Watters v. Wachovia Bank, N.A., No. 05-1342 (previously discussed in the June 19, 2006 Docket Report). The National Bank Act, 12 U.S.C. § 1 et seq., exempts national banks from most state regulation and also specifically allows them to make mortgage loans. 12 U.S.C. § 371(a). The question in this case was whether a state-chartered, wholly-owned operating subsidiary of a national bank is similarly exempt from most state regulation.

In a 5-3 opinion by Justice Ginsburg, the Court held that it is. The Court reasoned that because operating subsidiaries, as distinct from other types of bank “affiliates,” may engage only in “the business of banking” (12 U.S.C. § 24a), state regulation of an operating subsidiary would be just as offensive to the federal regulatory scheme as state regulation of the nationally chartered parent. The Court also held that the Tenth Amendment does not preserve state power over subsidiaries, as bank regulation is a power constitutionally delegated to Congress. Justice Stevens, joined by the Chief Justice and Justice Scalia, dissented; Justice Thomas did not participate.

The case is a major victory for national banks conducting consumer lending operations and other activities through operating subsidiaries. While national banks have always enjoyed broad preemption rights under the National Bank Act, the extension of these rights to operating subsidiaries had been challenged by a number of states. A ruling affirming state regulatory authority would have required national banks either to obtain state lending licenses for their operating subsidiaries or to pull these businesses back into the bank. Such a decision could also have raised questions about the enforceability of the loans originated by these unlicensed operating subsidiaries.

Global Crossing Telecommunications, Inc. v. Metrophones Telecommunications, Inc., No. 05-705. The Telephone Operator Consumer Services Improvement Act of 1990 requires payphone operators to allow payphone users to obtain “free” access to the long-distance carrier of their choice, i.e., access without depositing coins. But recognizing that the “free” call imposes a cost upon the payphone operator, Congress required the FCC to “prescribe regulations that * * * establish a per call compensation plan to ensure that all payphone service providers are fairly compensated for each and every completed intrastate and interstate call.” 47 U.S.C. § 276(b)(1)(A). The FCC did so, and determined that a long distance carrier’s refusal to pay the ordered compensation amounts to an “unreasonable practice” under Section 201(b) of the Communications Act of 1934. 47 U.S.C. § 201(b). At issue in this case was whether a payphone operator may sue in federal court under Section 207 of the Communications Act of 1934, which empowers persons “damaged” by unjust or unreasonable practices to bring suit in a “court” of the United States. 47 U.S.C. § 207. Writing for the majority in a 7-2 decision, Justice Breyer found that Section 207 authorizes such a suit.

In reaching this conclusion, the Court reasoned that Section 207 “plainly” creates a private right of action for all “actions that complain of a violation of § 201(b) as lawfully implemented by an FCC regulation.” Because the splitting of revenue received by a long-distance carrier for coinless calls is “necessary to the proper implementation” of the statutory scheme, the Court concluded that the FCC was “well within its authority” in determining that the carrier’s failure to compensate a payphone operator is an “unreasonable practice” under Section 201(b) and therefore actionable in federal court under Section 207.

The Supreme Court’s decision is significant in its definition of the scope of Section 201(b). The Court rejected—as inconsistent with the statute’s plain text and the history of the provision— Justice Thomas’s argument in dissent that a “practice” under Section 201(b) extends only to actions that harm carrier customers, not carrier suppliers. The majority’s decision also reinforces the FCC’s enforcement authority. Notably, the Court rejected Justice Scalia’s argument that the practice of not paying compensation to a payphone operator is not itself unjust or unreasonable, but made so only by violation of a substantive regulation of the Commission, which is insufficient to give rise to a private cause of action. The Court responded that the relevant issue in determining whether Section 207 creates a right of action is not whether the practice is inherently unjust or unreasonable under Section 201(b), but whether the carrier violated an FCC regulation. “[I]n ordinary English,” the Court reasoned, a practice violating an FCC order must necessarily be “an ‘unjust practice.’”

If you have any questions about today’s decisions, please contact Andrew Tauber at atauber@mayerbrown.com or 202-263-3324.