July 29, 2019 Facebook’s Libra Prompts Federal Draft Legislation

By: Jeffrey A. Atteberry

CryptocurrencyIn June, Facebook publicly launched an initiative to develop a cryptocurrency called Libra in partnership with 27 other technology and finance companies including Visa, PayPal and Uber.  According to Facebook, consumers will be able to buy Libra anonymously and then use the currency to buy things online, send money to people, or cash out at physical exchange points such as grocery stores.  The blockchain technology behind Libra is meant to be open-source and not controlled exclusively by Facebook, but by an association of its founding companies, each of which has already invested at least $10 million into the venture. 

Facebook’s announcement triggered a rapid response from federal legislators, and on July 15 the House Financial Services Committee introduced draft legislation aimed at preventing large tech companies from creating digital currencies such as Libra.  Entitled “Keep Big Tech Out of Finance Act,” the draft legislation would apply only to tech companies with over $25 billion in annual global revenue that primarily operate online marketplaces or social platforms.  Such companies would be prohibited from using blockchain or distributed ledger technology to create or operate “a digital asset that is intended to be widely used as a medium of exchange, unit of account, store of value, or any other similar function.”  The draft legislation would further prohibit such tech companies from being or affiliating with “a financial institution.” 

The draft legislation is just the latest indication that federal legislators and regulators are increasingly focused on the growing linkages between technology, particularly in the form of social media and online marketplaces, and more traditional consumer finance industries.

CATEGORIES: FinTech

July 26, 2019 The Consumer Finance Observer

CFO-ATBi_600x285Jenner & Block has recently launched The Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch.  In this issue, consumer finance lawyers David BitkowerKali BraceyJeremy M. CreelanJoseph L. NogaMichael W. Ross and Damon Y. Smith and Associate William S.C. Goldstein discuss how enforcement authorities are zeroing in on alternative data; the NY District Court’s block of a fintech charter; the CFPB’s proposed debt collection rules; the Saga of Madden v. Midland Funding; news from the CFPB’s UDAAP Symposium; updates on cryptocurrency; the FDIC’s consumer compliance supervisory highlights; and Texas’s enactment of new consumer finance laws. 

To read the full newsletter, click here.

July 22, 2019 Eighth Circuit Reminds: The First Principle of Arbitration Is Get Consent

By: Gabriel K. Gillett

6a01310fa9d1ee970c0240a482f2c4200dIn recent years, the Supreme Court has issued many decisions about arbitration, including the enforceability of arbitration agreements and employment agreements that bar classwide arbitration.  Last week, the Eighth Circuit issued a decision in a case involving those issues, holding that an employment agreement’s arbitration clause mandating individual arbitration was unenforceable.  Shockley v. PrimeLending, -- F.3d. --, 2019 WL 3070502 (8th Cir. 2019).  The arbitration clause provided that the employee and the company agree to “resolve the covered dispute exclusively through final and binding arbitration,” that both parties waive “the right to initiate a class, collective, representative or private attorney general action,” and that “[a]ll Covered Disputes will be settled by binding arbitration, on an individual basis.”  The court did not find that belt-and-suspenders language defective in any way.  Rather, the court reasoned that a valid agreement to arbitrate had not been formed because the employer had provided the employee with a link to the agreement, but there was no evidence the employee had clicked the link or otherwise assented to the agreement. 

The Eighth Circuit’s decision does not provide gloss on the Supreme Court’s arbitration jurisprudence—it does not even cite many of the Court’s recent cases.  The Eighth Circuit’s decision also does not discuss a novel legal theory or break new ground in the arbitration space.  Nor does it address one of the many open and often litigated issues related to arbitration.  Still, the holding is notable because it serves as an important reminder: even the best, clearest language in an arbitration clause (or any contract for that matter) is enforceable only if the parties actually agreed to it.  See, e.g., Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407, 1415 (2019) (“‘[T]he first principle that underscores all of our arbitration decisions’ is that ‘[a]rbitration is strictly a matter of consent.’” (citations omitted)).

CATEGORIES: Arbitration

PEOPLE: Gabriel K. Gillett

July 10, 2019 British Airways: To Fly. To [be] Serve[d with a huge fine]

By: Kelly Hagedorn and Oliver J. Thomson

AirplaneThe UK Information Commissioner’s Office (ICO) on 8 July 2019 issued a notice of its intention to fine British Airways £183.39 million for infringements of the General Data Protection Regulation (GDPR).  Such a fine, if levied, would represent around 1.5% of British Airways’ worldwide turnover for 2017, and would be approximately 367 times larger than the next largest fine that the ICO has imposed.

Background

The proposed fine relates to a data breach notified to the ICO by British Airways in September 2018.  In late August and early September 2018, British Airways customers attempting to use the British Airways website or app were redirected to a fraudulent website, which then gathered the customers’ personal data.  This personal data gathered included payment card information, booking details, and name and address information.  The breach affected around 500,000 British Airways customers.

In a statement, the UK’s Information Commissioner Elizabeth Denham said “when you are entrusted with personal data, you must look after it.  Those that don’t will face scrutiny from [the ICO] to check they have taken appropriate steps to protect fundamental privacy rights.”

Fining regime

The proposed fine represents a new record for financial penalties related to breaches of data protection law in the UK.  As we note above, the fine is roughly 367 times larger than the previous record: the £500,000 fine imposed on Facebook relating to the Cambridge Analytica affair in July 2018.  That fine, which was for the maximum amount available to the ICO at the time, was made under powers contained in the Data Protection Act 1998.  The proposed fine against British Airways would be levied under the UK Data Protection Act 2018, which implements the GDPR into national law.  The Data Protection Act 2018 empowers the ICO to fine a company up to 4% of its worldwide turnover for the previous year, meaning British Airways could have received a fine of around £500 million.[1]

The knowledge that it avoided an even higher sum will be of little comfort to British Airways, which said that it was “surprised and disappointed” by the decision.  British Airways purportedly cooperated with the ICO’s investigation and has since made a number of improvements to its processes and systems.  Willie Walsh, chief executive of IAG (British Airways’ parent company), said that the company “intends to take all appropriate steps to defend the airline’s position… including making any necessary appeals.”

British Airways will now have a period within which to make representations to the Information Commissioner as to why it contests the size of the proposed fine.  The Information Commissioner will consider these representations, possibly alongside a panel of non-executive advisors[2], following which she will issue a penalty notice.  After confirmation of the size of the penalty, British Airways could choose to appeal the decision to the First-tier Tribunal (General Regulatory Chamber).  The company may appeal the size of the penalty notice or the notice itself.[3]

Comment

This is a substantial fine by any standards, but particularly for a penalty in the arena of data protection.  Many expected the ICO to ease into the use of its new powers more gradually, but today’s announcement charts a bold course for the Information Commissioner, Elizabeth Denham.  When the penalty notice is issued, it will be interesting and useful to consider the full range of factors that the ICO took into account when determining the size of fine to impose on British Airways.

What is clear in the wake of this announcement is that the ICO will not hold back from issuing substantial penalties when it determines that there has been a serious breach of data protection law.  This announcement may be seen as a statement of intent on the part of the ICO, and executives and board members may wish to look once more at their companies’ data protection compliance programme.  The stakes have just been raised dramatically.

 

[1] s.157, Data Protection Act 2018, implementing Article 83, GDPR.

[2] The ICO’s Regulatory Action Policy states that, “For very significant penalties (expected to be those over £1M) a panel comprising non-executive advisors to the Commissioner’s Office may be convened by the Commissioner to consider the investigation findings and any representations made, before making a recommendation to the Commissioner as to any penalty level to be applied.  It will be the Commissioner’s final decision as to the level of penalty applied.  The panel may comprise technical experts in areas relevant to the case under consideration.”

[3] s.162, Data Protection Act 1998.

June 19, 2019 What Securities Pros Need to Know About SEC Data Analytics

CodeIn an article published by Law360, Partner Charles D. Riely and Associate Danielle Muniz explore the publicly available information about the US Securities and Exchange Commission’s use of data analytics to detect and pursue violators.  The authors discuss why understanding the SEC’s data analytics concepts is important for lawyers and other professionals responsible for supervision and compliance at investment advisers and broker-dealers. 

To read the full article, please click here

CATEGORIES: Securities

May 20, 2019 SDNY Decision Blocks National Bank Charters for FinTech

By William S. C. Goldstein

FintechEarlier this month, a federal district court in New York handed a win to the New York State Department of Financial Services (DFS) in its long-running, closely watched suit seeking to block the Office of the Comptroller of the Currency (OCC) from issuing national bank charters to non-bank financial technology (FinTech) companies that don’t receive deposits.  Judge Victor Marrero denied most of OCC’s motion to dismiss and found the agency’s interpretation of the National Bank Act, 12 U.S.C. § 21 et seq., to be unpersuasive.  Vullo v. Office of the Comptroller of the Currency, No. 18-cv-8377, 2019 WL 2057691, at *18 & n.13 (S.D.N.Y. May 2, 2019).  DFS’s suit has significant stakes for the FinTech industry: under the United States’ dual banking system, nationally chartered banks are regulated primarily by OCC and avoid the application of most state laws and regulations through federal preemption, while financial institutions without national bank charters are generally subject to state oversight—and non-bank institutions are often regulated by multiple states. Id. at *8.  Judge Marrero’s decision casts doubt on whether comprehensive, uniform regulation of FinTech companies can be achieved without congressional action.

The OCC allegedly first began considering whether to accept applications from FinTech companies for special purpose national bank (SPNB) charters in early 2016, pursuant to a 2003 regulation authorizing such charters for entities engaged in “at least one” core banking function: receiving deposits, paying checks, or lending money. Id. at *2 (quoting 12 C.F.R. § 5.20(e)(1)(i)).  DFS first sued OCC in 2017, arguing that the National Bank Act (NBA) prohibits charters from issuing to entities that don’t receive deposits and that to issue them would violate the Tenth Amendment of the Constitution.  That suit was dismissed without prejudice in December of 2017 on justiciability grounds after Judge Naomi Reice Buchwald found that DFS had not suffered an injury in fact and that its claims were not ripe. Id. at *3.  After OCC announced in July of 2018 that it would begin accepting applications from non-depository FinTech companies for SPNB charters, DFS sued again, under the Administrative Procedure Act (APA) and the Tenth Amendment, to prevent OCC from issuing any charters and to invalidate the underlying regulation.  OCC moved to dismiss this past February, arguing that DFS lacked standing, its claims weren’t ripe or timely, and that on the merits it failed to state a claim. Id. at *4.  Judge Marrero issued a decision on OCC’s motion on Thursday, May 2.

Judge Marrero first addressed OCC’s justiciability arguments.  He found that DFS had standing based on two distinct alleged harms: i) the loss of “critical financial protections” for the citizens of New York that would result if non-depository financial institutions were no longer subject to DFS regulation; and ii) direct financial harm to DFS due to the loss of assessments levied on institutions it licenses and regulates. Id. at *8.  As to constitutional ripeness, the Court found that OCC “has the clear expectation of issuing SPNB charters,” and thus that “DFS has demonstrated a ‘substantial risk that harm will occur,’” making its claims ripe. Id. at *9 (quoting Clapper v. Amnesty Int’l USA, 568 U.S. 398, 414 n.15 (2013)).  Judge Marrero also rejected OCC’s argument that, insofar as DFS was challenging the validity of the underlying regulation authorizing SPNB charters—issued in 2003—its claims were untimely. Id. at *10-11.  The Court noted that DFS’s claims “cannot be both unripe and untimely,” and that to hold otherwise would allow agencies to insulate their actions from judicial review by promulgating rules and then waiting out the limitations period before taking any actions under those rules. Id. at *10.  The Court also invoked several administrative law doctrines and decisions allowing review of agency action where an agency claims broad new authority derived from an older regulation. Id. at *10-11.  OCC is free to re-raise its timeliness defense on a more fully developed record. Id. at *11.

On the merits, OCC’s chief argument was that the scope of the phrase “business of banking” in the National Bank Act is ambiguous, and thus that OCC’s interpretation is entitled to Chevron deference. Id. at *13.  The Court was not persuaded by this argument, concluding instead that the text, structure, purpose, and history of the statute all supported a conclusion that the NBA “unambiguously requires receiving deposits as an aspect of the business.” Id. at *13-16.  The original version of the NBA “is replete with provisions predicated upon a national bank’s deposit-receiving power,” and was based heavily on New York’s experience with a state banking law, under which deposit-receiving was always a core, unchallenged power of banks. Id. at *15.  The Court emphasized that OCC had never before chartered a non-depository institution in reliance on the “business of banking” clause; rather, the previous two times OCC began issuing national charters to such institutions, it acted in reliance on congressional amendments to the NBA explicitly authorizing it do so. Id.  The Court was reluctant to find a broad new agency power, with the potential to significantly disrupt the banking industry, in 140-year-old statutory language—the “Congress doesn’t hide elephants in mouse holes” canon. Id. at *16.  Judge Marrero acknowledged a significant line of authority finding ambiguous the “outer bounds” of the “business of banking,” but found those cases inapposite to determining what the necessary core activities of banking are, what he called the “threshold requirements” or “inner limits” of banking. Id. at *17.  In light of all these and other “interpretive clues,” the Court concluded that only depository institutions are eligible for national charters under the NBA’s “business of banking” clause, and that OCC cannot issue such charters to non-depository institutions without specific statutory authorization. Id. at *18.  Accordingly, DFS’s arguments that OCC’s plan to charter FinTech companies would violate the National Bank Act stated claims under the APA. Id. at *18.  However, the Court did dismiss DFS’s Tenth Amendment claim.  DFS argued that OCC violated the Tenth Amendment by exceeding its statutory authority and acting contra to congressional intent. Id.  The Tenth Amendment allows litigants to object to exercises of federal authority that exceed “the National Government’s [constitutionally] enumerated powers.” Id. at *19 (citation and quotations omitted).  The authority to regulate national banks has long been recognized as within the scope of the powers granted to Congress by the Constitution’s Commerce and Necessary and Proper Clauses. Id. at *18.  The court observed that DFS did not allege that it would “categorically lie beyond federal authority” for Congress to authorize OCC to issue national bank charters to non-depository institutions. Id. at *19.  DFS therefore did not state a Tenth Amendment claim. Id.

CATEGORIES: FinTech

May 10, 2019 The CFPB Rolls Out New Regulations for Debt Collection

By Amy Egerton-Wiley

CallDebt 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.

CATEGORIES: Decisions of Note

May 9, 2019 US Supreme Court Holds that Classwide Arbitration is Unavailable Unless the Parties Clearly Agree to It

   

By: Michael T. BrodyGabriel K. GillettHoward S. Suskin and Adam G. Unikowsky

Supreme Court Pillars - iStock_000017257808LargeOn 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.[1]  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.[2]  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.[3]

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.’”[4]

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.[5]

Lamps Plus appealed, and the Ninth Circuit affirmed.[6]  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.”[7]  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.”[8]  “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.’”[9]  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.”[10]

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.[11]  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,[12] and no notable petitions are currently pending.[13]  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.[14]

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. 

 

 

[1]  -- S. Ct. --, 2019 WL 1780275 (Apr. 24, 2019).

[2]  Slip op. 8.

[3]  See id. at 9-12.

[4]  Id. at 8 (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 348, 350 (2011)).

[5]  Varela v. Lamps Plus, Inc., 2016 WL 9110161 (C.D. Cal. Jul. 7, 2016).

[6]  Varela v. Lamps Plus, Inc., 701 F. App’x 670 (9th Cir. 2017).

[7]  Slip op. at 6.

[8]  Id.

[9]  Id. at 8 (quoting Concepcion, 563 U.S. at 348).

[10]  Id. at 10-12.

[11]  See New Prime v. Oliveira, 139 S. Ct. 532 (2019); Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).

[12]  See https://www.scotusblog.com/case-files/terms/ot19/.

[13]  See https://www.scotusblog.com/case-files/petitions-were-watching/.

[14]  Slip op. at 9 n.4 (citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569, n. 2 (2013)).

CATEGORIES: Arbitration, Decisions of Note, US Supreme Court

May 9, 2019 US Supreme Court Holds that Classwide Arbitration is Unavailable Unless the Parties Clearly Agree to It

By: Michael T. BrodyGabriel K. GillettHoward S. Suskin and Adam G. Unikowsky

Supreme Court Pillars - iStock_000017257808LargeOn 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.[1]  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.[2]  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.[3]

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.’”[4]

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.[5]

Lamps Plus appealed, and the Ninth Circuit affirmed.[6]  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.”[7]  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.”[8]  “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.’”[9]  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.”[10]

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.[11]  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,[12] and no notable petitions are currently pending.[13]  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.[14]

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. 

 

 

[1]  -- S. Ct. --, 2019 WL 1780275 (Apr. 24, 2019).

[2]  Slip op. 8.

[3]  See id. at 9-12.

[4]  Id. at 8 (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 348, 350 (2011)).

[5]  Varela v. Lamps Plus, Inc., 2016 WL 9110161 (C.D. Cal. Jul. 7, 2016).

[6]  Varela v. Lamps Plus, Inc., 701 F. App’x 670 (9th Cir. 2017).

[7]  Slip op. at 6.

[8]  Id.

[9]  Id. at 8 (quoting Concepcion, 563 U.S. at 348).

[10]  Id. at 10-12.

[11]  See New Prime v. Oliveira, 139 S. Ct. 532 (2019); Henry Schein, Inc. v. Archer & White Sales, Inc., 139 S. Ct. 524 (2019).

[12]  See https://www.scotusblog.com/case-files/terms/ot19/.

[13]  See https://www.scotusblog.com/case-files/petitions-were-watching/.

[14]  Slip op. at 9 n.4 (citing Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 569, n. 2 (2013)).

CATEGORIES: US Supreme Court

May 8, 2019 The Consumer Welfare Standard on Shaky Ground?

 

By: Lee K. Van Voorhis and Eugene Lim

City-community-crossing-109919For the past forty years, the consumer welfare standard (CWS) was the consensus economic model that antitrust enforcement agencies used to determine whether a company’s behavior necessitates antitrust action.  The CWS became mainstream after former DC Circuit Justice Robert Bork published his exceedingly influential The Antitrust Paradox in 1978.[1]  The book argued that antitrust laws were created to maximize consumers’ benefits, which meant focusing on surplus gains for consumers while disregarding efficiency gains for producers. The US Supreme Court quickly solidified Bork’s views in Reiter v. Sonotone Corp.[2]  The CWS has since provided more predictability in antitrust enforcement, narrowing its focus purely on consumer prices.[3]

However, critics are now voicing concerns that it is time to broaden the factors analyzing what benefits consumers.  Critics have advocated that antitrust enforcement should be determined by a “total welfare standard" (TWS) instead.[4]  Note that it is not clear whether the TWS is best for any particular political point of view.  On the one hand, the standard considers whether mergers could lead to higher unemployment, or harm the environment.  On the other hand, the standard would allow some mergers that result in higher prices to consumers, but have benefits that outweigh those higher prices.

Although the FTC has not clearly stated if actual changes will come, there is now a debate on the appropriate standard that has not seriously occurred for several decades.

Recent Moves by Congress Indicate Skepticism for the Consumer Welfare Standard

Earlier this year in the Staples-Essendant decision, dissenting Democratic Commissioners may have suggested Congress step in, and possibly create a regulatory role for US antitrust.[5]  Though Congress has not affirmatively signaled this type of action, some members of Congress have suggested modifications to the mainstream standard governing anticompetitive behavior.[6]

On March 4, 2019, the House Subcommittee on Antitrust, Commercial and Administrative Law added Lina Khan, a former legal fellow for the FTC, to its ranks to work on committee priorities related to competition and business regulation.[7]  Khan created quite a buzz in her January 2017 law review article criticizing the CWS and “Amazon’s Antitrust Paradox.”[8]  In the article, she argued that the CWS is currently “unequipped to capture the architecture of market power in the modern economy,” because the “current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anti-competitive.”[9]  Further, on March 5, 2019, the Senate Judiciary Committee solicited testimony from experts on whether the CWS is outdated and whether the United States should return to this earlier era of antitrust enforcement.[10]

Commissioner Wilson’s Speech Suggesting a Potential Move Away From the Consumer Welfare Standard

Earlier this year, Republican Commissioner Wilson addressed the benefits of the TWS in a speech at an antitrust symposium at George Mason University’s Antonin Scalia Law School on February 15, 2019.[11]

Wilson held out the standard as a potential alternative to the CWS.  She explained that the TWS looks beyond customer impacts to consider all participants in the market, including both producers and consumers, and suggests that the TWS comes with other benefits.  One of the purported benefits is a focus on maximizing efficiency, instead of how surplus (or financial benefits) should be distributed across a market.  In Wilson’s view, this would ensure markets are as productive as possible—yielding the maximum gains from trades.  “Speaking colloquially, we would expand the size of the pie,” she said.

Wilson also highlighted that the FTC’s expertise lies in economics and efficiency, which fits better under the TWS.  Other agencies with expertise on making “judgments about the distribution of wealth,” would be better suited to analyze issues under the current CWS.

Further, she said criticism that the TWS would harm consumers fails to see that some markets have consumers that are also producers and distributors.  For instance, in the sportswear market, athletes may be consumers, employees and direct or indirect shareholders through vehicles like 401(k) programs—though not always simultaneously.

At the same time, the TWS raised questions such as whether it could clear conduct and mergers with benefits in one area, but also downsides in another.  She noted that policymakers, academics and antitrust practitioners should soon be considering the multiple benefits of the TWS in the coming months as they debate what should be the governing legal standard in modern antitrust law. 

Wilson also spent time defending the mainstream CWS, stating that recent criticism of it fails to see that it does include other consumer impacts such as quality, innovation and labor.

This talk by Commissioner Wilson only adds more fuel to the fire that the FTC and policymakers are considering a move away from the mainstream CWS and will begin to considering other standards.

 

 

[1] The Antitrust Paradox: A Policy at War with Itself, Robert Bork, (Basic Books, 1978).

[2] Reiter v. Sonotone Corp., 442 U.S. 330 (1979).

[3] Joshua D. Wright & Douglas H. Ginsburg, The Goals of Antitrust: Welfare Trumps Choice, 81 Fordham L. Rev. 2405, 2406-07 (2013).

[4] See, e.g., “Welfare Standards and Merger Analysis: Why not the Best?” Kenneth Heyer, DOJ-EAG 06-8, March 2006, https://www.justice.gov/sites/default/files/atr/legacy/2007/09/28/221880.pdf

[5] See, e.g., Commissioner Rebecca Kelly Slaughter, In the Matter of Staples, Inc. / Essendant, Inc., File No. 181-0180, January 28, 2019, at *1.

[6] See, e.g., “Here’s How we can Break up Big Tech,” Sen. Elizabeth Warren, March 8, 2019,https://medium.com/@teamwarren/heres-how-we-can-break-up-big-tech-9ad9e0da324c.

[7] “House Panel Picks Amazon Critic as Antitrust Counsel,” Christopher Cole, March 5, 2019,https://www.law360.com/articles/1135174/house-panel-picks-amazon-critic-as-antitrust-counsel.

[8] See Lina M. Kahn, Amazon’s Antitrust Paradox, 126 Yale L.J. 710 (2016).

[9] Id.

[10] “Does America Have a Monopoly Problem?: Examining Concentration and Competition in the US Economy,” Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights, March 5, 2019,https://www.judiciary.senate.gov/meetings/does-america-have-a-monopoly-problem-examining-concentration-and-competition-in-the-us-economy.

[11] “Welfare Standards Underlying Antitrust Enforcement: What You Measure is What You Get,” Christine S. Wilson, February 15, 2019,
https://www.ftc.gov/system/files/documents/public_statements/1455663/welfare_standard_speech_-_cmr-wilson.pdf.

CATEGORIES: Antitrust

May 8, 2019 The Consumer Welfare Standard on Shaky Ground?

By: Lee K. Van Voorhis and Eugene Lim

For the past forty years, the consumer welfare standard (CWS) was the consensus economic model that antitrust enforcement agencies used to determine whether a company’s behavior necessitates antitrust action.  The CWS became mainstream after former DC Circuit Justice Robert Bork published his exceedingly influential The Antitrust Paradox in 1978.[1]  The book argued that antitrust laws were created to maximize consumers’ benefits, which meant focusing on surplus gains for consumers while disregarding efficiency gains for producers. The US Supreme Court quickly solidified Bork’s views in Reiter v. Sonotone Corp.[2]  The CWS has since provided more predictability in antitrust enforcement, narrowing its focus purely on consumer prices.[3]

However, critics are now voicing concerns that it is time to broaden the factors analyzing what benefits consumers.  Critics have advocated that antitrust enforcement should be determined by a “total welfare standard" (TSW) instead.[4]  Note that it is not clear whether the TWS is best for any particular political point of view.  On the one hand, the standard considers whether mergers could lead to higher unemployment, or harm the environment.  On the other hand, the standard would allow some mergers that result in higher prices to consumers, but have benefits that outweigh those higher prices.

Although the FTC has not clearly stated if actual changes will come, there is now a debate on the appropriate standard that has not seriously occurred for several decades.

Recent Moves by Congress Indicate Skepticism for the Consumer Welfare Standard

Earlier this year in the Staples-Essendant decision, dissenting Democratic Commissioners may have suggested Congress step in, and possibly create a regulatory role for US antitrust.[5]  Though Congress has not affirmatively signaled this type of action, some members of Congress have suggested modifications to the mainstream standard governing anticompetitive behavior.[6]

On March 4, 2019, the House Subcommittee on Antitrust, Commercial and Administrative Law added Lina Khan, a former legal fellow for the FTC, to its ranks to work on committee priorities related to competition and business regulation.[7]  Khan created quite a buzz in her January 2017 law review article criticizing the CWS and “Amazon’s Antitrust Paradox.”[8]  In the article, she argued that the CWS is currently “unequipped to capture the architecture of market power in the modern economy,” because the “current doctrine underappreciates the risk of predatory pricing and how integration across distinct business lines may prove anti-competitive.”[9]  Further, on March 5, 2019, the Senate Judiciary Committee solicited testimony from experts on whether the CWS is outdated and whether the United States should return to this earlier era of antitrust enforcement.[10]

Commissioner Wilson’s Speech Suggesting a Potential Move Away From the Consumer Welfare Standard

Earlier this year, Republican Commissioner Wilson addressed the benefits of the TWS in a speech at an antitrust symposium at George Mason University’s Antonin Scalia Law School on February 15, 2019.[11]

Wilson held out the standard as a potential alternative to the CWS.  She explained that the TWS looks beyond customer impacts to consider all participants in the market, including both producers and consumers, and suggests that the TWS comes with other benefits.  One of the purported benefits is a focus on maximizing efficiency, instead of how surplus (or financial benefits) should be distributed across a market.  In Wilson’s view, this would ensure markets are as productive as possible—yielding the maximum gains from trades.  “Speaking colloquially, we would expand the size of the pie,” she said.

Wilson also highlighted that the FTC’s expertise lies in economics and efficiency, which fits better under the TWS.  Other agencies with expertise on making “judgments about the distribution of wealth,” would be better suited to analyze issues under the current CWS.

Further, she said criticism that the TWS would harm consumers fails to see that some markets have consumers that are also producers and distributors.  For instance, in the sportswear market, athletes may be consumers, employees and direct or indirect shareholders through vehicles like 401(k) programs—though not always simultaneously.

At the same time, the TWS raised questions such as whether it could clear conduct and mergers with benefits in one area, but also downsides in another.  She noted that policymakers, academics and antitrust practitioners should soon be considering the multiple benefits of the TWS in the coming months as they debate what should be the governing legal standard in modern antitrust law. 

Wilson also spent time defending the mainstream CWS, stating that recent criticism of it fails to see that it does include other consumer impacts such as quality, innovation and labor.

This talk by Commissioner Wilson only adds more fuel to the fire that the FTC and policymakers are considering a move away from the mainstream CWS and will begin to considering other standards.

 

 

[1] The Antitrust Paradox: A Policy at War with Itself, Robert Bork, (Basic Books, 1978).

[2] Reiter v. Sonotone Corp., 442 U.S. 330 (1979).

[3] Joshua D. Wright & Douglas H. Ginsburg, The Goals of Antitrust: Welfare Trumps Choice, 81 Fordham L. Rev. 2405, 2406-07 (2013).

[4] See, e.g., “Welfare Standards and Merger Analysis: Why not the Best?” Kenneth Heyer, DOJ-EAG 06-8, March 2006, https://www.justice.gov/sites/default/files/atr/legacy/2007/09/28/221880.pdf

[5] See, e.g., Commissioner Rebecca Kelly Slaughter, In the Matter of Staples, Inc. / Essendant, Inc., File No. 181-0180, January 28, 2019, at *1.

[6] See, e.g., “Here’s How we can Break up Big Tech,” Sen. Elizabeth Warren, March 8, 2019,https://medium.com/@teamwarren/heres-how-we-can-break-up-big-tech-9ad9e0da324c.

[7] “House Panel Picks Amazon Critic as Antitrust Counsel,” Christopher Cole, March 5, 2019,https://www.law360.com/articles/1135174/house-panel-picks-amazon-critic-as-antitrust-counsel.

[8] See Lina M. Kahn, Amazon’s Antitrust Paradox, 126 Yale L.J. 710 (2016).

[9] Id.

[10] “Does America Have a Monopoly Problem?: Examining Concentration and Competition in the US Economy,” Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights, March 5, 2019,https://www.judiciary.senate.gov/meetings/does-america-have-a-monopoly-problem-examining-concentration-and-competition-in-the-us-economy.

[11] “Welfare Standards Underlying Antitrust Enforcement: What You Measure is What You Get,” Christine S. Wilson, February 15, 2019,
https://www.ftc.gov/system/files/documents/public_statements/1455663/welfare_standard_speech_-_cmr-wilson.pdf.

May 7, 2019 No Circuit Split Yet on Constitutionality of CFPB

By Jessica Ring Amunson

New-Development-IconIn a highly anticipated decision, the Ninth Circuit recently held that the target of a civil investigative demand from the Consumer Financial Protection Bureau (CFPB) could not avoid responding to the demand on the grounds that the CFPB itself is unconstitutional.  The Ninth Circuit thus joined the en banc DC Circuit in upholding the constitutionality of CFPB’s single-director, for-cause removal structure.  However, a circuit split may yet emerge with cases still pending before both the Second and Fifth Circuits raising the same issue.

In CFPB v. Seila Law LLC, the CFPB issued a civil investigative demand seeking to determine whether Seila violated the Telemarketing Sales Rule in the course of providing debt-relief service to its clients.  Seila refused to comply, arguing that the civil investigative demand was invalid because the CFPB is unconstitutionally structured.  According to Seila, not only was the civil investigative demand unlawful, but everything the agency has done is also unlawful because the agency’s structure violates the separation of powers.  The agency is headed by a single director who can be removed by the President only for cause.

Relying on the Supreme Court’s decisions in Humphrey’s Executor v. United States, 295 U.S. 602 (1935) and Morrison v. Olson, 487 U.S. 654 (1988), the Ninth Circuit rejected Seila’s argument, holding that “the for-cause removal restriction protecting the CFPB’s Director does not ‘impede the President’s ability to perform his constitutional duty’ to ensure that the laws are faithfully executed.”  Slip Op. at 8.  Perhaps presaging the future, the Ninth Circuit commented that “the Supreme Court is of course free to revisit those precedents, but we are not.”  Id.

Given that the Ninth Circuit’s recent decision was in accord with the DC Circuit’s decision from last year in PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018) (en banc), as of yet there is no circuit split to present to the Supreme Court.  That could change though.  Last month, the Fifth Circuit heard oral argument in CFPB v. All American Check Cashing, Inc., an interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  And currently being briefed before the Second Circuit is CFPB v. RD Legal Funding, LLC, which comes to the court in the opposite posture, with the district court having held that the CFPB’s structure is unconstitutional. 

Interestingly, these cases pit agency lawyers against their own Department of Justice (DOJ).  While CFPB attorneys are defending the constitutionality of the agency before the various lower courts, DOJ is on record as stating that the position of the United States is that the for-cause removal restriction “impermissibly infringes on the President’s control of the Executive Branch, and unconstitutionally frustrates the President’s ‘responsibility to take care that the laws be faithfully executed.’”  See Brief in Opposition at 10, State Nat’l Bank of Big Spring v. Mnuchin, 139 S. Ct. 916 (2019) (No. 18-307), 2018 WL 6504249 (petition for certiorari denied).  One thing on which agency and DOJ lawyers do agree, however, is that “absent legislative action eliminating the restrictions on removal, the principal question presented in this case will ultimately need to be settled by th[e Supreme] Court.”  Id.

PEOPLE: Jessica Ring Amunson

May 7, 2019 No Circuit Split Yet on Constitutionality of CFPB

By Jessica Ring Amunson

New-Development-IconIn a highly anticipated decision, the Ninth Circuit recently held that the target of a civil investigative demand from the Consumer Financial Protection Bureau (CFPB) could not avoid responding to the demand on the grounds that the CFPB itself is unconstitutional.  The Ninth Circuit thus joined the en banc DC Circuit in upholding the constitutionality of CFPB’s single-director, for-cause removal structure.  However, a circuit split may yet emerge with cases still pending before both the Second and Fifth Circuits raising the same issue.

In CFPB v. Seila Law LLC, the CFPB issued a civil investigative demand seeking to determine whether Seila violated the Telemarketing Sales Rule in the course of providing debt-relief service to its clients.  Seila refused to comply, arguing that the civil investigative demand was invalid because the CFPB is unconstitutionally structured.  According to Seila, not only was the civil investigative demand unlawful, but everything the agency has done is also unlawful because the agency’s structure violates the separation of powers.  The agency is headed by a single director who can be removed by the President only for cause.

Relying on the Supreme Court’s decisions in Humphrey’s Executor v. United States, 295 U.S. 602 (1935) and Morrison v. Olson, 487 U.S. 654 (1988), the Ninth Circuit rejected Seila’s argument, holding that “the for-cause removal restriction protecting the CFPB’s Director does not ‘impede the President’s ability to perform his constitutional duty’ to ensure that the laws are faithfully executed.”  Slip Op. at 8.  Perhaps presaging the future, the Ninth Circuit commented that “the Supreme Court is of course free to revisit those precedents, but we are not.”  Id.

Given that the Ninth Circuit’s recent decision was in accord with the DC Circuit’s decision from last year in PHH Corp. v. CFPB, 881 F.3d 75 (D.C. Cir. 2018) (en banc), as of yet there is no circuit split to present to the Supreme Court.  That could change though.  Last month, the Fifth Circuit heard oral argument in CFPB v. All American Check Cashing, Inc., an interlocutory appeal from the district court’s ruling upholding the CFPB’s constitutionality.  And currently being briefed before the Second Circuit is CFPB v. RD Legal Funding, LLC, which comes to the court in the opposite posture, with the district court having held that the CFPB’s structure is unconstitutional. 

Interestingly, these cases pit agency lawyers against their own Department of Justice (DOJ).  While CFPB attorneys are defending the constitutionality of the agency before the various lower courts, DOJ is on record as stating that the position of the United States is that the for-cause removal restriction “impermissibly infringes on the President’s control of the Executive Branch, and unconstitutionally frustrates the President’s ‘responsibility to take care that the laws be faithfully executed.’”  See Brief in Opposition at 10, State Nat’l Bank of Big Spring v. Mnuchin, 139 S. Ct. 916 (2019) (No. 18-307), 2018 WL 6504249 (petition for certiorari denied).  One thing on which agency and DOJ lawyers do agree, however, is that “absent legislative action eliminating the restrictions on removal, the principal question presented in this case will ultimately need to be settled by th[e Supreme] Court.”  Id.

PEOPLE: Jessica Ring Amunson

May 2, 2019 New Indictment a Reminder of CPSC’s Enforcement Capabilities

New-Update-IconOn March 29, 2019, the Department of Justice announced that it had indicted for the first time two corporate executives for failing to furnish information under the Consumer Product Safety Act (CPSA).  The government alleged that the two individuals – executives of companies that imported, distributed and sold dehumidifiers – had failed to timely report known defects in the products to the Consumer Product Safety Commission (CPSC).  In an article published by the New York Law Journal, Jenner & Block Partner Anthony S. Barkow and Associate Danielle Muniz discuss this recent indictment and the sometimes overlooked enforcement capabilities of the CPSC, the federal agency that enforces the CPSA. 

To read the full article, please click here.

May 2, 2019 New Indictment a Reminder of CPSC’s Enforcement Capabilities

New-Update-IconOn March 29, 2019, the Department of Justice announced that it had indicted for the first time two corporate executives for failing to furnish information under the Consumer Product Safety Act (CPSA).  The government alleged that the two individuals – executives of companies that imported, distributed and sold dehumidifiers – had failed to timely report known defects in the products to the Consumer Product Safety Commission (CPSC).  In an article published by the New York Law Journal, Jenner & Block Partner Anthony S. Barkow and Associate Danielle Muniz discuss this recent indictment and the sometimes overlooked enforcement capabilities of the CPSC, the federal agency that enforces the CPSA. 

To read the full article, please click here.