Jenner & Block

Consumer Law Round-Up

February 18, 2019 Proposed Federal Privacy Legislation and the Year Ahead

Data securityIn a recent Corporate Counsel article, Jenner & Block Partner Jeffrey A. Atteberry examines the current federal privacy legislative proposals and the impact potential data privacy and cybersecurity legislation could have on businesses.  Mr. Atteberry explains that several recent high-profile data breaches and questions about how social media platforms share consumers’ personal data are contributing to increasing demand for passage of federal data privacy legislation.  He explains that the bills and proposals that have circulated in the last year are the best indicator of what lies ahead in terms of any potential federal privacy regime.  To help corporate counsel anticipate changes that may arise, Mr. Atteberry breaks down the current congressional proposals and provides key takeaways for in-house counsel.

To read the full article, please click here.

February 14, 2019 Jenner & Block’s Food and Beverage Practice Once Again Named a “Practice Group of the Year” by Law360

PGotY-B-Linkedin-Single-1400x800For the third consecutive year, Jenner & Block’s Food and Beverage Practice is recognized as a Law360 Practice Group of the Year for successfully leading a diverse array of matters for the titans of the food and beverage industry.  Law360 notes that the firm fended off claims against our clients that include household names such as Hain Celestial, Kraft and Mondelēz and led Snyder’s-Lance in its $6 billion sale to Campbell Soup.  In addition, Partner Dean N. Panos highlights that the group is handling cases in many areas, including commercial litigation, supplier, distributor, joint venture disputes, M&A, insurance coverage, antitrust and investigations and enforcement.  He adds that the practice is not “totally a litigation practice: it is transactional, litigation, and…a counseling practice.”  He explains that because of the group’s experience and knowledge, “we understand, as best as an outside counsel can, the business pressures our clients face and how these businesses are run so that we are being a net positive to their work environments.”

To read Law360’s profile, please click here.

February 7, 2019 Businesses Express Concerns with CCPA at Public Forum

ConsumerIn an article published by the Daily Journal, Jenner & Block Partner Jeffrey A. Atteberry discusses the recent public forum that was hosted by the California attorney general’s office regarding the California Consumer Privacy Act of 2018 (CCPA).  The forum was held in order to seek public comment on the CCPA as the attorney general moves forward with the initial phase of the rulemaking process.  Mr. Atteberry summarizes the concerns that businesses expressed at the forum, including a request to clarify the scope and meaning of the word “sell” as it relates to the sale of personal information, the need for guidance relating to the calculation of the revenue threshold in the CCPA, and the data security risks associated with the CCPA’s verification requirements, among others.

To read the full article, please click here.

February 4, 2019 En Banc Ninth Circuit Rejects Compelled-Commercial Speech Ordinance on First Amendment Grounds

By: Gabriel K. Gillett

Beverage1Last week the en banc Ninth Circuit unanimously struck down San Francisco’s ordinance requiring warnings on ads for certain sugary beverages as a violation of the First Amendment.  In American Beverage Ass’n v. City and County of San Francisco, No. 16-16072, the court held that the Ordinance is an “unjustified or unduly burdensome disclosure requirement[] [that] might offend the First Amendment by chilling protected commercial speech.”  Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985).  (Jenner & Block filed an amicus brief in the case, on behalf of the Retail Litigation Center.) 

Four of the eleven judges who participated joined three special concurrences, however, explaining why they believed the majority had erred even though it reached the right result.  Those three concurrences highlight a number of issues related to commercial speech for courts to address in the wake of the Supreme Court’s decision in National Institute of Family & Life Advocates v. Becerra (NIFLA), 138 S. Ct. 2361 (2018).   
 

San Francisco’s “Sugar-Sweetened Beverage” Ordinance

The American Beverage Association v. City and County of San Francisco centers on a 2015 ordinance that required ads for certain “Sugar-Sweetened Beverages” to include the following:  “WARNING: Drinking beverages with added sugar(s) contributes to obesity, diabetes, and tooth decay. This is a message from the City and County of San Francisco.”  Slip op. 8.

  • “Sugar-Sweetened Beverages” were defined as “any Nonalcoholic Beverage sold for human consumption, including, without limitation, beverages produced from Concentrate, that has one or more added Caloric Sweeteners and contains more than 25 calories per 12 ounces of beverage.”  Id. at 9.  The definition did not include “drinks such as milk, plant-based milk alternatives, natural fruit and vegetable juices, infant formulas, and supplements.”  Id.
     
  • The warning, which was required to take up 20% of the ad space, was mandated on “any advertisement, including, without limitation, any logo, that identifies, promotes, or markets a Sugar-Sweetened Beverage for sale or use that is any of the following: (a) on paper, poster, or a billboard; (b) in or on a stadium, arena, transit shelter, or any other structure; (c) in or on a bus, car, train, pedicab, or any other vehicle; or (d) on a wall, or any other surface or material.”  Id.  The warning was not required on: “periodicals; television; electronic media; SSB containers or packaging; menus; shelf tags; vehicles used by those in the business of manufacturing, selling, or distributing SSBs; or logos that occupy an area of less than 36 square inches.”  Id.

Plaintiffs challenged the ordinance, arguing that it was misleading, placed an undue burden on commercial speech, and was not rationally related to a substantial government interest.  Id. at 10.  The district court rejected the challenge and denied a preliminary injunction.  A panel of the Ninth Circuit reversed.  Then the full court agreed to hear the case en banc.  Id. at 10-11. 
 

The En Banc Court Unanimously Holds That The Ordinance Is An Undue Burden On Commercial Speech.

In a decision by Judge Susan Graber, the en banc court unanimously agreed with the panel and reversed the district court’s denial of a preliminary injunction.  The court relied heavily on National Institute of Family & Life Advocates v. Becerra (NIFLA), 138 S. Ct. 2361 (2018), where the Supreme Court provided a framework for analyzing First Amendment challenges to government-compelled speech.

In the majority opinion, the court held that:

  • Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985) “provides the appropriate framework to analyze a First Amendment claim involving compelled commercial speech—even when the government requires health and safety warnings, rather than warnings to prevent the deception of consumers.”  Slip Op. 14.
    • To pass scrutiny under Zauderer, compelled disclosure notice must be “(1) purely factual, (2) noncontroversial, and (3) not unjustified or unduly burdensome.”  Id.
    • “Defendant has the burden,” including to prove “that the warning is neither unjustified nor unduly burdensome.”  Id. at 15.
       
  • The court’s decision in CTIA–The Wireless Ass’n v. City of Berkeley, 854 F.3d 1105 (9th Cir. 2017), which had been vacated and remanded in light of NIFLA, had been correctly decided.
    • Rational-basis review, not intermediate scrutiny, applies “for situations in which speech is restricted or prohibited.”  Slip op. 12-14.
    • Zauderer provides the appropriate framework to analyze a First Amendment claim involving compelled commercial speech—even when the government requires health and safety warnings, rather than warnings to prevent the deception of consumers.”  Id. at 14.
       
  • The requirement that the warning cover 20% of the advertisement “is not justified when balanced against its likely burden on protected speech” because the record showed that “a smaller warning—half the size—would accomplish Defendant’s stated goals.”  Id. at 15-16.
    • The court stressed that it did “not hold that a warning occupying 10% of product labels or advertisements necessarily is valid, nor … that a warning occupying more than 10% of product labels or advertisements necessarily is invalid.”  Id. at 16-17.
    • Rather, the court held “only that, on this record, Defendant has not carried its burden to demonstrate that the Ordinance’s requirement is not ‘unjustified or unduly burdensome.’”  Id.
       
  • Having found that Defendants could not show that the “Ordinance’s requirement is not ‘unjustified or unduly burdensome,’” the court opted not to “decide whether the warning here is factually accurate and noncontroversial.”  Id. at 16-17.
     

Three Concurrences, Joined By Four Judges, Highlight Sharp Disagreement About How To Evaluate Compelled Commercial Speech After NIFLA.

Disagreement lurked behind the unanimous en banc decision.  Three special concurrences, joined by four of the eleven judges, explained why the majority had erred even though it had reached the right result.

  • Judge Sandra Ikuta concurred in the judgment but dissented from “most of the reasoning” because she believed the “majority fails to follow [NIFLA’s] analytical framework and makes several crucial errors.”  Slip op. 18.
    • Judge Ikuta argued that the court misapplied NIFLA by not first determining whether Zauderer applied (which she found it did not because the warning was not factual or uncontroversial and was unduly burdensome) and then striking down the ordinance under heightened scrutiny.  Id. at 18, 24-29. 
    • Judge Ikuta also argued that the majority should not have created “a First Amendment exception for government-compelled health and safety warnings,” because in her view NIFLA held only the “‘health and safety warnings long considered permissible’ would be excepted.”  Id. at 25-26.
       
  • Judge Morgan Christen, joined by Chief Judge Sidney Thomas, concurred in part and concurred in the judgment.
    • Judges Christen and Thomas agreed “that Zauderer’s framework applies to the government-compelled speech at issue” and “that the district court’s decision must be reversed.”  Id. at 29.
    • Judges Christen and Thomas would have held that San Francisco could not show that the speech it sought to compel was “purely factual”—because it was not literally accurate and could be misconstrued—rather than “jump[ing] straight to asking whether the proposed warning is ‘unjustified or unduly burdensome.’”  Id. at 29-36.
    • Judges Christen and Thomas emphasized that “[w]hen the government takes the momentous step of mandating that its message be delivered by private parties, it is exceptionally important that the compelled speech be purely factual.”  Id. at 36.
       
  • Judge Jacqueline Nguyen concurred in the judgment but “disagree[d] with the majority’s expansion of Zauderer’s rational basis review to commercial speech that is not false, deceptive, or misleading.”  Id. at 38.
    • Judge Nguyen would have held that Zauderer’s rational-basis test applies only to deceptive or misleading speech, not all regulations requiring public health disclosures.  Id. at 38-40.

CATEGORIES: Decisions of Note

PEOPLE: Gabriel K. Gillett

January 28, 2019 What’s In Your Baby Powder? New York Proposes Stringent New Disclosure Requirements on Cleaning and Personal Care Products

By Alexander M. Smith

Personal-Care-ProductsLast week, New York Governor Andrew Cuomo announced the Consumer Right to Know Act (“Act”) as part of his proposed executive budget.  The Act would authorize the New York Department of Environmental Conservation, along with the New York Department of Health and the New York Department of State, to promulgate regulations requiring product manufacturers to disclose the presence of potentially hazardous substances on their product labeling.  Among other things, the Act would require these agencies to assess the feasibility of on-package labeling; develop regulations establishing a labeling requirement for designated products; develop a list of more than 1,000 substances that must be labeled; and identify the types of consumer products that will be subject to these new labeling requirements.  The Act would also extend the Department of Environmental Conservation’s disclosure requirements for household cleaning products to encompass all cleaning products sold in New York, and it would empower the Department of Health to require similar disclosures for personal care products like shampoo, deodorant, or baby powder.  Needless to say, these disclosure requirements would be among the most stringent—if not the most stringent—in the United States. 

Governor Cuomo’s announcement is available here.  We will keep our readers updated on the progress of Governor Cuomo’s proposal. 

PEOPLE: Alexander M. Smith

January 7, 2019 Top 10 of 2018: The Best Consumer Law Round-Up Posts of the Year

2018 was another busy year for the Consumer Law Round-Up. Launched by the firm’s Consumer Law Practice, the blog updates readers on key developments within consumer law and provides insights that are relevant to companies and individuals that may be affected by the ever-increasing patchwork of federal and state consumer protection statutes. In 2018, the Consumer Law Round-Up featured posts by approximately 20 different authors on a wide array of topics. 

Below is a list of the Top 10 most popular posts of 2018. 


#1 SDNY Rules CFPB Unconstitutional, Creating Split of Authority and Raising New Questions

Since its inception, the Consumer Financial Protection Bureau (CFPB) has faced controversy over its structure as an independent agency headed by a single director who can be removed by the President only for cause. Critics have invoked the unitary executive theory to argue that the Constitution permits an agency to enjoy independence from at-will termination by the President only if the agency is headed by multiple commissioners, directors, or board members...Read more

#2 SEC Take on Tokens Clarifies Some Crypto Community Quandaries

In a June 14 speech, William Hinman, the SEC’s Director of the Division of Corporate Finance, began to place additional definition around the raging debate over whether digital assets, including tokens, are securities. Until that speech, much commentary had focused on the repeat statements by SEC officials that digital assets distributed in initial coin offerings (ICOs) are almost always securities in the SEC’s view, with the possible exception of widely disseminated cryptocurrencies like Bitcoin...Read more

#3 The Supreme Court Reaffirms the Reach and Force of the Federal Arbitration Act, This Time in Employment Cases

On May 21, 2018, the Supreme Court issued its long-awaited decision in the consolidated cases Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP v. Morris, No. 16-300; and NLRB v. Murphy Oil USA, No. 16-307. In a 5-4 opinion by Justice Gorsuch, the Court held that courts must enforce arbitration agreements requiring employees to bring employment-related claims in individualized arbitration proceedings, and barring them from pursuing those claims...Read more

#4 Congress Upends CFPB’s Indirect Auto Lending Guidance, Spares Payday Lending Rule

On May 21, 2018, President Trump signed into law a resolution disapproving the CFPB’s guidance on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act. In that guidance, the CFPB expressed the view that certain indirect auto lenders—that is, lenders that coordinate with dealerships to provide auto loans to consumers—are subject to the Equal Credit Opportunity Act...Read more

#5 Recent Activity Brings Further Clarity to Cryptocurrency Enforcement

September saw a flurry of activity that will help further define the cryptocurrency regulatory landscape. The Financial Industry Regulatory Authority (FINRA) brought its first-ever crypto-fraud case and a court ruling by the US District Court for the Eastern District of New York gave backing to the view that digital assets will be viewed as securities. And, in two enforcements actions, the SEC branched out beyond actions against fraudulent crypto-schemes and went after crypto companies for...Read more

#6 Ninth Circuit Reaffirms Narrow Scope of Restitution Under California Consumer Protection Statutes

In the last three years, the Ninth Circuit and the California Court of Appeal have issued a pair of decisions clarifying that restitution under California’s consumer protection statutes is limited to the difference between the price a consumer paid for the product and the value the consumer received from that product—i.e., the “price premium” attributable to the defendant’s conduct...Read more

#7 Supreme Court to Examine Cy Pres Remedy in Google Privacy Case

In April, the Supreme Court granted certiorari to review a decision of the Ninth Circuit approving an $8.5 million class action settlement in which the majority of the settlement proceeds took the form of a cy pres award. Cy pres—which comes from a French expression meaning “as near as possible”—is an equitable doctrine that allows a court to direct unclaimed or non-distributable funds awarded as part of a class action settlement “to an entity whose interests lie ‘as near as possible’ to that group”...Read more

#8 October Term 2018 Preview: The Supreme Court’s Class Action Docket

The US Supreme Court’s new term kicked off in October when the court re-convened for its first oral argument since last April. The Supreme Court term features four cases of interest to the consumer law and class action bar. In Lamps Plus, Inc. v. Varela, a divided panel of the Ninth Circuit construed a provision stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment” to authorize class arbitration...Read more

#9 SDNY Extends RD Legal Funding Dismissal to the NYAG; CFPB Appeals

On September 12, 2018, Judge Loretta Preska of the District Court for the Southern District of New York dismissed the New York State Attorney General’s suit against RD Legal Funding, LLC, and related entities for allegedly defrauding individuals awaiting payouts from two separate funds—the September 11th Victim Compensation Fund of 2011 and the fund arising out of the NFL Concussion Litigation Settlement Agreement. The Court’s ruling demonstrates the potentially far-reaching...Read more

#10 Crypto Winter Continues With Ongoing Enforcement

Several recent “first of kind” enforcement proceedings continue the flurry of enforcement activity by regulators. In two settled proceedings, the SEC brought two cases for failure to register digital tokens as securities in connection with ICOs, without allegations of fraud. With such enforcement actions now commonplace, a “crypto winter” has clearly set in...Read more

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December 21, 2018 Crypto Winter Continues With Ongoing Enforcement

By Michael W. Ross, Andrew J. Lichtman and Emily A. Bruemmer

Crypto-winterSeveral recent “first of kind” enforcement proceedings continue the flurry of enforcement activity by regulators.  In two settled proceedings, the Securities and Exchange Commission (SEC) brought two cases for failure to register digital tokens as securities in connection with initial coin offerings (ICOs), without allegations of fraud.  With such enforcement actions now commonplace, a “crypto winter” has clearly set in.  In another development, a federal court recently issued the first opinion concluding that the SEC had failed to establish that a digital asset issued in connection with an ICO was a “security” under the federal securities laws, underscoring that digital assets will not be subject to a one-size-fits-all analysis.

As for the two settled charges, according to the SEC’s orders, Paragon Coin, Inc.[1] and AirFox[2] launched their ICOs in 2017.  Paragon is an online company that was established to implement blockchain technology in the cannabis industry, as well as to work towards legalization of cannabis.  Through its ICO, Paragon raised approximately $12 million in digital assets to develop and expand its business.  As for AirFox, it sells mobile technology intended to allow customers to earn free or discounted data by watching advertisements on their phones.  AirFox raised approximately $15 million in its ICO to help expand its business overseas.  Neither Paragon nor AirFox registered their ICOs.

In charging the two companies with registration violations, the SEC’s legal analysis in both cases was very similar (in some places identical).  As an initial matter, the orders pointed out that the ICOs occurred after the SEC issued the DAO Report, which said that digital assets may qualify as “securities” under the securities law, and thus may require registration.[3]  The clear message from the SEC is that the companies should have been on notice.  Moreover, applying the Supreme Court’s Howey test, the SEC determined that the digital tokens at issue were securities because (1) the tokens were offered in general solicitations to US investors, (2) purchasers had a reasonable expectation of profits from their investment, (3) the investors’ profits would be driven by the managerial efforts of others (i.e., Paragon and AirFox), and (4) investors’ expectations were primed by Paragon and AirFox through marketing and promotional materials that touted the ICOs.

To settle the charges, Paragon and Airfox each agreed to pay a $250,000 civil money penalty, register their tokens as securities with the SEC, and reimburse investors who purchased tokens in the offerings.

These two cases are important for a variety of reasons.  For one thing, unlike many previous crypto-enforcements, they did not involve any allegations of fraud or misrepresentation.  Instead, they were pure failure-to-register cases.  Moreover, for companies that have not yet launched an ICO, the SEC’s press release warned that “[t]hese cases tell those who are considering taking similar actions that [the SEC] continue[s] to be on the lookout for violations of the federal securities laws with respect to digital assets.”  In other words, future ICO issuers should carefully consider whether their tokens are “securities” under the Howey factors and, if so, make sure they are complying with all the attendant securities laws, including registration requirements.  Finally, although we expect the SEC to bring similar actions in the near future against issuers who have already raised capital through ICOs, the SEC’s press release explains that these cases contain a forward-looking compliance roadmap of sorts:  “By providing investors who purchased securities in these ICOs with the opportunity to be reimbursed and having the issuers register their tokens with the SEC, these orders provide a model for companies that have issued tokens in ICOs and seek to comply with the federal securities laws.”[4]  Thus, issuers should consider taking proactive steps—including registering their tokens and reimbursing their investors—to minimize the likelihood or extent of an enforcement proceeding.

Although the SEC obtained favorable settlements against Paragon and AirFox, the SEC recently suffered a setback in its case against a company called Blockvest.[5]  According to the SEC, Blockvest materially misled investors by falsely claiming that its ICO had been registered with a “fictitious regulatory agency” similar to the SEC to “create legitimacy and an impression that [its] investment is safe.”  After the SEC filed a federal complaint and a motion for preliminary injunction, the court considered whether the digital asset at issue was a security under the Howey test.  The Southern District of California ultimately denied the SEC’s motion for a preliminary injunction because there were “disputed issues of fact” as to what the “investors relied on, in terms of promotional materials, information, economic inducements or oral representations . . . before they purchased” the tokens. 

Although the Blockvest ruling shows that courts will not rubberstamp SEC arguments in the cryptocurrency context, the value of this opinion is limited because the court did not reject the SEC’s arguments on the merits; rather, it held that the case should proceed to full discovery in light of the material facts in dispute.  And, just two months earlier, in September 2018 Judge Raymond Dearie of the Eastern District of New York denied a motion to dismiss the criminal prosecution of Maksim Zaslavskiy, who was charged with allegedly defrauding investors by falsely representing that two cryptocurrencies (REcoin and Diamond) were backed by real estate and diamonds, respectively.[6] Judge Dearie ruled that the prosecution of Zaslavskiy could continue.

* * *

In all, at this time last year, the value of Bitcoin was seeing record highs of nearly $20,000 while enforcement activity remained relatively low and courts had not yet seriously begun to grapple with how to categorize digital assets.  In the ensuing months, numerous regulators have gotten into the act, with SEC and others bringing enforcement actions to halt fraudulent schemes, and more recently, to push back on projects that failed to register with the SEC.  Courts have also begun to put contours around the Howey analysis.  With all those developments, the price of Bitcoin is hovering in the $4,000 range, leading commentators to claim a crypto winter.  As we head into 2019, time will tell whether the increased clarity from enforcement authorities resulting from a year of enforcement activity will lead to a springtime thaw.

 

[1] U.S. Securities and Exchange Comm’n, In the Matter of Paragon Coin, Inc., Order Instituting Cease-and-Desits Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing Penalties and a Cease-and-Desist Order, Release No. 10574, Nov. 16, 2018, https://www.sec.gov/litigation/admin/2018/33-10574.pdf.

[2] U.S. Securities and Exchange Comm’n, In the Matter of CarrierEQ, Inc., d/b/a/ Airfox, Order Insituting Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933, Making Findings, and Imposing Penalties and a Cease-and-Desist Order, Release No. 10575, Nov. 16, 2018, https://www.sec.gov/litigation/admin/2018/33-10575.pdf.

[3] U.S. Securities and Exchange Comm’n, Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: The DAO, Release No. 81207, July 25, 2017, https://www.sec.gov/litigation/investreport/34-81207.pdf.

[4] U.S. Securities and Exchange Comm’n, Press Release, “Two ICO Issuers Settle SEC Registration Charges, Agree to Register Tokens as Securities,” https://www.sec.gov/news/press-release/2018-264.

[5] Securities and Exchange Comm’n v. Blockvest, LLC and Reginald Buddy Ringgold, III a/k/a Rasool Abdul Rahim El, Case No.: 18CV2287-GPB(BLM), Order Denying Plaintiff’s Motion for Preliminary Injunction (S.D. Cal. Nov. 27, 2018).

[6] U.S. v. Zaslavskiy, Memorandum & Order, 1:17-cr-00647 (E.D.N.Y. Sept. 11, 2018).

October 10, 2018 Blockchain, Antitrust and Standard Setting

BlockchainIn an article for Fintech Weekly, Partner Michael W. Ross explains that, as companies have experimented with blockchain and other distributed ledger technologies, commentators have highlighted antitrust concerns.  Mr. Ross suggests areas to watch as the technology expands, particularly at the International Standards Organization and the Federal Trade Commission.  The article also notes the possibility for developing blockchain standards that may foster efficiency, compatibility and interoperability of diverse technologies through the adoption of “FRAND licensing” concepts.

To read the full article, please click here.

PEOPLE: Michael W. Ross

October 1, 2018 SDNY Extends RD Legal Funding Dismissal to the NYAG; CFPB Appeals

By Nicolas G. Keller

new updateOn September 12, 2018, Judge Loretta Preska of the District Court for the Southern District of New York dismissed the New York State Attorney General’s (“NYAG”) suit against RD Legal Funding, LLC, and related entities (collectively, “RD Entities”)[1] for allegedly defrauding individuals awaiting payouts from two separate funds—the September 11th Victim Compensation Fund of 2011 (“VCF”) and the fund arising out of the NFL Concussion Litigation Settlement Agreement (“NFL Fund”).[2] The Court’s ruling demonstrates the potentially far-reaching implications of the ongoing debate over the constitutionality of the CFPB’s structure in terms of not only the CFPB’s enforcement actions but also those of state actors. 

The lawsuit, commenced jointly by the NYAG and the Consumer Financial Protection Bureau (“CFPB”) in February 2017, alleges that the defendants’ transactions with individuals that the defendants characterized as “purchases” or “assignments” of VCF or NFL Fund payouts are substantively high-interest loans.[3] The CFPB and the NYAG assert that the alleged loans are usurious and violate provisions of the Consumer Financial Protection Act (“CFPA”)—also known as Title X of the Dodd-Frank Act—and various New York state fraud and usury laws.[4]

Nearly three months ago, on June 21, the Court dismissed the CFPB from the suit.[5] The gist of the Court’s holding, which we wrote more about here, was that the CFPB’s structure as an independent agency headed by a single director who can be removed by the President only for cause violates separation of powers.[6]  And the Court ruled that the remedy for this constitutional infirmity is to strike the CFPA in its entirety, thereby leaving the CFPB without the authority to bring suit.[7]  The Court also noted that:

Vexingly, Defendants do not address the NYAG’s independent authority to bring claims in federal district court under the CFPA, without regard to the constitutionality of the CFPB’s structure. . . . The Government has alleged adequately claims for deceptive and abusive acts or practices under the CFPA, and therefore federal question subject matter jurisdiction over the CFPA claims exists regardless of the constitutionality of the CFPB’s structure.[8]

Amending its June 21 Order, the Court clarified that because “the appropriate remedy for Title X’s unconstitutional for-cause removal provision is invalidating Title X in its entirety, it follows that there is no statute for the NYAG to proceed under and no grant of authority to proceed.”[9]  Accordingly, the Court dismissed the NYAG’s federal law claims.

The Court also dismissed the NYAG’s state law claims.  The NYAG argued that the Court should hear the remaining state law claims on the basis of federal question jurisdiction because the claims implicate the question of whether the purported assignments of VCF payouts violate the federal Anti-Assignment Act, but the Court rejected this argument, finding that the question does not “implicate broad consequences to the federal system or the nation as a whole” and can be competently addressed by state courts.[10]  Additionally, citing “judicial economy, convenience, fairness, and comity[,]” the Court rejected the NYAG’s argument that the Court should use its discretion to exercise supplemental jurisdiction over the remaining state law claims.[11]

The debate over the constitutionality of the CFPB is certainly not over.  In fact, given that the CFPB filed a Notice of Appeal on September 14,[12] the issue of the CFPB’s constitutionality is now on appeal before several circuit courts.[13]  The NYAG could also appeal Judge Preska’s ruling, and/or it may attempt to pursue its CFPA and state law claims against the RD Entities in state court, likely depending at least in part on its assessment of the probability a state court would stay the case pending the CFPB’s appeal.

 

[1] The NYAG and the CFPB also allege that the founder and owner of the RD Entities, Roni Dersovitz, is liable for providing substantial assistance to the RD Entities in carrying out the violations.  Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC, No. 17-CV-890 (LAP), 2018 WL 3094916, at *4 (S.D.N.Y. June 21, 2018), appeal docketed, No. 18-2743 (2d Cir. Sept. 17, 2018).

[2] Order at 6-7, Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC, No. 17-CV-890 (LAP) (S.D.N.Y. Sept. 12, 2018), Doc. No. 105, appeal docketed, No. 18-2743 (2d Cir. Sept. 17, 2018); see RD Legal Funding, LLC, 2018 WL 3094916, at *2.

[3] RD Legal Funding, LLC, 2018 WL 3094916, at *2.

[4] Id. at *4.

[5] Id. at *36 (“Because Plaintiff Consumer Financial Protection Bureau is unconstitutionally structured and lacks authority to bring claims under the CFPA, the Clerk of Court shall terminate Plaintiff Consumer Financial Protection Bureau as a party to this action.”).

[6] Id. at *35-36.

[7] Id.

[8] Id. at *31.

[9] Order at 1, RD Legal Funding, LLC, No. 17-CV-890 (LAP) (S.D.N.Y. Sept. 12, 2018), Doc. No. 105.

[10] Id. at 2-4. 

[11] Id. at 5-6. 

[12] Notice of Appeal, RD Legal Funding, LLC, No. 17-CV-890 (LAP) (S.D.N.Y. Sept. 14, 2018), Doc. No. 108.  The RD Entities filed a Notice of Cross-Appeal on September 25.  Notice of Cross-Appeal, RD Legal Funding, LLC, No. 17-CV-890 (LAP) (S.D.N.Y. Sept. 25, 2018), Doc. No. 111.

[13] See, e.g., Order, Consumer Fin. Prot. Bureau v. All Am. Check Cashing, Inc., No. 16-CV-356 (S.D. Miss. Mar. 27, 2018), Doc. No. 236, interlocutory appeal docketed, No. 18-60302 (5th Cir. Apr. 24, 2018); Consumer Fin. Prot. Bureau v. Seila Law, LLC, No. 17-CV-01081-JLS-JEM, 2017 WL 6536586 (C.D. Cal. Aug. 25, 2017), appeal docketed, No. 17-56324 (9th Cir. Sept. 1, 2017); Consumer Fin. Prot. Bureau v. Future Income Payments, LLC, 252 F.Supp.3d 961 (C.D. Cal. 2017), appeal docketed, No. 17-55721 (9th Cir. May 19, 2017); Consumer Fin. Prot. Bureau v. D & D Mktg., Inc., No. CV 15-9692 PSG (EX), 2016 WL 8849698 (C.D. Cal. Nov. 17, 2016), interlocutory appeal docketed, No. 17-55709 (9th Cir. May 18, 2017); CFPB v. CashCall, Inc., No. CV-15-7522-JFW-RAOx, 2016 WL 4820635 (C.D. Cal. Aug. 31, 2016), appeal docketed, No. 18-55479 (9th Cir. Apr. 12, 2018); cf. Order, State Nat. Bank of Big Spring v. Lew, No. 12-1032 (ESH) (D.D.C. Feb. 16, 2018), Doc. No. 78, aff’d sub nom. Order, State National Bank of Big Spring v. Mnuchin, No. 18-5062 (D.C. Cir. June 8, 2018), Doc. No. 1734973, cert. filed (Sept. 6, 2018).

PEOPLE: Nicolas G. Keller

September 28, 2018 October Term 2018 Preview: The Supreme Court’s Class Action Docket

SCOTUSBy Alexander M. Smith

The Supreme Court’s next term kicks off next week, when the court re-convenes for its first oral argument since last April.  The docket currently features four cases of interest to the consumer law and class action bar:

  • In Lamps Plus, Inc. v. Varela, a divided panel of the Ninth Circuit construed a provision stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment” to authorize class arbitration, even though the plaintiff’s employment agreement with Lamps Plus did not expressly authorize class-wide arbitration.  The Supreme Court granted certiorari to determine whether the Federal Arbitration Act “forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.” 
  • In Frank v. Gaos, the district court authorized a class-wide settlement of a lawsuit alleging that Google violated federal and state privacy laws by disclosing users’ search terms to third parties, even though the settlement consisted only of cy pres relief and attorneys' fees.  A divided panel of the Ninth Circuit affirmed, rejecting the objectors’ arguments that (1) a settlement that provided no direct relief to the class was inappropriate and (2) that the cy pres beneficiaries, which had previously received settlement funds from Google and which were affiliated with the law schools attended by class counsel, were improper.  The Supreme Court granted certiorari to determine “[w]hether, or in what circumstances, a cy pres award of class action proceeds that provides no direct relief to class members supports class certification and comports with the requirement that a settlement binding class members must be ‘fair, reasonable, and adequate.’”
  • In Nutraceutical Corp. v. Lambert, the plaintiff filed a motion for reconsideration of the district court’s order decertifying the class twenty days after the district court entered its order, and he filed a Rule 23(f) petition for interlocutory review of the decertification order after the district court denied his motion for reconsideration.  Although Rule 23(f) requires that a petition for interlocutory review be filed within fourteen days of the district court’s order, the Ninth Circuit nonetheless granted the Rule 23(f) petition, holding that the fourteen-day deadline in Rule 23(f) was not jurisdictional.  The Ninth Circuit also held that the deadline to file a Rule 23(f) petition was tolled because the plaintiff had orally informed the district court that he would seek reconsideration, even though it acknowledged that this outcome conflicted with the law of several other circuits.  The Supreme Court granted certiorari to determine whether the Ninth Circuit “erred when it held that equitable exceptions apply to mandatory claim-processing rules—such as Federal Rule of Civil Procedure 23(f), which establishes a 14-day deadline to file a petition for permission to appeal an order granting or denying class-action certification—and can excuse a party’s failure to file timely within the deadline specified by Federal Rule of Civil Procedure 23(f), in conflict with the decisions of the U.S. Courts of Appeals for the 2nd, 3rd, 4th, 5th, 7th, 10th and 11th Circuits.” 
  • In Home Depot U.S.A. Inc. v. Jackson, a bank filed a debt collection action against the defendant, who brought a third-party class action counterclaim against Home Depot and Carolina Water Systems, Inc., which he alleged had engaged in unfair and deceptive trade practices.  After the bank dismissed its debt collection action against the original defendant and counterclaim plaintiff, Home Depot sought to remove the class action counterclaim to federal court under the Class Action Fairness Act, 28 U.S.C. § 1332(d) (“CAFA”).  Relying on the Supreme Court’s decision in Shamrock Oil & Gas Corp. v. Sheets, 313 U.S. 100 (1941), the district court granted the counterclaim plaintiff’s motion to remand and held that Home Depot was not a “defendant” eligible to remove the action to federal court under CAFA.  The Fourth Circuit affirmed.  The Supreme Court granted certiorari to determine (1) whether “an original defendant to a class-action claim can remove the class action if it otherwise satisfies the jurisdictional requirements of the Class Action Fairness Act when the class action was originally asserted as a counterclaim against a co-defendant” and (2) whether the “Court’s holding in Shamrock . . . ‘that an original plaintiff cannot remove a counterclaim against it’ extend[s] to third-party counterclaim defendants.” 

We will update the blog with updates on the outcome of these cases, as well as more information on additional class action or consumer law cases the Court adds to its docket.

PEOPLE: Alexander M. Smith

September 26, 2018 Recent Activity Brings Further Clarity to Cryptocurrency Enforcement

By Michael W. Ross and Andrew J. Lichtman

image from https://s3.amazonaws.com/feather-client-files-aviary-prod-us-east-1/2018-09-26/d04d50c7-b740-45a9-b4a6-3b9e95def44d.pngSeptember saw a flurry of activity that will help further define the cryptocurrency regulatory landscape.  The Financial Industry Regulatory Authority (“FINRA”) brought its first-ever crypto-fraud case and a court ruling by the U.S. District Court for the Eastern District of New York gave backing to the view that digital assets will be viewed as securities.  And, in two enforcements actions, the U.S. Securities and Exchange Commission (“SEC”) branched out beyond actions against fraudulent crypto-schemes and went after crypto companies for failing to register with the SEC.  The latter two cases signal that the SEC is committed to enforcing applicable securities law requirements beyond those accused of fraud, and therefore SEC enforcement activity remains an area for legitimate businesses to watch.

A Federal Court Rules On Whether Digital Assets Are Securities

Last October, the U.S. Attorney’s Office in Brooklyn brought charges against Maksim Zaslavskiy alleging that Zaslavskiy made false representations in connection with two cryptocurrencies and their related initial coin offerings (“ICOs”) in violation of U.S. securities law.  According to the indictment, Zaslavskiy induced investors to purchase tokens in an ICO for “REcoin” by falsely claiming that REcoin was backed by real estate investments.  Similarly, the government alleged, Zaslavskiy falsely claimed that a second cryptocurrency, “Diamond,” was backed by actual diamonds when it was not.

Zaslavskiy moved to dismiss the indictment arguing that the REcoin and Diamond offerings did not involve securities under the Supreme Court’s Howey test.  In a seminal ruling on the issue, the court rejected Zaslavskiy’s argument and found that a reasonable jury could conclude that the cryptocurrency transactions were “investment contracts.”  Applying the federal securities laws “flexibly,” the court held that a reasonable jury could conclude that:  (1) defrauded individuals invested money (2) in a common enterprise and (3) were led to expect that profits from the REcoin and Diamond enterprise would be derived solely from the managerial efforts of Zaslavaskiy.  The decision was consistent with recent remarks by William Hinman, the SEC’s Director of the Division of Corporate Finance, with regard to determining whether digital assets are securities.

FINRA Brings a Fraud Action Involving Cryptocurrency 

On September 11, 2018, FINRA filed an action against Timothy Tilton Ayre in its “first disciplinary action involving cryptocurrencies.”  In its complaint, FINRA alleged that Ayre purchased the rights to a cryptocurrency called HempCoin and repackaged it into a security backed by the stock of Rocky Mountain Ayre, a worthless company Ayre owned.  Ayre then marketed HempCoin as “the world’s first currency to represent equity ownership” in a publicly-traded company.  FINRA alleges that Ayre defrauded investors by making false statements about Rocky Mountain’s business and failing to register HempCoin as a security.

SEC Extends Enforcement Activity Into Registration Violations 

This month also witnessed the expansion of the types of enforcement actions by the SEC, with two actions against crypto companies for failing to register.  In one case—In re TokenLot—the SEC brought its first case charging that a company selling digital tokens was an unregistered broker-dealer.  According to the SEC’s settlement order, TokenLot, which was a self-described “ICO Superstore,” was promoted as a way to purchase digital tokens during ICOs and also to engage in secondary trading.  By soliciting investors and facilitating the sales of digital tokens, TokenLot and its two founders were required to register with the SEC as broker-dealers, but they failed to do so.

In the other case—In re Crypto Asset Management—the SEC brought an enforcement action claiming that a hedge fund manager that invested in digital assets failed to register as an investment company.  According to the SEC’s order, the fund raised $3.6 million by marketing itself as the “first regulated crypto asset fund in the United States.”  But it had failed to file a registration statement and therefore was operating as an unregistered investment company.

* * *

These cases further cement the view that regulators, and now courts, will continue to treat certain digital assets as securities, with all the attendant securities law requirements.  As the SEC actions show, that will mean more than just enforcement actions against those using the new technology to defraud the unwitting.  It will also mean that other players in the space—such as those acting as brokers and asset managers—will need to take steps to assure themselves that they are abiding by relevant securities law provisions, lest they invite an enforcement action.

September 4, 2018 How Blockchain Use Can Block Competition

BlockchainIn an article for Law360, Partners Daniel T. Fenske and Justin C. Steffen examine anti-competition issues with blockchain.  The authors explain that anti-competition issues abound now that financial institutions, corporations and other industries are investing in blockchain technology.  The issues, they observe, can be mitigated through early planning.  The authors discuss the “basics” of blockchain and anti-competition risks.  “The antitrust risks of blockchain technology will be clarified as the technology develops and it is put to more uses,” they conclude.  “It is critical that you consult competent antitrust counsel when structuring blockchain technology and policies so as to best mitigate antitrust risk.”

To read the full article, please click here.

CATEGORIES: Antitrust

July 10, 2018 SEC Take on Tokens Clarifies Some Crypto Community Quandaries

By Jolene E. Negre, Michael W. Ross, Justin C. Steffen and Andrew J. Lichtman

CurrencyIn a June 14 speech William Hinman, the SEC’s Director of the Division of Corporate Finance, began to place additional definition around the raging debate over whether digital assets, including tokens, are securities.  Until that speech, much commentary had focused on the repeat statements by SEC officials that digital assets distributed in initial coin offerings (ICOs) are almost always securities in the SEC’s view, with the possible exception of widely disseminated cryptocurrencies like Bitcoin.  Hinman’s remarks set out the view that, in their initial phases, tokens are more likely to qualify as securities under the Supreme Court’s Howey test, but in limited circumstances may, over time, shed enough of the characteristics of securities to lose that designation.  Under the rubric Hinman laid out, the new hallmark of success for a token project may become the point at which a project’s tokens are so widely used that they function without any centralized efforts and lose their securities status.  This post lays out some of the background and considerations under this new framework.

 

Hinman Lays Out a Framework 

In his June 14 speech, Hinman addressed a hotly debated issue in the cryptocurrency world:  which tokens, if any, are securities and which aren’t?  His remarks started by covering well-trod territory explaining why cryptocurrencies issued in ICOs are generally securities, but, later in his remarks, added important comments that could shift the ground beneath current thinking.

At the outset, and consistent with past comments from Hinman and other SEC staff, Hinman stated that most, if not all, sales of digital assets in ICOs he has seen satisfy Howey’s “investment contract” test and should be treated as securities.  In reaching this conclusion, Hinman explained that token promoters tend to tout their ability to create an innovative application of blockchain technology; that investors are passive; that marketing efforts are rarely targeted to token users; and that, although the business model is still uncertain, purchasers usually must rely on the efforts of the promoter to build the network and make the enterprise a success.  “At that stage,” Hinman said, “the purchase of a token looks a lot like a bet on the success of the enterprise and not the purchase of something used to exchange for goods or services on the network.”

The ground-shift came in Hinman’s next explanation:  that tokens that start out as securities, can later change their characteristics such that they no longer would be securities.  He explained, “[i]f the network on which the token or coin is to function is sufficiently decentralized—where purchasers would no longer reasonably expect a person or group to carry out essential managerial or entrepreneurial efforts—the assets may not represent an investment contract.  Moreover, when the efforts of the third party are no longer a key factor for determining the enterprise’s success, material information asymmetries recede.”  In other words, issuers may structure their token platforms in a manner that initially requires significant setup and investment, but, if the network and tokens eventually become self-sustaining, the tokens can lose their status as securities. 

Having drawn this distinction between more and less mature projects, Hinman then laid out a variety of questions relevant to the analysis of which side of the line a particular project (or a particular project at a particular time) would fall:

  1. Is token creation commensurate with meeting the needs of users or, rather, with feeding speculation?
  2. Are independent actors setting the price or is the promoter supporting the secondary market for the asset or otherwise influencing trading?
  3. Is it clear that the primary motivation for purchasing the digital asset is for personal use or consumption, as compared to investment?  Have purchasers made representations as to their consumptive, as opposed to their investment, intent?  Are the tokens available in increments that correlate with a consumptive versus investment intent?
  4. Are the tokens distributed in ways to meet users’ needs?  For example, can the tokens be held or transferred only in amounts that correspond to a purchaser’s expected use?  Are there built-in incentives that compel using the tokens promptly on the network, such as having the tokens degrade in value over time, or can the tokens be held for extended periods for investment?
  5. Is the asset marketed and distributed to potential users or the general public?
  6. Are the assets dispersed across a diverse user base or concentrated in the hands of a few that can exert influence over the application?
  7. Is the application fully functioning or in early stages of development?

Hinman was careful to note that this list of factors was not exclusive, however, and to state that not every factor would need to be present to find that a token was not a security.  Indeed, while laying out these factors, Hinman reiterated that the north star of the analysis is the economic substance of the transaction.  In Hinman’s words:

Again, we would look to the economic substance of the transaction, but promoters and their counsels should consider these, and other, possible features. This list is not intended to be exhaustive and by no means do I believe each and every one of these factors needs to be present to establish a case that a token is not being offered as a security.  This list is meant to prompt thinking by promoters and their counsel, and start the dialogue with the staff—it is not meant to be a list of all necessary factors in a legal analysis.

Based on this framework, Hinman concluded that applying the disclosure regime of the federal securities laws to current transactions in Bitcoin and Ether would add little value because the networks are decentralized and there is no third party whose efforts are a key determining factor in the enterprises.  But each project will require its own analysis to determine whether it bears sufficient indicia to not be deemed a security by the SEC.

 

Clayton Confirms Hinman’s Framework

It appears that Hinman’s view is not a one-off.  Testifying before the Committee on Financial Services of the U.S. House of Representatives, SEC Chairman Jay Clayton referred to Hinman’s June 14, 2018 remarks saying, “[o]ur Corporation Finance Division Director recently further outlined the approach staff takes to evaluate whether a digital asset is a security.”  Clayton’s reference suggests that Hinman’s framework is not merely his personal view, but rather an approach taken by the staff as a whole. 

 

Moving Forward 

Hinman’s and Clayton’s remarks create somewhat more certainty about an approach to regulatory compliance for a group of issuers that has been in regulatory limbo.  A class of companies and token holders—mostly related to digital assets issued back at a time when the crypto community was of a view that a “utility token” would not be treated as a security—was caught between a rock and a hard place as it became evident that the SEC Chairman and staff had a broader view of which tokens constituted securities (i.e., most tokens issued in ICOs) than most in the crypto community had originally believed.  These issuers who had already conducted ICOs based on the idea that their tokens were not securities were left with few and poor options to develop their platform and transact in their tokens without running into potential securities law violations.  Common questions in the community included whether, when, and how the SEC would create a way forward for these companies and digital assets. 

Now we know a little more.  For platforms designed to run independently after a certain point—or that can be adapted to do so—tokens that the SEC would previously consider securities may transition and become non-securities tokens.  The factors laid out by Hinman establish a useful baseline for predicting where the SEC will draw the line, with project participants on notice that they will need to comply with securities laws until platforms are “sufficiently decentralized.”

But numerous issues still remain.  The concept of being “sufficiently decentralized” has not yet been tested, and some reports draw into question just how decentralized certain cryptocurrency ecosystems truly are.  Recently, for instance, reports indicated that the zCash Foundation paid money to a developer to prevent a fork of the protocol.  Likewise, earlier this year, a report prepared by researchers at Cornell indicated that neither Ether nor Bitcoin was as decentralized as initially thought.  This issue will likely be tested in the months and years to come.  Further, projects may need to add new disclosures around the transition from securities tokens to non-securities tokens, including that the protections of the securities law may, at some point, cease to apply.  And, in addition, some commentators have surmised that this new framework may breathe new life into the movement for the use of Simple Agreement for Future Tokens (SAFTs); however, no SEC official has formally endorsed SAFTs and Hinman’s prepared remarks expressly disavowed any view on whether any particular SAFT passed muster, noting that each case is reviewed on its particular economic substance and advising those with questions to contact the SEC.

In all, these and other questions will continue to be debated.  And, as the market develops its understanding of the mix of factors that will safely render a token a non-security, any potential distributor of tokens should work closely with counsel to ensure its tokens comply with applicable legal requirements. 

July 2, 2018 SDNY Rules CFPB Unconstitutional, Creating Split of Authority and Raising New Questions

By Joseph L. Noga, Michael W. Ross, Justin C. Steffen and Kashan Pathan

-Since its inception, the Consumer Financial Protection Bureau (the “CFPB”) has faced controversy over its structure as an independent agency headed by a single director who can be removed by the President only for cause. Critics have invoked the unitary executive theory to argue that the Constitution permits an agency to enjoy independence from at-will termination by the President only if the agency is headed by multiple commissioners, directors, or board members.[1] About six months ago, the D.C. Circuit took a step toward silencing those critics by rejecting en banc a constitutional challenge to the CFPB’s structure.[2] But in another twist, two weeks ago news broke that the issue may remain unsettled, because in Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC, U.S. District Judge Loretta Preska of the Southern District of New York explicitly rejected the PHH majority opinion and held the CFPB’s structure to be unconstitutional.[3] As discussed below, the new split of authority raises interesting questions going forward.

The SDNY Ruling

In RD Legal Funding, the defendant companies had offered cash advances to consumers waiting for settlement payouts. The CFPB and the New York Attorney General (the “NYAG”) alleged that these transactions were not sales transactions but loans and that these loans were made in violation of certain provisions of the Consumer Financial Protection Act (the “CFPA” or the “Act”).[4] Defendants moved to dismiss the complaint on three grounds, including that the CFPB is unconstitutionally structured and therefore lacks authority to bring claims under the CFPA.[5]

Judge Preska denied the motion to dismiss but terminated the CFPB as a party to the action. In holding the CFPB’s structure unconstitutional, Judge Preska largely adopted the dissenting opinion of Judge Brett Kavanaugh in PHH. Specifically, Judge Preska agreed with Judge Kavanaugh’s conclusion that the CFPB’s structure is unconstitutional because “it is an independent agency that exercises substantial executive power and is headed by a single Director.”[6] However, Judge Preska disagreed with Judge Kavanaugh’s remedy to cure the constitutional defect. Judge Kavanaugh concluded that the constitutional defect could be cured by invalidating and severing the provision of the Act prohibiting the President from removing the CFPB Director at will.[7] Conversely, Judge Karen LeCraft Henderson’s dissent in PHH concluded that, because this provision is at the heart of Title X of the Dodd-Frank Act, the entirety of Title X should be stricken. [8] Judge Preska adopted this portion of Judge Henderson’s dissent.[9] Finally, Judge Preska rejected the CFPB’s filing of a Notice of Ratification to cure any constitutional defects.[10] The CFPB argued that the ratification of this enforcement decision by the CFPB’s current Acting Director, Mick Mulvaney, who is removable at will by the President, cured any constitutional defect in the instant action.[11] Judge Preska rejected this argument and found that, even if Acting Director Mulvaney is removable at will by the President, the relevant provisions of Dodd-Frank that render the CFPB’s structure unconstitutional remain intact.[12]

What the Ruling May Mean

A number of interesting questions and takeaways arise here:

First, one wonders if RD Funding will affect the CFPB’s choice of forum in bringing claims. A federal court in the District of Columbia that is now bound to follow the PHH majority may look more attractive after RD Funding, and that could affect the CFPB’s de facto practice of usually suing in the home district court of the defendant. That said, Judge Preska’s decision does not bind any other court, including any other court in the Southern District of New York. Thus, whether the CFPB will risk bringing other enforcement actions in the Southern District of New York is unclear. However, the opinion may create a strong incentive for the CFPB to forum shop.

Second, RD Funding confirms that the federal bench is unlikely to fall completely into line behind the majority opinion in PHH, and the issue of constitutionality remains ripe for those in the cross-hairs of the CFPB to raise. Even though the D.C. Circuit is influential, other courts may be more inclined to depart from that result now that one judge has already done so. As Judge Preska notes in her decision, several other district courts have addressed the constitutionality of the CFPB’s structure.[13] There also is an appeal currently pending before the Ninth Circuit on this issue,[14] and defendants will likely invoke Judge Preska’s decision to dismiss enforcement actions by the CFPB. Accordingly, the likelihood of a circuit split on this issue has increased following RD Funding.

Third, RD Funding suggests that the seven separate written opinions within the lengthy PHH decision may become something of a menu of options for judges facing the issue to select from. It is striking that Judge Preska wrote relatively little on the constitutional issue and merely adopted the reasoning of certain dissenting opinions in PHH. Most of the opinion focuses on whether the defendants are covered by the CFPA and if the plaintiffs have stated a claim for relief.

Fourth, Judge Preska’s choice to follow Judge Kavanaugh’s dissent is of added significance now that early rumors have Judge Kavanaugh as a leading candidate to take Justice Anthony Kennedy’s recently vacated Supreme Court seat. Such an event would likely heighten the persuasive impact of Judge Kavanaugh’s dissent and increase the likelihood that other judges would adopt his view.

In sum, there appears to be much more to come regarding the constitutionality of the CFPB structure and the impact of any constitutional infirmity.

 

[1] See PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 6 (D.C. Cir. 2016), rev’d en banc, 881 F.3d 75 (D.C. Cir. 2018).

[2] See PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75 (D.C. Cir. 2018). The original panel held the CFPB’s structure to be unconstitutional. PHH Corp. v. Consumer Fin. Prot. Bureau, 839 F.3d 1, 6 (D.C. Cir. 2016).

[3] No. 17-CV-890, 2018 WL 3094916 (S.D.N.Y. June 21, 2018).

[4] Id. at *1–2.

[5] Id. at *1.

[6] Id. at *35 (quoting PHH Corp. v. Consumer Fin. Prot. Bureau, 881 F.3d 75, 198 (D.C. Cir. 2018)).

[7] Id. at *35.

[8] Id.

[9] Id.

[10] Id. at *36.

[11] Id.

[12] Id.

[13] Id. at *35 n.7.

[14] Consumer Fin. Prot. Bureau v. Future Income Payments, LLC, 252 F. Supp. 3d 961 (C.D. Cal. 2017), appeal filed, No. 17-55721 (9th Cir. May 18, 2017).

June 29, 2018 Jenner & Block Partners with Chicago-Kent College of Law and FinTEx for Blockchain and Cryptocurrency Conference

FinTech-Linkedin-1400x800Jenner & Block is partnering with Chicago-Kent College of Law and FinTEx, a non-profit, member-driven community of the leading organizations within FinTech and Financial Services, for a first-of-its kind conference focused on the evolving regulatory and legal issues in the blockchain and cryptocurrency space.  Co-organized by Partner Justin C. Steffen, the Block(Legal)Tech conference will take place on August 9 at The Law Lab at Illinois Tech Chicago-Kent College of Law.  The Block(Legal)Tech conference will feature presentations and panel discussions on the law of distributed ledger systems, tokenized assets and cryptoasset-based funding.  The day-long conference will include a number of discussions, interviews and debates, delving deep into the complicated issues that affect the crypto-landscape, such as the future of US regulation of cryptoassets and the government’s role in promoting blockchain adoption.  Topics discussed will include minimizing the risks of crypto-litigation, the role of lawyers, the evolution of smart contracts and their impact on the legal profession as well as other legal issues that stem from the use and implementation of blockchain technology.

To register for the event, please click here.