CURRENT MONTH (September 2024)
Chevron Deference Has Died
By Margaret M. Cassidy, Cassidy Law PLLC
Since 1984, federal courts have had to defer to a federal agency’s interpretation of a statute, rule, or regulation when that agency’s interpretation was “reasonable.” This canon of interpretation is known as “Chevron Deference” after the Supreme Court case Chevron v. Natural Resources Defense Counsel, 467 U.S. 837 (1984).
Chevron Deference died in June 2024 when the Supreme Court decided Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024). In Loper, the Supreme Court held that courts must exercise their independent judgment when evaluating if a federal agency acted within its statutory authority when creating and interpreting regulations or rules implementing a statute. In other words, courts should no longer defer to the federal agency on how to apply or interpret a statute.
The issue that brought the Chevron Deference to the Supreme Court arose over a dispute on a rule implementing the Magnuson-Stevens Fishery Conservation and Management Act, which required certain fishing businesses to pay fees for observers responsible for monitoring fishing. The National Marine Fisheries Service, an agency within the U.S. Department of Commerce, implemented the rule requiring the fees be paid. Fishing businesses challenged the requirement, and the lower courts ruled in favor of Commerce, applying Chevron Deference.
In Loper, the 6–2 majority explained that the approach taken in Chevron was inconsistent with the Constitution’s separation of powers doctrine, which requires, among other things, that federal courts are the final authority on the law, not the executive branch through its regulatory agencies. The Supreme Court ruled that the Administrative Procedure Act (5 U.S.C. §§ 551–559) requires courts to decide questions of law and to interpret statutes rather than deferring to an agency’s legal interpretation.
The Supreme Court noted that courts resolve ambiguity in other contexts, and there is no reason treat the decision of an executive agency any differently. However, the Supreme Court determined that if Congress has delegated the power to interpret to a federal agency, either expressly or through a term implying delegation, courts must review the agency’s determination under the more deferential standard by asking whether the agency’s decision is arbitrary and capricious.
The Court also rejected the idea that federal agencies have unique expertise to resolve statutory ambiguity, explaining that courts may still consider the agency’s interpretations and opinions on a matter. The Court explained that previous decisions that applied Chevron Deference are not subject to review.
Loper’s impact will play out over the coming months and years as businesses bring legal challenges to agency regulations and rules. Challenges are likely to be mounted against SEC rules and regulations as well as rules and regulations related to healthcare, financial services, exporting, transportation, and energy, for example. Further, Loper may result in agencies being more conservative in their rulemaking.
Banking Law
Banking Agencies Issue Important Changes to Bank Merger Review Process
By Joseph E. Silvia, Duane Morris LLP
On September 17, 2024, the Office of the Comptroller of the Currency (“OCC”) and the Federal Deposit Insurance Corporation (“FDIC”) separately finalized previously proposed policy statements on their review of bank mergers under the Bank Merger Act and its implementing regulations. Noticeably missing in action was the Federal Reserve Board of Governors, which has not issued any policy statement that would update or amend its review of bank mergers. Also on September 17, 2024, the Department of Justice (“DOJ”) formally withdrew from the 1995 joint Bank Merger Guidelines and issued commentary on its plans to transition to the 2023 Merger Guidelines for its review of bank mergers.
While much of these updated policy statements is consistent with the more recent practice of the OCC and FDIC, the disconnect with the DOJ’s 2023 Merger Guidelines may cause some confusion for bank merger applicants and could frustrate the already extended review process. Certainly more to come, but bank acquirers need to consider these updated policy statements and merger guidelines before considering strategic transactions.
Illinois Adopts Model Money Transmission Act
By Joseph E. Silvia, Duane Morris LLP
On August 9, 2024, Governor of Illinois J.B. Pritzker signed legislation to adopt the Uniform Money Transmission Modernization Act, which creates a new regulatory framework for money transmission in the State of Illinois. The Illinois Uniform Money Transmission Modernization Act supersedes the existing Transmitters of Money Act in Illinois and generally prohibits an entity from engaging in money transmission or advertising, soliciting, or portraying itself as offering money transmission services in Illinois unless the entity is licensed or otherwise qualifies for an exemption from licensing. The new statute requires more strict licensing and reporting requirements for money transmitters in Illinois and includes the establishment of the Transmitters of Money Act Consumer Protection Fund, which will provide restitution to consumers who suffer monetary loss due to regulatory violations. The new regulations generally become effective as of January 1, 2026.
Consumer Finance
The CFPB Continues to Target ‘Junk Fees’ in Its Latest Overdraft Fee Guidance
By Olivia (Liv) Lawless, Pilgrim Christakis LLP
As the Consumer Financial Protection Bureau (“CFPB”) continues to push forward its initiative targeting “junk fees,” the agency released its latest guidance on a financial institution’s duty to obtain a consumer’s affirmative consent to be charged overdraft fees under the Electronic Fund Transfer Act (“EFTA”) and Regulation E. Under the current statutory framework, a consumer must affirmatively opt in, not opt out, to overdraft fees assessed in connection with ATM or one-time debit transactions. The affirmative consent requirement seeks to protect consumers from acquiring fees related to services they never requested. Nonetheless, the CFPB’s examinations have determined that some financial institutions were unable to provide proof of a consumer’s affirmative consent prior to being charged overdraft fees.
In response, the CFPB’s guidance provides exemplary forms of affirmative consent financial institutions can obtain and notes that the type of affirmative consent varies depending on the means by which the consumer opted in to overdraft coverage. For example, a form signed by the consumer, a call recording confirming consent, or a consumer’s electronic signature may suffice.
District Court Dismisses Truth in Lending and Regulation Z Action against Corporate Executives
By Marisa Roman, McGlinchey Stafford PLLC
On September 13, 2024, the United States Court for the District of Massachusetts dismissed a pro se litigant’s claims against four executives of a bank for alleged violations of the Truth in Lending Act (TILA) and certain provisions of Regulation Z, 12 C.F.R. §§ 226.22, 1026.5 after Plaintiff alleged that he was inaccurately charged more than the Annual Percentage Rate (APR) reflected in a promissory note.
On or about June 6, 2020, bank executives were sued after Plaintiff received a loan in the amount of $23,135.68 used to purchase a 2010 Toyota Tacoma. The Retail Installment Sales Contract (RISC) Plaintiff signed set a sixty-month payment schedule with an APR of 15.66 percent.
In his complaint, Plaintiff alleged that the four named bank executives violated Regulation Z because of a discrepancy in his March 7, 2023, payment that purportedly reflected a 90.11 percent APR, which was beyond the one-eighth of a percentage point margin of error allowed under § 226.22. Plaintiff further alleged that the “complete terms and conditions” of his vehicle loan were “not entirely realized and considered” by Plaintiff before he signed the RISC in June 2020.
After removing the complaint from state court, the four executives moved to dismiss Plaintiff’s complaint under Rule 12(b)(6) on the grounds, inter alia, that they were neither “creditors” nor parties to the RISC and, therefore, could not be held liable under TILA or Regulation Z.
The court agreed with Defendants and held that none of them met the definition of “creditor” under either TILA or the parallel definition in Regulation Z in that none of them “(1) regularly extend[ed] consumer credit which is payable by agreement in more than four installments or for which the payment of a finance charge is or may be required” or were the parties (2) “to whom the debt arising from the consumer transaction [was] initially payable” (internal citation omitted).
The court found that Plaintiff failed to allege sufficient facts to show that each of the Defendants were the parties who had extended the consumer credit to Plaintiff and were the parties to whom the debt was payable. Further, the court reasoned that even though Defendants were employees of the financial institution that had extended the financing to Plaintiff, Defendants did not “fall under the plain language of the definition of ‘creditor’ under [] TILA and Regulation Z.”
Defendants’ removal of Plaintiff’s action likely waived any personal jurisdiction defense Defendants would have had. However, had Plaintiff’s case been originally filed in federal court, Defendants easily could have moved for dismissal for a lack of personal jurisdiction, as it was clear from the RISC alone that Defendants lacked the necessary minimum contacts to be hauled into court by Plaintiff. In matters where their executives are directly named, financial institutions will often move for dismissal for a lack of personal jurisdiction, as a simple personal jurisdiction motion to dismiss can save preparation hours in preparing a motion to dismiss under Fed. R. Civ. P. 12(b)(6).
Eighth Circuit Upholds Sanctions against Defendant in FCRA Lawsuit for Demanding ‘Too Much’ in Discovery
By Alexander Green, McGlinchey Stafford PLLC
Recently, the U.S. Circuit Court of Appeals for the Eighth Circuit affirmed a discovery ruling, including an award of $93,243.50 in attorneys’ fees, against a defendant in a lawsuit arising under the Fair Credit Reporting Act (FCRA). The court found that the defendant “crossed the line when it demanded mostly irrelevant information” from the consumer’s law firm.
Surprised by the erroneous reporting of an auto loan as being “discharged through bankruptcy,” a consumer couple eventually filed suit in Indiana, alleging that the credit reporting agency (CRA) violated the FCRA by ignoring their prior disputes. After the matter was removed to federal court, the CRA issued multiple subpoenas against the consumer’s law firm. According to the court, “[t]he requests reached far and wide, from the assistance the firm had provided to the [consumers] to how it structured its business. [The subpoenas] even asked about the assistance provided to other clients.”
Rather than answer, the law firm requested that a federal court in Missouri quash the subpoenas as being “not relevant.” The lower court agreed and awarded $93,243.50 in attorneys’ fees and costs. An appeal followed.
Noting that “broad discovery” is the “norm” in most lawsuits, the court cautioned that the information and documents sought “must still be probative” of some claim or defense in the action. Taking the position that the subpoenas did seek relevant information, the CRA argued, as one of its defenses, that “it had no duty to investigate or respond because the [consumers] did not ‘notif[y] [it] directly, or indirectly through a reseller.’ ” In other words, the CRA argued that receiving disputes from a consumer’s law firm did not qualify as receiving a dispute “directly” from the consumer, as required for liability to attach under the FCRA.
The Eighth Circuit found the CRA’s reading of the FCRA to be unnatural. Looking to the plain meaning of the statute’s language and observing “basic agency law,” the court found that “a letter from a lawyer is good enough.”
Turning to the subpoenas, the Eighth Circuit observed that “[t]he lesson here is that [the CRA] should not have cast its discovery net so wide.” Finding that “the subpoenas posed an ‘undue burden’ precisely because much of the requested information was irrelevant,” the court affirmed the lower court’s ruling, including the award of attorneys’ fees as a sanction.
At times, it may be tempting to seek expansive discovery exploring the relationship between a consumer and their attorney, but the opinion in Stecklein & Rapp Chartered v. Experian Info. Sols., Inc. outlines the risks of such tactics. As with everything in an FCRA lawsuit, defense strategies should be deliberate and measured.
Lack of Actual Knowledge and Prior Express Consent Defeat FDCPA and TCPA Claims
By Alyssa Lynn Szymczyk, McGlinchey Stafford PLLC
The U.S. District Court for the District of Nevada granted a defendant’s motion for summary judgment in a recent case arising under the Fair Debt Collection Practices Act (FDCPA) and the Telephone Consumer Protection Act (TCPA). It found that the evidence did not reasonably support an inference that the defendant had actual knowledge of the plaintiff’s legal representation regarding an account and that the plaintiff providing her phone number regarding the original transaction was consent to communications originating from that transaction, including efforts to collect on the debt.
The plaintiff owed three separate medical debts to St. Rose Hospital, which assigned the three accounts to Medicredit to collect. The plaintiff retained legal representation in April 2021 regarding her first two debt accounts, and Medicredit received notice of the plaintiff’s legal representation on those two accounts the same month. Thereafter, the plaintiff’s third account was placed with Medicredit on June 4, 2021. The plaintiff contends her counsel provided notice of representation regarding the third account by fax on June 15, 2021, but Medicredit denies it received notice on the third account until August 12, 2021.
Medicredit contacted the plaintiff by phone directly to collect on the debt. As a result, the plaintiff filed a lawsuit alleging that Medicredit violated the FDCPA by contacting her directly when Medicredit had knowledge of her legal representation. The plaintiff also alleged that Medicredit violated the TCPA because communications were made through an automatic telephone dialing system (ATDS) without her consent. Medicredit moved for summary judgment, arguing that it could not be held liable under the FDCPA because it did not have any knowledge of the plaintiff’s legal representation regarding the third account and that the plaintiff gave express consent for such calls pursuant to her agreement to seek medical care.
The court pointed out that the sole issue to determine liability for harassment and unconscionable practices under the FDCPA was whether Medicredit knowingly contacted the plaintiff in violation of the FDCPA. Considering that the June 2021 notice only referenced the second account and not the third account subject to the dispute, the court found “[b]ecause Medicredit’s policy designates representation by account, Medicredit’s knowledge of representation was thus limited to the accounts on which it was specifically informed. Communication efforts to collect on the third account were therefore not improper during the disputed time.” The court held Medicredit was entitled to summary judgment regarding the FDCPA claims because “[t]he evidence does not reasonably support an inference that Medicredit had actual knowledge of [the plaintiff’s] representation on the third account . . . and therefore [it found] Medicredit was reasonable in its efforts to collect on the third account.”
Next, the court analyzed the plaintiff’s claim that Medicredit uses an ATDS and artificial, prerecorded messages in violation of the TCPA. Medicredit denied using an ATDS and argued that the plaintiff gave express consent for such calls pursuant to her agreement to seek medical care. The court looked at the general elements of a TCPA claim: (1) The defendant called a cellular telephone number, (2) using an automatic telephone dialing system or artificial or prerecorded voice, (3) without the recipient’s prior express consent, and found the third element dispositive.
The court relied on a Sixth Circuit case that found “consumers may give ‘prior express consent’ under the [Federal Communication Commission’s] interpretation of the TCPA when they provide a cell phone number to one entity as part of a commercial transaction, which then provides the number to another related entity from which the consumer incurs a debt that is part and parcel of the reason they gave the number in the first place.”
Here, since the plaintiff provided her cellphone number to St. Rose as part of a commercial transaction to seek medical care, she consented to communications originating from that transaction, including efforts to collect on the debt. Medicredit received the plaintiff’s number from St. Rose when St. Rose placed the account for collection with Medicredit. The court found this practice to be compliant with the FCC’s guidance and other circuit opinions and granted summary judgment in favor of Medicredit. Since it is undisputed, the plaintiff provided her phone number on her medical admission form.
Woodman v. Medicredit highlights defenses to liability under both the FDCPA and TCPA—lack of actual knowledge by a debt collector in contacting a debtor represented by legal counsel and prior express consent given for communications regarding the original transaction underlying the debt.
Gaming Law
Trading on Elections
By Megan Carrasco, Snell & Wilmer LLP
The prop bet market is booming. Prop betting is betting on every aspect of a game, not just who wins or loses. Bets can be placed on how many yards will be run, number of baskets scored, tackles made, passes caught, and so on.
So, why not bet on the outcome of the hundreds of elections coming this November?
Kalshi, Inc., a company based in New York, thinks its users should be able to do so. Right now, Kalshi allows “event contracts” on everything from financial products, such as derivatives; to weather—what will the temperature in Miami be; to culture happenings—will Nintendo announce a new console before the end of the year?
Last year, the Commodity Futures Trading Commission (“CFTC”) took issue with such betting on elections when it issued an order barring Kalshi from creating event contracts related to the outcome of congressional elections because it was prohibited “gaming” under § 5c(c)(5)(C)(i) of the Commodity Exchange Act. This section of the Commodity Exchange Act gives the CFTC authority to determine whether certain financial agreements, contracts, transactions, or swaps “involve” “gaming” or “other similar activity” and to determine if the instrument, like an event contract, is contrary to public interest. In its order barring Kalshi’s election-related event contracts, the CFTC did find the contracts were against public interest. The Kalshi event contract that the CFTC considered was: Will [a certain chamber of Congress] be controlled by [party] for [a term]? The only answers were yes or no. Kalshi sued the CFTC, arguing that its order is “arbitrary, capricious, and otherwise contrary to law.”
On September 12, 2024, the District Court for the District of Columbia handed Kalshi a win, stating, “The CFTC’s order exceeded its statutory authority. Kalshi’s contracts do not involve unlawful activity or gaming. They involve elections, which are neither.”
But the win was short-lived. The CFTC appealed the district court’s order on an emergency basis, asking the D.C. Circuit to stay the lower court’s order. Oral argument took place on September 19, 2024, Case No. 2024-cv-05205. We await a decision.
This opens up a can of worms. If control of the House or Senate is up for consideration, can Kalshi or other platforms expand the event contract market to include whether Vice President Kamala Harris will be elected president? Could it trickle down to whether your neighbor is elected to the local school board? Is it against public policy to have a market where voters can “bet” on outcomes of elections? If so, will there be claims that elections are “fixed” at the behest of those who bet big wanting a particular outcome? As some commentators have pointed out, with the Supreme Court recently diluting the powers of regulatory agencies (see the month-in-brief entry on Loper Bright Enterprises v. Raimondo above), this might be another test case ripe for a change to regulatory authority.
Intellectual Property Law
Signs of the Times: Latest Developments in The New York Times’ Copyright Case Against OpenAI
By Emily Poler, Poler Legal LLC
In December 2023, The New York Times sued several OpenAI affiliates (OpenAI) alleging that, among other things, OpenAI directly infringed on the Times’ copyrights by using the media company’s content to train OpenAI’s large language models (LLMs), thus enabling users of products like ChatGPT to generate their own, “original” content. Microsoft was also named as a defendant in this case because, according to the Times, Microsoft benefited from OpenAI’s infringement.
Since the suit was filed, both Microsoft and OpenAI separately moved to dismiss the complaint. In OpenAI’s motion, the company asserted, among other things, that some of the alleged infringement occurred more than three years before the complaint was filed and was thus barred by the statute of limitations. The Times responded to this latter claim by noting that OpenAI’s arguments on the statute of limitations did not apply to OpenAI’s GPT-3.5 and GPT-4 models, which were released in 2022 and 2023. The Times also pointed out that the statute of limitations does not begin to run until a copyright owner “discovers, or with due diligence should have discovered, the infringement” and that, based on materials available in 2019 and 2020, it could not have known the full scope of OpenAI’s infringement until later. This, combined with the fact that OpenAI’s motion to dismiss is full of materials the court has to ignore on a motion to dismiss, indicates OpenAI’s motion is rather weak, but we will have to wait a little longer for a decision here.
In the context of discovery, OpenAI sought, among other things, the Times’ “reporter’s notes, interview memos, records of materials cited, or other ‘files’ ” for each copyrighted work. OpenAI says it needs this material to distinguish the facts underlying an article (which cannot be copyrighted) from the method in which those facts were expressed (which can be copyrighted). The Times objected to this request on grounds that such materials are protected by the reporters’ privilege under the First Amendment to the U.S. Constitution and/or the New York State Shield Law.
On September 13, 2024, the court rejected OpenAI’s request for these materials. While the court didn’t provide a basis for its decision, it seems likely that the burden associated with the requests for reporters’ notes might have played a role. Moreover, the relevance of these materials to OpenAI’s proving that it did not infringe on the Times’ copyrights seems questionable, as OpenAI used the Times’ content not for the underlying facts. Rather, presumably, OpenAI used the expression of those facts—what is protected by copyright—to train its LLMs.
Stay tuned as there will be much more to come.
