TandaPay Cannot Be Regulated — 3

Grounds for TandaPay groups to seek regulatory relief — Andrew Mabon

TandaPay is a blockchain project which seeks to provide groups the ability to self insure. This post provides a complete index for the work done on the project.

Contract law is key to achieving regulatory arbitrage

Tandas have avenues for legal protections from intrusive regulation. There is precedent that will allow Tandas to use contract law and first amendment freedoms of speech to seek specific regulatory relief. In this way groups can protect themselves against unnecessary and burdensome interference from state and federal regulators.

To begin, TandaPay groups ought to consider using some of the very tools the insurance companies have successfully applied, to assert and protect their subrogation rights. This would force members to limit their ability to seek payments or arbitrate disputes for claims outside of a tanda’s own procedures. With this approach the same laws and regulations that protect insurance companies could also help middle and working-class people benefit from this technology. This would free tandas from having to assume the tremendous cost of unnecessary regulatory overhead in order to operate. In this way tandas could provide relief to consumers seeking to escape exploitation from legacy insurance institutions.

The following principles underlying contract law could provide guidance.

1. A legal contract between tanda members will provide a protection from government interference.

By formalizing the agreed terms of a tanda group in a contract, suddenly the members have a property right protected by the Constitution and the varying complexities of state law. The Contracts Clause of the Constitution protects tanda groups from state interference:

“No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.” U.S. Const. art. I, § 10.

Note in article 9 that the same prohibition does not exist for the Congress only for the jurisdiction of the states. Because state legislation regulates these types of financial contracts directly we want to see how Section 10 protects a tanda group. The members would formalize the terms agreed to in their charter and given the proper legal language this could provide the group some protection from unnecessary regulatory interference.

The prohibition of states of “impairing the obligation of contracts” has been deemed a property right by the Supreme Court. “Valid contracts are property, whether the obligor be a private individual, a municipality, a state, or the United States. Rights afforded against the United States arising out of a contract dispute are protected by the Fifth Amendment.” Lynch v. United States, 292 U.S. 571, 579 (1934). As is already known, there are few values as important in American law as property rights.

First, let’s address the freedom to contract from state interference. The Supreme Court clarified in Energy Reserves Group v. Kansas P. & L. Co., 459 U.S. 400, 411–412 (1983), that a violation of the Commerce Clause is determined by a three part test. The court will examine if there is “substantial impairment of a contractual relationship…If the state regulation constitutes a substantial impairment, the State, in justification, must have a significant and legitimate public purpose behind the regulation…The requirement of a legitimate public purpose guarantees that the State is exercising its police power, rather than providing a benefit to special interests.” Finally, the court will look to ensure that the action is “appropriate to the public purpose justifying adoption.” Id. at 412.

Laws preventing the organization of tanda groups would be a “substantial impairment” to the contract rights and obligations of the members. In these examples we see that there is legitimate purpose to these types of community relationships underscored by legal precedent. In these seminal cases one is challenged to fathom a good-faith reason to prevent middle and working-class consumers from providing each other with community-backed financial assistance. Given the high costs associated with many aspects of today’s insurance policies legislation which would impair a group members ability to seek financial relief would certainly be inappropriate. If such a strategy was used in combination with the 1st Amendment analysis to come, there is arguable claims to full legal protection from state interference.

As we will see, Congress has greater leeway to regulate a potential tanda group. In 1923, the Supreme Court clarified that a contract right is considered a protected constitutional property right under the 5th Amendment’s Taking Clause in Omnia Commercial Co., Inc. v. United States, 261 U.S. 502 (1923). One would construe that such a position would provide robust protections for privately contracting individuals.

A short summary of the facts Omnia facts: During World War I, the federal government requisitioned a steel order that was contracted by the Omnia Commercial Co. Omnia contended that such an action constituted a “taking” under the 5th Amendment. The court distinguishes between “frustration” and “appropriation.”

“In the present case, the effect of the requisition was to bring the contract to an end, not to keep it alive for the use of the government. The government took over during the war railroads, steel mills, shipyards, telephone and telegraph lines, the capacity output of factories and other producing activities. If appellant’s contention is sound, the government thereby took and became liable to pay for an appalling number of existing contracts for future service or delivery, the performance of which its action made impossible. This is inadmissible.” Frustration and appropriation are essentially different things.” Id. at 513 (emphasis added).

The discrepancy between “appropriation” (a constitutional violation) and “frustration” (permissible under the constitution) essentially reads like a distinction without a difference — likely as a product of the practical, political necessities of the situation. It is very unlikely that America’s own Supreme Court is not going to find actions taken to win a World War unconstitutional unless that action is egregious beyond belief.

Omnia’s issue has developed much common law that is very deferential to federal statutes, and it is more likely than not that federal legislation regulating blockchain systems like TandaPay would be considered constitutional, especially if Congress provides a reasonable justification for the law (e.g. to protect consumers).

However, there are a few caveats for platforms like TandaPay. First, before Congress would get involved, the tanda concept would have to grow exponentially. It is conceivable that platforms such as TandaPay would be safe from federal legislation until becoming so popular that the insurance lobby pushed for regulations. Should it come to this, recall there are few topics as difficult to legislate as insurance. It took almost 60 years from when Harry Truman first proposed universal health care for the idea to be effectuated. And Americans continue to witness the drama play out with highly-politicized repeal efforts.

Second, considering any of the recent congressional hearings regarding social media congress has quite a bit of work to do to fully understand these new technologies. If Twitter, Facebook, and Uber have proven this confusing, this will certainly also apply to blockchain technologies. Historically, it has always proven difficult to draft legislation on cutting edge technologies and unfamiliar topics.

Third, tanda is not a conventional insurance, but a private financial arrangement. If a strictly-construed description of TandaPay is put forth, the concept is only a means to protect against an unaffordable deductible. TandaPay does not provide primary coverage protecting against loss but is only meant to provide supplemental coverage. Furthermore, this coverage is limited to parametric events which requires that a claim award must, by definition, have a known value that never indemnifies the actual cost associated with a loss. Since primary coverage should be purchased individually apart from the group this means that TandaPay is not meant to be a primary means consumers should use to mitigate potential risk of loss. It is a special class of financial product that can only ever provide supplemental coverage.

In this sense TandaPay is not a financial product or institution which would be subject to traditional forms of regulation, specifically because the groups charter mandates that it cannot indemnify pure loss. Parametric contracts are strictly defined and if the parties wish to subrogate their legal rights to protection under state and federal regulations this is their own personal choice. In this way tandas are better characterized as a co-operative arrangement (without using the word co-operative as some states have a specified meaning of that term). From this narrow construction, it seems unlikely a state or the federal government would craft regulations governing how a few dozen people are able to help one another financially. Additionally, legal questions involving financial consideration under or over certain dollar amount thresholds trigger varying levels of scrutiny at the state and federal level for tax and accounting purposes. Millions of dollars held in tandas would draw the eye of regulators; a few thousand dollars or even a a few tens of thousands would fall into different and generally more lax regulatory categories, if not lying outside regulatory purview altogether.

Before moving onto the 1st Amendment discussion, what ought to be highlighted are potential benefits of LLC formation. Corporate personhood is a controversial topic since the supreme court issued its ruling on Citizens United. This controversial case should provide the grounds for significant protection for tandas to operate. In states like Nevada, Wyoming, and Delaware, very little personal information regarding the members need to disclosed publicly. If the members, or the secretary, were concerned about legal liability from the project, LLC formation could provide a liability shield, in states with what are called ‘Series LLCs.’ In addition there are plenty of possible business torts that could arise to protect participants. Multiple tanda groups could all reside under an initial LLC umbrella while using the same yearly fee, with liability demarcated between each individual series so each tanda group has individual protection from the others as well. Big corporations are known for using the legal system to bully smaller competitors; given certain possible occurrences, incorporation could be quite helpful.

2. How the First Amendment can assist tanda members

Regarding the application of Citizens United and Janus, given how narrowly the Supreme Court decides legal matters, of potential worry is that these groups may be a of a different class or nature. Tanda groups seek avoidance of unnecessary regulatory interference given the members rights to free speech as protected under the first amendment. Citizens United only pertains to the political contributions of corporations; one ought to be wary extrapolating the rights conferred upon other organizations that are looking to do something other than spend money during campaigns. But, the likely outrage and backlash the courts could face if they attempted such a narrow legal ruling would likely result in violent protests. This is because it would affirm in the minds of ordinary Americans that they live in a society with two distinct classes of citizens. Non-corporate persons and corporate persons. The latter of which would be seen to have greater rights and privileges. Such a decision would certainly provoke righteous outrage against a court that prioritizes the personhood of corporations above the personhood of actual persons.

Given that the court may choose a narrow application of precedent when it serves their biased purpose, one should consider that courts can become highly reactionary foes if the limits of legal precedent are contested. Similarly, Janus is generally interpreted through the lens of a public sector union case and the courts would likely be skeptical of extrapolating too far from the narrow definition of speech given to us by this decision.

However, it makes sense to look to the First Amendment for protections we cannot find in the Commerce Clause. The initial First Amendment model and proposed tanda group structures explicitly declare that a policyholders associations with such groups are a form of political protest. Although members may only join for financial considerations, declaring the project’s purpose as political protest will provide additional legal protections.

In Texas v. Johnson, 491 U.S. 397, 404 (1989), the Supreme Court stated “the First Amendment literally forbids the abridgment only of ‘speech,’ but we have long recognized that its protection does not end at the spoken or written word.” Because of the vital importance of freedom of speech the court has “not permitted the government to assume that every expression of a provocative idea will incite a riot, but have instead required careful consideration of the actual circumstances surrounding such expression, asking whether the expression ‘is directed to inciting or producing imminent lawless action and is likely to incite or produce such action.’” Id. at 409.

The court clarifies that there are robust protections for speech disliked by the government. “If there is a bedrock principle underlying the First Amendment, it is that the government may not prohibit the expression of an idea simply because society finds the idea itself offensive or disagreeable.” Id. at 414. To conclude, “the government may not prohibit expression simply because it disagrees with its message, is not dependent on the particular mode in which one chooses to express an idea.” Id. at 416.

If the tanda project is about more than helping people overcome unreasonable insurance costs — that is, if it were to explicitly declare the group’s purpose as a political repudiation of for-profit insurance institutions for example — then First Amendment right to dissent is triggered. The court may believe that there is no reasonable arguments to be made that a cost savings co-operative is a type of protest against unfair social injustice or class inequality. If the motives of the tanda groups are consensual, peaceful, and mutually-supportive, then one might see this type of protest as perfectly valid, given how many lives have been destroyed by the high cost of insurance and the unfair denial of claims. Given the current state of insurance coverage in this country such a protest is not only justifiable, but moral.

Before concluding, let’s address the keynote clause of the First Amendment. “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.” Allow the author to tease out a hypothetical. Let’s say tanda groups get very popular and people become devoted to this type of networking. Perhaps the insurance lobby is using all its resources to use the legal system to prevent the use of tanda groups. What is the big difference between overt passion and faith? If tanda members were willing to characterize their feelings for the program as faith in a religion or sincerely-held beliefs, they could establish a church of sorts to practice their beliefs. Doing so would add even more legal protection.

Congress codified the common law regarding the free exercise (in our hypothetical, the use of tanda groups) in the Religious Freedom Restoration Act. The Act states that the government may only burden region with a compelling government interest through the least restrictive means of achieving that objective. This is commonly known as the ‘strict scrutiny’ standard and is the most intense and thorough examination a court will make in federal law. Cases decided under strict scrutiny rarely lose unless the proposed action shocks the conscious of the court (the polygamy ban is a famous example). Helping friends and neighbors pay bills is nothing like this.

Contrast the strict scrutiny of religious exercise with the rational basis deference we saw with “takings” issues under the 5th Amendment in Omnia. The difference is drastic. Religious organizations receive the most robust protections under law as judges are simply uninterested in determining how an individual’s faith should be practiced. Although seemingly absurd to pursue such a course, there are practical benefits. If the Supreme Court is willing to protect animal sacrifice, surely community funding for insurance costs isn’t a bridge too far.

These groups may initially not assert a move for religious establishment, however if a local tanda group came under legal pressure, the idea cannot be dismissed out of hand. To conclude, it is worthy of final contemplation by the reader: why can’t the secretary be a priest and the bi-monthly meetings be observances? This isn’t any less protected by established legal precedent than declaring that a corporation has the same rights as a citizen. The overarching difference, of course, is that this helps people, rather than rob them of a voice.