Jenner & Block

Consumer Law Round-Up

April 2, 2020 COVID-19 / Coronavirus

On March 27, 2020, Congress passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act), a historic $2 trillion stimulus package to address economic fallout from the COVID-19 pandemic. With the deep experience of Jenner & Block lawyers who served in government, including Noun_virus_1772453former Special Inspector General of the Troubled Asset Relief Program  Neil Barofsky, our COVID-19 Response Team includes members who played key leading roles in the country’s response to the last economic crisis. To read what they have to say, please click here. If you have any questions or feel that we can assist, please reach out to our task force.

March 27, 2020 COVID-19 / Coronavirus

We are closely tracking and providing information on developments facing companies and organizations arising from the COVID-19 pandemic. In the latest alerts, our lawyers offer guidance on financial and tax relief provisions in Illinois; share observations of how landlords and real estate lenders are Noun_virus_1772453responding to defaulting tenants and borrowers; consider the effects of the crisis on M&A transactions; explore how social distancing affects ongoing environmental investigations and mediation; analyze how state and federal legislation may combat insurance coverage denials for COVID-19; and examine the Department of Labor’s guidance regarding expanded family and medical leave under the Families First Coronavirus Response Act. These alerts and others are available in the library of our COVID-19 / Coronavirus Resource Center

 

CATEGORIES: Decisions of Note, Employment, Privacy Data Security, Securities

March 25, 2020 The Wait is Over: FDIC Approves Insurance for New Industrial Banks for the First Time in Over a Decade

Evarts_Susanna_COLOR HR

By: Susanna D. Evarts

New UpdateOn March 18, 2020, the Federal Deposit Insurance Corporation (FDIC) approved the deposit insurance applications for industrial bank applicants Square, Inc., a provider of payment services for small businesses, and Nelnet, Inc., a student loan servicer.  The approvals allow Square and Nelnet to create new industrial banks chartered under Utah law.  Obtaining an industrial bank charter allows companies that are not bank holding companies to own banks that are authorized to originate consumer and commercial loans and collect insured deposits.  Square and Nelnet’s applications are the first that the FDIC has approved in over a decade, marking a potentially significant shift in how the FDIC will treat such applications, and reflecting an increase in the number of active Utah industrial banks, which has hovered at fifteen.  These state-chartered financial institutions are generally subject to the same banking laws and regulations as other types of bank charters.

The approvals come one day after the FDIC issued a proposed rule for public comment, which would impose certain conditions on industrial bank applicants.  This marks a change in the FDIC’s position on approving deposit insurance applications for industrial banks, indicating that the long-dormant industrial bank charter may begin to attract attention once more.  The two new approvals and proposed rule may prompt FinTech and other tech companies to consider seeking a charter as a way to expand their market presence.

CATEGORIES: FinTech

March 19, 2020 COVID-19 / Coronavirus Resources

We continue our efforts to do everything we can to support our clients as they navigate these times.  Our lawyers have provided practical insight into the legal and strategic challenges companies are facing.  To stay abreast of the quickly changing landscape, Jenner & Block has assembled a multi-disciplinary team, drawn from a variety of our practice areas and sector gro Noun_virus_1772453ups, to support clients as they navigate these uncharted waters.  We also continue to update our COVID-19 / Coronavirus Resource Center.  It provides helpful and timely information on the legal and strategic challenges companies are facing. Following is a list of some of those pieces.


First COVID-19 Securities Class Action Lawsuits Hit Cruise Line and Pharmaceutical Company

The rapid developments in the spread and economic impact of COVID-19 present particular challenges for officers and directors of public companies trying to manage their businesses while providing timely and truthful information to shareholders.  Over the last few days, shareholders have filed the first suits alleging that public companies materially misrepresented the impact of COVID-19 on their operations.  If history is any guide, derivative litigation alleging director and officer mismanagement is likely to follow.  Directors and officers of public companies should exercise great care in any public statements regarding the impact of COVID-19 on their businesses, and carefully consider and document the steps they are taking to oversee and respond to COVID-19 developments.

To read more, please click here.

COVID-19: "Employer Guidance for Addressing Possible Layoffs and Closures"

As employers grapple with staffing while dealing with the current COVID-19 crisis, they need to be mindful of their obligations under federal and state legislation addressing certain closures and layoffs.

Under the federal Work Adjustment and Retraining Notification (WARN) Act, 29 U.S.C. §2101, covered employers must provide at 60 calendar days written notice of a covered “plant closing” or “mass layoff.”  WARN contains various definitions that establish:

  • Which employers must give notice;
  • When such notice must be given;
  • Who must receive notice;
  • What must the notice contain; and
  • When notice may be excused.

To read more, please click here.

COVID-19: Issues Facing the Airline Industry

As the novel coronavirus / COVID-19 continues to cause economic and social turmoil across the globe, the airline industry is suffering particularly acute hardships.  US carriers, including Delta, American, United and Southwest, have announced plans to cut their international routes by as much as 80% to 90% over the next several months, and domestic capacity is now being reduced by 20%-40%.  Foreign carriers have been impacted even more harshly.  Ryanair has announced it may have to ground its entire fleet, Air France has announced cuts into its flight schedule of up to 90% and British Airways has made similar cuts of up to 75%.  Furthermore, the aircraft that continue to fly are far from full.  Along with these flight reductions, airlines have grounded fleets of their larger aircraft, instituted hiring freezes and in some cases commenced layoffs, and US airlines are actively seeking ways to preserve cash on hand and obtain relief from the federal government.

To read more, please click here.

To stay abreast of developments through this unprecedented situation, continue to monitor the Consumer Law Round-Up blog and visit the resource library for helpful reference materials.

CATEGORIES: Class Action Trends, Employment, Securities

March 18, 2020 COVID-19 / Coronavirus Resources

When we read the daily news, we see uncharted waters. Industries are being impacted overnight. We continue to do everything we can to support clients as they navigate these times. Our lawyers have provided practical insight into the legal and strategic challenges companies are facing. Jenner & Block has assembled a multi-disciplinary team, drawn from a variety of our practice areas and sector groups, to support clients as they navigate these uncharted waters. We also continue to update our COVID-19 / Coronavirus Resource Center.  It provides helpful and timely information on the legal and strategic challenges companies are facing.  Noun_virus_1772453Following is a list of some of those pieces.

Evaluating Force Majeure Clauses in Connection with the COVID-19 Outbreak

As governments and businesses take action to mitigate the impact of COVID-19, companies must consider whether and to what extent their existing contractual agreements oblige parties to perform while events related to COVID-19 are impacting the performance under those contracts. Many contracts contain force majeure clauses that may excuse performance in the face of COVID-19. These provisions are not uniform, and the scope of relief they afford may vary considerably based upon the language used, the jurisdictions involved, and the unique facts and circumstances of each case. We provide a brief overview here of how a force majeure clause may excuse performance with respect to COVID-19-related events. To read more, please click here.

SEC Reacts to COVID-19 Crisis and Issues Relief Relevant to Public Companies and Regulated Entities

On Friday, March 13, 2020, and over the subsequent weekend, the Securities and Exchange Commission (SEC) and its staff made announcements with guidance and/or relief for public companies and firms experiencing challenges because of COVID-19 / coronavirus. The SEC and its staff appear to have calibrated the guidance and relief to balance investors’ need for information with the practical realities of an unprecedented public health event. The SEC also emphasized that it is continuing to “assess impacts relating to the coronavirus on investors and market participants, and will consider additional relief from other regulatory requirements.” To read more, please click here.

Cybersecurity Concerns with Regard to Work-From-Home Policies

The COVID-19 outbreak is causing many companies to consider work-from-home programs for many of their employees. Any arrangement where employees are permitted to work from home poses a unique set of cybersecurity risks and challenges, but those risks are heightened when a majority of the work force are away from offices that are controlled. Ensuring that appropriate technical and administrative safeguards are in place prior to launching wide-scale work-from-home programs is critical to ensuring the safety of your network and data.  For considerations that businesses should take into account when implementing work from home programs, please click here.

To stay abreast of developments through this unprecedented situation, continue to monitor the Consumer Law Round-Up blog and visit the resource library for helpful reference materials.

 

CATEGORIES: Employment, Privacy Data Security

March 13, 2020 Ninth Circuit Sharply Limits Pre-Certification Discovery Into the Identity of Other Class Members

By:  Alexander M. Smith 

CaliforniaWhile the Ninth Circuit’s decision reflects a welcome concern about the use of pre-certification discovery to identify potential clients, it further exacerbates the stark contrasts between class action practice in California state courts and California federal courts.

In class actions, named plaintiffs frequently seek discovery from the defendant regarding the identities and contact information of other putative class members. While some view this practice as a normal method of obtaining information about other similarly situated consumers, others view it as a way for plaintiffs’ lawyers to fish for potential plaintiffs—either in new lawsuits, or as a “backup” in the event the court finds the original named plaintiff atypical or inadequate.

In spite of these concerns about fishing expeditions, California state courts have consistently permitted named plaintiffs in class actions to obtain pre-certification discovery regarding the names and contact information of other putative class members. Indeed, the California Supreme Court has repeatedly blessed this practice, holding that the interests of named plaintiffs in seeking relief on behalf of similarly situated consumers—and the broad scope of discovery under California law—weighed in favor of requiring defendants to identify other potential members of the class. See Pioneer Elecs. (USA) v. Superior Court, 40 Cal. 4th 360, 373-74 (2007); Williams v. Superior Court, 3 Cal. 5th 531, 547 (2017).

In a sharp divergence from this line of cases, however, the Ninth Circuit held earlier this year that a named plaintiff in a class action is not entitled to pre-certification discovery regarding the identities of other putative class members. See In re Williams-Sonoma, 947 F.3d 535 (9th Cir. 2020). While the Ninth Circuit’s decision reflects a welcome concern about the use of pre-certification discovery to identify potential clients, it further exacerbates the stark contrasts between class action practice in California state courts and California federal courts.

Williams-Sonoma

In Williams-Sonoma, the named plaintiff—a Kentucky resident—allegedly purchased bedding from Williams-Sonoma in reliance on the advertised thread count of 600 threads per square inch. When the plaintiff allegedly discovered that this representation was false, he filed a class action in the Northern District of California on behalf of a putative class of consumers who bought bedding from Williams-Sonoma based on the same thread count representations. Before a class was certified, the district court determined that the plaintiff could not assert his claim on a class-wide basis, as Kentucky consumer law governed his individual claims and barred class actions. The named plaintiff informed the district court that he would pursue his individual claims in Kentucky, but sought discovery from Williams-Sonoma to identify a California purchaser who might be willing to serve as a named plaintiff in his stead.

Over Williams-Sonoma’s objections, the district court ordered Williams-Sonoma to produce a list of all California consumers who had purchased the bedding at issue since January 2012. Williams-Sonoma then filed a petition for a writ of mandamus, and the Ninth Circuit—in a divided opinion—granted that petition. Relying primarily on Oppenheimer Fund v. Sanders, 437 U.S. 340 (1978), the court held that the district court clearly erred in permitting pre-certification discovery into the identities of absent class members, as the names of absent class members were not “relevant to any party’s claim or defense” under Federal Rule of Civil Procedure 26(b)(1). As in Oppenheimer, the court reasoned, “using discovery to find a client to be the named plaintiff before a class action is certified is not within the scope of Rule 26(b)(1).”

Notably, the court did not make any effort to square its holding with the rule embraced by the California Supreme Court. Instead, it emphasized that the district court erred by relying on California discovery rules to justify its order compelling Williams-Sonoma to produce the names of other purchasers, as these rules are not binding in federal court.

Judge Paez dissented. He rejected the majority’s reading of Oppenheimer to preclude discovery into the identities of putative class members and held that it “stands for a much narrower proposition”—namely, that class counsel must rely on the procedures set forth in Federal Rule of Civil Procedure 23, rather than the discovery rules set forth in Rule 26 through 37, to identify and notify absent class members that a class had been certified. In fact, Judge Paez explained, the Supreme Court had expressly left open the possibility that Rule 26 would authorize discovery into the identity of absent class members so long as it was “relevant to other issues in the case.”

Moreover, aside from Oppenheimer, Judge Paez noted that no federal court had clearly addressed whether Rule 26 could be used to obtain discovery for the purpose of identifying a substitute plaintiff, and he accordingly refused to conclude that the district court’s discovery was erroneous—let alone so clearly erroneous as to warrant the extraordinary remedy of mandamus.

And in any event, even if Rule 26 did not authorize discovery into the identities of absent class members, he explained that Rule 23(d) provided an alternative source of authority for that order, as it permits district courts to order the plaintiff to provide notice to putative class members and empowers them to force defendants (such as Williams-Sonoma) to cooperate in this process.

Implications of Williams-Sonoma for Federal Court Practitioners

As the competing opinions illustrate, it is possible to read Williams-Sonoma in any number of ways. For instance, one might read Williams-Sonoma to stand for the broad proposition that the federal discovery rules simply do not permit discovery into the identity of absent class members and that this information is categorically not relevant to the parties’ claims or defenses. Indeed, given that the Ninth Circuit found the district court’s order so clearly erroneous as to warrant the extraordinary remedy of mandamus, one might conclude that this information is now strictly off-limits.
On the other hand, one could also read Williams-Sonoma much more narrowly. Unusually, the plaintiffs in Williams-Sonoma expressly admitted that their discovery requests were aimed at finding a new plaintiff, rather than discovering information relevant to the merits of the class’s claims. Thus, a plaintiff could argue that Williams-Sonoma simply stands for the uncontroversial proposition that discovery must be related to the parties’ claims and defenses. And in a similar vein, a plaintiff might argue that Williams-Sonoma no longer applies once a class has been certified: if the court has already concluded that the named plaintiff is an adequate class representative, there is no reason to believe that discovery into the identity of absent class members is aimed at identifying substitute plaintiffs.

At this stage, it is unclear which of these readings courts will adopt. The Ninth Circuit issued its decision in Williams-Sonoma less than two months ago, and no federal court has had occasion to apply that decision since then. But regardless of how broadly or narrowly federal courts read Williams-Sonoma, it adds yet another checkmark to the long list of distinctions between federal and state court class action practice.

Reprinted with permission from the March 12 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.

CATEGORIES: Class Action Trends

March 13, 2020 COVID-19 / Coronavirus Resources

Noun_virus_1772453Conscious of the human, operational and financial strain that coronavirus is placing on businesses and organizations worldwide, Jenner & Block has assembled a multi-disciplinary team, drawn from a variety of our practice areas and sector groups, to support clients as they navigate these uncharted waters.  We have also developed a COVID-19 / Coronavirus Resource Center.  It provides helpful and timely information on the legal and strategic challenges companies are facing. Following is a list of some of those pieces.

US OSHA Issues Guidance for Employers Regarding Preparing for COVID-19 Risks
On March 9, 2020, the federal Occupational Safety and Health Administration (OSHA) issued its “Guidance on Preparing Workplaces for COVID-19,” (Guidance) compiling best practices and existing regulatory standards for evaluating and preparing for risks to workers from exposure to the novel coronavirus and COVID-19. OSHA urges that “it is important for all employers to plan now for COVID-19.” (p. 3)  The Guidance describes: (1) how a COVID-19 outbreak could affect workplaces; (2) steps employers can take to reduce workers’ risk of exposure; (3) classification of jobs into categories of risk and controls to protect workers in each category; and (4) how to protect workers living or traveling outside the US. To read more click here.

EPA Issues Emergency Guidance to Mitigate Spread of coronavirus in the United States
United States Environmental Protection Agency (USEPA) activated its Emerging Viral Pathogens Guidance for Antimicrobial Pesticides (the Guidance) in an attempt to help curb the spread of the novel coronavirus (COVID-19) (the coronavirus) in the United States.  Drafted pursuant to USEPA’s authority under the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA), the Guidance sets forth a voluntary process by which companies holding FIFRA registrations for disinfecting/antimicrobial products can promote the use of their products against specific “emerging pathogens,” including the coronavirus. While the Guidance was finalized in August 2016, it had remained inactive prior to USEPA’s recent announcement.  To read more click here.

Insurance Law Update: Applying Commercial Property Insurance to COVID-19 Losses
Governments and health authorities worldwide are responding to an outbreak of respiratory disease caused by a novel coronavirus that was first detected in China and which has now been detected in almost 100 locations internationally, including in the United States.  To read more click here.

Action Plan for Government Contractors: An Ounce of Prevention is Worth a Pound of Cure: Be Prepared for coronavirus (COVID-19)
The headlines on coronavirus (COVID-19) continue to escalate.  The World Health Organization now categorizes the outbreak as a “pandemic.”  The Office of Personnel Management (OPM) recently circulated new, additional guidance for federal workers. This guidance intends to ward off criticism that the government had not yet signaled that federal employees and their contractors should not be asked to choose between financial obligations and public health.  To read more click here.

To stay abreast of developments through this unprecedented situation, continue to monitor the Consumer Law Round-Up blog and visit the resource library for helpful reference materials.

March 13, 2020 Seventh and DC Circuits Allow Nationwide Class Actions with Claims of Out-of-State Plaintiffs after Bristol-Myers Squibb

   

By: Michael T. Brody, Gabriel K. Gillett, Howard S. Suskin and Brenna J. Field

New-Development-IconThis week, the Seventh and DC Circuits issued long-awaited and major decisions addressing a critical issue in class action litigation explicitly left unresolved in Bristol-Myers Squibb Co. v. Superior Court of California, 137 S. Ct. 1773 (2017)—whether a federal court has jurisdiction to hear claims by out-of-state members of a putative nationwide class action whose claims lack a connection to the forum. Both courts said yes, albeit for different reasons. As other circuit courts weigh in, and possibly disagree, the Supreme Court will likely be called upon to resolve the issue.

In Bristol-Myers Squibb, 600 plaintiffs brought a coordinated mass tort action asserting California state law claims in California state court using a California rule for consolidating individual suits. But only 86 plaintiffs were California residents. The defendant argued that it was not subject to specific personal jurisdiction as to the non-resident plaintiffs’ claims because they and their claims lacked a sufficient connection to the forum. The Supreme Court agreed, but stated that it did not decide whether its holding applied to federal courts or to class actions. Since then, some federal district courts have taken this to mean that federal courts have specific personal jurisdiction over defendants facing claims by absent non-resident putative class members in any type of aggregated litigation while others have taken the opposite view, that this ruling limits the court’s jurisdiction to claims by plaintiffs (named and unnamed) with a connection to the forum.

On March 11, the Seventh Circuit became the first appellate court to decide whether Bristol-Myers Squibb applies to federal class actions. In Mussat v. IQVIA, Inc., No. 19-1204, the court sided with plaintiffs and held that a federal court has jurisdiction to hear federal claims by unnamed class members in a putative nationwide class action even if they lack a connection to the forum. In this Telephone Consumer Protection Act suit, defendant moved to strike the class definition, which included out-of-state plaintiffs. The Court held that Bristol-Myers Squibb did not bar federal courts from hearing these claims, reasoning that absent class members are not “parties” to a class action for purposes of jurisdiction, whereas due process required a due process result for the consolidated mass action plaintiffs in Bristol-Myers Squibb. A day earlier, the DC Circuit reached a similar conclusion, at least temporarily, without taking on Bristol-Myers Squibb. In Molock v. Whole Foods Market Group, Inc., No. 18-7162, an employment discrimination case arising from the denial of the defendant’s motion to dismiss, the court held that the defendant could not challenge personal jurisdiction over claims by absent class members until after the class is certified. The Court reasoned that it would be premature to dismiss absent class members until they are full parties to the action.

IQVIA and Whole Foods will not be the last words on federal court jurisdiction over class actions after Bristol-Myers Squibb. The Fifth and Ninth Circuits are each considering cases that raise the issue. See Tredinnick v. Jackson National Life Ins., No. 18-40605 (5th Cir.); Moser v. Health Insurance Innovations, No. 19-56224 (9th Cir.). Meanwhile, district courts likely will continue to reach divergent results. Litigants are therefore well-advised to continue raising and preserving the issue for further review, as these decisions hardly bring clarity or certainty on the important issue of whether a defendant is subject to claims in federal court asserted by a putative class of plaintiffs with no tie to the forum. That clarity and certainty may only arrive when the Supreme Court interprets how its decision in Bristol-Myers Squibb applies in the class action context once and for all.

CATEGORIES: Class Action Trends

March 13, 2020 COVID- 19: Managing Financial Disruption

   

By: Angela M. Allen, Marc B. Hankin and Melissa M. Root

Covid-SideCOVID-19 presents an unprecedented global public health challenge that is placing significant stress on economic activity and financial markets.  Widespread mitigation efforts including social distancing and travel restrictions are most directly affecting businesses such as airlines and manufacturers reliant on an international supply chain.  However, at this point it is not possible to accurately predict COVID-19’s second and third order effects.

Just as a business needs to take appropriate steps to safeguard the health and well-being of its employees, it should also ensure its financial viability during this period of significant disruption and uncertainty.  While each enterprise necessarily faces unique challenges, as a general matter   a business would be well served to assess its current financial situation, with a particular focus on maintaining sufficient liquidity and compliance with its financing agreements so as to not trigger a default.  Recognizing that addressing the risk of financial distress is among the many challenges facing businesses at this time, the following are examples of the principal issues they should address in this regard. 

  • Financial Planning
    • Maintain Liquidity: During periods of financial and operational stress, the cliché  “Cash is King” rings true.  Conduct a table top exercise with leaders from finance, operations and legal to determine impact of COVID-19 on cash flow, with a goal of creating a 13-week cash flow forecast.  Update the forecast on a regular basis to incorporate new events and insights regarding the impact that COVID-19 is having on employees, customers and suppliers.  Consider delaying non-essential expenditures to address potential liquidity shortfalls.
    • Providing Credit: Consider changing credit terms for customers with liquidity restraints or whose revenue will be reduced due to common mitigation responses to COVID-19, such as travel restrictions and event cancellations.  Options include obtaining third-party guarantees, letters of credit, or moving to COD before fulfilling the customer’s next order.  Before making any such request, confirm that all applicable agreements with the customer permit the changing of such terms.
    • Insurance: Review coverage and consider making a claim under (1) business interruption insurance, (2) civil authority coverage and (3) trade-disruption insurance.
    • Contracts: Evaluate and understand terms of any key contracts where COVID-19 may impair the ability to timely perform. In particular, focus on “force majeure” clauses and cure periods in the event of a potential breach.  
  • Maintain Access to Credit
    • Evaluate credit documents for covenant default triggers.
    • Evaluate credit documents for substantive compliance with all reporting obligations. These often include matters relating to litigation, material contracts and events that have a material impact on the business – all of which may arise as a result of COVID-19.
    • Where business interruption insurance is available, review loan covenants to determine if proceeds of that policy may be added back to EBITDA or Net Income when calculating compliance with financial covenants.
  • Supply Chain Risks
    • Know and understand your supply chain and map it several tiers down to understand how your business inputs may be affected by COVID-19.
    • Identify critical vulnerabilities and take action. For key suppliers, identify potential alternatives (in particular any local sources) and seek to diversify supply chain to mitigate disruption.
    • Anticipate disruptions in key counterparty supply chain and evaluate potential implications on cash flow, EBIDTA, financial covenants, etc.

As during any period of significant disruption, clear and credible communication within an organization and to customers, suppliers and lenders is key.  Recognize that no one has experienced the substantial and widespread disruption that COVID-19 is causing.  Customers, suppliers and lenders are usually more willing to make reasonable accommodations to assist an enterprise experiencing financial distress when they have transparency into the problem, and the business leaders maintain credibility by providing accurate information and demonstrating that they have carefully considered the interests of all stakeholders. 

CATEGORIES: CAFA

March 6, 2020 Seila Law LLC v. Consumer Financial Protection Bureau Summary

By: Julian J. Ginos

Supreme Court 35719-0001

The below summary is based on the Court’s official transcript of the argument, which remains subject to final review.

The March 3, 2020 oral argument in Seila Law LLC v. Consumer Financial Protection Bureau[1] focused on whether the Consumer Financial Protection Bureau’s (CFPB) single-director leadership structure is unconstitutional on the ground that the President, by statute, cannot remove that director at will.

Most questioning concerned whether (and how) the Court could draw a principled line distinguishing permissible and impermissible removal restrictions. The justices also probed the advocates about the likely breadth and impact of the rules being proposed. As usual, Justice Thomas asked no questions. Several themes emerged:

  • Many justices pursued lines of questioning concerning the possibility of a limited ruling.
    • The Chief Justice asked several times how the CFPB’s budgetary independence should affect the Court’s analysis, which suggests he might propose a resolution distinguishing the CFPB from other agencies to produce a narrower opinion.
    • Justice Kavanaugh pointed out that past decisions treating severability clauses as merely creating a presumption of severability date to an era when the Court’s analysis focused less on statutory text, which may indicate a view that the Court is bound to treat the removal restrictions as severable.
    • Justice Ginsburg asked whether Petitioner had even been harmed, given that the investigative demand was later ratified by an acting director (who was removable at will).
    • Justice Sotomayor similarly asked if the Court should address severability first and reserve consideration of the removal restriction for when a concrete dispute arises between a President and a director, if one ever does.
  • Two justices, however, appeared unreceptive to certain arguments advanced in favor of a narrower holding.
    • Justice Alito asked the Solicitor General to explain the Court’s earlier precedents treating severability clauses as nondispositive, potentially indicating willingness to strike down the entire statute.
    • Justice Gorsuch seemed taken aback by one proposed nonconstitutional resolution, observing that the appointed amicus’s argument that ratification resolves the dispute resembles a request for dismissal of the writ as improvidently granted, even though the ratification argument against certiorari was raised during certiorari briefing.

  • Several justices expressed concern about the rationale and administrability of the rules being proposed.
    • The Chief Justice appeared hostile to a rule that would prohibit removal for particular policy decisions but permit it for broad policy disagreements (an approach Justice Gorsuch likewise seemed to think unworkable), which could necessitate the Court’s refereeing of such questions—a result the Chief Justice called “the worst of all possible worlds.”
    • Justices Alito and Gorsuch both displayed skepticism at the feasibility of the amici’s proposal that removal restrictions be tolerated only where the principal officer is not exercising core powers the Constitution assigns to the President.
    • Justice Breyer focused on whether the facially straightforward rule of permitting removal restrictions on multimember but not single-director structures had an underlying logic or useful guiding principle, compared to a case-by-case approach that would assess each agency’s particular need for independence.
    • Justices Ginsburg and Kagan both suggested that multimember committees are actually harder to influence, and thus more independent, than single-director structures, which arguably cuts in favor of tolerating more removal restrictions for single-director structures.
    • Justice Sotomayor noted that several agencies comparable in power to the CFPB—the Office of Special Counsel and the Social Security Administration—have leaders with similar removal restrictions.

  • The justices also alluded to the practical consequences of the proposed rules.
    • Justice Kavanaugh repeatedly echoed the Solicitor General’s concern that a director, whose tenure may extend into the next President’s term, could saddle that President with unwanted policy priorities.
    • Justices Gorsuch and Kavanaugh both expressed concern that allowing removal for policy differences would effectively overturn Humphrey’s Executor v. United States.[2] Justice Gorsuch appeared to prefer “being honest” about such an overruling, and Justice Kavanaugh observed that watering down the removal restrictions would implicate the independence of other agencies as well.

In sum, those forecasting the CFPB’s demise may have found little at oral argument to dissuade them. Even so, the variety of rationales debated suggests the scope and reasoning of any decision remains up in the air.

 

[1] Docket No. 19-7.

[2] 295 U.S. 602 (1935).

 

March 6, 2020 Seila Law LLC v. Consumer Financial Protection Bureau Summary

By: Julian J. Ginos

Supreme Court 35719-0001The below summary is based on the Court’s official transcript of the argument, which remains subject to final review.

The March 3, 2020 oral argument in Seila Law LLC v. Consumer Financial Protection Bureau[1] focused on whether the Consumer Financial Protection Bureau’s (CFPB) single-director leadership structure is unconstitutional on the ground that the President, by statute, cannot remove that director at will.

Most questioning concerned whether (and how) the Court could draw a principled line distinguishing permissible and impermissible removal restrictions. The justices also probed the advocates about the likely breadth and impact of the rules being proposed. As usual, Justice Thomas asked no questions. Several themes emerged:

Many justices pursued lines of questioning concerning the possibility of a limited ruling.

- The Chief Justice asked several times how the CFPB’s budgetary independence should affect the Court’s analysis, which suggests he might propose a resolution distinguishing the CFPB from other agencies to produce a narrower opinion.

- Justice Kavanaugh pointed out that past decisions treating severability clauses as merely creating a presumption of severability date to an era when the Court’s analysis focused less on statutory text, which may indicate a view that the Court is bound to treat the removal restrictions as severable.

- Justice Ginsburg asked whether Petitioner had even been harmed, given that the investigative demand was later ratified by an acting director (who was removable at will).

- Justice Sotomayor similarly asked if the Court should address severability first and reserve consideration of the removal restriction for when a concrete dispute arises between a President and a director, if one ever does.

Two justices, however, appeared unreceptive to certain arguments advanced in favor of a narrower holding.

- Justice Alito asked the Solicitor General to explain the Court’s earlier precedents treating severability clauses as nondispositive, potentially indicating willingness to strike down the entire statute.

- Justice Gorsuch seemed taken aback by one proposed nonconstitutional resolution, observing that the appointed amicus’s argument that ratification resolves the dispute resembles a request for dismissal of the writ as improvidently granted, even though the ratification argument against certiorari was raised during certiorari briefing.

Several justices expressed concern about the rationale and administrability of the rules being proposed.

- The Chief Justice appeared hostile to a rule that would prohibit removal for particular policy decisions but permit it for broad policy disagreements (an approach Justice Gorsuch likewise seemed to think unworkable), which could necessitate the Court’s refereeing of such questions—a result the Chief Justice called “the worst of all possible worlds.”

- Justices Alito and Gorsuch both displayed skepticism at the feasibility of the amici’s proposal that removal restrictions be tolerated only where the principal officer is not exercising core powers the Constitution assigns to the President.

- Justice Breyer focused on whether the facially straightforward rule of permitting removal restrictions on multimember but not single-director structures had an underlying logic or useful guiding principle, compared to a case-by-case approach that would assess each agency’s particular need for independence.

- Justices Ginsburg and Kagan both suggested that multimember committees are actually harder to influence, and thus more independent, than single-director structures, which arguably cuts in favor of tolerating more removal restrictions for single-director structures.

- Justice Sotomayor noted that several agencies comparable in power to the CFPB—the Office of Special Counsel and the Social Security Administration—have leaders with similar removal restrictions.

The justices also alluded to the practical consequences of the proposed rules.

- Justice Kavanaugh repeatedly echoed the Solicitor General’s concern that a director, whose tenure may extend into the next President’s term, could saddle that President with unwanted policy priorities.

- Justices Gorsuch and Kavanaugh both expressed concern that allowing removal for policy differences would effectively overturn Humphrey’s Executor v. United States.[2] Justice Gorsuch appeared to prefer “being honest” about such an overruling, and Justice Kavanaugh observed that watering down the removal restrictions would implicate the independence of other agencies as well.

In sum, those forecasting the CFPB’s demise may have found little at oral argument to dissuade them. Even so, the variety of rationales debated suggests the scope and reasoning of any decision remains up in the air.

 

[1] Docket No. 19-7.

[2] 295 U.S. 602 (1935).

PEOPLE: Julian J. Ginos

March 3, 2020 Federal Reserve Highlights the Fair Lending Risks Posed by Targeted Internet Marketing

James_Keturah

By: Keturah R. James

Internet-MarketingIn January 2020, the Federal Reserve’s Division of Consumer and Community Affairs published an article titled “From Catalogs to Clicks: The Fair Lending Implications of Targeted, Internet Marketing.”[1]  In the article, Federal Reserve staff Carol Evans and Westra Miller discuss how new technologies have made it possible for companies to obtain a “treasure trove of data about consumers”—including their race, gender, internet browsing patterns, where they live, and with whom they do business—and to use that data to target consumer groups.[2]  As the authors put it, this “targeted marketing” cuts both ways: it can facilitate financial inclusion and tailoring for consumers, but it may also be discriminatory under civil rights and consumer protection laws.[3]

In particular, Evans and Miller acknowledge that the use of consumer data to market credit can raise fair lending concerns, but also recognize that little regulatory guidance exists despite the increased use of Internet-based targeted marketing.[4]  Financial institutions are largely left to their own devices in determining how best to comply with laws that prohibit discrimination in lending, like the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA).  Evans and Miller therefore provide specific recommendations to financial institutions who use targeted marketing, such as:

  • Lenders should “ensure that they understand how they are employing targeted, Internet-based marketing and whether any vendors use such marketing on their behalf.”[5]
  • Lenders that use online advertising services or platforms should “monitor the terms used for any filters, as well as any reports they receive documenting the audience(s) that were reached by the advertising.”[6]
  • Lenders should learn “whether a platform employs algorithms . . . that could result in advertisements being targeted based on prohibited characteristics.”[7]

Evans and Miller conclude by emphasizing the importance of carefully designing and monitoring online targeted advertising, especially given the high stakes that fair access to housing and credit have for minority consumers.[8]  Accordingly, as regulation in this area remains to be more thoroughly developed, financial institutions and others may choose to draw on the guidance in this article in their efforts to ensure that their marketing practices comply with applicable law.

 

[1] Carol A. Evans & Westra Miller, From Catalogs to Clicks: The Fair Lending Implications of Targeted, Internet Marketing, Consumer Compliance Outlook, Third Issue 2019, at 1.

[2] Id. at 2.

[3] Id. 

[4] Id. at 4. 

[5] Id. at 7. 

[6] Id. 

[7] Id.

[8] Id.

February 25, 2020 House Hearing on Equitable Algorithms

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By: Isabel F. Farhi

New-Development-IconOn February 12, the Task Force on Artificial Intelligence of the House of Representatives Committee on Financial Services conducted a hearing titled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.”  The purpose of this hearing, as articulated in the opening remarks of the Committee Chair, was to assess fairness and transparency in the use of algorithms in the financial services industry.  The panelists were public interest advocates, academics, and legal professionals working in the technology space. 

The comments at the hearing revolved around two major themes:  first, how to define ‘fairness’ and the consequences of choosing a definition, and second, how bias can result from using algorithms and how regulators might correct that bias.  The panelists and Congressional representatives also made some general suggestions about appropriate regulations and remedies Congress could implement to ensure fair algorithms.

On the first theme of defining fairness, the panelists explained that fairness can have an actual price, because inserting fairness can make the algorithm less accurate.  Therefore, choosing why to diverge from that accuracy is a key issue.  They observed that there were multiple definitions of fairness and proposed a few different ones, all of which were fairly abstract.  The panelists also discussed potential tradeoffs presented by choosing a definition, as the panelists opined that choosing a definition that creates more fairness on one metric (for instance, race) may create less, or be at the expense of more, fairness on another metric (for instance, gender).  There was also a dialogue on who should participate in the development of an algorithm to ensure proper tradeoffs were being made, with the panelists arguing for the importance of including the communities affected by the algorithm in the discussion at all stages. 

On the second theme, the Congressional representatives attempted to determine at what point in the algorithmic system bias entered the algorithm and thus where to direct the regulation: at the input data, at the algorithm process itself, at the outputs, or at the human decision makers who use the output.  Generally, the consensus among the panelists appeared to be that the whole system should be considered, but they also stressed focusing on the outputs.  In part that view seemed to stem from a belief by the panelists that the inputs to an algorithm could not be effectively regulated, leading them to stress the need to examine and constrain outputs instead.  In addition, the panelists argued for the need to also regulate the conduct of the individuals who develop and use algorithms. 

The panelists also opined that the technological capability to create fair algorithms existed, although they noted that there have been relatively few deployments of such capabilities in critical products at the big tech companies. 

While no one suggested specific policy actions, the panelists and Congressional representatives offered some general thoughts on appropriate regulations to ensure fair algorithms, including:

  • Strengthening the current regulatory framework, both for consumer finance regulations specifically and agencies generally.
  • Requiring disgorgement of profits made through the use of an unfair algorithm. However, the panelists noted that this would only be useful if disclosure of unfair algorithms was mandated, or regulators had better tools to detect unfair algorithms.
  • Requiring the maintenance of good records concerning the development, process, and evolution (through machine learning) of an algorithm that would allow for auditing.
  • Allowing market forces to ensure fairness through arbitrage or other economics concepts.

The hearing concluded with no overarching decisions or conclusions reached.  However, from the discussion, it appeared that lawmakers were considering how to define fairness in the context of using algorithms and artificial intelligence and how to determine where regulation should be used to ensure it.  Given the preliminary nature of the discussion, it will be important to continue to watch for developments in this space.

February 25, 2020 House Hearing on Equitable Algorithms
By: Isabel F. Farhi
 
New-Development-IconOn February 12, the Task Force on Artificial Intelligence of the House of Representatives Committee on Financial Services conducted a hearing titled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.”  The purpose of this hearing, as articulated in the opening remarks of the Committee Chair, was to assess fairness and transparency in the use of algorithms in the financial services industry.  The panelists were public interest advocates, academics, and legal professionals working in the technology space. 
 
The comments at the hearing revolved around two major themes:  first, how to define ‘fairness’ and the consequences of choosing a definition, and second, how bias can result from using algorithms and how regulators might correct that bias.  The panelists and Congressional representatives also made some general suggestions about appropriate regulations and remedies Congress could implement to ensure fair algorithms.
 
On the first theme of defining fairness, the panelists explained that fairness can have an actual price, because inserting fairness can make the algorithm less accurate.  Therefore, choosing why to diverge from that accuracy is a key issue.  They observed that there were multiple definitions of fairness and proposed a few different ones, all of which were fairly abstract.  The panelists also discussed potential tradeoffs presented by choosing a definition, as the panelists opined that choosing a definition that creates more fairness on one metric (for instance, race) may create less, or be at the expense of more, fairness on another metric (for instance, gender).  There was also a dialogue on who should participate in the development of an algorithm to ensure proper tradeoffs were being made, with the panelists arguing for the importance of including the communities affected by the algorithm in the discussion at all stages. 
 
On the second theme, the Congressional representatives attempted to determine at what point in the algorithmic system bias entered the algorithm and thus where to direct the regulation: at the input data, at the algorithm process itself, at the outputs, or at the human decision makers who use the output.  Generally, the consensus among the panelists appeared to be that the whole system should be considered, but they also stressed focusing on the outputs.  In part that view seemed to stem from a belief by the panelists that the inputs to an algorithm could not be effectively regulated, leading them to stress the need to examine and constrain outputs instead.  In addition, the panelists argued for the need to also regulate the conduct of the individuals who develop and use algorithms. 
 
The panelists also opined that the technological capability to create fair algorithms existed, although they noted that there have been relatively few deployments of such capabilities in critical products at the big tech companies. 
 
While no one suggested specific policy actions, the panelists and Congressional representatives offered some general thoughts on appropriate regulations to ensure fair algorithms, including:
 
  • Strengthening the current regulatory framework, both for consumer finance regulations specifically and agencies generally.
  • Requiring disgorgement of profits made through the use of an unfair algorithm. However, the panelists noted that this would only be useful if disclosure of unfair algorithms was mandated, or regulators had better tools to detect unfair algorithms.
  • Requiring the maintenance of good records concerning the development, process, and evolution (through machine learning) of an algorithm that would allow for auditing.
  • Allowing market forces to ensure fairness through arbitrage or other economics concepts.
The hearing concluded with no overarching decisions or conclusions reached.  However, from the discussion, it appeared that lawmakers were considering how to define fairness in the context of using algorithms and artificial intelligence and how to determine where regulation should be used to ensure it.  Given the preliminary nature of the discussion, it will be important to continue to watch for developments in this space.
February 13, 2020 FDA to Study "Endorser Status and Explicitness of Payment in Direct-to-Consumer Promotion"

By: Jay K. Simmons

DrugstoreFor several years the FDA and FTC have been considering the impact of celebrity endorsers.  The FDA is now providing an opportunity for public comment on a proposed study on celebrity endorsers and the explicitness of payment disclosures in direct-to-consumer promotions.  As the agency’s January 28, 2020 notice indicates, commercial advertisers have long employed celebrity endorsers, including in direct-to-consumer pharmaceutical promotion.[1]  Prior research has explored the role of various types of endorsers, such as celebrity influencers, experts and non-celebrities, in generating attention for a product.[2]  Existing research suggests that physicians and pharmacists, followed by other consumers and celebrities, are the types of endorsers most likely to influence consumers’ interest in purchasing over-the-counter pharmaceuticals.[3]

The FDA proposes collecting new information in this area via two studies on the role of celebrity product endorsements and endorsers’ payment status.  These studies are proposed to consider “the role of endorsement and payment status on participants’ recall, benefit and risk perceptions, and behavioral intentions.”  This includes, first, whether the type of endorser and “the presence of their payment status influences participant reactions,” and second, the impact of different types of endorsers’ payment disclosure language, ranging from “direct and more consumer-friendly” to “less direct.”[4]

The FDA invites comments on these topics: (1) whether the proposed collection of information is necessary for the proper performance of FDA's functions, including whether the information will have practical utility; (2) the accuracy of FDA's estimate of the burden of the proposed collection of information, including the validity of the methodology and assumptions used; (3) ways to enhance the quality, utility and clarity of the information to be collected and (4) ways to minimize the burden of the collection of information on respondents, including through the use of automated collection techniques, when appropriate, and other forms of information technology.  Comments on the proposed information collection are due by March 30, 2020.[5]

 

[1] Endorser Status and Explicitness of Payment in Direct-to-Consumer Promotion, 85 Fed. Reg. 4,994 (Jan. 28, 2020). For online publication of the notice, see https://www.govinfo.gov/content/pkg/FR-2020-01-28/pdf/2020-01408.pdf.

[2] Id. at 4,995. (citing Bhutada, N.S. and B.L. Rollins, Disease-Specific Direct-to-Consumer Advertising of Pharmaceuticals: An Examination of Endorser Type and Gender Effects on Consumers’ Attitudes and Behaviors, 11 Research in Soc. & Admin. Pharm. 891– 910 (2015))).

[3] Id. (citing LaTour, C. and M. Smith, A Study of Expert Endorsement of OTC Pharmaceutical Products, 1 J. Pharm. Mktg. & Mgmt. 117–128 (1986)).

[4] Id.

[5] Id. Under the Paperwork Reduction Act of 1995, federal agencies are required to publish notices in the Federal Register pertaining to proposed collections of information and must allow 60 days for public comment in response to such notices.