InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
Supreme Court Holds "Arising Under" Standard Satisfies Jurisdictional Questions
In an 8-0 opinion delivered by Justice Kagan on May 16, the Supreme Court affirmed the Third Circuit’s ruling that the “jurisdictional test established by §27 [of the Exchange Act] is the same as [28 U.S.C.] §1331’s test for deciding if a case ‘arises under’ a federal law.” Merrill Lynch v. Manning, No. 14-1132 (U.S. May 16, 2016). In this case, the defendant, an investment bank, removed plaintiff’s case against the bank for its short sale practices to Federal District Court. The bank asserted that plaintiff’s claims, which referred explicitly to the SEC’s Regulation SHO in “describing the purposes of that rule and cataloguing past accusations against [the bank] for flouting its requirements,” were within federal jurisdiction on the following two grounds: (i) 28 U.S.C. §1331 grants district courts jurisdiction of “all civil actions arising under federal law”; and (ii) §27 of the Exchange Act “grants federal courts exclusive jurisdiction of ‘all suits in equity and actions at law brought to enforce liability or duty created by [the Exchange Act] or the rules or regulations thereunder.’” The plaintiff, in seeking remand of the case back to state court, argued that neither 28 U.S.C. §1331 nor §27 of the Exchange Act granted federal court the authority to adjudicate his claims which were brought under state law – specifically, the New Jersey Racketeer Influenced and Corrupt Organizations Act (RICO), New Jersey Criminal Code, and New Jersey Uniform Securities Law, as well as New Jersey common law of negligence, unjust enrichment, and interference with contractual relations. The Supreme Court’s opinion relies heavily on the natural reading of §27: “Like the Third Circuit, we read §27 as conferring exclusive federal jurisdiction of the same suits as ‘aris[e] under’ the Exchange Act pursuant to the general federal question statute.” The Court concluded that because the plaintiff’s claims were brought under state law and merely referenced Regulation SHO, the Federal District Court did not have jurisdiction and the case was remanded to state court.
Special Alert: SCOTUS Vacates Ninth Circuit Decision in Case Alleging Procedural FCRA Violations
On May 16, the United States Supreme Court issued an opinion vacating the Ninth Circuit’s 2014 ruling that a plaintiff had standing under Article III of the Constitution to sue an alleged consumer reporting agency as defined by the Fair Credit Reporting Act (FCRA), for alleged procedural violations of the FCRA, 15 U.S.C § 1681 et seq. Spokeo v. Robins, No. 13-1339 (U.S. May 16, 2016). According to plaintiff Thomas Robins, the reporting agency violated his individualized (rather than collective) statutory rights by reporting inaccurate credit information regarding Robins’s wealth, job status, graduate degree, and marital status in willful noncompliance with certain FCRA requirements. In a 6-2 opinion delivered by Justice Alito, the Court ruled that Robins could not establish standing by alleging a bare procedural violation because Article III requires a concrete injury even in the context of statutory violation. Here, the Ninth Circuit erred in failing to consider separately both the “concrete and particularized” aspects of the injury-in-fact component of standing. The Court opined that the Ninth Circuit’s analysis was incomplete:
[T]he injury-in-fact requirement requires a plaintiff to allege an injury that is both “concrete and particularized.” Friends of the Earth, Inc. v. Laidlaw Environmental Services (TOC), Inc., 528 U.S. 167, 180-181 (2000) (emphasis added). The Ninth Circuit’s analysis focused on the second characteristic (particularity), but it overlooked the first (concreteness). We therefore…remand for the Ninth Circuit to consider both aspects of the injury-in-fact requirement.
Relying on case law, the Court emphasized that the “irreducible constitutional minimum” of Article III’s standing to sue relies on the plaintiff demonstrating (i) an injury-in-fact; (ii) that the injury is fairly traceable to the challenged conduct of the defendant; and (iii) that the injury is likely to be redressed by a favorable judicial decision. Lujan v. Defenders of Wildlife, 504 U.S., 560-561 (U.S. June 12, 1992); Friends of the Earth, Inc., 528 U.S., at 180-181. Spokeo primarily revolves around the first element, establishing an injury-in-fact. Again relying on Lujan, the Court reasoned that to establish injury-in-fact, the plaintiff must “show that he or she suffered ‘an invasion of a legally protected interest’ that is ‘concrete and particularized’ and ‘actual or imminent, not conjectural or hypothetical.’” Lujan, at 560. According to the Court, the Ninth Circuit’s discussion of Robins’s standing to sue, and in particular its discussion of whether Robins had articulated an individualized statutory right rather than a collective right, concerned only the particularization element of establishing an injury-in-fact. The Court stated that the Ninth Circuit’s standing analysis was incomplete because it had failed to consider whether the “concreteness” requirement for an injury-in-fact—whether Robins had a “real” and “not abstract” injury—also had been satisfied. While the Court did make clear that a concrete injury could be intangible and that Congress may identify intangible harms that meet minimum Article III requirements, it noted that “Congress’ role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right.”
The Court noted that because the Ninth Circuit had not fully distinguished concreteness from particularization, it had failed to consider whether the reporting agency’s procedural violations of the FCRA constituted a sufficient degree of risk to Robins to meet the concreteness standard. The Court observed that while a procedural violation of the FCRA may, in some cases, be sufficient to establish a concrete injury-in-fact, not all inaccuracies in consumer information, i.e. an incorrect zip code, cause harm or a material risk of harm. Further, because “Article III standing requires a concrete injury even in the context of a statutory violation” the Court explained that “Robins cannot satisfy the demands of Article III by alleging a bare procedural violation.”
The Court vacated the Ninth Circuit’s judgment, and remanded the case for the Ninth Circuit to consider both aspects of the injury-in-fact requirement.
* * *
Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Amanda Raines Lawrence, (202) 349-8089
- Fredrick Levin, (310) 424-3984
- Andrew Louis, (202) 349-8061
State AGs File Amicus Brief With U.S. Supreme Court in FCRA Standing Case
On September 9, the Massachusetts Attorney General announced that her office, along with 12 other states and the District of Columbia, had filed with the U.S. Supreme Court an amicus brief supporting the plaintiff-respondent in Spokeo v. Robins. (Previous InfoBytes coverage can be seen here). The putative class-action plaintiff in that case claimed that an online data broker published inaccurate information about him in violation of the Fair Credit Reporting Act (FCRA). Reversing the district court, the U.S. Court of Appeals for the Ninth Circuit held that the violation of a statutory right created by FCRA was, in itself, a sufficient injury to confer standing to sue under Article III of the Constitution. In their multistate amicus brief, the AGs argued that the Supreme Court should affirm this holding. The states asserted that businesses frequently rely on consumer data profiles to make important credit, employment, housing, and insurance decisions. However, “the damage done by . . . an inaccurate data profile is frequently impossible for the affected consumer to detect or quantify,” they argued. Accordingly, “Congress rightly has authorized statutory damages for a willful violation of the FCRA.” The AGs asserted that, given their limited resources, statutory damage cases and private class actions are needed to supplement their own consumer protection actions.
Special Alert: Disparate Impact Under the Equal Credit Opportunity Act After Inclusive Communities
On June 25, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). The Court, in a 5-4 decision, concluded that the FHA permits disparate-impact claims based on its interpretation of the FHA’s language, the amendment history of the FHA, and the purpose of the FHA.
Applicability to ECOA
When certiorari was granted in Inclusive Communities, senior officials from the CFPB and DOJ made clear that they would continue to enforce the disparate impact theory under the Equal Credit Opportunity Act (ECOA) even if the Supreme Court held that disparate-impact claims were not cognizable under the FHA. It is reasonable to expect that the Court’s decision will embolden the agencies, as well as private litigants, to assert even more aggressively the disparate impact theory under ECOA.
But just as the federal officials had stated that they would continue to assert disparate impact under ECOA if Inclusive Communities invalidated disparate impact under the FHA, lenders still have a number of arguments that the Inclusive Communities Court’s analysis does not apply to ECOA, given the material differences between the text and history of the FHA and ECOA. First, the Court principally based its textual arguments on the use of “otherwise make unavailable” in Section 804 of the FHA—a section that applies to the sale and rental of housing but not to lending. The Court stated that this effects-based language “is of central importance” to its analysis. Although the Court also stated that it had construed statutory language similar to FHA Section 805—which applies to lending—the discussion of Section 805 is so brief as to suggest it was merely an afterthought. The Court repeatedly states its textual analysis focused on the text “otherwise make unavailable.” But ECOA contains no similar effects-based language.
Second, the Court’s analysis of the FHA’s amendment history is inapplicable to ECOA. The Court focused principally on three provisions which it characterized as “exemptions” from disparate-impact liability, and concluded that such exemptions made sense only if Congress were acknowledging the validity of disparate impact claims. But ECOA contains no similar “exemptions” from disparate-impact liability that might otherwise lead to the conclusion disparate impact is cognizable under ECOA.
Finally, while the Court also notes that disparate-impact claims are “consistent with the FHA’s central purpose,” this justification appears merely to support the Court’s textual and historical arguments. The Court has repeatedly cautioned that a statute’s purpose does not trump its text. Whatever similarities may exist between the purpose of the FHA and ECOA, the material textual and historical differences weigh heavily against treating the two statutes the same for disparate-impact purposes.
Burden Shifting Framework
Even if the Inclusive Communities analysis could apply to ECOA, the Court’s emphasis on rigorous application of the three-step burden-shifting framework to analyze disparate impact claims—and protect against “abusive disparate-impact claims” —is likely to impose significant burdens on regulators and plaintiffs seeking to bring disparate impact claims under ECOA. The Court’s articulation of the steps in the burden-shifting framework are materially different—and more friendly to lenders—than those applied by federal agencies (e.g., in HUD’s disparate impact rule). While it is possible that the government and private plaintiffs will argue that the burden shifting framework outlined in Inclusive Communities applies only to the FHA, the Court’s reasoning supports applying the same framework to other civil rights laws—including ECOA.
First, the Court has reaffirmed the significant burden plaintiffs must bear in satisfying the first step of the burden-shifting framework: establishing a prima facie case. The Court noted that a “robust causality requirement” must be satisfied to show that a specific policy caused a statistical disparity to “protect[] defendants from being held liable for racial disparities they did not create.” “[A] disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” The Court emphasized that “prompt resolution of these cases [by courts] is important.” This, when taken together with the Court’s decision in Wal-Mart Stores, Inc. v. Dukes, may make maintaining a disparate impact claim under ECOA particularly difficult when addressing such practices as discretionary pricing (e.g., dealer markup in the auto finance context).
Second, with respect to the second step of the framework, the Court explained that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The Court noted that this is critical to ensure that defendants “must not be prevented from achieving legitimate objectives.” Specifically, the Court endorsed the importance of considering “practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system” in determining whether a company’s policy is supported by a legitimate business justification. The Court further explained that “entrepreneurs must be given latitude to consider market factors,” as well as other “objective” and “subjective” factors.
Third, the Court emphasized that before rejecting a “business justification,” a court “must determine that a plaintiff has shown that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.” (internal quotations and alterations omitted). Significantly, and in contrast to previous interpretations by federal agencies, the Court clarified that the plaintiff bears the burden of showing a less discriminatory alternative in the third step of the burden-shifting framework.
The Court cautioned that a rigorous application of the burden-shifting framework is necessary to prevent disparate-impact liability from supplanting nondiscriminatory private choice: “Were standards for proceeding with disparate-impact suits not to incorporate at least the safeguards discussed here, then disparate-impact liability might displace valid governmental and private priorities, rather than solely removing artificial, arbitrary, and unnecessary barriers. And that, in turn, would set our Nation back in its quest to reduce the salience of race in our social and economic system.” (internal citations and alterations omitted).
Special Alert: Supreme Court Upholds Disparate Impact Under Fair Housing Act, But Emphasizes Limits on Such Claims
Today, the Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project, Inc. held that disparate-impact claims are cognizable under the Fair Housing Act (FHA). In a 5-4 decision, the Court concluded that the use of the phrase “otherwise make available” in Section 804 of the Fair Housing Act supports disparate-impact claims. The Court also held that Section 805 of the Fair Housing Act (which applies to lending) permits disparate impact, reasoning that the Court “has construed statutory language similar to § 805(a) to include disparate-impact liability.” The Court also wrote that the 1988 amendments to the Fair Housing Act support its conclusion because (1) all the federal Courts of Appeals to have considered the issue at that time had held that the FHA permits disparate-impact claims; and (2) the substance of the amendments, which the Court characterized as exceptions from disparate impact, “is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”
The Court emphasized, however, that “disparate-impact liability has always been properly limited in key respects . . . .” Specifically, the Court explained disparate-impact liability must be limited so companies “are able to make the practical business choices and profit-related decisions that sustain a vibrant and dynamic free-enterprise system.” “Entrepreneurs must be given latitude to consider market factors,” the Court explained. The Court clarified further that a variety of factors, including both “objective” and “subjective” factors, are “legitimate concerns.”
To prevent what the Court characterized as “abusive disparate-impact claims,” the Court emphasized that the three-step burden-shifting framework used to analyze disparate-impact claims must be applied rigorously by courts and government agencies. At the first step in the framework, the Court noted that a “robust causality requirement” must be satisfied to show that a specific policy caused a statistical disparity to “protect[] defendants from being held liable for racial disparities they did not create.” “[A] disparate-impact claim that relies on a statistical disparity must fail if the plaintiff cannot point to a defendant’s policy or policies causing that disparity.” The Court emphasized that “prompt resolution of these cases [by courts] is important.”
With respect to the second step of the framework, the Court, citing the seminal Title VII case of Griggs v. Duke Power, further explained that “[g]overnmental or private policies are not contrary to the disparate-impact requirement unless they are ‘artificial, arbitrary, and unnecessary barriers.’” The Court stated that this is critical to ensure that defendants “must not be prevented from achieving legitimate objectives.”
Finally, under the third step of the framework, the Court emphasized that before rejecting a “business justification,” a court “must determine that a plaintiff has shown that there is an available alternative practice that has less disparate impact and serves the entity’s legitimate needs.” (internal quotations and alterations omitted). Significantly, the Court clarified that the plaintiff bears the burden of showing a less discriminatory alternative in the third step of the burden-shifting framework.
Without a rigorous application of this burden shifting framework, the Court cautioned that disparate-impact liability could be used to replace nondiscriminatory private choice: “Were standards for proceeding with disparate-impact suits not to incorporate at least the safeguards discussed here, then disparate-impact liability might displace valid governmental and private priorities, rather than solely removing artificial, arbitrary, and unnecessary barriers. And that, in turn, would set our Nation back in its quest to reduce the salience of race in our social and economic system.” (internal citations and alterations omitted).
Although the Court did not expressly address whether its decision invalidates HUD’s disparate impact rule with its expansive burden shifting framework, the decision also does not rely on or defer to the discussion of the burden shifting framework contained in HUD’s disparate impact rule, notwithstanding the HUD rule’s extensive treatment of the burden shifting framework for disparate-impact claims under the FHA. The dissenting justices, however, concluded that given what they called “this unusual pattern” regarding the promulgation of the HUD rule, “there is an argument that deference may be unwarranted.”
Supreme Court Grants Cert. to Decide if Offer of Complete Relief Moots Case
On May 18, the Supreme Court granted certiorari to resolve a circuit split as to whether an offer of complete relief to a plaintiff seeking to represent a putative class moots the case. Campbell-Ewald Co. v. Gomez, 2015 WL 246885 (U.S. May 18, 2015). According to the cert. petition, the plaintiff received an unsolicited text message in 2006 from the petitioner, a firm hired by the U.S. Navy to assist with its recruitment efforts. The plaintiff claimed that the text message violated the Telephone Consumer Protection Act, and sought to represent a class of all non-consenting recipients of the recruitment text. Before the plaintiff had moved for class certification, the petitioner tendered an offer of judgment pursuant to Fed. R. Civ. P. 68 and a separate informal settlement offer, both of which would have fully satisfied the plaintiff’s individual claim by offering more than the maximum statutory damages plus reasonable costs and injunctive relief. The plaintiff rejected the offers and moved for class certification. The district court rejected the petitioner’s claim that the claim was moot, but eventually granted the petitioner summary judgment on the merits on the ground that the petitioner was entitled to “derivative sovereign immunity.” The Ninth Circuit reversed, holding that the case was not moot and that the district court had improperly applied the derivative sovereign immunity doctrine. The Supreme Court granted cert. to consider both questions. As to the mootness issue, the Court will also consider whether the resolution depends on whether or not the class has been certified at the time of the offer.
Supreme Court to Hear Historic FCRA Standing Case During October 2015 Term
On April 27, the United States Supreme Court granted a petition for a writ of certiorari seeking review of a hotly-debated question with potentially far-reaching implications: whether a mere violation of a federal statute, without more, satisfies the “injury-in-fact” standard required for constitutional standing under Article III. The case at issue involves a plaintiff alleging violations of the Fair Credit Reporting Act (FCRA); specifically, the plaintiff argued that he suffered actual harm when an online search engine, acting as a credit reporting agency (CRA), published inaccurate information about his background and character in violation of FCRA provisions requiring a CRA to ensure accuracy and provide notice regarding the information it disseminates. The district court ruled that plaintiff failed to demonstrate injury-in-fact without showing more than mere violations of the FCRA. The Ninth Circuit reversed, holding that the violation of federal statutory rights is sufficient to show constitutional standing, and that a plaintiff need not demonstrate any actual damages in order to file suit. Notably, the Ninth Circuit did not opine that the “harm” alleged by the plaintiff – the online search engine portrayed him as wealthier and more educated than he actually was – affected him economically by impeding his employment prospects.
The Supreme Court’s decision to hear the widely-followed case has the attention of many. Ten amicus briefs have been filed over the past year, all highlighting the “substantial impact” the Court’s decision could have. Currently, numerous federal statutes allow a plaintiff to recover damages based on statutory violations without a showing of actual or concrete injury, including those prominent in the financial industry such as the Real Estate Settlement Procedures Act (RESPA), the Fair Debt Collection Practices Act (FDCPA), and the Truth in Lending Act (TILA), among others. Despite the Solicitor General’s recommendation against hearing the case, in which the government argued that courts have traditionally provided redress for statutory violations alone, the Supreme Court’s decision will affect the degree to which consumers and classes can utilize federal statutes to recover without proving additional causal injury. A decision affirming the Ninth Circuit’s decision could arguably open the floodgates to “no-injury” lawsuits, coercing defendants to pay millions in damages without a showing of any actual harm. Oral arguments for the case will be heard this coming October, at the beginning of the Court’s 2015 term. Reply and supplemental briefs to the petition can be found here and here, respectively.
Supreme Court Grants Federal Agencies Wide Discretion in Interpreting Regulations
On March 9, the Supreme Court unanimously ruled that the Administrative Procedure Act (APA) does not require federal agencies to go through the formal rulemaking process when making changes to rules interpreting regulations, or “interpretive rules,” even if those changes are significant. This decision, Perez v. Mortgage Bankers Association, is of impactful significance to federal agencies and regulated entities alike because it overrules long-standing precedent—known as the D.C. Circuit’s Paralyzed Veterans doctrine—that required agencies to engage the public in the formal notice-and-comment period before issuing new interpretations of previously promulgated regulations. Here, the Court held that the Paralyzed Veterans doctrine is contrary to the APA’s rulemaking previsions and imposes unwarranted procedural obligations on federal agencies.
In this case, the Mortgage Bankers Association (MBA) challenged a 2010 Department of Labor (DOL) interpretative rule declaring that mortgage loan originators were no longer exempt from the Fair Labor Standard Act’s requirement that employees working more than forty hours per week are to be paid overtime. The DOL had previously taken the opposite position on this issue in a 2006 interpretative rule stating that mortgage loan officers were exempt from the overtime pay requirement. In challenging the DOL’s withdrawal of their 2006 interpretation, the MBA relied on the Paralyzed Veterans doctrine and argued that the 2010 interpretation was invalid because it was a “substantive change” that did not comply with the public notice-and-comment period. While the D.C. Circuit agreed with the MBA, the Supreme Court reversed, holding that the clear text of the APA’s procedural requirements does not apply to interpretive rules even though courts had long held this was not necessarily the case.
For highly-regulated entities, such as banks and other financial institutions, the Court’s decision in Perez will compromise the ability of such entities to maintain compliance with the regulations that govern their industries—especially when these regulations become the basis for enforcement actions. The deference the Court imparts to agencies allows them to informally change their positions on rules at any given time and has the potential to create an unstable and unpredictable regulatory environment.
U.S. Supreme Court To Hear Arguments Involving Guarantor-Spouse's Eligibility for ECOA Protection
On March 2, the U.S. Supreme Court agreed to hear arguments to resolve claims as to whether spousal guarantors could assert ECOA as a defense against a bank’s collection efforts requiring them to guarantee their spouse’s loans. In the case at bar, two men borrowed more than $2 million to fund a real estate development company, and their wives guaranteed the loan. Subsequently, the husbands were unable to make payments and the bank declared default and ordered payment both from the company and the wives as guarantors. Later, the wives filed suit against the bank claiming the bank’s requirement that they guarantee the loans as a condition of the credit constituted discrimination on the basis of marital status. The lower court granted summary judgment in favor of the bank, and the Eighth Circuit affirmed, finding the wives were not “applicants” for credit under ECOA. Hawkins v. Community Bank of Raymore, 761 F.3d 937 (8th Cir. 2014) cert. granted, No. 14-520, 2015 WL 852422 (U.S. Mar. 2, 2015)
The Sixth Circuit recently disagreed, however, finding ambiguity as to whether a guarantor is afforded the protections of ECOA as an applicant for credit. RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., 754 F.3d 380 (6th Cir.2014).
Supreme Court Hears Oral Arguments on Fair Housing Act Disparate Impact Case
On January 21, the U.S. Supreme Court heard oral arguments in Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, in which Texas challenged the disparate impact theory of discrimination under the Fair Housing Act (FHA). In their questions to counsel, the Justices focused on (i) whether the phrase “making unavailable” in the FHA provides a textual basis for disparate impact, (ii) whether three provisions of the 1988 amendments to the FHA demonstrate congressional acknowledgement that the FHA permits disparate impact claims, and (iii) whether the Court should defer to HUD’s disparate impact rule. The Court is expected to issue its ruling by the end of June. For more information on the oral argument, please refer to our previously issued Special Alert.