Why Watters Matters: An Early Lesson from the First Circuit

Even in a quieter Term, the Supreme Court’s 5-3 decision in Watters v. Wachovia Bank, N.A. would hardly go down as one of the more significant, noteworthy, or even interesting rulings handed down, and that will certainly prove to be the case as the present Term races toward its (increasingly controversial) end. That’s not to say, though, that Watters won’t turn out to have a substantial impact on federal and state commercial regulation in a large class of cases, and we have a First Circuit decision from yesterday as proof of that. [Hat tip to How Appealing.]

First, Watters. I’ve blogged extensively about the issue and the decision before (see, e.g., here, here, and here), but the short of it is that the Office of the Comptroller of the Currency is entitled to preempt state consumer regulation of “national banking activities” even when those activities are conducted by entities other than “national” banks. In Watters itself, the issue was whether the OCC could preempt state regulation of national banks’ operating subsidiaries, and the Court affirmed decisions of the Second, Fourth, Sixth, and Ninth Circuits, all answering that question in the affirmative (although, as I noted at the time, the Court adopted the Ninth Circuit’s Chevron-free analysis, rather than the Chevron-laden views of the other three circuits).

The problem is that by focusing on the activity rather than the actor, the Court endorsed a broad understanding of the OCC’s preemptive authority, and one that could possibly extend to oust state regulation of all kinds of commercial actors, none of whom are actually “national banks,” and none of whom are therefore expressly protected by federal statute. Justice Stevens, in his eloquent dissent, raised the specter of such a possibility, and the First Circuit, yesterday, proved Justice Stevens prophetic. More about the decision below the fold…

At issue in the First Circuit case, SPGGC, LLC v. Ayotte, was whether the OCC could preempt New Hampshire’s regulation of gift cards sold by the operator of New Hampshire’s three largest malls, given that the cards were “issued” by Bank of America, a “national” bank under the National Bank Act. Specifically, New Hampshire, via a consumer protection statute, sought to prohibit the sale of such gift cards when the cards contained both an expiration date and less-than-obvious administrative fees that would ultimately reduce the face value of the card. Thus, put another way, the case raises the question whether the OCC can preempt state regulation of third parties when the third parties are selling gift cards issued by national banks.

Writing for a unanimous panel, Judge Torruella held that the New Hampshire statute was preempted by an OCC regulation. In the opinion’s critical passage, the court, understandably, relied upon Watters:

Because the National Bank Act confers on national banks the power to issue stored value gift cards like those at issue here and to market and sell them through third party agents, we consider whether the New Hampshire CPA frustrates the exercise of that power. The New Hampshire CPA prohibits the sale of a giftcard with a value of less than $100 that carries an expiration date or administrative fees. Ayotte argues that this regulation does not conflict with the National Bank Act or OCC regulations because it regulates only Simon, a company that is not a bank. Ayotte notes that no enforcement action was brought against USB. But this analysis is too formalistic: the question here is not whom the New Hampshire statute regulates, but rather, against what activity it regulates. See Watters v. Wachovia Bank, N.A., No. 05-1342, slip op. at 13, 550 U.S. __ (Apr. 17, 2007) (“We have never held that the preemptive reach of the [National Bank Act] extends only to a national bank itself. Rather, in analyzing whether state law hampers the federally permitted activities of a national bank, we have focused on the exercise of a national bank’s powers . . . .” (emphasis in original)).

In other words, it is irrelevant whether the entity being regulated by the state is a national bank or isn’t; it matters only whether it is conducting “national banking activities.”

This may sound entirely reasonable, save one small problem: There is no support in the National Bank Act for such an activity-specific view of preemption. Quite to the contrary, the Act repeatedly relies upon the special and unique nature of national banks as justifying the preemption of state law. And so, whether the state law or the federal preemption is the wiser policy, there is absolutely zero evidence of congressional intent (which used to matter) supporting preemption of regulation such as that attempted by New Hampshire in this case.

Justice Stevens put it best at the end of his dissent in Watters:

Almost invariably the finding of preemption has been based on this Court’s interpretation of statutory language or of regulations plainly authorized by Congress. Never before have we endorsed administrative action whose sole purpose was to preempt state law rather than to implement a statutory command.

Just over one month later, we begin to reap the consequences.

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