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District Court grants motions to compel and dismiss in FDCPA, TCPA class action
On June 16, the U.S. District Court for the Southern District of California granted a Delaware-based debt collector’s (defendant) motions to dismiss with prejudice and compel arbitration in an FDCPA, TCPA class-action case, while denying as moot the defendant’s motion to strike or stay. The plaintiff’s unpaid credit card debt was sold to the defendant, who sought to collect the debt by calling the plaintiff’s cell phone two dozen times in a span of two weeks using an automated telephone dialing system. The plaintiff filed a lawsuit originally alleging TCPA violations. He later amended the complaint to include FDCPA violations after he claimed he never received notice as required by the FDCPA. Under the FDCPA, debt collectors are required to provide a consumer with written notice containing various required information within five days after the initial communication in connection with the collection of any debt, “unless the. . .information is contained in the initial communication or the consumer has paid the debt.” The defendant initially moved to dismiss, but after the plaintiff opposed, filed an instant motion to compel arbitration based on an arbitration provision contained in a set of terms and conditions in the plaintiff’s credit card agreement with the original creditor. The plaintiff countered, among other things, that the debt collector cannot enforce the arbitration provision because the plaintiff never signed it, and further argued that the card agreement is unconscionable.
The court disagreed, ruling that the defendant did not waive its right to arbitrate the plaintiff’s claims, pointing out that the arbitration provision between the plaintiff and the defendant is part of the card agreement, which the plaintiff accepted once he began using the credit card. According to the court, the arbitration provision “states that it covers ‘any claim, dispute or controversy between you and us arising out of or related to your [a]ccount, a previous related [a]ccount, or our relationship,’ including but not limited to those ‘based on. . .statutory or regulatory provisions, or any other sources of law.’” According to the court, the plaintiff’s dispute with the defendant relates to violations of the TCPA and FDCPA and exists between the plaintiff and the original creditor’s assignee (the defendant). Thus, because the claims relate to a creditor-debtor relationship arising out of the card agreement, the court determined that the arbitration provision “constitutes a valid agreement to arbitrate” and was unpersuaded by the plaintiff’s arguments that the arbitration provision is unconscionable. With respect to the plaintiff’s TCPA claims, the court found that it “disregards as unreasonable and implausible Plaintiff’s allegation that any calls he received related to amounts unpaid arising out of his [credit card] were unlawful in light of the [c]ard [a]greement,” which expressly authorizes the original creditor or its assignees to call the plaintiff once the plaintiff accepted the card agreement. The court found that as the plaintiff did not plead sufficient facts to show that the calls were inconsistent with the FDCPA, the defendant had every right to call him.
Supreme Court limits class standing in FCRA suit
On June 25, the U.S. Supreme Court issued a 5-4 decision in TransUnion LLC v. Ramirez, holding that only a plaintiff concretely harmed by a defendant’s violation of the FCRA has Article III standing to seek damages against a private defendant in federal court. In writing for the majority, Justice Brett Kavanaugh reversed and remanded a 2020 decision issued by the U.S. Court of Appeals for the Ninth Circuit, which found that all 8,185 class members had standing to recover statutory damages due to, among other things, TransUnion’s alleged “reckless handling of information” from the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), which, according to the appellate court, subjected class members to “a real risk of harm” when TransUnion erroneously linked class members to criminals and terrorists with similar names in a database maintained by OFAC. (Covered by InfoBytes here.) The 9th Circuit, however, did reduce punitive damages, explaining that, although TransUnion’s “conduct was reprehensible, it was not so egregious as to justify a punitive award of more than six times an already substantial compensatory award.” TransUnion filed a petition for writ of certiorari after the 9th Circuit denied its petition for rehearing.
The Court considered whether federal courts can certify consumer classes where the majority of class members have not alleged the type of concrete injury necessary to establish Article III standing, even if the named plaintiff suffered an injury meeting this bar. The parties stipulated prior to trial that only 1,853 members of the class had misleading credit reports containing OFAC alerts provided to third parties during the period specified in the class definition, whereas the remaining class members’ credit files were not provided to any potential creditors during that period. In applying the standing requirement of concrete harm, the majority concluded that the 6,332 class members whose credit reports were not provided to third parties did not suffer a concrete harm and thus did not have standing as to the reasonable-procedures claim. The majority further determined that even though all 8,185 class members complained about alleged formatting defects in certain mailings sent to them by TransUnion, only the lead plaintiff had demonstrated that the alleged defects caused him concrete harm, thus only he could move forward with those claims. According to the majority, the remaining class members failed to explain how the formatting error prevented them from requesting corrections to prevent future harm.
“The mere existence of inaccurate information, absent dissemination, traditionally has not provided the basis for a lawsuit in American courts,” the majority wrote, adding that while the Court “has recognized that material risk of future harm can satisfy the concrete-harm requirement in the context of a claim for injunctive relief to prevent the harm from occurring, at least so long as the risk of harm is sufficiently imminent and substantial,” in this instance the 6,332 class members have not demonstrated that the risk of future harm materialized.
9th Circuit partially reverses lower court’s ruling based on tech company's misleading statements
On June 16, the U.S. Court of Appeals for the Ninth Circuit partially revived a securities fraud action brought by the state of Rhode Island on behalf of its employees’ retirement system against a California-based technology company, its holding company, and several individuals (collectively, “defendants”), reversing a district court’s dismissal. In 2018, investors sued the defendants after the technology company discovered a security glitch that same year on its now-defunct social network site that exposed hundreds of thousands of users’ private data. The suits were consolidated, with the state of Rhode Island as lead plaintiff, alleging the defendants deceived investors and caused the company’s shares to be traded at artificially inflated prices between the discovery of the software glitch and its disclosure. According to the plaintiffs, the defendants omitted material facts on Form 10-Qs filed with the SEC in 2018 by including statements such as “[t]here have been no material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2017.” The defendants moved to dismiss for failure to state a claim, which the district court granted, stating, among other things, that the plaintiffs failed to adequately allege “falsity, materiality, and scienter” in statements made by the defendants in their April 2018 and July 2018 10-Qs.
On appeal, the 9th Circuit reviewed the challenged statements, concluded that two statements made by the parent company in its 10-Qs were materially misleading or had omitted facts regarding the software issues, and vacated the dismissal of the plaintiffs’ falsity, materiality, and scienter claims. The appellate court also found that the defendants’ claim that the software problem had been patched by the time the challenged statements were made in their 10-Qs was not enough. “Given that [the company’s] business model is based on trust, the material implications of a bug that improperly exposed user data for three years were not eliminated merely by plugging the hole in [the social network site’s] security,” the appellate court wrote, further concluding that “[t]he market reaction, increased regulatory and governmental scrutiny, both in the United States and abroad, and media coverage alleged by the complaint to have occurred after disclosure all support the materiality of the misleading omission.” The 9th Circuit also referenced a so-called “Privacy Bug Memo” that was supposedly circulated among some of the defendants’ leadership team, which warned that disclosing these security issues “would likely trigger ‘immediate regulatory interest’ and result in the defendants ‘coming into the spotlight[.]’”
Concerning the remaining 10-Q statements identified in the complaint, the 9th Circuit affirmed the district court’s dismissal of claims based on these statements after concluding that the plaintiffs did not plausibly allege that they were “misleading material misrepresentations.”
Supreme Court says FHFA unconstitutionally structured, leaves net worth sweep intact
On June 23, the U.S. Supreme Court issued a split opinion in Collins v. Yellen (previously Collins v. Mnuchin), holding that FHFA’s leadership structure, which only allows the president to fire the FHFA director for cause, is unconstitutional. The Court’s determination follows its decision in Seila Law LLC v. CFPB (covered by a Buckley Special Alert), in which the Court held that a similar clause in the Dodd-Frank Act that requires cause to remove the director of the CFPB violates the constitutional separation of powers. In Collins, the Court stated, “[a] straightforward application of our reasoning in Seila Law dictates the result here. The FHFA (like the CFPB) is an agency led by a single Director, and the [Housing and Economic Recovery Act of 2008 (Recovery Act)] (like the Dodd-Frank Act) restricts the President’s removal power.”
Last July, the Court agreed to review the U.S. Court of Appeals for the 5th Circuit’s en banc decision (covered by InfoBytes here) issued in a 2016 lawsuit brought by a group of Fannie Mae and Freddie Mac (GSEs) shareholders against the U.S. Treasury Department and FHFA. The shareholders claimed that the Recovery Act, which created the agency, violated the separation of powers principal because it only allowed the president to fire the FHFA director “for cause,” and that FHFA acted outside its statutory authority when it adopted a third amendment to the Senior Preferred Stock Purchase Agreements, which replaced a fixed-rate dividend formula with a variable one requiring the GSEs to pay quarterly dividends equal to their entire net worth minus a specified capital reserve amount to the Treasury Department (known as the “net worth sweep”). Following the en banc rehearing, the appellate court reaffirmed its earlier decision that FHFA’s structure violates the Constitution’s separation of powers requirements. However, the opinions differed on the appropriate remedy, with nine judges concluding that the remedy should be severance of the for-cause provision, not prospective relief invalidating the net worth sweep, stating that “the Shareholders’ ongoing injury, if indeed there is one, is remedied by a declaration that the “for cause” restriction is declared removed. We go no further.”
While the split Court agreed with the 5th Circuit that the agency’s structure violates the Constitution’s separation of powers, the justices left intact the net worth sweep. “Although the statute unconstitutionally limited the President’s authority to remove the confirmed Directors, there was no constitutional defect in the statutorily prescribed method of appointment to that office. As a result, there is no reason to regard any of the actions taken by the FHFA in relation to the third amendment as void,” Justice Samuel Alito wrote for the majority. “It is not necessary for us to decide—and we do not decide—whether the FHFA made the best, or even a particularly good, business decision when it adopted the third amendment,” the Court added. “[W]e conclude only that under the terms of the Recovery Act, the FHFA did not exceed its authority as a conservator, and therefore the anti-injunction clause bars the shareholders’ statutory claim.” The Court remanded the case to determine “what remedy, if any, the shareholders are entitled to receive on their constitutional claim.”
Various concurring and dissenting opinions were issued as well. While concurring, Justice Elena Kagan noted that “[s]tare decisis compels the conclusion that the FHFA’s for-cause removal provision violates the Constitution. But the majority’s opinion rests on faulty theoretical premises and goes further than it needs to.” Justice Sonia Sotomayor dissented, writing: “[t]he Court has proved far too eager in recent years to insert itself into questions of agency structure best left to Congress. In striking down the independence of the FHFA Director, the Court reaches further than ever before, refusing tenure protections to an Agency head who neither wields significant executive power nor regulates private individuals.”
Shortly after the ruling, President Biden appointed Sandra L. Thompson as acting FHFA Director, effective immediately. Thompson has served at FHFA since March 2013 as Deputy Director of the Division of Housing Mission and Goals where she oversaw FHFA’s housing and regulatory policy, capital policy, financial analysis, fair lending, as well as all mission activities for the GSEs and the Federal Home Loan Banks. Former Director Mark Calabria issued a statement noting his respect for the Court’s decision and the authority of the president to remove the FHFA director.
District Court grants emotional damages award in FDCPA Case
On June 17, the U.S. District Court for the Western District of Washington awarded plaintiffs approximately $62,000 in damages, including $60,000 for emotional distress, after suing a debt collector for alleged Washington Collection Agency Act and FDCPA violations when the defendant allegedly attempted to collect more than what was owed and allegedly made false and misleading statements when attempting to collect. According to the amended findings of fact and conclusions of law, the court previously granted the plaintiffs’ motion for summary judgment, finding that the defendant’s actions had violated Sections 1692e, 1692e(2), 1692e(8), and 1692f of the FDCPA, in addition to a provision of the Washington Collection Agency Act entitling them to damages under the Washington Consumer Protection Act. These actions included attempts to collect amounts not owed in three separate phone calls with one of the plaintiffs, one letter that was sent to both plaintiffs, and repeated and ongoing credit reporting of an inflated balance. The defendant allegedly made false and misleading statements, including that a judgment had been entered for the alleged debt, claiming that “Plaintiffs’ wages would be garnished, that plaintiffs had been evicted, and that various charges and fees were legitimate.” Though the defendant admitted the statements were made in error, the court ruled that the plaintiffs “did not need to meet the intentional infliction of emotional distress standard to recover” in this case under the FDCPA. The defendant’s actions caused the plaintiffs “stress, anxiety, feelings of helplessness and hopelessness, and other forms of general emotional distress … at a particularly vulnerable time for both plaintiffs, as they were experiencing the joy and challenges of raising a new baby.” The court awarded each of the two plaintiffs $30,000 in emotional distress damages.
District Court: Underlying court judgment does not waive right to compel arbitration
On June 21, the U.S. District Court for the Western District of New York granted defendants’ motion to compel arbitration in an action accusing the defendant of violating the FDCPA by making false statements when attempting to collect outstanding debt. In 2018, the defendant purchased the plaintiff’s charged-off account and a year later filed a lawsuit seeking to collect on the outstanding credit card debt. Default judgment was entered in favor of the defendant, who then attempted to collect on the judgment by filing an income execution to garnish the plaintiff’s wages. The plaintiff filed suit, contending that the income execution contained false statements and failed to comply with various requirements under the New York State Consumer Protection Law. The defendants filed a motion to compel arbitration and to dismiss the complaint based on provisions in a credit card agreement between the plaintiff and the original creditor. The plaintiff argued that the arbitration provisions did not apply because the judgment obtained by the defendant on the underlying debt extinguished the agreement and, as such, “there is no longer an ‘account’ upon which to enforce the arbitration provision.” The court disagreed, noting that if the plaintiff’s assertion that “an underlying court judgment merges with and extinguishes an underlying contractual debt” was correct, “contracts would be rendered meaningless whenever a party breached any portion of an agreement and the other party obtained a judgment on such breach.” Additionally, the court noted that the agreement “expressly permitted parties to file suit without waiving the right to compel arbitration on subsequent claims.” Specifically, the agreement provides that cases filed to collect money owed by a consumer will not be subject to arbitration, but that a response to such a collection suit claiming any wrongdoing may be subject to arbitration. “Thus, regardless of whether an underlying court judgment merges with and extinguishes an underlying contractual debt, the contract itself and its obligations—including the ability to compel the arbitration of subsequent claims—do not similarly merge,” the court wrote.
State AGs argue FDIC’s “valid-when-made rule” violates APA
On June 17, eight state attorneys general (from California, Illinois, Massachusetts, Minnesota, New Jersey, New York, North Carolina, and the District of Columbia) filed an opposition to the FDIC’s motion for summary judgment and reply in support of their motion for summary judgment in a lawsuit challenging the FDIC’s “valid-when-made rule.” As previously covered by InfoBytes, last August the AGs filed a lawsuit in the U.S. District Court for the Northern District of California arguing, among other things, that the FDIC does not have the power to issue the rule, and asserting that the FDIC has the power to issue “‘regulations to carry out’ the provisions of the [Federal Deposit Insurance Act]” but not regulations that would apply to non-banks. The AGs also claimed that the rule’s extension of state law preemption would “facilitate evasion of state law by enabling ‘rent-a-bank’ schemes,” and that the FDIC failed to explain its consideration of evidence contrary to its assertions, including evidence demonstrating that “consumers and small businesses are harmed by high interest-rate loans.” The complaint asked the court to declare that the FDIC violated the Administrative Procedures Act (APA) in issuing the rule and to hold the rule unlawful. The FDIC countered in May (covered by InfoBytes here) that the AGs’ arguments “misconstrue” the rule, which “does not regulate non-banks, does not interpret state law, and does not preempt state law.” Rather, the FDIC argued that the rule clarifies the FDIA by “reasonably” filling in “two statutory gaps” surrounding banks’ interest rate authority.
In response, the AGs argued that the rule violates the APA because the FDIC’s interpretation in its “Non-Bank Interest Provision” (Provision) conflicts with the unambiguous plain-language statutory text, which preempts state interest-rate caps for federally insured, state-chartered banks and insured branches of foreign banks (FDIC Banks) alone, and “impermissibly expands the scope of § 1831d to preempt state rate caps as to non-bank loan buyers of FDIC Bank loans.” Additionally, the AGs challenged the FDIC’s claim that its Provision “does not implicate rent-a-bank schemes or the true lender doctrine because the Provision only applies ‘if a bank actually made the loan,’” emphasizing that the FDIC’s “mere statement that it does not condone rent-a-bank schemes” is insufficient and that “choosing to not address true-lender issues is an insufficient response to comments that the Provision creates significant uncertainty about those issues.” Moreover, the AGs claimed that the Provision is “arbitrary and capricious” and fails to meaningfully address valid concerns and criticisms raised by commenters, and that the rule constitutes “in substance if not form, a reversal of the FDIC’s previous stance” that the FDIC is “obligated to acknowledge and explain.”
District Court stays CSBS’s fintech charter challenge while OCC reviews framework
On June 16, the U.S. District Court for the District of Columbia entered an order staying litigation in a lawsuit filed by the Conference of State Bank Supervisors (CSBS) challenging the OCC’s authority to issue Special Purpose National Bank Charters (SPNB). (Covered by InfoBytes here.) Earlier this year, the OCC responded to CSBS’s opposition to the agency’s alleged impending approval of an SPNB for a financial services provider (proposed bank), in which CSBS argued that the OCC was exceeding its chartering authority (covered by InfoBytes here). The OCC countered that the same fatal flaws that pervaded CSBS’s prior challenges, i.e., that its challenge is unripe and CSBS lacks standing, still remain (covered by InfoBytes here). Moreover, the agency argued, among other things, that the cited application (purportedly curing CSBS’s prior ripeness issues) is not for an SPNB (the proposed bank that has applied for the charter would conduct a full range of services, including deposit taking), but that even it if was an application for an SPNB charter, there are multiple additional steps that need to occur prior to the OCC issuing the charter, which made the challenge unripe.
According to CSBS’s unopposed motion to stay litigation, a “90-day stay would conserve the [p]arties’ and the [c]ourt’s resources by avoiding potentially unnecessary briefing and oral argument.” Further, in referring to acting Comptroller Michael Hsu’s testimony to the U.S. House of Representatives—in which he stated that “the OCC is currently reviewing various regulatory standards and pending actions, including the OCC’s framework for chartering national banks”—CSBS noted that the OCC has represented that it anticipates this review period will take approximately 90 days and that it does not intend to take any action towards granting a charter to the proposed bank during this period. Following the conclusion of the 90-day stay, the parties agreed to confer and submit to the court a joint status report on or before September 27 “addressing the status of the OCC’s plans with respect to processing applications for uninsured national bank charters, including the [proposed bank’s] charter application, and the [p]arties’ proposed schedule for proceeding with or resolving the present case.”
District Court: Applying Michigan law is contrary to California’s interest in protecting citizens in data breach case
On June 15, the U.S. District Court for the Eastern District of Michigan denied an e-commerce company’s request to compel arbitration after reviewing whether Michigan or California state law applied to class claims concerning a 2019 data breach. After four actions against the company were consolidated and transferred from California court to Michigan, a separate putative class action was filed in the U.S. District Court for the Northern District of California related to the data breach. Members in this putative class action brought claims against the company for allegedly failing to protect California residents’ confidential and personal information from the 2019 data breach. The class sought public injunctive relief under California’s Consumer Records Act (CRA) and Unfair Competition Law, arguing, among other things, that the potential for “future injury to the general public” remains because the company has not changed its practices.
The court initially granted the company’s motion to compel arbitration according to its terms of service and privacy policy, which contained a mandatory arbitration clause as well as a clause requiring parties to apply Michigan law to all claims or disputes. However, because the order applied to the originally amended consolidated class action complaint that did not include the newest California putative class action, the court reopened the case in order to determine which state law applied to the California class’s claims. In denying the company’s motion to compel arbitration, the court cited to McGill v. Citibank (covered by a Buckley Special Alert here, which held that a waiver of the plaintiff’s substantive right to seek public injunctive relief is not enforceable) and determined that applying Michigan law is “contrary” to California’s “materially greater interest in protecting its citizens”—particularly because the alleged violations are ongoing. The court rejected the company’s argument that McGill did not apply in this case because the putative class is seeking an injunction that would only benefit a narrow subset of individuals whose data was stolen rather than the general public. According to the court, rejecting the putative class’s claims for this reason would allow the company “to continue engaging in inadequate data protection practices in violation of the Unfair Competition and CRA and leave consumers unable to adjudicate their claims based on those practices on behalf of the public.” The putative class’s proposed 12-point injunction would, among other things, require the company to hire third-party security auditors and implement other reasonable and appropriate security practices and procedures, which would benefit all future customers, not only those harmed in the 2019 data breach, the court stated, adding that the proposed class has “nothing to personally gain from an injunction requiring [the company] to employ safer data practices” because their data was already compromised.
OCC supports national bank’s challenge to state law requiring interest payments on escrow accounts
On June 15, the OCC filed an amicus curiae brief in support of a defendant-appellant national bank in an appeal challenging a requirement under New York General Obligation Law § 5-601 that a defined interest rate be paid on mortgage escrow account balances. As previously covered by InfoBytes, the bank argued that the National Bank Act (NBA) preempts the state law, but the district court disagreed and issued a ruling in 2019 concluding that there is “clear evidence that Congress intended mortgage escrow accounts, even those administered by national banks, to be subject to some measure of consumer protection regulation.” The district court also determined that, with respect to the OCC’s 2004 real estate lending preemption regulation (2004 regulation), there is no evidence that “at this time, the agency gave any thought whatsoever to the specific question raised in this case, which is whether the NBA preempts escrow interest laws,” citing to and agreeing with the U.S. Court of Appeals for the Ninth Circuit’s decision in Lusnak v. Bank of America (which held that a national bank must comply with a California law that requires mortgage lenders to pay interest on mortgage escrow accounts, previously covered by InfoBytes here). The district court further applied the preemption standard from the 1996 Supreme Court decision in Barnett Bank of Marion County v. Nelson, and found that the law does not “significantly interfere” with the bank’s power to administer mortgage escrow accounts, noting that it only “requires the [b]ank to pay interest on the comparatively small sums” deposited into the accounts and does not “bar the creation of mortgage escrow accounts, or subject them to state visitorial control, or otherwise limit the terms of their use.”
In its amicus brief filed with the U.S. Court of Appeals for the Second Circuit, the OCC wrote that it “respectfully submits that the [appellate court] should reverse the decision of the [d]istrict [c]ourt and find that application of Section 5-601 to [the bank] is preempted by federal law,” adding that the 2019 ruling “upsets…settled legal principles” and “creates uncertainty regarding national banks’ authority to fully exercise real estate lending powers under the [NBA].” In addressing the district court’s application of Barnett, the OCC argued that the district court had incorrectly concluded that state laws cannot be preempted unless they “practical[ly] abrogat[e] or nullif[y] a national bank’s exercise of a federal banking power—a “stark contrast to the preemption standard set forth in Barnett and the OCC’s—as well as many other federal courts’—interpretation of that standard.” The OCC urged the appellate court to “conclude that a state law that requires a national bank to pay even a nominal rate of interest on a particular category of account impermissibly conflicts with a national bank’s power by disincentivizing the bank from continuing to offer the product. This is sufficient to trigger preemption under Barnett.”
The OCC further stated, among other things, that the district court also incorrectly disregarded the agency’s 2004 regulation, which the OCC said “specifically authorizes national banks to exercise their powers to make real estate loans ‘without regard to state law limitations concerning…[e]scrow accounts, impound accounts, and similar accounts….’” The agency further cautioned that the district court’s determination that the OCC’s 2004 regulation was not entitled to any level of deference was done in error and warned that “[i]f the OCC’s regulation regarding escrow accounts is rendered ineffective, this result could cause disruption within the banking industry by upsetting long-settled law regarding the applicability of state laws to national bank powers.”