Banking Law
Second Circuit Finds Bankruptcy Claim Non-Arbitrable
By Buckley Sandler LLP
On March 7, 2018, the U.S. Court of Appeals for the Second Circuit denied a bank’s motion to compel arbitration of a debtor’s claims because the dispute concerned a core bankruptcy proceeding and arbitration would present an inherent conflict with the intent of the Bankruptcy Code. The debtor said the bank refused to remove a “charge-off” status on the debtor’s credit file after the debtor was released from all dischargeable debts through a Chapter 7 bankruptcy. The bankruptcy court allowed the debtor to reopen the proceeding in order to file a putative class action complaint against the bank alleging that the designation amounted to coercion to pay a discharged debt. The Second Circuit agreed with bankruptcy and district court decisions denying the bank’s motion to compel arbitration based on the debtor’s cardholder agreement, reasoning that a claim of coercion to pay a discharged debt is an attempt to undo the effect of the discharge order and therefore “strikes at the heart of the bankruptcy court’s unique powers to enforce its own orders.”
Federal Reserve Orders Chinese Bank to Correct BSA/AML Controls
By Buckley Sandler LLP
On March 12, 2018, the Federal Reserve Board (Fed) entered into a consent order with a Chinese bank and its New York branch in connection with alleged Bank Secrecy Act and anti-money-laundering (BSA/AML) violations. According to the Fed’s order, a recent examination identified “significant deficiencies” in the branch’s BSA/AML compliance and risk management controls. The consent order requires, among other things, the bank and branch submit within 60 days: (i) a written governance plan to achieve compliance with BSA/AML requirements; (ii) a system to identify and assess risks associated with all products and customers, including “politically exposed persons”; (iii) an enhanced customer due diligence program plan; and (iv) a compliance program to ensure accurate suspicious activity monitoring and reporting. The bank and branch are further required to engage an independent third party acceptable to the Fed to review their dollar-clearing transaction activity in the second half of 2016 “to determine whether suspicious activity involving high-risk customers or transactions” was properly flagged. The order imposes no financial penalty.
Consumer Finance
Key Parts of FCC’s TCPA Order Vacated
By Eric Tsai, Maurice Wutscher LLP
The U.S. Court of Appeals for the District of Columbia recently set aside recently set aside key portions of the Federal Communications Commission’s (FCC) 2015 Declaratory Ruling and Order that unreasonably expanded the reach of the Telephone Consumer Protection Act (TCPA). The FCC’s 2015 Order interpreted the definition of an “automatic telephone dialing system” (ATDS) to include equipment that had the “potential capacity” to operate as an ATDS, taking into account possible upgrades or modification, even if the system did not have the present capacity to perform such functions. The D.C. Circuit ruled that the FCC’s interpretation unreasonably extended a law originally aimed to deal with hundreds of thousands of telemarketers into one constraining hundreds of millions of everyday callers using ubiquitous devices, such as a smartphone. This portion of the 2015 Order was set aside and vacated. The D.C. Circuit left in place the FCC’s interpretation that consent is needed from the current subscriber to a reassigned number, as well as the FCC’s exemption for certain time sensitive healthcare related calls. It also confirmed that consumers may continue to revoke consent “at any time and through any reasonable means.” However, the D.C. Circuit clarified that the 2015 Order does not foreclose the ability of the parties to agree upon a revocation procedure, echoing the Second Circuit’s reasoning in Reyes v. Lincoln Auto. Fin. Servs., 861 F.3d 51 (2d Cir. 2017). This decision can assist businesses in developing procedures to address the TCPA’s definition of an ATDS, and the problems associated with revocation of consent through nondescript channels.
Ninth Circuit Strikes Blow to Bank’s Federal Preemption
By Kristen Benadom, Rabobank, N.A.
A consumer lawsuit against Bank of America will now proceed after the U.S. Ninth Circuit Court of Appeals March 2, 2018, ruling overturned a lower court’s dismissal, finding that the national bank could not rely on federal preemption under the National Banking Act (NBA) to avoid California Civil Code 2953.8(a) requiring payment of interest on escrow accounts. The court relied upon the 1996 U.S. Supreme Court decision in Barnett Bank of Marion County, N.A. v. Nelson allowing states to regulate national banks so long as “doing so does not prevent or significantly interfere with the national bank’s exercise of its powers.” The appellate court further held that Dodd-Frank codified this Barnett standard, despite its significant departure from the NBA preemption. With the ruling, federal preemption remains a case-by-case assessment for banks, as the court analyzed both the facial text of the statute and the congressional history of Dodd-Frank’s Truth in Lending Act amendments regarding escrow accounts as well as the consumer protection nature of the state law at issue. The potential implication of the Ninth Circuit’s ruling remains to be seen as courts continue to consider federal preemption in light of Dodd-Frank and a flurry of state consumer financial protection statutes implemented over the last decade in response to the financial crisis.
Bipartisan Group of State Attorneys General Denounce Legislation to Limit State Oversight of Student Loan Industry
By Buckley Sandler LLP
On March 15, 2018, a bipartisan group of 30 state Attorneys General released a letter urging Congress to reject Section 493E(d) of the Higher Education Act reauthorization—H.R. 4508, known as the “PROSPER Act”—which would prohibit states from “overseeing, licensing, or addressing certain state law violations by companies that originate, service, or collect on student loans.” Led by the New York and Colorado Attorneys General, the letter characterizes Section 493E(d) as an “an all-out assault on states’ rights and basic principles of federalism.” According to the letter, the legislation would immunize the student loan industry from state-level enforcement, leaving the Department of Education to assume a consumer-protection role it is ill-equipped to handle. The Attorneys General assert that the states have the capacity and track record to prevent abuses in the student loan market; citing an estimated $1.38 trillion in student loan debt, the letter highlights previous state enforcement actions and emphasizes cooperation between states and the federal government to protect U.S. borrowers.
Court Denies CFPB Motion to Reconsider, Applies New RESPA Safe Harbor
By Buckley Sandler LLP
On March 22, 2018, the U.S. District Court for the Western District of Kentucky denied the CFPB’s motion to reconsider a July 2017 opinion holding that a safe harbor under Section 8(c)(4) of RESPA protects a Louisville law firm's relationship with a string of now-closed title insurance agencies. The court found that the transactions did not violate Section 8(a) of RESPA because the law firm did not give the title insurance agencies a “thing of value.” Even assuming a violation, the court said the safe harbor under Section 8(c)(2) applied, even though it had previously relied on the Section 8(c)(4) safe harbor. The court relied on the D.C. Circuit’s 2016 interpretation of Section 8(c)(2) in PHH Corporation v. CFPB, which found that payments made in exchange for a service “actually received” is not the same as payments made for referrals, and a payment is bona fide if it amounts to “reasonable market value” for the service. In applying the PHH holding, the court concluded that the payments consumers made to the title agencies, which subsequently were distributed as profits to corresponding partners, were made in exchange for title insurance that was actually received by the consumer. The court noted that there was no evidence that the payments were above market value, and therefore concluded they were bona fide. The opinion emphasized that the purpose of RESPA is to prevent unnecessary increases in costs of certain settlement services for consumers, and the payments resulting from the relationship between the law firm and the title agencies not only were for services actually received, but also were not found to increase settlement costs.
Judge Orders Student Loan Servicer to Comply with CFPB CID
By Buckley Sandler LLP
On February 28, 2018, the U.S. District Court for the Western District of Pennsylvania granted the CFPB’s petition to enforce a Civil Investigative Demand issued against a student loan servicer. The servicer petitioned the CFPB to set aside the June 2017 CID, claiming that its Notification of Purpose did not comply with the notice requirements under 12 U.S.C. § 5562(c)(2). The loan servicer argued that the CID’s list of activities under investigation—e.g., processing payments, charging fees, transferring loans, maintaining accounts, and credit reporting—failed to provide the servicer with fair notice as to the nature of the investigation because it “merely categorize[s] all aspects of a student loan servicing operation.” The CFPB denied the petition, and in November 2017, filed a petition in court to enforce the CID. The court said the CFPB had satisfied notice requirements because nothing in the law barred it “from investigating the totality of a company’s business operations.” The court also found that the CID’s Notification of Purpose met the necessary requirements regarding administrative subpoenas set forth by the U.S. Court of Appeals for the Third Circuit, concluding that the investigation is for a “legitimate purpose,” the information requested is relevant and not already known by the Bureau, and the request is not unreasonably broad or burdensome.
Employee Benefits
PAID Program to Supervise Settlement of Voluntarily Disclosed FLSA Violations
By Meagan Bainbridge, Weintraub, Tobin, Chediak, Coleman, Grodin Law Corporation
On March 6, 2018, the Wage and Hour Division (WHD) of the U.S. Department of Labor (DOL) announced the creation of the Payroll Audit Independent Determination (PAID) program in an effort to facilitate the payment of unpaid wages to employees in accordance with the Fair Labor Standards Act (FLSA). According to the WHD, the PAID program is designed “to resolve such claims expeditiously and without litigation, to improve employers' compliance with overtime and minimum wage obligations, and to ensure that more employees receive the back wages they are owed.” The program is open to all FLSA-covered employers who discover potential violations of the FLSA’s overtime and minimum wage requirements, provided that the issue is not already being litigated. Employers who choose to participate in the program will be required to disclose the particular FLSA violation(s), the employee(s) and time period involved, as well as a calculation of the back pay due to each employee. If accepted into the PAID program, the WHD will supervise the payment of the back pay to the employee, if the employee also agrees to participate in the program. By doing so, the employee gives up his/her private right of action to bring a claim for the violations under the FLSA, as well as the awarding of liquidated damages and/or civil monetary penalties. For now, the PAID program is operating as a six-month pilot program, after which time the DOL will evaluate the effectiveness of the program and determine whether to implement the program on a more permanent basis.
Intellectual Property Law
Patent Office Panel Rejects Tribal Sovereign Immunity Claim in Inter Partes Review
By Joseph F. Marinelli, Fitch, Even, Tabin & Flannery LLP
In Mylan Pharm. v. Saint Regis Mohawk Tribe, a panel of the Patent Trial and Appeal Board (PTAB) ruled that the Saint Regis Mohawk Tribe could not use tribal sovereign immunity to block the PTAB’s inter partes review (IPR) of patents covering Allergan’s drug Restasis. Allergan attempted to shield its Restasis patents from IPR by assigning the patents to the tribe, which in turn promised to assert sovereign immunity in any IPRs. Allergan paid the tribe $13.75 million plus quarterly royalties of $3.75 million in exchange for an exclusive license to the patents. The tribe subsequently requested termination of pending IPR proceedings, claiming sovereign immunity. The PTAB denied the tribe’s request, reasoning that (1) IPR proceedings were created by a statute to which tribal sovereign immunity did not apply, (2) IPR was appropriate without regard to the patent owner’s identity, and (3) even if the tribe were immune, the IPRs could continue with Allergan alone because the tribe had transferred all of the substantial patent rights back to Allergan, such that Allergan remained an owner of the patents.
Federal Circuit Affirms Eligibility of Exergen Thermometer Patents
By Joseph F. Marinelli, Fitch, Even, Tabin & Flannery LLP
In Exergen Corp. v. Kaz USA, Inc., the Federal Circuit affirmed a lower court’s finding that Exergen’s forehead thermometer patents were not invalid for claiming laws of nature. The patents cover thermometers that compute a person’s body temperature by measuring the temperature of the skin across their forehead. The Federal Circuit found that although the patents were directed to the measurement of a natural phenomenon (core body temperature), the measurement method was not conventional, routine, and well-understood. The court reasoned that following years and millions of dollars of testing and development, the inventor determined the coefficient representing the relationship between temporal-arterial temperature and core body temperature for the first time. The inventor then incorporated that discovery into an unconventional method of temperature measurement, thus transforming the process into an inventive application of the formula. This is one of several recent Federal Circuit decisions upholding an invention as patent-eligible, as patent owners look for guidance on what subject matter may be eligible for patent protection.