In 1901, Huron County, Ohio, merchant S.J. Hawkins hired the Lake Shore and Michigan Southern, and Wheeling and Lake Erie railroads to transport to urban markets grain Hawkins bought from Northern Ohio farmers. The railroads reneged on the contracts, reallocating railcars to other customers with bigger loads. Hawkins’ grain rotted on a rail siding. Acting as his own attorney, Hawkins sued and won damages from the railroads before the Interstate Commerce Commission.[1] He was my maternal great-grandfather.

Congress created the ICC in 1887 in its first-ever legal regulation of an American industry. The ICC’s mission was to (i) provide a federal forum for farmers and merchants to obtain redress of their grievances against railroads and (ii) create an orderly market where railroads could earn reasonable returns on investment by charging “just and reasonable rates” to all comers. Previously, large volume customers like Rockefeller’s Standard Oil forced railroads into ruinous price wars and rebate schemes.

A federal solution was needed because state legislatures were uniformly in the pocket of the railroads. Well into the 20th Century, the Pennsylvania Railroad’s lobbyist had his own seat on the floor of the General Assembly. The inside joke among legislators was that at the end of a legislative session the presiding officer would announce, “The Pennsylvania Railroad having no further business to come before the Assembly, the Session is concluded.” The federal solution was possible only because the U.S. Supreme Court in 1824 ruled in Gibbons v. Ogden that interstate commerce (as opposed to intrastate commerce) was exclusively the province of federal law.[2] Almost 200 years later, that case remains the cornerstone of federal commercial regulation.

This historical context came to mind as I read a transcript of last week’s U.S. Supreme Court oral argument in Consumer Financial Protection Bureau v. Community Financial Services Association.[3] On its face, the case is about whether Congress violated the Appropriations Clause of the Constitution when it provided for the CFPB to be funded out of the budget of the Federal Reserve System. Beneath the surface, the case is the most recent salvo in a campaign to eviscerate federal government agencies.

Community Financial Services Association (CFSA) mimics names like the Independent Community Bankers Association of America or National Association of Federal Credit Unions. CFSA’s members are so-called “payday lenders,” non-bank lenders who lend money to the working poor. According to CNBC, “Texas has the highest payday loan [interest] rates in the U.S. The typical APR for a loan, 664%, is more than 40 times the average credit card interest rate of 16.12%.”[4] Ohio formerly had the highest rates, but capped payday loans’ rates, amounts and duration in 2019. Thereafter, the typical rate declined to 138%.

“The rate of workers taking out payday loans tripled as a result of the pandemic [according to a survey of 530 small business workers]. About 2% of these employees reported using a payday loan prior to the start of the pandemic, but about 6% said they’d used this type of loan since [March 2020].”[5]

The CFPB in 2017 adopted a legal rule that curbed or prohibited some of the harshest features of payday loans. For example, the rule says a payday lender can debit a borrower’s bank account twice to collect a payday loan. If both debits are rejected for insufficient funds, the payday lender must get the borrower’s permission before making further attempts to debit his or her account.

The practical effect is to prevent a payday lender from debiting its customer’s account daily to collect payment as soon as a deposit like a Social Security benefit payment is credited to the account. The rule also thereby prevents the borrower’s bank from imposing endless fees for insufficient funds.

The CFSA sued to overturn the rule, objecting to the just-described feature among others. Because Congressional authority to set terms on which agencies are funded is legally well established and because the CFSA is not a sympathetic plaintiff, the CFSA’s counsel at the Jones Day law firm likely expected to lose at trial in the federal district court. So counsel added a Trojan Horse feature to its case: a potentially far-reaching constitutional law argument claiming Congress abdicated its constitutional responsibility by funding the CFPB through the Federal Reserve System rather than by annual appropriations.

By filing the CFSA’s case in federal court in Texas, the CFSA’s counsel assured any appeal would be heard by the New Orleans-based Fifth Circuit Court of Appeals, which has a documented hostility toward federal government agency actions.

The strategy worked. That court held the substance of the rule was legal but said Congress’s manner of funding the CFPB was unconstitutional. Thus, the court gave with one hand and took away with the other. Further, the court’s three judge panel wrote its opinion in sweeping terms that led observers to doubt the enforceability of all CFPB actions since the agency’s inception if the Fifth Circuit’s decision is upheld by the U.S. Supreme Court.

The Fifth Circuit’s ruling set off alarms in such bastions of the financial establishment as the Mortgage Bankers Association. That group filed an amicus brief in the Supreme Court saying, “If the Court [adopts the Fifth Circuit’s approach and] issues a decision that extends beyond the Payday Lending Rule and asserts that these mortgage-related rules are potentially invalid because they were promulgated using funds appropriated through § 5497, it could set off a wave of challenges and the housing market could descend into chaos, to the detriment of all mortgage borrowers. Lenders, servicers, and consumers have operated by the CFPB’s guideposts for more than ten years, and without those rules substantial uncertainty would arise as to how to undertake mortgage transactions in accordance with federal law.”

In contrast to this strong statement, last week’s oral arguments read like a law school classroom exchange: questions and answers about sterile hypothetical cases applying lofty constitutional principles to test the boundaries of the litigants’ arguments. Opposing counsel carefully observed court decorum, such as by referring to one another as “my friend.” Yet everyone present understood what the Mortgage Bankers Association and other amici curiae said: at stake is the essential functioning of the CFPB and, by extension, many other government regulatory agencies. In fact, 73% of federal spending is not subject to the annual appropriations process.[6]

In my own career representing clients, I have experienced regulatory overreach, including regulators’ decisions based not on statutes, regulations or case law but on “because I say so” mandates. That said, effective federal regulation of the nation’s most essential commerce is critical to our economic wellbeing.

The CFSA suit is an affront to that precept. It comes before the Supreme Court at a time when the wealth and power disparity between the nation’s biggest and smallest businesses is as great as it has ever been. Payday lenders are simply willing pawns in this contest.

As S.J. Hawkins’ experience shows, the conflict between big, rich businesses and small, not-so-rich ones is age-old. Different today is how big, rich businesses’ concentrate their financial firepower on influencing Congress and the Supreme Court the way they once targeted state government officials.

The Court itself created the necessary predicate for that behavior. In its 2010 Citizens United decision, the Court ruled the First Amendment free speech clause bars the government from restricting political campaign contributions by corporations.[7] Citizens United is the cornerstone of the anti-federal agency campaign in the same way Gibbons v. Ogden made federal regulation of interstate commerce possible.

The other then-and-now difference is that the battle over creating the ICC was fought on its merits: What, if any, limitations should be placed on the economic power of railroads? Today’s battle is being fought by indirection, using corporate fiscal resources to influence Congress and the federal courts to choke off agencies’ fiscal resources. The results in the CFSA case at the district court and Fifth Circuit suggest that tactic is being used because a direct attack on the agencies’ jurisdiction is a surefire loser.

Samuel Clemens is credited with the saying, “history does not repeat itself but it often rhymes.” Whether and when rhyming happens cannot be known. For all of today’s S.J. Hawkinses working to earn their keep in family-owned business we hope it occurs sooner rather than later.

[1]Hawkins’ ability to prosecute the cases himself was undoubtedly aided by his experience as a station agent for the Lake Shore and Michigan Southern Railway in the 1890s before opening his own business as a dry goods merchant in Norwalk, Ohio. Both cases were decided Apr. 23, 1902. Catalogue of United States Public Documents, No. 90, June 1902, available at https://www.govinfo.gov/content/pkg/GOVPUB-GP3-477328a1f2e0a5134869618fa37b6e3a/pdf/GOVPUB-GP3-477328a1f2e0a5134869618fa37b6e3a.pdf.

[2] 22 U.S. 1 (1824).

[3] Case No. 22-448, argued October 4, 2023.

[4] www.cnbc.com/2021/02/16/may-shows-typical-payday-loan-rate-in-each-state.

[5] Id.

[6] https://www.pewresearch.org/short-reads/2023/09/13/congress-has-long-struggled-to-pass-spending-bills-on-time.

[7] Citizens United v. Federal Election Commission, 558 U.S. 310 (2010).