Argument Recap: Watters v. Wachovia on 11/29

The following argument recap was written by Jennifer Liu of the Stanford Supreme Court Litigation Clinic. Her preview of this case can be found here.

On Wednesday, November 29, the Court heard argument in Watters v. Wachovia Bank (No. 05-1342). Wachovia Bank centers on 12 C.F.R. § 7.4006, a regulation promulgated by the Office of the Comptroller of the Currency (OCC), the agency with primary regulatory and enforcement power over national banks. That regulation interprets 12 U.S.C. § 484(a), a provision of the National Bank Act that prohibits states from exercising visitorial authority over national banks, as also preempting state regulation of state-chartered nonbank operating subsidiaries of national banks. The two questions presented in the case are, first, whether the regulation is entitled to Chevron deference, and second, if it violates the Tenth Amendment by displacing state regulation of state-chartered operating subsidiaries of national banks.

During much of oral argument, the justices focused their questions on the practical implications of the rule. Chief Justice Roberts, in particular, seemed preoccupied by the fact that, under the OCC’s interpretation, a national bank could use an operating subsidiary to engage in banking activities that the parent bank could otherwise conduct, but also to shield the parent bank from liability for the acts of the subsidiary. “You are really trying to have your cake and eat it, too,” he remarked. Arguing for respondents, Robert Long of Covington & Burling countered that state authorities are preempted from regulating the same activities when they are conducted by the parent national bank itself, and that the purpose of 12 U.S.C. § 24a(g)(3)(A) was to enable national banks to use operating subsidiaries to conduct such activities subject to the same terms and conditions that would apply to the national bank.

Several justices brought up the reverse problem that petitioner’s position would subject national banks to two systems of regulation—both federal and state—making compliance extremely costly and burdensome. Justice Souter highlighted this concern as a reason to question what Congress intended in enacting Section 484(a). Petitioner had argued in her briefs that Congress, by distinguishing between national banks and affiliates elsewhere in the statutory scheme, clearly and unambiguously foreclosed federal preemption of state laws regulating affiliates, including operating subsidiaries. “It seems counterintuitive,” Justice Souter said, “that Congress would silently say, ‘and of course, we acquiesce to a [] dual system of regulation that would not apply to the bank itself.’” Picking up on this concern, Mr. Long emphasized the longstanding principle of McCulloch v. Maryland that the primacy of federal banking law is essential to protect the national banking system from interference by potentially unfriendly states. Michigan Assistant Attorney General E. John Blanchard, arguing on behalf of petitioner, similarly pressed policy reasons in his argument, stressing that the regulation deprived states of the authority to protect its consumers from predatory mortgage lending practices that might not be caught by federal regulators, a rationale that seemed to win support from the Chief Justice.

The justices also grappled with whether the preemption of state regulation in the case amounted to conflict preemption or field preemption. Justices Breyer and Kennedy asked several questions on this point, pressing Mr. Blanchard on how the case presented anything other than a standard conflict preemption case. Mr. Long adopted the position that the regulation effected field preemption, but added that respondents would win on conflict preemption as well. Sri Srinivasan, arguing on behalf of the United States as amicus curiae, maintained that the case involved conflict preemption only, pointing out that other state laws, such as those dealing with corporate governance, would still apply, a point that both Justices Kennedy and Ginsburg also appeared to make during questioning of Mr. Blanchard. Chief Justice Roberts appeared convinced, however, that the regulation’s scope extended more broadly than conflict preemption. The regulation, he mentioned several times, would preempt state law regulating operating subsidiaries regardless of whether the state law actually conflicted with federal law: “It’s field preemption when it comes to regulation.” If, to the contrary, the Court views Wachovia Bank as a standard conflict preemption case, it will likely affirm the lower court’s decision, consistent with the Fidelity Federal Savings and Loan Association v. De La Cuesta line of cases cited by Mr. Long.

Justice Scalia also focused much of his questioning on statutory interpretation, eliciting responses that may direct how the Court will proceed under Step One of its Chevron analysis. In 12 U.S.C. § 481, Justice Scalia noted, Congress explicitly distinguished between national banks and affiliates. In Section 484(a), however, the text refers only to national banks, implying that preemption of state law should not extend to affiliates. The OCC’s regulation, he continued, eliminates that distinction. Both Mr. Long and Mr. Srinivasan responded that Congress was necessarily silent on the question of whether preemption of state visitorial powers over national banks would extend to the operating subsidiaries of national banks, as operating subsidiaries did not exist at the time Section 484(a) was drafted. In his rebuttal, however, Mr. Blanchard pointed out that Congress has amended both Section 481 and 484(a) multiple times since operating subsidiaries came into existence, and that its decision not to amend Section 484 to include affiliates should be read to evince its intent.