Bundled Discounts in the FTC’s Crosshairs
By Kasia Hebda, Troutman, Pepper, Hamilton, Sanders, LLP
Recently, the Federal Trade Commission (“FTC”) has focused on the potential harm that loyalty discounts and bundled prices could cause to competitors and their access to customers. A vendor offers a bundled discount when it offers to sell two or more products for a lower price than it charges for those same items sold separately. Traditionally, such discount programs have been viewed as procompetitive because they often result in lower prices and because of concerns that overenforcement might chill companies from offering customers the opportunity to reduce their costs. The FTC’s position on bundling in private litigation and the proposed merger guidelines suggest that the past concerns about chilling such discounts no longer drive agency enforcement priorities.
The FTC recently intervened in private litigation to file an amicus brief in Applied Medical Resources Corp. v. Medtronic, Inc., No. 8:23-cv-00268 (C.D. Cal. July 3, 2023), which it described as “clarifying legal standards that apply” to cases involving bundled discounts. Such bundled discounts may be challenged by competitors that cannot offer similar discounts because they do not sell all the products in the bundle.
In its brief, the FTC criticized the “incremental” price-cost or “discount-attribution” test that courts in the Ninth Circuit apply to determine whether a bundled discount runs afoul of the antitrust laws. Under this test, described in Cascade Health Solutions v. PeaceHealth, 515 F.3d 883 (9th Cir. 2008), the full amount of the discount should be allocated to the competitive product—i.e., the product that is also manufactured by the challenger. If the resulting price is above the defendant’s incremental cost to produce the competitive product, then the bundled discount is legal. The discount attribution test does not require the plaintiff show that it is more efficient than the defendant. Rather, the plaintiff must show that a defendant’s bundled discount would exclude a hypothetical equally efficient competitor. The purpose of this test is not to protect less efficient rivals because doing so would be “overly solicitous of small firms and denies customers the benefits of the defendant’s lower costs.” Id. at 907 (quoting Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law, ¶ 749a at 322–23 (Supp.2006)).
The FTC did not offer an alternative test but criticized the discount attribution standard as underprotecting competition. First, the FTC noted that the incremental price-cost test offers no protection to less-efficient rivals, even when the bundling at issue is the reason that the rival cannot achieve the scale necessary to be more efficient. Further, the exclusion of a less-efficient rival may harm competition and lead to higher prices for consumers. Second, the FTC rejected the idea that bundled discounts always lead to lower prices for consumers. Instead, the FTC characterized such “discounts” as charging a penalty for customer disloyalty; a firm could raise its baseline prices before offering the discount, such that even “loyal” customers do not pay less than they did before. According to the FTC, such penalties for purchasing a rival’s products may force the rival to exit the market and give the bundling firm an opportunity to raise its prices.
Similarly, the Department of Justice and FTC explained in the proposed merger guidelines that, as part of their merger reviews, they will examine whether bundling, tying, or other conduct might “tend to extend” a firm’s dominance, even if such vendor programs would not violate Sherman Act, Section 2’s monopolization prohibition.
The district court did not address the FTC’s criticisms of the discount attribution standard in its opinion denying Medtronic’s Motion to Dismiss. See Applied Med. Res. Corp. v. Medtronic, Inc., 2023 WL 5503107 (C.D. Cal. Aug. 2, 2023). Whether in the vendor relationship or merger context, it remains to be seen whether the FTC’s skepticism of bundling will gain traction in the courts.
Decision Rejecting Proposed Canned Tuna Class Action May Portend Fair(er) Weather Ahead for Canadian Competition Class Action Defendants
By Eric Buist, Cassels Brock & Blackwell LLP
Canadian competition class action jurisprudence has been plaintiff-friendly for many years, with defendants facing stiff headwinds and other inclement weather at the certification stage. Recently, however, the Ontario Superior Court declined to certify two proposed price-fixing class actions, brought by representative plaintiff Vanessa Lilleyman, alleging that several canned tuna companies had conspired to fix the price of canned tuna in Canada.
Like many Canadian price-fixing class actions, Lilleyman’s proposed class actions followed guilty pleas obtained by US Department of Justice, Antitrust Division. Extrapolating from the facts underpinning the US plea agreements (i.e., that Bumble Bee, COSI, and Starkist Company had conspired from 2011 to 2013 to fix the prices of their respective tuna products sold in the United States), Lilleyman filed a proposed class action alleging that Bumble Bee Foods, COSI, Starkist Company, and certain associated corporations, partnerships, and equity owners engaged in a twenty-year price-fixing conspiracy in Canada.
The standard for class certification in Canada is less rigorous than in the US. The first criterion in Canada is that the proposed representative plaintiff’s pleadings must disclose a reasonable cause of action. In determining whether the pleading discloses a reasonable cause of action, no evidence is admissible, and the material facts pleaded are accepted as true, unless patently ridiculous or incapable of proof.
The plaintiff must also show “some basis in fact” for each of the following four certification criteria: (1) there is an identifiable class of two or more persons that would be represented by the representative plaintiff; (2) the claims of the class members raise common issues; (3) a class proceeding would be the preferable procedure for the resolution of the common issues; and (4) there is a representative plaintiff who would fairly and adequately represent the interests of the class.
The court found that the plaintiff did not meet the cause of action criterion or satisfy the common issues or preferable procedure criteria, with the result that “her class action battleship sank like the Bismarck.” The decision is notable for at least three reasons. First, it applies well-settled rules of pleading in determining whether the reasonable cause of action criterion has been met. In adhering to and meaningfully applying those rules, the court found that there were at least fourteen substantive pleading deficiencies that were ultimately fatal to the plaintiff’s request for certification, including a failure to plead specific acts to specific defendants. Second, it confirms that under the common issues criterion, a proposed representative plaintiff is “obliged at least to show that there is some evidentiary foundation to conclude that the alleged conspiracy with attendant harm to the Class Members could or might have occurred in Canada.” The Court found that there was no basis in fact for the existence of the alleged conspiracy. Finally, as can be seen from the foregoing, the decision applies the Supreme Court of Canada’s direction that certification is meant to be a meaningful screening device.
Lilleyman is one of several recent decisions in which Canadian courts have applied a meaningful (and appropriate) level of analysis of proposed competition class actions. These decisions may collectively represent a proverbial red sky at night portending fair(er) weather ahead for Canadian competition class action defendants.
FTC Settles Challenge to Acquisition of Black Knight by Intercontinental Exchange
By Barbara Sicalides, Troutman, Pepper, Hamilton, Sanders, LLP
Chair of the Federal Trade Commission (“FTC”) Lina Khan has made plain that “[the agency is] going to be focusing [its] resources on litigating, rather than on settling." This summer, however, the FTC has negotiated and agreed to settlements in two separate merger matters. While this might appear to be a sea change, merging parties should not assume that it is.
On August 31, the FTC announced the settlement of its challenge to the $13.1 billion acquisition of Black Knight, Inc. (“Black Knight”) by Intercontinental Exchange, Inc. (“ICE”). Black Knight and ICE are direct competitors with their loan origination system software (“LOS”) and a number of ancillary services, including product pricing and eligibility engines (“PPE”). PPE is software that allows a lender to identify potential loan rates for a borrower, determine the borrower’s eligibility for a given loan, and lock in the loan’s terms for the borrower.
According to the FTC, ICE offers the dominant LOS in the United States, processing nearly half of all residential mortgages originated each year, and Black Knight has the second-largest LOS in the United States. Black Knight’s PPE is the industry leader, serving lenders that originate as much as 40% of the residential mortgages in the U.S. each year. ICE’s PPE is currently available only to lenders who use ICE’s LOS. The FTC alleged that because of ICE's dominant LOS market share and the dependency of PPEs and other ancillary service providers on LOS integration, ICE will have the ability to disadvantage existing and potential ancillary service competitors, including competing PPE providers, by foreclosing or impeding LOS access.
In an effort to resolve the FTC’s concerns, Black Knight proposed divesting its LOS and certain ancillary products but not its PPE. The divestiture buyer, Constellation Web Solutions, Inc. (“Constellation”), would also act as a reseller for certain ancillary services acquired by ICE from Black Knight. The FTC rejected the proposed remedy because it allegedly failed to provide Constellation with the ability, resources, and incentive to replace the intensity of the competition between ICE and Black Knight.
As part of the FTC settlement, Black Knight and Constellation agreed that Black Knight will finance a portion of Constellation’s purchase price of Black Knight’s PPE via a promissory note, but within ten days of a trustee’s appointment, the promissory note will be transferred to the trustee. The trustee will sell the note to a third party within six months of the divestiture.
The Black Knight settlement reflects the importance of addressing the potential lessening of competition in all the markets about which the agencies are concerned and, to the extent possible, the complete disentanglement of the divested business from the merging parties. In this and past administrations, the agencies would be very skeptical of a remedy that includes a resale agreement involving the products or services of the merged firm. Parties should be aware that the goal is for the divestiture buyer to compete vigorously against the post-merger company; this includes ensuring that the divestiture buyer has access to all the elements needed to compete and that the merged parties do not have the ready ability to interfere with that access.
For more information regarding recent merger settlements, see “Amgen, Black Knight, and Assa Abloy: Are Merger Settlements Making a Comeback?”
Proposed Amendments to Canadian Competition Act Should Give US Companies Doing Business in Canada Reason to Worry
By Eric Buist, Cassels Brock & Blackwell LLP
The Canadian government has proposed three amendments to the Competition Act—the principal competition statute in Canada—as the “first set” of what are anticipated to be sweeping and fundamental legislative changes to Canadian competition law. According to the government, these initial amendments aim to “enhance competition and drive down costs for middle-class Canadians.” For companies doing business in Canada, these proposed changes, and those they foreshadow, raise the specter of a more costly and uncertain antitrust regulatory environment and more aggressive enforcement by the Canadian Competition Bureau on a decidedly uneven playing field.
Repeal of the Efficiencies Defense
In Canada, unlike the US, merging parties can invoke a statutory efficiencies defense that allows otherwise anticompetitive mergers to proceed if the merging parties can prove that their efficiency gains will be greater than and offset the anticompetitive effects of the merger and would not likely be attained if the transaction is prohibited. The proposed amendments would repeal the efficiencies defense.
Although empirically, the efficiencies defense has only been in issue in a handful of cases (including two recent merger challenges where the respondent failed to establish the defense), the Commissioner of Competition—the head of the Competition Bureau—and others have repeatedly claimed that the defense “permits anti-competitive mergers that are harmful to Canadians” and have made its repeal the centerpiece of a campaign described as intended to make the Competition Act “fit for purpose” in a modern economy.
New Market Studies Powers
When conducting market studies, the Commissioner currently has no ability to seek orders compelling documents and information from market participants. Instead, the Commissioner must rely on voluntary cooperation. The second proposed amendment would empower the government to direct the Commissioner to conduct an inquiry into the state of competition in a market or industry. Once on inquiry, the Commissioner will be able to apply to for court orders compelling persons who likely have information that is relevant to the inquiry to produce records, deliver written responses under oath to questions from the Commissioner, and attend to be examined under oath by the Commissioner.
Vertical Agreements May Now Be Prohibited
Currently, under section 90.1, the Commissioner may seek an order prohibiting agreements or arrangements between actual or potential competitors that prevent or lessen competition substantially. The third proposed amendment would expand the scope of that provision to apply to agreements and arrangements between and among non-competitors if a “significant purpose of the agreement or arrangement, or any part of it, is to prevent or lessen competition in any market.”
The proposed amendments should give US companies doing business in Canada cause for concern, less for the impacts they are likely to actually have but because of what they represent and portend. It is not clear these amendments will meaningfully advance either of the government’s stated objectives for proposing them and (and especially the repeal of the efficiencies defense) appear to be driven by politics. For that reason, the proposed amendments suggest that some of the other sweeping, fundamental changes to Canada’s competition law regime advocated by the Commissioner will be part of the “next set” of amendments. Those potential amendments include a lower standard for condemning mergers as anticompetitive; automatic interim relief and a lower standard for the Commissioner to obtain interlocutory relief blocking mergers pending a challenge; and an exemption for the Commissioner against the traditional “loser pays” costs rule in litigation. The Commissioner’s recent losses in the Parrish & Heimbecker and Rogers/Shaw merger cases make clear that the possibility of these amendments should give companies doing in business in Canada good reason to worry.
Banking Agencies Propose Long-Term Debt Requirements for Large Bank Holding Companies
By Joseph E. Silvia, Dickinson Wright PLLC
On September 19, 2023, the federal banking agencies (the Office of the Comptroller of the Currency [OCC], Federal Reserve, and Federal Deposit Insurance Corporation [FDIC]) jointly published a proposed rule in the Federal Register that would require certain large depository institution holding companies, U.S. intermediate holding companies of foreign banking organizations, and certain insured depository institutions, to issue and maintain a minimum amount of long-term debt. The FDIC and Federal Reserve previously introduced a version of this potential new requirement in an advanced notice of proposed rulemaking back in October 2022.
However, this new proposal, with the addition of the OCC, comes on the heels of the second and third largest bank failures in U.S. history in March 2023, which were precipitated by significant withdrawals of uninsured deposits while experiencing debilitating liquidity, and funding issues. This new proposal provides an additional means to “improve the resolvability of these banking organizations in case of failure, may reduce costs to the Deposit Insurance Fund, and mitigate financial stability and contagion risks.” The agencies are requesting comments on the proposed rule, which will likely be voluminous and take a significant amount of time to review, by November 30, 2023.
Banking Agencies Propose New Capital Requirements for Large Bank Holding Companies
By Eric R. Slutsky, Dickinson Wright PLLC
The federal banking agencies (the OCC, Federal Reserve, and FDIC) published a proposed rule in the Federal Register that would make significant changes to the capital requirements for large banking institutions (those with $100 billion or more in assets) and those involved in substantial trading activities. The goal of the proposal is to “improve the calculation of risk-based capital requirements to better reflect the risks of these banking organizations’ exposures.” Additionally, the agencies indicated that the proposal will simplify the existing framework, promote consistency, and facilitate more effective monitoring of capital adequacy.
While just one in a series of proposals we expect around capital, liquidity, and risk management after the second and third largest bank failures in U.S. history in March 2023, this proposal is meant to supplement the initial regulatory capital improvements developed after the financial crisis in 2008. Importantly, the proposed changes include replacing the current reliance on banks’ internal models for assessing credit risk and operational risk with standardized approaches to credit risk measurement.
FinCEN Releases Beneficial Owner Reporting Compliance Guide
By Rachael Aspery, McGlinchey Stafford, PLLC
On September 18, 2023, the United States Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) announced and published a Small Entity Compliance Guide (“Guide”) aimed to assist the small business community in complying with the beneficial ownership information (“BOI”) reporting rule. Effective on January 1, 2024, and published in the Federal Register (87 FR 59498), a final rule will require many types of entities, such as corporations, limited liability companies, and other entities created in or registered to do business in the United States, to report information about their beneficial owners—the individuals who ultimately own or control a company—to FinCEN. The Guide was created with small businesses in mind to assist them with the reporting requirements. In an ongoing effort to educate the public about the BOI requirement, the Guide, among other things:
- describes each of the BOI reporting rule’s provisions in simple, easy-to-read language;
- answers key questions; and
- provides interactive checklists, infographics, and other tools to assist businesses in complying with the BOI reporting rule.
The Guide is now available on FinCEN’s beneficial ownership information reporting webpage. FinCEN also posted revised and new FAQs about the BOI reporting requirements that incorporate new references and content from the Guide. Additionally, translated versions of these FAQs will be available on FinCEN’s website soon.
The requirements become effective on January 1, 2024, and companies will be able to begin reporting BOI to FinCEN at that time. FinCEN announced that it will soon provide additional guidance on how to submit BOI. In the meantime, small businesses can continue to monitor FinCEN’s website for more information or subscribe to FinCEN updates.
FDIC Releases Report on Its Supervision of First Republic Bank Leading Up to Its Failure
By Joseph E. Silvia, Dickinson Wright PLLC
On September 8, 2023, the Federal Deposit Insurance Corporation (“FDIC”) released an internal review of its supervision of First Republic Bank leading up to its failure in May 2023 (the “Report”). The Report reviews the causes of First Republic Bank’s failure and the FDIC’s supervision of the bank since 2018. The FDIC identifies up front that the primary cause of First Republic’s failure was “a loss of market and depositor confidence, resulting in a bank run following the failure of Silicon Valley Bank (SVB) and Signature Bank on March 10 and 12, 2023, respectively.”
The executive summary of the Report goes on to identify a few specific “attributes” of First Republic’s business and management strategy that the FDIC believes made it more vulnerable to interest rate changes and the post-SVB contagion. Such attributes included “rapid growth and loan and funding concentrations,” “overreliance on uninsured deposits and depositor loyalty,” and “failure to sufficiently mitigate interest rate risk.”
While the FDIC reiterates that First Republic Bank should have “taken additional proactive measures to mitigate interest rate risk,” the FDIC admits that they “could have been more forward-looking in assessing how increasing interest rates could negatively impact the bank… and could have done more to effectively challenge and encourage bank management to implement strategies or changes to mitigate interest rate risk.” Therefore, the Report identifies areas for improvement at the FDIC, and areas of focus going forward for the banking industry. Ultimately, the FDIC notes eight matters that will require additional review, with a focus on examiner guidance, expectations, and internal processes.
ICC Unveils Redesigned 2024 I-Codes
By Devin P. Leary-Hanebrink, McGlinchey Stafford, PLLC
Earlier this month the International Code Council (“ICC”), an international standard-setting organization that emphasizes building safety, started releasing the 2024 editions of its International Codes (“I-Codes”), including its 2024 International Plumbing Code and 2024 International Zoning Code. By the first quarter of next year, the ICC will publish its entire slate of 2024 I-Codes, which will include an updated International Building Code, International Residential Code, and International Energy Conservation Code.
Altogether, the ICC’s 2024 update revises more than a dozen I-Code standards and includes more than one thousand code changes, with a continued focus on energy efficiency. New features this year include embedded QR codes (for cross-referencing updates, revisions, and other code changes) and a near-field communication (NFC) pilot program (for linking code books and other physical documents with the ICC’s web or app-based subscription services). In addition, beginning with the 2024–2026 code development cycle, which will culminate with the release of the 2027 edition of the I-Codes, the ICC and its committees approved several procedural changes, including expanding the development process to a single, continuous three-year cycle (instead of multiple one-year cycles) and adjustments to the Public Comment Hearing period.
Understanding how the I-Codes affect construction and building safety requirements is critical for anticipating legal challenges. The ICC, through its various committees, updates the I-Codes on three-year cycles—with state, municipal, and local adoption usually trailing several years behind. While the I-Codes themselves are not legally binding, eventually most U.S. jurisdictions will either adopt them as written or with amendments. As a result, the I-Codes are a reliable tool not only for anticipating building, manufacturing, and safety requirements, but also for gauging future regulatory enforcement activity.
DEA Likely to Reschedule Marijuana According to Congressional Report
By Daniel Shortt, McGlinchey Stafford, PLLC
In October 2022, President Biden requested that the Department of Justice (DOJ) and the Department of Health and Human Services (HHS) evaluate marijuana’s status as a Schedule I substance under the Controlled Substances Act (CSA). The CSA places drugs into one of five schedules; Schedule I is the most restrictive and includes substances seen as having no medical use and a high potential for abuse. Due to these restrictions, Schedule I substances are nearly impossible to research. Schedule III substances are considered to have an accepted medical use and a relatively lower potential for abuse compared to Schedule I and II substances. Moving marijuana to Schedule III from Schedule I would be a historic development, as marijuana has remained in Schedule I since the CSA was first enacted in 1970.
According to a report from the Congressional Research Service (the Report), the Drug Enforcement Administration (DEA) is likely to follow HHS and the Food and Drug Administration’s (FDA) recommendation to move marijuana from Schedule I to Schedule III under the CSA. The DEA confirmed in a 2020 congressional hearing that it will be bound by the FDA’s recommendation, as cited in the Report. The FDA operates under the umbrella of HHS, so the Report interchanges references as to whether the recommendation comes from HHS or the FDA. In turn, the Department of Justice (DOJ) oversees the DEA.
The Report goes on to state that Congress may proactively decide to take some other action, including upholding marijuana’s Schedule I substance, moving it to any other Schedule, or removing it from the CSA altogether, which would be descheduling. Additionally, the Report lists several potential impacts of rescheduling. As reported elsewhere in depth, rescheduling would make Internal Revenue Code Section 280E inapplicable to marijuana businesses, allowing marijuana and marijuana-related businesses to take deductions. In addition, the Report states, “[t]hose who use medical marijuana lawfully may now be eligible to (1) access public housing, (2) obtain immigrant and nonimmigrant visas, and (3) purchase and possess firearms.”
While these potential changes are substantial, it is also important to recognize that a person’s use of medical marijuana pursuant to a state-legal program would not be legalized or allowed under the CSA, per se, if marijuana is rescheduled as recommended by the HHS. If marijuana is moved to Schedule III, its use would require a person to hold a prescription. The prescription would need to be obtained through the proper channels, such as through a doctor or other healthcare provider directly or from a pharmacy. In medical marijuana states, doctors currently recommend or authorize the use of marijuana; they do not write “prescriptions” as that term is used in the context of the CSA, and marijuana distributed pursuant to state marijuana laws does not comply with federal law.
Consumer Finance Law
E.D. of Texas Vacates and Enjoins CFPB’s Expansion of “Discriminatory” Practices in its Examination Manual
By Olivia Lawless, Pilgrim Christakis LLP
In March of 2022, the Consumer Financial Protection Bureau (“CFPB”) updated its Supervision and Examination Manual (“Manual”) to direct its examiners to root out discrimination against unspecified “protected classes” and “disparate-impact discrimination.” The CFBP invoked its unfair, deceptive, or abusive acts and practices (“UDAAP”) authority as covering this type of conduct. However, a group of trade associations sued the CFPB in the Eastern District of Texas claiming that this update exceeded the CFPB’s authority under both the Appropriations Clause, and the Dodd-Frank Act. On September 8, 2023, the court agreed and granted the plaintiffs’ motion for summary judgment. Chamber of Commerce of United States of Am. v. CFPB, No. 6:22-CV-00381, 2023 WL 5835951 (E.D. Tex. Sept. 8, 2023).
The court first granted summary judgment on the plaintiffs’ claims based on the Appropriations Clause since the CFPB itself conceded that binding Fifth Circuit precedent required such a finding. Cmty. Fin. Servs. Ass’n of Am., Ltd. v. CFPB, 51 F.4th 616 (5th Cir. 2022). The court then analyzed whether the CFPB’s authority to regulate UDAAP under the Dodd-Frank Act includes “discriminatory” practices. The court determined that the CFPB’s expansive interpretation of UDAAP ran afoul of the “major-questions canon” that requires Congress to grant an agency certain regulatory powers through “exceedingly clear language.” It stated that “exceedingly clear language” was lacking here because “the Dodd-Frank Act treats discrimination and unfairness as distinct concepts.” Further, the Act does not define or include discrimination within its definition of “unfairness,” making “its definition of ‘unfairness’ at least vague as to the topic of discrimination.” Therefore, the CFPB exceeded its authority, and the court vacated and enjoined the CFPB’s update to the Manual.
CFPB Agrees to Settlement with Credit Repair Companies for $2.7 Billion and Ten-Year Industry Ban
By Mark E. Rooney and Rob Tilley, Hudson Cook
In May 2019, the CFPB initially sued six associated companies for allegedly violating the Consumer Financial Protection Act’s prohibition against deceptive practices and the Telemarketing Sales Rule (“TSR”). Among other things, the Bureau alleged that the companies’ practice of billing clients in advance for credit repair services violated the TSR’s prohibition on charging fees “for telemarketed credit repair unless it has been six months since the company achieved the promised results.” On March 10, 2023, the district court granted partial summary judgment on TSR liability in the Bureau’s favor. Following that ruling, according to the Bureau, the companies filed for Chapter 11 bankruptcy protection and closed the vast majority of their business. On August 28, 2023, the parties filed a proposed stipulated final judgment to resolve the Bureau’s claims.
In order to resolve the case, the companies agreed to the following remedial measures as outlined in the consent order, which still needs court approval:
- The companies are enjoined for a period of ten years against direct or indirect participation in telemarketing of credit repair services, or offering any credit repair services that are advertised, promoted, or sold through telemarketing.
- The companies will provide notice of the settlement to affected consumers.
- The companies will be ordered to pay $2.66 billion for consumer redress.
- The court will impose more than $64 million in civil money penalties against two of the companies.
You can review all of the relevant court filings and press releases at the CFPB’s Enforcement page.
U.S. District Court of Arizona Rejects Argument that Written Notice Is Required to Maintain FCBA Claim
By Margaret Hayes, Pilgrim Christakis LLP
In Mitchell v. JPMorgan Chase Bank NA, the U.S. District Court for the District of Arizona denied Defendant’s motion to dismiss Plaintiff’s Fair Credit Billing Act (FCBA) claim even though Plaintiff admittedly failed to provide the requisite written notice of his billing dispute. Mitchell v. JPMorgan Chase Bank NA, No. CV 22-00435-TUC-RM, 2023 WL 5590635 (D. Ariz. Aug. 29, 2023).
Conrad Mitchell (“Plaintiff”) called JPMorgan Chase Bank, N.A. (“Chase”) to dispute some charges on his credit card account. Chase acknowledged the dispute in an email and letter to Plaintiff and provisionally credited the account. After conducting an investigation, Chase declined the dispute, finding that Plaintiff benefited from the charges, and re-billed Plaintiff. Plaintiff filed suit, alleging that Chase violated the FCBA because it failed to conduct a reasonable investigation into his dispute and failed to show how Plaintiff benefitted from the disputed charges. Chase moved to dismiss in part because Plaintiff did not provide written notice of his billing dispute as required under the FCBA. Plaintiff admitted that he did not provide written notice, but instead he argued that his phone call to Chase satisfied the purpose of the written notice requirement.
In ruling on Chase’s motion to dismiss, the District Court acknowledged that a creditor’s duties under the FCBA are triggered when a creditor receives adequate written notice from a cardholder. Id. at *2; see also 15 U.S.C. § 1666(a)(1)–(3). Nevertheless, the District Court declined to dismiss Plaintiff’s FCBA claim, ruling that it was reasonable to infer that (i) Chase received “actual notice” of Plaintiff’s name and account number, and identification of, amount, and belief in a billing error—i.e., the “critical information identified by” the FCBA—and (ii) Chase waived the written notice requirement “by acknowledging and investigating Plaintiff’s dispute and instructing Plaintiff to call” with any further concerns related to the dispute. Mitchell, 2023 WL 5590635 at *3. The District Court expressed concerns that “[t]o rule otherwise would be to empower credit institutions to accept a person’s oral notice of an error” and “even lull the person into a false sense of security that the person had timely and properly notified” the creditor of the dispute. Id., citing Savitz v. Citizens Bank, N.A., No. 19CV0873, 2020 WL 128573, at *4 (W.D. Pa. Jan. 10, 2020).
CFPB Announces Rulemaking to Prohibit Medical Debt Information on Credit Reports
By Eric Mogilnicki and Rye Salerno
On September 21, the CFPB announced it is beginning a rulemaking process designed to prohibit consumer reporting companies from including medical debts and medical debt collection information on consumer reports, and to prohibit creditors from using medical collections information when evaluating consumer credit applications.
The Fair Credit Reporting Act (“FCRA”) restricts the placement of medical information on credit reports and the use of medical information in credit decisions, but it grants regulatory authority—now held by the CFPB—to create exemptions to those restrictions. Since 2005, creditors have been able to rely on medical information that can be characterized as “financial information.” The CFPB now plans to narrow that exemption and released an outline of proposals and alternatives for the rulemaking prepared for review by the Small Business Advisory Review Panel for Consumer Reporting Rulemaking.
The importance of this initiative to the Bureau and the broader Biden Administration was demonstrated by Vice President Kamala Harris participating in a joint press call with CFPB Director Rohit Chopra to announce the rulemaking. In his remarks, Director Chopra framed the goal of the rulemaking as “block[ing] medical debt collectors from weaponizing the credit reporting system to coerce patients into paying bills they may not even owe.” He emphasized the “limited predictive value” of medical debt information and the ubiquity of medical debt collection issues, citing Bureau research finding that 58% of all third-party debt collection tradelines on credit reports were for medical debt.
CFPB Issues Circular on Credit Denials by Lenders Using AI or Complex Models
By Eric Mogilnicki and Rye Salerno
On September 19, the CFPB issued a circular discussing the legal requirements for lenders that use artificial intelligence or complex models in making credit denial determinations. The Bureau asked itself the question: “When using artificial intelligence or complex credit models, may creditors rely on the checklist of reasons provided in CFPB sample forms for adverse action notices even when those sample reasons do not accurately or specifically identify the reasons for the adverse action?” The Bureau's answer is No.
The circular explains that creditors may rely on the checklist of reasons in the sample forms in the CFPB’s Regulation B to satisfy their Equal Credit Opportunity Act (“ECOA”) obligations only if the checked reason or reasons “specifically and accurately indicate[s] the principal reason(s) for the adverse action.” The Circular maintains that the Regulation B requirement that the statement of reasons “relate to and accurately describe the factors actually considered or scored by a creditor” means that creditors that rely on complex algorithms or artificial intelligence must identify the specific pieces of information that led to the denial decision. The circular uses the example of closing a credit line based on a model’s evaluation of shopping behavioral data, stating that it would be insufficient to simply state “purchasing history” as the reason for the adverse action; “the creditor would likely need to disclose more specific details about the consumer’s purchasing history or patronage that led to the reduction or closure, such as the type of establishment, the location of the business, the type of goods purchased, or other relevant considerations, as appropriate.”
The press release accompanying the release of the circular frames it as part of the Bureau’s broader push to prioritize issues at the intersection of fair lending and technological advancements. Director Chopra stated, “Creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence.”
CFPB Issues Updated Small Business Data Collection Rule FAQs
By Eric Mogilnicki and B. Graves Lee
On September 14, the CFPB published updated frequently asked questions regarding its section 1071 rule. The updated FAQs cover topics that include the treatment of refinanced loans and agricultural-purpose credit loans under the rule, the exclusion of consumer-designated credit from the rule’s scope, and the rule’s coverage of merchant cash advances.
Director Chopra Delivers Remarks on Mortgage Market, Lessons Learned from 2008 Crisis, CFSA Case
By Eric Mogilnicki and B. Graves Lee
On September 11, CFPB Director Rohit Chopra spoke before The Mortgage Collaborative National Conference. His remarks covered the relationship between the CFPB and the U.S. mortgage market, crediting the Bureau with implementing new standards that made the mortgage market safe and transparent. He concluded that “[i]f these rules had been in place during the 2008 crisis, I believe families would have been able to stay in their homes and that what became the Great Recession would have had a different outcome.”
Director Chopra also argued that the CFSA case pending in the Supreme Court could have “significant implications for the entire . . . financial regulatory system.” Indeed, he insisted that because “we are not the only agency funded this way . . . [a]ny doubt about the legitimacy of the CFPB could be destabilizing.” Director Chopra suggested that the Supreme Court could impose retroactive relief, and that “[r]everting to a system without [the Bureau’s mortgage] regulations would create uncertainty for the mortgage industry and the economy.” He added that “even putting aside the questions about existing rules, moving to a world where the future of housing finance oversight is uncertain and unknown . . . should raise serious shared trepidations.”
On September 13, Director Chopra spoke before a Better Markets Conference centered on the fifteenth anniversary of the collapse of Lehman Brothers. In his remarks, he reflected on the Lehman bankruptcy and lessons learned from the 2008 crisis, and concluded that “the consumer financial protection laws enforced by the CFPB serve as catalysts for long-term economic growth, and defend against the buildup of systemic risk.” In looking to the future, he pointed to five key areas of focus for regulators:
- the Bureau’s upcoming rule to implement section 1033 of the Dodd-Frank Act (which provides consumers a right of access to their financial data);
- consolidation in the banking industry;
- banks’ living wills;
- efforts by the Financial Stability Oversight Council to designate systemically important nonbanks for enhanced supervision and regulation; and
- the risks of “uninsured short-term funding instruments outside the core banking system . . . like uninsured balances on popular nonbank payment apps, coins minted by Big Tech and other firms, and other pockets of short-term funding.”
Director Chopra closed his remarks by alluding to the CFSA case, stating that “[t]he rules administered by the CFPB, and other financial regulators, are crucial for the stability of the financial markets and of household finances, and questions about those rules and the ability of markets to adapt to future challenges would raise significant concerns for the stability of the nation’s financial system.”
CFPB Report Examines Tuition Payment Plans
By Eric Mogilnicki and B. Graves Lee
On September 14, the CFPB published a report titled “Tuition Payment Plans in Higher Education.” The report examines the payment of college tuition through payment plans, which the Bureau considers to be a credit transaction. The Bureau highlighted a number of findings, including:
- Nearly all colleges offer tuition payment plans of some sort, and millions of students utilize these plans every year.
- Disclosures related to tuition payment plans vary widely, unlike traditional private student loans, which are subject to a uniform set of disclosure requirements.
- Some students are forced into tuition payment plans, which “could lead to fees and financial difficulties for students.”
- Late payment fees under tuition payment plans are high, and some payment plans’ terms permit colleges to convert interest-free plans into interest-bearing loans upon a missed payment.
- Borrowers under tuition payment plans may be subject to “intrusive forms of debt collection,” including transcript withholding and removal from classes, meal plans, and campus housing. The Bureau has stated in past Supervisory Highlights that transcript withholding as a means of debt collection could constitute an abusive act or practice.
- Some tuition payment plans are conditioned on borrowers' waivers of consumer rights, such as class action waivers and mandatory arbitration agreements.
Director Chopra Speaks on Big Tech in Mobile Payments and Section 1033 Rulemaking
By Eric Mogilnicki and B. Graves Lee
On September 7, CFPB Director Rohit Chopra delivered remarks before the Federal Reserve Bank of Philadelphia’s Annual Fintech Conference regarding mobile payment systems. His remarks came on the heels of an ongoing CFPB inquiry into “Big Tech payment platforms” launched in 2021. Echoing a July statement regarding bank capital requirements, Director Chopra described the country’s payments system as a type of critical infrastructure underpinning the economy “[l]ike transportation, telecommunications, and energy.”
Director Chopra pointed to the role of “Big Tech” in the rise of mobile phone tap-to-pay transactions, noting that tens of millions of Americans use these transaction systems, and that two large tech firms dominate the market. Director Chopra described Big Tech firms as seeking to “deepen consumer engagement on their platforms, harvest and potentially monetize transactions-related data, and exploit traditional financial sector fee streams.” In particular, he criticized practices by Apple that he said “forbid any third-party apps from accessing the mobile device’s [near-field communications] technology for tap-to-pay payments,” meaning that “many popular payment apps cannot directly use tap-to-pay.” According to Director Chopra, “there are real concerns that such policies may create potential roadblocks to a more open payments ecosystem in the U.S.” He pointed to a CFPB report issued the same day as his remarks regarding the effects of restrictions that Apple and Google place on tap-to-pay systems.
In his remarks, Director Chopra also touched on the Bureau’s ongoing efforts to promulgate a rule implementing Dodd-Frank section 1033 to provide consumers with enhanced control regarding to their financial data. The Bureau issued an Advance Notice of Proposed Rulemaking on the topic in late 2020 and an Outline of Proposals and Alternatives Under Consideration in October 2022. In last week’s remarks, Director Chopra indicated that a proposed rule to implement section 1033 will be coming “[n]ext month.” In promulgating the rule, he indicated, the Bureau “hope[s] to intensify competition across financial products by allowing consumers to securely permission their transaction data and switch more easily.”
CFPB Publishes List of Applicable HUD Regulations and Guidance
By Eric Mogilnicki and B. Graves Lee
On September 1, the CFPB updated its page providing information on compliance with the Real Estate Settlement Procedures Act (“RESPA”) to release a “non-exhaustive list” of regulations and guidance issued by the U.S. Department of Housing and Urban Development that the Bureau applies in its current activities. The Dodd-Frank Act transferred to the CFPB authority under RESPA in 2011, at which time the Bureau issued a Transfer of Authorities Notice stating that documents issued by other agencies relating to RESPA would continue to be applied by the CFPB. Last week’s list sets forth a series of HUD policy statements and an interpretive rule that the CFPB still considers to be applicable.
Buy Now, Pay Later Provider Forecasts CFPB Supervision
By Eric Mogilnicki and B. Graves Lee
On August 25, Affirm Holdings, Inc., one of the country’s largest buy now, pay later (“BNPL”) providers, indicated in a regulatory filing that it could soon be subject to the CFPB’s supervision authority. In its annual 10-K filing, the company stated, “we expect the CFPB to begin to supervise us in the immediate future.” The CFPB has intensified scrutiny on the BNPL market since the outset of Director Rohit Chopra’s term, opening an inquiry into BNPL practices and releasing a number of reports and blog posts on the industry (see publications from September 2022, March 2023, and June 2022). The Bureau has authority under 12 U.S.C. § 5514(a)(1)(B) to designate for supervision certain “larger participant[s]” in the consumer financial marketplace, but to date it has not done so in the BNPL market.
Intellectual Property Law
The Courts and Copyright Office Say AI-Generated Art Is Not Copyrightable—At Least For Now
By DaJonna Richardson, J.D. Candidate, Class of 2024, University of Colorado Law School
Copyright law balances two interests: stimulating artistic creativity for the general public good and granting the artist control of some of the ways their art can be used. From this balance, the public then has the right to build on and/or use that art in new and interesting ways. But where does the new artificial intelligence (“AI”) art fall under the scope of copyright law?
Artificial intelligence is a tool implemented in a system that strives to mimic human brainpower and decision-making processes by the initial creation of algorithms that learn from themselves and that continue to learn from their experience—much like humans. What is artificial intelligence?, 3 Health L. Prac. Guide § 50:1 (2023). AI-generated artwork can be created fully autonomously by AI systems or as a collaboration between a human and an AI system. Agnieszka Cichocka, “AI in Art: What Does It Mean,” DailyArt (Dec. 15, 2022). This new artform is trying to gain a foothold in the art space and carve its own identity, much like painters defining a new impressionistic style.
In Thaler v. Perlmutter et al., Case No. 1:22-cv-01564 (D.D.C. 2023), the US Register of Copyrights denied Stephen Thaler’s application for copyright in an artwork on the basis that an AI-generated work lacks the human authorship necessary to support a copyright claim. Here, Thaler attempted to register a work of AI art created by a computer algorithm, which he called the “Creativity Machine,” as an original work of authorship because he had created the algorithm. He described the piece, A Recent Entrance to Paradise, as produced “autonomously” by the Creativity Machine. Although Thaler acknowledged his piece “lack[ed] traditional human authorship,” he contested the Copyright Office’s human authorship requirement. He felt that AI should be “acknowledge[d] . . . as an author where it otherwise meets authorship criteria, with any copyright ownership vesting in the AI’s owner.” Thaler’s main argument hinged upon the theory that because he had created and owned the machine that generated the artwork, copyright in any original art generated by the technology would transfer to him.
While Judge Beryl A. Howell conceded to Thaler that “[c]opyright is designed to adapt with the times” and is “malleable enough to cover works created with… any tangible medium of expression,” Judge Howell ruled that copyright does not cover a computer’s work of art because United States copyright law only protects works of human creation.
Ultimately, Judge Howell upheld the Copyright Office’s decision, explaining that under the plain language of the Copyright Act, “an original work of authorship” required that the author be a human, based upon “centuries of settled understanding” and the dictionary definition of “author.” Thaler, No. 22-1564 (BAH), slip op. at 10. Moreover, the Supreme Court has traditionally recognized the human authorship requirement, and the Constitution’s Intellectual Property clause, which specifically mentions “authors and inventors,” was discussed by the Founding Fathers as regarding the claims of individuals. Id. at 9–10. “Copyright has never stretched so far… as to protect works generated by new forms of technology operating absent any guiding human hand.” Id. at 8.
Essentially, copyright law’s ultimate purpose is to stimulate artistic creativity for the general public good, and with it comes the promise of exclusive rights to the art. For now, artists can use AI as an instrument as part of their artistic construction, but the art must remain their own original mental conception to be copyrightable. Undoubtedly, we are approaching new frontiers in copyright as artists put AI in their toolbox to be used in the generation of new visual and other artistic works. As such, the Copyright Office continues to grapple with how much human input is necessary to qualify the user of an AI as an “author” of an artwork, the scope of the protection of the image, and more importantly, how its office will assess the originality of AI-generated works.
Labor & Employment Law
Fifth Circuit Court of Appeals Overturns Title VII Precedent
By Steven H. Garrett, Partner at Boulette Golden & Marin
On August 18, 2023, the Fifth Circuit Court of Appeals overturned decades of Title VII jurisprudence when it issued an en banc opinion in Hamilton v. Dallas County, brought by nine female correctional officers against their employer, Dallas County. Prior to Hamilton, the Fifth Circuit required plaintiffs complaining of discrimination under Title VII of the Civil Rights Act of 1964 to prove that they suffered from their employer’s “ultimate employment decision” such as “hiring, granting leave, discharging, promoting, and compensating.” The Hamilton court examined the text of Title VII and held that for a plaintiff to plead an illegal adverse employment action, a plaintiff “need only show that she was discriminated against, because of a protected characteristic, with respect to hiring, firing, compensation, or the ‘terms, conditions, or privileges of employment.’” This holding reversed an earlier Fifth Circuit panel’s upholding of the district’s court grant of Dallas County’s Rule 12(b)(6) motion to dismiss.
In Hamilton, the plaintiffs alleged that the Dallas County Sherriff’s Department gave its detention services officers two days off each week. According to the plaintiffs, the Department used a “sex-based policy to determine which two days an officer can pick. Only men can select full weekends off—women cannot. Instead, female officers can pick either two weekdays off or one weekend day plus one weekday.” Neither party disputed that full weekends off was the preferred shift for both men and women. Id. The Court examined the “atextual” origins of its “ultimate employment decision” jurisprudence and concluded that it existed on “fatally flawed foundations.” Focusing on the text of Title VII, the Court considered how the statute referred to decisions relating to “terms, conditions, or privileges of employment.” Upon reviewing the allegations by the female correctional officers, the court had “little difficulty concluding that they have plausibly alleged discrimination” under Title VII. The Court remanded the case back to the district court, and to date, the County has not appealed to the Supreme Court.
Left open by the Court was “the precise level of minimum workplace harm a plaintiff must allege on top of showing discrimination in one’s ‘terms, conditions, or privileges of employment.’” Employers in the Fifth Circuit should discuss with employment counsel immediately to reexamine whether they have any policies that can plausibly be alleged to discriminate against one protected characteristic over the other.