The court did not address the dissenting statements of the two Republican FTC commissioners and dismissed the arguments of ATS and the amici supporting the stay. The fact that the FTC did not issue substantive rules until 1962, and even doubted that it had the authority to issue substantive rules, was left to a footnote. The court offered little guidance on what principles exist to limit the FTC’s issuance of other substantive rules under Section 6(g), besides that such rules must concern “unfair methods of competition,” a phrase the court states Congress wrote to be “intentionally vague.”
The court’s ruling is not a final judgment, but its approach and its finding that the plaintiffs did not demonstrate either a “substantial likelihood of success on the merits” or “irreparable harm” strongly suggests that it will not issue a permanent injunction. While the Texas court has committed to issuing a decision on the merits by August 30, a parallel case has also been filed in a third federal court, this one in Florida. This means that at least the Third, Fifth, and Eleventh Circuits will each have an opportunity to address the FTC’s authority and noncompete ban. If, after appellate review, a conflict remains, Supreme Court review is likely. What is not likely, however, is that this issue will be resolved definitively before the September 4 effective date of the FTC ban.
The FTC’s noncompete rule, if it becomes effective, will apply to any written or oral employment provision or policy that penalizes or prevents a worker from (a) seeking or accepting work in the U.S. with a different employer, or (b) operating a business in the U.S. after leaving the employment that included a noncompete. The rule prohibits new noncompetes on or after the effective date and enforcing or attempting to enforce a noncompete that existed before the effective date for any worker except for senior executives. The FTC ban also requires employers to give notice to all current and former individuals under a noncompete that the restriction is unenforceable. The ban does not apply to customer or employee nonsolicitation agreements.
The noncompete ban has a lengthy legal battle ahead of it. Therefore, companies should continue to prepare for implementation of the rule on September 4:
- Assess existing agreements imposing post-employment restrictions, as well as confidentiality and nonsolicitation agreements.
- Consider improvements and clarifications that could strengthen nonsolicitation and confidentiality agreements, which are not covered by the ban. Clear and precise drafting is essential, and employers with workers in multiple states must account for the many different and evolving state laws.
- Prepare to provide the required notice under the final rule to all workers (other than senior executives) who are subject to oral or written noncompete provisions or policies.
The FTC Focuses on Franchise Relationships
By Barbara Sicalides and Christopher Young, Troutman, Pepper, Hamilton, Sanders, LLP
The FTC’s latest policy statement aims to dictate the outcome of contract negotiations between franchisors and their franchisees and to limit the potential negative impact on franchisees of certain types of contract provisions. Last week’s “Policy Statement of the Federal Trade Commission on Franchisors’ Use of Contract Provisions, Including Non-Disparagement, Goodwill, and Confidentiality Clauses” was issued along with an “Issue Spotlight” prepared by FTC staff and staff guidance, as well as the launch of a webpage with FTC resources regarding its regulation and guidance for franchisors and franchisees.
Since 1979, the FTC has regulated franchising through the original Franchise Rule (16 C.F.R. Part 436), which requires the disclosure of specific information so that prospective franchisees can make informed investment decisions. This latest regulatory effort, however, was launched in March 2023, when the FTC issued a request for information seeking public comment on “franchise agreements and franchisor business practices, including how franchisors may exert control over franchisees and their workers.” The FTC’s press release announcing the request for information claimed that “the promise of franchise agreements as engines of economic mobility and gainful employment is not being fully realized. . . . [T]he unequal bargaining power inherent in these contracts is impacting franchisees, workers, and consumers.”
The FTC received 2,216 responsive comments, only 10 percent of which were from self-identified franchisors, attorneys, suppliers, or industry groups, while more than 50 percent were from franchisees. According to FTC staff, almost 75 percent of franchisors supported the status quo, compared with roughly 40 percent of franchisees. Based on these comments, the FTC’s Issue Spotlight summarizes the top twelve concerns raised by franchisees:
- Unilateral changes to franchise operating manuals
- Franchisor misrepresentations and deception
- Fees and royalties
- Franchise supply restrictions and vendor kickbacks
- Actual and feared retaliation
- Noncompetes and no-poach clauses
- Franchise renewal problems
- Franchisor refusal to negotiate contract terms
- Franchise disclosure document issues
- Private equity takeovers
- Marketing fund transparency
- Liquidated damages clauses and early termination fees
Rather than amend its existing Franchise Rule or promulgate new rules, the FTC issued the policy statement. The FTC explained that a “practice is unfair if it causes or is likely to cause substantial consumer injury, which consumers cannot reasonably avoid, and which is not outweighed by benefits to consumers or competition.” The policy statement asserts that a franchisor’s use of standard confidentiality, nondisparagement, or goodwill provisions is “unfair” because they could be misinterpreted as prohibiting the reporting of illegal conduct to the government. The policy statement makes these pronouncements even though federal courts have generally treated contracts as unenforceable to the extent they forbid cooperation with law enforcement investigations.
The policy statement vote was 3–2 along party lines, with both Republican commissioners dissenting. Both dissents were critical of the policy statement on the basis that it seeks to change or overstate Section 5’s reach. Commissioner Melissa Holyoak explained her dissent and view on the FTC’s role:
Certainty and clarity about the state of the law is a critical incentive to investment in and formation of new business. Today’s Policy Statement neither provides useful guidance, nor does it increase certainty about the state of the law. Rather, it casts a pall over the use of non-disclosure, non-disparagement, confidentiality, and goodwill clauses in franchisor-franchisee contracts, in a manner that is unlikely to help franchisors comply with the law while potentially impeding franchisors’ ability to protect their brands and intellectual property.
Commissioner Andrew N. Ferguson also criticized the policy statement as “go[ing] too far” and “an attempt to announce de facto rules . . . bypassing the procedural safeguards that govern [the agency’s] rulemakings and denying regulated parties the benefit of ex ante judicial review.”
The staff guidance states that it is illegal for franchisors to impose fees that were not disclosed to franchisees at the time of their decision to invest. A number of commenters complained of franchisors increasing fees for technology and payment processing and failing to disclose training, marketing, and facility improvement fees. The agency described such fees as “junk fees.” The International Franchise Association, however, responded that the “FTC’s guidance . . . regarding fee disclosure in franchise agreements stands to unnecessarily restrict franchisors’ ability to innovate and evolve their system, damaging the equity of franchisees for whom the FTC actions are purposely taken.”
The FTC reopened the comment period until October 10 as part of its interest in engagement with franchisees.
Cannabis Law
What a Kamala Harris Presidency May Mean for Marijuana Policy
By Daniel Shortt, McGlinchey Stafford PLLC
With the sudden change in the Democratic presidential candidate, there are a whole host of implications for the future of America. As presumptive nominee Kamala Harris ramps up her campaign for the White House, we examine her stance on cannabis.
During his time as president, Joe Biden initiated the process to reschedule marijuana under the Controlled Substances Act (CSA) from Schedule I—the most restrictive category—to Schedule III. This move would allow for the development of traditional marijuana-based pharmaceutical drugs. The notice and comment period on the rule to reschedule marijuana has now closed, but the rule has not been finalized. If this process does not wrap up before the election, and there is no certainty that it will, then the next president will have the ability to undo or impede the rescheduling process. As a result, Kamala Harris’s view on marijuana is of significant consequence to the marijuana industry.
In 2010, while still the San Francisco district attorney, Harris opposed Proposition 19, which would have legalized recreational cannabis in California. During this time she also oversaw the conviction of more than 1,900 people for marijuana-related charges.
Despite a somewhat rocky past, Harris has since embraced marijuana reform. In March 2024, while serving as vice president, Harris said “nobody should have to go to jail for smoking weed.” Harris more recently also called on the federal government to speed up the rescheduling process. As a senator, and while campaigning for the Democratic potential candidacy, Harris introduced legislation to decriminalize and tax marijuana and trigger resentencing and expungement for marijuana convictions with tax revenue generated from the industry. Harris also co-sponsored the Marijuana Justice Act with New Jersey Senator Cory Booker.
During any administration change, it is expected that some policies will shift. However, given that Harris, if elected, was part of the Biden administration, it is unlikely that her policies will shift drastically from Biden’s. In addition, keeping in mind the trajectory of her views on cannabis towards federal marijuana decriminalization, it is possible that as president she could go beyond rescheduling. Marijuana is just one of many issues for voters to consider in this consequential election, but we have a good idea as to where Harris stands based on her comments and actions on cannabis.
Consumer Finance Law
7th Circuit Upholds Dismissal of FCRA and FDCPA Claims, Emphasizing Need to Identify CRA in Credit Dispute Claims
By Cole Hodge, McGlinchey Stafford, PLLC
In Freeman v. Ocwen Loan Servicing, LLC, the Seventh Circuit Court of Appeals recently affirmed a decision by the U.S. District Court for the Southern District of Indiana to dismiss the plaintiff’s claims against her mortgage servicer, Ocwen Loan Servicing, LLC (“Ocwen”), for alleged violations of the Fair Credit Reporting Act (“FCRA”) and the Fair Debt Collection Practices Act (“FDCPA”). In doing so, the Seventh Circuit highlighted the need for individuals bringing suit under the FCRA to identify in the complaint which of the Credit Reporting Agencies (“CRAs”) were notified of their credit dispute. The appellate court also addressed what constitutes a concrete injury amounting to Article III standing under the FDCPA.
With regard to her FCRA claim, in her Second Amended Complaint, the borrower merely alleged that Ocwen failed to conduct a reasonable investigation after receiving notice from “one or more” of the CRAs that she notified of her credit dispute. However, in affirming the district court’s decision to dismiss the plaintiff’s FCRA claim, the Seventh Circuit explained that the plaintiff’s failure to identify the CRAs did not provide Ocwen the ability to effectively respond to her disputed claim because Ocwen did not have “fair notice of what the claim is and the grounds upon which it rests.” Put differently, Ocwen was unable to “effectively respond to a claim that it failed to comply with [its FCRA] obligations if it [did] not know which CRA’s dispute notification it needed to respond to with an investigation.”
Concerning the plaintiff’s FDCPA claim, the Seventh Circuit affirmed that the plaintiff did not have standing to bring an FDCPA claim against Ocwen because she failed to establish that she suffered a concrete injury in fact. While the plaintiff identified common claims against Ocwen for defamation, false light, invasion of privacy, intrusion upon seclusion, and abuse of process, these alleged injuries are insufficient to establish standing under Article III of the United States Constitution.
In affirming the district court’s holding, the Seventh Circuit, in part, noted that defamation would only sufficiently create standing under Article III if a third party understood the defamatory significance of the communication regarding credit. Here, the plaintiff’s defamation claim failed to establish an injury because there was no evidence that Ocwen transmitted any inaccurate credit reporting to a third party that was able to understand the defamatory significance of the reporting.
The Seventh Circuit also reasoned that even the plaintiff’s assertion that she suffered monetary harm by paying legal fees and costs associated with her FDCPA claim did not provide her standing to bring her claim under the FDCPA. Indeed, “[s]eeking legal advice in response to a communication concerning a disputed debt does not amount to an injury in fact.”
In short, Freeman stands to highlight the importance for plaintiffs to allege, with specificity, the factual occurrences that comprise their claims, as well as identify the concrete injury in fact that they have suffered.
New York Court Finds Mortgage Loan Made to Corporate Entity Is “Consumer Credit Transaction” under Truth in Lending Act
By Aleksandr Altshuler and Jim Sandy, McGlinchey Stafford, PLLC
On July 8, 2024, the United States District Court for the Eastern District of New York held that a mortgage loan from a private lender was within the scope of the Truth in Lending Act (TILA) and Home Ownership and Equity Protection Act (HOEPA) even though the recipient of the funds was a business entity, not an individual consumer.
In Barker v. Rokosz, plaintiff asserted claims against several defendants under TILA, HOEPA, Section 6-l of the New York Banking Law, and New York’s usury statute arising from an allegedly unlawful home mortgage loan on which she defaulted. Specifically, plaintiff obtained the loan from a private “hard money” lender through a corporate entity, which plaintiff was required to form as a condition of the loan transaction and whose shares were given to the lender as further collateral. Notably, such corporate entity’s sole purpose was to borrow funds from the lender and hold title to plaintiff’s property following the loan closing.
After all other defendants either settled or were dismissed from the case, plaintiff moved for summary judgment against the lender, who cross-moved to foreclose on plaintiff’s home. There was no dispute that the lender failed to provide any TILA disclosures or to comply with HOEPA and state predatory lending laws. The lender, however, argued that TILA and HOEPA claims failed because the mortgage loan was not a “consumer credit transaction” since the party to whom credit was extended was not a natural person.
The Court rejected the lender’s argument that “the party to whom credit is offered or extended,” as specified in 15 U.S.C. § 1602(i), is always the party whose name appears on the face of the mortgage. Instead, the Court looked to the broader context and primary purpose of TILA and HOEPA in holding that the transaction was within the scope of TILA and HOEPA notwithstanding that credit was extended to an organization “where that organization [wa]s created at the lender’s behest as a condition of transacting with the individual borrower and serves no discernible function other than evading TILA and other regulations that protect consumers.”
The Barker decision is a keen reminder that courts are inclined to employ a substance-over-form analysis in evaluating the scope of statutory protections for consumer credit transactions.
Cellphone Users Not Categorically Excluded from Definition of “Residential Subscriber” under TCPA
By Aleksandr Altshuler and Jim Sandy, McGlinchey Stafford, PLLC
On July 3, 2024, the United States District Court for the Southern District of New York held that “users of cellphones are not categorically excluded from the definition of ‘residential subscriber’ under the TCPA [(Telephone Consumer Protection Act)].”
In Cacho v. McCarthy & Kelly LLP, plaintiff claimed that he used his cellular phone exclusively for personal, family, and household purposes. The cellphone was registered in plaintiff’s name under the National Do Not Call Registry. Despite this, plaintiff began to receive calls soliciting him for legal services from the defendant. Plaintiff then filed suit and asserted claims against defendant for violations of the TCPA as well as state law related to telemarketing solicitations.
The defendant moved to dismiss, arguing that the TCPA claim failed since the calls were made to a cellular number. Moreover, defendant asserted that the term “residential,” as used in the phrase “residential subscriber” under the TCPA, denotes a landline, not a cellular line, and, as such, that only persons who subscribe to landlines and not those who subscribe to cellular lines can be “residential subscribers.”
The Court rejected this claim, observing that “[c]arried to its logical limits, that argument would admit of absurd consequences—ones that Congress could not have intended and contrary to Congress’s purposes,” and finding it “perfectly consonant with the statute that residential subscriber would be read to include those individuals who use a cellphone for household purposes.”
Nevertheless, the Court concluded that the complaint “cannot be sustained based on Plaintiff’s legal conclusions, couched as factual allegations” because it “is bereft of any allegation from which one could reasonably infer that Defendant knew or should have known that the telemarketers were violating the TCPA and its implementing regulations.”
Cacho makes clear that courts continue to employ the substance-over-form approach in interpreting consumer protection laws and regulations to ensure the fullest extent of coverage intended.
CFPB Warns against Intimidation of Whistleblowers
By Eric Mogilnicki and Brandon Howell, Covington & Burling LLP
On July 24, the Consumer Financial Protection Bureau (“CFPB”) issued a circular describing the potential legal implications under Section 1057 of the Consumer Financial Protection Act of overly broad nondisclosure agreements (“NDAs”). It is unlawful under Section 1057 for a covered person or entity to discriminate against an employee for whistleblowing with respect to suspected violations of federal consumer financial law. The circular indicates that broad NDAs, which often prohibit employees from discussing confidential information, can deter whistleblowers from reporting misconduct to government officials or law enforcement agencies. In a press release, CFPB Director Rohit Chopra added that “[t]he law enforcement community uncovers serious wrongdoing by financial firms through whistleblower tips. . . . Companies should not censor or muzzle employees through nondisclosure agreements that deter whistleblowers from coming forward to law enforcement.”
The circular highlights instances where employees of covered entities are required to sign NDAs during internal investigations, and argues that such NDAs may be viewed as a threat to the employee for whistleblowing or cooperating with authorities. The circular states that such a threat, whether or not acted on by the employer, could be viewed as prohibited discrimination under Section 1057. The CFPB notes that covered entities can mitigate the risk of violations of Section 1057 by including explicit language in NDAs that permits employees to communicate freely with government agencies and cooperate in government investigations.
CFPB Issues Report on School Lunch Junk Fees
By Eric Mogilnicki and Brandon Howell, Covington & Burling LLP
On July 25, the CFPB released a report highlighting the average costs and potential risks for families using electronic payment platforms to add money to their children’s school lunch accounts. In a press release, CFPB Director Chopra stated, “Today’s report will help school districts avoid contracts with financial firms that harvest excessive fees from families who purchase school lunch.”
The report notes that many school districts are shifting to cashless payment systems to reduce administrative costs. However, these systems may result in increased costs for students and their families. The report indicates that school lunch payment processors may be collecting as much as $100 million annually in transaction fees, with total fee revenues collected by these payment processors being much higher.
The report highlights several issues with the current school lunch payment processing system, including the following:
- Parents have no choice in selecting a payment platform, as contracts are determined at the school district level.
- Fee-free payment options are often not well advertised by school districts or easily accessible.
- Flat fee structures of these charges disproportionately burden low-income families, as they are more apt to make frequent, smaller payments.
Limited competition among payment processors allows these companies to maintain high fees with little incentive to reduce costs.
CFPB’s Proposed Interpretive Rule Would Subject Earned Wage Access to Federal Credit Regulations
By Eric Mogilnicki and Tyler Smith, Covington & Burling LLP
On July 18, the CFPB issued a proposed interpretive rule that would subject certain paycheck advance, or “earned wage access” (“EWA”), products to the requirements of the Truth in Lending Act (“TILA”) and Regulation Z. As provided in the proposed interpretive rule, TILA and Reg Z would apply to any EWA product that charges consumers a fee in connection with a paycheck advance, even where the consumer opts to pay the fee voluntarily, as is the case with expedited funds delivery fees and “tips.” According to the proposed interpretive rule, these fees are “finance charges” that the creditor “imposes” on the consumer.
If finalized, providers of covered EWA products would be subject to TILA’s account opening and periodic statement disclosures requirements, as well as other requirements in TILA relating to billing error resolution, the prompt crediting of refunds for returned items, and the right of cardholders to assert claims and defenses against the card issuer. The proposed interpretive rule replaces an advisory opinion the Bureau issued in 2020, which established a safe harbor from TILA for employer-sponsored EWA products that are cost-free to the consumer. The press release accompanying the proposed interpretive rule nonetheless concedes that for EWA products that are “no-fee and truly free to the employee, many requirements would not apply.”
This action marks the second time this year the CFPB has proposed an interpretive rule that, if finalized, would subject a novel financial product to the requirements of TILA. A proposed interpretive rule the Bureau issued in May would establish that certain “buy now, pay later” products are “credit cards” and thus subject to a portion of TILA and Regulation Z.
Although interpretive rules are not subject to notice and comment under federal law, the Bureau is soliciting comments on the proposed interpretive rule, just as it did for the proposed buy now, pay later product interpretive rule. Comments are by August 30, 2024.
CFPB Proposes Rule to Amend Mortgage Servicer Obligations
By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP
On July 10, the CFPB issued a proposed rule that would amend and update the obligations of mortgage servicers under Regulation X, which implements the Real Estate Settlement Procedures Act (“RESPA”).
In a press release, the Bureau framed the proposal as “requir[ing] mortgage servicers to focus on helping borrowers, not foreclosing, when a homeowner asks for help,” and making it “simpler for servicers to offer assistance by reducing paperwork requirements.” The proposed rule would generally prohibit servicers from “dual tracking” a foreclosure while a borrower is seeking payment assistance or otherwise in the loss mitigation review process, and it would limit the fees that servicers can charge borrowers who are being reviewed for loss mitigation. The proposed rule would also remove the requirement that servicers collect a full application from borrowers prior to making a loss mitigation determination. In addition, the proposed rule would update the notices that servicers are required to provide to borrowers at risk of foreclosure, including by requiring additional information in written early intervention notices. The proposed rule would also require that such notices be made in both English and Spanish to all borrowers.
In a statement, Vice President Kamala Harris lauded the proposed rule as one that would help homeowners “stay in their homes, grow their equity, and keep their families safe.” CFPB Director Rohit Chopra echoed the sentiment, and cast the proposed rule more broadly as wise macroeconomic policy, explaining that it “would reduce avoidable foreclosures and make the mortgage market more resilient during future crises.”
CFPB Releases Semiannual Rulemaking Agenda
By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP
Last week, the CFPB released its Spring 2024 Rulemaking Agenda, which lists rulemakings the Bureau expects to enter the pre-rule, proposed rule, or final rule stages during the period from June 1, 2024, through May 31, 2025. The agenda includes a number of rules that the Bureau anticipates proposing or finalizing in the coming months:
- In July, the Bureau intends to propose a rule that will regulate data brokers covered under the Fair Credit Reporting Act (“FCRA”).
- Also in July, the Bureau intends to finalize the rule that will require supervised nonbank entities that use standard-form contracts to register with the Bureau and provide information about their use of terms and conditions that seek to waive or limit consumer rights.
- In September, the Bureau intends to finalize its rule subjecting larger participants in the market for digital consumer payment applications to supervision.
- Also in September, the Bureau is considering proposing a rule to replace the Federal Reserve’s former Regulation AA (which was repealed as a result of the Dodd-Frank Act’s transfer of authority to the CFPB).
- In October, the Bureau intends to finalize its rule determining that charging nonsufficient fund fees on instantaneously declined transactions is an abusive practice.
- Also in October, the Bureau intends to finalize its rulemaking on personal financial data rights.
Finally, the Bureau does not expect to finalize its rule to limit overdraft fees until January 2025.
CFPB’s Summer 2024 Supervisory Highlights Focuses on Loan Servicing and Debt Collection
By Eric Mogilnicki and Rye Salerno, Covington & Burling LLP
On July 2, the CFPB released its Spring 2024 Supervisory Highlights report. The report, which is the thirty-fourth edition of the Supervisory Highlights publication, focuses on findings from examinations of auto and student loan servicing companies, as well as debt collectors, completed between April 1, 2023, and December 31, 2023. In particular, the report discusses Bureau findings of deficiencies in the practices of student and auto loan servicers, and deceptive or harassing practices by debt collectors in violation of the Fair Debt Collection Practices Act (“FDCPA”).
The report notes that “[e]xaminers found that [auto loan] servicers engaged in unfair acts or practices by failing to debit consumers’ final payment via their autopay system without adequate notification to borrowers enrolled in autopay that they need to make the final payment manually.” With regard to student loan servicing, the report notes failures to provide accurate information about benefit forms and to provide notifications of preauthorized electronic funds transfers, and it focuses on the barriers to assistance for consumers: “[e]xaminers found certain servicers had excessive hold times when consumers contacted them, with average hold times of 40 minutes over a six-month period. As a result of these long hold times almost half of consumers dropped their calls before speaking with an agent.”
As to debt collection, “examiners found that debt collectors used false, deceptive, or misleading representations or means in connection with collection of a debt when they used a business, company, or organization name other than the true name of the debt collectors’ business, company, or organization,” and that debt collectors often failed to provide initial disclosures that are required under the FDCPA’s implementing Regulation F. The report also notes that debt collectors communicated with consumers at inconvenient or unusual times or places in violation of Regulation F.
In addition to its focus on loan servicers and debt collectors, the Supervisory Highlights notes deficiencies in the way some financial institutions communicate with customers about account freezes due to suspicious activity. The Supervisory Highlights also flags consumer complaints related to the marketing and promotion of medical credit cards that are offered to consumers at healthcare facilities such as doctor’s offices and hospitals.
Gaming Law
U.S. Supreme Court Declines to Review Constitutionality of Federal Horseracing Act, with Pending Petition for Rehearing
By Amanda Z. Weaver, PhD, attorney at Snell & Wilmer, LLP
May’s Month-in-Brief discussed a petition for a writ of certiorari before the United States Supreme Court arising from a circuit split addressing the constitutionality of the 2020 Horseracing Integrity and Safety Act (the “Act”). See “Thoroughbred Racing’s Triple Crown Coincides with Briefing to U.S. Supreme Court on Constitutionality of Federal Horseracing Act.” The Supreme Court has since denied the petition, for which Petitioners (who include the states of Oklahoma and West Virginia, their racing commissions, and other industry participants) filed a petition for rehearing. See docket for U.S. Sup. Ct. No. 23-402.
In relevant summary, the Act created in part a “private, independent, self-regulatory, nonprofit corporation” known as the Horseracing Integrity and Safety Authority (“HISA”). The Act authorized HISA to develop and implement medication control and racetrack safety with Federal Trade Commission oversight for “covered” horses, persons, and horseraces (which include thoroughbred horseraces that are the subject of interstate wagering), 15 U.S.C. § 3052; see also 15 U.S.C. §§ 3051(5), 3053. HISA’s established standing committees for Racetrack Safety and Anti-Doping and Medication Control are “designed to enhance the safety and wellbeing of both horse and rider while ensuring the integrity of the sport for the benefit of the industry, fans and bettors.” See HISA, “Our Mission.”
Parties challenging the Act in the Sixth Circuit filed a petition for a writ of certiorari in October 2023. After briefing from the parties and of amici, the Supreme Court denied certiorari on June 24, 2024. However, on July 18, 2024, Petitioners filed a petition for rehearing, which is essentially a motion for reconsideration. The petition for rehearing argues rehearing is justified based on the “exceptionally rare situation in which a significant ‘intervening circumstanc[e]’” arose “within 25 days” of the Supreme Court’s denial of certiorari. Oklahoma v. United States, No. 23-402, at 1, on petition for rehearing.
Specifically, the petition for rehearing argues that the Fifth Circuit expressly issued a ruling after the Supreme Court denied certiorari, see id., at 2, holding that the Act violated the private nondelegation doctrine because the Act “facially delegates unsupervised enforcement power to private actors,” Nat’l Horsemen’s Benevolent & Protective Ass’n v. Black, 23-10520, 2024 WL 3311366, at *11 (5th Cir. July 5, 2024). The nondelegation doctrine “teaches that a private entity may wield government power only if it functions subordinately to an agency with authority and surveillance over it.” Id. at *3 (internal quotation marks and citation omitted). Because the Act “empowers [HISA] to investigate, issue subpoenas, conduct searches, levy fines, and seek injunctions—all without the FTC’s say-so,” the Fifth Circuit held that the Act’s enforcement provisions are facially unconstitutional. Id. at *1. The Sixth Circuit, in contrast, has “held that ‘the FTC has full authority to review the Horseracing Authority’s enforcement actions.’” Oklahoma, at 5, on petition for rehearing (quoting Pet. App. 17a).
The Supreme Court distributed the petition for rehearing for consideration on July 25, 2024. See docket for U.S. Sup. Ct. No. 23-402.
Is There a Tribal Right to Sports Betting? The Southern Ute Indian Tribe Says Yes
By Megan Carrasco, attorney at Snell & Wilmer LLP
On July 9, 2024, the Southern Ute Indian Tribe (the “Tribe”) sued the State of Colorado for the right to engage in online sports betting. Sports betting is regulated on a state-by-state basis—there is no overarching federal scheme. The lawsuit targets Colorado’s legalization of sports betting, which the Tribe claims has adversely impacted it since 2020.
The Tribe claims in its suit that the Tribal-State Compact, an agreement negotiated between the Tribe and Colorado, gives the Tribe the right to operate any form of legal gaming in Colorado so long as it does not go beyond the commercially available offerings. This means that, for example, if non-tribal sportsbook entities are allowed to offer parlays (meaning bets related to a slew of independent outcomes), then so are the Tribes. As a corollary, if non-tribal entities have a betting cap of $150 per wager, the Tribe would also be bound by that cap.
Colorado’s governor, Jared Polis, disagrees. This matters because in Colorado it is the governor’s office that has the responsibility to oversee gaming. The complaint alleges that Governor Polis, in his official capacity as governor, has insisted the Tribe obtain a state license should it wish to offer sports betting. To that end, the complaint alleges that Governor Polis has instructed the Colorado Division of Gaming to take the position that the State of Colorado has the authority to regulate tribal sports betting. Further, the Tribe claims that the Polis administration threatened its gaming license, and as a result, the Tribe’s primary vendor, concerned that the Tribe might lose the license and its ability to pay the vendor, terminated its relationship with the Tribe. The Tribe views this as a roundabout enforcement mechanism.
The task before the Court is not novel. The Court simply must interpret the Tribal-State Compact. But that does not mean that it will be easy. According to the complaint, Governor Polis has taken the position that sports betting on Tribal land in Colorado is “illegal.” The Tribe alleged that the governor’s administration is ignorant of the nuances of tribal sovereignty and is pressuring the Tribe to waive its sovereign immunity in exchange for the privilege (that it believes it already has) of operating sports betting.
The Tribe is asking the Court to (1) interpret the Tribal-State Compact, (2) enjoin the State of Colorado from interfering with the Tribe’s sports betting activity, and (3) reimburse the Tribe for its costs and fees associated with bringing the lawsuit.
Tax Law
Supreme Court Holds Redemption Obligation Does Not Offset Value of Life Insurance Proceeds in Estate Tax Valuation
By Timothy M. Todd, Liberty University School of Law
In Connelly v. United States, 602 U.S. __ (2024), the Supreme Court addressed the valuation of closely held corporate shares that were redeemed by the corporation using life-insurance proceeds. In doing so, the Court resolved a circuit split concerning whether life-insurance proceeds must be included in the valuation. In the case, two brothers entered into a buy-sell agreement under which the surviving brother or the company could buy the deceased brother’s shares. The company obtained life insurance on the brothers. When the majority-interest brother died, his estate filed an estate tax return that valued the corporate shares without including the value of the life insurance. The IRS audited the return and added the life-insurance proceeds to the valuation of the corporation. The estate challenged that valuation in district court, arguing that the value of the life-insurance proceeds was offset by the redemption obligation to purchase the shares, which resulted in no net change to the entity. The district court and Eighth Circuit disagreed.
The Supreme Court framed the issue as “whether life-insurance proceeds that will be used to redeem a decedent’s shares must be included when calculating the value of those shares for purposes of the federal estate tax.” More specifically, the issue was whether the contractual obligation to redeem the shares offset the value of the received life-insurance proceeds. The Court held that “[a]n obligation to redeem shares at fair market value does not offset the value of life-insurance proceeds set aside for the redemption because a share redemption at fair market value does not affect any shareholder’s economic interest.”
Supreme Court Upholds Mandatory Repatriation Tax and Avoids Ruling on Realization Requirement
By Timothy M. Todd, Liberty University School of Law
In Moore v. United States, 602 U.S. __ (2024), the Supreme Court addressed the constitutionality of the mandatory repatriation tax, which was enacted as part of the Tax Cuts and Jobs Act (TCJA). The TCJA modified the United States’ approach to international taxation; as part of the transition, the mandatory repatriation tax (MRT) imposed a one-time tax on accumulated and undistributed income of American-controlled foreign corporations to American shareholders based on their pro rata shares of that income. Two minority shareholders of a foreign corporation sued, challenging, as relevant here, that the tax was unconstitutional because the MRT was a direct tax that was not apportioned. The district court dismissed the case, and the Ninth Circuit affirmed. Specifically, the Ninth Circuit held that the MRT was a tax on income.
Although the case was touted as one that could potentially upend various tax norms, the Court narrowly framed the question in its decision. Indeed, the Court framed the question as “whether Congress may attribute an entity’s realized and undistributed income to the entity’s shareholders or partners, and then tax the shareholders or partners on their portions of that income.” The answer to that question, according to the Court, was that the “Court’s longstanding precedents, reflected in and reinforced by Congress’s longstanding practice, establish that the answer is yes.” In particular, the Court synthesized that its precedents establish that “when dealing with an entity’s undistributed income, Congress may tax either (i) the entity or (ii) its shareholders or partners.”
Importantly, the Court emphasized that its analysis did not address three issues: “(i) an attempt by Congress to tax both the entity and the shareholders or partners on the entity’s undistributed income; (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on appreciation.” Furthermore, the Court did not address whether “realization” is a constitutional requirement.
