Jenner & Block

Consumer Law Round-Up

January 15, 2021 Consumer Finance Observer – Winter 2021 Edition

CFO WinterJenner & Block has published its sixth issue of The Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch. As thought leaders, our lawyers write about the consumer finance sector on topics ranging from biometric data, compliance, data security, FinTech, lending, and securities litigation.

In the Winter 2021 issue of the CFO, our consumer finance lawyers discuss: California's passing of Proposition 24; CCPA's Private Right of Action; California's new Consumer Financial Protection Law; betting on an athlete's biometric data; Colorado's right to enforce its consumer loan interest rates; LendIt 2020, the largest FinTech conference of the year; a recent enforcement action by the SEC and the CFTC in the FinTech space; and European Data Protection Board's guidance on personal data transfers following Schrems II. Contributors are Partners Kelly HagedornCharles D. RielyMichael W. RossDavid P. SaundersKate T. Spelman, and Wade A. Thomson; Special Counsel David W. Sussman; Associates Vivian L. BickfordEffiong K. DamphaMichael F. LindenE.K. McWilliamsMadeline Skitzki, and Matthew Worby; and Staff Attorney Alexander N. Ghantous.

To read the full newsletter, please click here

November 13, 2020 EDPB Provides Guidance on Personal Data Transfers Following Schrems II

   

By: Kelly HagedornDavid P. Saunders, and Matthew Worby

New-Development-IconEarlier this year, in Schrems II, the Court of Justice of the EU (CJEU) invalidated the EU-US Privacy Shield.[1] That judgment also cast doubt over the validity of standard contractual clauses (SCCs) as a means by which to transfer personal data outside of the EU, in particular to the United States. Unsurprisingly, this has caused concern within organisations who rely on such transfers as part of their business model.

Data protection requirements, imposed by the GDPR, travel with any personal data whenever it is transmitted outside of the EU. Problems arise when an organisation needs to transfer personal data to a jurisdiction where local laws might undermine these protections. Without some way to manage this potential conflict, it was unclear if organisations’ personal data transfers outside of the EU would be able to continue.

Unfortunately, the CJEU provided no practical guidance for organisations as to how to make international personal data transfers compliant with its ruling and did not provide any safe harbour period before its ruling took effect. In recent days, however, two key efforts have been made to assist organisations meet their post-Schrems II GDPR requirements:

  1. recommendations have been issued by the European Data Protection Board (EDPB);[2] and
  2. a revised set of SCCs has been published by the European Commission for consultation.

Recommendations Issued by the EDPB

The EDPB has published a practical roadmap for organisations seeking to transfer personal data internationally in a compliant manner in the wake of Schrems II. This roadmap sets out six recommended steps:

  1. Map all transfers of personal data

As a first step, organisations should identify and catalogue all of their international personal data transfers. The EDPB used this opportunity to remind organisations that remote access to personal data, or the cloud storage of personal data, may constitute transfers to be included in this exercise.

  1. Verify that this personal data is being transferred in a compliant manner

Once the data flows have been catalogued, the tool (for example, SCCs) that each transfer relies upon must be identified. 

An international transfer of personal data should not proceed without an appropriate transfer tool in place. The transfer tools available are (i) an adequacy decision in respect of the recipient country made under Article 45 of the GDPR, (ii) one of the mechanisms provided for under Article 46 of the GDPR, including SCCs and Binding Corporate Rules, or (iii) one of the derogations provided for in Article 49 of the GDPR (such as public interest).

  1. Assess if there is any law or practice in the receiving country that would limit the effectiveness of the safeguards created by the transfer mechanism in use

The third step requires organisations to assess each transfer tool, and identify – on a practical level – if each tool being relied upon protects personal data to the level required by the GDPR.[3]

Of principal concern, per the EDPB, is the existence of “anything in the law or practice of the [receiving country] that may impinge on the effectiveness of the appropriate safeguards” being relied upon. Schrems II highlighted the difficulties posed by the US’ mass surveillance programmes in this regard. If a transfer tool is unable to provide an adequate level of protection, despite otherwise being valid, it should not be used alone as a means of transferring personal data outside of the EU.

Where an assessment is required, the EDPB recommends that this should be based on an objective review of the receiving country’s legislation or, if this is not possible, “other relevant and objective factors”. This assessment should not take into account any subjective factors, such as the type of data being transferred. If the receiving country’s laws do not allow for personal data to be protected, then further action, as detailed in step 4 below, will be required.

It is possible that a country’s legislation empowers national security agencies to access personal data. If this is the case, the assessment should consider (i) the extent to which these powers are limited to what is necessary or proportionate in a democratic society, or (ii) if they breach EU standards.[4]

Any such assessment will be a complex undertaking. Helpfully, however, the EDPB does provide practical and positive recommendations in this regard. In particular, the EDPB notes that:

  1. it is possible to conclude following an assessment that any potential interference permitted by a country’s laws will be limited to a similar degree to that to level of potential interference allowed under the GDPR; and
  2. the existence of a comprehensive data protection law, or an independent data protection authority, can indicate that a country’s potential interference with personal data protections can be considered proportionate.

This is a pragmatic approach from the EDPB and seems to be designed to empower organisations to make positive decisions as to the ability to transfer personal data internationally, where appropriate.

In any event, the assessment should be clearly documented and undertaken carefully. The EDPB notes that organisations will be held accountable for the decisions made based on the assessment.

  1. Identify and adopt any additional measures as necessary to bring the level of protection for this data to the level required by the GDPR

It is possible that a company concludes that the transfer tool they intend to rely on, by itself, will not provide the required level of protection for personal data. This may be the case with transfers to the US in light of Schrems II. The EDPB has however provided companies with suggestions as to how supplementary measures can be used to continue data transfers even if the tool for transfer alone is insufficient.

These supplementary measures are categorised as being of a technical, contractual, or organisational nature. All three, when used in combination, are likely to be most effective in ensuring compliance with the GDPR.

The technical measures suggested by the EDPB include:

  • “State-of-the-art” encryption;
  • Pseudonymisation, where the personal data being transferred is altered such that an individual can no longer be identified without further information; and
  • Split processing, where the personal data is segmented and provided to separate parties, such that no one party can identify an individual from the data it receives.

The contractual measures listed by the EDPB include imposing obligations on recipients of the personal data to implement appropriate technical measures, or a requirement for relevant legislative developments within the recipient country to be brought to the attention of the data exporter by the recipient.

Organisational measures relate to internal policies or methods, intended to improve a company’s awareness of the risks present in transferring personal data outside of the EU.

It is important to note that these supplementary measures must be capable of ensuring, in conjunction with a transfer tool, that the level of data protection provided will meet the level required by the GDPR. If this is not the case then the transfer should not proceed.

  1. Take formal procedural steps if required

Where supplementary measures are identified and implemented, certain formalities may need to be completed. These should be completed prior to any international transfer of personal data.[5]

  1. Periodically re-evaluate the level of protection these transfers enjoy

Finally, once this process has been concluded, organisations should ensure that they monitor any developments in countries where personal data has been transferred. In the event there are any developments, these six steps should then be re-visited to ensure continued compliance with the GDPR.

Draft SCCs Published by the European Commission

Seemingly drafted with the EDPB guidance in mind, the European Commission has proposed a new set of SCCs. This document, currently published in draft form, is open for consultation until 10 December 2020. It is currently unclear when the final version of the revised SCCs will be published.

Importantly, and not entirely in response to Schrems II or the EDPB guidance, these draft SCCs represent a clear attempt by the European Commission to provide as practical a set of SCCs as possible. For example, the draft SCCs:

  1. Cater for international data transfers from a data processor to another data processor, a long overdue development;
  2. Set out a new modular approach, allowing for parties to use one single template document to govern transfers from (i) controller-to-controller, (ii) controller-to-processor, (iii) processor-to-processor and (iv) processor-to-controller; and
  • Reference the need for parties, using whichever module, to assess what constitutes an “appropriate level of security” for a transfer, account for the risks involved in a transfer, and then undertake due consideration of the technical measures that would be appropriate to safeguard a transfer.

In perhaps one of the more significant concessions to businesses put into some difficulty by Schrems II, the European Commission’s draft measures currently provide for a year’s grace period to implement these new clauses. This would give organisations time to transition from the previous form of SCCs (subject to implementing any required supplementary measures in the meantime) to the new version, whenever these are finalised.

Conclusion

In the face of the uncertainty that Schrems II created, it is to be welcomed that the EDPB and European Commission have sought to provide practical guidance to organisations. This uncertainty has been compounded by the impending end of the Brexit transition period on 31 December 2020, following which personal data transfers from the EU to the UK will need to rely on an effective and reliable transfer tool. The finalisation of the new SCCs will allow for greater stability in that regard. It is a fact that many businesses rely on international personal data transfers for various reasons, and a recognition that these should be facilitated as far as possible is a positive step.

Organisations now face the task on implementing the EDPB’s recommendations, which is where their utility and practicality will really be tested.

 

[1] Case C-311/18, available here.

[2] The EDPB is the body within the EU tasked with ensuring that data protection rules are applied consistently within the bloc.

[3] It should be noted that, where the transfer of personal data relies on an adequacy decision, no further steps need to be taken in this regard, apart from ensuring on a periodic basis that this decision is still in force. This is because, unlike other transfer mechanisms, an EU adequacy decision in effect states that there are no laws or practices that would undermine data protection rights in that jurisdiction.

[4] Greater guidance is available from the EDPB, available here. Broadly, EU standards are as follows:

  • Processing should be based on clear, precise and accessible rules.
  • Necessity and proportionality with regard to the legitimate objectives pursued need to be demonstrated.
  • An independent oversight mechanism should exist.
  • Effective remedies need to be available to the individual.

[5] Such formalities include, for example, where parties seek to deviate from the SCCs, or the technical measures that are required in some way contradict the SCCs. In such an instance prior approval from the appropriate Data Protection Authority would be required before any international transfer of personal data occurs.

November 4, 2020 California Passes Proposition 24: California Privacy Rights Act to Become Law

   

By: David P. Saunders, Kate T. Spelman, and Effiong K. Dampha

New-Update-IconPrivacy was on the ballot this November, at least in California. And it appears that enough people voted in favor of Proposition 24, the California Privacy Rights Act (CPRA), for it to become law. Although the CPRA technically becomes effective five days after the California Secretary of State certifies the voting results, the bulk of the law – which is an overhaul of the California Consumer Privacy Act (CCPA) – will not come into force until January 1, 2023. Businesses have some time to prepare for the most significant changes, which we have written about previously. Those changes include handling a new category of “sensitive personal information,” the expansion of the existing CCPA private right of action, and mandatory changes to company privacy policies. So what happens to the CCPA, and what do businesses have to prepare for? The answer is not much in the short term.

Until the CPRA becomes fully effective in 2023, the CCPA remains in full effect. That means businesses should keep up with their CCPA compliance, including being attentive to new California Attorney General regulations. The following CPRA provisions – which largely do not impact businesses directly – will become effective once the California Secretary of State certifies the voting results:

  • An extension of the carve out for business contact and employee personal information that is collected by businesses covered by the CCPA. In the existing CCPA, these carve outs were set to expire on January 1, 2021. The carve outs will now be extended to January 1, 2023.
  • A Consumer Privacy Fund will be created – with appropriations to be made by the legislature – with the purpose of “offsetting the costs” of state courts and the California Attorney General enforcing the CCPA (and later the CPRA). The fund will also be used “to promote and protect consumer privacy, educate children in the area of online privacy, and fund cooperative programs with international law enforcement organizations” in connection with addressing consumer data breaches.
  • The California Attorney General will be charged with developing a laundry list of new regulations, which will put meat on the bones of many of the new CPRA rules.
  • A new state agency, the California Privacy Protection Agency, will be created, funded, and begin operations.

Because of the phased effective dates for CPRA’s provisions, businesses have time to revise their policies and prepare for the full weight of the CPRA. Of course, that does not account for whatever CPRA regulations the California Attorney General publishes, which we expect to be previewed perhaps as early as late 2021.

Jenner & Block has developed a checklist for clients to compare their existing CCPA privacy notices against the new requirements of the CPRA. If you need assistance preparing for the CPRA, please contact the authors.

October 28, 2020 Authors Explore Cases that Test Limits of the California Consumer Privacy Act

CaliforniaIn a recent article published by The Recorder, Jenner & Block Partner Kate T. Spelman and Associates Vivian L. Bickford and Effiong G. Dampha examine class action cases that test the limits of the California Consumer Privacy Act, which took effect January 1. “These suits shed light on the various ways plaintiffs are testing the boundaries of the CCPA and its private right of action,” the authors observe. They then highlight several categories of these boundary-testing lawsuits.

To read the full article, titled "Class Actions Seek to Test the Limits of the CCPA's Private Right of Action," please click here

October 21, 2020 Three Takeaways from Lendit 2020

 

By: Michael W. Ross 

FintechI recently attended LendIt’s 2020 conference, the largest Fintech conference of the year.  Kudos to everyone at LendIt for successfully transitioning the conference to a remote platform – it was a great few days of speakers and topics including really slick tools for engagement and networking. In this post, I’m sharing rough notes on my top three takeaways from the sessions I attended. This is by no means a comprehensive recap, and, if you attended, I’d love to hear from you about what you thought.

Artificial Intelligence. First, artificial intelligence and machine learning are on everyone’s mind these days. From regulators to service providers to financial institutions, speakers honed in on the use of AI for everything from underwriting, to risk analysis, to loan servicing, to many other things. Everyone is talking about the risks and rewards of using these new tools, including how to hone their models and how much to involve a human touch. As I listened, the relevance of our prior writing and talks on the potential for enforcement activity in the area of AI was top of mind – it has stayed quite relevant.  Check it out!

Serving the Underserved.  Relatedly, almost everyone seems to be talking about how technology is helping improve access to credit and banking services to those previously cut out – not only the use of AI, but also the overall digitization of banking, payments, and credit. Thought leaders are focused on looking beyond the ordinary credit file; on the use of mobile services to reach new consumers; and on the growth of non-traditional payment platforms. Stay tuned for developments in this area, including the broadening of the “payments” world to include non-financial institutions.

Partnerships.  Last, partnerships are all the rage. Financial institutions are buying startups, in addition to investing in technology themselves; smaller banks, community banks, and others are partnering to keep up with the latest tech trends; and regulators are focused on the third-party risk issues that partnerships raise, and also on allowing third parties to keep smaller banks competitive through partnerships. This area is not limited to true lender issues – especially keep an eye on the FDIC’s recent request for information on standard-setting for third-party service providers.

Again, these are just some blog thoughts from one attendee – please get in touch with your reactions and thoughts!

October 6, 2020 Colorado Consumers Receive Additional Protections after Attorney General Settles Lawsuits

By: Alexander N. Ghantous

loan

In August of 2020, the Colorado Attorney General’s Office settled two lawsuits concerning Colorado’s right to enforce its consumer loan interest rate limits.[1] The lawsuits involved Avant of Colorado, LLC (“Avant”) and Marlette Funding, LLC (“Marlette”), both of which are not banks.[2] However, partnerships with banks located outside of Colorado were established by the companies: Avant with WebBank, and Marlette with Cross River Bank.[3]

According to the Colorado Attorney General’s website, federal law permits “certain out-of-state banks” to offer loans at higher interest rates in Colorado than what is generally permitted in the state.[4] The Colorado Attorney General alleged that the partnerships in these matters were established to illegally offer loans at higher interest rates than what was allowed in Colorado.[5] While the lawsuits did result in a settlement, there was no admission of fault, liability, or wrongdoing.[6]  

The settlement provides Colorado consumers with an extra layer of protection against predatory lending practices.[7] It ensures that “true bank loans” are being made by Cross River Bank, WebBank, and their non-bank company partners that include, but are not limited to, Marlette and Avant.[8] Included in those protections is a “Safe Harbor” provision, which was implemented to ensure compliance with the Colorado Uniform Consumer Credit Code.[9] The following criteria must be met to comply with the settlement’s “Safe Harbor” provision:

  • Oversight Criteria: To satisfy the “Safe Harbor” provision’s “Oversight Criteria,” 14 terms must be met.[10] For example, the first term mandates that any loan that is “offered and originated” online by either WebBank or Cross River Bank in conjunction with Avant, Marlette, or any other Fintech company partner is “subject to oversight by the respective [b]ank’s prudential regulators, including the FDIC and the [b]ank’s state banking regulators.”[11]
     
  • Disclosure and Funding Criteria: Three terms must be met to satisfy the “Safe Harbor” provision’s “Disclosure and Funding Criteria.”[12] For example, the first term requires that WebBank or Cross River Bank be identified as the lender on loan agreements.[13]
  • Licensing Criteria: Five terms must be met to satisfy the “Safe Harbor” provision’s “Licensing Criteria,” including, but not limited to, licensing requirements when “supervised loans” are offered.[14]
  • Consumer Terms Criteria: Two terms must be met to satisfy the “Safe Harbor” provision’s “Consumer Terms Criteria.”[15] For example, loans cannot have an interest rate that is higher than 36 percent.[16]
  • Structural Criteria: To satisfy the “Safe Harbor” provision’s “Structural Criteria,” there must be compliance with a minimum of one of the options that follow: “the Uncommitted Forward Flow Option, the Maximum Committed Forward Flow Option, the Maximum Overall Transfer Option, or an Alternative Structure Option,” all of which are described within the settlement.[17]

Under the settlement agreement, Web Bank, Cross River Bank, Avant, and Marlette are also joint and severally liable for: (1) a payment of $1,050,000 to the State of Colorado; and (2) a $500,000 contribution to the Colorado MoneyWi$er program.[18]  

The final, executed version of the settlement agreement is located here

 

[1] Colorado Attorney General’s Office, Colorado Attorney General’s Office Settles Lawsuit Against Lenders for Exceeding State Interest Rate Limits on Consumer Loans, (Aug. 18, 2020), https://coag.gov/press-releases/8-18-20/; Assurance of Discontinuance, https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf

[2] Colorado Attorney General’s Office, Colorado Attorney General’s Office Settles Lawsuit Against Lenders for Exceeding State Interest Rate Limits on Consumer Loans, (Aug. 18, 2020), https://coag.gov/press-releases/8-18-20/; Assurance of Discontinuance, pg. 1, https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf

[3] Colorado Attorney General’s Office, Colorado Attorney General’s Office Settles Lawsuit Against Lenders for Exceeding State Interest Rate Limits on Consumer Loans, (Aug. 18, 2020), https://coag.gov/press-releases/8-18-20/

[4] Id

[5] Id

[6] Assurance of Discontinuance, pg. 6, https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf

[7] Colorado Attorney General’s Office, Colorado Attorney General’s Office Settles Lawsuit Against Lenders for Exceeding State Interest Rate Limits on Consumer Loans, (Aug. 18, 2020), https://coag.gov/press-releases/8-18-20/

[8] Id. 

[9] Assurance of Discontinuance, pgs. 6-14, https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf

[10] Id. at 6-8

[11] Id at 6, 2-3

[12] Id. at 8

[13] Id. at 8, 2-3

[14] Id. at 8-9

[15] Id. at 9

[16] Colorado Attorney General’s Office, Colorado Attorney General’s Office Settles Lawsuit Against Lenders for Exceeding State Interest Rate Limits on Consumer Loans, (Aug. 18, 2020), https://coag.gov/press-releases/8-18-20/; Assurance of Discontinuance, pg. 9, https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf

[17] Assurance of Discontinuance, pgs. 9-14, https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf

[18] Colorado Attorney General’s Office, Colorado Attorney General’s Office Settles Lawsuit Against Lenders for Exceeding State Interest Rate Limits on Consumer Loans, (Aug. 18, 2020), https://coag.gov/press-releases/8-18-20/; Assurance of Discontinuance, pgs. 14-15, 2, https://coag.gov/app/uploads/2020/08/Avant-Marlette-Colorado-Fully-Executed-AOD.pdf

PEOPLE: Alexander N. Ghantous

September 14, 2020 California Legislature Passes New Consumer Financial Protection Law

By: Madeline Skitzki

New-Update-IconOn August 31, 2020, the California Legislature passed Assembly Bill 1864. In general, this bill (1) renamed the Department of Business Oversight as the Department of Financial Protection and Innovation and renamed the commissioner of the Department as the Commissioner of Financial Protection and Innovation, and (2) enacted the California Consumer Financial Protection Law (CCFPL) to, among other purposes, strengthen consumer protections by expanding the ability of the Department of Financial Protection and Innovation to improve accountability and transparency in the California financial system and promote nondiscriminatory access to responsible, affordable credit.

Under the bill, the Department of Financial Protection and Innovation is required to regulate the provision of various consumer financial products and services and exercise nonexclusive oversight and enforcement authority under California and federal (to the extent permissible) consumer financial laws. The Department is granted the power to bring administrative and civil actions, issue subpoenas, promulgate regulations, hold hearings, issue publications, conduct investigations, and implement outreach and education programs, and is required to promulgate certain rules and regulations regarding registration requirements. The bill also makes it unlawful for covered persons or service providers to engage in unlawful, unfair, deceptive, or abusive acts or practices with respect to consumer financial products or services or to provide consumers financial products or services that are not in conformity with any consumer financial law.  It further requires covered persons and service providers to file certain documents under oath and imposes specific civil and monetary penalties, as well as injunctive relief, for violations of the CCFPL.  With respect to funding, the bill requires the Commissioner to deposit all money collected or received under the CCFPL with the State Treasurer for the Financial Protection Fund, which is created under the bill for the administration of the CCFPL.

PEOPLE: Madeline Skitzki

September 3, 2020 Consumer Finance Observer – Summer 2020 Edition

Summer 2020Jenner & Block has published its fifth issue of Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch. As thought leaders, our lawyers write about the consumer finance sector on topics ranging from artificial intelligence, compliance, data security, FinTech, lending, and securities litigation.

In the Summer 2020 issue of the CFO, our consumer finance lawyers discuss: litigation and enforcement consideration for FinTech PPP Lenders; an update on New York State’s Department of Financial Services; the US Supreme Court’s decision in Selia Law LLC v. CFPB; Office of the Comptroller of the Currency's adoption of the rule in Madden v. Midland Funding; COVID-19's disparate impact; and proposed amendments to California's Proposition 65. Contributors are Partners Kali N. BraceyJeremy M. CreelanMichael W. Ross, and Kate T. Spelman; Associates Jacob D. Alderdice and Julian J. Ginos.

To read the full newsletter, please click here

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

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.