Federal judge strikes down rules for publishers of commodities information

Thursday, July 1, 1999

A federal law requiring anyone who publishes information about commodities or futures trading for compensation to register as a “commodity trading adviser” violates the First Amendment, a federal judge has ruled.

The Commodities Futures Trading Commission, the federal agency in charge of implementing and enforcing the Commodity Exchange Act, had implemented an extensive registration process for commodity trading advisers. The registration process required providing fingerprints, undergoing background checks, paying fees and filing reports with the commission. Those who failed to register were subject to severe civil and criminal penalties.

The CFTC interpreted the law to apply to virtually anyone who ran a Web site that discusses commodities.

Ten individuals — most of whom publish books, newsletters or Web sites about commodities and futures trading — challenged the law and related CFTC regulations in federal court in July 1997. The plaintiffs in Taucher v. Born contended the law violated their First Amendment free-speech rights.

After a three-day trial last May, U.S. District Court Judge Ricardo Urbina took the matter under advisement. On June 21, he issued his ruling that struck down the registration requirements on First Amendment grounds.

Attorneys for the CFTC argued that the registration and licensing requirements represented permissible regulations of a profession rather than regulations of speech.

The government attorneys argued that because the requirements were only regulations of a profession, the court wouldn't need to apply First Amendment analysis.

However, Urbina noted that “there comes a point, however, where government legislation crosses the line between the regulation of a profession and the regulation of speech.”

The judge noted that the requirements applied to individuals like the plaintiffs who did not have personal contact with their customers and did not offer personal investment advice for particular clients.

Urbina ruled that the regulations, as they applied to the plaintiffs, represented an attempt by the government to regulate speech.

The government attorneys argued that if the court employed First Amendment review, it should characterize the plaintiffs' speech as “commercial speech” defined by the U.S. Supreme Court as speech “which does no more than propose a commercial transaction.”

The government wanted the court to categorize the plaintiffs' speech as commercial because in First Amendment law commercial speech does not receive as much protection as other types of noncommercial speech, such as political speech.

Urbina rejected this argument as well, writing that the plaintiffs' publications “do not propose any commercial transactions between the plaintiffs and their customers and the publications are not related solely to the economic interests of the plaintiffs and their customers.”

The judge then noted that the licensing scheme employed by the CFTC served as a prior restraint on speech. Prior restraints on speech occur when laws seek to prevent speech without prior governmental approval.

“The First Amendment permits restraints on speech only when they are narrowly tailored to advance a legitimate governmental interest,” Urbina wrote. While the government has a legitimate interest in protecting consumers from potentially fraudulent speech, the judge ruled that the means chosen by the CFTC were “extreme.”

The defendants “have imposed a drastic prohibition on speech based on the mere possibility that the prohibited speech will be fraudulent,” the judge wrote. “Such a prior restraint on fully protected speech cannot withstand the searching scrutiny of the First Amendment.”

Scott Bullock, an attorney with the Institute for Justice, the public interest law firm representing the plaintiffs, praised the ruling as a First Amendment victory.

“We are really pleased with this ruling because the judge said that all the plaintiffs' publications — whether they are books or newsletters or computer software or Internet Web sites — are entitled to full First Amendment protection,” he said.

“This decision sets a strong precedent for free speech and protects the public against other governmental attempts to license Internet speech and software,” Bullock said.

The CFTC declined to comment on the decision. However, a spokesman said the agency was considering an appeal of the ruling.