17 January 2006

Federalism Triumphant???

Two federalism decisions from the Court today have interesting implications for both some pervading questions of ideology (usually disguised as concerns over allocation of power, and not ideological concerns over what one's neighbors are doing) and Internet/intellectual property jurisdiction.

In Gonzales v. Oregon (PDF), the Court held by a 6–3 vote (the usual suspects in a social-liberals-and-moderates v. social-conservatives case) that principles of federalism prevent the federal government from interfering with Oregon's traditional right to regulate physicians. This is in the doubly emotional context of physician-assisted suicide (a practice that Oregon's voters have approved under certain rigidly regulated conditions) and Postmodern Prohibition the Fiasco War on Drugs, which was Ashcroft's justification for trying to stop Oregon from allowing physicians to prescribe terminal palliative medication. It's a long opinion, but it basically boils down to this: Sauce for the goose is sauce for the gander. The twist is that this matter is not so much a question of authorization for legislation as it is of the scope of executive power to interpret regulatory statutes in a way that increases federal involvement in an area of presumed state supremacy. This decision will no doubt lead to howls of protest from social conservatives. Tough luck, Procrustes. I hope this encourages you to grow a little, especially on any vacations to the island of Cuba.

The other case today is much more interesting to procedure nerds. Like me. In Wachovia Bank v. Schmidt, the Court gave a unanimous (Thomas recused) smackdown to the Fourth Circuit's increasingly bizarre jurisdiction jurisprudence. The Bank should have been careful what it asked for… because it appears to have gotten it.

The litigation before us commenced when plaintiff-respondent Daniel G. Schmidt III and others, citizens ofSouth Carolina, sued Wachovia in a South Carolina state court for fraudulently inducing them to participate in an illegitimate tax shelter. Shortly thereafter, Wachovia filed a petition in the United States District Court for the District of South Carolina, seeking to compel arbitration of the dispute. As the sole basis for federal-court jurisdiction, Wachovia alleged the parties' diverse citizenship. The District Court denied Wachovia's petition on the merits; neither the parties nor the court questioned the existence of federal subject-matter jurisdiction. On appeal, a divided Fourth Circuit panel determined that the District Court lacked diversity jurisdiction over the action; it therefore vacated the judgment and instructed the District Court to dismiss the case.

Id., slip op. at 3 (emphasis added, citations omitted). Thus, the effect of this opinion is twofold. On the one hand, it expands the scope of federal-court jurisdiction in cases involving national banking associations. That's clearly something that Wachovia wants to happen; whether it should is a question for another time.1 More interestingly, though, the effect of the decision on this matter isn't exactly favorable to Wachovia: It reinstates a decision on the merits denying its motion to arbitrate. In the end, that result would be worse than merely getting dumped into state court: The last thing any financial corporation wants is to have "unsympathetic" judges and juries passing judgment upon it, especially if the other side is (gasp! shock! horror!) allowed to take discovery. As I read the Fourth Circuit's opinion, this really means that the Fourth Circuit will now review the District Judge's determination on the merits, as it had vacated that decision on (now-invalidated) jurisdictional grounds.

Wachovia is interesting for its implications for the theoretical foundations of Internet-based (and intellectual property-based) jurisdiction. For one thing, two major ISPs have arbitration clauses that appear virtually identical to Wachovia's, implying that those arbitration clauses may well have similar problems. For another, it clarifies some aspects of the ability of Internet commerce parties—including banks and credit-card issuers—to get into federal court on diversity grounds, whether under a contract or some other cause of action. Finally, it has some implications for some state-law-based suits that might end up in court, such as a state-law anti-spam suit with traceback from the actual sender to the party authorizing the spam, or certain varieties of trademark infringement. But now we're into nerd territory, aren't we?

  1. In the broadest sense, it's obvious why Wachovia wants this result: The pervasive myth that federal courts are more "defendant-friendly." Next time I'm involved in one of these—and I have been before—we'll discuss that after I serve my first set of discovery requests.