Cannabis Law
Marijuana Rescheduling Not Likely to Occur in 2024
By Perry N. Salzhauer, McGlinchey Stafford PLLC
On August 27, 2024, Anne Milgram, the administrator for the United States Drug Enforcement Administration (DEA), announced that a formal administrative law judge (ALJ) hearing will be held by the agency on December 2, 2024, in connection with the DEA’s issuance of a proposed rule to reschedule cannabis from Schedule 1 of the Controlled Substances Act (CSA) to Schedule 3 of the CSA. The primary legal effects of the proposed rescheduling would be to (i) end the application of Internal Revenue Code Section 280E to state-legal marijuana businesses, a provision that increases the effective federal tax rate upon those businesses, and (ii) open the door to expanded pharmaceutical applications of marijuana and its derivatives. It had been anticipated by many in the cannabis industry that the rescheduling would occur before the November elections.
Although the public comment period for the proposed rescheduling ended on July 22, 2024, with the DEA having received over 40,000 public comments, the ALJ hearing allows interested parties another opportunity to be heard on the issue by providing briefs, evidence, and testimony either in support of or in opposition to the proposed rescheduling rule. Any person who is adversely affected or aggrieved by the proposed rescheduling rule is an interested party with a right to participate in the ALJ hearing. The sum total of the public comments and the proceedings at the ALJ hearing will then comprise the record upon which any resulting final rule can be challenged by an interested party on appeal to the federal courts.
The ALJ hearing is sure to garner a great deal of interest from those who support and those who oppose the proposed rescheduling rule. A key issue at the ALJ hearing will likely be whether or not there is a “currently accepted medical use” for cannabis in the United States, which is a requirement for a substance to be removed from Schedule 1 of the CSA. The United States Department of Health and Human Services (HHS) asserted in its recommendation to DEA in support of a rescheduling rule that there now is a currently accepted medical use for cannabis in the United States. The ALJ hearing will provide an opportunity for DEA to gather and consider evidence on this issue as it moves towards the issuance of a final rule.
With the ALJ hearing scheduled for December 2, 2024, it is now almost certain that a final rule on the scheduling of marijuana will not be issued by DEA in 2024. Even if the ALJ hearing is concluded in under a week, it is not the final step in the rulemaking process. When the ALJ hearing concludes, DEA will need to consider the voluminous record before drafting a proposed rule. The proposed rule will then need to be reviewed by the White House Office of Management and Budget (OMB) prior to its publication in the Federal Register. If DEA publishes a rule rescheduling marijuana, it is not likely to go into effect until sixty days following its publication to allow the agency to comply with Congressional Review Act requirements. Given the administrative procedures now facing the proposed rescheduling rule, marijuana seems destined to remain a Schedule 1 substance under the CSA until at least March 2025.
Consumer Finance
Seventh Circuit Affirms Dismissal of FCRA Claim against Equifax, Finding It Is Not Liable for Credit Information in Report Prepared by Third-Party Company
By Margaret Hayes, Pilgrim Christakis
In Frazier v. Equifax Information Services, LLC, No. 23-2355, 2024 WL 3688469 (7th Cir. Aug. 7, 2024), the Seventh Circuit affirmed the Northern District of Illinois’s finding of summary judgment in favor of Equifax on plaintiff Tamara S. Frazier’s Fair Credit Reporting Act (FCRA) claim. Specifically, the Seventh Circuit held that Equifax was not liable under the FCRA because (i) its report of Frazier was accurate, and (ii) Equifax was not liable for a third-party company’s report that merged information from Equifax and the other consumer reporting agencies.
Frazier was denied a mortgage application after the mortgage lender reviewed a “tri-merge” credit report published by CreditLink that contained data from Equifax, Experian, and Trans Union, and subsequently brought separate FCRA actions against Equifax, among others. Frazier had a prior mortgage where she fell behind (ninety or more days past due) on her payments, and ultimately extinguished the mortgage through a short sale and paying less than the full balance owed. Specifically, Frazier claimed Equifax inaccurately reported that prior mortgage when it reported her account status as “90-119 days past due” and some months of her payment history with status codes indicating ninety or more days late. Id. at *3.
The Seventh Circuit disagreed with Frazier, noting that the disputed reporting, “reviewed in context,” was accurate—i.e., it was not misleading for Equifax to report the late account history or status, because Equifax was also reporting that the account was closed, that it was paid for less than the full balance, and that the balance owed was $0, and Frazier could not be “currently delinquent on a loan that no longer exists” with a $0 balance. Id. at *3 (citing Frazier v. Equifax Info. Servs., LLC, 2023 WL 4134907, at *2 (N.D. Ill. June 22, 2023); Frazier v. Dovenmuehle Mortg., Inc., 72 F.4th 769 (7th Cir. 2023)).
Additionally, the Seventh Circuit held that Equifax cannot be liable for the information in the CreditLink report—even though it used data from Equifax as part of its report—as the CreditLink report was not prepared by Equifax and did not contain all the information (i.e., context) that Equifax reported in its own credit file. Id. at *4–5. Additionally, Equifax’s report was not considered by the mortgage lender (only the CreditLink report was), and thus, Equifax’s report did not cause Frazier’s loan application to be denied. Id. at *5.
Frazier expressly limits liability for consumer reporting agencies for a third party’s reporting of credit information—even when that report contains information supplied by the agency itself. However, Frazier’s holding could potentially be beneficial for furnishers of credit information as well; under the Seventh Circuit’s reasoning, a furnisher could potentially avoid liability if it reports accurate information to a third party (e.g., a consumer reporting agency), but that information is somehow reported in an inaccurate or misleading way (e.g., it becomes mixed with another consumer’s credit file).
CFPB Announces Consent Order with Mortgage Servicer
By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP
On August 21, the Consumer Financial Protection Bureau (CFPB) entered a consent order with Fay Servicing, a nationwide mortgage servicer with offices in Florida, Illinois, and Texas. The Bureau had entered a consent order with Fay Servicing in June 2017 for alleged violations of the Real Estate Settlement Procedures Act (RESPA) and its implementing Regulation X, particularly with regards to foreclosure protections and other rights afforded to mortgage borrowers. That consent order required Fay Servicing to cease its violative practices and comply with Regulation X, conduct outreach to borrowers regarding their options to avoid foreclosure, and pay consumer redress totaling $1.15 million. The order was modified on six different occasions to extend its termination date, with the most recent modification extending the order until August 22, 2024 (one day after the issuance of the new consent order).
This August consent order finds that Fay Servicing continued to violate RESPA and Regulation X over the last seven years by engaging in prohibited foreclosure activities, and therefore also violated the June 2017 consent order. The order further finds that Fay Servicing engaged in violations of the Truth in Lending Act, its implementing Regulation Z, and the Homeowners Protection Act, and in unfair and deceptive practices in violation of the Consumer Financial Protection Act. In addition to prohibiting further legal violations, the consent order requires $3 million in consumer redress, a $2 million civil money penalty, and that Fay Servicing invest at least $2 million in updating its servicing technology and compliance management systems. The consent order also provides that Fay Servicing may not provide any compensation or distributions to its founder and CEO Edward Fay if its Compliance Committee or auditor finds that he did not take actions necessary to ensure compliance with the order.
Supreme Court Asked to Hear Appeal of CFPB Jurisdiction over Securitization Vehicles
By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP
On August 16, a group of fifteen student loan securitization trusts petitioned the Supreme Court to hear their appeal from a Third Circuit decision that affirmed the CFPB’s jurisdiction over entities used as securitization vehicles for consumer financial products such as student loans. In March, the Third Circuit held that the petitioning trusts are “covered persons” under the Consumer Financial Protection Act (CFPA) because they “engage[d] in offering or providing a consumer financial product or service” by holding student loans and, in particular, by servicing and collecting on those loans through contractual agents. The trusts argue that they are passive vehicles that are not “engaged” in student loan servicing or any other consumer financial service under the CFPA. The trusts argue that the loan servicing is performed by an independent entity that is only connected to the trusts through multiple layers of contract, and that it is too attenuated to trace back through those contracts and attribute the servicing activity to the trusts. On May 6, after its victory in the Third Circuit, the Bureau filed proposed stipulated final judgments against the trusts for loan servicing violations.
In addition to their jurisdictional arguments, the trusts claim that the Bureau’s enforcement action should be dismissed because it was initiated when the Bureau was led by Director Richard Cordray, prior to the Supreme Court’s decision in Seila Law that held that the director was unconstitutionally insulated from presidential removal.
CFPB Comments on Treasury Rulemaking Request
By Eric Mogilnicki and Brandon Howell, Covington & Burling LLP
On August 12, the CFPB provided a comment letter to the US Treasury Department regarding its Request for Information on Uses, Opportunities, and Risks of Artificial Intelligence in the Financial Services Sector.
In its comment letter, the CFPB describes its “leadership role in working to understand the future of consumer finance and novel uses of consumer data, including by means of new technologies.” The comment letter emphasized two main points, which it believes apply to AI and other new technologies:
- Existing rules should be enforced for all technologies, even if the technology is considered new or novel. In particular, companies using AI for lending and underwriting decisions must recognize that the consumer financial laws still apply.
- Innovation should take place on a level playing field. To that end, the CFPB lists its efforts so far to foster such an environment:
- making clear that there is no exception to the federal consumer financial protection laws for new technology;
- ensuring regulations don’t stifle competition in pricing or favor incumbents;
- ensuring consistent treatment under the law for similar products and services;
- combating anticompetitive practices; and
- monitoring the market and ensuring accountability.
Although the Treasury RFI specifically asks for comments on how the use of AI might be facilitated, the CFPB’s comment letter focuses on the ways in which AI and other technology should be reined in. Indeed, the Bureau’s comment letter criticizes prior Bureau efforts to encourage innovation as failing to provide “a larger market impact that was positive for consumers.”
CFPB Targets Contracts for Deed Financing Market
By Eric Mogilnicki and Brandon Howell, Covington & Burling LLP
On August 13, CFPB Director Rohit Chopra delivered prepared remarks at the CFPB’s Field Hearing in St. Paul, Minnesota, discussing an alternative form of mortgage lending known as contracts for deed financing. Director Chopra describes contracts for deed financing as a form of seller financing where buyers make payments over time directly to sellers, but the sellers retain legal title until all payments have been made. Director Chopra described this type of lending as a “borrower trap[]” that often targets families looking for the “American Dream of homeownership” but that are shut out from traditional financing opportunities. Director Chopra explained that this form of lending typically involves higher interest rates, fees, and risks to the borrower if payments are missed.
In conjunction with Director Chopra’s remarks, the CFPB released a research report describing the contracts for deed market and also an advisory opinion to “warn people about the potential pitfalls” of this market.
The research report describes contracts for deed financing as a “set-up-to-fail” product that is targeted at low-income, minority, and religious communities. The report concludes that this type of seller financing harms housing markets by causing or perpetuating substandard housing stock, inflated home prices, and reduced access to mainstream mortgage credit. In the advisory opinion, the CFPB affirms that buyers are generally entitled to the protections provided for residential mortgage transactions under the Truth in Lending Act.
Plaintiffs Ask Texas District Court to Deny CFPB’s Request to Transfer Late Fee Rule Case to District Court of DC
By Eric Mogilnicki and Brandon Howell, Covington & Burling LLP
On August 12, the plaintiffs in the lawsuit challenging the CFPB’s late fee rule filed a brief asking the District Court for the Northern District of Texas to deny the CFPB’s request to send the case to a federal court in DC. The plaintiff’s filing comes in opposition to the CFPB’s argument that one of the plaintiffs—the Fort Worth Chamber of Commerce, and the only plaintiff in the Texas federal district—lacks standing because the lawsuit is not germane to this plaintiff’s mission. Plaintiff’s brief argues that the Fort Worth Chamber of Commerce has at least six members that are large credit card issuers operating in Fort Worth who will be directly harmed by the CFPB’s final rule, and that under Fifth Circuit precedent, it has standing as a party to this lawsuit.
CFPB Appeals to Fifth Circuit, Seeks Reinstatement of Anti-Discrimination Instruction in Examination Manual
By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP
On August 7, the CFPB filed an appeal with the Fifth Circuit Court of Appeals seeking reversal of a decision by the District Court for the Eastern District of Texas, issued almost a year ago, which struck down a March 2022 update to the Bureau’s UDAAP examination manual indicating that discriminatory conduct may violate the Dodd-Frank Act’s prohibition on unfairness. The district court’s decision was based in part on the Fifth Circuit decision (since overturned by the US Supreme Court), that the CFPB’s funding mechanism violated the Appropriations Clause of the US Constitution. The District Court’s decision also cited the major questions doctrine, noting that the Bureau’s manual update “might be something Congress can authorize,” but only through “exceedingly clear language” not present in the statute.
The Bureau makes a number of arguments on appeal beyond noting that the Supreme Court has upheld the CFPB’s funding mechanism, including that:
- the plaintiffs (various industry groups) have failed to establish associational standing;
- venue is improper in the Eastern District of Texas;
- the Consumer Financial Protection Act permits the CFPB to treat discrimination as unfair; and
- the District Court misapplied the major questions doctrine.
Industry Groups Ask Texas District Court to Maintain Injunction on CFPB’s Late Fee Rule
By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP
On August 8, the plaintiffs in the lawsuit challenging the CFPB’s late fee rule filed a brief asking the District Court for the Eastern District of Texas to keep in place the preliminary injunction the court entered against the rule in May. The industry groups’ filing comes in opposition to the Bureau’s motion to dissolve the injunction. Among other arguments, the plaintiffs’ brief suggests that the CFPB has failed to show any “significant change” since the court issued the injunction and that the court’s justifications for issuing the injunction—namely that plaintiffs are likely to succeed on their claims that the late fee rule violates the CARD Act and the Truth in Lending Act—continue to exist. The brief alternatively argued that, in the event the court is inclined to grant the CFPB’s motion, the court should establish a ninety-day compliance period following its decision.
Labor & Employment Law
Fifth Circuit Throws Out Department of Labor’s 80/20 and 30-Minute Rules for Tipped Workers
By Taylor Graham, Boulette Golden & Marin L.L.P.
In an August 23 decision, the Fifth Circuit vacated a Department of Labor (DOL) regulation governing how tipped employees could be paid by their employers.
The Fair Labor Standards Act (FLSA) requires employers to pay employees at least the minimum wage. In 1967, Congress changed the minimum wage rule for “tipped employees” who “customarily and regularly receive more than $30 per month in tips” to allow an employer to claim a “tip credit,” allowing the employer count tips from customers toward a portion of the minimum wage obligation.
In 1988, the DOL later provided guidance to employers claiming a tip credit by segregating tipped employees work into three categories: (1) tip-producing work (e.g., a server taking a customer’s food order); (2) directly supporting work (e.g., a server cleaning up a dining area before serving the next customer); and (3) non-tipped work (e.g., a server cleaning the restaurant’s dining area as part of closing duties). The DOL published the “80/20 rule,” which prevented employers from taking a tip credit when a tipped employee spent more than 20 percent of the employee’s time on non-tip-producing duties. Then, in 2021, the DOL published the “30-minute rule,” which prevented employers from taking a tip credit when a tipped employee engaged in more than thirty minutes of non-tipped work at any given time.
The Restaurant Law Center and the Texas Restaurant Association sued in 2021 seeking to permanently enjoin the DOL’s enforcement of the 80/20 and 30-minute rules. The District Court granted the DOL’s motion for summary judgment after it found the statute ambiguous and the DOL’s interpretation reasonable under Chevron USA, Inc. v. Natural Resources Defense Council, Inc.’s deferential framework.
The Fifth Circuit Court of Appeals, noting Chevron’s reversal by the Supreme Court in Loper Bright Enterprises v. Raimondo, found that the 80/20 and 30-minute rules were (1) inconsistent with the FLSA’s text and (2) arbitrary and capricious. First, the Court held the DOL’s rules departed from the FLSA by parsing job duties by the minute or percentage—when the statute only required an employee to be “engaged in” a tipped “occupation.” The Court explained that where an employee regularly engages in distinct occupations (e.g., a maintenance person who also serves as a waiter), a tip credit is only permissible for the tipped occupation; however, an employee is not engaged in “dual jobs” when the employee is engaged in a single occupation that includes both tip-producing and non-tipped tasks (e.g., a waitress who serves tables, cleans, makes coffee, etc.). Second, the Court found the rules arbitrary and capricious, in part because they ignored the realities of a tipped employee’s occupation, which involves tip-producing and non-tipped work at varying and ever-changing intervals and durations.
The Court reversed the DOL’s lower court victory and rendered judgment for the restaurant plaintiffs vacating the rules.
Rest. L. Ctr. v. Dep’t of Lab., No. 23-50562, ---F.4th---, 2024 WL 3911308 (5th Cir. Aug. 23, 2024).
Texas District Court Blocks FTC Noncompete Rule
By Andrew M. Albritton, McGlinchey Stafford PLLC
On August 20, 2024, a Texas district court judge entered a final judgment blocking the implementation of the FTC’s proposed noncompete rule.
The rule was previously set to go into effect on September 4, 2024. It would have broadly banned the enforcement of noncompete clauses in employment agreements for nearly all employees nationwide and required employers to provide notice to employees (current and former) that their noncompete agreements were no longer enforceable. As of now, the rule will no longer go into effect.
The rule’s implementation has been long anticipated. Its predecessor was an executive order by President Biden in 2021. The rule in its substantially current form was then submitted by the FTC as a proposed rule in January 2023. Following an extended public comment period, the FTC voted to enter the rule into the Federal Register.
Several businesses immediately filed lawsuits to stay implementation of the rule in the Eastern and Northern Districts of Texas, the Eastern District of Pennsylvania, and the Middle District of Florida. In the case at issue, Ryan LLC v. Federal Trade Commission, Judge Ada E. Brown had previously implemented a limited preliminary injunction for the specific plaintiffs involved. The final judgment implements a nationwide injunction prohibiting implementation of the rule.
Judge Ada E. Brown’s decision held that the rule’s “categorical ban” overreached the FTC’s administrative authority under the FTC Act. The Court’s ruling represents an extension of the Supreme Court’s recent decision in Loper Bright Enterprises v. Raimondo, which limited the authority of agencies like the FTC to enact rules like the noncompete rule.
The FTC has indicated that it is seriously considering a potential appeal. It would appeal to the Fifth Circuit Court of Appeal in New Orleans, which many experts anticipate will uphold the Texas court’s decision. Given other lawsuits in the Third and Eleventh Circuits, the case is likely to reach the Supreme Court, which will dictate the ultimate fate of the rule.
Until then, employers can continue to enforce and create noncompete agreements, as long as they remain compliant with the laws of the individual states.
Sports Law
Athlete v. Coach: Name, Image, and Likeness Conflict Hits the Sunshine State
By Jada Allender and Megan Carrasco, Snell & Wilmer LLP
Jaden Rashada was a highly successful high school quarterback—so much so that he was recruited by the University of Florida (“UF”) after being ranked #7 among all high school football players in the country. Unfortunately, Rashada’s success was not without challenges. In consideration for his commitment to UF, he believed he was earning the lucrative opportunity to be compensated for his name, image, and likeness (“NIL”) as a UF football player.
This is a relatively new way for college athletes to be compensated. It came about because in 2020, the United States Supreme Court opened the doors for college athletes to monetize their name, image, and likeness, by holding that the prior prohibition of the National Collegiate Athletic Association (“NCAA”) on athletes using their NIL violated antitrust laws. Therefore, as part of recruiting packages, colleges and universities now tout the money-making prospect of NIL for those athletes committed to play at their schools.
Rashada says UF did not uphold its end of the deal. In August 2024, Rashada filed an eight-count claim in the District Court for the Northern District of Florida. Rashada filed his lawsuit against UF’s head football coach, Billy Napier; UF’s Director of Player Engagement and NIL, Marcus Castro-Walker; and Hugh Hathcock and his company, Velocity Automotive Solutions, LLC, both longtime UF donors. (“Defendants”). Rashada alleged, among other things, that they fraudulently induced him to play for UF based representations they made surrounding Rashada’s compensation as a UF athlete. Rashada v. Napier et al., No. 3:24-cv-219-MCR-HTC.
In an amended complaint, Rashada alleges that the Defendants offered him a $13.85 million NIL deal, paid over four years with UF, to flip his commitment from the University of Miami to UF, when all the while Defendants knew they did not have the money nor the intention to fulfill that promise.
Rashada also claims that the Defendants engaged in “unethical and illegal tactics,” such as Napier allegedly promising Rashada $1 million if he “signed with UF on National Signing Day.” The amended complaint details other allegations, such as that the Defendants coordinated among themselves to, for example, falsely represent that they were securing assignment of the $13.85 million NIL deal, even though this assignment had already been terminated.
The requirements for how college athletes will be paid for their NIL is an emerging area of law; it has only been four years since US college athletes began to be permitted to earn a substantial living through NIL. Rashada has apparently been forced to bring fraud and tort claims because there was no contract yet in place related to his NIL deal. Whether the NCAA will step into this matter or otherwise take steps to provide college athletes with protections around NIL during the highly competitive recruiting process—especially given that millions of dollars are now on the line when it comes to NIL—remains to be seen. Defendants must respond to the amended complaint by September 13.
