Jenner & Block

Consumer Law Round-Up

July 31, 2020 RIP “White” Chocolate Litigation (2012-2020)

By: Alexander M. Smith 

White chocolateWhile some varieties of food labeling lawsuits (such as lawsuits challenging the labeling of “natural” products) show no sign of dying off, other trends in food labeling litigation have come and gone. Last year, for example, appeared to mark the end of lawsuits challenging the labeling of zero-calorie beverages as “diet” sodas. And this year may witness the end — or, at least, the beginning of the end — of lawsuits challenging the labeling of “white” candy that is not technically “white chocolate,” at least as the FDA defines that term.

Although it is difficult to pinpoint the beginning of “white” chocolate litigation, the leading case for many years was Miller v. Ghirardelli Chocolate Co., 912 F. Supp. 2d 861, 864 (N.D. Cal. 2012). There, the court declined to dismiss a lawsuit challenging the labeling of Ghirardelli’s “Classic White” baking chips. The court concluded that the plaintiff had plausibly alleged that a variety of statements on the packaging — including “Classic White,” “Premium,” “Luxuriously Smooth and Creamy,” “Melt-in-Your-Mouth-Bliss,” and “Finest Grind for Smoothest Texture and Easiest Melting” — collectively misled the plaintiff into believing that the product was made with “real” white chocolate, even though it was not. Id. at 873-74. Emboldened by this decision, plaintiffs in California, New York, and elsewhere began filing a wave of similar class actions challenging the labeling of “white” chocolate, baking chips, and other candy. Since the beginning of this year, however, courts have begun dismissing “white” chocolate lawsuits with increasing frequency.

In Cheslow v. Ghirardelli Chocolate Co., for example, the plaintiffs — like the plaintiffs in Miller — challenged the labeling of Ghirardelli Classic White Premium Baking Chips as misleading. --- F. Supp. 3d ---, 19-7467, 2020 WL 1701840, at *1 (N.D. Cal. Apr. 8, 2020). Although the plaintiffs alleged that the product’s labeling misled them into believing that the product contained white chocolate, the court found this theory of deception implausible and dismissed the complaint. In reaching that conclusion, the court noted that the labeling did not include the terms “chocolate” or “cocoa” and that the term “white” referred to the color of the chips, rather than the presence of white chocolate or the quality of the chips. Id. at *4-5. Much as the term “white wine . . . does not inform the consumer whether the wine is a zinfandel or gewürztraminer,” the court reasoned that the adjective “white” was not probative of whether the chips contained white chocolate. Id. at *5. Likewise, even if some consumers might misunderstand the term “white” to refer to white chocolate, the court concluded that this would not salvage the plaintiffs’ claims; according to the court, the fact that “some consumers unreasonably assumed that ‘white’ in the term ‘white chips’ meant white chocolate chips does not make it so.”  The court also rejected the plaintiffs’ remaining theories of deception: it concluded that the term “premium” was non-actionable puffery (id. at *5-6); it held that the image of white chocolate chip macadamia cookies on the package did not “convey a specific message about the quality of those chips” (id. at *7); and it held that consumers could not ignore the ingredients list, which made clear that the product did not include white chocolate and resolved any ambiguity about its ingredients (id. at *7-8). And while the plaintiffs attempted to amend their complaint to bolster their theory of deception, the court concluded that their new allegations — including a summary of a survey regarding consumer perceptions of the labeling — did not render their theory any more plausible and dismissed their lawsuit with prejudice. See Cheslow v. Ghirardelli Chocolate Co., --- F. Supp. 3d ----, 2020 WL 4039365, at *5-7 (N.D. Cal. July 17, 2020).

Likewise, in Prescott v. Nestle USA, Inc., the court concluded that the labeling of Nestle Toll House Premier White Morsels would not “deceive a reasonable consumer into believing that the Product contains white chocolate,” particularly given that “the Product’s label does not state that it contains white chocolate or even use the word ‘chocolate.’” No. 19-7471, 2020 WL 3035798, at *3 (N.D. Cal. June 4, 2020). As in Cheslow, the court concluded that “[n]o reasonable consumer could believe that a package of baking chips contains white chocolate simply because the product includes the word ‘white’ in its name or label,” and it held that some “consumers’ subjective opinions that Nestle’s labeling is misleading” did not render their allegations plausible. Id. at *4.  And the court likewise concluded that “Nestle’s use of the word ‘premier’ on the label of its ‘Toll House Premier White Morsels’ is mere puffery that cannot form the basis of a claim under the reasonable consumer standard . . . .” Id.

And most recently, in Rivas v. Hershey Co., the court concluded that the plaintiff could not plausibly allege that the labeling of “Kit Kat White” candy bars misled consumers into believing that they contained white chocolate. No. 19-3379, 2020 WL 4287272, at *4-6 (E.D.N.Y. July 27, 2020). Although the court dismissed the lawsuit on jurisdictional grounds, it reached the merits of the plaintiff’s claims in determining that amendment would be futile because the phrase “Kit Kat White” was not even conceivably misleading. In so holding, the Court emphasized that, “[c]rucially, there is no statement anywhere on Kit Kat White’s packaging . . . that describes the product as containing white chocolate.” Id. at *5. Instead, the court reasoned, the term “white” was simply a “modifying adjective” that described the bars as “white in color.” Id. And even if Kit Kat White bars are displayed next to Kit Kat bars that contain real chocolate, the court concluded that a reasonable consumer would not therefore conclude that they also contained white chocolate—particularly given that the labeling describes the product as “crisp wafers in crème.” Id.

It is possible, of course, that the Second or Ninth Circuits may weigh in and conclude — like the court in Miller — that the labeling of these “white” candy products plausibly suggests that they contain white chocolate. But the recent flurry of opinions dismissing these lawsuits may nonetheless suggest that the trend of “white chocolate” litigation is coming to an end.

PEOPLE: Alexander M. Smith

July 24, 2020 SEC and CFTC Actions Against Cryptocurrency App Developer for Unregistered Security-Based Swaps Highlight Risks for Fintech Companies

By: Charles D. Riely and Michael F. Linden

FintechA recent enforcement action by the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) in the Fintech space serves as a cautionary tale for innovators who fail to heed traditional regulations. On July 13, 2020, the SEC and CFTC each filed settled enforcement actions against California-based cryptocurrency app developer Abra and its related company, Plutus Technologies Philippines Corporation. Abra’s bold idea was to provide its global users with a way to invest in blue-chip American securities, all funded via Bitcoin. In executing this idea, Abra took pains to focus its products outside of the United States and hoped to avoid the ambit of US securities laws. As further detailed below, however, the SEC and CFTC both found that Abra’s new product violated US laws. This post details Abra’s product, why the regulators came to the view that the new idea ran afoul of long-established provisions under federal securities and commodities laws, and the key takeaways from the regulators’ actions.

  1. Abra’s Product

In 2018, Abra began offering users synthetic exposure, via Bitcoin, to dozens of different fiat currencies and a variety of digital currencies, like Ethereum and Litecoin. Users could fund their accounts with a credit card or bank account, and Abra would convert those funds into Bitcoin. When a user wanted exposure to a new currency, the user would choose the amount of Bitcoin he or she wanted to invest, Abra would create a “smart contract” on the blockchain memorializing the terms of the contract, and the value of the contract would move up or down in direct relation to the price of the reference currency.

In February 2019, Abra announced that it planned to expand its business to provide synthetic exposure to US stocks and ETF shares, rather than just currencies. Abra advertised that users could enter into smart contracts to invest in their chosen stocks and ETFs. For example, Abra said in a blog post that:

[I]f you want to invest $1,000 in Apple shares you will place $1,000 worth of bitcoin into a contract. As the price of Apple goes up or down versus the dollar, bitcoin will be added to or subtracted from your contract. When you settle the contract – or sell the Apple investment – the value of the Apple shares will be reflected in bitcoin in your wallet which can easily be converted back to dollars, or any other asset for that matter.

Abra said it planned to hedge the smart contracts by purchasing—in the US securities markets—the actual securities referenced in a given contract.

  1. The Securities and Commodities Law Violations

The SEC’s cease-and-desist order found that the contracts Abra offered were swaps because they tracked the value of the underlying securities without also conveying any ownership in those securities. Abra did not set any asset requirements to enter into these swaps, nor did it make any effort to confirm the identity or financial resources of its customers, including whether those customers were “eligible contract participants,” as defined by the securities laws. More than 20,000 people joined the waitlist to buy swaps from Abra. After being contacted by the SEC and CFTC in February 2019, Abra shut down the swaps project before it went live and removed mention of it from its website.

In May 2019, however, Abra rebooted the project, this time limiting offers to non-U.S. persons and making Plutus, Abra’s related Filipino company, the counterparty to the swaps, apparently under the belief that doing so would avoid exposure to U.S. securities laws. While the app was run via Asian servers and Abra’s website was coded to show the swap opportunity only to users outside the United States, California continued to be Abra’s brain center. Employees in California designed the details of the contracts—including prices—sought out investors, marketed the swaps, and hedged the contracts by actually purchasing the underlying securities. Though Plutus was the legal party to the swaps, Abra lent it the hedging money.

Abra and Plutus ultimately sold more than 10,000 swaps, including a small number to customers in the United States, despite efforts to avoid doing so. The SEC’s order found that Abra and Plutus violated Section 5(e) of the Securities Act of 1933 —which prohibits offers to sell security-based swaps to any person who is not an eligible contract participant without an effective registration statement—when they marketed and sold swaps to thousands of unidentified customers without a registration statement in place. For similar reasons, the order found that Abra and Plutus also violated Section 6(1) of the Securities Exchange Act of 1934, which prohibits effecting security-based swaps with a person who is not an eligible contract participant, unless the transaction is effected on a national securities exchange.

The CFTC order similarly found that from December 2017 to October 2019, Abra entered into thousands of digital-asset and foreign currency-based smart contracts via its app. Those contracts, according to the CFTC, constituted swaps under the Commodity Exchange Act (CEA). Because Abra offered these swaps to persons who were not eligible contract participants, and did so outside of a board-of-trade-designated contract market, the swaps violated Section 2(e) of the CEA. Further, in soliciting and processing the swaps, Abra violated Section 4(d)(a)(1) of the CEA by operating as a futures commission merchant without registering with the CFTC.

Key Takeaways

In bringing the action, the SEC and CFTC also emphasized the messages they hoped the filing of the action would send: namely that it was important that Fintechs comply with the relevant laws as they seek to bring innovative products to the market. In filing the action, the SEC emphasized that parties could not avoid the reach of the securities laws easily when key parts of their operations occurred in the US. In the press release announcing the action, Dan Michael, the head of the Complex Financial Instrument, said, “businesses that structure and effect security-based swaps may not evade the federal securities laws merely by transacting primarily with non-U.S. retail investors and setting up a foreign entity to act as a counterparty, while conducting crucial parts of their business in the United States.” For its part, in its press release, the CFTC emphasized that it would continue to focus on ensuring responsible development of digital products. As stated by the CFTC’s Enforcement Director, “Rooting out misconduct is essential to furthering the responsible development of these innovative financial products.”

CATEGORIES: FinTech

PEOPLE: Charles D. Riely, Michael F. Linden

July 13, 2020 OCC Adopts Final Rule Rejecting Madden

By: Michael W. Ross, Williams S.C. Goldstein, Amy Egerton-Wiley and Maria E. LaBella

LoanLast month, the Office of the Comptroller of the Currency’s (OCC) adopted a final rule clarifying that the terms of a national bank’s loans remain valid even after such loans are sold or transferred.  The rule was intended to reject the Second Circuit’s decision in Madden v. Midland Funding 786 F.3d 246 (2015).  The Federal Deposit Insurance Corporation (“FDIC”) followed suit later in the month, adopting a rule to clarify that interest rates on state bank-originated loans are not affected when the bank assigns the loan to a nonbank.  These steps do not resolve all of the uncertainty surrounding the decision, as discussed further below.

  1. The Madden v. Midland Funding

In Madden v. Midland Funding, Saliha Madden, a New York resident, contracted with Bank of America for a credit card with a 27% interest rate.  That rate exceeded the 25% usury cap under New York law.  But, as a national bank, Bank of America believed that it was entitled to “export” the interest rate of Delaware, its place of incorporation, under the National Bank Act and attendant principles of federal preemption.  By the time Madden defaulted, the balance had been acquired by Midland Funding, a debt collector headquartered in California.  When Midland Funding tried to collect the debt at the 27% interest rate, Madden sued under New York usury laws.  She argued that Midland could not take advantage of Bank of America’s interest-rate exportation.

The Second Circuit ruled in favor of Madden, holding that the National Bank Act’s preemption of state usury law did not apply to Midland because it is not a national bank.  The decision generated considerable uncertainty in the lending market, which had operated under the assumption that the applicability of the National Bank Act’s preemption of state usury law turned on the identity of the loan originator.  This assumption was rooted in the century-old common law doctrine that a loan which is “valid when made” cannot become usurious by virtue of a subsequent transaction.

  1. The OCC Rule Rejecting Madden.

On June 2, the OCC adopted a final rule rejecting the Madden decision.  See Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 85 Fed. Reg. 33,530 (June 2, 2020) (to be codified at 12 C.F.R. pts. 7 & 160).  The rule, which fully adopted the OCC’s November 2019 proposed rule, states that interest rates on a loan issued by a national bank are not affected when the bank assigns the loan to a third party.  In its analysis, the OCC cites “valid when made” principles but notes that it does not do so “as independent authority for this rulemaking but rather as tenets of common law that inform its reasonable interpretation of section 85 [of the National Bank Act.]”  

The OCC rule unmistakably rejects Madden’s holding that a bank’s transfer of a loan can affect the validity of the loan’s interest rate, and reaffirms the “valid when made” doctrine that the Madden court failed to address.

  1. Opposition to the OCC’s Rule.

Commentators raised three main objections to the OCC’s rule.  First, some commentators questioned the OCC’s authority to issue the rule.  The OCC took the position that the Chevron doctrine allows it to interpret the National Bank Act’s silence on the effect of a national bank assigning loans to a third party.  Second, others argued that the rule could promote predatory lending. The OCC rejected this argument as well, affirming its “strong” opposition to predatory lending practices, and pointing to earlier OCC guidance on managing third-party relationships. Third, some argued that the rulemaking did not comply with Administrative Procedure Act requirements.  The OCC disagreed.

Notable among the rule’s opponents were 22 State Attorneys General, who lamented that the rule would “expand the availability of exploitative loans that trap borrowers in a never-ending cycle of debt.” Others voiced support for the rule, applauding the certainty it provides for banks and other loan market participants.

  1. Ambiguities Moving Forward.

The rule does not resolve all of the confusion surrounding Madden. Most notably, it expressly does not address the separate issue of how to determine when a bank is the “true lender” of a loan.  Specifically, in determining whether state usury or consumer protection laws apply to lending decisions involving nonbank entities, some courts have asked whether a bank or a nonbank lender has the “predominant economic interest” in a loan.  If the nonbank has the predominant economic interest in the loan, courts applying this doctrine will treat the nonbank as the “true lender,” even if the loan technically originated on the bank’s balance sheet.  In its notice of proposed rulemaking back in November 2019, the OCC noted simply that “[t]he true lender issue . . . is outside the scope of this rulemaking.”

Additionally, the scope and effect of the OCC’s rule remain uncertain.  As noted, some objectors stated that it did not comply with the Administrative Procedure Act, which could be the subject of future challenges.  And future litigation may be required to resolve the inconsistency between the rule and Madden.[1]  Specifically, courts may be asked to decide whether the OCC is entitled to deference in its interpretation of the National Bank Act, particularly given the Second Circuit’s Madden decision.

  1. An Analogous Move by the FDIC

On June 25, the FDIC took a similar step to clarify that interest rates on state bank-originated loans are not affected when the bank assigns the loan to a nonbank.  It finalized a rule identical to the OCC’s for loans originated and sold by state banks (rather than national ones).  As a result, the “valid when made” doctrine is now codified—at least as an administrative matter—for all state and federally chartered depository institutions.  Whether there will be challenges to these rules remains to be seen.

 

[1] A Colorado court, for example, recently discounted the OCC’s proposed rule, instead expressly adopting Madden’s analysis. See Fulford v. Marlette Funding, LLC, No. 2017-cv-0376 (Colo. Dist. Ct. June 9, 2020).  However, it is unclear whether the court realized the OCC rule had become final, as it wrote that “the rule proposals are not yet law and the Court is not obligated to follow those proposals.” Id.

PEOPLE: Michael W. Ross, Amy Egerton-Wiley

June 25, 2020 Update on the PPP Litigation Landscape

By: Michael W. Ross and Jacob D. Alderdice

COVID19The implementation of the Paycheck Protection Program (PPP) under Title I of the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) amidst the COVID-19 economic downturn has spawned a growing cottage industry of litigation, including several waves of cases against different defendants—primarily bank and non-bank lenders, and the United States Small Business Administration (SBA).  The nature of the cases has varied.  In the first cases filed, borrowers excluded from PPP sued banks for imposing additional restrictions on their applications, and for prioritizing bigger, institutional clients.  The second wave of lawsuits saw different categories of borrowers, such as companies owned by borrowers with criminal records, companies in bankruptcy, and others, suing the SBA for excluding them from the program entirely.  Finally, the latest round of cases involve financial services firms, accountants, and other borrowers’ agents initiating class actions against lenders for the failure to pay agent fees to those parties.  These three “waves” encompass the bulk of PPP litigation to date, but there have been some lawsuits of other varieties as well, including at least one civil enforcement action by the Federal Trade Commission alleging unfair and deceptive practices.[1]

In a prior update, we described one of the first court rulings in the PPP cases, in which on April 13, a federal district court in Maryland denied relief to a borrower who had sued Bank of America for imposing its own eligibility requirements on PPP borrowers.  See Profiles, Inc. v. Bank of Am. Corp., No. CV SAG-20-0894, 2020 WL 1849710, at *1 (D. Md. Apr. 13, 2020).  The court held that the CARES Act did not authorize a private right of action for borrowers to sue private lenders, and that the Act permitted banks to impose their own lending restrictions.  Soon after, a California federal court denied relief in a similar suit, denying a temporary restraining order for borrowers alleging that JPMorgan Chase and other large banks improperly accepted PPP applications from only existing customers.  Legendary Transp., LLC v. JPMorgan Chase & Co., No. 220CV03636ODWGJSX, 2020 WL 1975366, at *2 (C.D. Cal. Apr. 24, 2020).  Although no court has yet ruled in favor of borrowers in this type of lawsuit, similar lawsuits have continued to be filed and remain pending, alleging violations of state laws.[2]

By contrast, borrowers excluded from PPP by SBA regulations have had some early successes in lawsuits against the SBA.  These lawsuits have challenged an array of rules and regulations that the SBA has issued in its implementation of the CARES Act.  While the majority of the courts that have issued opinions in these cases have sided with the plaintiffs,[3] the SBA has scored some initial victories as well,[4] and several key cases remain pending.[5]

Finally, plaintiffs have more recently brought several class actions against bank and non-bank lenders alleging that the lenders violated the CARES Act and various state laws by not paying them “agent fees” when those plaintiffs allegedly assisted borrowers in applying for the loans.  These claims allege a wide array of state law claims, but the primary complaint is that in implementing the PPP, the SBA allegedly required lenders to pay fees to agents who assisted in facilitating borrower loan applications.[6]  There have been over a dozen such lawsuits filed in various courts across the country, and plaintiffs in several of the cases have moved to consolidate the cases before the Judicial Panel on Multidistrict Litigation.[7]  Courts have yet to speak to the merits of these claims.

 

[1] See Federal Trade Commission v. Ponte Investments, LLC et al, No. 1:20-cv-0017 (D.R.I.) (filed April 17, 2020) (alleging that the defendants deceptively represented themselves as a direct lender for PPP when they were not); Beechwood Lakeland Hotel, LLC v. U.S. Bank NA,, No. 8:20-cv-01022 (M.D. Fla.) (filed May 1, 2020) (later dismissed voluntarily); Beechwood Plaza Hotel of Appleton, LLC et al. v. Wilmington Trust, NA, No. 1:20-cv-03424 (filed May 1, 2020) (later dismissed voluntarily).

[2] See, e.g., KPA Promotions & Awards, Inc. et al. v. JPMorgan Chase & Co., et al., No. 1:20-cv-3910 (S.D.N.Y.) (filed May 19, 2020) (alleging that bank defendants committed unfair business practices under New York law by, among other things, “prioritizing the processing of larger loans over smaller loans” and providing “preferential ‘concierge’ treatment for their wealthiest clients”); Karen’s Custom Grooming LLC v. Wells Fargo & Company, No. 20-cv-0956 (S.D. Cal.) (filed May 22, 2020) (alleging on behalf of a class that Wells Fargo violated state consumer protection laws by prioritizing larger clients, among other acts of malfeasance).

[3] See, e.g., In re: USA Gymnastics, No. 18-09108-RLM-11 (Bankr. S. D. Ind. Jun. 12, 2020) (holding that it was arbitrary and capricious for the SBA to exclude debtor from the PPP) (Jenner & Block LLP as counsel for debtor); In re Gateway Radiology Consultants, P.A., No. 8:19-BK-04971-MGW, 2020 WL 3048197, at *11 (Bankr. M.D. Fla. June 8, 2020) (enjoining the SBA’s exclusion of bankruptcy debtors from the PPP as to debtor); DV Diamond Club of Flint, LLC v. United States Small Business Administration, No. 20-CV-10899, 2020 WL 2315880 (E.D. Mich. May 11, 2020) (granting preliminary injunction against SBA enjoining its exclusion of plaintiff strip clubs from PPP); Camelot Banquet Rooms, Inc. v. United States Small Business Administration, No. 20-C-0601, 2020 WL 2088637 (E.D. Wis. May 1, 2020) (same).

[4] See, e.g., In re Penobscot Valley Hosp., No. 19-10034, 2020 WL 3032939, at *9 (Bankr. D. Me. June 3, 2020) (holding that the SBA could exclude bankruptcy debtors from PPP); Am. Ass'n of Political Consultants v. United States Small Bus. Admin., No. CV 20-970, 2020 WL 1935525, at *3 (D.D.C. Apr. 21, 2020) (denying plaintiff’s motion for injunctive relief challenging SBA’s exclusion of political lobbyists, but only considering constitutional claims).

[5] See, e.g., Defy Ventures, Inc. et al. v. United States Small Business Administration et al., No. 1:20-cv-01838-CBB (D. Md.) (alleging that SBA cannot exclude individuals and businesses from PPP on the basis of having criminal records) (Jenner & Block LLP as counsel for the plaintiffs); Admiral Theater, Inc. v. United States Small Business Administration, et al., No. 1:20-cv-02807 (N.D. Ill.) (alleging that the SBA cannot exclude the plaintiff gentlemen’s club from the PPP).

[6] See James Quinn d/b/a Q Financial Services, et al. v. JPMorgan Chase Bank N.A., et al., No. 20-cv-4100 (S.D.N.Y. (filed May 28, 2020).

[7] See, e.g., Full Compliance LLC et al. v. Amerant Bank, N.A., et al., No. 1:20-cv-22339 (S.D. Fla.) (filed June 5, 2020); Juan Antonio Sanchez, PC, v. Bank of South Texas, et al., No. 20-cv-00139 (S.D. Tex.) (filed May 29, 2020); Fahmia, Inc. v. Pacific Premier Bancorp, Inc. et al., No. 8:20-cv-00965 (C.D. Cal.) (filed May 26, 2020).

 

June 25, 2020 Update on the PPP Litigation Landscape

By: Michael W. Ross and Jacob D. Alderdice

COVID19The implementation of the Paycheck Protection Program (PPP) under Title I of the Coronavirus Aid, Relief and Economic Security Act (the CARES Act) amidst the COVID-19 economic downturn has spawned a growing cottage industry of litigation, including several waves of cases against different defendants—primarily bank and non-bank lenders, and the United States Small Business Administration (SBA).  The nature of the cases has varied.  In the first cases filed, borrowers excluded from PPP sued banks for imposing additional restrictions on their applications, and for prioritizing bigger, institutional clients.  The second wave of lawsuits saw different categories of borrowers, such as companies owned by borrowers with criminal records, companies in bankruptcy, and others, suing the SBA for excluding them from the program entirely.  Finally, the latest round of cases involve financial services firms, accountants, and other borrowers’ agents initiating class actions against lenders for the failure to pay agent fees to those parties.  These three “waves” encompass the bulk of PPP litigation to date, but there have been some lawsuits of other varieties as well, including at least one civil enforcement action by the Federal Trade Commission alleging unfair and deceptive practices.[1]

In a prior update, we described one of the first court rulings in the PPP cases, in which on April 13, a federal district court in Maryland denied relief to a borrower who had sued Bank of America for imposing its own eligibility requirements on PPP borrowers.  See Profiles, Inc. v. Bank of Am. Corp., No. CV SAG-20-0894, 2020 WL 1849710, at *1 (D. Md. Apr. 13, 2020).  The court held that the CARES Act did not authorize a private right of action for borrowers to sue private lenders, and that the Act permitted banks to impose their own lending restrictions.  Soon after, a California federal court denied relief in a similar suit, denying a temporary restraining order for borrowers alleging that JPMorgan Chase and other large banks improperly accepted PPP applications from only existing customers.  Legendary Transp., LLC v. JPMorgan Chase & Co., No. 220CV03636ODWGJSX, 2020 WL 1975366, at *2 (C.D. Cal. Apr. 24, 2020).  Although no court has yet ruled in favor of borrowers in this type of lawsuit, similar lawsuits have continued to be filed and remain pending, alleging violations of state laws.[2]

By contrast, borrowers excluded from PPP by SBA regulations have had some early successes in lawsuits against the SBA.  These lawsuits have challenged an array of rules and regulations that the SBA has issued in its implementation of the CARES Act.  While the majority of the courts that have issued opinions in these cases have sided with the plaintiffs,[3] the SBA has scored some initial victories as well,[4] and several key cases remain pending.[5]

Finally, plaintiffs have more recently brought several class actions against bank and non-bank lenders alleging that the lenders violated the CARES Act and various state laws by not paying them “agent fees” when those plaintiffs allegedly assisted borrowers in applying for the loans.  These claims allege a wide array of state law claims, but the primary complaint is that in implementing the PPP, the SBA allegedly required lenders to pay fees to agents who assisted in facilitating borrower loan applications.[6]  There have been over a dozen such lawsuits filed in various courts across the country, and plaintiffs in several of the cases have moved to consolidate the cases before the Judicial Panel on Multidistrict Litigation.[7]  Courts have yet to speak to the merits of these claims.

 

[1] See Federal Trade Commission v. Ponte Investments, LLC et al, No. 1:20-cv-0017 (D.R.I.) (filed April 17, 2020) (alleging that the defendants deceptively represented themselves as a direct lender for PPP when they were not); Beechwood Lakeland Hotel, LLC v. U.S. Bank NA,, No. 8:20-cv-01022 (M.D. Fla.) (filed May 1, 2020) (later dismissed voluntarily); Beechwood Plaza Hotel of Appleton, LLC et al. v. Wilmington Trust, NA, No. 1:20-cv-03424 (filed May 1, 2020) (later dismissed voluntarily).

[2] See, e.g., KPA Promotions & Awards, Inc. et al. v. JPMorgan Chase & Co., et al., No. 1:20-cv-3910 (S.D.N.Y.) (filed May 19, 2020) (alleging that bank defendants committed unfair business practices under New York law by, among other things, “prioritizing the processing of larger loans over smaller loans” and providing “preferential ‘concierge’ treatment for their wealthiest clients”); Karen’s Custom Grooming LLC v. Wells Fargo & Company, No. 20-cv-0956 (S.D. Cal.) (filed May 22, 2020) (alleging on behalf of a class that Wells Fargo violated state consumer protection laws by prioritizing larger clients, among other acts of malfeasance).

[3] See, e.g., In re: USA Gymnastics, No. 18-09108-RLM-11 (Bankr. S. D. Ind. Jun. 12, 2020) (holding that it was arbitrary and capricious for the SBA to exclude debtor from the PPP) (Jenner & Block LLP as counsel for debtor); In re Gateway Radiology Consultants, P.A., No. 8:19-BK-04971-MGW, 2020 WL 3048197, at *11 (Bankr. M.D. Fla. June 8, 2020) (enjoining the SBA’s exclusion of bankruptcy debtors from the PPP as to debtor); DV Diamond Club of Flint, LLC v. United States Small Business Administration, No. 20-CV-10899, 2020 WL 2315880 (E.D. Mich. May 11, 2020) (granting preliminary injunction against SBA enjoining its exclusion of plaintiff strip clubs from PPP); Camelot Banquet Rooms, Inc. v. United States Small Business Administration, No. 20-C-0601, 2020 WL 2088637 (E.D. Wis. May 1, 2020) (same).

[4] See, e.g., In re Penobscot Valley Hosp., No. 19-10034, 2020 WL 3032939, at *9 (Bankr. D. Me. June 3, 2020) (holding that the SBA could exclude bankruptcy debtors from PPP); Am. Ass'n of Political Consultants v. United States Small Bus. Admin., No. CV 20-970, 2020 WL 1935525, at *3 (D.D.C. Apr. 21, 2020) (denying plaintiff’s motion for injunctive relief challenging SBA’s exclusion of political lobbyists, but only considering constitutional claims).

[5] See, e.g., Defy Ventures, Inc. et al. v. United States Small Business Administration et al., No. 1:20-cv-01838-CBB (D. Md.) (alleging that SBA cannot exclude individuals and businesses from PPP on the basis of having criminal records) (Jenner & Block LLP as counsel for the plaintiffs); Admiral Theater, Inc. v. United States Small Business Administration, et al., No. 1:20-cv-02807 (N.D. Ill.) (alleging that the SBA cannot exclude the plaintiff gentlemen’s club from the PPP).

[6] See James Quinn d/b/a Q Financial Services, et al. v. JPMorgan Chase Bank N.A., et al., No. 20-cv-4100 (S.D.N.Y. (filed May 28, 2020).

[7] See, e.g., Full Compliance LLC et al. v. Amerant Bank, N.A., et al., No. 1:20-cv-22339 (S.D. Fla.) (filed June 5, 2020); Juan Antonio Sanchez, PC, v. Bank of South Texas, et al., No. 20-cv-00139 (S.D. Tex.) (filed May 29, 2020); Fahmia, Inc. v. Pacific Premier Bancorp, Inc. et al., No. 8:20-cv-00965 (C.D. Cal.) (filed May 26, 2020).

 

PEOPLE: Michael W. Ross, Jacob D. Alderdice

June 19, 2020 Ready for Launch (Redux)? An Updated Analysis of the Federal Reserve’s Rapidly Changing Main Street Lending Facilities

By: Neil M. Barofsky, Michael W. Ross and Ali M. Arain

COVID19On June 8, 2020—shortly after announcing the program was set to launch—the Board of Governors of the Federal Reserve (Federal Reserve) announced material changes to some of the key terms for the “Main Street” lending program.[1]  As of June 15, 2020, months after it was first announced, the program is finally operational.

As described in our prior alert, the Main Street lending program will provide up to $600 billion in loans to small- and medium-sized businesses in order to ease the economic dislocation caused by the COVID-19 pandemic.  Federal Reserve Chair Jerome H. Powell has underscored in several recent remarks that one key goal of the program is to ensure companies can continue to support the country’s workforce.  

Since the initial roll out of the program, the Federal Reserve has continued to announce changes, new details, and clarifying FAQs, that provide important guidance to potential participants.  These include significant changes made to the program on May 27, 2020, and then again on June 8, 2020, on the eve of the program’s launch.  Understanding the changes and clarifications to the program since its launch will be crucial for companies considering submitting an application for funds.

This client alert builds on our prior alert and provides a summary of the key features of the Main Street program, highlighting changes since its initial announcement and how those changes may affect the businesses that are considering seeking relief through this program.  We encourage you to follow up with any questions or concerns.  Jenner & Block offers a wide array of resources and lawyers with experience necessary to help our clients navigate the implications of these important new programs, led by our COVID-19 Response Team.  The firm is well positioned to help our clients manage the challenging issues related to the current crisis, from applications for funds, to managing workforce concerns, to the Congressional oversight and government investigations that may accompany any such financial assistance.

To read the full alert, please click here.

Additional Contributors: Marc B. Hankin, Anna Meresidis, Edward L. Prokop, Jacob D. Alderdice and William R. Erlain

May 8, 2020 Mitigating COVID-19’s Additional Disparate Impacts - Fair Housing and Lending Obligations Under the CARES Act

By: Kali N. Bracey and Damon Y. Smith

COVID19As data began pouring in from cities and states hit hard by COVID-19 it became clear that, even though the virus is color blind, certain racial and ethnic communities were suffering a disproportionate impact from the disease.  See, e.g.https://www.npr.org/2020/04/09/831174878/racial-disparities-in-covid-19-impact-emerge-as-data-is-slowly-released, last visited on May 5, 2020.  In particular, African Americans who contract COVID-19 have higher death rates, caused by underlying conditions and lack of access to health care.  Id.  Similarly, women- and minority-owned businesses may be disproportionately impacted by this crisis due to preexisting economic conditions such as lack of access to credit.  See, e.g., https://www.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses, last visited on May 5, 2020.

When Congress passed the CARES Act to provide desperately needed funds to impacted industries, they waived statutory and regulatory requirements that could delay the delivery of that aid.  However, in recognition of the disparate conditions described above, Congress did not provide waivers of the Fair Housing Act, 42 U.S.C. § 3602 et. seq. and the Equal Credit Opportunity Act, 15 U.S.C. § 1691 et. seq.

The Fair Housing Act (FHA) prohibits discrimination in the sale or rental of housing because of race, color, national origin, religion, sex, familial status and disability.  With very few exceptions, homebuyers, homeowners, renters and prospective renters are protected from discrimination based on these classifications in all aspects of the financing and provision of housing.  The FHA prohibits both intentional discrimination and policies and decisions that are not intentionally discriminatory, but have a disproportionate and adverse impact against a protected class.  If a plaintiff is able to show that the disproportionate adverse impact exists, the burden shifts to the defendant to prove that there is a legitimate, non-discriminatory business need for the policy or decision.

For example, the CARES Act requires single-family loan servicers and multifamily property owners that have federally-backed mortgages, to permit forbearance agreements and stay evictions for borrowers and renters that have a COVID-19 related loss of income.  The applicable FHA provisions prohibit such servicers and owners from refusing to negotiate or setting different terms, conditions or privileges based on protected classifications in order to qualify for and receive those forbearances and eviction protections.  As a result, any communications, policies, requirements or considerations regarding forbearances and evictions should be carefully vetted to protect against any disparate impact, even if they are not facially discriminatory.

Also, the Paycheck Protection Program (PPP) loans provided under the CARES Act are subject to Equal Credit Opportunity Act’s (ECOA) fair lending requirements, which prohibit credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.  Lenders are required to provide PPP loan applicants with ECOA-compliant disclosures and notices for any credit-related decisions.  Decisions that restrict access to credit for protected classes can result in liability if they are intentional or result in disparate impact.

A number of news outlets have reported that minority businesses are being all but shut out of the PPP program.  See, e.g., https://www.cbsnews.com/news/women-minority-business-owners-paycheck-protection-program-loans, last visited on May 5, 2020; https://www.nbcnews.com/business/business-news/why-are-so-many-black-owned-small-businesses-shut-out-n1195291, last visited on May 5, 2020.  Moreover, the Consumer Financial Protection Bureau (CFPB) published a reminder of discrimination warning signs for minority and women owned businesses applying for PPP lending including: “[r]efusal of available loan or workout option[s] even though you qualify . . . ;” offers of credit at a higher rate although the business qualifies at a lower rate; discouragement from applying for credit because of a protected class status; “[d]enial of credit, but not given a reason why or told how to find out why”; or “[n]egative comments about race, national origin, sex, or other protected statuses.” See https://www.consumerfinance.gov/about-us/blog/fair-equitable-access-credit-minority-women-owned-businesses, last visited on May 6, 2020.  At the end of the warning signs publication is the link to file a complaint with the CFPB if the small business owner believes they have been discriminated against.

Although it is not yet clear what role discrimination plays, if any, in the lack of PPP funds going to women and minority-owned businesses, as a result of this potential liability, lenders should have all of their CARES Act-related documents, notices, training materials, and offers reviewed by an attorney for Fair Lending compliance.

May 8, 2020 Mitigating COVID-19’s Additional Disparate Impacts - Fair Housing and Lending Obligations Under the CARES Act

By: Kali N. Bracey and Damon Y. Smith

COVID19As data began pouring in from cities and states hit hard by COVID-19 it became clear that, even though the virus is color blind, certain racial and ethnic communities were suffering a disproportionate impact from the disease.  See, e.g., https://www.npr.org/2020/04/09/831174878/racial-disparities-in-covid-19-impact-emerge-as-data-is-slowly-released, last visited on May 5, 2020.  In particular, African Americans who contract COVID-19 have higher death rates, caused by underlying conditions and lack of access to health care.  Id.  Similarly, women- and minority-owned businesses may be disproportionately impacted by this crisis due to preexisting economic conditions such as lack of access to credit.  See, e.g., https://www.mbda.gov/page/executive-summary-disparities-capital-access-between-minority-and-non-minority-businesses, last visited on May 5, 2020.

When Congress passed the CARES Act to provide desperately needed funds to impacted industries, they waived statutory and regulatory requirements that could delay the delivery of that aid.  However, in recognition of the disparate conditions described above, Congress did not provide waivers of the Fair Housing Act, 42 U.S.C. § 3602 et. seq. and the Equal Credit Opportunity Act, 15 U.S.C. § 1691 et. seq.

The Fair Housing Act (FHA) prohibits discrimination in the sale or rental of housing because of race, color, national origin, religion, sex, familial status and disability.  With very few exceptions, homebuyers, homeowners, renters and prospective renters are protected from discrimination based on these classifications in all aspects of the financing and provision of housing.  The FHA prohibits both intentional discrimination and policies and decisions that are not intentionally discriminatory, but have a disproportionate and adverse impact against a protected class.  If a plaintiff is able to show that the disproportionate adverse impact exists, the burden shifts to the defendant to prove that there is a legitimate, non-discriminatory business need for the policy or decision.

For example, the CARES Act requires single-family loan servicers and multifamily property owners that have federally-backed mortgages, to permit forbearance agreements and stay evictions for borrowers and renters that have a COVID-19 related loss of income.  The applicable FHA provisions prohibit such servicers and owners from refusing to negotiate or setting different terms, conditions or privileges based on protected classifications in order to qualify for and receive those forbearances and eviction protections.  As a result, any communications, policies, requirements or considerations regarding forbearances and evictions should be carefully vetted to protect against any disparate impact, even if they are not facially discriminatory.

Also, the Paycheck Protection Program (PPP) loans provided under the CARES Act are subject to Equal Credit Opportunity Act’s (ECOA) fair lending requirements, which prohibit credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.  Lenders are required to provide PPP loan applicants with ECOA-compliant disclosures and notices for any credit-related decisions.  Decisions that restrict access to credit for protected classes can result in liability if they are intentional or result in disparate impact.

A number of news outlets have reported that minority businesses are being all but shut out of the PPP program.  See, e.g., https://www.cbsnews.com/news/women-minority-business-owners-paycheck-protection-program-loans, last visited on May 5, 2020; https://www.nbcnews.com/business/business-news/why-are-so-many-black-owned-small-businesses-shut-out-n1195291, last visited on May 5, 2020.  Moreover, the Consumer Financial Protection Bureau (CFPB) published a reminder of discrimination warning signs for minority and women owned businesses applying for PPP lending including: “[r]efusal of available loan or workout option[s] even though you qualify . . . ;” offers of credit at a higher rate although the business qualifies at a lower rate; discouragement from applying for credit because of a protected class status; “[d]enial of credit, but not given a reason why or told how to find out why”; or “[n]egative comments about race, national origin, sex, or other protected statuses.” See https://www.consumerfinance.gov/about-us/blog/fair-equitable-access-credit-minority-women-owned-businesses, last visited on May 6, 2020.  At the end of the warning signs publication is the link to file a complaint with the CFPB if the small business owner believes they have been discriminated against.

Although it is not yet clear what role discrimination plays, if any, in the lack of PPP funds going to women and minority-owned businesses, as a result of this potential liability, lenders should have all of their CARES Act-related documents, notices, training materials, and offers reviewed by an attorney for Fair Lending compliance.

PEOPLE: Kali Bracey

May 5, 2020 Proposed Amendments to Prop 65 Regulations May Force Changes to E-Commerce Warnings

By:  Kate T. Spelman and Amy Egerton-Wiley

Proposition 65 warnings are familiar to any business that manufactures, distributes, or supplies consumer products for sale in California. Enacted through a ballot initiative in 1986 as “the Safe Drinking Water and Toxic Enforcement Act,” Proposition 65 requires businesses to provide “clear and reasonable” warnings to consumers regarding exposure to certain carcinogenic and/or toxic chemicals identified by the California EPA’s Office of Environmental Health Hazard Assessment (OEHHA). image from environblog.jenner.com

Recent amendments—and proposed amendments—to the Proposition 65 warning regulations purportedly seek to clarify ambiguities related to the who, what, where, and when of providing safe harbor warnings under the law. With respect to internet purchases, however, the proposed amendments arguably go farther than simply clarifying the existing law, requiring e-commerce businesses to provide multiple warnings not required of brick-and-mortar retailers.

I. Recent Amendments Addressing Responsibility for Proposition 65 Warnings

OEHHA’s most recent amendments to the Proposition 65 warning regulations became effective on April 1, 2020. These amendments clarify the roles of upstream sellers and retail sellers in providing Proposition 65 warnings to consumers.

The warning regulations previously provided that upstream sellers (including manufacturers, distributors, and importers) could satisfy the Proposition 65 warning requirement with either an on-label warning, “or by providing a written notice directly to the authorized agent for a retail seller.” This “written notice” provision created confusion for upstream businesses involved in complicated supply chains or otherwise without knowledge of the final retail seller of the product at issue. The April 2020 amendments helpfully clarify that upstream sellers are only required to provide Proposition 65 notices to their direct customers, which in some cases may be other manufacturers or distributors as opposed to retailers. The April 2020 amendments also clarify that an upstream seller may deliver such notice to its customer’s “legal agent” if that customer has not selected an “authorized agent” for purposes of Proposition 65.

Moreover, the warning regulations previously imposed on retailers the obligation to provide Proposition 65 warnings to certain consumers after obtaining “actual knowledge” of a covered exposure, with “actual knowledge” defined as “specific knowledge of the consumer product exposure received by the retail seller from any reliable source.” This definition proved ambiguous, and the April 2020 amendments clarify that a retailer has “actual knowledge” only when “the retail seller receives information from any reliable source that allows it to identify the specific product or products that cause the consumer product exposure.” The April 2020 amendments also limit “actual knowledge” to knowledge received by a retailer’s “authorized agent or a person whose knowledge can be imputed to the retailer.” This revision limits retailers’ legal exposure in the event a lower-level employee fails to take action after they obtain knowledge of a covered exposure.

II. Proposed Amendments Addressing Methods for Communicating Proposition 65 Warnings

OEHHA has also proposed several additional amendments to the 2016 warning regulations that are currently making their way through the rulemaking process. These proposed amendments address Proposition 65’s safe harbor provisions as they apply to internet and catalog sales, as well as the sale of alcoholic beverages. As explained further below, while OEHHA has characterized these amendments as clarifications, industry groups have warned that one of the proposed amendments represents a “dramatic change to the safe harbor warning regulations.”

Internet and Catalog Sales

Under the current safe harbor regulations, a Proposition 65 warning provided in connection with an internet or catalog purchase must appear on the seller’s website or in the catalog as specified in Article 6 Section 25602(b) and (c), and must be transmitted using one or more of the methods specified in Section 25602(a). The Section 25602(a) transmission methods include posted signs or shelf tags, on-label warnings, and warnings “provided via any electronic device or process that automatically provides the warning to the purchaser prior to or during the purchase of the consumer product, without requiring the purchaser to seek out the warning” (the electronic warning). Pursuant to the plain language of the regulations, online sellers may—and often do—satisfy Proposition 65’s safe harbor regulations for e-commerce by providing website and electronic warnings only.

According to OEHHA, the agency “has received a number of inquiries from affected businesses concerning the requirement in the safe-harbor regulations to provide both a warning for sales on the internet or through a catalog, and a warning with or on products delivered to consumers.” Thus, OEHHA proposes to “clarify” the requirement by making the following revisions to the regulations:

  • Making clear that the warning requirements for internet and catalog purchases as described in Section 25602(b) and (c) apply must be satisfied in connection with the warnings for specific product, chemical and area exposure enumerated in Section 25607, et seq.;
  • Specifying that internet purchases include mobile device applications; and
  • Limiting the use of the electronic warning method to “physical retail location[s].”

The last of these three proposed revisions has caused significant concern in the business community. A coalition of 26 business organizations, including the California Chamber of Commerce (the coalition), submitted a comment to OEHHA characterizing the proposed revision as a “dramatic change to the safe harbor warning regulations, not a clarification.” According to the coalition, limitation of the electronic warning option to “physical retail locations” will force businesses to provide on-label warnings for all products sold through the internet, thereby resulting in two warnings for such products—one on the seller’s website or mobile application, and one on the label. The coalition expressed concern that this change would require businesses to overhaul their Proposition 65 warning programs after having just significantly revised the programs as recently as 2018, and could spur frivolous litigation.

The coalition’s concerns appear justified. As written, OEHHA’s proposed amendment would seemingly require e-commerce businesses that previously provided online-only warnings to provide additional warnings on the products themselves, resulting in a two-warning requirement for online sellers while permitting physical retailers to continue providing a single warning at the point of sale.

Alcoholic Beverage Warnings

The proposed amendments also revise the Proposition 65 warning requirements for the sale of alcoholic beverages. While the existing regulations require specific warnings for alcoholic beverages sold “through package delivery services,” the proposed regulations would require product-specific warnings “prior to or during the purchase of the product” for any deliveries of alcoholic beverages directly to consumers.

The proposed amendments also impose a separate warning requirement for alcoholic beverages sold over the internet or through a catalog. For such sales, a warning must be provided “prior to or contemporaneously with the delivery of the product” on either the shipping container or package, or by email or text message as part of the e-receipt or confirmation of purchase. This proposed revision would bring the Proposition 65 warning regulations in line with a recent settlement between the California Attorney General and numerous e-commerce businesses, including DoorDash and Postmates, that sell or facilitate the sale of alcohol online.

In light of OEHHA’s proposed amendments, e-commerce businesses should prepare for the possibility that they may be forced to update their compliance programs yet again should they seek the continued shelter of Proposition 65’s regulatory safe harbor.

Reprinted with permission from the May 4 issue of The Recorder. © [2020] ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. The original article can be viewed here.

April 21, 2020 Early CARES Act Ruling Recognizes Broad Discretion for Participating Lenders

By: Michael Ross and Jake Alderdice

On April 13, 2020, a federal district court in Maryland issued one of the first rulings to interpret the provisions of Congress’s Coronavirus Aid, Relief and Economic Security Act (the CARES Act), signed into law by President Trump on March 27, 2020.  At issue before the Court was whether Bank of America could be prevented from adding eligibility restrictions, beyond those in the Act, on small businesses applying for forgivable loans under the CARES Act’s $349 billion Paycheck Protection Program (PPP).  In denying relief to the prospective borrower, the district court found that the bank could impose additional eligibility criteria and that private parties were powerless to bring private actions to enforce the terms of the program.  Although just one data point, the early ruling may signal that courts will give lenders latitude in how they are carrying out CARES Act programs.

Background image from environblog.jenner.com

Title I of the CARES Act established the Paycheck Protection Program (PPP), which provided for $349 billion in loans to small businesses.  These loans become fully forgivable if the businesses use them for certain purposes, such as maintaining their payroll.  Demand for the emergency loans quickly ate up the funding, with the entire $349 billion fund depleted by April 16, 2020, based on 1.4 million approved applications. Congress is currently debating providing additional funding for the program.

The CARES Act set out eligibility requirements for PPP borrowers, including, among others, that the businesses, with some exceptions, need to have fewer than 500 employees.  Following the program’s launch, news reports indicated that lenders were imposing additional requirements on potential borrowers, particularly to ensure borrowers had certain preexisting relationships with the lender.  In the case of Bank of America (BofA), early reports claimed that the bank required applicants to have both a preexisting deposit account and a lending account in order to apply for a PPP loan.  BofA later changed that requirement so that it only required a deposit account with the bank, and that the applicant not have a lending relationship elsewhere. BofA included simply having a credit card with another bank as a “lending relationship.”

The Profiles Inc. Case

In Profiles, Inc. v. Bank of America, several small businesses—including some with longstanding deposit relationships with the bank—sued BofA after being denied the opportunity to apply for PPP loans with BofA due to the bank’s restrictions.  These varied businesses—a hair salon, security services company, public relationships firm, and car part business—claimed the bank had to accept their applications and could not add eligibility restrictions not contained in the Act.  In a 23-page opinion, Judge Stephanie A. Gallagher denied the plaintiffs’ request to enjoin BofA from denying their applications.  The court’s opinion contains several notable rulings.

First, the court held that the CARES Act did not create a private right of action that allows private parties to sue lenders.  Although the plaintiffs argued that a lender’s application of its pre-existing criteria was inconsistent with the CARES Act’s broad eligibility requirements, the court held that nothing in the CARES Act authorized borrowers, either explicitly or implicitly, to bring civil suits against lenders.  The court based this decision on Supreme Court and Fourth Circuit precedent, including Alexander v. Sandoval, 532 U.S. 275 (2001), which required an indication of Congressional intent to create a private right of action with a private remedy.  The court held there was no such intent in the CARES Act, concluding that Congress intended for any lender misconduct to be enforced by the Administrator of the SBA, under the SBA’s existing civil and criminal enforcement regime.

Second, the court held that BofA’s loan eligibility criteria did “not run afoul of the CARES Act.”  The court observed that nothing in the CARES Act prevented a bank from “considering other information when deciding from whom to accept applications, or in what order to process applications it accepts.”  The court referenced a prior version of the Act stating that a lender “shall only consider” the eligibility requirements set forth in the Act, but noted that provision failed to win approval in Congress.  The court also acknowledged that given the size of the program and the urgency of the demand, it was more efficient for banks to prioritize their existing customers, and thus more effective for achieving the goals of the program.  Moreover, because participation in PPP is voluntary, the court worried that preventing banks from applying their own rules could disincentivize them from participating altogether. Finally, although Judge Gallagher stated that “BofA’s rigid eligibility criteria have undoubtedly made it materially harder for some small businesses to access the PPP,” the court held it was for Congress rather than the courts to prevent banks from doing so.

Third, the court rejected plaintiffs’ argument that they would be irreparably harmed by a denial. The court noted that the plaintiffs could still apply elsewhere, and that at least some institutions—at least ten—did not have requirements that applicants have a preexisting relationship. The court expressed sympathy for the harm that the plaintiffs were facing as a result of COVID-19, recognized that not every small business owner has the necessary sophistication to locate the few banks across the country that would allow their application, and faulted BofA in part for its conduct in denying some of the plaintiffs’ applications. Ultimately, in denying the plaintiffs’ motion, the court acknowledged that the plaintiffs’ experiences “demonstrate a significant flaw” in the implementation of PPP, one criticized by some members of Congress, but given the “competing policy interests,” the court held that it could not “wade into the merits of this debate.”

The plaintiffs have appealed the court’s ruling to the Fourth Circuit. On April 17, 2020, the district court denied the plaintiffs’ motion for a stay of BofA’s challenged lending practices pending the plaintiffs’ appeal. The court held that the plaintiffs’ motion improperly sought to alter the status quo. The court also reiterated its concerns about adjudicating “between the competing and compelling public interests implicated in this incredibly complex situation,” and further noted that “imposing an emergency stay at a point in which the PPP funding has been exhausted may have no practical effect whatsoever.”

Profiles is just one among many suits that have been filed recently, including another lawsuit against BofA in California federal court. See, e.g., Law Office of Sabrina Damast, Inc v. Bank of America Corp., No. 20-3589 (C.D. Cal.) (plaintiffs assert California state law claims against BofA, alleging it prioritized larger loans over smaller businesses); Cyber Defense Group, LLC v. JPMorgan Chase & Co., No. 20-3589 (C.D. Cal.) (same as to JPMorgan Chase); Infinity Consulting Group, LLC v. US Small Business Administration, No. 8:20-cv-00891 (D. Md.) (plaintiffs allege that the SBA’s administration of PPP discriminated against women- and minority-owned small businesses); Scherer v. Wells Fargo Bank NA, No. 4:20-cv-01295 (S.D. Tex.) (plaintiff alleges on behalf of a putative class that Wells Fargo violates the CARES Act by only accepting PPP applications from small businesses with a business checking account with the bank); Scherer v. Frost Bank, No. 4:20-cv-01297 (S.D. Tex.) (same as to Frost Bank). In all, with other lawsuits from aggrieved small business owners still pending, and Congress debating in what manner to replenish the PPP funds, the issues raised within the Profiles, Inc. opinion will likely continue to be significant in the coming weeks and months.

PEOPLE: Michael W. Ross, Jacob D. Alderdice

April 15, 2020 Regulatory Alert: An Analysis of the Federal Reserve’s New and Expanded Programs to Support the US Economy

On April 9, 2020, the Board of Governors of the Federal Reserve (Federal Reserve) announced an array of new and expanded programs designed to ease the economic dislocation caused by the COVID-19 pandemic. Together, these programs will provide up to $2.3 trillion in funding to support the flow of credit to US businesses of all sizes, individual households, and state and local governments. Although these programs in many ways mirror those established by the Federal Reserve after the 2008 financial crisis, there are some significant expansions and differences as well. Noun_virus_1772453

The support programs include:

  • a new “Main Street” lending program that will provide up to $600 billion in loans to small- and medium-sized businesses;
  • expanded corporate credit programs that will provide up to $750 billion to purchase corporate debt on the primary and secondary markets, including, in a significant departure for the Federal Reserve, debt that is rated below investment grade;
  • a groundbreaking new program that will provide up to $500 billion in lending to state and local governments;
  • up to $100 billion in loans for borrowers who pledge certain highly rated asset-backed securities (ABS), which will support consumer and other types of lending; and
  • a new lending facility that will provide up to $350 billion in financing to banks to help them meet the overwhelming demand by small businesses for the Paycheck Protection Loans created by the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act).

To read the full article, click here.

April 15, 2020 New York’s SHIELD Act in Full Force

By: Tracey Lattimer

ShieldOn July 25, 2019, New York Governor Andrew Cuomo signed into law the Stop Hacks and Improve Electronic Data Security (SHIELD) Act, which updates New York’s data breach notification law (as set out in the New York General Business Law and New York State Technology Law) and implements new data security requirements.  On March 21, 2020, the SHIELD Act came into full effect.

The most significant changes introduced by the SHIELD Act include:

  • The types of information that may trigger the data breach notification requirements have been expanded to include: (i) in combination with a personal identifier, an account number, credit or debit card number if such number could be used to access an individual’s financial account without additional identifying information, security code, access code or password; (ii) in combination with a personal identifier, biometric information; and (iii) a user name or email address in combination with a password or security question and answer that would permit access to an online account.  (See definition of “private information” within the Act.)
  • The Act introduces new data security requirements.  Any person or business that owns or licenses computerized data that includes private information of a New York resident must now develop, implement and maintain “reasonable safeguards to protect the security, confidentiality and integrity of the private information.”  The Act also sets out “reasonable” administrative, technical and physical safeguards that should be included in a compliant data security program.

The amendments to the data breach notification requirements came into force on October 23, 2019.  The new data security requirements came into force on March 21, 2020.

Under the Act, violations of the data breach notification requirements can attract a civil penalty of the greater of $5,000 or up to $20 per instance of failed notification, provided the latter amount shall not exceed $250,000 (an increase from the cap of $150,000 under the old law).  Similarly, violations of the data security requirements can attract a civil penalty of not more than $5,000 per violation (as set out in § 350-D of the New York General Business Law).

In order to comply with the SHIELD Act, companies throughout the United States that process information relating to New York residents should review the information they collect and consider whether they need to update their data protection and breach notification policies and procedures.  Such companies should also implement appropriate data security programs and safeguards as detailed in the Act.

PEOPLE: Tracey Lattimer

April 13, 2020 New York State Temporarily Modifies Regulations Governing Mortgage Payments and Consumer Fees

By: Jason P. Hipp

New York StateAs just one of the many aspects of New York State’s response to the coronavirus outbreak, last month, on March 21, 2020, New York Governor Andrew Cuomo issued Executive Order 202.9 (the Order), which directed institutions regulated by the New York Department of Financial Services (DFS) to provide financial relief to any person or business who has a financial hardship as a result of the COVID-19 pandemic for a period of ninety days. 

To carry out that general mandate, the Order directed DFS to ensure that “licensed or regulated entities”—which includes banks and savings banks, credit unions, investment companies and mortgage loan servicers, among others—provide to consumers in New York State an opportunity to make an application for a forbearance of mortgage payments (including principal and interest) to “any person or entity facing a financial hardship” resulting from the COVID-19 pandemic and grant such applications in “all reasonable and prudent circumstances.”  While the Order does not specify the precise meaning of the “forbearance,” when read in context of the Order as a whole, it appears to refer solely to a forbearance of mortgage payments for a consumer in New York State.  The Order also empowers DFS to issue regulations directing the restriction or modification of ATM fees, overdraft fees and credit card late fees.

The Order took effect on March 21, 2020, and, under a subsequent executive order issued on April 7, 2020, will remain in effect through May 7, 2020.

Days after the Order, on March 24, 2020, DFS issued emergency regulations implementing the Order.  Under the emergency regulations—which remain in effect for the same period of time as the Order— “New York regulated institutions” (which include both banking organizations and mortgage servicers) are required to grant forbearances of payments due on a residential mortgage for property in New York for ninety days for individuals who reside in New York and demonstrate COVID-19-related financial hardship.  3 NYCRR § 119.3(a).  Denial of such forbearance will subject an institution to a review by DFS of whether that activity constituted an unsafe or unsound practice (relying on several factors enumerated by DFS).  3 NYCRR § 119.3(f).  All DFS-regulated institutions are subject to such a review, notwithstanding language in the Order limiting the review to the practices of any “bank.”

Under the emergency regulations, DFS also required “banking organizations” to provide financial relief to individuals who demonstrate COVID-19-related financial hardship by:  (1) eliminating fees for the use of ATMs owned or operated by the banking organization; (2) eliminating overdraft fees and (3) eliminating credit card late payment fees.

The emergency regulations require regulated institutions to promptly notify consumers of the available relief and respond to applications within ten  business days after receiving all needed information.  3 NYCRR § 119.3(c) and (e).

In addition to the requirements of these initiatives, DFS also issued a broader set of advisory guidelines.  The March 19, 2020 guidance is directed to the same populations as the Order and DFS regulations (mortgage servicers and other regulated financial institutions).  The guidance to mortgage servicers recommends that these institutions take actions to benefit mortgage borrowers, such as refraining from reporting late payments to credit agencies.  The guidance to regulated financial institutions recommends that financial institutions “do their part to alleviate” the financial hardship of the COVID-19 pandemic on small businesses and consumers (whereas the Order and regulations are limited to consumers), and applies to a variety of loans (whereas the Order and regulations are limited to mortgages and bank and credit card fees).  The guidance includes that financial institutions should provide new loans on favorable terms, offer payment accommodations, and increase ATM cash withdrawal and credit card limits.  The guidance also urges financial institutions to refrain from exercising rights and remedies based on “potential technical defaults under material adverse change and other contractual provisions that might be triggered by the COVID-19 pandemic.”  However, as these guidelines are voluntarily and broadly worded, the regulations described above prevail over the guidelines in the event of an inconsistency.  3 NYCRR § 119.3(j).

As the financial effects of the COVID-19 pandemic continue to evolve in New York, careful attention is required to the rapidly shifting patchwork of rules and regulations governing financial institutions in New York.  The Order, emergency regulations, and guidance discussed in this article each vary in the scope of their application based on the type of financial institution (such as a bank or mortgage servicer); the characteristics of the loan (such as whether the loan is a mortgage or other type of loan); and the characteristics of the customer (such as an individual consumer or business).  These distinctions call for careful attention to ensure that financial institutions serving customers in New York remain fully compliant with New York law.

PEOPLE: Jason P. Hipp

April 13, 2020 Zoom Video Communication Meets Resistance from Government Regulators and Plaintiff’s Lawyers as it Zooms Toward Virtual Conferencing Domination

By: Madeline Skitzki and Kate T. Spelman

Computer conferenceAs Zoom’s popularity has soared in recent weeks, the company has begun facing increasing scrutiny from both government regulators and consumer advocates.  Much of this scrutiny has focused on privacy and security concerns, including the following:

  • “Zoombombing” incidents in which unauthorized individuals have allegedly hijacked Zoom meetings, often with racist or pornographic imagery;
  • Zoom’s allegedly unauthorized disclosure of user data to third parties; and
  • Zoom’s alleged use of transport encryption, rather than end-to-end encryption, which allegedly allows Zoom to access user video and audio content.

Government regulators at both the state and federal level have expressed concerns regarding these perceived privacy and security deficiencies.  Multiple state attorneys general, including those in New York, Florida, and Connecticut, have sought information on Zoom’s privacy practices.  Further, the Boston office of the FBI issued a warning and related guidance regarding Zoom’s privacy settings in response to reported “zoombombing” incidents.

Other constituencies have called on the Federal Trade Commission (FTC) to open an investigation.  The Electronic Privacy Information Center (EPIC) sent a letter to the FTC on April 6, 2020, urging the FTC to investigate Zoom’s security practices.  EPIC’s letter referenced a July 2019 FTC complaint that EPIC had filed against Zoom, noting that “the problems have only become worse” in the interim.  Three days earlier, on April 3, 2020, Senator Sherrod Brown (D-OH), the ranking member on the Senate Committee on Banking, Housing and Urban Affairs, requested that the FTC “immediately open an investigation into what appears to be Zoom’s deceptive representations about the security and privacy it provides to its users.”  Senator Brown’s request focused on Zoom’s alleged misrepresentations regarding its use of end-to-end encryption.  Senator Brown also sent a letter directly to Zoom requesting information on its encryption practices.  Senator Richard Blumenthal (D-Conn.) also requested information from Zoom regarding its data collection, privacy, and security practices.

In addition to the aforementioned governmental scrutiny, Zoom is facing three consumer privacy class action lawsuits recently filed in the Central and Northern Districts of California.

Cullen v. Zoom Video Communications, Inc., No. Case 5:20-cv-02155-LHK (N.D. Cal.), filed on March 30, 2020, challenges Zoom’s alleged disclosure of user information to third parties without user consent.  The putative class comprises “[a]ll persons and businesses in the United States whose personal or private information was collected and/or disclosed by Zoom to a third party upon installation or opening of the Zoom video conferencing application.”  Taylor v. Zoom Video Communications, Inc., No. 5:20-cv-02170-SVK (N.D. Cal.), filed on March 31, 2020, similarly challenges Zoom’s alleged unauthorized disclosure of user information to third parties, though the plaintiff seeks to represent only those “persons who used the Zoom app for iOS during the applicable limitations period.”

Ohlweiler v. Zoom Video Communications, Inc., No. 2:20-cv-03165-SVW-JEM (C.D. Cal.), filed on April 3, 2020, is slightly broader than the Cullen and Taylor actions. In addition to challenging Zoom’s alleged unauthorized disclosure of user information to third parties, Ohlweiler challenges Zoom’s allegedly false advertising of its end-to-end encryption capabilities. The plaintiff seeks to represent a putative class of all individuals who used Zoom, and/or purchased the application for personal use, in the US and/or California in the past four years.

All three lawsuits (the Zoom lawsuits) assert statutory claims under California’s Unfair Competition Law, Consumer Legal Remedies Act, and the newly-enacted California Consumer Privacy Act (CCPA), as well as common law claims for negligence and unjust enrichment.  In addition, certain of the Zoom lawsuits assert claims for violation of California’s constitutional right to privacy (Cullen and Ohlweiler); breach of implied contract (Taylor); unjust enrichment (Taylor and Ohlweiler); public disclosure of private facts (Taylor); violation of California’s False Advertising Law (Ohlweiler); and breach of express warranty (Ohlweiler).

The CCPA claims asserted in the Zoom lawsuits are particularly interesting, given that the statute took effect less than four months ago, and no court has yet interpreted its provisions. Significantly, while the CCPA’s private right of action has commonly been understood to apply only to data breach incidents involving the involuntary disclosure of user data due to inadequate security protocols, the Zoom lawsuits seek relief under the CCPA for Zoom’s allegedly voluntary-yet-unauthorized disclosure of user data to third parties.  These lawsuits may therefore present one of the first opportunities for the courts to articulate the boundaries of the CCPA’s private right of action.  Additionally, should any of the Zoom lawsuits fail to allege access or disclosure of “personal information,” as that term is narrowly defined for purposes of the private right of action, the CCPA claims will likely fail.

And on April 7, 2020, Zoom was hit with a shareholder lawsuit asserting violations of the Securities Exchange Act based on Zoom’s allegedly materially false and misleading statements regarding its data privacy and security procedures.  See Drieu v. Zoom Video Communications, Inc., No. 5:20-cv-02353-JD (N.D. Cal.).

Zoom has implemented a number of countermeasures to address the security and privacy concerns discussed above, including the issuance of a 90-day Plan to Bolster Key Privacy and Security Initiatives.  Only time will tell whether these countermeasures will mollify the various constituencies that have been raising alarm bells following the broad adoption of Zoom’s virtual conferencing capabilities during these unusual times.

PEOPLE: Kate T. Spelman, Madeline Skitzki

April 10, 2020 Former CFPB Director Releases White Paper Encouraging CFPB to Protect Consumers Amid COVID-19 Crisis

By: Alexander N. Ghantous

New-Development-IconOn April 6, 2020, Richard Cordray, former director of the Consumer Financial Protection Bureau (CFPB), posted a white paper addressed to current CFPB Director Kathy Kraninger, listing sixteen actions the agency should take to protect consumers during the COVID-19 pandemic.[1]  Cordray wants the CFPB to ensure that financial institutions continue complying with consumer protection laws.[2]  The recommended actions relate to mortgage servicing, foreclosure and eviction, vehicle repossession, debt collection and credit reporting.[3]  Examples of these recommendations are as follow:   

  • Collect data regarding consumers’ experiences and widely disseminate the findings.[4] Cordray encourages the CFPB to use all of its tools to compile consumer marketplace data, particularly regarding what consumers need at this difficult time.[5]  According to Cordray, the CFPB can only protect consumers if it identifies current issues in the consumer marketplace.[6] 
  • Provide assistance with preventing foreclosure.[7] The CARES Act (Act), recently passed by Congress, offers consumers protection against foreclosure if they are unable to pay their mortgage loans during the COVID-19 crisis.[8]  For mortgage loans that fall within the purview of the Act, the CFPB, with its supervisory power, can ensure that consumers are afforded this protection.[9]  Cordray encourages the CFPB to work alongside servicers and lenders to attempt to establish similar protections for mortgage loans that are not protected by the Act.[10]
  • Provide assistance with preventing eviction.[11] During the COVID-19 crisis, many consumers are at risk of losing their housing if they do not have the financial resources available to pay rent.[12]  Cordray encourages the CFPB to keep consumers apprised of all options that are available for relief to help protect against eviction.[13]
  • Monitor vehicle repossession efforts against consumers.[14] Cordray encourages the CFPB, in collaboration with Congress, to suspend vehicle repossessions throughout the COVID-19 pandemic and the after-effects of the economic downturn.[15]  According to Cordray, the CFPB should ensure that consumers faced with vehicle repossession “are informed, treated fairly, and have the remaining equity in their car or truck fully applied to the balance of their loan.”[16]

The white paper, outlining all recommendations, can be accessed here

 

[1] Rich Cordray, White Paper: Immediate Actions for CFPB To Address COVID-19 Crisis, https://medium.com/@RichCordray/cfpbwhitepaper-193a5aed0d75 (Apr. 6, 2020).

[2] Id. 

[3] Id.

[4] Id

[5] Id

[6]Id.

[7] Id.

[8] Id

[9] Id

[10] Id

[11] Id

[12] Id

[13] Id

[14] Id

[15] Id

[16] Id

PEOPLE: Alexander N. Ghantous