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

By: Tracey Lattimer

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

The most significant changes introduced by the SHIELD Act include:

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

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

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

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

PEOPLE: Tracey Lattimer

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

By: Jason P. Hipp

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

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

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

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

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

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

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

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

PEOPLE: Jason P. Hipp

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

By: Madeline Skitzki and Kate T. Spelman

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

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

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

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

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

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

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

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

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

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

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

PEOPLE: Kate T. Spelman, Madeline Skitzki

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

By: Alexander N. Ghantous

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

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

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

 

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

[2] Id. 

[3] Id.

[4] Id

[5] Id

[6]Id.

[7] Id.

[8] Id

[9] Id

[10] Id

[11] Id

[12] Id

[13] Id

[14] Id

[15] Id

[16] Id

PEOPLE: Alexander N. Ghantous

April 10, 2020 Navigating Enforcement Risks Associated with the Use of Alternative or Sensitive Data - TechGC

Data trackingIn a recent blog post, TechGC highlighted a dinner that Jenner & Block hosted with TechGC in New York to discuss the use of alternative data when making consumer facing decisions.  At their dinner, “Navigating Enforcement Risks Associated with the Use of Alternative or Sensitive Data,” Kali BraceyJoseph L. NogaMichael W. Ross, Damon Y. Smith and Kate T. Spelman discussed what alternative data is, why consumers should care about it, what regulators are focused on and what consumers need to know when it comes to alternative data.

To read the blog post, please click here

April 8, 2020 COVID-19 / CORONAVIRUS

A key part of the historic $2 trillion package to address the economic fallout from the coronavirus pandemic (the CARES Act or the Act) is the Paycheck Protection Program (PPP), which extends $349 billion in fully forgivable loans to small businesses, generally those with 500 or fewer employees, through the US Small Business Administration (SBA). In the past week, Noun_virus_1772453the SBA and the US Department of Treasury have issued initial guidance for the new program, which they then expanded and revised just hours before the program was officially launched on Friday, April 3, 2020. The preexisting lineup of 1,800 authorized SBA lenders can now distribute the loans, and lenders have reportedly processed over $2 billion in program funds as of Friday afternoon. To read more about this program, please click here. If you have any questions or feel that we can assist, please reach out to our task force.

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