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Business Law Today

October 2023

October 2023 in Brief: Business Regulation & Regulated Industries

Dredeir Roberts, Perry N Salzhauer, and Latif Zaman

October 2023 in Brief: Business Regulation & Regulated Industries

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Antitrust Law

FTC Issues Policy Statement Confirming Its Position That Improperly Listing Patents in the Orange Book May Be Considered a Violation of the FTC Act

By Michael Hartman, Barbara Sicalides, and Julian Weiss, Troutman, Pepper, Hamilton, Sanders, LLP

The Federal Trade Commission (FTC) has released a new Policy Statement addressing one of its long-standing concerns in the pharmaceutical industry: the improper listing of patents in the Orange Book. In an open meeting of the Commissioners in September, the FTC voted unanimously to approve the issuance of the new statement, which directly addresses the improper listing of patents in the Food and Drug Administration’s (FDA) publication of Approved Drug Products with Therapeutic Equivalence Evaluations, commonly known as the “Orange Book” (Policy Statement). The Policy Statement is a forceful warning to companies and individuals that may thwart competition in pharmaceutical markets through improperly listed patents.

The Hatch-Waxman Act sets forth the criteria for publication of patents in the Orange Book. The Act was intended to encourage new pharmaceutical development and greater public access to generic drugs and established the approval pathway for generic drugs. The Hatch-Waxman Act identifies two requirements for a patent to be eligible for listing in the Orange Book. First, the patent must be one for which “infringement could reasonably be asserted if a person not licensed by the owner of the patent engaged in the manufacture, use, or sale of the drug.” (21 U.S.C.) Second, the patent must claim one of three categories of subject matter—“a drug substance (active ingredient),” “a drug product (formulation or composition),” or “a method of using such drug for which approval is sought or has been granted in the [patent holder’s New Drug Application].” (Id.)

Although these requirements exist, the FDA does not itself investigate whether a listing is appropriate. Generally, this leaves a company with a potentially competing generic product that suspects a patent is improperly listed in the Orange Book with no path other than patent litigation and a delay in the FDA approval process. The FTC’s Policy Statement addresses how this framework may have played a role in distorting pharmaceutical markets “for decades,” and specifically notes that incorrectly listing a patent in the Orange Book “may disincentivize investments in developing a competing product and increase the risk of delayed generic and follow-on product entry, reducing patient access to more affordable prescription drugs and increasing costs to the healthcare system.”

The Policy Statement is not the first time the FTC has directly addressed this subject. It previously made clear its opposition to improper Orange Book listings in 2002, when it filed administrative litigation claiming, among other things, that the wrongful listing of a patent in the Orange Book for the purpose of blocking generic competition constituted a violation of the FTC Act. (Biovail Corp.) Similarly, in late 2022, the FTC, by a 4–0 vote, filed an amicus brief in a patent infringement action, explaining that when patents are listed that do not meet the statutory listing criteria, the purpose of the Hatch-Waxman Act’s thirty-month stay on approval of competing drugs is frustrated, leading instead to the blocking of consumer access to a competing product that might reduce prices, improve quality, or both without any countervailing benefit. (Jazz Pharmaceuticals). The FTC further argued in the amicus brief that the thirty-month stay actually incentivizes companies to wrongfully list patents in the Orange Book.

The Policy Statement affirms these views, and makes clear that the FTC will not hesitate to use its enforcement powers in this area. The Policy Statement is not critical of the Hatch-Waxman Act, but instead focuses on the distortion of pharmaceutical markets, the delay of generic product launches, and the possibility of higher drug prices resulting from improperly listed patents. In addition to Section 5 of the FTC Act, the Policy Statement notes that improper listing in the Orange Book may be actionable under Sherman Act Section 2’s prohibition of monopolization and that failure to remove an improperly listed patent may be deemed unfair competition. The Statement is unsurprising in that it further implements this administration’s stated goals to promote competition in the pharmaceutical industry, including through support of the generic drug patent framework.

The EU Foreign Subsidies Regulation

By Sarah Blazek and Sebastian Waldmann, Noerr

The EU Foreign Subsidies Regulation (FSR) has now entered into full effect. On October 12, its last element—the obligation to notify the European Commission of certain M&A transactions and public procurement procedures—became applicable. Companies must now adopt internal implementing measures to comply with all the obligations imposed by the FSR. This discussion will briefly outline the main aspects of the FSR and demonstrate why FSR issues may be important even for US companies.

The FSR empowers the European Commission (EC) to impose remedies on companies that receive subsidies from non-EU countries. To avoid this, companies have to make sure they are prepared, as the EC intends to enforce the FSR rigorously.

Under the FSR, the EC has three tools for assessing the legality of foreign subsidies:

(1) “M&A tool”: Companies are subject to a standstill obligation and must notify financial contributions from non-EU countries when

  • at least one merging company, the target, or the joint venture is established in the EU and generates aggregate turnover of at least EUR 500 million in the EU, and
  • taken together, all companies involved have received more than EUR 50 million in financial contributions from non-EU countries in the three previous years.

(2) “Public procurement instrument”: This expands the notification obligation to include procurement procedures. The EC is to be notified of financial contributions from non-EU countries when

  • the estimated total value of the awarded public procurement agreement is at least EUR 250 million, and
  • the bidder has received at least EUR 4 million in financial contributions from non-EU countries in the three previous years.

(3) “Ex officio review tool”: The EC will also be able to investigate ex officio any potentially distorting foreign subsidies.

Notification requirements are tied to “financial contributions” granted (directly or indirectly) by non-EU countries. They refer to more than just “foreign subsidies” and are defined very broadly. Once notified, the EC will assess whether the foreign financial contribution constitutes a foreign subsidy and evaluate whether it has any distorting effect on the EU market. Finally, the EC may carry out a balancing act, taking into account all positive and negative effects of the foreign subsidy. The actual test criteria to be applied remain unclear and will only be further clarified by the EC in the coming years. The EC is expected to choose an approach inspired by well-established principles regarding EU state aid law.

Because the FSR creates new notification requirements, companies are facing additional administrative burdens to ensure M&A compliance and be M&A-ready (i.e., collecting necessary data and preparing a compliance system). The FSR will impact deal timelines and transaction security by creating one more regulatory filing that will have to be considered in addition to merger control and foreign direct investment filings.

The FSR also provides companies with new options to use the FSR itself against competitors. Companies can complain to the EC, which can result in an ex officio investigation. Such informal complaints over distortive subsidies from Qatar or the United Arab Emirates were raised by soccer clubs and associations earlier this year. So far, the EC has reacted with restraint.

With respect to its wide scope, implementing the duties resulting from the FSR is a topic that also matters to US companies. To mention one example, according to the parties, the merger between the two US fashion companies Tapestry and Capri is subject to the FSR M&A notification obligation.

The situation remains very dynamic. So far, seventeen M&A deals have been pre-notified, and more FSR (pre)notifications to the EC will certainly follow soon. The EC can also be expected to extend its ex officio FSR activities sooner or later—in general and in regard to other sectors.

See Business Law Today’s upcoming full-length article on this topic for more information.

Banking Law

FinCEN Proposes Deadline to File Beneficial Ownership Information (“BOI”) Reports

By Rachael Aspery, McGlinchey Stafford, PLLC

On September 27, 2023, the Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemaking (“NPRM”) in order to extend the deadline for reporting companies that were created or registered in 2024 to file the initial beneficial ownership information (“BOI”) reports. In the NPRM, FinCEN proposed amending the BOI Reporting Rule initial report deadline for reporting companies created or registered in 2024 from thirty days to ninety days. There are no other changes proposed in the NPRM to the final BOI Reporting Rule; reporting companies created or registered before January 1, 2024, would still have until January 1, 2025, to file their initial BOI reports with FinCEN, and entities created or registered on or after January 1, 2025, would still have thirty days to file their initial BOI reports. The comment period for the NRPM closed on October 30, 2023.

With this extension proposal, FinCEN expects increased compliance and reduced burdens on reporting companies since these reporting companies should have time to understand their regulatory obligations under the Reporting Rule and obtain the requisite information. Further, these companies will have additional time to familiarize themselves with FinCEN’s guidance and educational materials, and also be able to resolve questions that come from completing the initial BOI Report. However, after January 1, 2025, there is an expectation that reporting companies be familiar with BOI reporting requirements and be able to timely file BOI reports.

FinCEN has articulated its commitment to creating a highly useful beneficial ownership database equipped to assist law enforcement and national security agencies with combatting money laundering and terrorist financing, but also its commitment to making this process as smooth as possible for businesses now subject to these requirements. Earlier in September 2023, FinCEN previously released the Small Entity Compliance Guide and accompanying FAQs to assist small businesses with understanding their reporting requirements and identifying beneficial owners.

Federal Banking Agencies Release Final Rules to Modernize the Community Reinvestment Act

By Joseph E. Silvia

After a yearslong notice and comment period, on October 24, 2023, the federal banking agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) jointly issued a final rule “to strengthen and modernize regulations implementing the Community Reinvestment Act” (the “Final Rule”). Key goals in drafting the Final Rule included: encouraging banks to expand access to credit, investment, and banking services in low- and moderate-income communities; updating the regulations to reflect certain evolution in the banking industry to more digital experiences; providing increased clarity and consistency in applying the regulations; and tailoring evaluations and data collection based on bank size and type.

The Final Rule maintains the general structure of the regulations implementing CRA with a focus on lending, investments, and/or services provided by a bank in its geographic area. However, among other things, the Final Rule updates the relevant asset thresholds for delineating between small banks (less than $600 million in assets), intermediate banks ($600 million to $2 billion in assets), and large banks (more than $2 billion in assets), and it creates a series of new performance tests by which banks will be evaluated. The Final Rule becomes effective January 1, 2026, with some reporting requirements effective January 1, 2027.

Federal Banking Agencies Release Principles for Climate-Related Financial Risk Management

By Joseph E. Silvia

On October 24, 2023, the federal banking agencies (the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) jointly issued a set of principles to provide a framework for the “safe and sound management of exposures to climate-related financial risks for large financial institutions.” Financial institutions with $100 billion or more in total assets that are supervised by the federal banking agencies will be subject to this set of principles, which the federal banking agencies have indicated are consistent with existing rules and guidance that the agencies had previously proposed in 2021 and 2022.

These principles cover the following six areas: (1) governance; (2) policies, procedures, and limits; (3) strategic planning; (4) risk management; (5) data, risk measurement, and reporting; and (6) scenario analysis. The principles also address how climate-related financial risk can be addressed in more traditional risk areas, and the agencies are clear that nothing in the principles is intended to prohibit or discourage any financial institution from providing banking services to any particular customer.

Federal Reserve Issues Proposed Rule to Lower Interchange Fees

By Joseph E. Silvia

On October 25, 2023, the Board of Governors of the Federal Reserve System proposed changes to Regulation II (Debit Card Interchange Fees and Routing) that would lower the maximum interchange fee that large debit card issuers can receive for debit card transactions. By statute, specifically a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act known as the “Durbin Amendment,” the Federal Reserve must “establish standards for assessing whether an interchange fee received by a large debit card issuer for processing a transaction is reasonable and proportional to certain issuer costs.” This was first implemented by the Federal Reserve in 2011 for debit card issuers with $10 billion or more in assets.

Since the Federal Reserve’s implementation of these provisions, the Federal Reserve has collected data, as required by the Durbin Amendment, related to the costs incurred by debit card issuers and has noticed a material decline in the costs incurred by debit card issuers in connection with debit card transactions. Therefore, the Federal Reserve is proposing to lower the so-called “interchange fee cap” to continue ensuring that the “interchange fee received by a large debit card issuer for processing a transaction is reasonable and proportional to certain issuer costs,” as required under the Durbin Amendment.

Supreme Court Takes Up Question of National Bank Act Preemption of State Law

By Courtney Dankworth, Jehan Patterson, and Valerie Zuckerman, Debevoise & Plimpton LLP

On October 13, 2023, the Supreme Court granted certiorari to hear Cantero v. Bank of America, an appeal from the Second Circuit raising the issue of whether the National Bank Act (“NBA”) preempts the application of state escrow-interest laws to national banks. Plaintiffs represented two classes of homeowners who had financed the purchase of their homes through home mortgage loans from defendant Bank of America, N.A., and alleged defendant failed to pay interest on their escrow accounts as required by New York’s General Obligations Law § 5-601. That law provides that whenever a mortgage investing institution maintains an escrow account for certain types of real estate, the institution shall pay interest on the escrow amount “at a rate of not less than two per centum per year . . . or a rate prescribed by the superintendent of financial services.” The court of appeals assessed the viability of plaintiffs’ state law claims in light of the Supreme Court’s preemption standards as articulated in Barnett Bank of Marion County, N.A. v. Nelson, Florida Insurance Commissioner, 517 U.S. 25 (1996), and two provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank provisions codify Barnett Bank and amend the Truth in Lending Act to require the creditor to pay interest on the amount held in escrow for certain mortgages if prescribed by applicable state or federal law, respectively.

The Second Circuit held that the New York interest-on-escrow law was preempted by the NBA, holding that “[i]t is the nature of an invasion into a national bank’s operations—not the magnitude of its effects—that determines whether a state law purports to exercise control over a federally granted banking power and is thus preempted. . . . To determine whether the NBA conflicts with a state law, we ask whether enforcement of the law at issue would exert control over a banking power—and thus, if taken to its extreme, threaten to ‘destroy’ the grant made by the federal government.” The court further observed that “state laws exercising control over national banks— even if their own practical effect may be minimal—are invalid if, when aggregated with similar laws of other states, they would threaten to undermine a federal banking power.” The Second Circuit rejected the district court’s approach looking at the “impact” and “degree of interference” to determine whether the state law at issue was preempted. Further, the court held that Dodd-Frank had merely codified the preemption standard articulated in Barnett Bank and had not created a new heightened standard. Accordingly, the court held that compliance with New York’s interest-on-escrow statute would require a national bank “to pay its customers in order to exercise a banking power granted by the federal government,” improperly encroaching on the bank’s “power to create and fund escrow accounts.”

The Second Circuit’s ruling comes out opposite to a Ninth Circuit case, Flagstar v. Kivett, in which the court found a similar California interest-on-escrow law was not preempted by the NBA. While petitions for writ of certiorari were filed in both cases, the Supreme Court has not taken action on Flagstar. We may well have to wait for the Court’s decision in Cantero to resolve whether an NBA preemption analysis considers the degree of interference by, or the nature of invasion of, the state law.

Cannabis Law

SAFER Act: Marijuana May Soon Become a Bigger Deal

By Heidi Urness and Aaron Kouhoupt, McGlinchey Stafford

Proponents of marijuana reform have had cause for celebration in 2023. Despite challenges facing the industry, the political and social momentum surrounding cannabis is ticking upward.

Most recently, the marijuana industry touted the passage of the Secure And Fair Enforcement Regulation Banking Act (SAFER Banking Act) by the Senate Banking Committee, by a notable bipartisan majority of 14–9, on September 27. The bill, S. 2860, was placed on the Senate legislative calendar under general orders the following day. A Senate floor vote is now pending.

Despite the SAFE Banking Act passing in the U.S. House of Representatives on seven previous occasions since its first passage in 2019, the SAFER Banking Act’s advancement through the Senate has caused quite a stir among not only cannabis and cannabis-related businesses, but also among banks, credit unions, insurers, lenders, and more—especially those that have, until now, elected not to serve the cannabis industry due to the risk that they could be prosecuted given federal restrictions on cannabis. While some banks, credit unions, and other financial services providers do serve the cannabis industry, the majority of state-legal medicinal or recreational cannabis businesses do not participate in traditional and secure banking systems and financial services for this very reason.

The advancement of the SAFER Banking Act by the Senate Banking Committee may be a signal that significant changes are on the horizon, making marijuana a bigger, more accessible deal throughout the country—and allowing cannabis industry participants to make bigger deals—in the near future.

See Business Law Today’s upcoming full-length article on this topic for more information.

Consumer Finance Law

CFPB Releases Proposed Rule Implementing Section 1033 of the CFPA

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On October 19, the CFPB released its much-anticipated Proposed Rule to implement Section 1033 of the Consumer Financial Protection Act (“CFPA”), 12 U.S.C. § 5533. The Proposed Rule, which is nearly three hundred pages long, would grant consumers what the Bureau has termed “personal financial data rights,” with the core right being the ability to easily port data from one financial institution to another when switching between banks or other consumer financial service providers. The Proposed Rule also outlines how third parties may access data on a consumer’s behalf, and it restricts the use of consumer data by third parties for purposes other than the provision of products or services to that consumer. Comments on the Proposed Rule are due by December 29.

Section 1033 requires covered persons under the CFPA, subject to rules prescribed by the Bureau, to “make available to a consumer, upon request, information in the control or possession of the covered person concerning the consumer financial product or service that the consumer obtained from such covered person, including information relating to any transaction, series of transactions, or to the account including costs, charges and usage data . . . in an electronic form usable by consumers.”

There are exceptions to this requirement for confidential commercial information (such as algorithmic risk scores), information collected to prevent fraud or money laundering, and information that is required to be kept confidential by another provision of law. Section 1033 also does not impose any duty on covered persons to maintain additional records about consumers, or to make available to consumers information that cannot be retrieved in the ordinary course of business.

In the preamble to the Proposed Rule, the Bureau frames it as “intend[ed] to accelerate the shift to a more open and decentralized system” of consumer financial services. This means, in the Bureau’s view, increasing competition and quality among service providers by improving the ability of consumers to leave and take their data elsewhere. In prepared remarks by CFPB Director Rohit Chopra, he compared the Proposed Rule to a Federal Communications Commission policy that requires wireless number portability, in order to allow users to switch phone carriers more easily when better service or prices are available elsewhere. Director Chopra also highlighted the need for controlled access to consumer financial data, and limitations on the use of consumer financial data, for unrelated purposes such as targeted advertising. To these ends, the Proposed Rule includes the following provisions:

  • The Proposed Rule would apply to all “data providers:” financial institutions under Regulation E, card issuers under Regulation Z, and “any other person that controls or possesses information concerning a covered consumer financial product or service the consumer obtained from that person” (such as a digital wallet provider).
  • The Proposed Rule would have an exception for data providers that do not have any “consumer interface” (e.g., a “My Account” page), reflecting a judgment that these tend to be very small institutions that may lack the resources to implement the Proposed Rule.
  • Data providers would be required to provide authenticated consumers, authorized third parties, or data aggregators acting on behalf of authorized third parties (subject to additional requirements) with access to data that concerns any covered product or service a consumer obtained from the data provider.
  • Data providers would be required to make consumer financial data available “in an electronic form usable by consumers and authorized third parties.”
  • Data providers would be required to develop and maintain standardized developer interfaces to allow third parties to access consumer financial data.
  • The Proposed Rule does not provide technical standards, but rather contemplates that the format of consumer data and developer interfaces would be subject to standards set by an industry-created body recognized by the Bureau.
  • The Proposed Rule would prohibit the collection, use, and retention of consumer data by third parties other than to the extent reasonably necessary to provide the requested product or service, and would explicitly identify targeted advertising, cross-selling, and data sales as activities that are not reasonably necessary.
  • The Proposed Rule includes requirements for compliance programs for data providers, and record retention programs for authorized third parties, including the use of written policies and procedures.

CFPB Says Fees and Customer Service Wait Times May Be an Unreasonable Impediment to Consumers’ Requests for Information

By Courtney Dankworth, Jehan Patterson, and Valerie Zuckerman, Debevoise & Plimpton LLP

On October 11, 2023, the Consumer Financial Protection Bureau (“CFPB”) released an advisory opinion regarding consumer information requests to large banks and credit unions under section 1034(c) of the Consumer Financial Protection Act. Section 1034(c) provides that banks or credit unions with more than $10 billion in assets, as well as their affiliates, are required to respond in a timely manner to a consumer’s request for information relating to the consumer’s financial product or service by providing complete and accurate information within the bank or credit union’s possession or control.

Notably, the advisory opinion clarified conditions likely to be deemed unreasonable impediments to requesting such information. For example, requiring a consumer to pay a fee or charge for the requested information, regardless of how it is characterized or labeled on the large bank or credit union’s schedule, is likely an unreasonable impediment because it operates as a significant deterrent to a consumer initiating an information request. These likely include “charging fees (1) to respond to consumer inquiries regarding their deposit account balances; (2) to respond to consumer inquiries seeking the amount necessary to pay a loan balance; (3) to respond to a request for a specific type of supporting document, such as a check image or an original account agreement; and (4) for time spent on consumer inquiries seeking information and supporting documents regarding an account.”

Other conditions or obstacles that likely create an unreasonable impediment include excessively long wait times to submit a request to a customer service representative, requiring a consumer to submit the same request multiple times, requiring the consumer to engage with an ineffective chatbot, or directing a consumer to obtain information from a third party that is within the possession of the bank or credit union. While each circumstance is fact dependent, the advisory opinion strongly suggests that these enumerated conditions or obstacles may frustrate consumers’ ability to exercise their right to request information under section 1034(c), and thus may violate that provision. The CFPB does not intend to seek monetary relief for any potential violations occurring prior to February 1, 2024.

Senate Passes Congressional Review Act Resolution of Disapproval of CFPB Small Business Lending Data Rule

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On October 18, the Senate passed a resolution pursuant to the Congressional Review Act (“CRA”) disapproving of the CFPB’s recently finalized Small Business Lending Data Collection Rule. The disapproval passed by a vote of 53–44, with three Democratic senators and two independents joining with all voting Republican senators. Under the CRA, Congress may pass a joint resolution of disapproval of an administrative rulemaking, which, if signed into the law by the President, immediately overturns the rule, and prevents the agency from issuing any new rule that is substantially the same as the disapproved rule. In a statement of policy, the White House promised to veto the resolution if it is also passed by the House of Representatives.

The Rule requires covered financial institutions—including both non-bank lenders and banks—to report data on credit applications by businesses with $5 million or less in gross revenue. A financial institution is covered if it originates one hundred or more loans to such businesses annually. The Rule has a phased compliance schedule, with an initial compliance date of October 1, 2024, for financial institutions that originate more than 2,500 such loans per year. However, the Rule’s future is uncertain, as two district courts have entered preliminary injunctions against it pending the Supreme Court’s decision in Consumer Financial Protection Bureau et al. v. Community Financial Services Association of America, Ltd. et al. Those injunctions temporarily exempt a significant number—but not all—of the Rule’s covered financial institutions: members of the Texas Bankers Association, members of the American Bankers Association, and members of the Kentucky Bankers Association.

CFPB Takes Action against Fintech Company for Alleged Deceptive Practices in International Money Transfers

By Michael A. Goodman and Mark D. Metrey, Hudson Cook

On October 17, 2023, the CFPB took action against a nonbank fintech company (“Company”) providing international money transfer services for alleged EFTA, Regulation E, and CFPA violations. The fintech Company operates throughout the United States via its mobile application, facilitating remittance transfers to several countries, primarily in Africa and Asia.

The CFPB alleged a series of deceptive and noncompliant practices resulting in significant violations and penalties. The Company allegedly engaged in deceptive advertising, misleading consumers with claims of “instant” or “within seconds” remittance transfers, in violation of the CFPA, and included service agreement clauses that appeared to waive consumers’ EFTA rights, in violation of the EFTA.

The CFPB also alleged that the Company inaccurately disclosed critical information, including the date of fund availability and exchange rates. The Consent Order also asserts that Company’s alleged failure to investigate and address consumer-reported errors, as well as broader noncompliance with the Remittance Rule, led to multiple violations of regulatory standards. Notably, the Company allegedly failed to round exchange rates consistently as mandated by the Remittance Rule and provided contact and cancellation information in a manner that did not meet regulatory requirements. Without admitting to these allegations, the Company agreed to pay a $1.5 million penalty, as well as set up a comprehensive compliance plan and provide redress to the affected customers.

President Biden Speaks on CFPB and FTC Efforts to Combat Junk Fees as FTC Proposes Junk Fee Ban, California Passes Junk Fee Legislation

By Eric Mogilnicki and B. Graves Lee, Covington & Burling, LLP

On October 11, President Joe Biden delivered remarks at the White House regarding his administration’s efforts to address “junk fees,” which he described as “hidden charges that companies sneak into your bill to make you pay more . . . simply because they can.” In attendance for the president’s remarks were CFPB Director Rohit Chopra and Federal Trade Commission (FTC) Chair Lina Khan. President Biden decried the imposition of junk fees in industries spanning “banking, hotels, concerts, airlines, rental housing, cable, interest, [and] healthcare.” He called on Congress to pass the Junk Fee Prevention Act, proposed in the House (H.R. 2463) and the Senate (S. 916), which would outlaw certain fee practices across industries and empower the FTC and other agencies to promulgate rules to effectuate the statute.

Headlining the President’s remarks was an FTC proposal to issue a regulation that would broadly prohibit “unfair or deceptive practices relating to fees for goods or services, specifically, misrepresenting the total costs of goods and services by omitting mandatory fees from advertised prices and misrepresenting the nature and purpose of fees.” The proposal surveys comments received in response to an October 2022 advance notice of proposed rulemaking on fee practices in a broad range of industries. In the financial services sector, the FTC proposal highlighted comments regarding hidden fees in personal banking, credit cards, and investment services. Comments on the FTC’s proposal will be due sixty days from its publication in the Federal Register. In his remarks, President Biden stated that, if finalized, the proposal would empower the FTC to “impose financial penalties on companies that don’t disclose their full up-front price, and secure refunds for customers who have been defrauded by companies charging hidden fees.”

President Biden also hailed efforts by the CFPB to combat the imposition of junk fees. Specifically, he alluded to a CFPB advisory opinion limiting financial services providers’ imposition of fees in customer service contexts; a CFPB report tracking the imposition of insufficient funds fees; and a CFPB Supervisory Highlights report tracking CFPB redress to consumers impacted by the imposition of junk fees across the financial sector (all released last week and discussed below), as well as a CFPB rulemaking expected this month to facilitate consumer access to financial data (discussed above). In a press call, CFPB Director Chopra delivered remarks highlighting these Bureau developments and the Biden Administration’s broader efforts to combat junk fees, stating, “We are pleased to be part of this all-of-government effort to promote competition for the benefit of both families and honest businesses.”

Elsewhere in anti-junk fee initiatives, on October 7, California Governor Gavin Newsom signed into law Senate Bill 478, which imposes a broad set of fee prohibitions under the state’s unfair or deceptive acts or practices prohibition. The law states its intent as banning “drip pricing,” described as “advertising a price that is less than the actual price that a consumer will have to pay for a good or service.” A wide variety of industries, including the consumer financial services industry, will be subject to the California law, which takes effect July 1, 2024.

CFPB Supervisory Highlights Track Junk Fee Violations and Redress

By Eric Mogilnicki and B. Graves Lee, Covington & Burling, LLP

On October 11, the CFPB published the Fall 2023 issue of its Supervisory Highlights. Like the Bureau’s Winter 2023 issue of Supervisory Highlights, the Fall 2023 issue focused on supervisory examination findings regarding junk fees. The issue opens with the Bureau describing the imposition of junk fees as anticompetitive behavior, noting that “[j]unk fees are typically not subjected to the normal forces of competition,” but that the “CFPB has observed that supervised institutions have started to compete more when it comes to fees.” The issue touts that the Bureau’s supervisory work relating to junk fees “has resulted in institutions refunding over $140 million to consumers.” The issue described examinations in the areas of deposits, auto servicing, and remittances completed between February and August 2023. Among the supervisory findings of violations of law were:

  1. depository institutions’ practice of assessing insufficient fund (NSF) fees regarding re-presented items without affording consumers a meaningful opportunity to prevent another fee after the first failed re-presentment attempt, which the Bureau deemed unfair;
  2. core processors’ practice of contributing to depository institutions’ assessment of NSF fees regarding re-presented items, which the Bureau deemed unfair;
  3. depository institutions’ practice of assessing authorize-positive-settle-negative overdraft fees, which the Bureau deemed unfair (consistent with recent CFPB guidance);
  4. depository institutions’ practice of assessing fees for the printing and delivery of paper statements (including additional fees for mailed statements returned undeliverable) and for assessing such fees without actually delivering such statements, which the Bureau deemed unfair;
  5. depository institutions’ practice of imposing “surprise depositor fees” (i.e., fees assessed to consumers when an institution returns as unprocessed a check that the consumer attempted to deposit), which the Bureau noted could likely be unfair under CFPB guidance;
  6. financial institutions’ practice of cutting off consumers’ access to pandemic relief benefits as a result of garnishments or setoffs, which the Bureau noted could be unfair;
  7. auto servicers’ practice of failing to provide, or miscalculating, refunds for add-on products following early loan termination, which the Bureau deemed unfair; and
  8. remittance transfer providers’ practice of failing to disclose transfer fees, which the Bureau deemed to violate Regulation E.

Separately, the Bureau flagged concerns surrounding payment platforms for K-12 student meal accounts, but did not identify any specific law violations.

Bureau Report Tracks Dramatic Decline in NSF Fees

By Eric Mogilnicki and B. Graves Lee, Covington & Burling, LLP

On October 11, the CFPB’s Offices of Consumer Populations and Markets published a Data Spotlight report tracking trends in the insufficient fund (NSF) fee practices of banks and credit unions. The report tracks a striking retreat from NSF fee practices across the industry, finding that a substantial majority of large banks have eliminated NSF fees in recent years, leading to a 97% drop in NSF fee revenue among banks with more than $10 billion in assets. According to the report, the Bureau estimates that “consumers are saving almost $2 billion annually on a going forward basis” as a result of the widespread elimination of NSF fees. The report follows a series of prior research reports dating back to December 2021, tracking declines in NSF and overdraft fee practices. This week’s report notes that some institutions—in particular, many large credit unions—continue to charge NSF fees, and that the CFPB “will continue to monitor NSF fee practices in the market.”

CFPB and DOJ Statement Cautions against Consideration of Immigration Status under Fair Lending Laws

By Eric Mogilnicki and B. Graves Lee, Covington & Burling, LLP

On October 12, the CFPB and Department of Justice issued a joint statement and accompanying blog post on lenders’ consideration of borrowers’ immigration status under the Equal Credit Opportunity Act (ECOA). Regulation B, which implements ECOA, prohibits creditors from considering race, color, religion, national origin, or sex—but not immigration status—in any aspect of a credit transaction. 12 C.F.R. § 1002.6(b)(9). Other provisions of Regulation B permit creditors to “consider [an] applicant’s immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditor’s rights and remedies regarding repayment,” 12 C.F.R. § 1002.6(b)(7), and to “inquire about the permanent residency and immigration status of an applicant or any other person in connection with a credit transaction.” 12 C.F.R. § 1002.5(d)(1). Similarly, CFPB commentary on Regulation B provides that a creditor “may not refuse to grant credit because an applicant comes from a particular country but may take the applicant’s immigration status into account.” 12 C.F.R. § 1002.2(z) cmt. 2.

The CFPB–DOJ joint statement acknowledges that ECOA/Regulation B permit creditors to take immigration status into account in certain contexts, but cautions that “creditors should be aware that unnecessary or overbroad reliance on immigration status in the credit decisioning process, including when that reliance is based on bias, may run afoul of ECOA’s antidiscrimination provisions and could also violate other laws.”

The joint statement tracks a number of issues related to ECOA/Regulation B and noncitizen borrowers. First, the agencies note that immigration status risks serving as a proxy for protected characteristics such as race and national origin, and so if “consideration of immigration status is not ‘necessary to ascertain the creditor’s rights and remedies regarding repayment’ and it results in discrimination on a prohibited basis, it violates ECOA and Regulation B.” The agencies also note that certain criteria—such as how long a consumer has had a Social Security Number—could also serve as a proxy for citizenship or immigration status. Accordingly, the use of such criteria “should be supported by evidence and cannot be a pretext for discrimination.” Along those lines, “if a creditor requires documentation, identification, or in-person applications only from certain groups of noncitizens, and this requirement is not necessary for assessing the creditor’s ability to obtain repayment or fulfilling the creditors’ legal obligations, that policy may violate ECOA and Regulation B by harming applicants on the basis of national origin or race.”

Apart from ECOA/Regulation B, the joint statement notes creditors’ obligations under 42 U.S.C. § 1981, which provides broad antidiscrimination protections. The agencies assert that “[t]o the extent that a creditor’s consideration of immigration status would violate Section 1981, courts have made clear that the limited consideration of immigration status that is permissible under ECOA and Regulation B does not conflict with Section 1981, creditors must therefore comply with both statutes.” Therefore, “discrimination that arises from overbroad restrictions on lending to noncitizens may violate either or both statutes.”

CFPB Director Chopra Discusses Digital Payments and Oversight of Large Payment Firms at Brookings Institution Event

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On October 6, CFPB Director Rohit Chopra spoke at a Brookings Institution event entitled “Making America’s payment system work for a digital century.” In his remarks and an ensuing question and answer session, Director Chopra said that the Bureau is considering new guidance that would discuss the application of the Electronic Fund Transfer Act to “private digital dollars and other digital dollars,” including credit card rewards points. Director Chopra expressed particular concern with situations where a credit card issuer promises rewards points in order to entice consumers to sign up for a credit card, but misrepresents the availability or usability of those rewards points.

In addition, Director Chopra said that the Bureau is considering “appropriate authorities to conduct supervisory examinations of nonbanks offering consumer payment platforms.” He noted the Bureau’s authority to examine companies that provide services to large banks, as well as the Bureau’s authority to define larger participants in the consumer payments market.

Finally, Director Chopra forecast that the Bureau would soon propose a rule regarding personal financial data rights under Section 1033 of the Dodd-Frank Act (discussed above). That rulemaking process was announced on October 27, 2022.

CFPB General Counsel Speaks in Support of Medical Debt Rulemaking at Financial Justice Summit

By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP

On October 4, CFPB General Counsel and Senior Advisor to the Director Seth Frotman delivered prepared remarks at the New Jersey Citizen Action Education Fund’s 14th Annual Financial Justice Summit. In his remarks, General Counsel Frotman made the case for the Bureau’s recently announced rulemaking to prohibit consumer reporting companies from including medical debts and medical debt collection information on consumer reports, and creditors from using medical collections information when evaluating consumer credit applications.

In addition to noting the vast number of Americans who are burdened by medical debts, General Counsel Frotman explained that “the CFPB has deep concerns that families are being saddled with medical bills that they should not—or do not—owe.” He also discussed the use of medical financial products such as special-purpose credit cards and medical care installment loans, and emphasized that the Consumer Financial Protection Act’s prohibition on unfair, deceptive, or abusive acts or practices applies to those products. Finally, he lauded state legislative and enforcement efforts on these fronts, highlighting states including California, and encouraged other states to undertake similar initiatives.

CFPB and FTC FCRA Amicus Brief on Unverified Consumer Report Information

By Eric Mogilnicki and B. Graves Lee, Covington & Burling LLP

On September 28, the CFPB and the FTC filed an amicus brief in Suluki v. Credit One Bank, a case currently pending before the U.S. Court of Appeals for the Second Circuit. The case concerns the Fair Credit Reporting Act duties of furnishers of consumer report information to investigate disputed information in consumer reports and remove unverified information. The plaintiff in the case disputed a tradeline in her credit file, alleging identify fraud. The defendant investigated the dispute and declined to delete the information. The plaintiff then sued, alleging the defendant violated 15 U.S.C. § 1681s-2(b)(1) by failing to conduct a reasonable dispute investigation. The trial court denied the plaintiff’s motion for summary judgment, finding that there was a genuine issue of fact as to whether the investigation was reasonable. However, the court also concluded that even a reasonable investigation would not have been able to determine whether there was identity fraud, and so plaintiff could not prove that she was injured by the alleged unreasonableness of the bank’s investigation.

The CFPB/FTC amicus brief argues that the trial court’s ruling should be reversed because the court failed to consider the possibility that a reasonable investigation would have concluded that the defendant could not verify the debt. Section 1681s-2(b) requires furnishers, after conducting an investigation of a disputed item in a consumer report, to delete, modify, or block reporting of any information that is “found to be inaccurate or incomplete or cannot be verified.” The CFPB and FTC argued that the plaintiff should have had the opportunity to prove at trial that the investigation was unreasonable, and that a reasonable investigation would have not verified the debt. Under those circumstances, the amici maintain, the defendant should have deleted the debt, and its failure to do so may have injured the plaintiff. In an uncredited blog post announcing the amicus brief, the CFPB stated, “Consumer reporting companies and companies that provide information to them have great power over consumers’ lives, and we’re committed to ensuring that those companies meet their legal obligations, including by responding appropriately to errors.”

CFPB Report Tracks 2022 Mortgage Market Trends

By Eric Mogilnicki and B. Graves Lee, Covington & Burling LLP

On September 27, the CFPB released its annual report on residential mortgage lending activity and trends. The report tracks developments in the U.S. mortgage market throughout 2022. CFPB Director Rohit Chopra summarized the report as demonstrating the “profound effects” of the higher interest rate environment on borrowers. Key findings included the following comparisons between 2022 and 2021:

  • The costs and fees associated with a mortgage increased 22% in 2022.
  • Borrowers’ average monthly mortgage payments increased 46.1% in 2022 (from $1,400 in December 2021 to $2,045 in December 2022).
  • Both applications and origination numbers dropped substantially in 2022 (by 38.6% for applications, and by 44.1% for originations).
  • Refinancing dropped by 73.2% in 2022.
  • Lenders denied loan applications due to insufficient income at higher rates than at any point since that data was first collected and reported in 2018.
  • Black and Hispanic white borrowers continued to have lower median credit scores and higher denial rates, in addition to paying higher median interest rates and total loan costs, as compared to non-Hispanic white and Asian borrowers.

In a statement accompanying the release of the report, CFPB Director Rohit Chopra indicated that “the CFPB will be devoting more attention to ensure that borrowers can sufficiently navigate alternatives to foreclosure when faced with financial distress. For example, we are currently exploring some amendments to mortgage servicing standards.”

Health & Life Sciences

9th Circuit Hears Argument Regarding DEA Process for Drug Rescheduling and Remands for Further Consideration

By Jim Sandy, McGlinchey Stafford

The Ninth Circuit Court of Appeals recently heard oral argument in the case of Aggarwal v. U.S. Drug Enforcement Administration over whether the DEA’s process to consider controlled substances reclassification was unlawful and, in a remarkably fast turnaround, remanded the case for the DEA to consider the petition in more detail.

According to the petitioner, the DEA erred when it summarily denied his petition to move psilocybin, the active ingredient in psychedelic mushrooms, from Schedule I to Schedule II. The petitioner claimed that he had presented significant evidence to support rescheduling due to the purported medical benefits of psilocybin (including use in treating depression) but that the agency denied it in a two-paragraph denial letter asserting that since the FDA had not yet approved a psilocybin-based treatment, there was no basis for moving the drug into Schedule II.

The petitioner contended that in refusing to consider the evidence presented to it, the DEA “will have effectively rewritten this statute so that it can front-run petitions—meritorious petitions like the one that we submitted—make up the law, and deny them without ever getting HHS’ opinion on them.” The petitioner further argued that DEA’s position would be tantamount to “control [of] the practice of medicine.”

Conversely, the DEA argued that it was justified in denying the petition since the petitioner failed to conform its petition to the five-factor test considered by the agency in rescheduling a controlled substance. As the U.S. Attorney argued, “[t]he rescheduling petition here did not so much as attempt to address the five elements of the test, let alone attempt to satisfy them.” The DEA also pushed back on the claim that it did not consider the substance of the rescheduling petition, putting the onus on the petitioner himself: “In the absence of FDA approval, petitioners do have to make a showing according to this five-part test, and that has been repeatedly upheld by the courts of appeals. And there was no showing in that respect at all.”

The parties also sparred on whether the argument should be remanded for the DEA to “more robustly articulate its position.” The petitioner claimed that such a remand would be “fruitless” and that continuing to delay the petition based upon a purportedly unlawful five-part test constitutes an injustice the court should not permit or tolerate. Ultimately, the Ninth Circuit agreed with the DEA and remanded the case for the DEA to “either clarify its pathway for denying [Petitioner’s] petition or reevaluate [Petitioner’s] petition on an open record.”

Intellectual Property Law

Kanye West’s Very Bad, Horrible, Not Good Trade Secret Complaint

By Emily Poler, Poler Legal LLC

In early September, Kanye West, who now goes by Ye (“West”), filed a lawsuit against as-yet-unnamed individuals for the misappropriation of his trade secrets and breach of contract. According to the complaint, these unnamed defendants distributed “musical compositions” to someone who goes by @daunreleasedgod_ on Instagram and @DaUnreleasedGo4 on Twitter who released West’s as-yet-unreleased compositions on social media.

According to the complaint, between March and August 2023 there were a total of twenty-one posts with leaked tracks on Instagram, and between June and August 2023, there were an additional eleven posts with leaked tracks on Twitter.

This complaint is a good reminder of five things practitioners should keep in mind when contemplating bringing a claim for the misappropriation of a trade secret, whether under state law or the federal Defend Trade Secrets Act.

  1. To state a claim for trade secret protection, a complaint has to allege some details showing that the plaintiff took reasonable steps to keep its alleged trade secret a secret. Unfortunately for West, his complaint doesn’t do that. It alleges that West “took all reasonable precautions” but fails to describe any of those precautions.
  2. Taking reasonable steps to protect a trade secret likely means controlling who has access to it. This includes requiring recipients to execute a confidentiality agreement, but it can also include steps such as making sure that only employees who need to access particular documents or materials have access to them and tracking who receives any trade secret. It does not bode well for West that his complaint doesn’t attach a copy of a signed confidentiality agreement or list the names of the people or entities that received the tracks under such an agreement.
  3. To establish the existence of a trade secret, a complaint has to allege that the purported trade secret has economic value because of its secrecy. The complaint here, however, doesn’t provide any information to show that West’s music had value because of its secrecy, and it seems like West will have a hard time establishing that insofar as his music is valuable by virtue of being released to the public for purchase.
  4. In some cases, state trade secret claims can be preempted by copyright law where the rights asserted are the same as those protected by copyright. To the extent that the complaint alleges that the defendants wrongfully copied or published West’s musical tracks, the claims in the complaint go to the heart of copyright protection. West could escape arguments that his trade secret claim is preempted by copyright law, but only if the trade secret complaint alleges something more than just the use or copying of materials. This means West needs to allege that the defendants had an obligation to keep materials secret, whether under a contract or by operation of law. However, as noted above, the complaint fails to describe such obligations.
  5. Practitioners need to act quickly to protect trade secrets because the longer that an alleged trade secret is out in the public, the less it is secret. That undercuts any argument that the material is entitled to trade secret protection.

Labor & Employment Law

Fifth Circuit Holds that EEOC Must Recognize Faith-Based Employer’s Exemption from Title VII’s Prohibition against Discrimination on the Basis of Sexual Orientation and Gender Identity

By Tori Bell, Boulette, Golden, & Marin L.L.P.

Amidst the uncertainty thrust upon the courts in 2020, the Supreme Court ruled in Bostock v. Clayton County that Title VII’s prohibition against discrimination “on the basis of sex” includes discrimination on the basis of sexual orientation and gender identity but provided little guidance on how to reconcile this prohibition with federal religious liberty protections, such as the Religious Freedom Restoration Act of 1993 (“RFRA”). For example, the Court recognized, “Because RFRA operates as a kind of super statute, displacing the normal operation of other federal laws, it might supersede Title VII’s commands in appropriate cases,” but did not opine on what that might mean practically for faith-based employers. Recently, in Braidwood Management, Inc. v. Equal Employment Opportunity Commission, the Fifth Circuit became the first appellate court to address these questions left open in the wake of the Bostock-decision.

In Braidwood, two Texas employers filed a lawsuit against the Equal Employment Opportunity Commission and related governmental defendants (“EEOC”) seeking declaratory judgments. One employer, Braidwood, is a for-profit management company owned by a single individual who operates his businesses as “Christian businesses.” The other, Bear Creek, is a nondenominational church. Both employers have policies that unquestionably discriminate against “homosexual and transgender conduct” (the employers contend their policies are focused on behavior, not identity) according to EEOC guidance, and both employers claim to have sincere religious and non-religious reasons for the policies. In addition to bringing claims on behalf of themselves, the employers moved to certify two classes: “all employers that oppose homosexual or transgender behavior for sincere religious reasons and all employers that oppose homosexual or transgender behavior for religious or nonreligious reasons.” The EEOC moved for summary judgment based on standing, ripeness, and sovereign immunity. It also moved for summary judgment on substantive grounds, averring that it did not violate the employers’ religious rights and that Bostock prohibits employment policies which discriminate based on homosexuality or transgender status. The employers similarly sought summary judgment on substantive grounds.

The district court granted in part and denied in part the parties’ cross-motions for summary judgment and modified the classes plaintiffs moved to certify. Both parties appealed. The Fifth Circuit held the employers had standing to bring the action and the action was ripe for adjudication as a declaratory judgment. The Court then held that the proposed classes were not sufficiently precise to warrant class certification. The Fifth Circuit also affirmed the district court’s decision not to certify a “church-type employers’ class” because these employers, like Bear Creek, are typically statutorily exempt as religious organizations from Title VII and could not therefore be burdened by it.

On the merits, and as a matter of first impression, the Fifth Circuit held, “RFRA requires that Braidwood, on an individual level, be exempted from Title VII because compliance with Title VII post-Bostock would substantially burden its ability to operate per its religious beliefs about homosexual and transgender conduct.” Applying strict scrutiny, the Court also held the EEOC failed to “carry its burden to show it has a compelling interest in refusing Braidwood an exemption, even post-Bostock.”

The case was remanded to the district court and, as of today, no final order has been entered. How this decision will impact future EEOC guidance and whether the EEOC will seek review of this decision in the Supreme Court remains to be seen.