Jenner & Block

Consumer Law Round-Up

March 20, 2019 Facebook Announces New Privacy Initiative

By Emily A. Bruemmer

Smartphone computerOn March 6, 2019, Facebook CEO Mark Zuckerberg announced via an interview and a Facebook blog post a planned shift to “building a privacy-focused messaging and social networking platform.”  Characterizing this shift as a “privacy-focused vision,” Zuckerberg said that this change in focus meant that Facebook and Instagram would not only function as “the digital equivalent of a town square” but also “the digital equivalent of the living room.”  This shift was billed in part as a response to user demand: according to the post, the “fastest growing areas of online communication” were private messaging, “ephemeral stories,” and small group communication. 

According to the blog post, Facebook’s “privacy-focused platform” will be based on six principles: private interactions, encryption, reducing permanence, safety, interoperability, and secure data storage.  “Interoperability” refers to Facebook’s plan to integrate its messaging services across Facebook Messenger, WhatsApp, and Instagram Direct.  The blog post did not provide much detail on what these principles would mean in practice or what changes users would see from an experiential perspective, but rather qualified its efforts as being in the “early stages.”  

The blog post acknowledged Facebook’s reputation for not building “privacy protective services.”  In 2011, Facebook entered into a consent decree with the Federal Trade Commission (FTC) related to its privacy practices and has continued to face criticism for its privacy and data protection practices.  Indeed, just a few days prior to the announcement, news reports circulated regarding the ability to look up individuals on Facebook based on their telephone numbers, despite Facebook’s statements to users when they provided their telephone numbers that the number would be used for two-factor authentication.  Reports last year led to Facebook’s confirmation that the telephone numbers are also used for advertising. 

Some legislators and regulators have expressed concerns about information sharing between Facebook’s services. Last month, the German antitrust regulator issued a decision restricting Facebook from sharing information between services in the absence of users’ voluntary consent.  Facebook announced that it planned to appeal the decision.

CATEGORIES: Privacy Data Security

PEOPLE: Emily A. Bruemmer

March 15, 2019 CFPB Releases Winter Supervisory Highlights Report

By Alexander M. Smith

AutoEarlier this month, the Consumer Financial Protection Bureau (CFPB) released the latest iteration of its Supervisory Highlights report, which summarizes some of the CFPB’s recent supervisory examinations and provides guidance to industry about practices to avoid.  The CFPB’s Supervisory Highlights report notes that the CFPB has recently examined the following practices:

  • Automobile Loan Servicing.  The CFPB has recently conducted examinations of captive automotive finance companies for unfair and deceptive acts and practices (UDAAPs) involving rebates for extended automobile warranties.  Typically, when a lessee purchases an extended warranty for a leased car and the car is a total loss, the lessee is entitled to a pro-rated rebate of the premium amount for the un-used portion of the warranty; the rebate is applied first to any deficiency balance on the lease, and the balance is returned to the lessee.  The CFPB found that some automotive finance companies had engaged in UDAAPs by (1) failing to apply the rebate to the deficiency balance or artificially deflating the value of the rebate (for instance, by overstating the number of miles on the car) and then (2) attempting to collect on the inflated deficiency balance.
  • Bank Debiting Practices.  The CFPB found that some banks had inaccurately represented that debits made through an online bill-pay service would occur on a given date, even though they might occur earlier than the stated date (for instance, if a payee only accepted a paper check).  In some instances, this caused consumers to suffer overdraft fees because there was insufficient money to cover the debit on the earlier date.
  • Mortgage Servicing.  The CFPB found that some mortgage servicers had unlawfully charged consumers fees that were not authorized by their mortgage loans, failed to cancel private mortgage insurance when the loan-to-value ratio dipped below 80%, failing to exercise “reasonable diligence” in processing loss mitigation applications, and failed to provide necessary documentation to the successors-in-interest to borrowers who obtained a home equity conversion mortgage (a type of HUD-insured reverse mortgage).

The CFPB also noted that it had brought five public enforcement actions against payday lenders and other financial institutions relating to a variety of unlawful practices, including debiting consumers’ bank accounts without authorization, furnishing inaccurate information to credit reporting agencies, failing to make required disclosures to consumers, and improperly threatening to initiate debt collection actions.

PEOPLE: Alexander M. Smith

February 22, 2019 CSBS Releases Recommendations for FinTech Regulators

By Camila A. Connolly

New-Update-IconOn February 12, the Conference of State Bank Supervisors (CSBS) released its Fintech Industry Advisory Panel Recommendations.  CSBS is a national organization of financial regulators from around the United States, Guam, Puerto Rico, American Samoa, and the US Virgin Islands. The recommendations are designed to improve the use of regulatory technology and harmonize regulatory standards throughout the United States.  The recommendations include a plan to develop a model state law for MSBs and to standardize licensing requirements.  The panel also recommended a pilot program for building a uniform state licensing examination.  Overall, the recommendations seek to create uniformity in state FinTech licensing and regulation.  To aid in the harmonizing process, the panel recommends creating repositories of the different state laws and licensing requirements so that financial companies can access all necessary regulations at once.  CSBS includes these recommendations as part of a broader effort to streamline state FinTech regulation called Vision 2020.  Read the full list of recommendations here.

CATEGORIES: FinTech

PEOPLE: Camila A. Connolly

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