Taucher v. Born
Chapter 04
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Judge Ricardo M. Urbina
DECISION
Entering Judgment for the Plaintiffs
A bench trial was held in the above-captioned case beginning Monday, May 3, 1999 and ending Wednesday, may 5, 1999, during which the court took testimony from various witnesses and received documents into evidence. Upon reviewing the testimony and evidence, as well as the existing record and the relevant law, the court enters the following findings of fact and conclusions of law. Based on these findings and conclusions, the court will enter judgment in this case for the plaintiffs.
I. INTRODUCTION
This case involves a First Amendment challenge to Section 4m of the Commodity Exchange Act ("CEA"), 7 U.S.C. § 6m (1994), as applied to the plaintiffs who publish books, newsletters, Internet websites, detailed written instruction manuals (known in the industry as "trading systems"), and computer software that provide information, analysis, and advice on commodity futures trading. The plaintiff-publishers in this action seek a declaration that they may lawfully publish without being registered as commodity trading advisors ("CTA") with the Commodity Futures Trading Commission ("CFTC"). The defendants contend that the registration requirement is constitutional under the First Amendment.
. . .
III. CONCLUSIONS OF LAW
A. Commodity Exchange Act Registration Requirement
. . . Specifically, the plaintiffs challenge the CFTC's application of the CEA's registration requirement, 7 U.S.C. § 6m(1), to individuals who publish and sell information about futures trading. The registration requirement at issue provides that "[i]t shall be unlawful for any commodity trading advisor . . . , unless registered under this chapter, to make use of the mails or any means or instrumentality of interstate commerce in connection with his business as such commodity trading advisor . . . , provided that the provisions of this section shall not apply to any commodity trading advisor who, during the course of the preceding twelve months, has not furnished commodity trading advice to more than fifteen persons and who does not hold himself out generally to the public as a commodity trading advisor." 7 U.S.C. § 6m(1) (emphasis added).
As stated in 7 U.S.C. § 6m(1), the CEA's registration requirement applies only to persons who are classified as commodity trading advisors. A commodity trading advisor is defined in the CEA as any person who
(i) for compensation or profit, engages in the business of advising others, either directly or through publications, writings, or electronic media, as to the value of or the advisability of trading in--7 U.S.C. § 1a(5)(A). Excluded from this definition is "the publisher or producer of any print or electronic data of general and regular dissemination, including its employees." 7 U.S.C. § 1a(5)(B)(iv). This exclusion applies, however, "only if the furnishing of such services by persons referred to in subparagraph (B) is solely incidental to the conduct of their business or profession." 7 U.S.C. § 1a(5)(C).
(I) any contract of sale of a commodity for future delivery made or to be made on or subject to the rules of a contract market;
(II) any commodity option authorized under section 6c of this title; or
(III) any leverage transaction authorized under section 23 of this title; or
(ii) for compensation or profit, and as part of a regular business, issues or promulgates analyses or reports concerning any of the activities referred to in clause (i).
Each of the plaintiffs in this case falls squarely within the definition of a CTA. They engage in the business of advising others, through publications, writings and electronic media, as to the value of or the advisability of trading in the futures market, and they do so for compensation or profit. Moreover, they are not excluded as publishers or producers of print or electronic data of general and regular dissemination because the furnishing of such services is not solely incidental to the conduct of their business or profession. To the contrary, the furnishing of such services is the plaintiffs' primary business or profession.
Accordingly, as persons who meet the definition of a CTA and who furnish commodity trading advice to more than fifteen persons per year, the plaintiffs are required to register with the CFTC pursuant to 7 U.S.C. § 6m(1). Failure to do so may result in conviction for "a felony punishable by a fine of not more than . . . $500,000 . . . [for] an individual or imprisonment for not more than five years, or both, together with the costs of prosecution . . . ." 7 U.S.C. § 13(a)(5).
Registration with the CFTC involves, among other requirements, filing an application with the National Futures Association ("NFA") and paying an annual fee of $100. Additional conditions placed upon registrants include: attending four hours of ethics training the first year and an additional hour every three years thereafter, maintaining books and records which are subject to inspection by the CFTC, and filing reports as directed by the CFTC. Moreover, the CFTC is authorized to deny registration to applicants in accordance with 7 U.S.C. § 12a, which states in part:
The Commission is authorized--
. . . .
(2) upon notice, but without a hearing and pursuant to such rules, regulations, or orders as the Commission may adopt, to refuse to register, to register conditionally, or to suspend or place restrictions upon the registration of, any person and with such a hearing as may be appropriate to revoke the registration of any person [who meets the criteria listed in 7 U.S.C. § 12a(2)(A)-(H)].
Among those to whom registration may be refused pursuant to 7 U.S.C. § 12a(2) are persons who previously had their registration with the CFTC suspended or revoked; were convicted within ten years for certain felonies, including felonies related to the commodity futures or the securities business; failed to reasonably supervise another person who was subject to their supervision; or violated the CEA or federal or state securities laws. Moreover, 7 U.S.C. § 12a(3)(M) authorizes the CFTC to "refuse to register or to register conditionally any person, if it is found, after opportunity for hearing, that . . . there is other good cause." In an Interpretative Statement, the CFTC has explained that:
In general, the Commission interprets paragraph (M) to authorize the Commission to affect the registration of any person if, as a result of any act or pattern of conduct attributable to such person, although never the subject of formal action or proceeding before either a court or governmental agency, such person's potential disregard of or inability to comply with the requirements of the [Commodity Exchange] Act or the rules, regulations or order thereunder, or such person's moral turpitude, or lack of honesty or financial responsibility is demonstrated to the Commission. Any inability to deal fairly with the public and consistent with just and equitable principles of trade may render an applicant or registrant unfit for registration, given the high ethical standards which must prevail in the industry.7 C.F.R. Part 3, App. A.
Among the plaintiffs in this case, only Robert Miner is currently registered with the CFTC as a CTA. All of the plaintiffs, including Mr. Miner, argue that the application of the CEA's registration requirement to them constitutes a violation of their rights under the First Amendment of the United States Constitution. The CFTC maintains, on the other hand, that the registration requirement constitutes the permissible regulation of a profession, and its application to the plaintiffs does not run afoul of the Constitution. Thus, as Justice White noted in his concurrence in Lowe v. Securities and Exchange Commission, 472 U.S. 181 (1985), this case "involves a collision between the power of the government to license and regulate those who would pursue a profession or vocation and the rights of freedom of speech and the press guaranteed by the First Amendment." Id. at 228 (White, J., concurring in the result).
B. Regulation of Speech Versus Regulation of a Profession
In general, the government may regulate entry into a profession as long as the regulations imposed "have a rational connection with the applicant's fitness or capacity to practice' the profession." Lowe, 472 U.S. at 228 (White, J., concurring in the result) (quoting Schware v. Board of Bar Examiners, 353 U.S. 232 (1957)). This is so even if the profession that the government seeks to regulate involves speech. There comes a point, however, where government legislation crosses the line between the regulation of a profession and the regulation of speech. It is at this point where the protections of the First Amendment are invoked and the regulation becomes subjects to a less deferential level of judicial scrutiny. The first question for the court to decide in this case, therefore, is whether by applying the CEA's registration requirement to the plaintiffs the CFTC is engaging in the regulation of a profession or the regulation of speech. This is a question with which courts have struggled in the past in a effort to articulate a principled way of distinguishing between the two kinds of regulations. In 1945, for example, the Supreme Court was faced with a controversy that required it to distinguish between a state's right to regulate the profession of labor organizers and the organizers' right to lawfully address workers regarding their labor grievances. See Thomas v. Collins, 323 U.S. 516, 544 (1945). In a concurring opinion, Justice Jackson drew the following distinction between regulation of a profession and the regulation of speech:
Though the one may shade into the other, a rough distinction always exists, I think, which is more shortly illustrated than explained. A state may forbid one without its license to practice law as a vocation, but I think it could not stop an unlicensed person from making a speech about the rights of man or the rights of labor, or any other kind of right, including recommending that his hearers organize to support his views. Likewise, the state may prohibit the pursuit of medicine as an occupation without its license but I do not think it could make it a crime publicly or privately to speak urging persons to follow or reject any school or medical thought. So the state to an extent not necessary now to determine may regulate one who makes a business or a livelihood of soliciting funds or memberships for unions. But I do not think it can prohibit one, even if he is a salaried labor leader, from making an address to a public meeting of workmen, telling them their rights as he sees them and urging them to unite in general or to join a specific union.Thomas, 323 U.S. at 544-45 (Jackson, J., concurring), quoted in Lowe, 472 U.S. at 231.
More recently, in Lowe, the Supreme Court was faced with a challenge to the Securities and Exchange Commission's application of the registration requirement in the Investment Advisers Act. See Lowe, 472 U.S. 181. As in the instant case, the plaintiffs in Lowe argued that the registration requirement constituted an impermissible regulation of speech, while the defendant argued that it was properly considered a regulation upon a profession. Convinced that it was necessary for the Court to reach the constitutional question presented to it, Justice White endeavored to "locate the point where regulation of a profession leaves off and prohibitions on speech begin." Lowe, 472 U.S. at 232. He drew the distinction as follows:
One who takes the affairs of a client personally in hand and purports to exercise judgment on behalf of the client in the light of the client's individual needs and circumstances is properly viewed as engaging in the practice of a profession. Just as offer and acceptance are communications incidental to the regulable transaction called a contract, the professional's speech is incidental to the conduct of the profession. If the government enacts generally applicable licensing provisions limiting the class of persons who may practice the profession, it cannot be said to have enacted a limitation on freedom of speech or the press subject to First Amendment scrutiny. Where the personal nexus between professional and client does not exist, and a speaker does not purport to be exercising judgment on behalf of any particular individual with whose circumstances he is directly acquainted, government regulation ceases to function as legitimate regulation of professional practice with only incidental impact on speech; it becomes regulation of speaking or publishing as such, subject to the First Amendment's command that "Congress shall make no law . . . abridging the freedom of speech, or of the press."
Lowe, 472 U.S. at 232 (White, J., concurring in the result). Guided by the writings of Justice Jackson and Justice White, this court concludes that the CFTC's application of the CEA's registration requirement to the plaintiffs in this case constitutes an attempt to regulate speech, not a profession.
There are several facts that lead the court to this conclusion. The plaintiffs, through their publishing activities, do not go so far as to "exercise judgment" on behalf of those who purchase their products. Through their products, they provide advice on commodities futures trading strategies and techniques; they sell trading systems designed to influence their customers' trading decisions; in some instances, they even go so far as to offer specific by and sell recommendations; but their advice and recommendations are identical for every customer and their products are available to all who wish to purchase them. Moreover, the plaintiffs never have any personal contact with their customers. They never supplement their general recommendations with specific recommendations directed at individual customers. They never make trades for their customers. They simply sell their products and leave it to their customers to decided for themselves whether and how they will use the advice and recommendations purchased from the plaintiffs.
This is similar to the factual scenario in Lowe. There, the petitioner did not "offer his subscribers investment advice specifically tailored to their individual needs and engage[d] in no directed communications with them." Lowe, 472 U.S. at 214. Nevertheless, "he undeniably engage[d] in the business of advising others through publications as to the value of securities and issue[d] or promulgate[d] analyses or reports concerning securities." Id. (internal quotations omitted). Based on these facts, the concurring justices opined that "[t]he application of the [Investment Advisers] Act's enforcement provisions to prevent unregistered persons from engaging in the business of publishing investment advice for the benefit of any who would purchase their publications . . . [was] a direct restraint on freedom of speech and of the press subject to the searching scrutiny called for by the First Amendment." Id. at 233.
Given similar facts, the United States District Court for the Southern District of New York reached a different conclusion in Commodity Futures Trading Commission v. AVCO Financial Corp., 979 F.Supp. 232 (S.D.N.Y. 1997), a case involving the CFTC's application of the same registration requirement at issue in this case. In AVCO, however, the investment advice went beyond that provided by the plaintiffs here. AVCO not only provided specific buy and sell recommendations; it also provided a telephone number that customers could call to receive additional advice about AVCO's general recommendations and it provided customers "a service by which brokers authorized by AVCO c[ould] actually make trades" for AVCO's customers. AVCO, 979 F.Supp. at 237. According to the AVCO court, these facts "negate[d] [AVCO's] assertions that AVCO's investment advice [was] entirely impersonal and not characteristic of investment adviser-client relationships meant to be covered by the CEA." Id.
In contrast to the defendants in AVCO, the plaintiffs here never engage in individual consultations with their customers regarding their standard advice and recommendations and under no circumstances do they make trades for their customers. Indeed, their customers must go through some other licensed broker before they can act on any of the plaintiffs' recommendations. On these facts, this court cannot conclude that the plaintiffs are "exercising judgment" on behalf of their customers.
Moreover, a determination that the CFTC's application of the registration requirement challenged in the instant case constitutes the regulation of speech and not a profession comports with Justice Jackson's reasoning in Thomas. Explaining the rationale behind giving the government more power to regulate a profession than to regulate speech. Justice Jackson stated:
This wider range of power over pursuit of a calling than over speech-making is due to the different effects which the two have on interests which the state is empowered to protect. The modern state owes and attempts to perform a duty to protect the public from those who seek for one purpose or another to obtain its money. When one does so through the practice of a calling, the state may have an interest in shielding the public against the untrustworthy, the incompetent or the irresponsible, or against unauthorized representation of agency. A usual method of performing this function is through a licensing system.Thomas, 323 U.S. at 545 (Jackson J., concurring) (internal citations omitted). In the instant case, the CFT is attempting to protect the public against false doctrine. That is, the Commission seeks to protect the public from obtaining and acting upon advice and recommendations offered by persons who it believes are not adequately qualified. In this regard, the CFTC is attempting to act as the "watchman for truth" for the public.
But it cannot be the duty, because it is not the right, of the state to protect the public against false doctrine. The very purpose of the First Amendment is to foreclose public authority from assuming a guardianship of the public mind through regulating the press, speech, and religion. In this field every person must be his own watchman for truth, because the forefathers did not trust any government to separate the true form the false for us. Nor would I. Very many are the interest which the state may protect against the practice of an occupation, very few are those it may assume to protect against the practice of propagandizing by speech or press. These are thereby left great range of freedom.
It is true that the plaintiffs seek to obtain money from their customers and, to that extent, they are pursuing a calling. Their calling, however, is the selling of ideas, not the trading of commodity futures, and they obtain money by selling their products irrespective of whether or not their customers ever trade in the commodity futures market. Because the plaintiffs do not profit from their customers' gains or losses in the market and because the plaintiffs do not exercise judgment on behalf of their customers, the court concludes that their publications fall within the definition of protected speech.
Justice Jackson stated in Thomas 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." Thomas, 323 U.S. at 547. Here, the CFTC seeks to associate the plaintiffs' speech with the commodity trading advice profession so as to bring the speech within its official control. In such a circumstance, it is the court's duty to "inquire whether [the] speech or publication is properly condemned by association; [otherwise the court's] claim to guardianship of free speech and press is but a hollow one." Id. In this case, the court concludes that the CFTC's attempted association is not valid and its application of the CEA's registration requirement to the plaintiffs is an effort to regulate speech, not an extension of the CFTC's official duty to regulate the commodity futures trading profession. Accordingly, the court must analyze the CFTC's application of the registration requirement under the strictures of the First Amendment.
C. First Amendment Analysis
The First Amendment provides that "Congress shall make no law . . . abridging the freedom of speech, or of the press . . . ." U.S. Const. amend. I. Not all restrictions on speech are impermissible, however, and not, all kinds of speech are protected to the same extent. See Lowe, 472 U.S. at 233. In contrast to fully protected speech, speech that is considered "commercial" may be regulated by the government provided that the regulations are "narrowly tailored to advance a legitimate governmental interest." Id. at 234. In order to assess the constitutional validity of the CFTC's application of the CEA's registration requirement, therefore, it is necessary for the court to determine first whether the plaintiffs' publications constitute fully protected speech or commercial speech.
1. Commercial Versus Fully Protected Speech
The Supreme Court has defined commercial speech as "expression related solely to the economic interests of the speaker and its audience." Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557, 561 (1980). Speech is not automatically considered commercial, however, "simply because it concerns economic subjects or is sold for a profit." Commodity Trend Service, Inc. v. Commodity Futures Trading Commission, 19 F.3d 679 684 (7th Cir. 1998) (citing to "[a] long line of Supreme Court cases") [hereinafter CTS, Inc..]. Traditionally, only speech "which does not more than propose a commercial transaction" has been considered commercial speech for the purposes of the First Amendment. CTS, Inc., 149 F.3d at 684.
The most typical form of commercial speech is advertising. Although Central Hudson can be read to expand the definition of commercial speech beyond advertising the Supreme Court has "not utilized the broader test [articulated in Central Hudson ] in its recent commercial speech cases." CTS, Inc., 149 F.3d at 684 (citing Cincinnati v. Discovery Network Inc., 507 U.S. 410, 422 (1993)). It is not necessary for this court to determine the intended breadth of the Supreme Court's definition of commercial speech, however, because under either a narrow or broad definition the court concludes that the plaintiffs' publications do not constitute commercial speech.
In CTS, Inc.., the Seventh Circuit was faced with deciding whether or not the publications of a financial publishing corporation constituted commercial speech. According to the record before the court, CTS distributed
a number of publications concerning the commodity futures markets. These publications c[a]me in the form of books, periodicals, updates by facsimile, voice recordings accessible by telephone, and materials that c[ould] be downloaded via the Internet. The content of CTS's publications . . . include[d] "securities and market charts, market commentary, and educational publications concerning markets and trading." All of these publications furnish[ed] only impersonal advice; CTS d[id] not provide personalized financial planning services or trading advice tailored to the individual needs of any particular subscribers.CTS, Inc., 149 F.3d at 682. The court concluded based on these facts that CTS's publications were "not commercial speech because they do not propose a commercial transaction between CTS and a specific customer." Id. at 686. Rather, they provided "information on commodity trading in general and le[ft] any actual trading to other parties." Id. at 685-86. The same is true in the instant case. The plaintiffs' publications in this case do not propose any commercial transaction between the plaintiffs and their customers and the publications are not related solely to the economic interests of the plaintiffs and their customers. Like the publications in CTS, Inc., the various publications distributed by the plaintiffs here provide impersonal information and provide the exact same advice and recommendations to all customers, regardless of any customer's individual circumstances.
It is true that portions of the plaintiffs' publications, particularly their Internet websites, includes material that is appropriately classified as advertisements for their publications. The inclusion of such advertising material in an otherwise non-commercial publication, however, does not render that publication commercial speech. As the Seventh Circuit stated in CTS, Inc., "[a] speaker's publication does not lose its status as protected speech simply because the speaker advertises the publication. An advertisement is a separate publication and does not strip the promoted publication of its First Amendment protection." CTS, Inc., 149 F.3d at 685 (citing Virginia State Board of Pharmacy v. Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 760-61 (1976)). In the instant case, the CFTC is seeking not to regulate the plaintiffs' advertisements, but rather to apply the CEA's registration requirement in such a way as to prevent the plaintiffs from publishing any of the information contained in their publications without first obtaining a license. The relevant inquiry, therefore, is not whether the plaintiffs' advertisements are commercial speech, but whether the substance of the plaintiffs' publication is commercial speech. For the reasons outlined above, the court concludes that it is not.
2. Prior Restraint as a Restriction on Speech
Having concluded that the plaintiffs' publications constitute fully protected speech, the court must next determine whether the restriction imposed upon the plaintiffs' speech by application of the CEA's registration requirement is permissible under the First Amendment. In this case, the restriction amounts to a licensing scheme that requires the plaintiffs to first register with the CFTC before they may engage in their publishing activities. Such licensing schemes have generally been classified as prior restraints on speech.
A prior restraint "arises in those situations where the government limitation, expressed in statute, regulation, or otherwise, undertakes to prevent future publication or other communication without advance approval of an executive official." Times Film Corp. v. Chicago, 365 U.S. 43, 56 (1961) (Warren, C.J., dissenting) (quoting Thomas I. Emerson, The Doctrine of Prior Restraint, 20 Law & Contemp. Prob. 648, 655). While not all restrictions on speech are impermissible, a restriction that imposes a prior restraint on speech "comes to th[e] Court bearing a heavy presumption against its constitutional validity." New York Times Co. v. United States, 403 U.S. 713, 714 (1971). Indeed, courts allow this "'most extraordinary remedy' only where the evil that would result from the [speech] is both great and certain and cannot be militated by less intrusive measures." CBS, Inc. v. Davis, 510 U.S. 1315, 1317 (1994) (quoting Nebraska Press Association v. Stuart, 427 U.S. 539, 562 (1976)). In the instant case, the court concludes that the CEA's registration requirement, as applied to the plaintiffs by the CFTC, is an unconstitutional prior restraint on speech.
The Supreme Court alluded to the correctness of such a conclusion in Lowe when it interpreted an almost identical provision of the Investment Advisers Act to not include publishers of impersonal investment advice. The majority's reasoning for interpreting the language of the statute in such a way was, in part, based on its belief that "Congress, plainly sensitive to First Amendment concerns, wanted to make clear that it did not seek to regulate the press through the licensing of non-personalized publishing activities." Lowe, 472 U.S. at 204. The Court then went on to discuss "two major First Amendment cases," Near v. Minnesota ex rel. Olson, 283 U.S. 697 (1931) and Lovell v. City of Griffin, 303 U.S. 444 (1938), in which the Court struck down a state statute and a city ordinance, respectively, as unconstitutional prior restraints on publication. Lowe, 472 U.S. at 204-05.
Unlike the majority, the concurring justices in Lowe directly concluded that the registration requirement of the Investment Advisers Act, as applied to publishers of impersonal investment advice, was an impermissible prior restraint. They stated:
[T]he First Amendment permits restraints on speech only when they are narrowly tailored to advance a legitimate governmental interest. The interest here is certainly legitimate: the Government wants to prevent investors from falling into the hands of scoundrels and swindlers. The means chosen, however, is extreme. Based on petitioner's past misconduct, the Government fears that he may in the future publish advice that is fraudulent or misleading; and it therefore seeks to prevent him from publishing any advice, regardless of whether it is actually objectionable. Our commercial speech cases have consistently rejected the proposition that such drastic prohibitions on speech may be justified by a mere possibility that the prohibited speech will be fraudulent.
Lowe, 472 U.S. at 234-35 (White, T., concurring).
As in Lowe, the defendants in this case have imposed a drastic prohibition on speech based on the mere possibility that the prohibited speech will be fraudulent. As applied by the CFTC, the CEA imposes a ban on the plaintiffs' publishing of impersonal commodity futures trading advice unless they register with the CFTC. Moreover, the CFTC may, within its discretion, refuse to register any applicant for various reasons enumerated at 7 U.S.C. § 12a, including that the Commission believes the applicant has the "potential" to disregard the requirements of the CEA or has demonstrated "moral turpitude, or lack of honesty or financial responsibility." See 7 U.S.C. §§ 12a(2), 12a(3); 7 C.F.R. Part 3, App. A. This is no different than the regulation in Lowe in that it seeks to prevent individuals from publishing information based solely on a fear that someone may publish advice that is fraudulent or misleading, regardless or whether or not the information published actually is fraudulent or misleading. Such a prior restraint on fully protected speech cannot withstand the searching scrutiny of the First Amendment. Accordingly, the court concludes that the registration requirement of the CEA as applied to restrict the plaintiffs from engaging in their publishing activities constitutes an impermissible prior restraint upon the exercise of free speech and runs afoul of the First Amendment of the United States Constitution.
IV. Conclusion
For the foregoing reasons the court concludes that Section 6m(1) of Title 7 of the United States Code is unconstitutional as applied to the plaintiffs in this case and, accordingly, enters judgment in favor of the plaintiffs. An appropriate Order directing the parties in a fashion consistent with this Decision is separately and contemporaneously executed and issued this 21st day of June, 1999.
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