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3rd Circuit: Section 13(b) of the FTC Act does not give the agency restitution power
On September 30, the U.S. Court of Appeals for the Third Circuit reversed a district court’s order of $448 million in disgorgement, concluding that disgorgement is not a remedy available under Section 13(b) of the FTC Act. According to the opinion, the FTC brought an action against the owners of a testosterone treatment patent (defendants) for allegedly “trying to monopolize and restrain trade over [the treatment],” in violation of Section 13(b) of the FTC Act. The district court dismissed the FTC’s claims related to the reverse-payment agreement the defendants entered into with another pharmaceutical company but held the defendants liable for the FTC’s sham-litigation allegations and ordered the defendants to pay $448 in disgorgement of ill-gotten gains. The district court denied the FTC’s request for an injunction.
On appeal, the 3rd Circuit concluded, among other holdings, that the court erred by ordering disgorgement, as it lacked the authority to do so under Section 13(b) of the FTC Act. Specifically, the appellate court noted that Section 13(b) “authorizes a court to ‘enjoin’ antitrust violations,” but is silent on disgorgement. The appellate court rejected the FTC’s contention that Section 13(b) “impliedly empowers district courts” to order disgorgement as well as injunctive relief, concluding that “the context of Section 13(b) and the FTC Act’s broader statutory scheme both support ‘a necessary and inescapable inference’ that a district court’s jurisdiction in equity under Section 13(b) is limited to ordering injunctive relief.” Thus the appellate court reversed the order of $448 million in disgorgement.
In reaching this conclusion, the appellate court noted its determination was consistent with the 7th Circuit’s decision FTC v. Credit Bureau Center (covered by InfoBytes here), which also held that the FTC does not have the power to order restitution under Section 13(b). As previously covered by InfoBytes, the U.S. Supreme Court granted consolidated review in Credit Bureau Center and in the 9th Circuit’s decision in FTC v. AMG Capital Management (covered by InfoBytes here). The Court will decide whether the FTC can demand equitable monetary relief in civil enforcement actions under Section 13(b) of the FTC Act.
District court dismisses credit card usury claims
On September 28, the U.S. District Court for the Eastern District of New York dismissed a putative class action alleging a national bank’s subsidiaries and trustee (collectively, “defendants”) violated New York usury and banking laws by charging and receiving payments at interest rates above the state’s 16 percent limits. The defendants moved to dismiss the action, arguing that the claims are preempted by the National Bank Act (NBA) because the national bank parent company, which is located in a state that does not impose interest rate limits so long as the rate is disclosed to the borrower, owned the credit card accounts underlying the securitization, and would therefore not be subject to New York’s limitations. The court agreed with the defendants, concluding that the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding LLC (covered by a Buckley Special Alert) supported the premise that the NBA preempts the usury claims. Specifically, the court noted that the case is distinguishable from Madden in that the national bank retained ownership of the credit card accounts throughout securitization and thus, “maintains a continuous relationship with the customer accounts that goes beyond its designation as originator of those accounts.” The court also rejected the plaintiffs’ unjust enrichment claim, because it was duplicative of the usury claim and therefore was also preempted. Thus, the court dismissed the action in its entirety with prejudice, noting that “any pleading amendment would be futile.”
District court allows some claims to proceed in ATM-fee action
On September 28, the U.S. District Court for the Southern District of California allowed fraud claims under California’s Unfair Competition Law (UCL) and breach of contract claims to proceed against a national bank and several independent ATM operators (collectively, “defendants”) in a putative class action alleging that the defendants (i) charged unwarranted fees for using out-of-network (OON) ATMs for balance inquiries; (ii) made deceptive and misleading representations on screens and on signs regarding those fees; and (iii) assessed fees in violation of governing account documents. As previously covered by InfoBytes, the class action alleged 13 claims against the defendants for violations of, among other things, the UCL, and claims for conversion, negligence, and breach of contract. In March, the court dismissed all 13 claims but allowed the plaintiffs leave to amend a number of them. After the plaintiffs filed their amended complaint, the defendants subsequently submitted four new motions to dismiss.
The court denied dismissal of the UCL claims against all ATM operators, concluding that the plaintiffs sufficiently alleged claims under the fraud prong. Specifically, the court noted that the plaintiffs provided details with enough particularity, such as the date and location and examples of the specific screen prompts, which established that the ATM operators “employed a misleading series of screen prompts at the ATM machines to trick Plaintiffs, and other accountholders, into engaging in OON balance inquiries.” However, the court dismissed all the unjust enrichment claims and one plaintiff’s breach of contract claim against the national bank, concluding, among other things, that the dispute between the plaintiffs and national bank is covered by a “valid and enforceable written agreement,” which precludes the assertion of unjust enrichment. Moreover, the court allowed two plaintiffs’ breach of contract claims to proceed against the national bank, determining that “[b]oth parties have set forth reasonable, opposing interpretations of the [account agreement],” and the plaintiffs’ definition of “balance inquiry” under the agreement is at least plausible. Thus, the court denied dismissal as to those claims.
District court: FTC allegations fail due to lack of credible experts
On September 24, the U.S. District Court for the Western District of Pennsylvania entered an order granting a Pennsylvania-based home insulation manufacturer’s motion under Fed. R. Civ. P. 52(c). The insulation manufacturer was accused of violating the FTC Act by making misrepresentations regarding the performance of its home insulation product. In particular, the FTC “challenge[d] the veracity” of the company’s “R-value” claims about the performance of its house insulation product. In the order, the court ruled that the FTC “offered no reliable or credible expert testimony.” The court explained that “[w]hen the FTC challenges the veracity of a corporation’s R-value and energy saving claims, expert testimony is required,” and emphasized that the FTC has the burden of proving that a company’s “purported substantiation is inadequate.” The FTC’s two expert witnesses, the court determined, were not credible and did not express “a reasonable degree of scientific certainty.” The court further ruled that the FTC failed to demonstrate by a preponderance of evidence that the company’s substantiation lacked a reasonable basis. As a result of the order, judgment will be entered in favor of the defendant and against the FTC.
District court: No SCRA foreclosure protections for servicemember not on the note
On September 23, the U.S. District Court for the Eastern District of New York held that an active duty servicemember could not avail herself of the foreclosure protections provided by the Servicemembers Civil Relief Act (SCRA) even though she was a signatory on the mortgage, because she was not a signatory on the note. According to the opinion, the SCRA foreclosure protections are afforded only to an “obligation on real . . . property” which is “secured by a mortgage” and that it is the note “which evidences the obligations, i.e. the promise to pay the debt.” By signing the mortgage, the servicemember-spouse “merely mortgaged her interest in the property, to secure her husband’s obligation to pay.” Accordingly, the court vacated a prior stay of foreclosure.
District court: Usury claims preempted by National Bank Act
On September 21, the U.S. District Court for the Western District of New York dismissed allegations against two entities affiliated with a national bank, and a trust acting as trustee of one of the entities, ruling that a plaintiff’s “state-law usury claims are expressly preempted by the [National Banking Act].” The court noted that, “[e]ven before the OCC issued its rule clarifying that interest permissible before a transfer remains permissible after the transfer, [the plaintiff’s] claims would have been preempted” because the national bank “continues to possess an ‘interest in the account.’” The plaintiff contended he was charged usurious interest rates that exceeded New York’s interest rate cap on unsecured credit card loans originated by the national bank. According to the opinion, one of the entities contracted with the bank to service the credit card loans, with the bank retaining ownership of the accounts. The plaintiff argued that the U.S. Court of Appeals for the Second Circuit’s decision in Madden v. Midland Funding LLC (covered by a Buckley Special Alert) supported his claims against the affiliated entities, but the court disagreed, ruling that the national bank retained interest in the loans, which included the right to “change various terms and conditions” as well as interest rates.
9th Circuit: HOLA preempts California interest on escrow law
On September 22, the U.S. Court of Appeals for the Ninth Circuit, in a split decision, reversed the denial of a national bank’s motion to dismiss, holding that state law claims involving interest on escrow accounts were preempted by the Home Owners Loan Act (HOLA). As previously covered by InfoBytes, three plaintiffs filed suit against the bank, arguing that it must comply with a California law that requires mortgage lenders to pay interest on funds held in a consumer’s escrow account, following the U.S. Court of Appeals for the 9th Circuit’s decision in Lusnak v. Bank of America (covered by InfoBytes here). The bank moved to dismiss the action, arguing, among other things, that the claims were preempted by HOLA. The court acknowledged that HOLA preempted the state interest law as to the originator of the mortgages, a now-defunct federal thrift, but disagreed with the bank’s assertion that the preemption attached throughout the life of the loan, including after the loan was transferred to a bank whose own lending is not covered by HOLA. The district court granted the bank’s motion for interlocutory appeal.
On appeal, the 9th Circuit disagreed with the district court. Specifically, the appellate court applied the plain meaning of the Office of Thrift Supervision’s preemption regulation, concluding that it “extend[ed] to all state laws affecting a federal savings association, without reference to whether the conduct giving rise to a state law claim is that of a federal savings association or of a national bank.” The appellate court distinguished the case from Lusnak, noting that HOLA preemption is “triggered at a much lower threshold” than National Bank Act. Finally, the appellate court rejected the premise that applying preemption would “run afoul” of HOLA’s purpose of consumer protection, concluding that “HOLA field preemption is so broad that the traditional presumption against preemption does not apply.”
In dissent, a judge argued that the statutory and regulatory text does not support the majority’s conclusion and therefore, HOLA’s application does not excuse the national bank from California’s law requiring interest on escrow accounts.
District court allows Georgia counties’ disparate impact claims to proceed
On September 18, the U.S. District Court for the Northern District of Georgia denied a national bank’s motion to dismiss claims that the bank and its subsidiaries’ (collectively, “defendants”) mortgage originating and servicing practices and policies had a disparate impact on, and resulted in disparate treatment of, minority borrowers, in violation of the Fair Housing Act (FHA). The plaintiffs, three Georgia counties, filed a second amended complaint raising two disparate impact claims and one disparate treatment claim under the FHA, claiming the defendants’ lending and servicing practices—which included allegedly targeting minority borrowers for higher cost loan products, approving unqualified minority borrowers for loans they could not afford, and providing less favorable terms for loan modifications—were “designed to reduce the overall equity minority borrowers located within their counties had in their homes.” The practices, among other things, allegedly caused African-American and Latino borrowers to receive disproportionately higher cost mortgage loans than similarly situated white, non-Latino borrowers, creating an increase in defaults and foreclosures, and causing the plaintiffs to incur alleged damages, including out-of-pocket foreclosure-related costs and increased municipal expenses, and loss of property tax revenues due to decreased home values.
The defendants moved to dismiss, asserting, among other things, that the plaintiffs failed to properly allege their disparate impact claims under Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. (covered by a previous Buckley Special Alert). The defendants also argued that the plaintiffs’ municipal “economic injuries were not proximately cause by the [d]efendants’ discriminatory policies under [City of Miami Garden v. Wells Fargo & Co.]” (covered by InfoBytes here), and that the plaintiffs failed to allege specific allegations within the FHA’s two-year statute of limitations.
The court granted the motion in part and denied it in part. With respect to the disparate impact claims, the court applied Inclusive Communities and held that the plaintiffs identified several specific policies that caused the alleged disparate impact. The court also rejected the statute of limitations arguments and held that the plaintiffs “‘can prove a set of facts’ showing a timely violation of the FHA.” The court dismissed certain of the counties’ injury claims—the plaintiffs’ attempts to recover franchise tax and municipal expenses (police, fire, and sanitation services related to vacant or foreclosed-upon properties)—ruling that plaintiffs failed to establish proximate cause and “explain how their municipal services injuries ‘are anything more than merely foreseeable consequences’ of [the d]efendants’ discriminatory acts.”
California AG enters into privacy settlement with fertility-tracking mobile app
On September 17, the California attorney general announced a settlement with a technology company that operates a fertility-tracking mobile app to resolve claims that security flaws put users’ sensitive personal and medical information at risk in violation of state consumer protection and privacy laws. According to the complaint filed in the Superior Court for the County of San Francisco, the company’s app allegedly failed to adequately safeguard and preserve the confidentiality of medical information by, among other things, (i) allowing access to user information without the user’s consent, by failing to “authenticate the legitimacy of the user to whom the medical information was shared”; (ii) allowing a password-change vulnerability to permit unauthorized access and disclosure of information stored in the app without the user’s consent; (iii) making misleading statements concerning implemented security measures and the app’s ability to protect consumers’ sensitive personal and medical information from unauthorized disclosure; and (iv) failing to implement and maintain reasonable security procedures and practices.
Under the terms of the settlement, the company—which does not admit liability—is required to pay a $250,000 civil penalty and incorporate privacy and security design principles into its mobile apps. The company must also obtain affirmative authorization from users before sharing or disclosing sensitive personal and medical information, and must allow users to revoke previously granted consent. Additionally, the company is required to provide ongoing annual employee training concerning the proper handling and protection of sensitive personal and medical information, in addition to training on cyberstalking awareness and prevention. According to the AG’s press release, the settlement also includes “a first-ever injunctive term that requires [the company] to consider how privacy or security lapses may uniquely impact women.”
11th Circuit: Class action incentive fees are unlawful
On September 17, the U.S. Court of Appeals for the Eleventh Circuit reversed and vacated a district court judgment awarding an “incentive payment” to a TCPA class action representative, concluding it violates a U.S. Supreme Court decision prohibiting such awards. Additionally, the 11th Circuit remanded the case so that the district court could adequately explain its findings on the fees and costs issues. According to the opinion, a consumer initiated a TCPA class action against a collection agency for allegedly calling phone numbers that had originally belonged to consenting debtors but were subsequently reassigned to non-debtors. The action quickly moved to settlement and one class member objected, challenging “the district court’s decision to set the objection deadline before the deadline for class counsel to file their attorneys’-fee petition.” Additionally, among other things, the objector argued that the proposed $6,000 incentive award to the class action representative violates the 1880s Supreme Court decisions in Trustees v. Greenough and Central Railroad & Banking Co. v. Pettus. The district court overruled the class member’s objections.
On appeal, the 11th Circuit concluded that the district court “repeated several errors” that “have become commonplace in everyday class-action practice.” Specifically, the appellate court held that the district court “violated the plain terms of Federal Rule of Civil Procedure 23(h)” by setting the settlement objection date more than two weeks before the date class counsel had to file their attorneys’ fee petition. The appellate court also concluded that the district court violated the Supreme Court’s rule from Greenough and Pettus, which provides that “[a] plaintiff suing on behalf of a class can be reimbursed for attorneys’ fees and expenses incurred in carrying on the litigation, but he cannot be paid a salary or be reimbursed for his personal expenses.” The 11th Circuit noted that modern day incentive awards pose even more risks than the concerns from Greenough, promoting “litigation by providing a prize to be won.” Thus, according to the appellate court, although incentive awards may be “commonplace” in class action litigation, they are not lawful and therefore, the district court’s decision must be reversed.