal banking regulator that has criticized the law as being an "ill-conceived" threat to the "efficient and effective" banking system.

At the same time, trade groups for restaurants and retailers have urged Judge Kendall to leave the law intact. They contend that relief from the fees at issue is badly needed for small family businesses and consumers.

Judge Kendall heard two hours of oral arguments on the measure in October, commenting at the time that she would be "going back to law school" to study up following the hearing. She added that the statute seemed like a "complicated" way to address higher costs for consumers, but also pushed counsel for banking trade groups to address why she should block a law that hasn't yet taken effect, and if compliance is as burdensome as they claim.

The Illinois attorney general's office didn't immediately respond to a request for comment late Friday.

The banking group plaintiffs are represented by Carolyn Settanni of the Illinois Bankers Association, Thomas Pinder and Andrew Doersam of the American Bankers Association, Ann C. Petros and Carrie R. Hunt of America's Credit Unions, Ashley Niebur Sharp of the Illinois Credit Union League, Bethany K. Biesenthal, Shea F. Spreyer, Charlotte H. Taylor, and Matthew J. Rubenstein of Jones Day, and Boris Bershteyn, Kamali P. Willett, Sam Auld, and Amy Van Gelder of Skadden Arps Slate Meagher & Flom LLP.

The Illinois Attorney General's Office is represented in-house by R. Douglas Rees, Alex Hemmer, and Darren Kinkead.

The case is Illinois Bankers Association et al. v. Kwame Raoul, case number 1:24-cv-07307, in the U.S. District Court for the Northern District of Illinois.