Not If the Supreme Court Shares Obama’s Vision of Federalism.

by Elizabeth Wydra, Chief Counsel, Constitutional Accountability Center

As we first wrote about here, yesterday President Obama issued a memorandum to the heads of executive departments and agencies announcing a return to first principles of constitutional federalism. Obama stated that “the general policy of my Administration [is] that preemption of State law by executive departments and agencies should be undertaken only with full consideration of the legitimate prerogatives of the States and with a sufficient legal basis for preemption.” The doctrine of preemption covers when and to what extent federal law “pre-empts” (or trumps) state law – and is an area in which the Bush Administration fought aggressively to block state and local efforts to protect their citizens and natural resources.

Putting his new policy into action, Obama’s memo directed the heads of departments and agencies to scrub statements in previously-issued regulatory preambles and codified provisions to ensure that they do not seek to unjustifiably preempt state authority. Obama officials will certainly have a lot to work with: as we have discussed on this site (see here, here, here, here, and here, for a taste) and at Warming Law (see here and here, for starters) the Bush Administration waged an aggressive pro-preemption campaign to trump important state laws that protect consumers, the environment, and public health and safety. The Bush Administration’s efforts to protect corporate interests came at the expense of both our federalist system and everyday Americans. Obama’s reversal of Bush’s preemption policies gives hope that his Administration will oversee a renewal of a cooperative federalism that appreciates the important role state and local governments play in protecting the citizenry.

Unfortunately, some of the Bush preemption legacy lives on in litigation pending before the Supreme Court. On the penultimate day of argument this Supreme Court Term, the Justices considered Cuomo v. The Clearing House Association, a case that challenges whether states can enforce laws against predatory lending and discriminatory credit practices – including the types of practices that directly resulted in last year’s subprime mortgage crisis. Involving the little-known federal agency Office of Comptroller of the Currency (OCC) and the even more obscure prohibition against “visitorial powers” in the Civil War-era National Bank Act, Cuomo asks whether a 2004 OCC regulation lawfully preempted state efforts to enforce fair lending laws against branches of national banks. The Bush Administration vigorously defended preemption of state enforcement powers and opposed the states’ efforts to obtain Supreme Court review. The Supreme Court granted review of the case a short time after Obama’s inauguration, and Obama’s Solicitor General maintained the Bush Administration’s “pro-preemption” position.

To a certain extent, the Solicitor General’s hands were tied: the OCC regulation had not been rescinded and remained federal agency law, and the SG has an obligation to defend federal laws and regulations as they are written. But one can only wish that Obama’s new vision of cooperative federalism had been put into place early enough to make a difference in Cuomo. As Eliot Spitzer wrote over a year ago in a Washington Post op-ed (and we discussed in greater depth here), the Bush OCC’s preemption crusade came at a crucial point in what we now know would become a massive crisis in our housing market and banking system. Had states been able to enforce their laws against predatory lending—as they were ready, willing, and able to do—they may have been able to prevent some bad loans and ward off home foreclosures.

The fate of Cuomo now rests with the Supreme Court. The Justices last considered an OCC preemption question in Watters v. Wachovia, a 2007 case that resulted in some very strange bedfellows: Justice Ginsburg delivered the pro-preemption opinion of the Court, with Justices Kennedy, Souter, Breyer and Alito joining; Justice Stevens wrote a dissent, joined by Justice Scalia and Chief Justice Roberts. (Justice Thomas recused himself due to a family-related conflict of interest.) In Wachovia, Justice Stevens’s dissent forcefully argued for states and the federal government to work together in ensuring a fair and well-regulated banking system, supporting this argument with text, history, and the longstanding doctrine of a “presumption against preemption,” which the Court recently re-affirmed in Wyeth v. Levine. With Justice Thomas back in the mix, Stevens might be able to add to his anti-preemption alliance and possibly cobble together the majority in Cuomo that he was unable to get in Wachovia.

We will likely have to wait until late June to find out in Cuomo whether a majority of Justices share the view of cooperative federalism expressed in Obama’s policy memorandum issued yesterday, or the view of OCC preemption expressed by the Bush Administration (and maintained by the Obama Administration) in their Supreme Court briefs. In the meantime, the Department of Justice and the Solicitor General should follow Obama’s policy statement in yesterday’s memorandum and, wherever possible, take positions in litigation that reflect the respect for state and local government at the heart of Obama’s new preemption policy and at the heart of our Constitution. At the very least, Obama’s move to reverse Bush-era preemption regulations assures us that the Solicitor General won’t be forced to defend cases like Cuomo for long.