Taucher v. Brown-Hruska

• Decision Date: 28 January 2005
• Docket Number: No. 04-5026.,04-5026.
• Citation: 396 F.3d 1168
• Parties: Frank TAUCHER, et al., Appellees v. Sharon BROWN-HRUSKA, Acting CFTC Chairman, et al., Appellants
• Court: U.S. Court of Appeals — District of Columbia Circuit

396 F.3d 1168

Frank TAUCHER, et al., Appellees v. Sharon BROWN-HRUSKA, Acting CFTC Chairman, et al., Appellants

No. 04-5026.

United States Court of Appeals, District of Columbia Circuit.

Argued October 8, 2004.

Decided January 28, 2005.

Appeal from the United States District Court for the District of Columbia (No. 97cv01711).

William S. Liebman, Assistant General Counsel, Commodity Futures Trading Commission, argued the cause for appellants. With him on the briefs was Kirk T. Manhardt, Deputy General Counsel.

Scott G. Bullock argued the cause for appellees. With him on the brief was William H. Mellor.

Before: EDWARDS, HENDERSON, and ROBERTS, Circuit Judges.

Opinion for the Court filed by Circuit Judge ROBERTS.

Dissenting opinion filed by Circuit Judge EDWARDS.

ROBERTS, Circuit Judge.

After a federal district court declared a portion of the Commodity Exchange Act unconstitutional, the prevailing parties sought attorneys' fees under the Equal Access to Justice Act. A magistrate judge concluded that the Commodity Futures Trading Commission's defense of the Act was not substantially justified, and accordingly awarded fees to the challengers. On appeal we reject the Commission's argument that it should not be held liable for fees because it was obligated to defend the statute, but we also conclude that the Commission's defense was a reasonable one on the merits. Accordingly, we reverse and vacate the award of attorneys' fees.

I.

A. Congress enacted the Commodity Exchange Act (CEA), Pub.L. No. 74-675, 49 Stat. 1491 (1936), in an effort to combat fraudulent practices affecting the commodity futures market. Section 4m of the CEA as amended, see Commodity Futures Trading Act of 1974, Pub.L. No. 93-463, 88 Stat. 1389, 1398, makes it unlawful for any commodity trading advisor (CTA) "to make use of the mails or any means or instrumentality of interstate commerce in connection with his business as [a] commodity trading advisor" unless the CTA is registered under the Act. 7 U.S.C. § 6m(1). Registration is burdensome; those applying to register must submit a substantial amount of background information, renew their registrations annually, maintain books and records for inspection, and undertake mandatory ethics training. See id. § 6n; 17 C.F.R. §§ 3.10, 3.34 (1997). The Commodity Futures Trading Commission (CFTC), which implements the Act, can deny, revoke, or suspend registration for a wide variety of reasons. See 7 U.S.C. § 12a(2)(A)-(H). It also has discretionary authority to deny registration for "good cause," § 12(a)(3)(M), which can be based on a pattern of conduct by the applicant indicating "moral turpitude, or lack of honesty," even if such conduct has never been the subject of a formal action or proceeding. 7 C.F.R. pt. 3, app. A (interpreting § 12(a)(3)(M)).

The statutory definition of a CTA subject to these provisions sweeps broadly. It includes those who "for compensation or profit ... advise[ ] others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in" commodity futures or "issue[ ] or promulgate[] analyses or reports concerning" trading in commodity futures. 7 U.S.C. § 1a(6)(A). There is an exemption for "any news reporter, news columnist, or news editor of the print or electronic media," id. § 1a(6)(B)(ii), but only if their activities relating to commodity futures are "solely incidental to the conduct of their business or profession," id. § 1a(6)(C). The consequences of acting as an unregistered CTA are not trifling: willfully violating Section 4m is a felony punishable by a maximum fine of $500,000 for individuals and as much as five years' imprisonment, id. § 13(a)(5), and unregistered CTAs risk civil penalties of $100,000 or triple their monetary gains, whichever is greater. Id. § 9.

B. On July 30, 1997, certain publishers providing information, analyses, and advice on commodity futures trading filed suit against the chairman and commissioners of the CFTC in their official capacities. Joined by customers who purchased their publications, these plaintiffs sought a declaration that the registration provision was unconstitutional under the First Amendment. The publishers did not dispute that they qualified as CTAs under the statutory scheme. After all, they offered advice on trading in commodity futures through newsletters, books and trading course manuals, Internet-based information services, and software programs. Although the publishers could be considered part of the print or electronic media for purposes of the exemption in 7 U.S.C. § 1a(6)(B), commodity trading advice was central rather than "incidental" to their businesses, and accordingly they could not qualify for the exemption. See id. § 1a(6)(c). Each publisher employed a trading system based on technical analysis of commodity price levels and historic trends. The publisher's system played a central role across the spectrum of publications, forming the basis for tips in newsletters and serving as the backbone of software programs generating trading recommendations based on current market data. See, e.g., Taucher v. Born, 53 F.Supp.2d 464, 466-67 (D.D.C.1999) ("Taucher I") (describing a publisher's use of his trading system in his newsletter, book, trading course, and software program).

The publishers' argument was not that they were not covered by the statute, but instead that their various publications were protected under the First Amendment and that the registration requirement constituted a prior restraint on speech prohibited by that Amendment. After rejecting the CFTC's motion to dismiss and the plaintiffs' motion for summary judgment, the district court held a three-day bench trial. In a memorandum opinion and order issued the following month, the court entered judgment in favor of the plaintiffs, declaring the registration requirement unconstitutional as applied to the publishers. Id. at 482-83.

The district court first addressed whether Section 4m was a regulation of speech triggering First Amendment scrutiny or was merely a regulation of a profession — that of commodity trading advisor — subject to rational basis review. As the court explained, "[t]his is a question with which courts have struggled in the past in an effort to articulate a principled way of distinguishing between the two kinds of regulations." Id. at 476-77. The court looked to Justice Jackson's concurring opinion in Thomas v. Collins, 323 U.S. 516, 65 S.Ct. 315, 89 L.Ed. 430 (1945), which noted that while regulation of speech and regulation of a profession "may shade into" one another, "a rough distinction always exists, ... which is more shortly illustrated than explained." Id. at 544, 65 S.Ct. at 329 (Jackson, J., concurring). The district court quoted Justice Jackson's view that "modern regulators sought, at times successfully, to regulate speech by `associating the speaking with some other factor which the state may regulate so as to bring the whole within official control.'" Taucher I, 53 F.Supp.2d at 479 (quoting 323 U.S. at 547, 65 S.Ct. at 330). "[I]t is the court's duty to `inquire whether [the] speech or publication is properly condemned by association.'" Id. (same).

The district court also sought guidance from Lowe v. SEC, 472 U.S. 181, 105 S.Ct. 2557, 86 L.Ed.2d 130 (1985), in which the Supreme Court addressed a First Amendment challenge to a registration requirement for securities investment advisors under the Investment Advisors Act (IAA). The Lowe majority did not reach the constitutional question, finding that the plaintiffs fell within a statutory exemption for the press. See id. at 211, 105 S.Ct. at 2573. Relying on the legislative history underlying the exemption, the Supreme Court construed it as reaching those whose investment advice was not personalized for clients. See id. at 203-11, 105 S.Ct. at 2569-74. Although the majority in Lowe did not reach the constitutional question, the district court looked to Justice White's separate opinion concurring in the result. Justice White did not think the exemption could be construed to cover the plaintiffs, but would have found the registration requirement an unconstitutional prior restraint of speech as applied to them. He found Justice Jackson's concurrence in Thomas"instructive" in "help[ing] to locate the point where regulation of a profession leaves off and prohibitions on speech begin." Id. at 231-32, 105 S.Ct. at 2583-84 (White, J., concurring in the result). Justice White reasoned that where there was no "personal nexus between professional and client" and a speaker does not exercise judgment on behalf of that client, "government regulation ceases to function as legitimate regulation of professional practice ... [and] becomes regulation of speaking or publishing as such" subject to heightened scrutiny under the First Amendment. Id. at 232, 105 S.Ct. at 2584.

Finding that the publishers here never exercised judgment or traded commodity futures on behalf of clients and had no personal contact with them, the district court concluded that the registration requirement was a regulation of speech when applied to the plaintiffs. Taucher I, 53 F.Supp.2d at 478-79. Rejecting the claim that the dispute involved commercial speech entitled to lesser First Amendment protection, the court then concluded that the registration scheme was an unconstitutional prior restraint. Id. at 480-82. The CFTC appealed the district court's decision, but later agreed to dismiss its appeal because of a new regulation it had promulgated exempting persons like the plaintiff-publishers from registration requirements. See 17 C.F.R. § 4.14(a)(9) (2000).

C. With its merits victory secured, the plaintiffs' pro bono counsel, a public interest law firm, sought to recover attorneys' fees pursuant to the Equal Access to Justice Act (EAJA), 28 U.S.C. § 2412. That Act authorizes an award of fees to a party prevailing against the government unless...