Blockchain, Antitrust and Standard Setting

BlockchainIn an article for Fintech Weekly, Partner Michael W. Ross explains that, as companies have experimented with blockchain and other distributed ledger technologies, commentators have highlighted antitrust concerns.  Mr. Ross suggests areas to watch as the technology expands, particularly at the International Standards Organization and the Federal Trade Commission.  The article also notes the possibility for developing blockchain standards that may foster efficiency, compatibility and interoperability of diverse technologies through the adoption of “FRAND licensing” concepts.

To read the full article, please click here.


SDNY Extends RD Legal Funding Dismissal to the NYAG; CFPB Appeals

By Nicolas G. Keller

new updateOn September 12, 2018, Judge Loretta Preska of the District Court for the Southern District of New York dismissed the New York State Attorney General’s (“NYAG”) suit against RD Legal Funding, LLC, and related entities (collectively, “RD Entities”)[1] for allegedly defrauding individuals awaiting payouts from two separate funds—the September 11th Victim Compensation Fund of 2011 (“VCF”) and the fund arising out of the NFL Concussion Litigation Settlement Agreement (“NFL Fund”).[2] The Court’s ruling demonstrates the potentially far-reaching implications of the ongoing debate over the constitutionality of the CFPB’s structure in terms of not only the CFPB’s enforcement actions but also those of state actors. 

The lawsuit, commenced jointly by the NYAG and the Consumer Financial Protection Bureau (“CFPB”) in February 2017, alleges that the defendants’ transactions with individuals that the defendants characterized as “purchases” or “assignments” of VCF or NFL Fund payouts are substantively high-interest loans.[3] The CFPB and the NYAG assert that the alleged loans are usurious and violate provisions of the Consumer Financial Protection Act (“CFPA”)—also known as Title X of the Dodd-Frank Act—and various New York state fraud and usury laws.[4]

Nearly three months ago, on June 21, the Court dismissed the CFPB from the suit.[5] The gist of the Court’s holding, which we wrote more about here, was that the CFPB’s structure as an independent agency headed by a single director who can be removed by the President only for cause violates separation of powers.[6]  And the Court ruled that the remedy for this constitutional infirmity is to strike the CFPA in its entirety, thereby leaving the CFPB without the authority to bring suit.[7]  The Court also noted that:

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October Term 2018 Preview: The Supreme Court’s Class Action Docket

SCOTUSBy Alexander M. Smith

The Supreme Court’s next term kicks off next week, when the court re-convenes for its first oral argument since last April.  The docket currently features four cases of interest to the consumer law and class action bar:

  • In Lamps Plus, Inc. v. Varela, a divided panel of the Ninth Circuit construed a provision stating that “arbitration shall be in lieu of any and all lawsuits or other civil legal proceedings relating to my employment” to authorize class arbitration, even though the plaintiff’s employment agreement with Lamps Plus did not expressly authorize class-wide arbitration.  The Supreme Court granted certiorari to determine whether the Federal Arbitration Act “forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.” 
  • In Frank v. Gaos, the district court authorized a class-wide settlement of a lawsuit alleging that Google violated federal and state privacy laws by disclosing users’ search terms to third parties, even though the settlement consisted only of cy pres relief and attorneys' fees.  A divided panel of the Ninth Circuit affirmed, rejecting the objectors’ arguments that (1) a settlement that provided no direct relief to the class was inappropriate and (2) that the cy pres beneficiaries, which had previously received settlement funds from Google and which were affiliated with the law schools attended by class counsel, were improper.  The Supreme Court granted certiorari to determine “[w]hether, or in what circumstances, a cy pres award of class action proceeds that provides no direct relief to class members supports class certification and comports with the requirement that a settlement binding class members must be ‘fair, reasonable, and adequate.’”

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Recent Activity Brings Further Clarity to Cryptocurrency Enforcement

By Michael W. Ross and Andrew J. Lichtman

image from https://s3.amazonaws.com/feather-client-files-aviary-prod-us-east-1/2018-09-26/d04d50c7-b740-45a9-b4a6-3b9e95def44d.pngSeptember saw a flurry of activity that will help further define the cryptocurrency regulatory landscape.  The Financial Industry Regulatory Authority (“FINRA”) brought its first-ever crypto-fraud case and a court ruling by the U.S. District Court for the Eastern District of New York gave backing to the view that digital assets will be viewed as securities.  And, in two enforcements actions, the U.S. Securities and Exchange Commission (“SEC”) branched out beyond actions against fraudulent crypto-schemes and went after crypto companies for failing to register with the SEC.  The latter two cases signal that the SEC is committed to enforcing applicable securities law requirements beyond those accused of fraud, and therefore SEC enforcement activity remains an area for legitimate businesses to watch.

A Federal Court Rules On Whether Digital Assets Are Securities

Last October, the U.S. Attorney’s Office in Brooklyn brought charges against Maksim Zaslavskiy alleging that Zaslavskiy made false representations in connection with two cryptocurrencies and their related initial coin offerings (“ICOs”) in violation of U.S. securities law.  According to the indictment, Zaslavskiy induced investors to purchase tokens in an ICO for “REcoin” by falsely claiming that REcoin was backed by real estate investments.  Similarly, the government alleged, Zaslavskiy falsely claimed that a second cryptocurrency, “Diamond,” was backed by actual diamonds when it was not.

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How Blockchain Use Can Block Competition

BlockchainIn an article for Law360, Partners Daniel T. Fenske and Justin C. Steffen examine anti-competition issues with blockchain.  The authors explain that anti-competition issues abound now that financial institutions, corporations and other industries are investing in blockchain technology.  The issues, they observe, can be mitigated through early planning.  The authors discuss the “basics” of blockchain and anti-competition risks.  “The antitrust risks of blockchain technology will be clarified as the technology develops and it is put to more uses,” they conclude.  “It is critical that you consult competent antitrust counsel when structuring blockchain technology and policies so as to best mitigate antitrust risk.”

To read the full article, please click here.


SEC Take on Tokens Clarifies Some Crypto Community Quandaries

By Jolene E. Negre, Michael W. Ross, Justin C. Steffen and Andrew J. Lichtman

CurrencyIn a June 14 speech William Hinman, the SEC’s Director of the Division of Corporate Finance, began to place additional definition around the raging debate over whether digital assets, including tokens, are securities.  Until that speech, much commentary had focused on the repeat statements by SEC officials that digital assets distributed in initial coin offerings (ICOs) are almost always securities in the SEC’s view, with the possible exception of widely disseminated cryptocurrencies like Bitcoin.  Hinman’s remarks set out the view that, in their initial phases, tokens are more likely to qualify as securities under the Supreme Court’s Howey test, but in limited circumstances may, over time, shed enough of the characteristics of securities to lose that designation.  Under the rubric Hinman laid out, the new hallmark of success for a token project may become the point at which a project’s tokens are so widely used that they function without any centralized efforts and lose their securities status.  This post lays out some of the background and considerations under this new framework.

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SDNY Rules CFPB Unconstitutional, Creating Split of Authority and Raising New Questions

By Joseph L. Noga, Michael W. Ross, Justin C. Steffen and Kashan Pathan

-Since its inception, the Consumer Financial Protection Bureau (the “CFPB”) has faced controversy over its structure as an independent agency headed by a single director who can be removed by the President only for cause. Critics have invoked the unitary executive theory to argue that the Constitution permits an agency to enjoy independence from at-will termination by the President only if the agency is headed by multiple commissioners, directors, or board members.[1] About six months ago, the D.C. Circuit took a step toward silencing those critics by rejecting en banc a constitutional challenge to the CFPB’s structure.[2] But in another twist, two weeks ago news broke that the issue may remain unsettled, because in Consumer Fin. Prot. Bureau v. RD Legal Funding, LLC, U.S. District Judge Loretta Preska of the Southern District of New York explicitly rejected the PHH majority opinion and held the CFPB’s structure to be unconstitutional.[3] As discussed below, the new split of authority raises interesting questions going forward.

The SDNY Ruling

In RD Legal Funding, the defendant companies had offered cash advances to consumers waiting for settlement payouts. The CFPB and the New York Attorney General (the “NYAG”) alleged that these transactions were not sales transactions but loans and that these loans were made in violation of certain provisions of the Consumer Financial Protection Act (the “CFPA” or the “Act”).[4] Defendants moved to dismiss the complaint on three grounds, including that the CFPB is unconstitutionally structured and therefore lacks authority to bring claims under the CFPA.[5]

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Jenner & Block Partners with Chicago-Kent College of Law and FinTEx for Blockchain and Cryptocurrency Conference

FinTech-Linkedin-1400x800Jenner & Block is partnering with Chicago-Kent College of Law and FinTEx, a non-profit, member-driven community of the leading organizations within FinTech and Financial Services, for a first-of-its kind conference focused on the evolving regulatory and legal issues in the blockchain and cryptocurrency space.  Co-organized by Partner Justin C. Steffen, the Block(Legal)Tech conference will take place on August 9 at The Law Lab at Illinois Tech Chicago-Kent College of Law.  The Block(Legal)Tech conference will feature presentations and panel discussions on the law of distributed ledger systems, tokenized assets and cryptoasset-based funding.  The day-long conference will include a number of discussions, interviews and debates, delving deep into the complicated issues that affect the crypto-landscape, such as the future of US regulation of cryptoassets and the government’s role in promoting blockchain adoption.  Topics discussed will include minimizing the risks of crypto-litigation, the role of lawyers, the evolution of smart contracts and their impact on the legal profession as well as other legal issues that stem from the use and implementation of blockchain technology.

To register for the event, please click here.


The US Supreme Court Allows Collection of State Sales Tax From Remote Sellers

By Adam G. Unikowsky and Leonard R. Powell

SCOTUSOn June 21, 2018, the US Supreme Court issued its much-anticipated decision in South Dakota v. Wayfair, Inc., No. 17-494.  In a 5-4 opinion by Justice Kennedy, the Court held that the Dormant Commerce Clause does not bar a state from requiring an out-of-state seller lacking in-state physical presence to collect and remit sales tax.  In reaching this conclusion, the Court took the unusual step of overruling two of its own prior opinions: National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992).  The Court held that stare decisis was an insufficient basis to uphold a rule it viewed as anachronistic, particularly in light of the explosive growth of e-commerce.

Wayfair is a major victory for states, who can now collect tax from out-of-state sellers and brick-and-mortar retailers, subjecting the latter to the same tax burdens as their online competitors.  Wayfair, however, does not hold that all tax regimes will pass constitutional muster.  To the contrary, it holds that such regimes will be subject to traditional Dormant Commerce Clause doctrines designed to prevent undue burdens on interstate commerce.

Background

Wayfair's issue was one the Court had decided twice before.  In Bellas Hess, the Court held that states could not impose sales tax collection obligations on out-of-state sellers who relied solely on the mail and common carriers to deliver their goods because the sellers “lacked the requisite minimum contacts with the State required by both the Due Process Clause and the Commerce Clause.”  In Quill, the Court overruled Bellas Hess’s due process holding, but reaffirmed Bellas Hess’s holding that the Dormant Commerce Clause forbids the imposition of sales tax collection obligations on sellers lacking an in-state physical presence.  In a concurring opinion, Justice Scalia, joined by Justices Kennedy and Thomas, emphasized that his vote was based solely on stare decisis.

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Ninth Circuit Reaffirms Narrow Scope of Restitution Under California Consumer Protection Statutes

By Alexander M. Smith

RetailIn the last three years, the Ninth Circuit and the California Court of Appeal have issued a pair of decisions clarifying that restitution under California’s consumer protection statutes is limited to the difference between the price a consumer paid for the product and the value the consumer received from that product—i.e., the “price premium” attributable to the defendant’s conduct.  See In re Tobacco Cases II, 240 Cal. App. 4th 779, 791-802 (2015); Brazil v. Dole Packaged Foods, LLC, 660 F. App’x 531, 534-35 (9th Cir. 2016).  Earlier this week, the Ninth Circuit continued this line of cases in Chowning v. Kohl’s Department Stores, Inc., which reaffirmed that “[t]he proper calculation of restitution . . . is price paid versus value received” and rejected a variety of alternative restitution models suggested by the plaintiff.  No. 16-56272, 2018 WL 3016908, at *1 (9th Cir. June 18, 2016). 

In Chowning, the plaintiff alleged that Kohl’s misled consumers by displaying alongside the sale price for its products an inflated “Actual Retail Price,” which was not the prevailing market retail price and which caused consumers to believe that they were receiving a larger discount than they were.  As a result, the plaintiff alleged that she and other putative class members were deceived into buying products that they would not have purchased but for Kohl’s misleading price comparisons.  In March 2016, Judge Klausner of the Central District of California granted Kohl’s motion for summary judgment.  He identified “three limiting principles” that defined the appropriate scope of restitution under California law: (1) that “restitution cannot be ordered exclusively for the purpose of deterrence”; (2) that any proposed method of restitution “must account for the benefits or value that a plaintiff received at the time of purchase”; and (3) that “the amount of restitution ordered must represent a measurable loss supported by the evidence.”  No. 15-8673, 2016 WL 1072129, at *6 (C.D. Cal. Mar. 15, 2016). 

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