January 1, 2000

Jump Ball -- Litigation Between Insurance And Banking Under the Financial Modernization Act

9 min

The Financial Modernization Act (Pub. L. No. 106-102) has introduced a new feature into law - the "jump ball " provision - that gives Federal courts effective authority to make final policy decisions about where to draw the line that separates insurance from banking. This dividing line has been a prolific source of litigation over the last decade, pitting industry against industry and Federal banking agencies against State insurance regulators. The "jump ball" provision will exacerbate the situation, by shifting the locus of decision-making from regulatory agencies to the judiciary. These lawsuits will present troublesome jurisprudential questions about the proper role of the courts in the administrative state.

The "jump ball" provision creates a unique standard of review for cases in which a State insurance commission sues a Federal bank regulator to challenge its determination whether a financial product constitutes insurance or is part of the business of banking. In such agency-versus-agency litigation, the "jump ball" standard directs Federal courts to decide the issue "without unequal deference" to the views of either agency, and after review of a defined list of policy considerations that an executive branch official would analyze in reaching a political decision.

The "jump ball" mechanism creates strong incentives for conversion of policy disagreements about the proper characterization of a financial product into agency-versus-agency litigation between State regulators and the Office of the Comptroller of the Currency ("OCC"). While the OCC will argue that judges should continue to defer to its position notwithstanding the new standard of review, the courts are likely to reject its position and conclude that the "jump ball" provision requires them to make a de novo decision whether a product constitutes banking or insurance. In these circumstances, the role of the OCC will be reduced to that of a subordinate fact gatherer and advisor for the appellate court.

Background. The "jump ball" mechanism responds to the insurance industry's convictions that the OCC bent the law to allow national banks to sell insurance and that insurers could not obtain a fair hearing of their challenges in Federal court, because of the operation of the principle of judicial deference to the views of the implementing agency. Two Supreme Court decisions in the mid-1990s fueled insurers' belief that the standard of review must be changed in order to assure a level playing field in litigation over the proper characterization of a product as banking or insurance.

In 1995, a unanimous Supreme Court upheld a controversial OCC decision that the sale of annuities by national banks to their customers was "incidental" to "the business of banking" under the National Bank Act. Nationsbank of North Carolina v. VALIC, 513 U.S. 251 (1995). The Court ignored the McCarran-Ferguson Act and the role it carves out for State regulation of insurance, and analyzed the matter exclusively as a question of Federal banking law. Settling a century-old dispute, the Court found that the statutory term "the business of banking" was ambiguous, that the OCC's broad construction of that term was reasonable, and that the judiciary was obliged to defer to the agency's interpretation under the normal operation of the Chevron doctrine.

In 1996, a unanimous Supreme Court held that a Federal banking statute preempted a conflicting Florida law that prohibited banks in small towns from selling most forms of insurance. Barnett Bank of Marion County v. Nelson, 517 U.S. 25 (1996). Upon review of the language and history of the banking law, the Court concluded that the Florida law was preempted because it prohibited national banks from engaging in insurance activities Congress had authorized, and that the State provision was not saved by a special insurance-related anti-pre-emption rule in the McCarran-Ferguson Act.

In Congressional negotiations over the Financial Modernization Act, insurers sought reaffirmation of the principle that States have primacy in the regulation of insurance, backed by inclusion of a mechanism to prevent future erosion of the line dividing insurance from banking through a process of OCC interpretation of Federal banking laws. Congress ultimately adopted the "jump ball" provision, which the insurance industry hoped would overcome VALIC and deny the OCC the advantage of Chevron deference in future litigation where State insurance commissioners challenge its decisions.

Standard of Review for Disputes between State and Federal Regulators. The "jump ball" provision, Section 304 of the Gramm-Leach-Bliley bill, applies to regulatory conflicts between a State insurance commission and a Federal regulator regarding whether a financial service is properly characterized as insurance, to be regulated by the State, or a banking activity subject to OCC regulation. When such a dispute arises, either the State or Federal regulator may obtain expedited judicial review by filing a lawsuit in the D.C. Circuit or the Circuit in which the State is located. The literal language of Section 304(a) extends this right only to the State regulator, and not to the companies whose business interests are involved. Accordingly, this special dispute resolution provision, with its attendant procedural innovations, does not apply to lawsuits filed by private parties, but only to agency-versus-agency litigation.

The OCC has expressed the hope that there will be little future litigation between the insurance and banking industries, because private companies now share a commonality of interest in selling their products through multiple types of institutions. Two procedural aspects of the "jump ball" provision, however, create significant countervailing incentives to prosecute insurance-banking disputes through litigation. First, Section 304(b) requires the court of appeals to issue its judgment within 60 days of the filing of the petition for review. This acceleration provision will give these industry turf battles priority over virtually all other cases on the court's docket. It thereby offers the side that lost at the agency level a rapid and cost-effective judicial review of the issue. This will allow the States to bind together in test cases, in order to offset the resource advantage that the OCC has enjoyed in litigation against individual State insurance commissions in insurance-banking lawsuits.

Second, Section 304(e) provides that the court must base its review "on the merits of all questions presented under State and Federal law, including the nature of the product or activity and the history and purpose of its regulation under State and Federal law, without unequal deference." The term "without unequal deference" is ambiguous, and the first lawsuits will test how this critical provision should be applied.

The insurance industry believes that Section 304(e) means that VALIC is no longer applicable and that State views about the proper classification of a product as insurance or banking should be weighed equally with that of the Federal regulator. The States will further argue that, with the repeal of the requirement of deference to OCC, the courts should apply the reaffirmed default principle of McCarran-Ferguson and find that disputed products fall on the "insurance" side of the dividing line.

The OCC disagrees. It believes that "without unequal deference" means that the courts should defer to State interpretations in matters that arise under State law and to OCC interpretations in matters that arise under Federal law. Since insurance-banking disputes typically arise in challenges to actions under the National Banking Act, OCC will argue that the courts should continue to defer to its construction of its own statute. Under this approach, most disputes would be resolved under VALIC and in OCC's favor.

Both the States and the OCC are likely to be disappointed by the courts' reaction to their arguments that, in practice, the "jump ball" provision implicitly requires deference to their position. A straightforward reading of the phrase "without unequal deference" suggests that the reviewing court should consider the views of both the State and Federal regulators and weigh them equally. The court is not bound by either interpretation, nor is it required to choose between their formulations. In other words, the court is free to devise its own position de novo about whether a product is properly characterized as insurance or banking, without regard to what the agencies believe. In reaching its conclusion, the court is directed to consider the nature of the product and the purpose of its regulation - factors that do not provide a judicial rule of decision but are appropriately considered by a body making a policy judgment.

The "without unequal deference" standard of review thus disables the Chevron doctrine, and its application in VALIC, for agency-versus-agency litigation. Congress thereby has quietly adopted, in the narrow area of insurance-banking disputes, a key part of the Bumpers Amendment, a failed regulatory reform proposal from the late 1970s. The courts will soon discover the practical and jurisprudential problems with this compromise.

In practical terms, the new standard virtually invites litigation. By directing the court to accord no special weight to the views of the Federal regulator, Section 304(e) drains the agency decision of much significance and reduces the regulatory process to a fact finding exercise that precedes the dispositive battle in court. Further, by disabling Chevron in agency-versus-agency litigation but not in private suits, the jump ball provision encourages losing business interests to recruit the preempted State regulator as their litigation champion. The acceleration provision reinforces this incentive, by offering a low cost, warp speed resolution from the appellate court.

In jurisprudential terms, the jump ball provision is troublesome because it invites the courts to reconcile competing industry interests on the basis of the judges' personal views of wise policy. The dividing line between insurance and banking must be drawn by one of three bodies: by Congress, by administrative agencies, or by the courts. Where Congress has directly addressed the matter, its "unambiguously expressed intent" will be given effect. More often than not, however, Congress "has not directly addressed the precise question at issue" or has not done so "at the level of specificity presented by the cases." Accordingly, in most insurance-banking disputes, the ultimate decision must be made elsewhere, following the new rule of decision Congress has established. The "jump ball" standard of review will preclude the courts from deferring to agency views. Instead, the courts will now have to decide these issues for themselves, based on Congressionally defined criteria - "the nature of the product or activity and the history and purpose of its regulation" - that describe policy factors to be considered rather than providing a functional decision-making principle.

The courts are hardly an ideal entity to make these decisions. They lack expertise in the distinctions between insurance and banking, and they are not directly accountable to the people, as are the political branches. Further, since the Bumpers Amendment was first proposed, the Supreme Court has clarified in Chevron that the principle of deference is grounded in separation of powers considerations, precisely because the courts are institutionally ill-equipped to make the kinds of decisions that typically are required of Federal regulators. Nonetheless, Federal appellate judges will now be required to make these decisions under the "without unequal deference" formula.

Conclusion. In Chevron, Justice Scalia observed that "[c]ourts must, in some cases, reconcile competing political interests, but not on the basis of the judges' personal policy preferences." While the "jump ball" provision may have helped Congress strike a political compromise between the insurance and banking industries, the mechanism it adopted threatens to stimulate litigation, in which Congress has directed Federal appellate judges to render decisions based on considerations that generally are not considered proper bases for judicial decisions. The judges called upon to resolve these agency-versus-agency disputes will need to display uncommon statesmanship to find a means for making this statutory provision work, without appearing to decide high stakes cases based on their own policy views.