In 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.
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. 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. 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. 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”). 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.
Jenner & Block Partners with Chicago-Kent College of Law and FinTEx for Blockchain and Cryptocurrency Conference
Jenner & 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.
On June 21, 2018, the US Supreme Court issued its much-anticipated decision in South Dakota v. Wayfair, Inc., No. 17-494. In a 5-4 opinion by Justice Kennedy, the Court held that the Dormant Commerce Clause does not bar a state from requiring an out-of-state seller lacking in-state physical presence to collect and remit sales tax. In reaching this conclusion, the Court took the unusual step of overruling two of its own prior opinions: National Bellas Hess, Inc. v. Department of Revenue of Illinois, 386 U.S. 753 (1967), and Quill Corp. v. North Dakota, 504 U.S. 298 (1992). The Court held that stare decisis was an insufficient basis to uphold a rule it viewed as anachronistic, particularly in light of the explosive growth of e-commerce.
Wayfair is a major victory for states, who can now collect tax from out-of-state sellers and brick-and-mortar retailers, subjecting the latter to the same tax burdens as their online competitors. Wayfair, however, does not hold that all tax regimes will pass constitutional muster. To the contrary, it holds that such regimes will be subject to traditional Dormant Commerce Clause doctrines designed to prevent undue burdens on interstate commerce.
Wayfair's issue was one the Court had decided twice before. In Bellas Hess, the Court held that states could not impose sales tax collection obligations on out-of-state sellers who relied solely on the mail and common carriers to deliver their goods because the sellers “lacked the requisite minimum contacts with the State required by both the Due Process Clause and the Commerce Clause.” In Quill, the Court overruled Bellas Hess’s due process holding, but reaffirmed Bellas Hess’s holding that the Dormant Commerce Clause forbids the imposition of sales tax collection obligations on sellers lacking an in-state physical presence. In a concurring opinion, Justice Scalia, joined by Justices Kennedy and Thomas, emphasized that his vote was based solely on stare decisis.
In 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).
On May 21, 2018, President Trump signed into law a resolution disapproving the Consumer Financial Protection Bureau’s (“CFPB”) guidance on Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act (“Indirect Auto Lending Guidance” or “Guidance”). In that Guidance, the CFPB expressed the view that certain indirect auto lenders—that is, lenders that coordinate with dealerships to provide auto loans to consumers—are subject to the Equal Credit Opportunity Act and its anti-discriminatory provisions.
The CFPB issued the Indirect Auto Lending Guidance in 2013 as a bulletin, not a formal rule, and did not submit it to Congress for review under the Congressional Review Act (“CRA”), which would have allowed Congress sixty days to disapprove the Guidance by simple majority vote in both houses. However, in March 2017, Senator Patrick Toomey of Pennsylvania requested that the Government Accountability Office (“GAO”) determine whether the Indirect Auto Lending Guidance is a “rule” under the CRA and therefore subject to the disapproval procedures. In an opinion issued on December 5, 2017, the GAO concluded that the Guidance is indeed a “rule” under the CRA—this was effectively treated as a trigger for the sixty-day clock, enabling Congress to exercise its powers under the CRA even though the Guidance was never submitted to Congress or published in the Federal Register. In its opinion, the GAO expressed a broad stance on the reach of the CRA over agency guidance, stating that “CRA requirements apply to general statements of policy which, by definition, are not legally binding.” This holds open the door for the CRA to be used to disapprove agency guidance that is much older than sixty days, as was the case with the Indirect Auto Lending Guidance.
The Supreme Court Reaffirms The Reach And Force Of The Federal Arbitration Act, This Time In Employment Cases
On May 21, 2018, the Supreme Court issued its long-awaited decision in the consolidated cases Epic Systems Corp. v. Lewis, No. 16-285; Ernst & Young LLP v. Morris, No. 16-300; and NLRB v. Murphy Oil USA, No. 16-307. In a 5-4 opinion by Justice Gorsuch, the Court held that courts must enforce arbitration agreements requiring employees to bring employment-related claims in individualized arbitration proceedings, and barring them from pursuing those claims as a collective or class action. The Court explained that absent a contrary congressional directive, arbitration clauses are “valid, irrevocable, and enforceable” under the Federal Arbitration Act (FAA), which reflects “‘a liberal federal policy favoring arbitration agreements.’” The Court held that such arbitration agreements do not violate employees’ statutory right under the National Labor Relations Act (NLRA) to “engage in other concerted activities for the purpose of … mutual aid or protection.” It concluded that the National Labor Relations Board (NLRB)’s contrary conclusion was not entitled to Chevron deference. Therefore, the Court held that the provisions requiring individual arbitration of employment disputes were enforceable under the FAA.
The Epic decision represents a major victory for employers. It allows them to avoid burdensome class actions and instead take advantage of the cost and speed of individualized arbitration. The decision continues the Court’s longstanding practice of enforcing the FAA according to its terms.
The Epic case began when Jacob Lewis filed a putative class and collective action in federal court against his former employer, Epic Systems Corp., alleging violations of federal and state wage-and-hour laws. Epic moved to compel individual arbitration, arguing that under the terms of an agreement that Lewis had accepted as a condition of employment, Lewis was required to bring employment-based claims through individual arbitration and not as a collective or class action. The district court held that the arbitration agreement was unenforceable, and the Seventh Circuit affirmed, deferring to the Board’s conclusion that individualized arbitration agreements violated an employee’s right to engage in concerted action under the NLRA. The Seventh Circuit’s decision conflicted with decisions from other circuits, which had held that the FAA required enforcement of such agreements according to their terms. The Court granted Epic’s petition for certiorari, along with two other petitions raising the same question, and consolidated the three cases.
Last month, the Supreme Court granted certiorari to review a decision of the Ninth Circuit approving an $8.5 million class action settlement in which the majority of the settlement proceeds took the form of a cy pres award. Cy pres—which comes from a French expression meaning “as near as possible”—is an equitable doctrine that allows a court to direct unclaimed or non-distributable funds awarded as part of a class action settlement “to an entity whose interests lie ‘as near as possible’ to that group,” i.e., to a charity that advances interests related to those pursued by the plaintiff class in the lawsuit.
The case, Frank v. Gaos, No. 17-961, involves a pre-certification settlement of a class action against Google for alleged violations of the federal Stored Communications Act and California privacy laws. The district court approved the settlement, which allocated approximately $3.2 million to the plaintiffs’ attorneys, administrative costs, and the named plaintiffs, and awarded the remaining $5.3 million to six not-for-profit cy pres recipients that had submitted proposals detailing the ways in which they planned to use the proceeds to promote internet privacy initiatives. On appeal, the Ninth Circuit affirmed the district court’s decision that the settlement was “fair, adequate, and free from collusion.” It noted that while cy pres-only settlements are “the exception, not the rule[,]” such a settlement was appropriate here, where there were approximately 129 million class members, each of whom would have been entitled to a mere 4 cents. Moreover, the panel held that the district court did not abuse its discretion by approving the selection of the cy pres recipients, notwithstanding objectors’ claims that, among other things, defendant Google and class counsel had “significant prior affiliations” with the recipient organizations. Finally, the Ninth Circuit upheld the reasonableness of the $2.125 million award to class counsel, which the district court had determined to be acceptable under either the percentage-of-recovery or lodestar method.
In an article for American Banker, Jenner & Block Partner Michael W. Ross and Associate Emily A. Bruemmer examine the Consumer Financial Protection Bureau’s (CFPB) preference for less enforcement at the federal level. The authors discuss acting Director Mick Mulvaney’s announcement that the CFPB would no longer be “pushing the envelope” through enforcement actions and will be depending on state regulators for more leadership in regard to enforcement. Mr. Ross and Ms. Bruemmer explain that this development may not translate to less enforcement activity overall, but instead could lead to more inconsistent and unpredictable efforts by the state authorities. The authors note that FinTech companies’ protection of consumer data could become an area of focus and warn FinTech companies to remain vigilant regarding their privacy practices to ensure they are prepared in all the jurisdictions in which they operate.
To read the full article, please click here.
Jenner & Block Partner Anne P. Ray will speak at the 23rd Annual Consumer Financial Services Institute in Chicago. Hosted by the Practising Law Institute, the two-day program will focus on a broad array of recent regulatory, enforcement and litigation issues relating to mortgages; auto finance; credit, debit and prepaid cards; marketplace lending and Fintech; deposit accounts; student loans; and other products and services. Titled “Ethical Issues Unique to the Consumer Space,” Ms. Ray’s session will take place on May 8, 2018, the second day of the program. Ms. Ray and the other speakers will cover the impact of In re Payment Card Interchange Fee on litigating and settling class actions. They will also discuss the ethical implications in joint defense agreements and social media, as well as the ethical pitfalls in the settlement context—a mediator’s perspective. Ms. Ray’s session begins at 3:30 pm CT.
To learn more and to register for the event, please click here.