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States have their say on CFPB funding
Recently, a coalition of state attorneys general from 22 states, including the District of Columbia, filed an amicus brief supporting the CFPB’s petition for a writ of certiorari, which asked the U.S. Supreme Court to review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution. A separate coalition of 16 state attorneys general filed an amicus brief opposing the Bureau’s position and supporting the 5th Circuit’s decision, however these states also urged the Supreme Court to grant the Bureau’s petition to address whether the 5th Circuit’s conclusion was correct.
As previously covered by a Buckley Special Alert, the 5th Circuit’s October 19 holding found that although the Bureau spends money pursuant to a validly enacted statute, the structure violates the Appropriations Clause because (i) the Bureau obtains its funds from the Federal Reserve (not the Treasury); (ii) the agency maintains funds in a separate account; (iii) the Appropriations Committees do not have authority to review the agency’s expenditures; and (iv) the Bureau exercises broad authority over the economy. The case involves a challenge to the Bureau’s Payday Lending Rule, which prohibits lenders from attempting to withdraw payments for covered loans from consumers’ accounts after two consecutive withdrawal attempts have failed due to insufficient funds. As a result of the 5th Circuit’s decision, lenders’ obligation to comply with the rule (originally set for August 19, 2019, but repeatedly delayed) will be further delayed while the constitutional issue winds its way through the courts. The Bureau’s petition also asked the court to consider the 5th Circuit’s decision to vacate the Payday Lending Rule on the premise that it was promulgated at a time when the Bureau was receiving unconstitutional funding. (Covered by InfoBytes here.)
- Amicus brief supporting CFPB’s position. The 22 states urged the Supreme Court to review the 5th Circuit’s decision, arguing that the Bureau’s funding is lawful and that even if the Supreme Court were to find a constitutional defect in the funding scheme, vacating otherwise lawfully-promulgated regulations is neither justified nor compelled by law. “Left undisturbed, the court of appeals’ reasoning could jeopardize many of the CFPB’s actions from across its decade-long existence, to the detriment of both consumers protected by those actions and financial-services providers that rely on them to guide their conduct,” the states said. In their brief, the states argued, among other things, that the Supreme Court should grant the petition “to review at least the question of whether the court of appeals erred in vacating a regulation promulgated during a time when the CFPB received allegedly unconstitutional funding.” The states asserted that the decision “threatens substantial harm” to the states because the states and their residents “could stand to lose the benefits of the CFPB’s critical enforcement, regulatory, and informational functions if the decision [] stands and is interpreted to impair the CFPB’s ongoing operations.” With respect to questions related to the Bureau’s funding structure, the states claimed that it is altogether speculative as to whether the Bureau would have behaved differently if its funding had come from the Treasury rather than the Federal Reserve. Former Director Kraninger’s ratification and reissuance of the Payday Lending Rule “is strong evidence that the CFPB would have issued the same regulation once again, after any constitutional defect was corrected,” the states said.
- Amicus brief opposing CFPB’s position. The 16 opposing states argued, however, that the Supreme Court should grant the Bureau’s petition to provide states with “certainty over their role” in regulating the financial system, and should affirm the 5th Circuit’s decision to “restore the CFPB’s accountability to the states.” In their brief, the states asked the Supreme Court “to resolve this issue quickly” and to “reinvigorate the protections of the Appropriations Clause, not weaken them.” The states maintained that if the Supreme Court does not quickly resolve the dispute, states “will have to litigate the same issue in other districts and circuits over and over,” and “[a]ny continuing confusion could seriously impede the growth of the consumer-financial services market at a time when the economy is already strained.” According to the brief, congressional oversight “ensures a level of state participation that ordinary administrative processes don’t allow.” In summary, the states’ position is that the 5th Circuit’s decision on the funding question is correct and that the court “was right to vacate a rule enacted without constitutional funding.”
10th Circuit: Vendor knowledge of consumer debt is not a public disclosure
On December 16, the U.S. Court of Appeals for the Tenth Circuit affirmed a lower court’s dismissal of an FDCPA suit. According to the opinion, the plaintiff, who had student loan debt, received a collection letter from the defendant that listed the assigned balance as $184,580.73 and the debt balance as $217,657.60 without explaining the difference or that the debt could increase due to interest, fees, and other charges. The defendant, who used an outside mailer to compose and send the letters, sent her two more letters without providing an explanation for the balances. The plaintiff sued, alleging the defendant violated the FDCPA by communicating information about the debt to a vendor that printed and mailed the letters. According to the plaintiff, communicating this information violated FDCPA provisions that prohibit debt collectors from communicating with, in connection with the collection of any debt, any person without the consumer’s consent or court permission. The plaintiff also claimed that the defendant violated the FDCPA by misrepresenting the amount of the debt because it did not indicate that the amount of the debt may increase.
On the appeal, the appellate court affirmed dismissal after it found that the plaintiff lacked standing since neither of the plaintiff’s claims caused a concrete injury. First, the appellate court found that one private entity knowing about the plaintiff’s debt is not a public disclosure of private facts, which does not rise to the level of sustaining a concrete injury needed to sue in federal court. Second, regarding the substance of the letters, the appellate court noted that the plaintiff simply claimed that the letters she received caused her to be confused and to believe the debt was not accruing interest. However, the appellate court found that “confusion and misunderstanding are insufficient to confer standing.”
9th Circuit affirms ruling for CFPB in deceptive solicitations case
On December 13, the U.S. Court of Appeals for the Ninth Circuit affirmed summary judgment in favor of the CFPB against a California-based student financial aid operation and its owner (collectively, “defendants”), which were sued for allegedly mailing deceptive solicitations to individuals that advertised help in applying for scholarships. As previously covered by InfoBytes, the defendants allegedly engaged in deceptive practices when they, among other things, represented that by paying a fee and sending in an application, consumers were applying for financial aid or the defendants would apply for aid on behalf the students. But, according to the Bureau, the consumers did not receive the promised services in exchange for their payment. The case was stayed in 2016 while the owner defendant faced a pending criminal investigation, until the court lifted the stay in 2019 after finding the possibility of the civil proceedings affecting the owner defendant’s ability to defend himself in the criminal proceeding “speculative and unripe.” In 2021, the U.S. District Court for the Southern District of California issued an order granting in part and denying in part the CFPB’s motion for partial summary judgment and granting the agency’s motion for default judgment (covered by InfoBytes here). The order required the defendants to pay a $10 million civil money penalty and more than $4.7 million in restitution. Additionally, default judgment was entered against the defendants on the merits of the Bureau’s claims, which included allegations that the defendants failed to provide privacy notices to consumers as required by Regulation P. The defendants appealed.
On appeal, the defendant-appellant argued that he was not subject to the Bureau’s authority because he provided nonfinancial advice on “free” scholarships and that the solicitations were not deceptive. The appellate court noted that the CFPA lists ten different categories of covered persons, one of which is “providing financial advisory services … to consumers on individual financial matters or relating to proprietary financial products or services ….” Because the solicitations dealt with the topic of financial aid and scholarships for college tuition, the 9th Circuit concluded that “[a]dvising students to exhaust scholarship opportunities before taking on debt is no less ‘financial’ than advising students to leverage their unique access to federally subsidized loans.” The appellate court noted that the defendant’s “advice covered the entire gamut of financial aid and was undoubtedly financial in nature.” The appellate court further noted that the defendant “is incorrect that scholarships are not financial in nature merely because they do not have to be repaid,” and that “the ordinary meaning of financial is broad and encompasses both cash financing and debt financing. Indeed, the definition of ‘finance’ specifically contemplates raising funds, regardless of their origin, for college tuition.”
Supreme Court agrees to hear second appeal over student debt relief plan
On December 12, the U.S. Supreme Court granted a petition for certiorari in a student debt relief challenge currently pending before the U.S. Court of Appeals for the Fifth Circuit. As previously covered by InfoBytes, the DOJ filed an application on behalf of the Department of Education (DOE) asking the U.S. Supreme Court to stay a judgment entered by the U.S. District Court for the Northern District of Texas concerning whether the agency’s student debt relief plan violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. In a brief unsigned order, the Supreme Court deferred the DOE’s application for a stay, pending oral argument. The Supreme Court said it will treat the application as a “petition for a writ of certiorari before judgment,” and announced a briefing schedule will be established to allow the case to be argued in the February 2023 argument session to resolve the legality of the program. Oral arguments are scheduled for February 28, 2023.
The Supreme Court said it will consider whether the respondents (individuals whose loans are ineligible for debt forgiveness under the plan, as covered by InfoBytes here) have Article III standing to bring the challenge. The Supreme Court will also consider whether the DOE’s plan is “statutorily authorized” and “adopted in a procedurally proper manner.”
This is the second case concerning the Biden administration’s student debt relief plan that the Supreme Court has agreed to hear. On December 1, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit, which temporarily prohibits the Secretary of Education from discharging any federal loans under the DOE’s student debt relief plan. (Covered by InfoBytes here.)
District Court stays action against remittance provider while Supreme Court weighs CFPB’s funding structure
On December 9, the U.S. District Court for the Southern District of New York stayed an action brought by the CFPB and the New York attorney general against a defendant remittance provider until after the U.S. Supreme Court decides if it will review whether the U.S. Court of Appeals for the Fifth Circuit erred in holding that the Bureau’s funding structure violates the Appropriations Clause of the Constitution. Last month the DOJ, on behalf of the CFPB, submitted a petition for a writ of certiorari seeking Supreme Court review of the 5th Circuit’s decision during its current term. (Covered by InfoBytes here.) The New York AG and the Bureau sued the defendant in April for allegedly violating the EFTA and its implementing Regulation E, the Remittance Rule, and the Consumer Financial Protection Act (CFPA), among various consumer financial protection laws, in its handling of remittance transfers. (Covered by InfoBytes here.)
The defendant argued that the district court should hold off on deciding on its motion to dismiss per the aforementioned argument, but should nonetheless rule on its pending motion to transfer. The Bureau opposed the defendant’s request for a stay, countering “that a stay would not promote efficiency” since the issue of the Bureau’s standing would not affect the claims brought in the current action. The Bureau further asserted “that the public and the parties’ interest weighs against a stay, as it would hinder Plaintiffs’ enforcement of the consumer protection laws and make obtaining evidence down the line more difficult.”
The district court disagreed, stating that the Supreme Court may address the broader issue of the Bureau’s standing to bring enforcement actions in its decision, and that, regardless, the agency’s claims in the current action “are inextricably linked to CFPB rules and regulations, which themselves may be implicated by a Supreme Court decision should it grant the petition.” The district court stayed the case in its entirety and said that it will wait to decide on both motions until after the Supreme Court decides on the Bureau’s filed petition for a writ of certiorari.
Parties reach agreement to resolve data scraping allegations
On December 8, the U.S. District Court for the Northern District of California issued a consent judgment and permanent injunction against a now-defunct plaintiff data analytics company in an action concerning whether the plaintiff breached a user agreement with a defendant professional networking site by using an automated process to extract user data (a process known as “scraping”) for the purposes of selling its analytics services to businesses. The case was sent back to the district court earlier this year by the U.S. Court of Appeals for the Ninth Circuit (on remand from the U.S. Supreme Court) after the appellate court affirmed the district court’s order preliminarily enjoining the defendant from denying the plaintiff access to publicly available member profiles. (Covered by Infobytes here.)
As previously covered by InfoBytes, last month the district court ruled that the plaintiff breached its user agreement by creating fake accounts and copying url data as part of its scraping process. Nonetheless, at the time, the district court noted that there remained a legitimate dispute over whether the defendant waived its right to enforce the user agreement after the plaintiff openly discussed its business model, including its reliance on scraping, at conferences it organized that were attended by defendant’s executives. The district court further questioned when the defendant became aware of the plaintiff’s scaping, whether it should have taken “steps to legally enforce against known scraping” sooner, and whether the defendant can raise certain defenses to its breach of contract claim tied to the plaintiff’s data scraping and unauthorized use of data.
On December 6, the parties separately reached an agreement to resolve all outstanding claims in the case. The final consent judgment enters a $500,000 judgment against the plaintiff and waives all other monetary relief. Additionally, the plaintiff is permanently enjoined from scraping or accessing the defendant’s platform without express written permission, whether directly or indirectly through a third party or whether logged in to an account or not. The plaintiff is also prohibited from developing, using, selling, or distributing any software or code for data collection from the defendant’s platform. The plaintiff must also delete all software code in its possession that is designed to access the defendant’s platform, must delete all member profile data in its possession (including data stored with a third party), and is barred from “using, distributing, selling, analyzing, or otherwise accessing any data” collected without the defendant’s express permission, whether directly or indirectly through a third party, among other requirements.
California appellate court upholds judgment in RFDCPA suit
On November 23, the California Court of Appeal for the Fourth Appellate District upheld a summary judgment ruling for a creditor over allegations that it violated the Rosenthal Fair Debt Collection Practices Act (RFDCPA). The plaintiff, the widow of a former patient of the defendant doctor, asserted claims against the doctor and his professional corporation (collectively, “defendants”) alleging that they were debt collectors within the meaning of the RFDCPA. The plaintiff alleged that the defendants violated the RFDCPA by sending “multiple bills and making incessant” phone calls seeking payment for services provided to her husband before he died. The plaintiff requested that the defendants stop contacting her and seek payment through insurance and the hospital. The defendants used two different companies for its third-party billing services, and those companies sent invoices to the plaintiff, who responded that payment inquiries for her deceased husband should only be submitted to the insurance company and the medical center. The trial court granted the defendants’ motion for summary judgment, ruling they did not meet the statute’s definition of a debt collector.
The appellate court affirmed, finding that “a medical service provider that exclusively uses an unaffiliated, third-party billing service to collect payment for services rendered to patients” is not a “debt collector” within the meaning of the RFDCPA. The court found that although the RFDCPA “applies to those who collect debts on behalf of themselves,” the law still requires that a defendant “must regularly and in the ordinary course of business ‘engage in’ debt collection” for liability to attach. The appellate court emphasized that it was not holding that “a creditor may never be vicariously liable for the actions of a debt collector on an agency theory.” Instead, the plaintiff carried “the burden to demonstrate a triable issue of material fact on the existence of such an agency relationship, and she failed to do so on this record.”
Supreme Court asked to stay judgment holding that HEROES Act does not authorize the creation of the DOE’s student debt relief plan
Recently, the DOJ filed an application on behalf of the Department of Education (DOE) asking the U.S. Supreme Court to stay a judgment entered by the U.S. District Court for the Northern District of Texas in an action related to whether the agency’s student debt relief plan violated the Administrative Procedure Act’s (APA) notice-and-comment rulemaking procedures. As previously covered by InfoBytes, the district court held that while the HEROES Act expressly exempts the APA’s notice-and-comment obligations, the district court stressed that the HEROES Act “does not provide the executive branch clear congressional authorization to create a $400 billion student loan forgiveness program,” and, moreover, does not mention loan forgiveness. On December 1, the U.S. Court of Appeals for the Fifth Circuit denied the DOE’s motion for stay pending appeal.
In its application, the DOE argued that the plaintiffs never asserted that the debt relief plan exceeded the education secretary’s statutory authority. Instead, the DOE argued, the plaintiffs alleged only that they were improperly denied the opportunity to comment on the plan, stressing that while the district court recognized that the HEROES Act expressly exempts the APA’s notice-and-comment obligations, it went further by holding that the plan went beyond the secretary’s authority. “The district court profoundly erred by raising and deciding a claim that respondents did not assert and could not have asserted,” the DOE stressed, further adding that the plaintiffs did not claim that providing debt relief to other borrowers would inflict injury on them. Beyond this, the secretary’s plan “falls squarely within the plain text of his statutory authority,” the DOE asserted. The DOE requested that the Supreme Court stay the district court’s judgment, or in the alternative, defer the application pending oral argument and treat it as a petition for certiorari before judgment, grant the petition, and hear the case along with a second separate action, discussed below, involving a challenge to an injunction that temporarily prohibits the Secretary of Education from discharging any federal loans under the agency’s student debt relief plan.
As previously covered by InfoBytes, on December 1, the Supreme Court agreed to hear the Biden administration’s appeal of an injunction entered by the U.S. Court of Appeals for the Eighth Circuit. The 8th Circuit held that “the equities strongly favor an injunction considering the irreversible impact the Secretary’s debt forgiveness action would have as compared to the lack of harm an injunction would presently impose,” and pointed to the fact that the collection of student loan payments and the accrual of interest have both been suspended. (Covered by InfoBytes here.) The 8th Circuit’s opinion followed a ruling issued by the U.S. District Court for the Eastern District of Missouri, which dismissed an action filed by state attorneys general from Nebraska, Missouri, Arkansas, Iowa, Kansas, and South Carolina for lack of Article III standing after concluding that the states—which attempted “to assert a threat of imminent harm in the form of lost tax revenue in the future”— failed to establish imminent and non-speculative harm sufficient to confer standing. In an unsigned order, the Supreme Court deferred the Biden administration’s application to vacate, pending oral argument. Oral arguments are scheduled for February 28, 2023.
9th Circuit revives data breach class action against French cryptocurrency wallet provider
On December 1, the U.S. Court of Appeals for the Ninth Circuit affirmed in part and reversed in part a district court’s dismissal of a putative class action brought against a French cryptocurrency wallet provider and its e-commerce vendor for lack of personal jurisdiction. As previously covered by InfoBytes, plaintiffs—customers who purchased hardware wallets through the vendor’s platform between July 2017 and June 2020—alleged violations of state-level consumer protection laws after a 2020 data breach exposed the personal contact information of thousands of customers. Plaintiffs contended, among other things, that when the breach was announced in 2020, the wallet provider failed to inform them that their data was involved in the breach, downplayed the seriousness of the attack, and did not disclose that the attack on its website and the vendor’s data theft were connected. The district court held that it did not have jurisdiction over the French wallet provider, and ruled, among other things, that the plaintiffs did not establish that the wallet provider “expressly aimed” its activities towards California in a way that would establish specific jurisdiction, and “did not cause harm in California that it knew was likely to be suffered there.” The district court further held that the fact that the vendor was headquartered in California at the time the breach occurred was not sufficient to establish general jurisdiction because the vendor moved to Canada before the class action was filed. “Courts have uniformly held that general jurisdiction is to be determined no earlier than the time of filing of the complaint,” the district court wrote, dismissing the case with prejudice.
On appeal, the 9th Circuit concluded that dismissal was improper because the French wallet provider’s contracts with California were sufficient to establish jurisdiction under the “purposeful availment” framework. The appellate court explained that because the French wallet provider sold roughly 70,000 wallets in the state, collected California sales tax, and shipped wallets directly to California addresses, the “facts suffice to establish purposeful availment because [the French wallet provider’s] contacts with the forum cannot be characterized as ‘random, isolated, or fortuitous.’” However, the 9th Circuit limited the claims to only those brought by California residents under the state’s consumer protection laws. A forum-selection clause in the French wallet provider’s privacy policy and terms of use documents provided that disputes would be subject to the exclusive jurisdiction of French courts, the appellate court said, which was enforceable except with respect to the class claims of California residents brought under California law “because it violated California public policy against waiver of consumer rights under California’s Consumer Legal Remedies Act.”
The 9th Circuit also determined that the district court abused its discretion in disallowing any jurisdictional discovery concerning the defendant e-commerce vendor. Explaining that the e-commerce vendor employs more than 200 people who work remotely from California, including a data-protection officer (DPO) who may have played a role related to the data breach, the appellate court wrote that “[b]ecause more facts are needed to determine whether those activities support the exercise of jurisdiction, we reverse the district court’s denial of jurisdictional discovery with respect to the DPO’s role and responsibilities and his relationship to [the e-commerce vendor], which processed and stored the data.”
States say student loan trusts are subject to the CFPA’s prohibition on unfair debt collection practices
On November 15, a bipartisan coalition of 23 state attorneys general led by the Illinois AG announced the filing of an amicus brief supporting the CFPB’s efforts to combat allegedly illegal debt collection practices in the student loan industry. As previously covered by InfoBytes, in February, the U.S. District Court for the District of Delaware stayed the Bureau’s 2017 enforcement action against a collection of Delaware statutory trusts and their debt collector after determining there may be room for reasonable disagreement related to questions of “covered persons” and “timeliness.” The district court certified two questions for appeal to the U.S. Court of Appeals for the Third Circuit related to (i) whether the defendants qualify as “covered persons” subject to the Bureau’s enforcement authority; and (ii) whether the case can be continued after the Supreme Court’s 2020 decision in Seila Law v. CFPB (which determined that the director’s for-cause removal provision was unconstitutional but was severable from the statute establishing the Bureau—covered by a Buckley Special Alert). Previously, the district court concluded that the suit was still valid and did not need ratification because—pointing to the majority opinion in the Supreme Court’s decision in Collins v. Yellen (covered by InfoBytes here)—“‘an unconstitutional removal restriction does not invalidate agency action so long as the agency head was properly appointed[,]’” and therefore the Bureau’s actions are not void and do not need to be ratified, unless a plaintiff can show that “the agency action would not have been taken but for the President’s inability to remove the agency head.” The district court later acknowledged, however, that Collins “is a very recent Supreme Court decision” whose scope is still being “hashed out” in lower courts, which therefore “suggests that there is room for reasonable disagreement and thus supports an interlocutory appeal here.”
The states argued that they have a “substantial interest” in protecting state residents from unlawful debt collection practices, and that this interest is implicated by this action, which addresses whether the defendant student loan trusts are “covered persons” subject to the prohibition on unfair debt collection practices under the CFPA. Urging the 3rd Circuit to affirm the district court’s decision to deny the trusts’ motion to dismiss, the states contended among other things, that hiring third-party agencies to collect on purchased debts poses a large risk to consumers. These types of trusts, the states said, “profit only when the third parties that they have hired are able to collect on the flawed debt portfolios that they have purchased.” Moreover, “[d]ebt purchasing entities, including entities like the [t]rusts, are thus often even more likely than the original creditors to resort to unlawful tactics in undertaking collection activities,” the states stressed, explaining that in order to combat this growing problem, many states apply their prohibitions on unlawful debt collection practices “to all debt purchasers that seek to reap profits from these illegal activities, including those purchasers that outsource collection to third parties.” The Bureau’s decision to do the same is therefore appropriate under the CFPA, the states wrote, adding that “as a practical matter, these debt purchasers are as problematic as debt purchasers that collect on their own debt. The [t]rusts’ request to be treated differently because of their decision to hire third party agents to collect on the debts that they have purchased (and reap the profits on) should be rejected.”