California’s Consumer Finance Regulator and Fintech: A Look at the DFPI’s First Year

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By: Jeremy M. Creelan, Megan B. Poetzel, Jenna E. Ross, and Karolina L. Bartosik

The regulation and enforcement of financial technology (Fintech) remains in sharp focus for California’s consumer finance regulator, the Department of Financial Protection and Innovation (DFPI), as it moves into its second year of operation. This Alert provides a short overview of the DFPI’s origins, a comparison of the DFPI’s stated priorities with its regulatory activities in its inaugural year, and an analysis of recent enforcement actions relevant to Fintech.   

Background

In August 2020, the California legislature passed Assembly Bill 1864, which included the California Consumer Financial Protection Law (CCFPL), one of the most expansive consumer protection laws in the country, and replaced the Department of Business Oversight (DBO) with the DFPI. As discussed in a contemporaneous blog post in Jenner & Block’s Consumer Law Round-Up, the CCFPL charges the DFPI with regulating “the provision of various consumer financial products and services” and exercising “nonexclusive oversight and enforcement authority under California and federal (to the extent permissible) consumer financial laws.”

To meet its “dual mission to protect consumers and foster responsible innovation,” the CCFPL expanded the scope of the DFPI’s oversight authority powers to cover entities and products not previously regulated by DBO, although it exempted major financial institutions from its reach. The DFPI now oversees nonbank small business lenders and Fintech companies, along with debt relief companies, consumer credit reporting agencies, among others, and can investigate and sanction unlawful, unfair, deceptive, or abusive acts or practices by any person offering or providing consumer financial products or services in the state. The CCFPL also grants the DFPI “the power to bring administrative and civil actions, issue subpoenas, promulgate regulations, hold hearings, issue publications, conduct investigations, and implement outreach and education programs.”

A Comparison of the DFPI’s Stated Priorities with its 2021 Activities

In its first monthly bulletin after the implementation of the CCFPL, the DFPI announced three notable areas of interest. Over a year later, in March 2022, the DFPI published a report summarizing its 2021 activities. A comparison of the two reveals areas of progress and sustained focus.

First, the DFPI promised to “review and investigate consumer complaints against previously unregulated financial products and services, including debt collectors, credit repair and consumer credit reporting agencies, debt relief companies, rent to own contractors, private school financing, and more.” In its annual report, the DFPI reported that it has collected “close to $1 million in restitution for consumers from enforcement actions” and reviewed 30% more complaints in 2021 than in 2020.  Notably, “[t]he top categories of [consumer] complaints included debt collection, cryptocurrency, and ‘neo banks’ (fintech companies partnering with banks to offer deposit account services).”

Second, the DFPI prepared to open the Office of Financial Technology Innovation, made “to work proactively with entrepreneurs and create a regulatory framework for responsible, emerging financial products.” Almost immediately, the DFPI signaled its interest in regulating earned wage access (EWA), or the ability for employees to access their wages before their scheduled payday. Not long after publication of its monthly bulletin, the DFPI entered into memoranda of understanding (MOU) with five EWA companies. The companies agreed to deliver quarterly reports beginning in April 2021 “on several metrics intended to provide the [DFPI] with a better understanding of the products and services offered and the risk and benefits to California consumers.” Later, the DFPI signed six additional MOU with EWA companies and stated in its annual report that the quarterly reports required in the MOU will “inform future oversight efforts.” The DFPI also indicated potential rulemaking may be forthcoming related to wage-based advances, including the registration of covered persons, record retention, and reporting.

Third, the DFPI stated that it would create the Division of Consumer Financial Protection, which would “feature a market monitoring and research arm to keep up with emerging financial products.” Per its report, the DFPI created a research team in September 2021, which is “in the process of evaluating DFPI’s consumer complaint data to identify broader market trends that may pose risks to consumers.”

Key Areas of DFPI Enforcement Related to Fintech

The Fintech industry has been a focus of DFPI enforcement activity since its inception. In one early action, for instance, the DFPI entered a desist and refrain order against a Fintech platform for allegedly selling securities, including cryptocurrency, without a broker-dealer certificate; misleading consumers in the sale of the securities; and engaging in unlicensed securities transactions.

In the last few months, the DFPI has continued to provide guidance to the industry in a variety of areas, via interpretive opinions and enforcement actions. Companies providing similar financial products and services in California should take note.

  • “True lender” and interest rate caps
    • In December 2021, the DFPI entered a consent order with a California company that had marketed consumer loans to California borrowers with interest rates in excess of the maximum set by California law. In the consent order, the company agreed not to market or service loans of less than $10,000 with interest rates greater than those set by the California Fair Access to Credit Act. The entrance of the consent order reveals that the DFPI viewed the California company as the true finance lender under the California Financing Law and the CCFPL, even though the company did not fund the loans and had provided servicing and marketing services to its banking partner, a Utah bank that is exempt from California’s usury laws.
    • In reaction to the above order, a Fintech platform and nondepository that operates a similar bank partnership program filed suit against the DFPI in March 2022, seeking a declaration that California’s interest rate caps do not apply to its loan program because its Utah bank partner originates and funds the loans. In April 2022, the DFPI filed a cross-complaint, accusing the Fintech platform of deceptive and unlawful business practices, by engaging in a “rent-a-bank” partnership scheme that allows it to evade California interest rate caps and promote predatory lending practices. The cross-complaint alleges that the Fintech platform is the “true lender” of the loans because it has the predominant economic interest in the transaction, as it collects nearly all of the loan profits after purchasing the loans’ receivables within days of their funding, shielding its bank partner from any credit risk. The DFPI also alleges that the Fintech platform performs traditional lender roles in marketing, underwriting, and servicing the loans. The DFPI seeks at least $100 million in penalties, in addition to restitution to the affected borrowers.
  • Wage-based advances and lender licensing
    • In a February 2022 interpretive opinion, the DFPI concluded that certain employer-facilitated advances, for which an EWA provider contracts with an employer to offer its employees early access to wages, were not loans under either the California Financing Law, which regulates consumer credit, or the California Deferred Deposit Transaction Law, which regulates payday loans. In reaching this conclusion, the DFPI found that the source of the funding (the employer), the limit on the funding amount (to the amount an employee earned), and the nominal fees associated with the advance counseled against the application of California’s lending laws. Therefore, the inquiring EWA provider and its employer-partner were not required to obtain lending licenses.
    • By contrast, the DFPI alleged in two recent enforcement actions that a merchant cash agreement (providing funding in exchange for a percentage of a company’s future revenue) and an income share agreement (providing college tuition funding in exchange for a percentage of the student’s income after graduation) qualify as loans, and such providers must be licensed in accordance with applicable California law.
  • Cryptocurrency and digital asset trading
    • In a March 2022 interpretive opinion, the DFPI addressed whether the California Money Transmission Act (MTA), which prohibits unlicensed engagement in the business of money transmission in the state, applies to software that provides retail and institutional investors with the ability to buy, sell, and store cryptocurrency. Of note, the MTA defines “money transmission” to include the selling or issuing of “stored value”; the selling or issuing of payment instruments; and the receipt of money for transmission. The DFPI concluded that closed-loop transactions, where the company does not facilitate the exchange of cryptocurrency transactions with a third party and the customer can only redeem monetary value stored in the account for cryptocurrency sold by the company, do not meet the definition of “money transmission.” However, the DFPI explained that it has not determined whether a “wallet storing cryptocurrency” is a form of “stored value” under the MTA.  Accordingly, the DFPI did not require the inquiring platform to be licensed in order to provide customers with fiat and digital wallets to store and exchange cryptocurrency directly with the platform. The DFPI noted, however, that the licensing requirements remain subject to change.
    • A month earlier, the DFPI concluded in a February 2022 consent order that sales of a cryptocurrency retail lending product qualify as a security under California law. Specifically, the company at issue offered and sold interest-bearing digital asset accounts, “through which investors could lend digital assets to [the company] and in exchange, receive interest” paid in cryptocurrency. The DFPI concluded that these accounts are securities, and that the company had wrongfully engaged in unregistered securities transactions. The DFPI’s decision came shortly after the federal Securities and Exchange Commission charged the company with a similar violation of federal securities laws, finding that the accounts were both “notes” and “investment contracts” because the investors’ digital assets were pooled and packaged as loan products that generated returns for the company and yielded variable monthly interest payments contingent on the company’s deployment and management of the assets.

As this overview makes clear, Fintech remains a top priority for the DFPI’s regulatory and enforcement activity in 2022. Jenner & Block will continue to monitor the DFPI and report on the dynamic regulatory landscape affecting Fintechs.


CFPB Publishes Market Snapshot Report on Consumer Use of State Payday Loan Extended Payment Plans

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By: Jenna L. Conwisar

Payday loans are small-dollar cash loans typically due in a single payment on the borrower’s next payday—they are extremely short-term and generally high-interest forms of consumer credit.[1] If the borrower cannot pay off the loan when it’s due, some states allow the borrower to pay a fee to defer full payment on, or “rollover,” their loan. A 2014 Consumer Financial Protection Bureau (CFPB) report found that over 80% of payday loans are rolled over within two weeks.[2]

The CFPB notes that upwards of 12 million borrowers utilize payday loans each year.[3] 16 states now require that payday lenders allow borrowers to repay their payday loans at regular intervals through Extended Payment Plans, or EPPs, typically at no additional cost to the borrower.[4]

On April 6, 2022, the CFPB published a report examining state EPPs.[5] Below are some of the CFPB report’s key findings.

Variation and Commonality Among State EPP Laws

The CFPB report found “substantial variation” among state EPPs, particularly in consumer eligibility requirements.[6] Depending on the state they are borrowing in, consumers may become EPP-eligible after surpassing a set number of rollovers, after they pay a certain percentage of the outstanding balance, or after they enroll in credit counseling.

Most states require EPPs to include at least four equal or substantially equal installments, and consumers are typically limited to one EPP election in a 12-month period. Many states mandate that lenders disclose the availability of an EPP option to consumers at the time they enter into the payday loan agreement or at the time of default.

EPP Usage, Default, and Rollover Rates

According to the CFPB report, extended payment plan usage rates vary drastically across states, with Washington reporting that 13.4% of payday loans converted to EPPs in 2020 compared to Florida’s 0.4%. In California, EPP usage rates doubled from 1.2% in 2019 to 3.0% in 2020. While the COVID-19 pandemic saw payday loan volume decrease by 65%, EPP usage rates tended to rise slightly. The report attributes the decline in overall payday loan volume to the federal Economic Impact Payments.

Meanwhile, rollover and default rates still remain higher than EPP usage rates. For example, 27% of Washington payday borrowers defaulted on their loan in 2020 and 47.1% of Idaho borrowers rolled over their loan in 2016. The CFPB attributes these high rates to lenders implementing practices that discourage EPP use. In the report’s press release, CFPB Director Rohit Chopra acknowledged that “[p]ayday lenders have a powerful incentive to protect their revenue by steering borrowers into costly re-borrowing” causing “state laws that require payday lenders to offer no-cost extended repayment plans [to] not work[] as intended.”[7]

*          *          *

Imbedded throughout the report is the CFPB’s clear preference for expanded EPP opportunities in order to prevent consumers from amassing repeat rollover fees. In 2014, the CFPB reported that most borrowers rollover their payday loans enough times that the accumulated rollover fees exceed the original loan amount.[8] Lenders should take note that the CFPB “will continue to monitor lender practices that discourage consumers from taking extended payment plans and take action as necessary.”[9]

 

[1] Payday loans are legal in only 26 states: Alabama, Alaska, California, Delaware, Florida, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Nevada, North Dakota, Rhode Island, South Carolina, Tennessee, Texas, Utah, Washington, Wisconsin, and Wyoming.

[2] CFPB Finds Four Out Of Five Payday Loans Are Rolled Over Or Renewed, CFPB (Mar 25, 2014).

[3] CFPB Finds Payday Borrowers Continue to Pay Significant Rollover Fees Despite State-Level Protections and Payment Plans, CFPB (Apr 6, 2022).

[4] Alabama, Alaska, California, Delaware, Florida, Idaho, Indiana, Louisiana, Michigan, Nevada, South Carolina, Utah, Washington, Wisconsin, and Wyoming.

[5] Market Snapshot: Consumer Use of State Payday Loan Extended Payment Plans, Consumer Financial Protection Bureau (April 2022).

[6] Id. at 5, 7.

[7] CFPB Finds Payday Borrowers Continue to Pay Significant Rollover Fees Despite State-Level Protections and Payment Plans, supra note 3.

[8] CFPB Data Point: Payday Lending, CFPB (March 2014).

[9] Market Snapshot, supra note 5, at 14.


US Supreme Court Issues Significant Ruling Limiting the “Look-Through” Jurisdiction of Federal Courts Under the Federal Arbitration Act

By: Laura P. MacDonald, Elizabeth A. Edmondson, and Adina Hemley-Bronstein

On March 31, 2022, the US Supreme Court issued a significant decision in Badgerow v. Walters, No. 20-1143, ending a circuit split about when federal courts have subject matter jurisdiction to review domestic arbitration awards under the Federal Arbitration Act (FAA). In an 8-1 opinion, the Court ruled that federal courts cannot “look through” to the underlying controversy to establish subject matter jurisdiction to confirm or vacate an arbitral award under the FAA. As a result, absent diversity of citizenship, petitioners seeking to confirm or vacate domestic arbitration awards under the FAA must now bring those petitions in state court.

The FAA governs the enforcement of most arbitration agreements in the United States. The statute dictates the standards for compelling arbitration (under Section 4) and for the confirmation or vacatur of an arbitration award (under Sections 9 and 10). But, although the FAA authorizes a party to make these petitions, the statute does not automatically authorize federal courts to hear them. This is because the FAA, unlike almost all federal statutes, does not itself confer federal subject matter jurisdiction, at least for domestic arbitration agreements. Instead, for a federal court to decide a petition under the FAA, the court must have an “independent jurisdictional basis.” Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 582 (2008). (Section 2 of the FAA confers federal subject matter jurisdiction over “non-domestic arbitrations,” i.e., those that have at least one foreign party or a substantial international nexus.)

The issue before the Court in Badgerow was whether a federal court may determine its jurisdiction to confirm or vacate an arbitration award only by looking at the face of the petition for judicial review, or whether it may “look through” the petition and examine whether federal jurisdiction would exist over the underlying dispute. The Court had previously authorized look-through jurisdiction in the context of petitions to compel arbitration under Section 4 of the FAA, see Vaden v. Discover Bank, 556 U.S. 49 (2009), but a circuit split had emerged regarding whether the same approach applied to petitions to confirm or vacate under Sections 9 and 10. Whereas the Third and Seventh Circuits maintained that Vaden should be confined to petitions to compel under Section 4, the Second Circuit, along with the First and Fourth, applied look-through jurisdiction to other petitions brought under the FAA. This means that until now, the Second Circuit has permitted federal court access for many petitioners seeking review of arbitration awards in New York, where a significant number of the nation’s arbitrations take place.

The case arose from an employment arbitration. The petitioner Denise Badgerow brought state and federal claims against her former employer for unlawful termination. After the arbitrators dismissed her claims, Badgerow filed suit in Louisiana state court to vacate the decision, arguing that fraud had taken place during the arbitration proceeding. In response, Badgerow’s employer removed the action to federal district court and petitioned the court to confirm the arbitration award. Badgerow then moved to remand, arguing that the federal district court lacked the subject matter jurisdiction needed to confirm or vacate the award under Sections 9 and 10 of the FAA. The district court applied Vaden’s look-through approach and held that, because the underlying employment dispute involved federal-law claims, it could therefore exercise jurisdiction over the employer’s petition to review and confirm the award. The Fifth Circuit affirmed, joining the First, Second, and Fourth Circuits in extending the look-through approach to additional petitions under the FAA.

On appeal, the Supreme Court reversed. Resolving the existing circuit split, it held that the look-through approach applicable under Section 4 does not apply to petitions to confirm or vacate arbitration awards under Sections 9 and 10. Thus, jurisdiction to confirm or vacate an arbitration award must be apparent on the face of the petition itself and independent of the underlying dispute. The Court reasoned that Sections 9 and 10 “contain none of the statutory language on which Vaden relied” and “[m]ost notably” lacked “Section 4’s ‘save for’ clause.” Unlike Section 4, Sections 9 and 10 “do not instruct a court to imagine a world without an arbitration agreement, and to ask whether it would then have jurisdiction over the parties dispute.” In fact, the Court pointed out, “Sections 9 and 10 do not mention the court’s subject-matter jurisdiction at all.” Applying standard principles of statutory interpretation, the Court reasoned that while “Congress could have replicated Section 4’s look-through instructions in Sections 9 and 10,” it did not, leading to the Court’s conclusion that federal courts may determine their jurisdiction only by assessing the parties’ petitions to confirm or vacate and not by looking through to the underlying controversy.

Following Badgerow, parties seeking to confirm or challenge arbitration awards in federal court will need to show that a federal question exists on the face of the petition itself. In practice, parties will have to show that either (a) the arbitration agreement is “non-domestic” and thus eligible for federal jurisdiction under Section 2, (b) federal diversity jurisdiction exists over the dispute, or (c) the confirmation action receives pendent jurisdiction due to the presence of a separate and independent federal claim.

The Court’s decision in Badgerow will likely shift a substantial number of confirmation and vacatur actions to state courts. While the FAA will remain the governing law, the shift to state court will require practitioners to follow state procedural rules and will potentially introduce questions about how state arbitration law can fill any gaps in the FAA itself.


CFPB Adds “Discrimination” to its “Unfair, Deceptive, or Abusive Acts and Practices” (UDAAP) Examination Guidance

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By: Michael W. Ross, Ali M. Arain, and Jonathan S. Steinberg

On March 16, 2022, the Consumer Financial Protection Bureau (CFPB) announced its intent to address discrimination as an “unfair practice” under the Consumer Financial Protection Act (commonly known as Dodd-Frank). Specifically, by indicating that discrimination falls within “unfair practices” in its Exam Manual, the CFPB has authorized its examiners to look “beyond discrimination directly connected to fair lending laws” and ask companies to “review any policies or practices that exclude individuals from products and services, or offer products or services with different terms, in an unfairly discriminatory manner.”[1]

Utilizing the Bureau’s manual, CFPB Examiners play a critical role in evaluating companies’ compliance with Dodd-Frank and other federal consumer protection laws in addition to aiding in the determination of whether “supervisory or enforcement actions are appropriate.”[2]

In its efforts to combat discrimination, the CFPB is particularly concerned with the growing use of artificial intelligence and machine learning, and how consumers from protected classes may be uniquely harmed by biased algorithms. For example, “data harvesting and consumer surveillance fuel complex algorithms that can target highly specific demographics of consumers to exploit perceived vulnerabilities and strengthen structural inequities.”[3]

Dodd-Frank prohibits “any provider of consumer financial products or services” from engaging in unfair, deceptive and abusive acts and practices (UDAAP).[4] It further provides the CFPB with “enforcement authority to prevent unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service.”[5] In addition, Dodd-Frank provides the CFPB with “supervisory authority for detecting and assessing risks to consumers and to markets for consumer financial products and services.”[6] In this capacity, the CFPB maintains “supervisory authority over banks, thrifts, and credit unions with assets over $10 billion, as well as their affiliates [and] . . . nonbank mortgage originators and servicers, payday lenders, and private student lenders of all sizes.”[7]

Under Dodd-Frank, “an act or practice is unfair when:

  • It causes or is likely to cause substantial injury to consumers;
  • The injury is not reasonably avoidable by consumers; and
  • The injury is not outweighed by countervailing benefits to consumers or to competition.”[8]

The CFPB, in its updated manual, details how it contends discrimination satisfies this definition. First, regarding the likelihood of “substantial injury,” the manual points to “[f]oregone monetary benefits or denial of access to products or services” that can result from discrimination.[9] Critically, the CFPB notes that “[c]onsumers can be harmed by discrimination regardless of whether it is intentional.”[10] Next, concerning reasonable avoidability, the CFPB states that the question is not “whether a consumer could have made a better choice[,]” but rather “whether an act or practice hinders a consumer’s decision-making.”[11] To that end, the CFPB contends that “[c]onsumers cannot reasonably avoid discrimination.”[12] Finally, the CFPB’s press release notes that “discrimination may meet the criteria for ‘unfairness’ . . . where that harm is not outweighed by countervailing benefits to consumers or competition.”[13]

While the manual’s updated language does not create legal duties, such as those imposed by fair lending laws, it establishes the CFPB’s expectations for covered entities. For this reason, these changes to the manual will likely have a substantial real-world impact on companies that engage in consumer-related financial transactions.


[1] Eric Halperin & Lorelei Salas, Cracking Down on Discrimination in the Financial Sector, Consumer Fin. Prot. Bureau (Mar. 16, 2022), https://www.consumerfinance.gov/about-us/blog/cracking-down-on-discrimination-in-the-financial-sector/.

[2] Consumer Fin. Prot. Bureau, CFPB Supervision and Examination Manual, 11 (March 2022) https://www.cfpaguide.com/portalresource/Exam%20Manual%20v%202%20-%20UDAAP.pdf (Examination Manual).

[3] Halperin & Salas, supra note 1.

[4] Press Release, Consumer Fin. Prot. Bureau, CFPB Targets Unfair Discrimination in Consumer Finance (Mar. 16, 2022), https://www.consumerfinance.gov/about-us/newsroom/cfpb-targets-unfair-discrimination-in-consumer-finance/.

[5] Examination Manual, supra note 2, at 1.

[6] Id. at 1.

[7] Consumer Fin. Prot. Bureau, Institutions Subject to CFPB Supervisory Authority, https://www.consumerfinance.gov/compliance/supervision-examinations/institutions/ (last visited Mar. 28, 2022).

[8] Examination Manual, supra note 2, at 1–2. This is the same test applied by the FTC under the FTC Act.

[9] Examination Manual, supra note 2, at 2.

[10] Press Release, Consumer Fin. Prot. Bureau, supra note 4.

[11] Examination Manual, supra note 2, at 2.

[12] Id. at 2.

[13] Press Release, Consumer Fin. Prot. Bureau, supra note 4.


Ninth Circuit Decision Foreshadows Major Blow to Prop 65 Acrylamide Claims

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By Matthew G. Lawson

On Thursday, March 17, 2022, the Ninth Circuit issued a critical decision in California Chamber of Commerce v. CERT, No. 21-15745 (9th Cir. 2022), reinstating a preliminary injunction against the filing or prosecuting of any new lawsuits to enforce Proposition 65’s warning requirements as applied to acrylamide in food and beverage products.  The decision reinstalls a roadblock against future lawsuits and may offer a light at the end of the tunnel for the regulated community by signaling the existence of a valid defense against Proposition 65 claims where the health risks of a chemical remain subject to ongoing debate and disagreement from scientific experts.  The decision is a blow against Proposition 65 plaintiffs who had recently succeeded in petitioning the court to grant an emergency stay of the district court’s preliminary injunction pending appeal.

Proposition 65 provides that “[n]o person in the course of doing business shall knowingly and intentionally expose any individual to a chemical known to the state to cause cancer . . . without first giving clear and reasonable warning to such individual…”  A chemical is deemed to be “known to the state to cause cancer” if it meets one of three statutory criteria: (1) the state’s qualified experts believe “it has been clearly shown through scientifically valid testing according to generally accepted principals to cause cancer”; (2) “a body considered to be authoritative by such experts has formally identified it as causing cancer”; or (3) “an agency of the state or federal government has formally required it to be labeled or identified as causing cancer.”  See Cal. Health & Safety Code § 25249.8(b).  Where a consumer product contains such a chemical, the manufacturer / distributor of the product must provide a warning to consumers, unless they can affirmatively show that quantities of the chemical within the product are below certain “safe harbor” levels.  Manufacturers that fail to provide a warning notice may be subject to significant civil penalties, often pursuant to claims brought by private plaintiff enforcers.

A particularly controversial chemical on Proposition 65’s list is acrylamide. Unlike many Proposition 65 chemicals, which are often additives or ingredients within a consumer product or food, acrylamide is a substance that forms through a natural chemical reaction between sugars and asparagine, an amino acid, in plant-based foods – including potato and certain grain-based foods.  Acrylamide often forms during high-temperature cooking, such as frying, roasting and baking.  Acrylamide was added to the Proposition 65 list in 1990 “because studies showed it produced cancer in laboratory rats and mice.”  However, this conclusion is not shared by other experts—including the American Cancer Society and National Cancer Institute—who has stated that “a large number of epidemiologic studies . . . have found no consistent evidence that dietary acrylamide exposure is associated with the risk of any type of cancer.”  Between 2015 and October 2020, the State of California reported that it received almost 1,000 notices of alleged acrylamide violations sent by private enforcers to businesses selling food products in California.

In an effort to strike back against enforcement of Proposition 65’s warning requirements, CalChamber—a nonprofit business association with over 13,000 members, many of whom sell or produce food products that contain acrylamide—filed litigation in California federal district court seeking to vindicate its members’ First Amendment right to not be compelled to place false and misleading acrylamide warnings on their food products. CalChamber’s preliminary injunction motion sought to prohibit parties from “filing and/or prosecuting new lawsuits to enforce the Proposition 65 warning requirement for cancer as applied to acrylamide in food and beverage products.”  The Council for Education and Research on Toxics (“CERT”) intervened as a defendant and argued that, as a private enforcer of Prop. 65, an injunction would impose an unconstitutional prior restraint on its First Amendment rights. In Cal. Chamber of Com. v. Becerra, 529 F. Supp. 3d 1099, 1123 (E.D. Cal. 2021), the district court granted CalChamber’s request for preliminary injunction finding that CalChamber was likely to succeed on the merits of its First Amendment Claim. Citing Zauderer v. Office of Disciplinary Counsel, 471 U.S. 626 (1985), the district court held that to pass constitutional  muster, the warnings compelled by Prop 65 must “(1) require the disclosure of purely factual and uncontroversial information only, (2) [be] justified and not unduly burdensome, and (3) [be] reasonably related to a substantial government interest.” Because the Attorney General and CERT did not meet their burden to show the warning requirement was lawful under Zauderer, the district court concluded that CalChamber was likely to succeed on the merits of its First Amendment claim and granted the preliminary injunction against new Proposition 65 lawsuits regarding acrylamide.  While CERT appealed the preliminary injunction order, the Attorney General did not, and a divided motions panel of the Ninth Circuit granted in part CERT’s motion for an emergency stay of the preliminary injunction pending appeal.

On Thursday, the Ninth Circuit issued its final decision on the merits of the preliminary injunction, and affirmed the district court’s original decision.  Citing to the existence of “robust disagreement by reputable scientific sources,” the Ninth Circuit held that the district court did not abuse its discretion by concluding that the acrylamide warning was “controversial.”  Similarly, the Ninth Circuit agreed with the district court’s conclusions that a Proposition 65 warning for acrylamide would mislead consumers because “[a] reasonable person might think that they would consume a product that California knows will increase their risk for cancer…Such a consumer would be misled by the warning because the State of California does not know if acrylamide causes cancer in humans.”  Finally, the appellate court found that the record supported the conclusion that Proposition 65’s “enforcement regime creates a heavy litigation burden on manufacturers who use alternative warnings.” Specifically, the appellate court reasoned that upon receipt of a Proposition 65 notice of violation, “a business must communicate to consumers a disparaging health warning about food containing acrylamide that is unsupported by science, or face the significant risk of an enforcement action under Proposition 65.”  For these reasons, the Ninth Circuit found that the preliminary injunction was warranted and removed the emergency stay against its enforcement.

While the immediate impact of the Ninth Circuit’s decision is limited to new lawsuits regarding Proposition 65 warning requirements for acrylamide, the Ninth Circuit’s holding could be viewed as its own warning sign to plaintiffs who seek to enforce Proposition 65 requirements where the science supporting the harmful effects of a chemical remains in dispute.  It remains to be seen whether the Ninth Circuit’s holding will spur the CalChamber or other similarly situated groups to raise similar defenses in future cases.


CFPB and other Federal Regulators Eye Regulation Aimed at Curbing Algorithmic Bias in Automated Home Valuations

By: Michael W. Ross, Ali M. Arain, and Jonathan Steinberg

Late last month, the Consumer Financial Protection Bureau (CFPB) took another step toward adopting rules governing the use of artificial intelligence (AI) and algorithms in appraising home values. Specifically, the CFPB issued a detailed outline and questionnaire soliciting feedback from small business entities on a proposed rulemaking proceeding for using Automated Valuation Models (AVMs).

The CFPB and other federal regulators[1] intend to adopt rules designed to: (1) ensure a high level of confidence in the estimates produced by AVMs; (2) protect against the manipulation of data; (3) avoid conflicts of interest; and (4) require random sample testing and reviews.[2] In addition, federal regulators are now considering whether to include express nondiscrimination quality control requirements for AVMs as a ”fifth factor.” Once adopted, the new rules will apply to banks, mortgage lenders who use AVMs to make underwriting decisions, and mortgage-backed securities issuers, and are intended to protect homebuyers and homeowners who may be negatively impacted by inaccurate appraisals.

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Potential Bias in AI Consumer Decision Tools Eyed by FTC, CFPB

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By Ali M. Arain, Michael W. Ross, and Jonathan Steinberg

Potential discrimination and bias resulting from consumer tools based on artificial intelligence and automated data will be an enforcement focus of regulators this year, Jenner & Block attorneys predict. Accuracy and transparency are also on the table, they say.

Given the growing use of artificial intelligence (AI) and automated decision-making tools in consumer-facing decisions, we expect federal regulators in 2022 to continue their recent track record of interest in potential discrimination and unfairness, as well as data accuracy and transparency.

Significant technological developments in these areas and the increasing use of data analytics to make automated decisions will likely result in further regulatory action this year in three key areas: (1) assessing whether AI and algorithms are excluding particular consumer groups in an unfair and discriminatory manner, whether intentionally or not; (2) evaluating whether collected data accurately reflects real-world facts and whether companies are giving consumers an opportunity to correct mistakes; and (3) assessing whether automated decisionmaking tools are being used in a transparent manner.

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Is There a Limit to Insurer Unwillingness to Cover Claims for Unsolicited Marketing Communications? Two Decisions by the Seventh Circuit Suggest the Question in a Unique Way.

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By Vivian L. Bickford and David M. Kroeger

Among the many unusual aspects of 2021 is that the same insurance company was before a federal appellate court on two separate but contemporaneous cases – one in which the insurer was asserting a lack of insurance coverage based on TCPA and TCPA-inspired policy exclusions, and the other in which the same insurer was actually a defendant in a lawsuit asserting TCPA and certain other causes of action. The juxtaposition of the two raises the question of whether there are any limits to insurer unwillingness to provide insurance coverage for claims alleging unsolicited marketing communications.

Mesa Laboratories, Inc. v. Federal Insurance Company[1] lays out an all-too-familiar battle. The policyholder, Mesa Laboratories, Inc. (Mesa), was sued in a putative class action asserting claims based on unsolicited marketing communications. The policyholder sought insurance coverage from its commercial general liability insurer, Federal Insurance Company (Federal, part of the Chubb family of insurance companies). The insurance claim was denied, and litigation ensued. The central issue before the court was whether the insurer had drafted exclusions that were sufficiently broad and sufficiently clear to exclude coverage for all of the claims asserted against the policyholder.

Continue reading "Is There a Limit to Insurer Unwillingness to Cover Claims for Unsolicited Marketing Communications? Two Decisions by the Seventh Circuit Suggest the Question in a Unique Way." »


Changes to California Consumer Law Protections on January 1, 2022

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By: Wesley M. Griffith and Jenna L. Conwisar

Effective January 1, 2022, California implemented several important changes to its consumer protection laws, ranging from data privacy to debt collection to updates to the Consumer Legal Remedies Act. This post highlights several notable changes that companies and practitioners may wish to bear in mind as they ring in the new year.

Data Privacy

In the world of data privacy, there has been a lot of buzz around California’s new consumer privacy law, the California Privacy Rights Act (CPRA), which was previously discussed on this blog here.

The CPRA will greatly expand the state’s current data protection infrastructure by, among other things, increasing consumer control over sensitive personal information, adding additional consumer privacy rights, and creating the California Privacy Protection Agency to enforce the CPRA.

While not effective until January 1, 2023, the CPRA will apply to certain data collected in 2022, requiring many businesses to begin updating their data practices now.[1]

Debt Collection

A number of the California consumer law updates that took effect on January 1, 2022 focused on debt collection practices. Perhaps most notable is the implementation of the Debt Collection Licensing Act (DCLA).[2] Aligning California with the majority of states that already have collection agency licensure requirements, the DCLA requires debt collectors and debt buyers operating in California to obtain a license from the Department of Financial Protection and Innovation.

The DCLA generally applies to entities collecting consumer debt in California, including organizations such as law firms and other companies engaged in collection activities who may not consider themselves “debt collectors” in the traditional sense. Critically, under the DCLA, debt collectors who missed the December 31, 2021 application deadline must halt operations in California until they are issued a license.[3]

Other changes to California debt collection laws effective January 1, 2022 include:

  • Health Care Debt and Fair Billing: Among other things, AB 1020 revises the state’s medical billing and debt collection policies, including by prohibiting hospitals from selling patient debt unless certain conditions are met.[4]
  • Identity Theft: AB 430 expands protections for victims of identity theft and requires debt collectors to pause collection activities until certain criteria are met if a consumer submits either a copy of a Federal Trade Commission (FTC) identify theft report or a police report.[5]
  • Fair Debt Settlement Practices Act: Adds new regulatory requirements and prohibitions on debt settlement service providers and payment processor activities. It also creates a consumer private right of action for intentional violations, with available remedies including actual damages, injunctive relief, attorneys’ fees, and/or statutory damages as high as $5,000 per violation.[6]

Consumer Legal Remedies Act

January 1, 2022 also saw revisions to the California Consumer Legal Remedies Act (CLRA).[7] As amended, the CLRA now offers additional protections to senior citizens from unfair and deceptive loan solicitations. Specifically, as amended the CLRA now applies to Property Assessed Clean Energy (PACE) program loans for seniors—such as loans for solar panels or energy efficient appliances­. Violations are subject to $5,000 in statutory damages, on top of any actual or punitive damages, injunctive relief, restitution, and/or attorneys’ fees.[8]

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Taken together, California has added significant additional complexity and potential liability to the consumer protection landscape at the outset of 2022, and companies who work in these spaces should be careful to ensure that their existing practices are updated to comply with the new laws.

 

[1] Cal. Civ. Code § 1798.130.

[2] Cal. Fin. Code § 100000 et seq.

[3] Debt Collection – Licensee, Department of Financial Protection & Innovation.

[4] Cal. Civ. Code §§ 1788.14, 1788.52, 1788.58, 1788.185; Cal. HSC § 127400 et seq.

[5] Cal. Civ. Code §§ 1788.18, 1788.61, 1798.92, 1798.93; Cal. Penal Code § 530.8.

[6] Cal. Civ. Code § 1788.300 et seq.

[7] Cal. Civ. Code § 1770.

[8] Cal. Civ. Code § 1780.


Ninth Circuit Rejects Challenges to Conjoint Analysis in Consumer Class Action

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By: Alexander M. Smith

In recent years, conjoint analysis has proliferated as a methodology for calculating class-wide damages in consumer class actions. While conjoint analysis first emerged as a marketing tool for measuring consumers’ relative preferences for various product attributes, many plaintiffs (and their experts) have attempted to employ conjoint analysis as a tool for measuring the “price premium” attributable to a labeling statement or the effect that the disclosure of a product defect would have had on the product’s price. Defendants, in turn, have taken the position that conjoint analysis is only capable of measuring consumer preferences, cannot account for the array of competitive and supply-side factors that affect the price of a product, and that it is therefore incapable of measuring the price effect attributable to a labeling statement or a disclosure. Consistent with that position, defendants in consumer class actions frequently argue not only that conjoint analysis is unsuited to measuring class-wide damages consistent with Comcast Corp. v. Behrend, 569 U.S. 27 (2013), but also that it is inadmissible under Federal Rule of Evidence 702 and Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993). But a recent Ninth Circuit decision, MacDougall v. American Honda Motor Co., --- F. App’x ---- (9th Cir. 2021) may threaten defendants’ ability to challenge conjoint analysis on Daubert grounds.

In MacDougall, the plaintiffs brought a consumer class action against Honda premised on Honda’s alleged failure to disclose the presence of a transmission defect in its vehicles. The plaintiffs attempted to quantify the damages attributable to this omission through a conjoint analysis, which purported to “measure the difference in economic value—and thus the damages owed—between Defendants’ vehicles with and without the alleged transmission defect giving rise to this action.” MacDougall v. Am. Honda Motor Co., No. 17-1079, 2020 WL 5583534, at *4 (C.D. Cal. Sept. 11, 2020). Honda argued that this conjoint analysis was flawed and inadmissible, both “because it only accounts for demand-side and not supply-side considerations” and “because it utilizes an invalid design that obtains mostly irrational results.” Id. at *5. The district court agreed with Honda, excluded the expert’s conjoint analysis, and entered summary judgment in Honda’s favor based on the plaintiffs’ failure to offer admissible evidence of class-wide damages. In so holding, the court concluded that the expert’s conjoint analysis “calculates an inflated measure of damages because it does not adequately account for supply-side considerations” and only measures a consumer’s willingness to pay for certain product features—not the market price that the product would command in the absence of the purported defect. Id. “[W]ithout the integration of accurate supply-side considerations,” the district court explained, “a choice-based conjoint analysis transforms into a formula missing half of the equation.” Id. And separate and apart from this central economic defect, the district court found that other errors in the expert’s methodology—including his failure to conduct a pretest survey and the limited number of product attributes tested in the conjoint survey—rendered his conjoint analysis unreliable and inadmissible. See id. at *7-9.

The Ninth Circuit reversed. Beginning from the premise that expert testimony is admissible so long as it is “relevant” and “conducted according to accepted principles,” the Ninth Circuit found that the admissibility of expert testimony was a “case-specific inquiry” and therefore rejected Honda’s argument that “conjoint analysis categorically fails as a matter of economic damages.” Slip Op. at 2-3. The Ninth Circuit then concluded that Honda’s methodological challenges based on “the absence of market considerations, specific attribute selection, and the use of averages to evaluate the survey data go to the weight given the survey, not its admissibility.” Id. at 3 (citations and internal quotation marks omitted). And while the Ninth Circuit acknowledged that the district court relied on numerous decisions that had rejected the use of conjoint analysis in consumer class actions, it held that these decisions did not concern the “admissibility of conjoint analysis under Rule 702 or Daubert” but instead its “substantive probity in the context of either class-wide damages under Comcast . . . or substantive state law.” Id. at 2.

In distinguishing between the question of whether conjoint analysis is admissible under Daubert and whether it is capable of measuring damages on a class-wide basis consistent with Comcast, the Ninth Circuit preserved an opening for defendants to challenge the use of conjoint analysis to measure class-wide damages at the class certification stage. Nonetheless, MacDougall undoubtedly weakens defendants’ ability to challenge the admissibility of conjoint analysis on methodological grounds, and it is possible that some district courts may read the Ninth Circuit’s opinion to stand for the broad proposition that juries, rather than judges, should decide whether conjoint analysis can properly measure economic damages.