Antitrust Law
FTC Seeks Public Comment on Potential Franchise Rule
By Barbara Sicalides, Christopher Young & Robert Jenkin, Troutman Pepper Hamilton Sanders LLP
The Federal Trade Commission (FTC) made another move to protect two of the Biden administration’s priority constituencies: small business and workers. This time, it targeted perceived unreasonable restraints in the franchise context. On March 10, 2023, the FTC asked for public comments related to how franchisors exert control over their franchisees and their workers. This request for information reflects continued efforts by the FTC to limit private businesses’ use of noncompete agreements and other practices believed to harm employees.
The FTC’s solicitation for public comments on provisions of franchise agreements and franchisor business practices (the “request”) reflects continued concerns about unfair and deceptive practices in the franchise industry. A spokesperson expressed the FTC’s concerns plainly: “[I]n some instances, the promise of franchise agreements as engines of economic mobility and gainful employment is not being fully realized.” According to the agency, “[The request is expected to] begin to unravel how the unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.”
The request comes on the heels of the FTC’s proposed new rule that would ban all noncompete clauses imposed by employers, as discussed in “FTC Extends Comment Period on Proposed Ban of Noncompete Agreements.” Per the request, the FTC seeks public comment on its proposed rule and is interested in comments addressing “whether the proposed rule should also apply to noncompete clauses between franchisors and franchisees.” To this end, the FTC’s request seeks comment on several specific issues, including, but not limited to:
- whether franchise agreements are negotiated between the franchisee and franchisor or whether they are presented to prospective franchisees on a take-it-or-leave-it contract;
- the types of unilateral changes made by franchisors during the course of the relationship;
- the prevalence of certain types of provisions in franchise agreements, such as no-poach provisions, provisions that impose maximum or minimum prices, and provisions that restrict where a franchisee may operate its business;
- how franchisors exercise control over wages and working conditions; and
- what types of payment and consideration franchisors receive from third parties.
The request for information on many of these topics is unsurprising given the current administration’s initiatives, especially as to restraints that can affect wages and employment mobility. As addressed in “Executive Order Throws Down the Gauntlet for a New Era of Antitrust Enforcement,” the administration has been keenly focused on protecting workers and small businesses from perceived overreach by big business. This focus was reflected in President Joe Biden’s July 2021 executive order that more generally asked the executive departments of the federal government to enact initiatives to eliminate barriers to competition and later actions by the Department of Justice (DOJ). For example, in October 2022, the DOJ secured the first-ever criminal convictions against the parties to a no-poach agreement. It also filed several amicus briefs in civil matters in 2022 and argued that no-poach agreements should receive per se treatment under Section 1 of the Sherman Act.
Comments in response to the request may be submitted until May 9, 2023. Notably, the FTC included a reference to its request for comments in its franchise rule press release about its proposed industry-agnostic ban on noncompete clauses.
Franchisors and franchisees should consider submitting comments to both the franchise rule and the proposed noncompete ban.
A Monumental Merger: FTC Seeks to Block Microsoft Corp’s Planned $68.7 Billion Acquisition
By Aja Finger, J.D. Candidate, Class of 2024, Howard University School of Law
On December 8, 2022, the Federal Trade Commission (FTC) voted 3-1 to issue a complaint against Microsoft to block it from acquiring video game developer Activision Blizzard. Microsoft is one of only two high-performance video game console manufacturers, and Activision is one of the leading producers of highly sought after “AAA” games, including some of the most iconic video game franchises such as Call of Duty. If Microsoft’s proposed merger is permitted, the vertical integration valued at approximately $70 billion would be the largest in the history of the video game industry.
The FTC asserts that it has reason to believe that the proposed merger violates §5 of the FTC Act, and would further violate §7 of the Clayton Act if consummated. The Commission alleges that the acquisition would “substantially lessen competition or tend to create a monopoly in multiple markets,” including the markets for high performance consoles, multi-game content library subscription services, and cloud gaming subscription services. The resulting firm would allegedly have the “ability and incentive to use its control of Activision titles to disadvantage Microsoft’s competitors.” Specifically, ownership of Activision would enable Microsoft to manipulate pricing of Activision’s catalog, degrade player experience on competing consoles, change access terms of Activision content, or deny competitors access to Activision content completely.
Microsoft and Activision’s attempts to dissuade the Commission’s concerns have been unsuccessful. Activision’s current strategy is to offer its games on as many devices as possible, regardless of the platform’s producer. However, Microsoft’s previous conduct suggests that if the tech giant acquires Activision, Microsoft may deny its platform competitors equal access to Activision’s video game content. “Despite statements by Microsoft to European regulators disavowing the incentive to make ZeniMax content exclusive post-[merger], . . . Microsoft plans for three of the newly acquired titles to become exclusive to Microsoft’s Xbox consoles and Xbox Game Pass subscription services.” The FTC fears that acquiring Activision will incentivize Microsoft to further withhold Activision content from competitors.
In response to the complaint, Microsoft claims that it is the third-place manufacturer of gaming consoles, and that Activision is only one of “hundreds” of popular video game publishers. Moreover, Microsoft asserts that its Xbox platform has little presence in mobile gaming, the fastest-growing segment of gaming, and where 94% of gamers are active. Microsoft further pleads that, in contrast to the FTC’s claim of denial of access, it has, since deal announcement, offered Call of Duty to its rivals.
Chief Administrative Law Judge Chappell is scheduled to preside over an evidentiary hearing beginning August 2, 2023.
Across the pond, the Competition and Markets Authority (CMA) updated its provisional findings to conclude that the merger would “not result in a substantial lessening of competition in relation to console gaming because the cost to Microsoft of withholding Call of Duty from PlayStation would outweigh any gains from taking such action.” Nevertheless, the CMA continues to hold the provisional view that the transaction raises concerns in the “cloud gaming market” and will issue its final report by April 26, 2023.
Banking Law
OFAC Imposes Sanctions for Engaging in the Mining and Metals Industry in Russia
By Joseph Mayo, LL.M. Candidate at New York University School of Law
On February 24, 2023, marking the one-year anniversary of Russia’s illegal invasion of Ukraine, the Biden Administration announced a series of military and economic measures and sanctions in yet another effort to support Ukraine and hold Russia accountable. In addition to military and financial assistance, the Administration, backed by the international community and G7 leaders, aims to further impose economic costs on Russia to disturb its financial, defense, and industrial sectors and quash its ability to continue financing its aggression against Ukraine. Using Executive Order 14024 authorization to impose sanctions on parties operating in designated sectors of the Russian economy, the White House is targeting numerous key revenue-generating industries; among the targets are Russian financial institutions, Russian officials and proxy authorities operating in Ukraine, third parties enabling Russia to evade sanctions, and Russia’s future energy capabilities.
The most notable and significant measure is the expansion of sanctions to apply to the metals and mining sector of the Russian Federation’s economy. In consultation with the State Department, the Office of Foreign Assets Control (OFAC) issued a sectoral determination, effective February 24, 2023, authorizing the imposition of economic sanctions on any person determined to operate or have operated in the metals and mining sector of the Russian Federation economy. OFAC defines the metals and mining sector of the Russian Federation economy to include “any act, process, or industry of extracting, at the surface or underground, ores, coal, precious stones, or any other minerals or geological materials in the Russian Federation, or any act of procuring, processing, manufacturing, or refining such geological materials, or transporting them to, from, or within the Russian Federation.”
While potentially exposed to sanction risks, not all persons operating or that have operated in the Russian Federation metal and mining sector are sanctioned automatically, and a specific determination must be made by OFAC. To date, OFAC has added four Russia-based steel and metal manufacturers for operating in the Russian metal and mining sector, all either directly or through subsidiaries involved in manufacturing artillery, metals, weapons, ammunition, and aviation defense industries. As a result of said announcement, these companies, their property, and any interests they have in the United States, along with any property or interest in possession or control of U.S. persons and entities, are blocked and must be reported to OFAC.
Failure of Silicon Valley Bank and Signature Bank Quickly Addressed by FDIC
By Rafael X. Zahralddin-Aravena, Lewis Brisbois
Over the weekend of March 12–13, 2023, the FDIC closed Silicon Valley Bank (“SVB”), based in Santa Clara, California ($209 billion in assets), and Signature Bank (“Signature”), based in New York, New York ($110 billion in assets). The FDIC was appointed receiver of both banks. President Biden moved quickly to bolster public confidence in the banking system by taking the unusual step of announcing that the FDIC, the Treasury Department, and the Federal Reserve Board would make all depositors whole, including those with uninsured deposits. On March 12, 2023, the Treasury Department, the Federal Reserve, and the FDIC issued a Joint Statement announcing that the senior management of both banks had been removed. The FDIC has created two bridge banks for each failed bank. Each bank will assume the deposit liabilities and most of the assets of the closed banks. The FDIC banks will operate the bridge banks to enable depositors to continue to have access to their funds, and will continue to service loans and other financial transactions for the FDIC. (For more information, please see the following legal alert: “Silicon Valley Bank and Signature Bank Closed: What Should You Do?”)
After the bank closures, the FDIC took various unique measures to broaden the bidding process to market the assets of both SVB and Signature to non-banks as well as qualified insured banks. Bids were due in late March. The FDIC announced that its marketing efforts resulted in the sale of most of the assets and obligations of SVB to First Citizens Bank and that Flagstar Bank would be taking the majority of deposits and some loan portfolios of Signature. SVB Financial Group, the holding company for SVB, has filed bankruptcy in the Southern District of New York. (For more information, please see the following legal alert: “Silicon Valley Bank Sale Process Evolving in Unusual Direction.”)
Commercial Finance Law
Illinois Small Business Truth in Lending Act
By Tiyanna D. Lords, McGlinchey Stafford PLLC
On February 10, 2023, Illinois State Senator Laura Ellman introduced SB2234, also referred to as the “Small Business Truth in Lending Act” ( “Act”), in the Illinois House of Representatives. The purpose of the Act is to protect business owners from predatory business loans. If passed, the Act creates new compliance requirements for nonbank commercial lenders in Illinois. These requirements include heightened disclosure obligations for lenders in sales-based financing, closed-end commercial financing, open-end commercial financing, factoring transactions, and renewal financing, all of which are further defined in the Act. Additionally, the Act broadens the disclosure obligations to include lenders engaged in “other forms of financing,” meaning a provider extending a specific offer of commercial financing that is not an open-end financing, closed-end financing, sales-based financing, or factoring transaction, but otherwise meets the definition of commercial financing. Notably, the Act also provides the Illinois Department of Financial and Professional Regulation rulemaking authority in the consumer-lending context, which may add to the regulatory burden that consumer lenders in Illinois currently face. If passed, the Act will apply to transactions occurring on or after January 1, 2024.
Consumer Finance Law
Second Circuit Upholds the CFPB’s Funding Structure as Constitutional
By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP
On March 23, 2023, the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) upheld the funding structure of the Consumer Financial Protection Bureau (CFPB) as constitutional. In Consumer Financial Protection Bureau v. Law Offices of Crystal Moroney PC, a debt collection law firm challenged a civil investigative demand (“CID”), arguing that the CFPB is unconstitutional because of its funding through the Federal Reserve and not the congressional appropriations process. In a unanimous three-judge panel decision, the Second Circuit rejected the defendant’s arguments and required the law firm to comply with the CFPB's CID.
In reaching its decision, the Second Circuit rejected the U.S. Court of Appeals for the Fifth Circuit's decision in Consumer Financial Protection Bureau v. Community Financial Services Association of America, Ltd., stating that it “cannot find any support for the Fifth Circuit’s conclusion in Supreme Court precedent.” Rather, the Second Circuit reasoned that the appropriations clause “means simply that no money can be paid out of the Treasury unless it has been appropriated by an act of Congress,” and Congress expressly authorized the CFPB’s funding structure when it created the Bureau. The Second Circuit stated that it is “not aware of any Supreme Court decision holding (or even suggesting) that the Appropriations Clause requires more than this ‘straightforward and explicit command,’” and it is “not at liberty to depart from binding Supreme Court precedent, ‘unless and until the [Supreme] Court reinterprets’ [such] precedent’ itself.”
The Second Circuit decision is a boost for the CFPB as it prepares to defend its funding structure to the Supreme Court later this year, and will allow the CFPB to characterize the Fifth Circuit decision as an outlier that need not and has not hampered the Bureau’s ongoing work. Following the decision, House Financial Services Committee Ranking Member Maxine Waters (D-CA) released a statement “applaud[ing]” the Second Circuit decision and criticizing the Fifth Circuit ruling as “radical and way out of the mainstream of legal opinion.”
CFPB Releases 2022 Home Mortgage Disclosure Act (“HMDA”) Data
By Eric Mogilnicki & Lucy Bartholomew, Covington & Burling LLP
On March 20, 2023, the CFPB announced the release of 2022 Home Mortgage Disclosure Act (“HMDA”) data on the Federal Financial Institutions Examination Council’s HMDA Platform. The 2022 data includes loan-level information from approximately 4,400 HMDA filers. Later this year, the 2022 data “will be available in other forms to provide users insights into the data,” including through a nationwide loan-level dataset, an aggregate disclosure reports with summary information, and a custom option to generate datasets, data maps, and reports. The CFPB will publish a “Data Point” article highlighting key trends in the 2022 HMDA data at a later date.
Supreme Court Gives Parties Additional Time to Brief CFPB Funding Case
By Eric Mogilnicki & Tyler Smith, Covington & Burling LLP
On March 14, 2023, the Supreme Court granted the parties’ joint motion to extend the time to file briefs on the merits in CFSA v. CFPB, in which the Fifth Circuit found the CFPB’s funding structure unconstitutional. The joint motion, and the Court’s decision to provide the parties with additional time, appear to reflect the Court’s earlier decision not to expedite consideration of the case so that it could be resolved this term. The joint appendix and petitioners’ brief on the merits is now due on May 8, 2023, and respondents’ brief is due July 3, 2023.
CFPB Launches Inquiry into Practices of Data Brokers
By Eric Mogilnicki & Tyler Smith, Covington & Burling LLP
On March 15, 2023, the CFPB issued a request for information related to the market for “data brokers,” a term the Bureau uses to describe companies that track and collect consumers’ personal information. The CFPB explained that the information it obtains pursuant to the request will inform a planned Fair Credit Reporting Act rulemaking effort and will shed light on an industry that “largely operates out of public view.”
The request seeks the public’s input on certain “market-level inquiries” and “individual inquiries.” The market-level inquiries request information on the data brokering industry as a whole, including the types of information data brokers request, how they use data, how they are structured, their business practices, and how those practices benefit or harm consumers. The individual inquiries ask for information about the public’s experiences with data brokers, including questions aimed at determining how transparent data brokers are and how difficult it is for consumers to access the information data brokers maintain.
CFPB Instructs Servicers to Stop Collecting on Student Loans Discharged in Bankruptcy
By Eric Mogilnicki & Tyler Smith, Covington & Burling LLP
On March 16, 2023, the CFPB issued a bulletin announcing its intention to enhance scrutiny of collection practices allegedly conducted by student loan servicers. The bulletin notes that “[a]lthough many student loans are subject to an ‘undue hardship’ standard and require a separate proceeding to be discharged in bankruptcy, some private student loans can be discharged in a standard bankruptcy proceeding, just like most other unsecured consumer debts.” However, the CFPB reports that its examinations found that some servicers continued to seek to collect on properly discharged student loans. The bulletin instructs student loan servicers to discontinue these collection practices and states that the Bureau will take action where it finds that such conduct has occurred.
CFPB and DOJ File Statement of Interest in Maryland Appraisal Bias Case
By Eric Mogilnicki & Tyler Smith, Covington & Burling LLP
On March 13, 2023, the CFPB and the Department of Justice filed a Statement of Interest in a District of Maryland case concerning allegations of appraisal bias. The statement contends that, contrary to arguments levied by the defendant, lenders can be held liable for relying on appraisals if they knew or should have known that the appraiser took race, sex, or any other prohibited bases into account in conducting the appraisal. That same day, the Bureau issued a blog post expressing the agencies’ joint efforts to combat appraisal bias.
CFPB Describes Efforts to Train Enforcement Agencies on Reining in Tech Company Activities
By Eric Mogilnicki & Tyler Smith, Covington & Burling LLP
On March 14, 2023, the CFPB released a blog post summarizing its efforts to train other federal and state enforcement agencies on the use of enforcement tools to protect consumers from tech companies that develop products that are harmful to consumers. In the Bureau’s words, the trainings are intended to help the agencies “stay on top of trends, address emerging risks, and rein in bad actors, especially those in Big Tech.” According to the blog post, the next training in the series is scheduled to occur in April.
