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Supreme Court to review whether SEC’s ALJ appointment process is constitutional
On January 12, the U.S. Supreme Court announced it had granted a writ of certiorari in Lucia v. SEC—a case which challenges the SEC’s practice of appointing administrative law judges (ALJs) and moves the Court to consider whether the ALJ appointment practice violates the Appointments Clause (Clause) of the Constitution. In Lucia, the petitioner—against whom an ALJ had issued sanctions, imposed a lifetime securities ban, and fined $300,000—appealed the decision to the D.C. Circuit Court of Appeals, and argued that ALJs are officers of the United States and therefore subject to provisions of the Clause, including the requirement that officers be appointed by the president, the head of a department, or a court of law. However, the D.C. Circuit upheld the ALJs sanctions and ruled that ALJs are not “inferior officers” subject to the Clause. In his petition for certiorari, the petitioner claimed that because he was subjected to a “trial before an unconstitutionally constituted tribunal,” the ALJ’s decision should be dismissed or a new hearing granted.
Notably, last November, the Solicitor General of the United States submitted a brief on behalf of the SEC to the Supreme Court, arguing that the SEC views in-house judges as officers of the U.S. government—not mere employees—who are subject to the Clause. Additionally, on November 30, the SEC ratified the appointment of its ALJs to resolve “any concerns that administrative proceedings presided over by its ALJs violate the Appointments Clause.”
A decision by the Court may resolve a split between the D.C. Circuit, which has ruled that ALJs are not “inferior officers” of the U.S. government, and the Tenth and Fifth Circuits, which disagreed and ruled separately that ALJs are officers.
See also previous Lucia coverage in an InfoBytes blog post and a Special Alert concerning the effect a decision in Lucia may have on the ongoing litigation in PHH v. CFPB.
Supreme Court Rejects Tribal Lenders’ Petition to Avoid CFPB CID
On December 11, the U.S. Supreme Court rejected without comment a petition from online tribal lending entities to appeal a Ninth Circuit Court of Appeals decision that ordered the entities to comply with a CFPB investigation related to small-dollar loan products. As previously covered by InfoBytes, the entities argued that due to tribal sovereignty, the CFPB does not have jurisdiction over the small-dollar lending services. The CFPB urged the Supreme Court to deny the petition, arguing that the Court’s review is unnecessary because “[t]he question at this juncture is solely whether the Bureau may obtain information from petitioners pursuant to a CID,” not “whether petitioners are subject to the Bureau’s regulatory authority.”
CFPB Urges Supreme Court to Reject Tribal Lenders' Petition
On November 9, the CFPB filed a brief with the Supreme Court opposing the petition for a writ of certiorari submitted by online tribal lending entities. The lenders are challenging a January decision by the Ninth Circuit Court of Appeals, which ordered the entities to comply with a CFPB investigation (previously covered by Infobytes). The litigation stems from the issuance of a civil investigative demand (CID) by the CFPB to online lending entities owned by Native American tribes. The entities argue that due to tribal sovereignty, the CFPB does not have jurisdiction over the small-dollar lending services in question. The district court and the Ninth Circuit concluded that the Consumer Financial Protection Act (CFPA) did not expressly exclude tribes from the CFPB’s enforcement authority and therefore, the entities cannot claim tribal sovereign immunity.
In its brief opposing the certiorari petition, the CFPB argues that the Ninth Circuit’s holding does not conflict with any prior Supreme Court or court of appeals decision, making further review unwarranted. The CFPB also argues, among other things, that Supreme Court review is unnecessary because “[t]he question at this juncture is solely whether the Bureau may obtain information from petitioners pursuant to a CID,” not “whether petitioners are subject to the Bureau’s regulatory authority.”
Servicemember Files Writ of Certiorari, Petitions Supreme Court to Review SCRA Protections for Non-Judicial Foreclosures
On October 11, a servicemember filed a petition for a writ of certiorari, requesting that the U.S. Supreme Court review an opinion issued by the U.S. Court of Appeals for the Fourth Circuit concerning whether the Servicemembers Civil Relief Act (SCRA) can be applied to a mortgage loan obligation incurred during a borrower’s earlier, distinct period of military service. (See previous InfoBytes summary on Fourth Circuit opinion.)
Under the SCRA, servicemembers are afforded certain protections against non-judicial foreclosures of their home while in active military service. Section 3953 provides that a home mortgage “originated before the period of the servicemember’s military service and for which the servicemember is still obligated” cannot be foreclosed upon unless allowed by a court order. However, the appellate court affirmed the district court’s decision in favor of the bank, concluding that because the servicemember “incurred his mortgage obligation during his service in the Navy, the obligation was not subject to SCRA protection” even through the servicemember, after a discharge period, later re-enlisted with the Army.
The petition argues that the appellate court “misconstrued” and narrowly interpreted the SCRA’s definition of the term “period of military service” under section 3911 by treating the servicemember’s “separate and distinct periods of military service as a single period of service.”
Second Circuit Cites Spokeo, Rules No Standing to Sue for Violation of FACTA
On September 19, the U.S. Court of Appeals for the Second Circuit issued an opinion ruling that a merchant who had printed the first six numbers of a consumer’s credit card on a receipt violated the Fair and Accurate Credit Transactions Act (FACTA), but that because the violation did not cause a concrete injury, the consumer did not have standing to sue the merchant. Under FACTA, merchants are prohibited from including more than the final five digits of a consumer’s credit card number on a receipt. In this instance, the plaintiff filed a complaint in 2014, followed by an amended complaint later that same year, in which he alleged that he twice received printed receipts containing the first six digits of his credit card number, in violation of FACTA. The plaintiff claimed that the risk of identity theft was a sufficient injury to establish standing. The defendants argued that that the first six digits of the credit card account only identified the card issuer and did not reveal any information about the consumer, which did not “raise a material risk of identity theft.” Citing a Supreme Court ruling in Spokeo v. Robins, the district court opined that a procedural violation of a statute is not enough to allow a consumer to sue, because it must be shown that the violation caused, or at least created a material risk of, harm to the consumer—which, in this case, was not present. Accordingly, the appellate court affirmed the district court’s dismissal for lack of subject matter jurisdiction, but found that the district court erred in dismissing the suit with prejudice.
Second Circuit Cites Escobar, Vacates and Remands FCA Suit
On September 7, the Second Circuit Court of Appeals issued an order concerning a False Claims Act (FCA) case on remand from the United States Supreme Court. In its order, the three-judge panel determined that the FCA complaint should be reviewed under the higher court’s Escobar standard, which “set out a materiality standard for FCA claims that has not been applied in the present case.” See Universal Health Servs., Inc. v. U.S. ex rel. Escobar, 136 S. Ct. 1989 (2016). As previously discussed in InfoBytes, Escobar holds that a misrepresentation must be material to the government’s payment decision to be actionable under the FCA and that the implied false certification theory can be a basis for liability under the FCA.
In issuing the order, the appellate court vacated the district court’s dismissal of the relators’ complaint (which it had affirmed the first time around) and remanded for further proceedings to determine whether the bank’s certification was materially false. At issue is a qui tam suit filed against a national bank, in which plaintiffs claimed the bank violated the FCA when it certified to the Federal Reserve that the bank and its predecessors were obeying the law in order to “borrow money at favorable rates” during the financial crisis. The decision originally relied upon two requirements cited in a case overturned by Escobar—“the express-designation requirement for implied false certification claims and the particularity requirement for express false certification claims.”
District Court Cites Spokeo, Refuses to Certify TCPA Class Action Suit
On August 15, a federal judge in the U.S. District Court for the Northern District of Illinois Eastern Division granted a pet health insurance company’s (defendants) motion to strike class allegations in a Telephone Consumer Protection Act (TCPA) lawsuit over alleged robocalls. Citing a recent Supreme Court ruling in Spokeo v. Robins, the judge opined that because evidence proved some of the class members agreed to receive calls, plaintiffs failed to establish a lack of consent and could therefore not claim to have suffered a concrete injury. In 2014, plaintiffs filed a suit against the defendants proposing certification of two classes—“advertisement” and “robocall”—alleging that calls were made to individuals’ cell phones without specific consent and arguing that these calls were a form of “advertising,” which, pursuant to FTC rules, requires express written consent. However, the defendants’ position—for which the judge ruled in favor—was that because affidavits signed by individuals during the pet adoption process show that some of the class members consented to receive calls about special offers (electing not to opt-out), these individuals would not be able to prove injury under the Spokeo standard. Thus, issues of individualized consent would predominate, making it impossible for plaintiffs to “establish a lack of consent with generalized evidence.” Furthermore, the court stated that if plaintiffs agreed to receive calls—as defendants claim a significant number did, just not in writing—a lack of written evidence does not make the calls unsolicited.
Ninth Circuit Rules FCRA Plaintiff Has Article III Standing
On August 15, the U.S. Court of Appeals for the Ninth Circuit issued an opinion, on remand from the U.S. Supreme Court, ruling that a consumer plaintiff could proceed with his Fair Credit Reporting Act (FCRA) claims because he had sufficiently alleged a “concrete” injury and therefore had standing to sue under Article III of the Constitution. Robins v. Spokeo, Inc., No. 11-56843, 2017 WL 3480695 (9th Cir. Aug. 15, 2017). By way of background, the plaintiff had alleged that the defendant consumer reporting agency “willfully violated various procedural requirements under FCRA,” and consequently published an inaccurate consumer report on its website that “falsely stated his age, marital status, wealth, education level, and profession” and “included a photo of a different person.” In May 2016, the Supreme Court vacated an earlier Ninth Circuit decision, finding that the court failed to consider an essential element of Article III standing: whether the plaintiff alleged a “concrete” injury. (See previous Special Alert here.) After providing some guidance—including that the plaintiff’s injury must be “real” and not “abstract” or merely “procedural”—the high court remanded to the Ninth Circuit for further consideration.
On remand, the court first asked “whether the statutory provisions at issue were established to protect [the plaintiff’s] concrete interests (as opposed to purely procedural rights).” The court answered affirmatively, finding that “the FCRA procedures at issue in this case were crafted to protect consumers’ . . . concrete interest in accurate credit reporting about themselves.” Next, the court asked “whether the specific procedural violations alleged in this case actually harm, or present a material risk of harm to, such interests.” The court again answered affirmatively, finding that the plaintiff sufficiently alleged that he suffered a “real harm” to his “concrete interests in truthful credit reporting.” That is, the plaintiff sufficiently alleged that the defendant “prepared . . . an [inaccurate] report,” “that it then published the report on the Internet,” and that “the nature of the specific alleged reporting inaccuracies” was not “trivial or meaningless,” but instead covered “a broad range of material facts” about the plaintiff’s life “that may be important to employers or others making use of a consumer report.” Finally, the court found that the plaintiff’s allegations were not too speculative, because “both the challenged conduct and the attendant injury have already occurred.” After reaffirming that the plaintiff had adequately alleged the other essential elements of standing, the court remanded to the Central District of California for further proceedings.
Supreme Court Rules Five-Year Statute of Limitations Applies to SEC Civil Penalties
In a unanimous ruling handed down on June 5, the United States Supreme Court held that the SEC is bound by a five-year statute of limitations on civil penalties or the return of illegal profits, citing 28 U.S.C. §2462 of the U.S. Code, which “establishes a [five-year] limitations period for ‘an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.’” Justice Sotomayor delivered the opinion.
The decision resolves a New Mexico case dating back to 2009, in which a jury found the defendant liable for misappropriating more than $34.9 million from 1995 through July 2007 from four SEC-registered investment companies under his control. See S.E.C. v. Kokesh, 834 F.3d 1158 (10th Cir. 2016). The district court judge ordered the defendant to pay a $2.4 million civil penalty, nearly $35 million in disgorgement, and more than $18 million in prejudgment interest after finding that §2462 did not apply because “disgorgement” is not a penalty within the meaning of the statute. The defendant appealed the ruling on the grounds that the disgorgement should be set aside because the claims accrued more than five years before the SEC brought its action against him and are consequently barred under the five-year statute of limitations. However, the 10th Circuit affirmed the ruling of the lower court, agreeing that disgorgement was not a penalty.
The Supreme Court reversed. Justice Sotomayor explained why the Court disagreed with the 10th Circuit panel’s conclusion that disgorgement was not a penalty under the statute. The Court held that disgorgement “bears all the hallmarks of a penalty” and “is imposed as a consequence of violating a public law and . . . is intended to deter, not to compensate.” Consequently, disgorgement represents a penalty, thus falling within the five-year statute of limitations of §2462.
Supreme Court Limits SEC Disgorgement
On June 5, the Supreme Court ruled in Kokesh v. SEC that the SEC’s authority to disgorge profits from defendants is subject to the five-year statute of limitations applicable to penalties and fines. The Court rejected the SEC’s position that disgorgement is an equitable remedy and not a penalty, resolving a circuit split on the issue. Writing for the unanimous Court, Justice Sotomayor said that disgorgement “bears all the hallmarks of a penalty,” reasoning that it “is intended to deter, not to compensate.” The defendant in Kokesh was an investment adviser who had been ordered to disgorge approximately $35 million for allegedly misappropriating investor funds.
The SEC routinely seeks disgorgement in FCPA enforcement actions. The Kokesh decision may lead the SEC to seek tolling agreements sooner and in more circumstances, particularly where the alleged conduct occurred over a long period of time. The decision may also impact defendants’ ability to claim insurance coverage for disgorgement because insurers might deny coverage for payment of penalties.