CFPB Warns Digital Marketers, Loops In State AGs
By Jacob D. Alderdice and Michael W. Ross
In a recent interpretive rule announced on August 10, 2022,—and unveiled at a summit of the National Association of Attorneys General—the CFPB stated that digital marketers are subject to the CFPB’s jurisdiction, and expressly warned that it may take enforcement action against these entities. Such enforcement is likely to concern anti-discrimination provisions, and the new rule notes that State Attorneys General have jurisdiction to enforce these rules as well.
Prior to the CFPB’s August 10 rule, digital marketers—companies that market to consumers through social media, websites, and other online and digital channels—may have considered themselves outside the reach of the Consumer Financial Protection Act of 2010 (CFPA), which provides that an entity is not a covered “service provider” if it provides “time or space” for an advertisement for a consumer financial product or service through print, television, or electronic media.
In its new interpretive rule, however, the CFPB announced that it believes digital marketers are not exempt if they are “materially involved” in the development of a “content strategy” for the marketing of financial products, and thus are covered service providers under the CFPA. The CFPB noted the evolution of modern digital ad targeting, describing how instead of just providing a forum for an ad, digital marketers are increasingly involved in the selection of prospective customers or the placement of content to affect consumer behavior, often based on the gathering of consumer data. Whereas the former practices would not be covered, the CFPB contends that the latter are more similar to conduct that would typically be performed by persons covered by the CFPA. The rule singled out practices such as lead generation, customer acquisition, and other marketing analysis or strategy using data and technology, as amounting to “material” involvement and thus covered behavior.
The new rule is a signal that the CFPB will be increasing enforcement in this area. In its accompanying press release, it described the new rule as a “warning” to digital marketing providers, and CFPB Director Rohit Chopra stated, “When Big Tech firms use sophisticated behavioral targeting techniques to market financial products, they must adhere to federal consumer protection laws. . . . Federal and state law enforcers can and should hold these firms accountable if they break the law.” In his remarks at the rule’s unveiling, Chopra also encouraged state attorneys general to pursue claims under the Consumer Financial Protection Act for any misconduct involving consumer financial products or services, including as to digital marketers.
The rule’s reference to “state law enforcers” is notable. The rule was first unveiled by Director Chopra during a summit of the National Association of Attorneys General, on consumer protection in the digital world. In his prepared remarks, Chopra emphasized the “role of state enforcers in policing unlawful conduct at the intersection of consumer finance and digital marketing.” The interpretive rule notes state AG jurisdiction, and the CFPB has stated previously that state enforcement authorities also have jurisdiction to enforce the CFPA.
Substantively, a stated purpose of this effort by the CFPB is to address discrimination, which the CFPB has raised as a concern with regard to AI and machine learning. The new rule warns that the UDAAP provision (unfair, deceptive and abusive acts/practices) will be used to combat the use of protected characteristics to make marketing decisions (i.e. digital redlining).
The CFPB has taken other actions directed towards discrimination more broadly. It recently updated its Examination Manual to include discrimination as a part of UDAAP, and the agency is currently litigating the reach of ECOA (Equal Credit Opportunity Act) to digital marketing. In July 2019, we publicly highlighted the use of UDAAP and similar authority as a basis for enforcement actions alleging discrimination in the use of digital tools.
Companies involved in digital marketing should review the new interpretive guidance carefully, re-review their practices to consider whether they may be potentially subject to enforcement action at the state or federal level, and be on the lookout for any potential challenges to the new rule.
US Supreme Court Issues Significant Ruling Limiting the “Look-Through” Jurisdiction of Federal Courts Under the Federal Arbitration Act
By: Laura P. MacDonald, Elizabeth A. Edmondson, and Adina Hemley-Bronstein
On March 31, 2022, the US Supreme Court issued a significant decision in Badgerow v. Walters, No. 20-1143, ending a circuit split about when federal courts have subject matter jurisdiction to review domestic arbitration awards under the Federal Arbitration Act (FAA). In an 8-1 opinion, the Court ruled that federal courts cannot “look through” to the underlying controversy to establish subject matter jurisdiction to confirm or vacate an arbitral award under the FAA. As a result, absent diversity of citizenship, petitioners seeking to confirm or vacate domestic arbitration awards under the FAA must now bring those petitions in state court.
The FAA governs the enforcement of most arbitration agreements in the United States. The statute dictates the standards for compelling arbitration (under Section 4) and for the confirmation or vacatur of an arbitration award (under Sections 9 and 10). But, although the FAA authorizes a party to make these petitions, the statute does not automatically authorize federal courts to hear them. This is because the FAA, unlike almost all federal statutes, does not itself confer federal subject matter jurisdiction, at least for domestic arbitration agreements. Instead, for a federal court to decide a petition under the FAA, the court must have an “independent jurisdictional basis.” Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 582 (2008). (Section 2 of the FAA confers federal subject matter jurisdiction over “non-domestic arbitrations,” i.e., those that have at least one foreign party or a substantial international nexus.)
The issue before the Court in Badgerow was whether a federal court may determine its jurisdiction to confirm or vacate an arbitration award only by looking at the face of the petition for judicial review, or whether it may “look through” the petition and examine whether federal jurisdiction would exist over the underlying dispute. The Court had previously authorized look-through jurisdiction in the context of petitions to compel arbitration under Section 4 of the FAA, see Vaden v. Discover Bank, 556 U.S. 49 (2009), but a circuit split had emerged regarding whether the same approach applied to petitions to confirm or vacate under Sections 9 and 10. Whereas the Third and Seventh Circuits maintained that Vaden should be confined to petitions to compel under Section 4, the Second Circuit, along with the First and Fourth, applied look-through jurisdiction to other petitions brought under the FAA. This means that until now, the Second Circuit has permitted federal court access for many petitioners seeking review of arbitration awards in New York, where a significant number of the nation’s arbitrations take place.
The case arose from an employment arbitration. The petitioner Denise Badgerow brought state and federal claims against her former employer for unlawful termination. After the arbitrators dismissed her claims, Badgerow filed suit in Louisiana state court to vacate the decision, arguing that fraud had taken place during the arbitration proceeding. In response, Badgerow’s employer removed the action to federal district court and petitioned the court to confirm the arbitration award. Badgerow then moved to remand, arguing that the federal district court lacked the subject matter jurisdiction needed to confirm or vacate the award under Sections 9 and 10 of the FAA. The district court applied Vaden’s look-through approach and held that, because the underlying employment dispute involved federal-law claims, it could therefore exercise jurisdiction over the employer’s petition to review and confirm the award. The Fifth Circuit affirmed, joining the First, Second, and Fourth Circuits in extending the look-through approach to additional petitions under the FAA.
On appeal, the Supreme Court reversed. Resolving the existing circuit split, it held that the look-through approach applicable under Section 4 does not apply to petitions to confirm or vacate arbitration awards under Sections 9 and 10. Thus, jurisdiction to confirm or vacate an arbitration award must be apparent on the face of the petition itself and independent of the underlying dispute. The Court reasoned that Sections 9 and 10 “contain none of the statutory language on which Vaden relied” and “[m]ost notably” lacked “Section 4’s ‘save for’ clause.” Unlike Section 4, Sections 9 and 10 “do not instruct a court to imagine a world without an arbitration agreement, and to ask whether it would then have jurisdiction over the parties dispute.” In fact, the Court pointed out, “Sections 9 and 10 do not mention the court’s subject-matter jurisdiction at all.” Applying standard principles of statutory interpretation, the Court reasoned that while “Congress could have replicated Section 4’s look-through instructions in Sections 9 and 10,” it did not, leading to the Court’s conclusion that federal courts may determine their jurisdiction only by assessing the parties’ petitions to confirm or vacate and not by looking through to the underlying controversy.
Following Badgerow, parties seeking to confirm or challenge arbitration awards in federal court will need to show that a federal question exists on the face of the petition itself. In practice, parties will have to show that either (a) the arbitration agreement is “non-domestic” and thus eligible for federal jurisdiction under Section 2, (b) federal diversity jurisdiction exists over the dispute, or (c) the confirmation action receives pendent jurisdiction due to the presence of a separate and independent federal claim.
The Court’s decision in Badgerow will likely shift a substantial number of confirmation and vacatur actions to state courts. While the FAA will remain the governing law, the shift to state court will require practitioners to follow state procedural rules and will potentially introduce questions about how state arbitration law can fill any gaps in the FAA itself.
Supreme Court Limits Article III Standing for Class Action Plaintiffs: Implications for Data Breach Class Actions
By: Clifford W. Berlow, Alexander E. Cottingham, and Lindsay C. Harrison
On June 25, 2021, the US Supreme Court in TransUnion LLC v. Ramirez narrowed the scope of Article III standing for plaintiffs who allege the violation of a statute but cannot show they otherwise suffered harm. Though decided in the context of a Fair Credit Reporting Act (FCRA) class action, the decision has major implications for parties litigating state and federal statutory claims of all varieties in federal courts. In particular, TransUnion seems poised to limit the viability of class actions arising from data breaches. The decision likely means, for example, that plaintiffs lack Article III standing when their information may have been accessed but was not misused in a manner causing concrete harm—a subject on which the courts of appeals previously had split. The decision also will limit plaintiffs’ ability to assert Article III standing merely based on the violation of privacy statutes alone without any resulting harm.
Defendants litigating data breach class actions can take advantage of this new precedent in federal court to seek dismissal of data breach class actions for lack of Article III standing. But doing so is not without consequence. If federal courts are not available to adjudicate these claims, plaintiffs likely will pursue them in state courts, where standing precedent may be more lenient for plaintiffs. Defendants thus will need to be strategic about how aggressively they pursue TransUnion-based dismissals.
A class of 8,185 individuals sued TransUnion under the FCRA for failing to use reasonable procedures to ensure the accuracy of their credit files. Each of their credit reports contained inaccurate information added by TransUnion that mislabeled them as matches for potential terrorists, drug traffickers, or other serious criminals from a list maintained by the Treasury Department’s Office of Foreign Assets Control (OFAC). The parties stipulated that TransUnion actually provided credit information to potential creditors for just 1,853 of those class members, and maintained in its database but did not share with anyone inaccurate credit file information for the remaining 6,332 class members. The question presented was whether the mere existence of inaccurate information, absent dissemination, constituted sufficient harm to supply the basis for Article III standing.
The Court, with Justice Kavanaugh writing for a five-justice majority, held that the class members whose credit reports were distributed had Article III standing because they demonstrated a concrete harm, but the 6,332 class members whose erroneous credit reports were never distributed lacked standing.
The Court’s decision focused on the requirement for Article III standing that the plaintiff allege an injury-in-fact that is “concrete.” In Spokeo v. Robbins, the Court held that a “bare procedural violation” of a statute was not enough to plead a concrete harm. But recognizing that Congress could “elevate” legally cognizable injuries that were previously inadequate, the Court left open exactly when a statutory violation may reflect the kind of concrete harm necessary to confer standing. As a result, courts remained divided over how to evaluate standing where a plaintiff alleged the violation of a state or federal statute. Some circuits focused on whether the harm alleged was a “bare procedural” violation of the statute or an intrusion on a “substantive” statutory right. Other circuits focused on whether the statutory harm alleged bore a “close relationship” to a harm “traditionally” recognized as providing a basis for a lawsuit in American courts.
In TransUnion, the Court reaffirmed that “Article III standing requires a concrete injury even in the context of a statutory violation” and that a plaintiff does not automatically satisfy the injury-in-fact requirement by pleading the violation of a statute. Then, the Court held that for a harm to be “concrete,” the harm attributable to the claimed statutory violation must bear a “close relationship” to a harm “traditionally” recognized as providing a basis for a lawsuit in American courts. That test narrows the path for Article III standing in those circuits that had previously rejected the “close relationship” test, though lower courts have some room to determine how to apply this test moving forward.
The Court also addressed when a risk of future harm may be sufficiently concrete to supply a plaintiff with Article III standing—another question on which courts remained divided following Spokeo. Although the plaintiffs had urged the Court to hold that a risk of future harm is sufficiently concrete, the Court rejected that theory. In a suit for damages, the Court held that the “mere risk of future harm” does not confer standing unless exposure to the risk of future harm causes a separate concrete harm or the risk of harm materializes into actual harm.
Takeaways for Data Breach Class Actions
While TransUnion addressed standing in the context of the FCRA, its holding on risk of future harm and concrete injury is broadly applicable to data breach class actions. Defendants litigating data breach class actions in federal court regularly move to dismiss for plaintiffs’ lack of Article III standing. In many of those cases, courts face the perennial question of a tree falling in the forest: if a plaintiff’s data is accessed but not misused in a manner causing concrete injury (such as for identity theft), was that person harmed? Courts in different circuits have resolved that question differently, with some accepting broader theories of standing related to risk of future harm than others. Courts deciding those motions now have clear direction from the Supreme Court as to two key issues: a plaintiff’s ability to demonstrate standing based on the mere risk of future harm, and a plaintiff’s ability to demonstrate standing based purely on the violation of a statute.
First, in the context of suits for damages, TransUnion appears to foreclose Article III standing where plaintiffs claim only the risk of future harm from a data breach without actual misuse of their data to cause injury. In TransUnion, the plaintiffs had attempted to demonstrate a risk of future harm, but the Court rejected each of their theories, explaining that they could not plead a “sufficient likelihood” that third parties would request their personal information or that TransUnion would intentionally or accidentally release their information. Those theories are remarkably similar to those pled by plaintiffs in data breach class actions, such as the risk that they will suffer identity theft, or that their information may be sold on the dark web and used to blackmail them. Just as the TransUnion class could not demonstrate standing by theorizing about hypothetical future harms, so too will data breach plaintiffs fail to satisfy Article III by pleading an imaginary parade of horribles yet to befall them.
Second, after TransUnion, plaintiffs may no longer rely on a violation of a statutory right alone to demonstrate Article III standing. In data breach cases, plaintiffs sometimes invoke state privacy statutes to bolster their standing claims, arguing that the violation of a state data breach notification or consumer protection law provides them with standing. Those sorts of arguments are likely to face greater resistance following TransUnion because plaintiffs will have to identify some historical common-law analogue to the statutory violation—a tall task in a data breach suit. Accordingly, TransUnion appears to close the door on several of the more creative arguments plaintiffs have used to assert Article III standing in data breach suits.
What to Look for Now
TransUnion is a clear win for corporate defendants, in particular corporate defendants seeking to dismiss federal class actions arising from data breaches on standing grounds. But the legacy of TransUnion may prove to be more complex, including in data breach cases.
It is important to remember that the Court’s decision places a limit only on the jurisdiction of federal courts. The states remain free to define the parameters for standing to sue in their own courts. At present, roughly half the states do not have lockstep Article III standing rules. And, as Justice Thomas noted in dissent, courts in states with more lenient standing requirements may still adjudicate statutory claims that now cannot proceed in federal courts under TransUnion. As a result, moving to dismiss federal class actions for lack of standing under TransUnion is not a panacea. Instead, in cases where Article III standing may be lacking under TransUnion, plaintiffs may be able to proceed in state court. And if defendants attempt to remove a state court lawsuit to federal court only to dismiss for lack of standing, courts may not only remand the case, but also may force the defendant to pay the plaintiffs’ attorney’s fees.
In short, as the doors to the federal courthouse close, companies can expect plaintiffs to cross the street to state court, at least when companies are subject to the jurisdiction of a state that is not in lockstep with federal Article III standing rules. Companies therefore will want to be strategic about how they advocate for the application of TransUnion, bearing in mind local conditions in the states where they are amenable to suit and local standing rules in those states. As a result, the ultimate consequence for corporate defendants of the Supreme Court’s decision to limit Article III standing remains to be seen.
 TransUnion LLC v. Ramirez, No. 20 - 297, slip op. (U.S. June 25, 2021).
 TransUnion, slip op. at 1.
 Id. at 4.
 Id. at 5 - 6.
 Id. at 6.
 578 U.S. 330 (2016).
 Id. at 341.
 TransUnion, slip op. at 1 (quoting Spokeo, 578 U.S. at 341).
 Id. at 9.
 Id. at 20–22.
 Some courts have accepted broader theories of standing. See, e.g., Attias v. Carefirst, Inc., 865 F.3d 620, 629 (D.C. Cir. 2017); Galaria v. Nationwide Mut. Ins. Co., 663 F. App’x 384, 387–89 (6th Cir. 2016); Remijas v. Neiman Marcus Grp., LLC, 794 F.3d 688, 692, 694–95 (7th Cir. 2015); Krottner v. Starbucks Corp., 628 F.3d 1139, 1142–43 (9th Cir. 2010). Other courts have limited standing more narrowly. See, e.g., Tsao v. Captiva MVP Restaurant Partners, LLC, 986 F.3d 1332 (11th Cir. 2021); Beck v. McDonald, 848 F.3d 262, 273–76 (4th Cir.), cert. denied sub nom. Beck v. Shulkin, ––– U.S. ––––, 137 S. Ct. 2307, 198 L.Ed.2d 728 (2017); Whalen v. Michaels Stores, Inc., 689 F. App’x 89, 90–91 (2d Cir. 2017); In re SuperValu, Inc., 870 F.3d 763, 770–72 (8th Cir. 2017); Reilly v. Ceridian Corp., 664 F.3d 38, 42–44 (3d Cir. 2011).
 TransUnion, slip op. at 22–23.
 State courts “are not bound by the limitations of a case or controversy or other federal rules of justiciability even when they address issues of federal law.” ASARCO Inc. v. Kadish, 490 U.S. 605, 617 (1989).
 See Bennett, The Paradox of Exclusive State-Court Jurisdiction Over Federal Claims, 105 Minn. L. Rev. 1211 (2021).
 TransUnion, slip op. at 18 n.9 (Thomas, J., dissenting).
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 responding 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.
Second Circuit Asks: Will New York Recognize Cross-Jurisdictional Class Action Tolling?
By: Gabriel K. Gillett and Katherine Rosoff
On August 7, 2019 the Second Circuit certified two questions to the New York Court of Appeals with broad implications for multi-jurisdictional class actions. First, “whether New York recognizes ‘cross-jurisdictional class action tolling,’ i.e., tolling of a New York statute of limitations by the pendency of a class action in another jurisdiction.” Chavez v. Occidental Chem. Corp., -- F.3d. --, 2019 WL 3673190, *1 (2d Cir. Aug. 7, 2019). Second, “whether non-merits dismissal of class certification can terminate class action tolling” when dismissal included a “return jurisdiction” clause allowing the plaintiffs to renew their claims if they were unable to find an adequate forum in their home countries. Id.
The case was brought by agricultural workers from Costa Rica, Ecuador and Panama, alleging they suffered adverse health effects from a pesticide used on banana plantations. The parties agree that their claims accrued no later than August 1993 and are subject to New York’s 3-year statute of limitations in personal injury actions. However, the parties dispute whether plaintiffs’ claims were tolled by related actions filed in other jurisdictions.
Judge Sack, writing for Judges Raggi and Carney, found no clear case law on whether New York State would recognize cross-jurisdictional class action tolling. The panel explained that, although New York has adopted the federal rule from American Pipe Construction Co. v. Utah, 414 U.S. 538 (1974) that allows for class-action tolling, New York state courts have not determined whether New York would apply that rule to class actions in other jurisdictions. Courts within the Second Circuit that have been tasked with predicting New York’s ruling on the issue are split. See, e.g., Chavez, 2019 WL 3673190, at *7 n.5. So too, the Second Circuit recognized, are courts in other states that have faced the same issue. Id.
Faced with a thorny question of state law, the Second Circuit asked the New York Court of Appeals to weigh in. See Second Circuit Local Rule 27.2; 22 NYCRR § 500.27. The Court of Appeals will decide whether to accept the question, and if it does, it may order briefing and argument on the merits consistent with the court’s rules.
Second Circuit Creates Split on Investment Company Act Private Right of Action
By: Gabriel K. Gillett and Howard S. Suskin
In a decision issued on August 5, 2019, the US Court of Appeals for the Second Circuit created a split with other courts, including the Third Circuit, on the issue of whether there is a private right of action for rescission under the Investment Company Act (ICA). The Second Circuit held that, based on the text of the statute and its legislative history, “ICA § 47(b)(2) creates an implied private right of action for a party to a contract that violates the ICA to seek rescission of that violative contract.” Oxford University Bank v. Lansuppe Feeder Inc., No. 16-4061 (2d Cir. Aug. 5, 2019), Slip op. 23. In so holding, the court acknowledged that it was creating a circuit split:
We note that the Third Circuit and several lower courts have reached the opposite result. In Santomenno ex rel. John Hancock Trust v. John Hancock Life Ins. Co., 677 F.3d 178 (3d Cir. 2012), the Third Circuit found plaintiffs lacked a private right of action to seek rescission under § 47(b). Plaintiffs in Santomenno alleged violations of ICA § 26(f), which makes it unlawful to pay ‘fees and charges’ on certain insurance contracts that exceed what is ‘reasonable,’ id. at 187, and sought rescission (in addition to monetary damages). The court in Santomenno found that plaintiffs did not have a cause of action. We do not find the reasoning in Santomenno persuasive.
Slip op. 21-22.
Litigators should watch to see how other courts weigh in, and whether the Supreme Court ultimately takes up the issue to resolve the split.
Gabriel Gillett is an Associate in Jenner & Block’s Appellate & Supreme Court Practice in Chicago. Howard Suskin is a Partner and Co-Chair of the Securities Litigation Practice Group at the firm.
The CFPB Rolls Out New Regulations for Debt Collection
By Amy Egerton-Wiley
Debt collectors have for years sought guidance on how and when digital messages could be sent to contact consumers. On Tuesday, the Consumer Financial Protection Bureau (CFPB) announced a notice of proposed debt collection regulations that would provide that guidance. The new regulations would expand the potential avenues by which debt collectors could contact consumers and would establish a host of other regulations that would alter debt collection practices. The proposed rulemaking announced by the CFPB is more than 500-pages long and would be the first substantive rules to interpret the Fair Debt Collection Practices Act, which regulates the debt collection industry.
The CFPB identified several main highlights that the proposed rulemaking would achieve, including establishing a bright-line rule limiting call attempts and telephone conversations, clarifying consumer protection requirements for certain consumer-facing debt collection disclosures, clarifying how debt collectors can communicate with consumers, prohibiting suits on time barred debts, and requiring communication before credit reporting.
The new regulations would allow debt collectors to expand methods of communicating with consumers, such as exploring WhatsApp or other online models. They also, however, restrict the abilities of debt collectors to contact consumers. For example, the proposed rules would cap the number of times a debt collector could call a consumer to seven times in one week, and once the debt collector reached the consumer, it would not be able to contact the individual again for another week. The bureau cited increased clarity and modernizing the legal regime as its goal for the new regulations.
The CFPB’s statement and proposed rules can be found here.
US Supreme Court Holds that Classwide Arbitration is Unavailable Unless the Parties Clearly Agree to It
By: Michael T. Brody, Gabriel K. Gillett, Howard S. Suskin and Adam G. Unikowsky
On April 24, 2019, the US Supreme Court issued its decision in Lamps Plus, Inc. v. Varela, No. 17-988, holding that classwide arbitration is not available unless clearly authorized by the parties. In a 5-4 decision authored by Chief Justice Roberts, the Court reasoned that when an arbitration agreement is ambiguous or silent about classwide arbitration, the parties have not actually agreed to it. As a result, the Federal Arbitration Act (FAA) does not allow a party to be forced into classwide arbitration based on an ambiguous agreement, even if state-law contract interpretation principles would construe ambiguity against the agreement’s drafter.
Lamps Plus is just the latest in a long string of victories for arbitration advocates. Building on prior decisions rejecting classwide arbitration in the consumer and employment contexts, the Court has now suggested that classwide arbitration is presumptively unavailable and that a clear expression of intent is required to overcome that presumption. The practical result is that classwide arbitration may only be available against corporate defendants that specifically subject themselves to it. And that may be a null (or very small) set, at least for companies that take the majority opinion’s view that classwide arbitration “‘sacrifices the principal advantage of arbitration—its informality—and makes the process slower, more costly and more likely to generate procedural morass than final judgment.’”
The Lower Courts Order Classwide Arbitration Based on an Ambiguous Contract
The Lamps Plus case began when a hacker obtained access to tax information for 1,300 Lamps Plus employees. The purloined information was used to file a fraudulent federal income tax return on behalf of one of company’s employees, Frank Varela. Varela then sued his employer in federal court, asserting state and federal claims on behalf of a putative class of employees whose tax information had been disclosed. Lamps Plus moved to compel individual arbitration based on an employment agreement Varela had signed, which said that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment.” The district court agreed that the language compelled arbitration but authorized arbitration on a classwide basis.
Lamps Plus appealed, and the Ninth Circuit affirmed. The panel recognized that the agreement did not expressly address classwide arbitration but found that failure rendered the agreement ambiguous rather than silent. Therefore, the panel found its decision was not controlled by Stolt-Nielsen S. A. v. Animal Feeds Int’l Corp., 559 U.S. 662 (2010), which held that a court may not compel classwide arbitration when an agreement is silent on the subject. Instead, the Ninth Circuit followed California law to construe the ambiguity against the drafter. Because Lamps Plus had drafted the ambiguous agreement, the court accepted Varela’s interpretation and allowed classwide arbitration.
The Supreme Court granted cert and reversed. The majority framed the central question as “whether, consistent with the FAA, an ambiguous agreement can provide the necessary ‘contractual basis’ for compelling class arbitration.” No, it held: “Class arbitration is not only markedly different from the ‘traditional individualized arbitration’ contemplated by the FAA, it also undermines the most important benefits of that familiar form of arbitration. The statute therefore requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.” “Like silence,” the majority explained, “ambiguity does not provide a sufficient basis to conclude that parties to an arbitration agreement agreed to ‘sacrifice the principal advantage of arbitration.’” Nor can the doctrine of interpreting ambiguities against the drafter. In the majority’s view, that canon of construction is a rule of public policy that “is by definition triggered only after a court determines that it cannot discern the intent of the parties,” and therefore “cannot be applied to impose class arbitration in the absence of the parties’ consent.”
Justices Ginsburg, Breyer, Sotomayor and Kagan each wrote a dissent. Across nearly three times the number of pages as the majority, they contended that the Court lacks jurisdiction; the FAA is inapplicable for contracts where the parties had unequal bargaining power; classwide arbitration is not fundamentally different from bilateral arbitration; and neutral state-law rules of contract interpretation are not preempted by the FAA because they do not conflict with it.
What’s Next for Arbitration at the Court?
The Court’s pro-arbitration bent is by now well-known and well-established. Earlier this term, the Court surprised some by handing down unanimous decisions in two different arbitration cases. Lamps Plus demonstrates that the Court’s trend of issuing sharply divided, defendant-friendly arbitration decisions is not likely to change any time soon. The Court has not yet added any arbitration-related cases to its docket for October Term 2019, and no notable petitions are currently pending. But a footnote in Lamps Plus may light the way to at least one open issue the Court could address in the future: “whether the availability of class arbitration is a so-called ‘question of arbitrability,’” and is thus a gateway issue to be decided by a court rather than an arbitrator.
Jenner & Block has substantial experience in arbitration and class action disputes and appeals. Partner Adam Unikowsky represented the Retail Litigation Center as amicus curiae at the Supreme Court in Lamps Plus. Both Mr. Unikowsky and Associate Gabriel Gillett, members of Jenner & Block’s Appellate and Supreme Court Practice, have represented clients in cases involving arbitration and class actions across the country. Partners Michael Brody and Howard Suskin, co-chairs of Jenner & Block’s Class Action Practice Group, have represented many clients in efforts to enforce and limit arbitration clauses. Mr. Suskin serves as an arbitrator for the American Arbitration Association, FINRA, CBOE and NFA and has substantial experience interpreting the scope of arbitration clauses.
 -- S. Ct. --, 2019 WL 1780275 (Apr. 24, 2019).
 Slip op. 8.
 See id. at 9-12.
 Id. at 8 (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 348, 350 (2011)).
 Varela v. Lamps Plus, Inc., 2016 WL 9110161 (C.D. Cal. Jul. 7, 2016).
 Varela v. Lamps Plus, Inc., 701 F. App’x 670 (9th Cir. 2017).
 Slip op. at 6.
 Id. at 8 (quoting Concepcion, 563 U.S. at 348).
 Id. at 10-12.
 See New Prime v. Oliveira, 139 S. Ct. 532 (2019); Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).
 See https://www.scotusblog.com/case-files/terms/ot19/.
 See https://www.scotusblog.com/case-files/petitions-were-watching/.
 Slip op. at 9 n.4 (citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569, n. 2 (2013)).
En Banc Ninth Circuit Rejects Compelled-Commercial Speech Ordinance on First Amendment Grounds
By: Gabriel K. Gillett
Last week the en banc Ninth Circuit unanimously struck down San Francisco’s ordinance requiring warnings on ads for certain sugary beverages as a violation of the First Amendment. In American Beverage Ass’n v. City and County of San Francisco, No. 16-16072, the court held that the Ordinance is an “unjustified or unduly burdensome disclosure requirement [that] might offend the First Amendment by chilling protected commercial speech.” Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626, 651 (1985). (Jenner & Block filed an amicus brief in the case, on behalf of the Retail Litigation Center.)
Four of the eleven judges who participated joined three special concurrences, however, explaining why they believed the majority had erred even though it reached the right result. Those three concurrences highlight a number of issues related to commercial speech for courts to address in the wake of the Supreme Court’s decision in National Institute of Family & Life Advocates v. Becerra (NIFLA), 138 S. Ct. 2361 (2018).
San Francisco’s “Sugar-Sweetened Beverage” Ordinance
The American Beverage Association v. City and County of San Francisco centers on a 2015 ordinance that required ads for certain “Sugar-Sweetened Beverages” to include the following: “WARNING: Drinking beverages with added sugar(s) contributes to obesity, diabetes, and tooth decay. This is a message from the City and County of San Francisco.” Slip op. 8.
“Sugar-Sweetened Beverages” were defined as “any Nonalcoholic Beverage sold for human consumption, including, without limitation, beverages produced from Concentrate, that has one or more added Caloric Sweeteners and contains more than 25 calories per 12 ounces of beverage.” Id. at 9. The definition did not include “drinks such as milk, plant-based milk alternatives, natural fruit and vegetable juices, infant formulas, and supplements.” Id.
The warning, which was required to take up 20% of the ad space, was mandated on “any advertisement, including, without limitation, any logo, that identifies, promotes, or markets a Sugar-Sweetened Beverage for sale or use that is any of the following: (a) on paper, poster, or a billboard; (b) in or on a stadium, arena, transit shelter, or any other structure; (c) in or on a bus, car, train, pedicab, or any other vehicle; or (d) on a wall, or any other surface or material.” Id. The warning was not required on: “periodicals; television; electronic media; SSB containers or packaging; menus; shelf tags; vehicles used by those in the business of manufacturing, selling, or distributing SSBs; or logos that occupy an area of less than 36 square inches.” Id.
Plaintiffs challenged the ordinance, arguing that it was misleading, placed an undue burden on commercial speech, and was not rationally related to a substantial government interest. Id. at 10. The district court rejected the challenge and denied a preliminary injunction. A panel of the Ninth Circuit reversed. Then the full court agreed to hear the case en banc. Id. at 10-11.
The En Banc Court Unanimously Holds That The Ordinance Is An Undue Burden On Commercial Speech.
In a decision by Judge Susan Graber, the en banc court unanimously agreed with the panel and reversed the district court’s denial of a preliminary injunction. The court relied heavily on National Institute of Family & Life Advocates v. Becerra (NIFLA), 138 S. Ct. 2361 (2018), where the Supreme Court provided a framework for analyzing First Amendment challenges to government-compelled speech.
In the majority opinion, the court held that:
Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985) “provides the appropriate framework to analyze a First Amendment claim involving compelled commercial speech—even when the government requires health and safety warnings, rather than warnings to prevent the deception of consumers.” Slip Op. 14.
To pass scrutiny under Zauderer, compelled disclosure notice must be “(1) purely factual, (2) noncontroversial, and (3) not unjustified or unduly burdensome.” Id.
“Defendant has the burden,” including to prove “that the warning is neither unjustified nor unduly burdensome.” Id. at 15.
The court’s decision in CTIA–The Wireless Ass’n v. City of Berkeley, 854 F.3d 1105 (9th Cir. 2017), which had been vacated and remanded in light of NIFLA, had been correctly decided.
Rational-basis review, not intermediate scrutiny, applies “for situations in which speech is restricted or prohibited.” Slip op. 12-14.
“Zauderer provides the appropriate framework to analyze a First Amendment claim involving compelled commercial speech—even when the government requires health and safety warnings, rather than warnings to prevent the deception of consumers.” Id. at 14.
The requirement that the warning cover 20% of the advertisement “is not justified when balanced against its likely burden on protected speech” because the record showed that “a smaller warning—half the size—would accomplish Defendant’s stated goals.” Id. at 15-16.
The court stressed that it did “not hold that a warning occupying 10% of product labels or advertisements necessarily is valid, nor … that a warning occupying more than 10% of product labels or advertisements necessarily is invalid.” Id. at 16-17.
Rather, the court held “only that, on this record, Defendant has not carried its burden to demonstrate that the Ordinance’s requirement is not ‘unjustified or unduly burdensome.’” Id.
Having found that Defendants could not show that the “Ordinance’s requirement is not ‘unjustified or unduly burdensome,’” the court opted not to “decide whether the warning here is factually accurate and noncontroversial.” Id. at 16-17.
Three Concurrences, Joined By Four Judges, Highlight Sharp Disagreement About How To Evaluate Compelled Commercial Speech After NIFLA.
Disagreement lurked behind the unanimous en banc decision. Three special concurrences, joined by four of the eleven judges, explained why the majority had erred even though it had reached the right result.
The US Supreme Court Allows Collection of State Sales Tax From Remote Sellers
Judge Sandra Ikuta concurred in the judgment but dissented from “most of the reasoning” because she believed the “majority fails to follow [NIFLA’s] analytical framework and makes several crucial errors.” Slip op. 18.
Judge Ikuta argued that the court misapplied NIFLA by not first determining whether Zauderer applied (which she found it did not because the warning was not factual or uncontroversial and was unduly burdensome) and then striking down the ordinance under heightened scrutiny. Id. at 18, 24-29.
Judge Ikuta also argued that the majority should not have created “a First Amendment exception for government-compelled health and safety warnings,” because in her view NIFLA held only the “‘health and safety warnings long considered permissible’ would be excepted.” Id. at 25-26.
Judge Morgan Christen, joined by Chief Judge Sidney Thomas, concurred in part and concurred in the judgment.
Judges Christen and Thomas agreed “that Zauderer’s framework applies to the government-compelled speech at issue” and “that the district court’s decision must be reversed.” Id. at 29.
Judges Christen and Thomas would have held that San Francisco could not show that the speech it sought to compel was “purely factual”—because it was not literally accurate and could be misconstrued—rather than “jump[ing] straight to asking whether the proposed warning is ‘unjustified or unduly burdensome.’” Id. at 29-36.
Judges Christen and Thomas emphasized that “[w]hen the government takes the momentous step of mandating that its message be delivered by private parties, it is exceptionally important that the compelled speech be purely factual.” Id. at 36.
Judge Jacqueline Nguyen concurred in the judgment but “disagree[d] with the majority’s expansion of Zauderer’s rational basis review to commercial speech that is not false, deceptive, or misleading.” Id. at 38.
Judge Nguyen would have held that Zauderer’s rational-basis test applies only to deceptive or misleading speech, not all regulations requiring public health disclosures. Id. at 38-40.
By Adam G. Unikowsky and Leonard R. Powell
On June 21, 2018, the US Supreme Court issued its much-anticipated decision in South Dakota v. Wayfair, Inc., No. 17-494. In a 5-4 opinion by Justice Kennedy, the Court held that the Dormant Commerce Clause does not bar a state from requiring an out-of-state seller lacking in-state physical presence to collect and remit sales tax. In reaching this conclusion, the Court took the unusual step of overruling two of its own prior opinions: National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court held that stare decisis was an insufficient basis to uphold a rule it viewed as anachronistic, particularly in light of the explosive growth of e-commerce.
Wayfair is a major victory for states, who can now collect tax from out-of-state sellers and brick-and-mortar retailers, subjecting the latter to the same tax burdens as their online competitors. Wayfair, however, does not hold that all tax regimes will pass constitutional muster. To the contrary, it holds that such regimes will be subject to traditional Dormant Commerce Clause doctrines designed to prevent undue burdens on interstate commerce.
Wayfair's issue was one the Court had decided twice before. In Bellas Hess, the Court held that states could not impose sales tax collection obligations on out-of-state sellers who relied solely on the mail and common carriers to deliver their goods because the sellers “lacked the requisite minimum contacts with the State required by both the Due Process Clause and the Commerce Clause.” In Quill, the Court overruled Bellas Hess’s due process holding, but reaffirmed Bellas Hess’s holding that the Dormant Commerce Clause forbids the imposition of sales tax collection obligations on sellers lacking an in-state physical presence. In a concurring opinion, Justice Scalia, joined by Justices Kennedy and Thomas, emphasized that his vote was based solely on stare decisis.
As the Court noted in Wayfair, criticism of Quill began as soon as it was decided. The Court pointed to one scholar’s view that Quill was “‘premised on assumptions that are unfounded’ and ‘riddled with internal inconsistencies.’” It further explained that “[e]ach year, the physical presence rule be[came] further removed from economic reality and result[ed] in significant revenue losses to the States.”
Against this background, South Dakota enacted the tax at issue, requiring out-of-state sellers to collect and remit sales taxes—with several caveats. First, the tax applied only to sellers with more than $100,000 of annual sales or more than 200 separate transactions in the state in a single year. Second, the tax had no retroactive application. Third, the tax’s application was stayed until its constitutionality was clearly established.
Seeking to establish the tax’s constitutionality, South Dakota then filed a state declaratory judgment action against Wayfair, Inc., Overstock.com, Inc. and Newegg, Inc. As contemplated by the statute and as requested by the state in its pleadings, the trial court granted summary judgment to the online retailers on the grounds that the issue had been decided in Bellas Hess and Quill. The South Dakota Supreme Court affirmed for the same reason.
The Court Discards the Physical Presence Rule
In a 5-4 decision, the Supreme Court reversed the lower court ruling, holding that the Commerce Clause does not foreclose the collection of state sales tax from remote sellers merely because they lack an in-state presence. The majority opinion—written by Justice Kennedy and joined by Justices Thomas, Ginsburg, Alito and Gorsuch—began by noting that “[a]ll agree that South Dakota has the authority to tax these transactions” under the Due Process Clause. But the Court explained that the Dormant Commerce Clause also forbids states from imposing sales tax obligations on sellers unless the sellers have “a substantial nexus with the taxing State”—and in Bellas Hess and Quill, the Court held that a “substantial nexus” requires in-state physical presence.
The Court rejected those holdings, concluding that a seller could have a “substantial nexus” to a state even without a physical presence. It observed that there exists a close relationship between “[t]his nexus requirement” and the minimum-contacts test imposed by the Due Process Clause. And although the two inquiries are not exactly the same, they are not so different as to justify different treatment. Because Quill had already recognized that due process does not impose a physical presence rule, the Court held that the Commerce Clause does not, either.
The Court also emphasized that the physical presence rule was inconsistent with the purpose of the Dormant Commerce Clause. The Dormant Commerce Clause, after all, was meant to prevent states from engaging in “economic discrimination.” But the physical presence rule had become a source of economic discrimination, “guarantee[ing] a competitive benefit to certain firms simply because of the organizational form they choose.” Worse still, the Quill rule “produces an incentive to avoid physical presence in multiple States,” thwarting the Dormant Commerce Clause’s goal of promoting interstate commerce. The Court also pointed out that Quill itself had “acknowledged that the physical presence rule is ‘artificial at its edges.’” In the Court’s opinion, “modern e-commerce does not align analytically with a test that relies on the sort of physical presence defined in Quill.” The Court found it “not clear why a single employee or a single warehouse should create a substantial nexus while ‘physical’ aspects of pervasive modern technology should not.”
The Court emphasized that the Quill rule “is not just a technical legal problem,” but also “an extraordinary imposition by the Judiciary on States’ authority to collect taxes and perform critical public functions.” The Court pointed to Wayfair’s advertising touting the fact that Wayfair does “not have to charge sales tax” and characterized that advertising as a “subtle offer to assist in tax evasion.” The Court concluded that the “physical presence rule … has limited States’ ability to seek long-term prosperity and has prevented market participants from competing on an even playing field.”
Finally, the Court concluded that stare decisis did not warrant retaining the Quill rule. The Court emphasized that the “Internet’s prevalence and power have changed the dynamics of the national economy” and that “[a]ttempts to apply the physical presence rule to online retail sales are proving unworkable.”
The Court concluded that under the “substantial nexus” test, South Dakota’s statute passed constitutional muster: “the nexus is clearly sufficient based on both the economic and virtual contacts respondents have with the State.” The Court remanded for further consideration of whether “some other principle in the Court’s Commerce Clause doctrine might invalidate the Act,” while emphasizing that “South Dakota’s tax system includes several features that appear designed to prevent discrimination against or undue burdens upon interstate commerce.”
Justice Thomas filed a concurring opinion, emphasizing that his views had changed since Quill and expressing disagreement with the Court’s entire body of Dormant Commerce Clause jurisprudence. Justice Gorsuch also filed a concurring opinion questioning the Court’s Dormant Commerce Clause cases. Chief Justice Roberts, joined by Justices Breyer, Sotomayor and Kagan, dissented. While agreeing that Bellas Hess was wrongly decided, he concluded that stare decisis warranted adhering to that precedent. He emphasized the importance of e-commerce to the national economy and concluded that a change to settled law “with the potential to disrupt the development of such a critical segment of the economy should be undertaken by Congress.”
Wayfair is a landmark decision that reshapes decades of settled tax law. But Wayfair will not be the last word in this controversial area. First, the Court observed that state tax laws would still be subject to traditional Dormant Commerce Clause principles barring “discrimination against or undue burdens upon interstate commerce.” The Court explained that several features of the South Dakota law were “designed to prevent” such burdens, including the safe harbor for those who transact limited business in South Dakota; the absence of retroactive tax collection obligations; and a standardized tax administration regime designed to reduce administrative and compliance costs. But the Court did not resolve whether other state laws, lacking these features, may be vulnerable to Dormant Commerce Clause challenges. Moreover, the Court observed that “Congress may legislate to address these problems if it deems it necessary and fit to do so.” Whether Congress takes up that offer remains to be seen.
To learn more about the implications of this case, please contact the authors or a member of Jenner & Block's national, state and local tax practice group.