HUD Publishes New Affirmatively Furthering Fair Housing Rule
By: Damon Y. Smith
Ever since the US Department of Housing and Urban Development (HUD) suspended certain reporting requirements of the Affirmatively Furthering Fair Housing (AFFH) rule for local governments in 2018, cities and affordable housing developers and lenders have awaited their proposed replacement. After a year of review and revisions, HUD recently released a newly proposed AFFH rule. The proposed regulation re-defines AFFH and makes substantial changes to the metrics for compliance.
The Department’s new definition of AFFH is “advancing fair housing choice within the program participant’s control or influence.” However, the headline change for most program participants (state and local government and public housing agencies) is that they will no longer have to use a HUD-prescribed computer assessment tool to determine their compliance with AFFH. That tool required program participants to answer questions about segregation levels and patterns in their communities and impediments to changing those patterns in the future. Instead, the proposed rule has adopted three metrics to determine if a participating jurisdiction is (1) free of fair housing claims; (2) has adequate supply of affordable housing and (3) has adequate quality in that supply of affordable housing. These metrics dovetail with the Department’s new definition of AFFH because “fair housing choice” is further defined to include choice that is (1) free of fair housing discrimination, (2) actual in fact, due to existence of informed affordable housing options and (3) capable of providing access to quality affordable housing that is decent, safe and sanitary.
Comments on this new rule are due on March 16, 2020.
Are E-Signed Arbitration Agreements Enforceable?
By: Amy M. Gallegos
As more and more businesses conduct transactions electronically, courts and practitioners are increasingly faced with questions about the validity and enforceability of electronically signed documents. In consumer law, this issue often arises when a company seeks to enforce an arbitration agreement contained in a document that was electronically signed by the consumer. California courts are well known for their skepticism of arbitration provisions in consumer contracts. Additionally, consumers may be more likely to challenge electronic agreements, perhaps because they believe electronic signatures are not legally binding, or because without a handwritten signature to prove up the contract, they think it makes sense to play the odds that the defendant will not be able to satisfy the court that an agreement was actually made. Understanding how to prove up an agreement to arbitrate when the consumer’s signature is electronic is critical for consumer lawyers practicing in California.
In California, general principles of contract law determine whether the parties have entered a binding agreement to arbitrate. California has enacted the Uniform Electronic Transaction Act, which recognizes the validity of electronic signatures. (Cal. Civ. Code Section 1633.1.) Under that act, an electronic signature has the same legal effect as a handwritten signature, and “[a] … signature may not be denied legal effect or enforceability solely because it is in electronic form.” (Cal. Civ. Code, Section 1633.7, subd. (a).) That said, any writing must be authenticated before the writing, or secondary evidence of its content, may be received in evidence. (Evid. Code Section 1401.) “Authentication of a writing means (a) the introduction of evidence sufficient to sustain a finding that it is the writing that the proponent of the evidence claims it is or (b) the establishment of such facts by any other means provided by law.”
California Civil Code Section 1633.9 addresses how a proponent of an electronic signature may authenticate the signature—that is, show the signature is, in fact, the signature of the person the proponent claims it is. The statute states: “An electronic record or electronic signature is attributable to a person if it was the act of the person. The act of the person may be shown in any manner, including a showing of the efficacy of any security procedure applied to determine the person to which the electronic record or electronic signature was attributable.”
Authentication is where the rubber hits the road. A recent case out of the Fourth Appellate District of the California Court of Appeal underscores the importance of scrupulously authenticating an electronically signed arbitration agreement. In Fabian v. Renovate America, a homeowner alleged that Renovate America (Renovate), a solar panel company, had violated the Consumer Legal Remedies Act and Unfair Competition Law in connection with the financing and installation of a solar energy system in Rosa Fabian’s home. (Fabian v. Renovate America, —Cal. Rptr.3d— (2019), 2019 L 6522978 (Nov. 11, 2019).) Renovate filed a petition to compel arbitration, based on an agreement that it claimed the homeowner had electronically signed. The agreement at issue was signed using DocuSign, a company that provides a platform to electronically sign documents. The words “DocuSigned by:” and the printed electronic signature of the homeowner appeared in a signature box at the end of the contract, along with the date, a 15-digit alphanumeric character, and the words “Identity Verification Code: ID Verification Complete.” Renovate’s petition was supported by the declaration of a Renovate employee stating that the plaintiff had entered into the contract on the date referenced in the electronic signature. However, the declaration did not include any information about what DocuSign was or how it worked. The plaintiff denied she had signed the agreement and contended that her electronic signature was placed on the agreement without her consent, authorization or knowledge.
The trial court denied Renovate’s motion, and the Court of Appeal affirmed. The Court of Appeal explained that because the plaintiff had “declared that she did not sign the contract,” Renovate had the burden of “proving by a preponderance of the evidence that the electronic signature was authentic.” The Court of Appeal found that Renovate had not met this burden. Although the court acknowledged that a federal court in California had accepted a DocuSign verified signature in Newton v. American Debt Services, 854 F. Supp. 2d 712 (N.D. Cal. 2012), the court found that case distinguishable because in that case the declarant proved that the electronic signature was authentic by explaining the process used to verify the signature. In Fabian, by contrast, the defendant had offered “no evidence about the process used to verify Fabian’s electronic signature via DocuSign,” including who sent her the contract, how her signature was placed on the contract, who received the signed contract, how the signed contract was returned to Renovate, and how Fabian was verified as the person who actually signed the contract.
Fabian underscores that California courts can be skeptical of arbitration agreements especially when they require a consumer to arbitrate a claim against a corporate defendant. It is therefore critical that practitioners moving to compel arbitration based on a consumer’s electronic signature be painstakingly diligent about laying the proper foundation. To establish that an electronic signature is authentic, defendants submit a declaration from a witness with personal knowledge explaining how the software used to generate the signature works and how it ensures that the signature is authentic—for example, by requiring the use of a unique, secure user name and password to create the signature. (See, e.g., Smith v. Rent-A-Center, No. 1:18-CV-01351, (E.D. Cal. Jul. 10, 2019).)
Optimally, the declarant should describe all of the facts surrounding the transaction that support the conclusion that the plaintiff signed the contract. The declarant should describe how the contract was sent to the plaintiff, such as whether it was emailed to an address belonging to the consumer, or whether the consumer was sent a password-protected link to the contract. The declarant should also describe all of the steps the plaintiff had to take in order to electronically sign the document—for example, creating a secure, password-protected account to use the software that generates the signature, or signing onto a secure website with a unique user name and password. (See id. at * 5 (E.D. Cal. Jul. 10, 2019); Espejo v. Southern California Permanente Medical Group, 246 Cal. App. 4th 1047, 1062 (2016).) Courts have also approved the use of check boxes on documents when a secure username and password were required to access the document. (Smith, 2019 L 3004160 at *5.) The declarant should describe how the signed document was transmitted to the company. Although it should not be necessary if an employee of the company has the requisite personal knowledge, some courts might be more inclined to accept a declaration from the software vendor.
Additionally, practitioners should be aware that some courts, due to skepticism about technology or vigilance protecting consumers, may be uncomfortable accepting sworn testimony about the reliability of electronic signature technology, especially when faced with a consumer swearing she never signed the agreement. In many cases, it would be helpful to bolster the declaration with other evidence that would tend to support the existence of a contractual relationship. Examples could include inquiries from the consumer about the status of the product purchased, or evidence that the company sent a “welcome” email to the consumer, and the consumer did not respond that it was sent in error.
Although the law states that electronically signed arbitration agreements are enforceable, lawyers defending consumer claims can’t make the assumption that courts will rubber-stamp motions to compel arbitration. Practitioners must be diligent about providing the proper evidence to ensure that agreements are upheld when challenged.
Reprinted with permission from the January 8 issue of The Recorder. ©  ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. The original article can be viewed here.
Top 10 of 2019: The Year’s Most Popular Consumer Law Round-Up Posts
2019 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 2019, the Consumer Law Round-Up published 44 posts on a wide array of topics.
Below is a list of the 10 most popular posts of the year.
#1 Regulators Continue to Focus on the Use of Alternative Data
In a July article published by Law360 (and reprinted in our Consumer Finance Observer periodical), our lawyers highlighted the increasing focus of government enforcement authorities on how companies are using “alternative data” in making consumer credit decisions. For example, the article highlighted that – as stated in a June 2019 fair lending report from the CFPB – “[t]he use of alternative data and modeling techniques may expand access to credit or lower credit cost and, at the same time, present fair lending risks.” Regulators have continued to focus on this area...Read more
#2 Eleventh Circuit Rules: Receiving Text Message Was Not Injury Under the TCPA
The Eleventh Circuit recently decided a case that raised the bar for pleading injury under the Telephone Consumer Privacy Act (TCPA), 47 U.S.C. § 227, noting its disagreement with an earlier decision from the Ninth Circuit on the same issue and creating a possible roadblock for future plaintiff classes seeking to assert claims under the TCPA. In Salcedo v. Hanna, the Eleventh Circuit held that “receiving a single unsolicited text message” in violation of the TCPA was not a “concrete injury” sufficient to confer standing...Read more
#3 New York SHIELD Act Expands Data Security and Breach Notification Requirements
#4 Eighth Circuit Reminds: The First Principle of Arbitration Is Get Consent
On July 25, 2019, New York enacted the Stop Hacks and Improve Electronic Data Security Act (SHIELD Act), which significantly amended the state’s data breach notification law to impose additional data security and data breach notification requirements on covered entities. Under the new law, the definitions of “private information” and “breach of the security system” have been revised in ways that broaden the circumstances that qualify as a data “breach” and could trigger the notification requirements...Read more
In recent years, the Supreme Court has issued many decisions about arbitration, including the enforceability of arbitration agreements and employment agreements that bar classwide arbitration. In July, the Eighth Circuit issued a decision in a case involving those issues, holding that an employment agreement’s arbitration clause mandating individual arbitration was unenforceable. Shockley v. PrimeLending, -- F.3d. --, 2019 WL 3070502 (8th Cir. 2019). The arbitration clause provided that the employee and the company agree to...Read more
#5 En Banc Ninth Circuit Rejects Compelled Commercial Speech Ordinance on First Amendment Ground
On January 21, 2019, 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...Read more
#6 DC Court Again Dismisses Challenge to OCC’s FinTech Charter, Splitting with SDNY
On September 3, 2019, a federal district court in the District of Columbia dismissed, for the second time, a lawsuit brought by the Conference of State Bank Supervisors (CSBS) seeking to block the Office of the Comptroller of the Currency (OCC) from issuing national bank charters to certain non-bank financial technology (FinTech) companies. Conference of State Bank Supervisors v. Office of the Comptroller of the Currency, No. 18-cv-2449, slip op. at 1-6 (D.D.C. Sept. 3, 2019) (CSBS II)...Read more
#7 Crypto Corner – Updates on Cryptocurrency
In the first half of 2019, the “crypto-winter” that had set in during 2018 appeared to see signs of a thaw, albeit with new regulatory developments and controversy continuing to characterize the space. On the regulatory front, the Securities and Exchange Commission (SEC) issued more detailed guidelines for companies seeking to sell digital tokens. The 13-page “Framework for ‘Investment Contract’ Analysis of Digital Assets” provides a detailed analysis of the factors relevant to the Howey test that the SEC uses to determine the existence of a security (and all that designation entails)...Read more
#8 SDNY Decision Blocks National Bank Charters for FinTech
In May, a federal district court in New York handed a win to the New York State Department of Financial Services (DFS) in its long-running, closely watched suit seeking to block the Office of the Comptroller of the Currency (OCC) from issuing national bank charters to non-bank financial technology (FinTech) companies that don’t receive deposits. Judge Victor Marrero denied most of OCC’s motion to dismiss and found the agency’s interpretation of the National Bank Act, 12 U.S.C. § 21 et seq., to be unpersuasive...Read more
#9 Second Circuit Creates Split on Investment Company Act Private Right of Action
In a decision issued on August 5, 2019, the US Court of Appeals for the Second Circuit created a split with other courts, including the Third Circuit, on the issue of whether there is a private right of action for rescission under the Investment Company Act (ICA). The Second Circuit held that, based on the text of the statute and its legislative history, “ICA § 47(b)(2) creates an implied private right of action for a party to a contract that violates the ICA to seek rescission of that violative contract.” Oxford University Bank v. Lansuppe Feeder Inc., No. 16-4061 (2d Cir. Aug. 5, 2019), Slip op. 23...Read more
#10 The CFPB Rolls Out New Regulations for Debt Collection
Zero Calories, Zero Plausibility: Ninth Circuit Affirms Dismissal of “Diet” Soda Class Action
Debt collectors have for years sought guidance on how and when digital messages could be sent to contact consumers. On May 7, 2019, the Consumer Financial Protection Bureau (CFPB) announced a notice of proposed debt collection regulations that would provide that guidance. The new regulations would expand the potential avenues by which debt collectors could contact consumers and would establish a host of other regulations that would alter debt collection practices. The proposed rulemaking announced by the CFPB is more than 500-pages long and would be the first substantive rules...Read more
By: Alexander M. Smith
In 2017, several plaintiffs began bringing lawsuits in California and New York premised on the theory that “diet” sodas — i.e., sodas sweetened with zero-calorie artificial sweeteners rather than sugar — were mislabeled because the sodas falsely suggested they would help consumers lose weight, even though aspartame and other artificial sweeteners are supposedly associated with weight gain. Courts have routinely dismissed these lawsuits on one of two grounds:
Some courts have concluded that this theory of deception is implausible because reasonable consumers understand the term “diet” to mean that the soda has zero calories, not that it will help them lose weight. See, e.g., Geffner v. Coca-Cola Co., 928 F.3d 198, 200 (2d Cir. 2019) (“[T]he “diet” label refers specifically to the drink’s low caloric content; it does not convey a more general weight loss promise.”); Becerra v. Coca-Cola Co., No. 17-5916, 2018 WL 1070823, at *3 (N.D. Cal. Feb. 27, 2018) (“Reasonable consumers would understand that Diet Coke merely deletes the calories usually present in regular Coke, and that the caloric reduction will lead to weight loss only as part of an overall sensible diet and exercise regimen dependent on individual metabolism.”).
Other courts have dismissed these lawsuits on the basis that the scientific literature cited by the plaintiffs does not support a causal relationship between zero-calorie sweeteners and weight gain. See, e.g., Excevarria v. Dr. Pepper Snapple Grp., Inc., 764 F. App’x 108, 110 (2d Cir. 2019) (affirming dismissal of lawsuit challenging labeling of Diet Dr. Pepper, as “[n]one of the studies cited . . . establish a causal relationship between aspartame and weight gain”).
The Ninth Circuit recently joined the chorus of courts that have rejected this theory of deception. In Becerra v. Dr. Pepper/Seven Up, Inc., the district court dismissed a lawsuit alleging that Diet Dr. Pepper was mislabeled as a “diet” soda, both because the plaintiff had not alleged that consumers construed the term “diet” as a representation about weight loss and because the plaintiff had not sufficiently alleged that aspartame is associated with weight gain. On December 30, 2019, the Ninth Circuit issued a published decision affirming the dismissal of this lawsuit. Becerra v. Dr. Pepper/Seven Up, Inc. --- F.3d ----, 2019 WL 7287554 (9th Cir. 2019).
The Ninth Circuit began by explaining that California’s consumer protection statutes require the plaintiff to allege that consumers are “likely to be deceived” — not simply a “mere possibility that Diet Dr. Pepper’s labeling might conceivably be misunderstood by some few consumers viewing it in an unreasonable manner.” Id. at *3. Applying this standard, the Ninth Circuit agreed that the term “diet” was not likely to mislead a reasonable consumer. In so holding, the Ninth Circuit rejected the plaintiff’s reliance on dictionary definitions of the term “diet”; even though this term may imply weight loss when used as a noun, the court explained, it clearly implied that a product was “reduced in or free from calories” when used as an adjective. Id. And while the plaintiff argued that consumers could nonetheless “misunderstand” the term “diet” to suggest weight loss benefits when used in this context, the Ninth Circuit made clear that such “unreasonable assumptions” would not give rise to a plausible claim of deception. Id. at *4. (“Just because some consumers may unreasonably interpret the term differently does not render the use of ‘diet’ in a soda’s brand name false or deceptive.”).
The Ninth Circuit also rejected the plaintiff’s remaining arguments about why consumers might interpret the term “diet” as a representation about weight loss. It held that the use of “attractive, fit models” in its advertisements did not suggest to consumers that drinking Diet Dr. Pepper would “help its consumers achieve those bodies.” Id. It also rejected the plaintiff’s reliance on American Beverage Association blog posts suggesting that consumers associate diet soft drinks with weight loss, as those blog posts “emphasize that other lifestyle changes beyond merely drinking diet soft drinks are necessary to see weight-loss results.” And it likewise rejected the plaintiff’s reliance on a survey showing that consumers expected diet soft drinks to help them lose weight or maintain their current weight: even accepting the survey’s findings at true, the Ninth Circuit nonetheless held that “a reasonable consumer would still understand ‘diet’ in this context to be a relative claim about the calorie or sugar content of the product.” Id. at *4-5. Because the survey “does not address this understanding or the equally reasonable understanding that consuming low-calorie products will impact one’s weight only to the extent that weight loss relies on consuming fewer calories overall,” the Ninth Circuit concluded that it did not support the plaintiff’s claims of deception. Id. at *5.
OCC and FDIC Propose “Madden Fix” Rules to Codify “Valid-When-Made” Principle
By: William S. C. Goldstein
The long-running saga of Madden v. Midland Funding is entering a new phase. Last week, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed rules that would codify the concept that the validity of the interest rate on national and state-chartered bank loans is not affected by the subsequent “sale, assignment, or other transfer of the loan.” See Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 84 Fed. Reg. 64229, (proposed Nov. 18, 2019); FDIC Notice of Proposed Rulemaking, Federal Interest Rate Authority, FDIC (proposed Nov. 19, 2019). Under these rules, an interest rate that is validly within any usury limit for such a bank when it is made would not become usurious if the loan is later transferred to a non-bank party that could not have charged that rate in the first instance.
The proposed rules are a long-awaited response to the Second Circuit’s decision in Madden, which held that a non-bank purchaser of bank-originated credit card debt was subject to New York State’s usury laws. 786 F.3d 246, 250-51 (2d Cir. 2015). In so holding, the Second Circuit cast doubt on the scope of National Bank Act (NBA) preemption, which exempts national banks from most state and local regulation, allowing them to “export” their home state interest rates without running afoul of less favorable usury caps in other states (FDIC-insured state banks are afforded similar protections). Before Madden, it was widely assumed that “a bank’s well-established authority [under the NBA] to assign a loan” included the power to transfer that loan’s interest rate. See Permissible Interest on Loans That Are Sold, 84 Fed. Reg. at 64231. The Madden decision also did not analyze the “valid-when-made” rule, a common law principle providing that a loan that is non-usurious at inception cannot become usurious when it is sold or transferred to a third party. See, e.g., Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 109 (1833) (“[A] contract, which, in its inception, is unaffected by usury, can never be invalidated by any subsequent usurious transaction.”). Madden has been widely criticized by a host of commentators, including the Office of the Solicitor General.
The OCC and FDIC rules aim to remedy the confusion caused by Madden. OCC’s rule “would expressly codify what the OCC and the banking industry have always believed and address recent confusion about the impact of an assignment on the permissible interest.” Permissible Interest on Loans That Are Sold, 84 Fed. Reg. at 64231-64232. Likewise, the FDIC rule would rectify “uncertainty about the ongoing validity of interest-rate terms after a State bank sells, assigns, or otherwise transfers a loan.” Notice of Proposed Rulemaking at 2-3. Both proposals cite Madden as the source of the confusion.
Notably, neither proposal purports to address the emerging “true lender” doctrine, which some courts have used to apply state usury or consumer protection laws to non-bank entities that have partnered with banks in issuing loans and that retain a “predominant economic interest” in the loan. See, e.g., People ex rel. Spitzer v. Cty. Bank of Rehoboth Beach, Del., 846 N.Y.S.2d 436 (N.Y. App. Div. 2007). Under that doctrine, courts look at whether the bank or the third-party was the “true lender” in the first place, taking loans facing a true lender challenge outside the ambit of Madden and the OCC and FDIC fixes. In that regard, the OCC proposal notes simply that “[t]he true lender issue . . . is outside the scope of this rulemaking.” See Permissible Interest on Loans That Are Sold, Fed. Reg. at 64232. The FDIC proposal likewise notes that the new rules do not address true lender issues, but goes on to express support for the concern animating the true lender doctrine: “the FDIC supports the position that it will view unfavorably entities that partner with a State bank with the sole goal of evading a lower interest rate established under the law of the entity’s licensing State(s).” Notice of Proposed Rulemaking at 4.
Comments are due on the OCC rule by January 21, 2020, and on the FDIC rule shortly thereafter.
NIST Releases Final Version of the Big Data Interoperability Framework
By: Alexander N. Ghantous
The National Institute of Standards and Technology (NIST) announced on October 29, 2019, that the final, nine-volume version of the “NIST Big Data Interoperability Framework” (Framework) has been published. The Framework, which was developed by NIST in collaboration with hundreds of experts from an array of industries, provides ways developers can utilize the same data-analyzing software tools on any computing platform. Under the Framework, analysts can transfer their work to different platforms and use more sophisticated algorithms without revamping their environment. This interoperability provides a solution to data scientists who are tasked with analyzing increasingly diverse data sets from a multitude of platforms. Consequently, it could also play a role in solving modern day difficulties that include, but are not limited to, detecting health-care fraud and issues that arise during weather forecasting.
Nat’l Inst. of Standards and Tech., https://www.nist.gov/news-events/news/2019/10/nist-final-big-data-framework-will-help-make-sense-our-data-drenched-age (Oct. 29, 2019).
Big Data, Hedge Funds, Securities Regulation, and Privacy: Mitigating Liability in a Changing Legal Landscape
Consumer Finance Observer – Fall 2019
In an article published by Westlaw Journal Securities Litigation & Regulation, Partners Charles D. Riely and Keisha N. Stanford and Associate Logan J. Gowdey explain that the use of big data to analyze market activity is on the rise. But with the opportunities that big data presents comes a complex regulatory landscape. The authors introduce these issues and offer a starting point for general counsel and chief compliance officers to mitigate risks.
To read the full article, please click here.
Jenner & Block has published its second issue of Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch. As thought leaders, our lawyers write about the consumer finance sector on topics ranging from artificial intelligence, compliance, data security, FinTech, lending and securities litigation.
In the Fall 2019 issue of the CFO, our consumer finance lawyers discuss the use of alternative data; best practices to avoid TCPA wrong-number claims; the OCC’s FinTech Charter; the FTC monitoring of class action settlements; an Eleventh Circuit ruling in a TCPA case; a quick look at HUD’s FHA Lender Annual Certification Statements; FinCen's report on business email scams; and a brief history of the CFPB payday lending rule. Contributors are Amy M. Gallegos, Joseph L. Noga, Michael W. Ross, David P. Saunders and Damon Y. Smith; Associates Gabriel K. Gillett, William S.C. Goldstein, Olivia Hoffman and Katherine Rosoff; and Staff Attorney Alexander N. Ghantous.
To read the full issue, please click here.
FTC Releases Guidance for Social Media Influencers
By: David D. Heckman and Kristen M. Iglesias
On November 5, 2019 the Federal Trade Commission (FTC) released Disclosures 101 for Social Media Influencers, to provide guidance to social media users that recommend or endorse products in their posts, videos or other content (often called ‘influencers’). Influencers have become big business, with millions of followers and payments of tens or even hundreds of thousands of dollars per post. The FTC took action in 2017, sending educational warning letters to influencers and settling charges with two influencers popular in the online gaming community for failing to disclose that they jointly owned a gambling service they endorsed. While the new guidance does not carry the force of law, it provides helpful insight into how the FTC views the issue and will approach enforcement.
The FTC cites the need for disclosure of any “material connections” between the influencer and the brand or product being endorsed. A material connection includes any financial, employment, personal, or family relationship with a brand or product. The guidance specifies that a material connection should be disclosed by an influencer if they are being provided with any free or discounted products or other perks, even if the influencer is reviewing or endorsing a different product made by the same brand. Additionally, the FTC guidance clarifies that influencers should disclose a material connection even if they believe their review of the product is unbiased. Endorsement is similarly broadly defined, to include “tags, likes, pins, and similar ways of showing [the influencer likes] a brand or product.”
When disclosing, influencers are urged to “make sure people will see and understand the disclosure.” The FTC recommends “simple and clear” language such as thanking the company for the free product or using terms like “advertisement,” “ad,” and “sponsored” and recommends avoiding vague terms such as “thanks” and “ambassador” or abbreviated terms such as “sp,” “spon,” or “collab.” During live streams, disclosures should be repeated throughout the video or stream. Disclosures should be made in endorsement videos themselves (ideally both audio and superimposed words), not simply included in the description or post.
Perhaps the most noteworthy items in the guidance were the disclosures likely to be insufficient. The guidance states a disclosure should be placed in a way that is “hard to miss” and notes they are likely to be missed “if they appear only on an ABOUT ME or profile page, at the end of posts or videos, or anywhere that requires a person to click MORE.” Many influencers currently disclose sponsored posts by adding “#ad” or “sponsored” at the end of a post, but the FTC’s new guidance suggests clearer disclosure is required; at minimum, influencers should consider moving “#ad” or “#sponsored” to the beginning of their posts so they are clear and hard to miss.
For more information, see FTC.gov/influencers.
NY Action Against UnitedHealth Algorithm
By: Isabel F. Farhi
On October 25, 2019, the New York State Department of Financial Services (DFS) and Department of Health (DOH) jointly sent a letter to UnitedHealth Group, Inc. (UnitedHealth) calling for the company to address its use of an algorithm it uses to make health care decisions, which a recent study had shown may have a racially discriminatory impact.
Specifically, researchers Ziad Obermeyer, Brian Powers, Christine Vogeli and Sendhil Mullainathan published an article in the periodical Science concerning “Impact Pro,” an algorithm UnitedHealth has used to identify patients who should receive the benefit of “high risk care management,” a service for patients with complex health care needs. According to one source, UnitedHealth licenses this algorithm to hospitals. The Science article describes how one metric the algorithm uses to determine eligibility for the program is the cost of patients’ previous health care. Yet, as the article explains, black patients typically spend less money on health care, in part because of historic barriers to access due to poverty and in part because of historic distrust of doctors. The article concludes that because of these systemic problems with the reliance on historic cost expenditures as an eligibility metric, two patients, one white and one black, with the same illness and complexity of care, could be treated differently when being considered for enrollment in the high risk care management program.
In the wake of this article, DFS and DOH sent a letter to UnitedHealth, calling on the company to act. The letter stated that the New York Insurance Law, the New York Human Rights Law, the New York General Business Law, and the federal Civil Rights Act all protect against discrimination for protected classes of individuals. As described in the letter, that prohibition against discrimination by insurers holds true “irrespective of whether they themselves are collecting data and directly underwriting consumers, or using and developing algorithms or predictive models that are intended to be partial or full substitutes for direct underwriting.” Therefore, it stated, neither UnitedHealth nor any other insurance company may “produce, rely on, or promote an algorithm that has a discriminatory effect.” The letter went on to say that the bias against black patients in the health care system makes such discrimination particularly troubling, such that the algorithm “effectively codif[ies] racial discrimination.” Such an outcome, the letter stated, “has no place in New York or elsewhere.” Therefore the state agencies called on UnitedHealth to immediately investigate the racial impact of the algorithm, and cease using it (or any other algorithm) “if [the company] cannot demonstrate that it does not rely on racial biases or perpetuate racially disparate impacts.”
In a statement to Forbes.com in connection with a story about the algorithm, UnitedHealth said that the algorithm “was highly predictive of cost, which is what it was designed to do” and that gaps in the algorithm, “often caused by social determinants of care and other socio-economic factors, can then be addressed by the health systems and doctor to ensure people, especially in underserved populations, get effective, individualized care.”
As this letter demonstrates, regulators continue to focus their attention on the use of algorithms in making consumer-facing decisions, and may expect companies to affirmatively justify that the algorithms they are using are non-discriminatory.
 Obermeyer et al., Dissecting racial bias in an algorithm used to manage the health of populations, 366 Science 447 (2019), available at https://science.sciencemag.org/content/366/6464/447.
 Erik Sherman, AI Enables Some Massive Healthcare Inequality According To A New Study, Forbes.com (Oct. 30, 2019), https://www.forbes.com/sites/eriksherman/2019/10/30/ai-enables-some-massive-healthcare-inequality-according-to-a-new-study/#70a9b90e3eec.
 Letter from Linda Lacewell, Superintendent, N.Y. State Dep’t of Fin. Servs., & Howard Zucker, M.D., J.D., Comm’r, N.Y. State Dep’t of Health, to David Wichmann, Chief Exec. Officer, UnitedHealth Grp. Inc. (Oct. 25, 2019) (available at https://www.dfs.ny.gov/system/files/documents/2019/10/20191025160637.pdf ).
 Sherman, supra at 2.
 David Bitkower et al., Data-Misuse Enforcement Is Focusing on 3 Key Areas, Law360 (July 23, 2019), https://www.law360.com/articles/1180800/data-misuse-enforcement-is-focusing-on-3-key-areas.
Texas Jury Awards $200 Million In Mobile Banking Patent Dispute
By: Benjamin J. Bradford
On November 6, a jury in the Eastern District of Texas awarded the United Services Automobile Association (USAA) a $200 million verdict finding that Wells Fargo willfully infringed two of USAA’s patents directed to the “auto-capture” process, which is used by banking customers to deposit checks using photographs taken from a mobile phone or other device. (Civ. No. 2:18-cv-00245 (E.D. Tex.)) Based on the finding of willfulness, USAA may be entitled to enhanced damages beyond the $200 million verdict.
Despite the verdict, the fight between Wells Fargo and USAA is still ongoing. Wells Fargo filed patent office challenges to the validity of USAA’s patents, which are still pending before the Patent Trial and Appeals Board, but may not be decided for another 15 months. In addition, Wells Fargo will likely appeal the decision, including a recent denial of summary judgment that found the patents were not invalid under 35 U.S.C. 101. Nevertheless, the verdict against Wells Fargo will likely embolden USAA to assert its patents against other banks and financial institutions that use an “auto-capture” process.
The Intersection of the California Consumer Privacy Act and California’s Preexisting Consumer Protection Statutes
By Kate T. Spelman
With the close of the California state legislative session on Sept. 14, 2019, the final shape of the California Consumer Privacy Act (CCPA)—which is set to take effect on Jan. 1, 2020—came into focus. The most recent amendments included carve-outs for business-to-business contracts and employee records, though both sunset after a year. While the statutory language is settled for now, many questions remain about how it will be enforced. The Attorney General has issued proposed regulations clarifying some of this uncertainty. However, one issue that may be left for future judicial interpretation is the interplay between the CCPA and California’s preexisting consumer protection statutes such as the Unfair Competition Law (UCL) and the Consumer Legal Remedies Act (CLRA). As discussed below, the CCPA contains an explicit prohibition, along with implicit safe harbors, likely to limit certain UCL and/or CLRA claims related to the use or disclosure of information subject to the CCPA.
The CCPA Likely Bars Derivative UCL Claims
The CCPA provides for enforcement by the Attorney General, but §1798.150(a) creates a private right of action for consumers whose personal information “is subject to an unauthorized access and exfiltration, theft, or disclosure as a result of the business’s violation of the duty to implement and maintain reasonable security procedures and practices.” Despite several legislative attempts to broaden the private right of action—which were supported by California’s Attorney general—it is currently limited to “violations as defined in subdivision (a),” precluding CCPA claims related to violations of other statutory provisions. (Notably, the CCPA contains no express provision permitting attorney fees for prosecution of claims under §1798.150, though plaintiffs’ attorneys may argue that such fees should be awarded as “other relief the court deems proper” (§1798.150(a)(1)(C)), or pursuant to the private attorney general attorney fee statute, CCP §1021.5.)
Given the narrow private right of action in the CCPA, consumers may seek an indirect route to CCPA liability under the “unlawful” prong of the UCL, which prohibits business practices that violate another law. However, §1798.150(c) of the CCPA states that “[n]othing in this title shall be interpreted to serve as the basis for a private right of action under any other law.” While California courts have held that the absence of a statutory private right of action does not preclude derivative UCL liability, a plaintiff may not “plead around an absolute bar to relief simply by recasting the cause of action as one for unfair competition.” Cel-Tech Commc’ns v. Los Angeles Cellular Tel. Co., 20 Cal. 4th 163, 182 (1999) (emphasis added). In other words, statutes that explicitly preclude private rights of action cannot be enforced through the UCL. For this reason, courts have rejected UCL “unlawful” claims where, for example, the predicate statute expressly exempted the defendants from liability for the alleged violation at issue, or stated that it was “not intended to create new civil causes of action.” Hobby Indus. Assn. of Am. v. Younger, 101 Cal. App. 3d 358, 370 (1980); LegalForce RAPC Worldwide P.C. v. UpCounsel, No. 18-02573, 2019 WL 160335, at *16 (N.D. Cal. Jan. 10, 2019). The CCPA’s admonition that the statute not be interpreted to “serve as the basis for a private right of action under any other law” is a strong basis on which a court could preclude UCL claims based on the same rationale.
Separate and apart from the statutory bar, consumers may lack standing to seek redress under the UCL for violations of the CCPA. This is because the UCL requires proof that a plaintiff “has lost money or property as a result of the unfair competition” (Cal. Bus. & Prof. Code §17204), and a plaintiff may need to allege something more than, for example, the unlawful collection or sale of her personal information to satisfy this requirement.
The CCPA May Provide ‘Safe Harbor’ Protections Against Other Consumer Protection Claims
Even assuming a bar against UCL “unlawful” claims based on express CCPA violations, consumers may assert UCL or CLRA claims based on allegedly unfair or deceptive conduct related to the collection, sale, or disclosure of personal information when such conduct does not directly violate the CCPA. In those cases, compliance with the CCPA could defeat UCL or CLRA claims that implicate conduct permitted by the CCPA or its implementing regulations, since the California Supreme Court has held that “[w]hen specific legislation provides a ‘safe harbor,’ plaintiffs may not use the general unfair competition law to assault that harbor.” Cel-Tech Commc’ns, 20 Cal. 4th at 182; see also Alvarez v. Chevron, 656 F.3d 925, 934 (9th Cir. 2011) (safe harbor provisions of California regulations prohibited CLRA claim). For example, a UCL or CLRA claim related to a business’ allegedly deceptive sale of consumers’ personal information to third parties may be barred by the business’s provision of a “clear and conspicuous” opt-out link on its Internet homepage in compliance with CCPA §1798.135(a). Additionally, a UCL or CLRA claim related to a business’ practice of charging more to consumers who prohibit that business from selling their personal information may be precluded if the difference is “reasonably related to the value provided to the business by the consumer’s data,” as permitted by CCPA §1798.125.
Thus, while the CCPA imposes new and arguably stringent requirements for businesses handling personal information, compliance with those requirements could provide protection against UCL and CLRA lawsuits regarding the allegedly deceptive treatment of consumers’ personal information.
Reprinted with permission from the November 5 issue of The Recorder. ©  ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. The original article can be viewed here.
California Attorney General Issues Proposed CCPA Guidelines
By: David P. Saunders
On October 10, 2019, the California Attorney General surprised many by issuing 24 pages of proposed regulations implementing the California Consumer Privacy Act of 2018 (CCPA). After reviewing the proposed regulations, they have left many in the industry shaking their heads. Absent from the proposed regulations is much of the clarity that industry participants were hoping for. In its place are additional obligations that not only risk confusing consumers, but that likely will pose administrative and logistical challenges.
Public comment on the proposed regulations is open through 5:00 pm PST on December 6, 2019. Interested parties can submit comments by e-mail to PrivacyRegulations@doj.ca.gov or by mailing comments to the Privacy Regulations Coordinator, California Office of the Attorney General, 300 South Spring Street, First Floor, Los Angeles, CA 90013. Additionally, the Attorney General will be holding four public hearings on the new proposed regulations, the schedule of which is available here.
In the meantime, let us examine the proposed regulations...
To read the full client alert, please click here.
FinCEN Has Eye on Sports Betting, Crypto Money Laundering Risks
In an article published by Bloomberg, Partners Reid J. Schar and Wade A. Thomson and Associate E.K. McWilliams highlight a recent speech by the director of the Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury Department. Speaking at an anti-money laundering conference in Las Vegas, FinCEN Director Kenneth A. Blanco affirmed the Department’s commitment to enforcing the Bank Secrecy Act on casinos and other businesses that deal in cryptocurrency. The authors give context to the speech and discuss its implications for brick-and-mortar and online gaming establishments.
To read the full article, please click here.
California Enacts AB 5, Gig Worker Bill
By: Amy Egerton-Wiley
On September 18, 2019, Governor Gavin Newsom signed Assembly Bill 5 (AB 5) into law, which is intended to reclassify many of the state’s independent contractors as employees. Proponents of the bill claim that the bill rectifies misclassification of employees as independent contractors. Opponents, which include both workers and companies, note the importance of the flexibility of independent contractors and worry about the increased costs to consumers.
This bill largely codifies the “ABC” test established by the California Supreme Court in Dynamex v. Superior Court, 4. Cal. 5th 903 (2018). Under the ABC test, a worker must be classified as an employee (versus an independent contractor) unless the hiring entity can establish:
(A) that the worker is “free from the control and direction of the hiring entity in connection with the performance of the work,”
(B) that the worker “performs work that is outside the usual course of the hiring entity's business,” and
(C) that the worker is “customarily engaged in an independently established trade, occupation, or business.”
Dynamex, 4 Cal. 5th at 964.
AB 5 expands the ABC test to certain areas not explicitly subject to Dynamex, such as reimbursements for expenses incurred in the course of employment. Of course, companies that rely on independent contractors will be impacted by this legislation.
While AB 5 will not take effect until January 1, 2020, it may impact ongoing litigation, such as the San Diego City Attorney’s recent lawsuit against the grocery delivery service Instacart, which alleges that the company misclassified workers as independent contractors. And it remains to be seen whether the law will be subject to a challenge via referendum or in the courts.