House Hearing on Equitable Algorithms


By: Isabel F. Farhi

New-Development-IconOn February 12, the Task Force on Artificial Intelligence of the House of Representatives Committee on Financial Services conducted a hearing titled “Equitable Algorithms: Examining Ways to Reduce AI Bias in Financial Services.”  The purpose of this hearing, as articulated in the opening remarks of the Committee Chair, was to assess fairness and transparency in the use of algorithms in the financial services industry.  The panelists were public interest advocates, academics, and legal professionals working in the technology space. 

The comments at the hearing revolved around two major themes:  first, how to define ‘fairness’ and the consequences of choosing a definition, and second, how bias can result from using algorithms and how regulators might correct that bias.  The panelists and Congressional representatives also made some general suggestions about appropriate regulations and remedies Congress could implement to ensure fair algorithms.

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FDA to Study "Endorser Status and Explicitness of Payment in Direct-to-Consumer Promotion"

By: Jay K. Simmons

DrugstoreFor several years the FDA and FTC have been considering the impact of celebrity endorsers.  The FDA is now providing an opportunity for public comment on a proposed study on celebrity endorsers and the explicitness of payment disclosures in direct-to-consumer promotions.  As the agency’s January 28, 2020 notice indicates, commercial advertisers have long employed celebrity endorsers, including in direct-to-consumer pharmaceutical promotion.[1]  Prior research has explored the role of various types of endorsers, such as celebrity influencers, experts and non-celebrities, in generating attention for a product.[2]  Existing research suggests that physicians and pharmacists, followed by other consumers and celebrities, are the types of endorsers most likely to influence consumers’ interest in purchasing over-the-counter pharmaceuticals.[3]

The FDA proposes collecting new information in this area via two studies on the role of celebrity product endorsements and endorsers’ payment status.  These studies are proposed to consider “the role of endorsement and payment status on participants’ recall, benefit and risk perceptions, and behavioral intentions.”  This includes, first, whether the type of endorser and “the presence of their payment status influences participant reactions,” and second, the impact of different types of endorsers’ payment disclosure language, ranging from “direct and more consumer-friendly” to “less direct.”[4]

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Consumer Finance Observer – Winter 2020

CFOJenner & Block has published its third issue of Consumer Finance Observer or CFO, a newsletter providing analysis of key consumer finance issues and updates on important developments to watch.  As thought leaders, our lawyers write about the consumer finance sector on topics ranging from artificial intelligence, compliance, data security, FinTech, lending and securities litigation.

In the Winter 2020 issue of the CFO, our consumer finance lawyers discuss the use of alternative data in credit underwriting; the New York action on UnitedHealth's algorithm; the next phase of Madden v. Midland Funding; the validity of arbitration agreements in bankruptcy proceedings; CCPA's impact on existing California consumer protection statutes; a quick look at HUD’s new Affirmatively Furthering Fair Housing Rule; and proposed amendments to the CCPA.  Contributors are Partners Landon S. RaifordMichael W. RossDavid P. SaundersDamon Y. SmithKate T. Spelman and Andrew W. Vail; Associates Kevin J. MurphyWilliam S.C. Goldstein and Effiong K. Dampha; and Law Clerk Isabel F. Farhi.

To read the full issue, please click here

California’s Attorney General Appeals a Preliminary Injunction Barring Enforcement of AB-5, The State’s New Worker Classification Law


By: Gabriel K. Gillett and Philip B. Sailer

CaliforniaCalifornia’s new AB-5, which took effect January 1, 2020, revised the state’s worker classification law to make it very difficult to classify a worker as an independent contractor.  Under the so-called ABC Test codified in the new law, businesses must show (A) that the worker is free from the hiring entity’s control and direction, (B) performs work that is outside the usual course of the business, and (C) engages in an independently established trade, occupation, or business.  A number of plaintiffs challenged the law, including Uber, freelance journalists, and the California Trucking Association. 

On January 16, 2020, the California Trucking Association became the first plaintiff to succeed in its challenge (at least so far).  In California Trucking Assn v. Becerra, the Southern District of California issued a preliminary injunction barring the state from enforcing the law as to motor carriers.  2020 WL 248993 (S.D. Cal. Jan. 16, 2020).  As the court explained, the Federal Aviation Authorization Administration Act (FAAAA) expressly preempted state regulations that “related to . . . price, route, or service of any motor carrier.”  49 U.S.C. § 14501(c)(1).  The court cited past cases in the First and Ninth Circuits that held that the FAAAA preempted similar state employee classification statutes, and distinguished a Third Circuit case that held otherwise.  See id. at *6 (comparing Schwann v. Fedex Ground Package Sys., 813 F.3d 429 (1st Cir. 2016), California Trucking Ass’n v. Su, 903 F.3d 953 (9th Cir. 2018), and Bedoya v. Am. Eagle Express, Inc., 914 F.3d 812 (3d Cir. 2019)).  Notably, the court explained, AB-5 codified a test that “classif[ied] workers for the purpose of determining whether all of California employment laws do or do not apply, rather than a small group of those laws” as other states had done.  Id. at *9.  The result, according to the court, is that AB-5 will cause employers to reclassify a substantial amount of independent contractors as employees because they work “within ‘the usual course of the hiring entity’s business.’”  Id. at *7.

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New York and California Aim to Provide Consumers with Additional Protections

By: Alexander N. Ghantous

New-Update-IconNew York Governor Andrew M. Cuomo recently introduced a number of new legislative proposals in his 2020 State of the State agenda, including proposals that would offer New York consumers increased protections.[1]  Additionally, California Governor Gavin C. Newsom also outlined how California will provide additional protections to its consumers in the Governor’s Budget Summary for 2020-2021.[2]  Below are some highlights from each state:

New York

I.  Regulating and Licensing Debt Collection Firms.

In Governor Cuomo’s 2020 New York State of the State agenda, legislation was proposed that would grant the Department of Financial Services (DFS) the power “to license debt collection entities, and empower DFS to examine and investigate suspected abuses, including by requiring the submission of information to DFS, and authorizing DFS investigators to enter a debt collector’s office at any time to review its books and records.”[3]  Consequently, DFS, with this new authority, would have the ability to initiate actions against debt collection organizations that could result in fines, or even the forfeiture of licenses that are required to conduct business in the state of New York.[4]   The proposed legislation would also protect individuals from fraudulent schemes in which they would pay non-existing debts.[5]  Governor Cuomo will also propose legislation that would authorize the state to “codify a Federal Trade Commission rule that prohibits confessions of judgement in consumer loans.”[6]                     

II.  Bolstering Consumer Protection Laws.

In Governor Cuomo’s 2020 State of the State Agenda, legislation was also proposed that would “mak[e] New York State consumer protection law consistent with federal law.”[7]  Currently, New York state authorities are unable to “bring the type of enforcement actions that federal authorities can bring for a broad range of unfair, deceptive, abusive acts and practices.”[8]  The proposed legislation would empower the state to oversee numerous consumer services and products by eradicating exemptions that are currently in play.[9]  Furthermore, the proposed legislation would eliminate loopholes and create an environment where regulated entities would all have the same chance to succeed.[10]

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HUD Publishes New Affirmatively Furthering Fair Housing Rule

By: Damon Y. Smith

Housing1Ever since the US Department of Housing and Urban Development (HUD) suspended certain reporting requirements of the Affirmatively Furthering Fair Housing (AFFH) rule for local governments in 2018, cities and affordable housing developers and lenders have awaited their proposed replacement.  After a year of review and revisions, HUD recently released a newly proposed AFFH rule.  The proposed regulation re-defines AFFH and makes substantial changes to the metrics for compliance.

The Department’s new definition of AFFH is “advancing fair housing choice within the program participant’s control or influence.”  However, the headline change for most program participants (state and local government and public housing agencies) is that they will no longer have to use a HUD-prescribed computer assessment tool to determine their compliance with AFFH.  That tool required program participants to answer questions about segregation levels and patterns in their communities and impediments to changing those patterns in the future.  Instead, the proposed rule has adopted three metrics to determine if a participating jurisdiction is (1) free of fair housing claims; (2) has adequate supply of affordable housing and (3) has adequate quality in that supply of affordable housing.  These metrics dovetail with the Department’s new definition of AFFH because “fair housing choice” is further defined to include choice that is (1) free of fair housing discrimination, (2) actual in fact, due to existence of informed affordable housing options and (3) capable of providing access to quality affordable housing that is decent, safe and sanitary.

Comments on this new rule are due on March 16, 2020.

Are E-Signed Arbitration Agreements Enforceable?

By: Amy M. Gallegos

LaptopAs more and more businesses conduct transactions electronically, courts and practitioners are increasingly faced with questions about the validity and enforceability of electronically signed documents.  In consumer law, this issue often arises when a company seeks to enforce an arbitration agreement contained in a document that was electronically signed by the consumer.  California courts are well known for their skepticism of arbitration provisions in consumer contracts.  Additionally, consumers may be more likely to challenge electronic agreements, perhaps because they believe electronic signatures are not legally binding, or because without a handwritten signature to prove up the contract, they think it makes sense to play the odds that the defendant will not be able to satisfy the court that an agreement was actually made.  Understanding how to prove up an agreement to arbitrate when the consumer’s signature is electronic is critical for consumer lawyers practicing in California.

In California, general principles of contract law determine whether the parties have entered a binding agreement to arbitrate.  California has enacted the Uniform Electronic Transaction Act, which recognizes the validity of electronic signatures. (Cal. Civ. Code Section 1633.1.)  Under that act, an electronic signature has the same legal effect as a handwritten signature, and “[a] … signature may not be denied legal effect or enforceability solely because it is in electronic form.” (Cal. Civ. Code, Section 1633.7, subd. (a).)  That said, any writing must be authenticated before the writing, or secondary evidence of its content, may be received in evidence. (Evid. Code Section 1401.)  “Authentication of a writing means (a) the introduction of evidence sufficient to sustain a finding that it is the writing that the proponent of the evidence claims it is or (b) the establishment of such facts by any other means provided by law.”

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Top 10 of 2019: The Year’s Most Popular Consumer Law Round-Up Posts

2019 was another busy year for the Consumer Law Round-Up.  Launched by the firm’s Consumer Law Practice, the blog updates readers on key developments within consumer law and provides insights that are relevant to companies and individuals that may be affected by the ever-increasing patchwork of federal and state consumer protection statutes.  In 2019, the Consumer Law Round-Up published 44 posts on a wide array of topics. 

Below is a list of the 10 most popular posts of the year. 

#1 Regulators Continue to Focus on the Use of Alternative Data
In a July article published by Law360 (and reprinted in our Consumer Finance Observer periodical), our lawyers highlighted the increasing focus of government enforcement authorities on how companies are using “alternative data” in making consumer credit decisions.  For example, the article highlighted that – as stated in a June 2019 fair lending report from the CFPB – “[t]he use of alternative data and modeling techniques may expand access to credit or lower credit cost and, at the same time, present fair lending risks.”  Regulators have continued to focus on this area...Read more

#2 Eleventh Circuit Rules: Receiving Text Message Was Not Injury Under the TCPA
The Eleventh Circuit recently decided a case that raised the bar for pleading injury under the Telephone Consumer Privacy Act (TCPA), 47 U.S.C. § 227, noting its disagreement with an earlier decision from the Ninth Circuit on the same issue and creating a possible roadblock for future plaintiff classes seeking to assert claims under the TCPA.  In Salcedo v. Hanna, the Eleventh Circuit held that “receiving a single unsolicited text message” in violation of the TCPA was not a “concrete injury” sufficient to confer standing...Read more

#3 New York SHIELD Act Expands Data Security and Breach Notification Requirements
On July 25, 2019, New York enacted the Stop Hacks and Improve Electronic Data Security Act (SHIELD Act), which significantly amended the state’s data breach notification law to impose additional data security and data breach notification requirements on covered entities.  Under the new law, the definitions of “private information” and “breach of the security system” have been revised in ways that broaden the circumstances that qualify as a data “breach” and could trigger the notification requirements...Read more

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Zero Calories, Zero Plausibility: Ninth Circuit Affirms Dismissal of “Diet” Soda Class Action

By: Alexander M. Smith

SodaIn 2017, several plaintiffs began bringing lawsuits in California and New York premised on the theory that “diet” sodas — i.e., sodas sweetened with zero-calorie artificial sweeteners rather than sugar — were mislabeled because the sodas falsely suggested they would help consumers lose weight, even though aspartame and other artificial sweeteners are supposedly associated with weight gain.  Courts have routinely dismissed these lawsuits on one of two grounds:

  • Some courts have concluded that this theory of deception is implausible because reasonable consumers understand the term “diet” to mean that the soda has zero calories, not that it will help them lose weight.  See, e.g., Geffner v. Coca-Cola Co., 928 F.3d 198, 200 (2d Cir. 2019) (“[T]he “diet” label refers specifically to the drink’s low caloric content; it does not convey a more general weight loss promise.”); Becerra v. Coca-Cola Co., No. 17-5916, 2018 WL 1070823, at *3 (N.D. Cal. Feb. 27, 2018) (“Reasonable consumers would understand that Diet Coke merely deletes the calories usually present in regular Coke, and that the caloric reduction will lead to weight loss only as part of an overall sensible diet and exercise regimen dependent on individual metabolism.”). 
  • Other courts have dismissed these lawsuits on the basis that the scientific literature cited by the plaintiffs does not support a causal relationship between zero-calorie sweeteners and weight gain.  See, e.g., Excevarria v. Dr. Pepper Snapple Grp., Inc., 764 F. App’x 108, 110 (2d Cir. 2019) (affirming dismissal of lawsuit challenging labeling of Diet Dr. Pepper, as “[n]one of the studies cited . . . establish a causal relationship between aspartame and weight gain”).

The Ninth Circuit recently joined the chorus of courts that have rejected this theory of deception.  In Becerra v. Dr. Pepper/Seven Up, Inc., the district court dismissed a lawsuit alleging that Diet Dr. Pepper was mislabeled as a “diet” soda, both because the plaintiff had not alleged that consumers construed the term “diet” as a representation about weight loss and because the plaintiff had not sufficiently alleged that aspartame is associated with weight gain.  On December 30, 2019, the Ninth Circuit issued a published decision affirming the dismissal of this lawsuit.  Becerra v. Dr. Pepper/Seven Up, Inc. --- F.3d ----, 2019 WL 7287554 (9th Cir. 2019).

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OCC and FDIC Propose “Madden Fix” Rules to Codify “Valid-When-Made” Principle

By: William S. C. Goldstein

New-Development-IconThe long-running saga of Madden v. Midland Funding is entering a new phase.  Last week, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) proposed rules that would codify the concept that the validity of the interest rate on national and state-chartered bank loans is not affected by the subsequent “sale, assignment, or other transfer of the loan.” See Permissible Interest on Loans That Are Sold, Assigned, or Otherwise Transferred, 84 Fed. Reg. 64229, (proposed Nov. 18, 2019); FDIC Notice of Proposed Rulemaking, Federal Interest Rate Authority, FDIC (proposed Nov. 19, 2019).  Under these rules, an interest rate that is validly within any usury limit for such a bank when it is made would not become usurious if the loan is later transferred to a non-bank party that could not have charged that rate in the first instance.

The proposed rules are a long-awaited response to the Second Circuit’s decision in Madden, which held that a non-bank purchaser of bank-originated credit card debt was subject to New York State’s usury laws.  786 F.3d 246, 250-51 (2d Cir. 2015).  In so holding, the Second Circuit cast doubt on the scope of National Bank Act (NBA) preemption, which exempts national banks from most state and local regulation, allowing them to “export” their home state interest rates without running afoul of less favorable usury caps in other states (FDIC-insured state banks are afforded similar protections).  Before Madden, it was widely assumed that “a bank’s well-established authority [under the NBA] to assign a loan” included the power to transfer that loan’s interest rate.  See Permissible Interest on Loans That Are Sold, 84 Fed. Reg. at 64231. The Madden decision also did not analyze the “valid-when-made” rule, a common law principle providing that a loan that is non-usurious at inception cannot become usurious when it is sold or transferred to a third party. See, e.g., Nichols v. Fearson, 32 U.S. (7 Pet.) 103, 109 (1833) (“[A] contract, which, in its inception, is unaffected by usury, can never be invalidated by any subsequent usurious transaction.”).  Madden has been widely criticized by a host of commentators, including the Office of the Solicitor General.

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