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Court permanently bans companies and officer from payment processing
On January 22, the U.S. District Court for the District of Arizona entered judgments (available here and here) prohibiting two companies and one officer from engaging in payment processing services, credit card laundering, and telemarketing as a result of their involvement in a credit card laundering scheme. As previously covered by InfoBytes, in July 2017, the FTC filed a complaint against 12 defendants, comprised of an independent sales organization (ISO), sales agents, payment processors, and identified principals, for allegedly violating the FTC Act and the Telemarketing Sales Rule by laundering credit card transactions on behalf of a “telemarketing scam” operation through fictitious merchant accounts. The defendants purportedly (i) underwrote and approved the operation’s fictitious companies; (ii) set up merchant accounts with its acquirer for the fictitious companies; (iii) used sales agents to market processing services to merchants; (iv) processed nearly $6 million through credit card networks; and (v) transferred sales revenue from the transactions to companies controlled by the defendants. In addition to the permanent injunctions, the court entered into an over $4.6 million suspended judgment against the companies and an over $460,000 suspended judgment against the officer. However, the judgments can be lifted should the court find that the officer failed to disclose material assets or the accurate value of material assets.
Court orders arbitration on non-signatory claims
On January 21, the U.S. District Court for the Eastern District of Pennsylvania granted a national cable provider’s motion to compel arbitration in a putative class action alleging the company violated the FCRA by checking consumer credit reports without a permissible purpose. According to the opinion, after the consumer filed the putative class action, the company moved to arbitrate the claims pursuant to a provision contained “in various written materials that were originally provided to [the consumer]’s household in 2006” upon the opening of a company account. In response, the consumer asserts that the arbitration provision is not binding on him, because he was not the signatory on the document that contains the provision. The court disagreed with the consumer, concluding that, even though he was a non-signatory, he “actively sought and obtained benefits provided pursuant to the Subscriber Agreement, such that he is equitably estopped from avoiding the Arbitration Provision contained therein.” Specifically, the court acknowledged the existence of the arbitration agreement was not in dispute, but whether the consumer was bound by it. The court found that, not only did the consumer obtain benefits from the household account, he also “exceris[ed] control over the account,” including placing servicing calls regarding the account. Moreover, because the claims filed by the consumer fall within the scope of the arbitration agreement, as they “relate[] to [company] and/or [consumer]’s relationship with [company],” and the court granted the company’s motion to compel arbitration.
7th Circuit affirms dismissal of FDCPA claims for lack of standing
On January 21, the U.S. Court of Appeals for the Seventh Circuit affirmed a lower court’s ruling dismissing a plaintiff’s FDCPA lawsuit for lack of standing. According to the opinion, the plaintiff claimed a debt collector violated the FDCPA when it sent her a collection letter including the following statement: “If you dispute this balance or the validity of this debt, please let us know in writing. If you do not dispute this debt in writing within 30 days after you receive this letter, we will assume this debt is valid.” The plaintiff argued that section 1692g(a)(3) of FDCPA does not specify how a consumer may dispute the validity of a debt, claiming that consumers should be allowed to dispute debts in whatever manner they choose. Instead of determining whether the debt collector violated section 1692g(a)(3) by requiring consumers to dispute debts in writing, the 7th Circuit determined that the plaintiff lacked standing to sue in the first place. The appellate court referenced an observation made by the district court that the plaintiff “‘did not allege she had any doubt that she owed the creditor the stated amount of money,” and that “she failed to allege any injury that flowed from her failure to dispute the debt.” Noting, however, that not all alleged section 1692g(a)(3) violations lack standing, the appellate court stated that in this case, the plaintiff “did not allege injury, because she did not try to show what good a dispute would have done her. She is no worse off than if the letter had told her that she could dispute the debt orally.”
District court approves $13 million settlement in ATM fee class action
On January 21, the U.S. District Court for the Southern District of California granted final approval of a $13 million class action out-of-network (OON) ATM fee settlement. As previously covered by InfoBytes, the plaintiffs filed the action asserting that the bank charges its customers two OON fees when an account holder conducts a balance inquiry and then obtains a cash withdrawal at an OON ATM. The bank moved for summary judgment on the breach of contract claim, which the district court denied, concluding that there were ambiguities regarding the fee terms provided in the contract and on the on-screen ATM warnings. After participating in a private mediation, the plaintiffs filed an unopposed motion for preliminary approval of the settlement. The $13 million settlement covers a total of over 1.6 million class members—defined as all bank account holders in the U.S. who incurred at least one OON balance inquiry fee during varying time periods based on location— and provides for a $10,000 incentive award to each of the named plaintiffs and $3.9 million for plaintiffs’ counsel. In exchange for their share of the settlement funds, the class members will agree to release the bank from all claims relating to the action.
Law firm ordered to produce cyberattack report in malpractice action
On January 12, the U.S. District Court for the District of Columbia ordered a law firm to produce a forensic report generated by a consultant retained by the firm’s outside counsel in the wake of the plaintiff’s data breach, concluding that the report and associated materials were neither protected work product nor attorney-client privileged. According to the order, as part of a malpractice action in which the plaintiff, a Chinese entrepreneur, accused the law firm of failing to protect his personal information from hackers, the plaintiff moved to compel the production of “‘all reports of its forensic investigation into the cyberattack’ that led to the public dissemination of [plaintiff]’s confidential information.” The law firm opposed the motion, arguing that it already had turned over all relevant internally generated materials and any other documents were protected by attorney-client and work-product privileges. The law firm argued that the forensic report was only one half of a two-tracked investigation of the incident. On one track, the law firm’s usual cybersecurity vendor worked to investigate the attack to preserve business continuity while on a separate track, a different consultant was retained by counsel for the sole purpose of assisting the law firm in gathering information necessary to render legal advice.
The district court disagreed, concluding that the report is not covered by work-product privilege because the law firm failed to show that the report “‘would [not] have been created in the ordinary course of business irrespective of litigation.’” The court noted that the forensic report summarizes the findings of the investigation and that substantially the same document would have been prepared in any event as part of the ordinary course of the law firm’s business. While seeming to endorse the idea of a two-track investigation, the court noted that the law firm failed to provide any evidence that supported the fact that there were actually two tracks. Among other things, the court noted that the report summarizes findings into the data breach’s “cause, nature, and effect” and was used “for a range of non-litigation purposes,” including being shared with members of the law firm’s leadership and IT team and the FBI. In addition, the court noted that there was no evidence that the law firm’s usual cybersecurity vendor produced any findings, let alone a comprehensive report about the incident. Instead, the court stated that the record suggested that two days after the cyberattack began, the law firm turned to this second consulting firm instead of rather than in addition to the first consulting firm. Moreover, the court rejected the application of attorney-client privilege, concluding that the law firm’s “true objective was gleaning [the security-consulting firm]’s expertise in cybersecurity, not in ‘obtaining legal advice from [its] lawyer.’” The court noted that the report included remediation advice, indicating the security firm was “engaged for immediate ‘incident response.’” Lastly, the court noted the law firm can safely respond to the plaintiff’s interrogatories calling for information regarding other clients impacted by the cyberattack with “appropriate redactions in responsive documents” and “tailored” answers.
OCC urges court to uphold valid-when-made rule
On January 14, the OCC moved for summary judgment in an action filed by the California, Illinois, and New York attorneys general (collectively, “states”) challenging the OCC’s valid-when-made rule, arguing that the challenge is without merit and that the agency “reasonably interprets the ‘gap’ in [12 U.S.C. § 85] concerning what happens when a national bank sells, assigns, or transfers a loan.” As previously covered by InfoBytes, the OCC’s final rule was designed to effectively reverse the Second Circuit’s 2015 Madden v. Midland Funding decision and provides that “[i]nterest on a loan that is permissible under [12 U.S.C. § 85 for national bank or 12 U.S.C. § 1463(g)(1) for federal thrifts] shall not be affected by the sale, assignment, or other transfer of the loan.” The states challenged the rule, arguing that it is “contrary to the plain language” of section 85 (and section 1463(g)(1)) and “contravenes the judgment of Congress,” which declined to extend preemption to non-banks. Moreover, the states contend that the OCC “failed to give meaningful consideration” to the commentary received regarding the rule, essentially enabling “‘rent-a-bank’ schemes.”
In response, the OCC argued that not only does the final rule reasonably interpret the “gap” in section 85, it is consistent with section 85’s “purpose of facilitating national banks’ ability to operate their nationwide lending programs.” Moreover, the agency asserts that 12 U.S.C. § 25b’s preemption standards do not apply to the final rule, because, among other things, the OCC “has not concluded that a state consumer financial law is being preempted.” The final rule “addresses only the ‘substantive [ ] meaning’ of § 85” and Congress “expressly exempted OCC’s interpretations of § 85 from § 25b’s requirements.” Lastly, the OCC argued that it made an “informed and reasoned decision,” including addressing issues raised during the public comment period. Thus, the court should uphold the final rule and affirm summary judgment for the agency.
Court says CFPB unconstitutionality argument strays from Supreme Court ruling in Seila
On January 13, the U.S. District Court for the Middle District of Pennsylvania denied a student loan servicer’s motion for judgment on the pleadings, ruling that the servicer’s argument that the CFPB is unconstitutional “strays afar” from the U.S. Supreme Court’s finding in Seila Law LLC v. CFPB. The servicer previously argued that the Supreme Court’s finding in Seila (covered by a Buckley Special Alert)—which held that that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the CFPB—meant that the Bureau “never had constitutional authority to bring this action and that the filing of [the] lawsuit was unauthorized and unlawful.” The servicer also claimed that the statute of limitations governing the CFPB’s claims prior to the decision in Seila had expired, arguing that Director Kathy Kraninger’s July 2020 ratification came too late. However, the court determined, among other things, that “[n]othing in Seila indicates that the Supreme Court intended that its holding should result in a finding that this lawsuit is void ab initio.” The court further noted that the servicer’s assertion that the Bureau “‘never had constitutional authority to bring this action’ is belied by Seila’s implicit finding that the CFPB always had the authority to act, despite the Supreme Court’s finding that the removal protection was unconstitutional.”
California appellate court concludes lender’s arbitration provision unenforceable
On January 11, the Court of Appeals of the State of California affirmed the denial of an auto lender’s motion to compel arbitration, concluding that the arbitration clause was invalid and unenforceable. According to the opinion, in May 2019, consumers filed a class action complaint alleging the lenders charged unconscionable interest rates in violation of California’s Unfair Competition Law (UCL) and Consumers Legal Remedies Act (CLRA). The company moved to compel arbitration, which the consumers opposed, arguing that the agreement was “procedurally and substantively unconscionable,” and that the California Supreme Court decision in McGill v. Citibank, N.A. (covered by a Buckley Special Alert here, holding that a waiver of the plaintiff’s substantive right to seek public injunctive relief is not enforceable) applied. The trial court denied the motion to compel arbitration, concluding that the McGill rule applied and that the injunctive relief provision could not be severed from the rest of the arbitration agreement because severability did not apply to the class waiver provision.
On appeal, the state appellate court agreed with the trial court, concluding that the McGill rule applied. Specifically, the appellate court concluded that the injunctive relief the consumers were seeking “encompasses all consumers and members of the public,” and “an injunction under the CLRA against [the lender]’s unlawful practices will not directly benefit the Customers because they have already been harmed and are already aware of the misconduct.” Moreover, the appellate court determined that there is no precedent holding that “the remedy of public injunctions under CLRA and UCL should be limited to false advertising claims.” The court further concluded that the class waiver was not severable, stating that the lender’s argument that the arbitration agreement could not be determined void until after an appellate court reviews the viability of the class waiver was “illogical.” Accordingly, the appellate court affirmed the denial of the motion to arbitrate.
National bank settles merchant processing fee class action for $40 million
On January 12, a national bank’s merchant services division agreed to pay up to $40 million to settle a class action alleging that the bank overcharged for payment processing services. According to the November 2017 amended complaint filed in the U.S. District Court for the Eastern District of New York, six small businesses alleged that the bank fraudulently induced merchant customers to enter into contracts by failing to properly disclose rates and charges that applied to their accounts. Specifically, the plaintiffs alleged that the bank induced merchants to retain its card payment processing services by promising low card processing fees at the time of enrollment but then charged higher rates and surcharges for the “vast majority of transactions.” Plaintiffs also alleged that the bank used an “upcharge” method, in which customers contract for “fixed” processing fees, but that the vast majority of transactions are ultimately deemed “non-qualified” and charged at higher rates than disclosed. Additionally, the bank allegedly told potential merchant customers that they could “cancel at any time without penalty,” when merchant customers that canceled prior to the expiration of the contract term were charged an “early termination fee [] of several hundred dollars.”
Under the proposed settlement, the bank will pay up to $40 million—and no less than $27 million—to class members and cover attorneys’ fees and expenses, service awards, and settlement administration costs. Additionally, the bank, among other things, has agreed to (i) continue to allow customers to switch, penalty-free to a newer standard pricing plan from the fixed pricing plan; and (ii) modify contract terms to allow customers to leave without termination fees within 45 days of being assessed new or increased fees.
National bank settles DACA discrimination class action
On January 8, the U.S. District Court for the Northern District of California granted final approval to a settlement resolving allegations brought by a national class and a California class against a national bank concerning the denial of credit to recipients who held valid and unexpired Deferred Action for Childhood Arrivals (DACA) status. In a motion for preliminary settlement filed last June, the plaintiffs claimed that the bank allegedly determined DACA recipients to be ineligible for direct auto financing because of their noncitizen status, even though “[t]here is no federal or state law or regulation that prohibits banks from lending to non-citizens generally, or DACA recipients specifically, based on their status as non-citizens.” The bank moved to dismiss, claiming the plaintiffs failed to plead facts sufficient to state claims under the Equal Credit Opportunity Act and the Fair Credit Reporting Act. The parties engaged in discovery, but ultimately agreed to stay the case and engaged a mediator to assist with settlement discussions.
Under the terms of the settlement, the bank is required to provide verified California class members up to $2,500 per claim and national class members up to $300 pending submission of a valid claim. The settlement also provides injunctive relief, a service award to the class representative, attorneys’ fees and costs, and settlement administration costs. Additionally, the bank will amend its direct auto lending practices in order “to extend loans to current and valid DACA recipients on the same terms and conditions as U.S. citizens,” and will provide class counsel an annual status report detailing the status of its programmatic relief for a two year period.