Association of Data Processing Service Organizations, Inc. v. Board of Governors of Federal Reserve System, Nos. 82-1910

CourtUnited States Courts of Appeals. United States Court of Appeals (District of Columbia)
Writing for the CourtBefore GINSBURG and SCALIA, Circuit Judges, and VAN PELT; SCALIA
Citation240 U.S.App.D.C. 301,745 F.2d 677
Parties, 53 USLW 2198 ASSOCIATION OF DATA PROCESSING SERVICE ORGANIZATIONS, INC., Comshare, Inc., Tymshare, Inc., Petitioners, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, Citicorp, Intervenor. ASSOCIATION OF DATA PROCESSING SERVICE ORGANIZATIONS, INC., Comshare, Inc., Tymshare, Inc., Petitioners, v. BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent, Citicorp, California Bankers Clearing House Association, et al., Intervenors.
Docket NumberNos. 82-1910,82-2108
Decision Date02 October 1984

Page 677

745 F.2d 677
240 U.S.App.D.C. 301, 53 USLW 2198
ASSOCIATION OF DATA PROCESSING SERVICE ORGANIZATIONS, INC.,
Comshare, Inc., Tymshare, Inc., Petitioners,
v.
BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent,
Citicorp, Intervenor.
ASSOCIATION OF DATA PROCESSING SERVICE ORGANIZATIONS, INC.,
Comshare, Inc., Tymshare, Inc., Petitioners,
v.
BOARD OF GOVERNORS OF the FEDERAL RESERVE SYSTEM, Respondent,
Citicorp, California Bankers Clearing House Association, et
al., Intervenors.
Nos. 82-1910, 82-2108.
United States Court of Appeals,
District of Columbia Circuit.
Argued April 26, 1983.
Decided Oct. 2, 1984.

Page 680

Petitions for Review of an Order of the Federal Reserve system.

P. Michael Nugent, Arlington, Va., with whom Milton R. Wessell, Ronald J. Palenski and David R. Wormser, Arlington, Va., were on the brief for petitioners.

Richard M. Ashton, Atty., Board of Governors of the Federal Reserve System, Washington, D.C., with whom Jennifer Johnson, Attorney, Board of Governors of the Federal Reserve System and J. Paul McGrath, Asst. Atty. Gen., U.S. Dept. of Justice, Washington, D.C., were on the brief for respondent.

Richard A. Whiting, Washington, D.C., with whom Charles G. Cole and David L. Roll, Washington, D.C., were on the brief for intervenor Citicorp.

Alan K. Palmer, Washington, D.C., with whom Steven S. Rosenthal, Henry D. Levine, Washington, D.C., and Deborah L. Leon, San Francisco, Cal., were on the brief for intervenors California Bankers Clearing House Association, et al., in No. 82-2108.

Before GINSBURG and SCALIA, Circuit Judges, and VAN PELT, Senior Judge of the United States District Court for the District of Nebraska. *

Opinion for the Court filed by Circuit Judge SCALIA.

SCALIA, Circuit Judge:

The Association of Data Processing Service Organizations, Inc. ("ADAPSO"), a national trade association representing the data processing industry, and two of its members petition this court for review of two orders of the Board of Governors of the Federal Reserve System, pursuant to 12 U.S.C. Sec. 1848 (1982). In No. 82-1910, they seek review of the Board's July 9, 1982 order approving Citicorp's application to establish a subsidiary, Citishare, to engage in certain data processing and transmission services. Order Approving Engaging in Data Processing and Data Transmission Activities, 68 Fed.Res.Bull. 505 (1982) ("Citicorp Order"). In No. 82-2108, they seek review of the Board's August 23, 1982 order, entered after notice and comment rulemaking, amending those portions of Regulation Y which dealt with the performance of data processing activities by bank holding companies. Data

Page 681

Processing and Electronic Funds Transfer Activities, 47 Fed.Reg. 37,368 (1982) (as set forth at 12 C.F.R. Secs. 225.4(a)(8), 225.123(e) (1983) ("Regulation Y Order"). 1 We consolidated the two appeals.

The Bank Holding Company Act of 1956, ch. 240, 70 Stat. 133 (codified as amended at 12 U.S.C. Secs. 1841-50 (1982)) (the "Act"), requires all bank holding companies to seek prior regulatory approval before engaging in nonbanking activities. The restrictions do not apply to:

activities ... which the Board after due notice and opportunity for hearing has determined (by order or regulation) to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.... In determining whether a particular activity is a proper incident to banking or managing or controlling banks the Board shall consider whether its performance by an affiliate of a holding company can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices.

12 U.S.C. Sec. 1843(c)(8). Section 1848, the source of our review authority, provides that "[t]he findings of the Board as to the facts, if supported by substantial evidence, shall be conclusive." Id. at Sec. 1848.

On February 23, 1979, Citicorp applied for authority to engage, through its subsidiary Citishare, in the processing and transmission of banking, financial, and economic related data through timesharing, electronic funds transfer, home banking and other techniques. It also sought permission to sell its excess computing capacity and some computer hardware. The Board published notice of Citicorp's application, which was protested by ADAPSO, and set it for formal hearing. 45 Fed.Reg. 41,533 (July 19, 1980). Before the hearing was held, Citicorp amended its application to add certain activities and to request amendment of Regulation Y to permit the activities it had specified. The Board published an Amended Order for Hearing and invited public comments and participation. 45 Fed.Reg. 76,515 (Nov. 19, 1980). A formal hearing was held before an Administrative Law Judge in which the merits of both the application and the proposed rule were considered. In addition, more than sixty companies and individuals submitted written comments on the proposed rule. On March 29, 1982, the ALJ decided that the activities proposed by Citicorp were closely related to banking and would produce benefits to the public which would outweigh their costs. In re: Application of Citicorp to Engage in Data Processing and Transmission Activities, ALJ Recommended Decision, J.A. B-68 to B-123 ("Recommended Decision"). The ALJ also recommended amendments to Regulation Y that would permit those activities contained in the Citicorp application. On July 9, 1982, the Board adopted the ALJ's recommendation to approve the Citicorp application, with certain restrictions. On August 23, 1982, the Board adopted the ALJ's recommended amendments to Regulation Y, again with certain restrictions. ADAPSO, and two of its members, participants in the actions below, filed these petitions for review.

I. STANDARD OF REVIEW

We are faced at the outset with a dispute regarding the proper standard of review. These consolidated appeals call for us to review both an on-the-record adjudication and an informal notice and comment rulemaking. Petitioners contend that the substantial evidence standard, which presumably authorizes more rigorous judicial review, should govern our review of both orders. Petitioners' Reply Brief at 26-28. The Board agrees, noting that Sec. 1848 applies a substantial evidence standard to factual

Page 682

determinations. Respondent's Brief at 22. Intervenor Citicorp contends that while the substantial evidence standard should govern review of the Citicorp order, Regulation Y should be upset only if arbitrary or capricious. Citicorp Brief at 16-17. Intervenor California Bankers Clearing House Association, addressing only Regulation Y, also advocates review under the arbitrary or capricious review standard. CBCHA Brief at 8-14. The parties' submissions on this point reflect considerable confusion, which is understandable when one examines decisions defining the standard of review under this statute.

Both of the Supreme Court's opinions reviewing action of the Board in amending Regulation Y noted that the Board's determination "is entitled to the greatest deference," Board of Governors of the Federal Reserve System v. Investment Company Institute, 450 U.S. 46, 56, 101 S.Ct. 973, 981-82, 67 L.Ed.2d 36 (1981) ("ICI "); Securities Industry Association v. Board of Governors of the Federal Reserve System, --- U.S. ----, 104 S.Ct. 3003, 3009, 82 L.Ed.2d 158 (1984) ("SIA "), but neither of them discussed the applicable standard of review, or even referred to Sec. 1848. 2 The courts of appeals, however, have applied the substantial evidence standard of Sec. 1848 to Board adjudications such as the authorization in the first order here under review, Securities Industry Association v. Board of Governors of the Federal Reserve System, 716 F.2d 92, 101-02 (2d Cir.1983), aff'd, --- U.S. ----, 104 S.Ct. 3003, 82 L.Ed.2d 158 (1984), while applying the arbitrary or capricious standard, despite Sec. 1848, to Board rules, including specifically amendments of Regulation Y, National Courier Association v. Board of Governors of the Federal Reserve System, 516 F.2d 1229 (D.C.Cir.1975); Association of Bank Travel Bureaus v. Board of Governors of the Federal Reserve System, 568 F.2d 549 (7th Cir.1978); see Investment Company Institute v. Board of Governors of the Federal Reserve System, 551 F.2d 1270, 1281 (D.C.Cir.1977) (dicta). In fact one appellate opinion has, like this one, addressed precisely the situation in which both an adjudicatory authorization and an amendment of Regulation Y were at issue in the same case--and applied the Sec. 1848 substantial evidence standard to the former but the arbitrary or capricious standard to the latter. Compare Alabama Association of Insurance Agents v. Board of Governors of the Federal Reserve System, 533 F.2d 224, 246 (5th Cir.1976), with id. at 240. This would make a lot of sense if, as the Board has argued in some cases, Sec. 1848 in its totality applies only to adjudication rather than rulemaking, since it is limited to "orders" of the Board, a word which the Administrative Procedure Act ("APA") defines to mean the product of an adjudication. See 5 U.S.C. Sec. 551(4), (6) (1982). Such a technical interpretation of the provision, however, has been uniformly and quite correctly rejected. See Investment Company Institute, supra, 551 F.2d at 1276-78; Alabama Association of Insurance Agents, supra, 533 F.2d at 234-35. That leaves the courts with the difficult task of explaining why the last sentence of Sec. 1848, unlike all the rest of it, should be deemed to apply only to adjudication and not to rulemaking. Difficult, because there is nothing in either the text 3 or the

Page 683

legislative history of the section to suggest such a result. The courts applying the arbitrary or capricious standard to Board...

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