United States: Post-Dodd-Frank Preemption Standard Clarified

There were two developments last week regarding the preemption standard for national banks that we want to call to your attention. One development was a decision by the U.S. Court of Appeals for the 11th Circuit that should provide national banks a bit more clarification and comfort regarding the post-Dodd-Frank Act¹ preemption standard for national banks. The other development was an interpretive letter from the Office of the Comptroller of the Currency (OCC) that says, in essence, that the post-Dodd-Frank preemption standard for national banks might not differ substantially from the standard applied prior to enactment of the Act. While this interpretation is generally seen as good news by banks, it merely establishes the battle lines for challenges that ultimately will need to be settled by the courts. This issue is important for federal thrifts as well, as the Dodd-Frank Act eliminated the field preemption enjoyed by federal thrifts and subjects federal thrifts to the same preemption standards as national banks.

11th Circuit Decision

On May 11, 2011 the 11th Circuit affirmed a district court decision in favor of JPMorgan Chase's argument that a Florida law was in conflict with OCC regulations and therefore preempted.² The Florida law prohibits banks from charging check cashing fees. Regulations put forth by the OCC explicitly permit national banks to charge check cashing fees to "customers," including non-accountholders who present a check written against an account held at the bank. The 11th Circuit affirmed the finding that the Florida law and OCC regulations were in conflict and found that the OCC regulations preempted the Florida prohibition. In its opinion, the 11th Circuit noted that the Dodd-Frank Act continues to call for conflict preemption and the use of the Barnett standard articulated by the Supreme Court in 1996.³ The 11th Circuit stated that it was adopting the reasoning of the 5th Circuit in a similar case involving Texas law decided in 2003.⁴ Implicit in the 11th Circuit's decision seems to be that the Dodd-Frank Act did not change the relevant standard in a case of this nature, even though the preemption provision in Dodd-Frank is not effective until July 21, 2011.

OCC Interpretive Letter

On May 12, 2011 the OCC issued a letter providing some additional guidance on the OCC's views of the preemption provisions in section 1044 of the Dodd-Frank Act. The letter was a response by Acting Comptroller John Walsh to Senator Thomas Carper (D-Del), who authored an early version of the Dodd-Frank Act. While Senator Carper's version explicitly cited to Barnett, the final version of the Act defines the Barnett standard by using language from the Supreme Court's Barnett opinion, which affirms the OCC's authority to preempt a state law or regulation that "prevents or significantly interferes with the exercise by the national bank of its powers."

The key interpretation in the OCC letter is that "precedents that are consistent with the principles of the Barnett conflict preemption analysis are preserved." Many supporters of strong national bank preemption see the OCC letter as good news. Some supporters and commenters also suggest that section 1044 of the Dodd-Frank Act codified the Barnett standard and thus nothing changed regarding the standard for preemption, and the May 12 letter from Acting Comptroller Walsh confirms that view, noting that the OCC will likely only make changes to its current preemption rules in 12 CFR §§ 7.4007, 7.4008, and 34.4, introduced in 2004, rather than repeal them.⁵

On the other side of the issue are many state Attorneys General, state regulators, and some House Democrats. They argue that because Congress included the phrase "prevents or significantly interferes with the exercise by the national bank of its powers," the intent was to repeal the OCC's 2004 rules and impose a standard that goes beyond that articulated by the Barnett Court as one that would "obstruct, impair, or condition." Thus, they believe section 1044 of Dodd-Frank codifies Barnett but pulls back the more aggressive position taken in the OCC rule because the statute does not simply cite to Barnett but also goes on to articulate the standard in this way: "the State consumer financial law prevents or significantly interferes with the exercise by the national bank of its powers; and any preemption determination under this subparagraph may be made by a court, or by regulation or order of the Comptroller of the Currency on a case-by-case basis, in accordance with applicable law."

While the May 12 letter from Acting Comptroller Walsh states that the OCC likely will not repeal its preemption rules, Acting Comptroller Walsh does concede that the OCC will be amending the regulations to delete the "obstruct, impair, or condition" language. Specifically, the letter states:

While the headlines about the May 12 letter focused on the OCC's statement that the preemption standard has not changed, the above quote is a concession on the part of the OCC that something has, in fact, changed. In addition, the May 12 letter notes that Dodd-Frank did overturn the OCC position that operating subsidiaries of national banks enjoy the same level of preemption as the national bank itself. As noted above, the May 12 letter also noted that the OCC will have to amend current Office of Thrift Supervision regulations regarding preemption after the transfer date because section 1046 of the Dodd-Frank Act harmonized the preemption standard applicable to federal thrifts and national banks, so that the relevant standard for both is conflict preemption and not the field preemption previously enjoyed by federal thrifts. Though it may not sound like it, both sides of this issue may be agreeing more than they are disagreeing.

Conclusion

Whether the preemption standard for national banks has changed or not will ultimately be decided by the courts. Nevertheless, the Dodd-Frank Act will make OCC preemption determinations a bit more difficult. The Dodd-Frank Act:

• affords OCC preemption determinations less deference in court reviews than is currently given to the OCC for these determinations
• requires the OCC to base its determinations on substantial evidence made on the record of a proceeding
• requires determinations to be made on a case-by-case basis
• requires the OCC to review existing preemption determinations periodically through notice and public comment
• requires OCC consultation with the Bureau of Consumer Financial Protection
• expressly provides that the OCC does not occupy the field of state law
• prohibits the Comptroller from delegating preemption determinations.

We expect the preemption battle to be hard fought by many constituencies. It is likely to be a long process, much like the many years that preceded the Barnett decision. We will continue to monitor this subject, and provide updates as substantive developments warrant.

Footnotes

1 Dodd Frank Wall Street Reform and Consumer Protection Act, P.L. 111-203 (2010)
2 See Baptista v. JPMorgan Chase, N.A., No. 10-13105 (11th Cir. May 11, 2011) (available at www.ca11.uscourts.gov/opinions/ops/201013105.pdf)
3 See Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, et al., 517 U.S. 25 (1996)
4 See Wells Fargo Bank of Tex. N.A. v. James, 321 F.3d 488 (5th Cir. 2003)
5 See 69 Fed. Reg. 1904 (Jan. 13, 2004)

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