Many enterprises and lawyers that handle financial, M&A, and joint venture transactions are now turning to alternative dispute resolution (ADR) processes as an effective way to resolve disputes. ADR institutions have seen a significant increase in these types of disputes over the last few years. Unfortunately, contract drafters oftentimes fail to appreciate the nuances of ADR or the various options that should be considered at the front end for a possible dispute down the road. Business corporate lawyers should include the litigators in their firms in this drafting process because the litigators will be in charge of any form of ADR process, be it mediation or arbitration, once the deal is complete and should a dispute arise.

Furthermore, as one of the institutional ADR providers, JAMS (formerly Judicial Arbitration and Mediation Services) notes: “Planning is the key to avoiding the adverse effects of litigation. The optimal time for businesses to implement strategies for avoidance of those adverse effects is before any dispute arises.” JAMS recommends “that whenever you negotiate or enter into a contract, you should carefully consider and decide on the procedures that will govern the resolution of any disputes that may arise in the course of the contractual relationship. By doing this before any dispute arises, you avoid the difficulties of attempting to negotiate dispute resolution procedures when you are already in the midst of a substantive dispute that may have engendered a lack of trust on both sides.”

The American Arbitration Association (AAA) states: “Alternative dispute resolution (ADR) allows parties to customize their dispute resolution process. Parties can insert the standard arbitration or mediation clause in their contract and can further customize their clause with options that control for time and cost.”

A well-written dispute resolution clause is the foundation of an effective dispute resolution process, and parties who draft these agreements most likely want an efficient, meaningful, and enforceable outcome. Flawed arbitration clauses may result in court intervention if disputes arise before the appointment of an arbitrator, during the arbitration, or afterward. So how do you decide what you will need within the provision? Is a simple, standard ADR provision too little protection, and can you “over-draft” a provision? Or is there some sort of “Goldilocks” provision that delivers the “right answer” each and every time? The answers to these questions can be “yes,” “no,” “perhaps,” “often,” “occasionally,” and many more. It truly just depends.

The Standard Clause

If a dispute arises from or relates to this contract or the breach thereof, and if the dispute cannot be settled through direct discussions, the parties agree to endeavor first to settle the dispute by mediation administered by the American Arbitration Association under its Commercial Mediation Procedures before resorting to arbitration. The parties further agree that any unresolved controversy or claim arising out of or relating to this contract, or breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

A standard arbitration clause is often chosen and is the best choice for ease in contract drafting and negotiation. By invoking a provider’s rule set, the standard clause provides a complete set of rules and procedures and eliminates the need to spell out each contingency and procedural matter. When combined with the organization’s case management services, the clause provides a simple, time-tested means of resolving disputes that has proven highly effective in hundreds of thousands of disputes.

By providing for mediation first, the parties have an opportunity to resolve their dispute early. Although sometimes a dispute might not be “ripe” for this facilitated step, many times it can serve to dispose of smaller, less complicated disputes almost immediately or serve to narrow the issues that might then proceed to the arbitration. It can therefore eliminate the need for arbitration and/or streamline the remaining unresolved issues, resulting in greater efficiency and cost savings. Anecdotally, it is said that mediation resolves around 80-85 percent of all cases, which if true or even remotely true, could be reason enough to consider its inclusion in a dispute resolution clause.

Should mediation prove unsuccessful, arbitration is included to provide a mechanism to fully and finally resolve “any unresolved controversy or claim.” This provision allows the institution and the rule set to manage the proceedings, including (among other things) arbitrator selection and appointment, managing challenges, collecting and dispersing arbitrator compensation, and general assurance that the case will keep moving toward a speedy resolution. Once the arbitrator (or panel of three arbitrators) is in place, the standard arbitration provision provides the arbitrator(s), advocates, and the parties the most flexibility to address the specific needs of a particular dispute and then craft an appropriate process to follow through to an award.

The Custom Clause

There are as many reasons to customize a clause as there are to not customize a clause. As explained above, the standard clause relies heavily on the advocates and a thoughtful, experienced arbitrator to collaboratively create a custom process in real time. This successfully occurs frequently. Sometimes, however, parameters cannot easily be agreed to while in the thick of the dispute, or agreeable counsel may settle on a process that mirrors the courtroom (both of which can be costly and time consuming), leaving clients with sour memories and raising serious questions about inserting an ADR provision into future contracts.

Thus, the crafting begins with well intentioned, battled-scarred mindsets like, “Don’t ever let that happen again,” “It can’t take longer than 90 days,” “We need three arbitrators next time,” “Make them come to us,” “What if . . . tried this,” and “I heard from a friend that we want to include . . . .”

In most cases, customizing a clause can help streamline the dispute resolution process. However, there are times when a custom clause becomes confusing, overly burdensome, or is impossible to interpret and administer. The courts and administrative agencies are regularly faced with arbitration clauses that are problematic in some respect. Resolving ambiguous filing requirements, vague conditions precedent, or unrealistic deadlines can add to costs and delays when parties in a dispute must work with a poorly worded dispute resolution clause. “Caveat Emptor” or “What’s Good for the Goose . . .” are phrases to remember when discussing what should and/or should not be included in your next dispute resolution clause.

So Many Choices

There are many resources available to the reader when choosing options. The AAA has “developed a ClauseBuilder® online tool—a simple, self-guided process—to assist individuals and organizations in developing clear and effective arbitration and mediation agreements.” Organizations such as JAMS offer drafting guides that help avoid ambiguity when contemplating the various choices in customizing an ADR clause.

Additionally, and specifically for M&A transactions, the Business Law Section of the American Bar Association offers the Model Asset Purchase Agreement and the Model Stock Purchase Agreement with Commentary, which are available as resources for attorneys negotiating and documenting a deal. These publications include model language, commentary, and explanations of related substantive laws regarding many issues. ADR clauses and purchase price dispute resolution clauses in M&A agreements are also covered.

Many parties use a standard clause as their “foundation” and then modify it to address unique circumstances, increase process predictability, or attempt to produce a desired outcome within the process. Items that can be included in the ADR clause are:

Domestic/International Rules

Number of Arbitrators

Method of Arbitrator Selection

Arbitrator(s) Qualifications

Locale Provisions

Governing Law

Discovery

E-Discovery

Documents-Only Hearing

Duration of Arbitration Proceedings

Remedies

Forum Fees and Attorney’s Fees

Opinion Accompanying the Award

Confidentiality

Language

Nonpayment of Arbitration Expenses

Appellate Process

Although this list is long, and each item seems like a great idea to consider, the list does not include the myriad ways in which the language surrounding the concept can become lengthy and confusing to the advocates and arbitrator(s) who are bound by the ADR clause. Language can be misinterpreted, and disputes may not arise until years after the documents are signed. It is therefore important to be clear and concise where possible, but remain flexible enough to allow administrators, advocates, and arbitrators the ability to adapt quickly and adjudicate the case in an efficient manner. It is realistic to recognize that you cannot, more times than not, design the perfect ADR mousetrap. In addition, what might work (or has worked) for certain disputes in certain parts of the world may not work in others. The general goal to include an ADR clause in any contract is to create a process that is fair and effective in resolving disputes in a manner that provides all the benefits of ADR: confidentiality, efficiency, some level of autonomy in selecting mutually agreeable mediators and arbitrators, and (hopefully) a reduction of legal costs in comparison to litigation.

International Considerations

Choice of the Seat. Although the selected arbitrators are probably the single most important factor in any arbitration, in an international arbitration, the “choice of the seat” of the arbitration may be a close second. The seat (as opposed to the location(s) of the hearings) is the jurisdiction of law that governs the arbitration. The courts of the seat, applying the procedural law of the arbitration (lex arbitri), supervise the arbitration for issues ranging from determining the validity of the arbitration agreement, compelling the parties to conform to the arbitration agreement, regulating the appointment of arbitrators, handling challenges should the parties or a chosen arbitration organization fail to do so, and deciding an action to set aside an award.

The procedural law, as applied by the courts of the seat, determines to what extent the courts can and cannot interfere in the arbitration. This is different from the substantive law applied to the transaction itself. In fact, there may be multiple substantive laws involved in an international transaction (e.g., contract law, real property law, labor law, etc.).

Although it is possible to choose a seat in one jurisdiction and the procedural law of the arbitration of a separate jurisdiction, it is almost always advisable for the courts of the seat to apply their own law. Thus, the arbitration clause should clearly identify both the seat and the procedural law. For instance, the Hong Kong International Arbitration Centre (HKIAC) model clause suggests the following:

“The law of this arbitration clause shall be . . . (Hong Kong law).

The seat of arbitration shall be … (Hong Kong).”

For choosing the seat, the Chartered Institute of Arbitrators (CIArb) in London has developed a set of principles “to provide a balanced and independent basis for the assessment of existing seats and to encourage the development of new seats.”

The CIArb London Centenary Principles (or London principles) comprise of 10 elements:

• an arbitration law providing a good framework for the process, limiting court intervention, and striking the right balance between confidentiality and transparency;
• an independent, competent, and efficient judiciary;
• an independent, competent legal profession with expertise in international arbitration;
• a sound legal education system; the right to choose one’s legal representative, local or foreign;
• ready access to the country for witnesses and counsel and a safe environment for participants and their documents;
• good logistical support, including transcription, hearing rooms, document handling, and translation;
• professional norms embracing a diversity of legal and cultural traditions, and ethical principles governing arbitrators and counsel;
• well-functioning venues for hearings and other meetings;
• adherence to treaties for the recognition and enforcement of foreign awards and arbitration agreements; and
• immunity for arbitrators from civil liability for anything done or omitted to be done in good faith as an arbitrator.

Ad Hoc Versus Administered Arbitration. Unless the parties have experience in arbitration and can maintain a reasonable working relationship throughout the dispute, it is usually advisable to use an established arbitration organization to administer the arbitration. Not only does this free the arbitrators from the administrative tasks (such as collecting deposits and managing document flow), but it may also lend credibility to the award in the event it must be enforced in other jurisdictions, particularly those with less experience in arbitration. Ad hoc or unadministered arbitration only works if the parties and their counsel are working collaboratively toward a resolution, post-dispute.

Discovery. In polite terms, it could be said that the rest of the world is less than enchanted with U.S.-style discovery. Any attempt to include extensive discovery provisions in an international arbitration agreement is likely to be strongly resisted. The International Bar Association (IBA) has issued “Rules on the Taking of Evidence in International Arbitration,” which are a compromise between the common law and civil law approaches to the exchange of information. Although not binding rules, international arbitrators commonly refer to them for guidance even if not specified or agreed to by the parties.

Although the standard of these rules is much more restrictive than U.S. discovery (e.g., for a document to be produced, it must be “relevant to the case and material to its outcome”), note that civil law arbitrators are likely to give an even more restrictive interpretation of these rules than common law arbitrators.

Language. Finally, selecting the language of the proceedings is highly advisable. Likewise, it is advisable that all the arbitrators are fluent in that language and that relevant documents are available or produced in that language.

Sample Problem Clauses

“The parties first agree to negotiate in good faith. If unsuccessful, the parties then agree to mediation. Should mediation fail, either party may file for arbitration.”—Although admirable, leaving the resolution of future disputes to “good faith” can lead to problems—namely, if there is no good faith between the parties or counsel, arguing about whether steps precedent to others have been satisfied could be problematic, and set the case up for a fight and undue delays at the very beginning. It is more advisable to include specific timeframes when providing a “step ADR clause” so that notice and impasse can be properly evidenced when proceeding to whatever the next phase is. An example of a better step clause:

If a dispute arises out of or relates to this contract, or the breach thereof, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration Association (AAA) or JAMS under its Commercial Mediation Procedures. Within 30 days after a party requests to mediate, any party may opt out of mediation by commencing binding arbitration with the AAA or JAMS in accordance with its Commercial [or other] Arbitration Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.

“Disputes may be submitted to JAMS or the AAA . . .”—Sometimes drafters prefer one set of rules or ADR administrator over another, or a particular panel over another. Although providers’ rules are similar, they are different, and the panels’ qualifications of each are generally specific to the administrator. Be mindful of which providers have specialized panels that are relevant to the disputes that will likely arise from the contract, and how ADR providers’ rules differ.

“Three Arbitrators shall be appointed.”—To prevent the “lone ranger” or “rogue arbitrator,” parties will sometimes include a mandatory appointment of three arbitrators to preside over their arbitration, believing that three heads are better than one. Unless this language specifically defines a threshold amount in controversy that requires the appointment of three arbitrators, however, a small, less complicated case could become very expensive very quickly, unless the parties agree to waive this requirement. If an established ADR provider is named in the clause, some will have thresholds for amounts in controversy to determine how many arbitrators will be appointed (e.g., for the AAA, controversies with over $1 million in dispute shall result in the appointment of three arbitrators unless the contract provides otherwise or the parties agree post-dispute to proceed with a single arbitrator).

“Arbitrator must be a lawyer with 15 years of experience in the technology industry and must have a Master’s degree in electrical engineering, and has been an Arbitrator for at least 10 years.”—This likely came about because, in the last arbitration, the arbitrator had no substantive knowledge in the subject matter, or the “deal” was so specific that these qualifications seemed reasonable at the time. Good luck trying to find someone who has this combination and is also available! One benefit of an administered process is help with arbitrator selection, either through their own rosters, outside organizations, or a facilitated compromise to reach an acceptable exception to this overly narrow requirement.

“The parties agree to apply the Federal Rules of Civil Procedure . . .”—Overly broad discovery can easily take over an otherwise efficient process without skilled counsel and a strong arbitrator. Language included in the clause can prevent efficiency from the start. Language added such as “or at the arbitrator’s discretion” can curtail and control the scope of discovery controversies. Most rules give the arbitrator broad discretion in allowing or limiting discovery and have a rule similar to AAA Rule 22(a), which instructs the panel to manage discovery “with a view to achieving an efficient and economical resolution of the dispute . . . .” JAMS’s Comprehensive Arbitration Rule 17, governing the exchange of information, outlines the scope and deadline for parties to engage in the voluntary and informal exchange of documents, but allows the arbitrator to “modify these obligations at the Preliminary Conference.”

“Either party may elect to appeal matters of . . .”—What may sound like a good idea to protect against a “bad decision” can drive up cost and time. Arbitration is inherently final and binding. Although some providers do offer rules for limited appeals (e.g., both AAA and JAMS offer an optional arbitration appeal procedure) in recognition that clients may hesitate to agree to arbitration due to its limited grounds for overturning an award, one of the hallmark benefits of arbitration is its finality; adding an appeals process should only be included if absolutely necessary. The cost and time associated with appealing the arbitration (within the confines of the optional arbitration appeals process offered by some ADR providers and not in the courts) makes sense in only a few “bet the farm” scenarios.

An example case of a good idea gone wrong is Hall Street Associates v. Mattel Inc. (2008), where an atypical clause in an arbitration agreement stipulated that the district court could override the arbitrator’s decision if “the arbitrator’s conclusions of law are erroneous.” Under the arbitration agreement in that case, both parties agreed to resolve matters according to Federal Arbitration Act (FAA) procedures; however, the FAA had a specific list of categories to which a court could override an arbitration award (e.g., “corruption,” “fraud, “evident partiality,” “misconduct”). Cost and time did indeed increase for this dispute: the initial arbitration in favor of Mattel was reviewed by the district court, the district court found legally erroneous conclusions, the arbitrator then ruled for Hall Street (the district court affirmed), the award was appealed to the U.S. Court of Appeals for the Ninth Circuit (in favor of Mattel), and finally the U.S. Supreme Court granted certiorari. The Supreme Court affirmed (6-3) the Ninth Circuit and held that the FAA’s categories are exclusive and cannot be expanded through contractual agreement.

Conclusion

The inclusion of an ADR clause in financial, M&A, and joint venture deals is increasingly favored because it offers parties confidentiality, expediency, ability to control the selection of decision makers in future disputes, the choice to craft a dispute resolution process that makes sense for all parties who wish to avoid the vagaries and unpredictable delays of the courts in both domestic and international jurisdictions, among other myriad benefits when compared to litigation. A savvy transactional attorney who understands the nuances of when it makes sense to include a step clause (where mediation is either encouraged or required) and when to modify a clause to address a specific concern or desire of their clients has great control to mitigate exposure and possibly reduce the time and cost associated with litigation – but only if the ADR clause is drafted thoughtfully, carefully, and in consultation with an experienced litigator who shares the clients’ interests and understands their concerns and goals. Recognizing that negotiating the dispute resolution clause can have a negative impact during the formation of a new venture or a merger, the hope is that the drafters take time to understand the process of mediation and arbitration (in contrast to litigation) and how customizing an ADR clause can be greatly beneficial (or very detrimental if drafted poorly), and to consider all the resources available to craft a dispute resolution process that their clients will appreciate should the deal go south in the future.

Editing assistance provided by Edgar Gonzalez.

This year marks the 10th anniversary of the ABA’s publication “Combating gray market goods,” which provided helpful insights on how to use the Lanham Act to protect clients. Since that publication, manufacturers and their distributors have continued to utilize the Lanham Act to protect against the gray market with a particular focus on enforcement at the U.S. International Trade Commission (ITC). As a result, the ITC has emerged as the go-to venue in the fight against the importation of gray-market goods, in part due to its simple in rem jurisdiction, quick schedules, ability to join many respondents, and broad exclusionary powers.

What Is the Gray Market and What Causes It?

Gray-market goods include products with genuine trademarks that are intended for sale and use in markets outside the United States but are imported and sold in the United States without the consent of the trademark owner.

Gray markets exist wherever unauthorized resellers are able to take advantage of pricing disparities and make money by importing goods from cheaper markets into more expensive markets. In our increasingly interconnected world, this kind of activity is becoming easier and more pervasive. Economic growth in less developed and less regulated markets, combined with the exponential boom in internet commerce and online marketplaces, have provided unauthorized resellers with bountiful sources of lower-priced products and open access to customers eager to buy them.

The pricing disparities that enable gray markets arise from numerous inescapable business realities. For example, local competition and currency fluctuations may serve to drive prices lower. At the same time, manufacturers in those markets may take advantage of lower labor and rent costs, fewer labor and environmental regulatory restrictions, lower costs of raw materials, lower taxes, and other considerations that may enable manufacturers to meet the need for lower prices while still maintaining profitability.

How Does the Gray Market Affect Manufacturers and Distributors?

Lost margins are often just the tip of the iceberg. A whole host of harms can follow from gray-market sales, including price erosion when customers in higher-price markets become accustomed to the presence of cheaper gray-market products. However, the effects are much broader than pricing. Products often differ in physical and nonphysical ways from market to market. When customers are initially unaware of these differences and discover them only after their purchase, manufacturers and their authorized distributors may bear the blame, albeit unfairly. For example, customers may be surprised to find that a gray-market product that they purchased has no warranty, was stored improperly, or is not entitled to important software updates. In these circumstances, customers’ dissatisfaction may result in harm to the goodwill associated with the manufacturer and its brand.

Effects of the gray market can also manifest in increased liability risk if, for example, a product recall must be issued, and gray-market customers do not receive recall notices because they did not purchase through authorized channels, or if a product fails in a safety-critical application due to the poor shipping and handling practices of unauthorized resellers. Manufacturers and their distributors also face liability risk in situations when unauthorized gray-market products have labels and safety warnings in a foreign language or that are otherwise unsuited for a particular market. Manufacturers and their distributors also often find themselves in a lose-lose dilemma when unhappy customers learn that their unauthorized gray-market products are not entitled to a warranty or technical support. Do they live with unhappy customers and take the chance that they leave for a competitor, or do they grant exceptions to their policies and expend uncompensated support costs?

How Does the Gray Market Affect Consumers?

Gray markets are not harmful to only manufacturers and distributors. Customers also often (unknowingly) pay a “hidden” price for cheaper gray-market goods. Price is usually not the only difference between genuine goods and their unauthorized gray-market counterparts. For example, products may exhibit physical differences, such as different formulations and composition, product labeling and packaging, instruction manuals, and product age and freshness, as well as differences resulting from the poor quality control in shipping, handling, and storage that is typical of unauthorized resellers. Product differences may also be nonphysical, such as differences in warranty, pre- and post-sale support, recall information, entitlement to software updates, and even applicability of environmental, safety, or supply-chain traceability certifications.

What Steps Can Be Taken to Stop Gray Market Goods?

Under Sections 32, 42, and 43 of the Lanham Act, both trademark owners and their exclusive and nonexclusive licensees may stop unauthorized resellers from selling gray-market goods upon showing a difference between the authorized and unauthorized goods.

Gray marketers hitch a free ride on manufacturers’ goodwill and reputation to have customers believe that the unauthorized goods are the same as the genuine articles, simply at a fraction of the price. When those gray-market goods have physical or nonphysical differences, such as not including the manufacturer’s warranty, courts have found those goods illegal.

Under what is known as the First Sale Doctrine, someone who buys a trademarked good may ordinarily resell that product without infringing the mark. However, this doctrine applies to only the resale of genuine goods and does not apply to the resale of a trademarked good that is “materially different” from the genuine goods sold by the trademark owner.

Trademarks serve to protect consumers from confusion just as much as they do trademark owners from erosion of goodwill. Accordingly, where there is a material difference between a genuine good and a gray-market good, the First Sale Doctrine does not prevent a trademark owner from blocking the resale of those gray-market goods. In evaluating differences between foreign gray-market goods and genuine domestic goods, “courts have applied a low threshold of materiality, requiring no more than showing that consumers would be likely to consider the differences between the foreign and domestic products to be significant when purchasing the product, for such differences would suffice to erode the goodwill of the domestic source.” Gamut Trading Co. v. United States ITC, 200 F.3d 775, 779 (Fed. Cir. 1999). The differences must also be present in “all or substantially all” the authorized goods. SKF USA Inc. v. Int’l Trade Commission, 423 F.3d 1307 (Fed. Cir. 2005). In the case of gray-market goods, confusion is presumed to exist in the presence of even a single material difference between the manufacturer’s genuine goods and unauthorized reseller’s gray-market goods.

Venues Available to Bring a Claim Against Unauthorized Resellers

Trademark infringement claims against unauthorized resellers may be brought in either a U.S. district court or the ITC. In federal district court, trademark owners may recover money damages for past infringement in addition to injunctive relief to try and prevent future infringement. However, because district court remedies are exercisable against only those entities properly brought into the court’s in personam jurisdiction, trademark owners must first identify and effectively serve process on any unauthorized reseller it wishes to stop—a task that may not be practical depending on the size or location of the unauthorized resellers. Unauthorized resellers also may evade actions in a district court by simply changing business names or locations. In many countries throughout the world, and particularly in online marketplaces, such changes are trivial to make yet require substantial investigatory effort to detect. Thus, a district court action to stop unauthorized resellers can devolve into a frustrating game of whack-a-mole in cases involving other than the largest and most deeply rooted infringers.

The ITC solves many of these potential district court issues and provides an alternative to pursue Lanham Act claims against unauthorized resellers. The ITC is empowered by statute to protect American industries from unfair methods of competition and unfair acts in the importation of articles as well as from importation into the United States of articles that infringe a valid and enforceable U.S. trademark. 19 U.S.C. § 1337. In contrast with federal district courts, however, the ITC exercises in rem jurisdiction over imported articles, which enables the ITC to issue general exclusion orders in certain circumstances that block the importation of all infringing articles, regardless of whether importers participate in the ITC’s investigation. In addition, service of process against accused importers is less rigorous—attempted service by regular mail is all that is required. Finally, unlike in district court, one investigation in the ITC can name many different unauthorized reseller respondents, consolidating resources and avoiding unnecessary multiplication of efforts.

The ITC’s available remedies include general exclusion orders against all infringing imports, limited exclusion orders against certain importers, and cease and desist orders against certain importers to prevent the sale of already imported articles. The work of enforcing exclusion orders issued by the ITC is accomplished at ports of entry by Customs and Border Patrol, which works closely with trademark owners to identify and block infringing articles.

In addition to the powerful remedies and simple service of process at the ITC, investigations conducted by the ITC are completed quickly and with a broad scope of permitted discovery. ITC investigations are typically completed within 12 months of institution. In addition, the broad scope of permitted discovery, combined with such a compressed investigatory timeframe and, in some cases, the involvement of a neutral, third-party staff attorney participating in the investigation on behalf of the Office of Unfair Import Investigations (OUII), often results in fewer, less hotly litigated discovery disputes than in typical district court actions.

In addition to these practical benefits, the ITC has proven itself to be a strong protector of domestic trademark owners’ rights against unauthorized gray-market importers. Several recent cases highlight the ITC’s important and effective role.

Recent Gray Market ITC Investigations

The maker of Red Bull energy drinks successfully petitioned the ITC to block unauthorized imports of its drinks sold in foreign markets on the basis of physical differences in formulation and ingredients between those drinks sold in the United States and those sold abroad. Certain Energy Drink Prods., ITC Inv. No. 337-TA-678.

Philip Morris also obtained a general exclusion order against unauthorized importation of Marlboro, Parliament, and Virginia Slims branded cigarettes because the unauthorized imports lacked English-language warning labels. Certain Cigarettes and Packaging Thereof, ITC Inv. No. 337-TA-643.

Most recently, Rockwell Automation, the largest company in the world dedicated to industrial automation, obtained a general exclusion order barring the unauthorized importation of its industrial control products. Certain Industrial Automation Systems and Components Thereof . . ., ITC Inv. No. 337-TA-1074. The ITC found that the existence of various material, nonphysical differences between Rockwell’s genuine goods sold through its authorized distribution network in the United States and those being imported from overseas, combined with strong evidence that importers had the ability to mask their identities and use online marketplaces to pass off gray-market goods as “new,” supported the issuance of the general exclusion order.

The material differences highlighted by the ITC included the gray-market products’ lack of a manufacturer’s warranty and lack of entitlement to pre- and post-sale customer support. The ITC also found that the lack of probable cause investigation and reporting that Rockwell offers its customers of genuine products when their product is returned under warranty to be a material difference in the eyes of consumers. In addition, the ITC noted that purchasers of genuine Rockwell products are notified of important product safety advisories and product notices because their contact information is maintained by Rockwell’s authorized distributors, whereas purchasers of unauthorized gray-market products have no such safety net. Finally, the ITC found that unauthorized gray-market importers of Rockwell’s products did not adhere to the same quality-control protocols that Rockwell’s authorized distributors did for the sale, shipping, handling, installation, and support for and marketing of Rockwell products.

Leveraging these precedents, manufacturers continue to seek protection in the ITC against unauthorized resellers. For example, just last month, Hyundai petitioned the ITC to investigate and block gray-market imports of auto parts that have materially different warranties, quality-control standards, and labeling.

Conclusion

The ITC can be a strong and effective partner in manufacturers’ battles against unauthorized gray-market imports if it is presented with evidence of the differences in those articles from genuine articles. Recent investigations have made it clear that creative analysis and compelling explanation of the importance of those differences are key to a successful campaign to convince the ITC to block harmful gray-market imports at the border. Given a proper understanding of gray-market challenges faced by American manufacturers and their distributors, the ITC has shown itself to be an eager partner in protecting the goodwill of those industries as well as the consumers they serve.

With the introduction of a variety of new, faster payment methods, including Same Day ACH, The Clearing House’s RTP® network, and Early Warning Services’ Zelle® payment service, the payments landscape is evolving rapidly.[1] These systems and services are subject to an extensive set of legal requirements. Those aiming to understand this legal framework must look not only to laws and regulations, but also to payment system rules. Core laws include the Electronic Fund Transfer Act (EFTA) and its implementing regulation, Regulation E, and Article 4A of the Uniform Commercial Code (Article 4A). In many cases, the applicability and operation of these requirements, a financial institution’s obligations, and a customer’s rights are dependent on the nature and features of a particular payment transaction. This includes, for example, whether the transaction is a consumer or commercial transaction; whether funds are moved via a “debit pull” or a “credit push” payment;[2] and whether the transaction is reversible or final.

Faster Payments Landscape

Same Day ACH is an upgrade to the existing Automated Clearing House (ACH) network that was enacted through revisions to the NACHA® Operating Rules. These changes added two new ACH clearing and settlement windows to the NACHA Operating Rules. Like all ACH transactions, Same Day ACH payments may be either debits or credits. Both Zelle and RTP are new offerings that allow for immediate transfers to end users, and allow for credit transfers only. However, their core features differ in important ways. Zelle is a payment service that allows financial institutions’ customers to initiate transactions using an alias (an e-mail address or phone number). Although the transactions clear nearly immediately, settlement occurs on a delayed basis primarily through the ACH system. RTP is an entirely new interbank payment system that allows account holders (both consumers and businesses) to send and receive credit push payments instantly, directly from and to their accounts at financial institutions. In contrast with Zelle, RTP payments both clear and settle immediately.

Payment System Operating Rules

Payments systems are governed by rules promulgated by the payment system operator or a designated rulemaking organization, such as the NACHA Operating Rules, Zelle Rules, and RTP Participation and Operating Rules. These rules set consistent expectations and operational requirements for the financial institutions that participate in a payment system. Such rules also serve as multilateral contracts that allow for scalability by removing the need for participants to enter into a contract with every other participant in the network. These rules supplement other laws and regulations, and in the case of 4A, may modify existing law. Another important function is to establish the allocation of loss among system participants, including with respect to unauthorized or erroneous payments. For example, under the NACHA Operating Rules, the bank that initiates an ACH debit warrants that the transaction is authorized.[3] Thus, the financial responsibility for unauthorized ACH debits generally falls on the payee’s bank in that the payer’s bank may bring a breach of warranty claim against the payee’s bank.

Laws and Regulations

The limitation-of-liability and error resolution requirements of the EFTA and Regulation E are applicable to erroneous and unauthorized consumer payments conducted through Same Day ACH, Zelle, and RTP. Under Regulation E, consumers may notify their financial institution of errors (as defined in the regulation) within 60 days from when it sends the periodic statement that reflects the error. If notified of the error within the appropriate timeframe, a financial institution must investigate the error, report the results of its investigation to the consumer, and correct the error if it is determined that an error occurred. Accordingly, if a consumer claims that an error has been made with respect to a Same Day ACH, Zelle, or RTP Payment, the consumer’s financial institution must investigate the error, report the results of the investigation, and correct any error.

The requirements of Article 4-A of the New York Uniform Commercial Code apply with respect to erroneous or unauthorized transactions that are not subject to the EFTA, and applies to both commercial RTP transactions and commercial Same Day ACH credits. Article 4-A allocates responsibility for various errors between the parties to a funds transfer. With respect to commercial Same Day ACH credits (but not debits) and commercial RTP transactions, liability as between the payer and the payer’s financial institution will be determined based upon Article 4-A’s loss allocation framework.[4]

General Loss Allocation Principles

The ultimate allocation of loss for an erroneous or unauthorized transaction differs based on the nature of the payment and, in particular, whether it is a debit or credit transaction, and often takes into consideration which party is best positioned to prevent the loss. For example, in a credit push system like RTP, the payer’s financial institution will have Regulation E obligations for unauthorized transactions from a consumer payer’s account. This obligation is independent of whether the consumer’s financial institution is able to recover funds from the payee’s financial institution. In other words, the financial responsibility for unauthorized RTP transactions falls to the sending financial institution. At a high level, the principle underlying this approach is that the payer’s financial institution should bear the loss because it is responsible for authenticating its customer and submitting the payment into the system, whereas the payee’s financial institution has simply received the transaction in a passive role. This is in contrast to debit-pull payment systems in which the payee’s financial institution (which originates the debit into the system) will generally have an obligation to repay another financial institution for an unauthorized transaction (through return or charge back rights) to a customer’s account at that institution. This includes, for example, the NACHA authorization warranty referenced above.

Which party is best positioned to prevent the loss is also an important principle underlying the allocation of loss between a consumer and a financial institution under the EFTA and Regulation E. Specifically, Regulation E’s error resolution and limitation-of-liability provisions are based on the premise that financial institutions are better positioned than consumers to prevent unauthorized transactions, and are expected to be responsible for errors caused by their systems. However, it is important to note that the EFTA and Regulation E are not intended to provide consumers with a remedy for all circumstances where they may have a complaint related to a payment, or where a consumer causes an erroneous transaction.

Evolving Regulatory Expectations

Not surprisingly, regulators are paying close attention to these new payment services and systems. For example, the CFPB has identified certain “long term actions” that are “potential rulemakings” to begin “beyond the immediate next 12 month period.”[5] The list includes a “Regulation E modernization” effort to address, among other things, issues raised by new payment systems. The CFPB has noted it intends to consider and address how “providers of new and innovative products and services comply with regulatory requirements” and indicates that updates to disclosure provisions and error resolution requirements are under consideration. As the CFPB evaluates potential actions that may modify existing consumer rights and the related requirements for financial institutions, it will likely consider the features of the new, faster payment types described above and the efficacy of their payment system operating rules and existing consumer protection regulations. It will also be important that any such changes take into consideration appropriate incentives for both financial institutions and consumers to manage risk.

Stephen Krebs is Associate General Counsel at The Clearing House Payments Company LLC, and Paul K. Holbrook is Associate General Counsel at HSBC Bank USA, N.A.

[1] Zelle® is a registered trademark of Early Warning Services, LLC; RTP® is a registered service mark of The Clearing House Payments Company LLC; and NACHA®, infra, is a registered trademark of NACHA—The Electronic Payments Association.

[2] These terms refer to how the payment is initiated and submitted to a payment system. In the debit pull model, the payment is initiated by the payee. The payee submits the transaction to a payment system to “collect” funds from the payer. In the credit-push model, the payment is initiated by the payer. The payer is “sending” funds to the payee.

[3] NACHA Operating Rules, Subsection 2.4.1.1

[4] See N.Y. U.C.C. 4-A-201 through 4-A-205.

[5] Regulation E Modernization.

Enforcement activities of cybersecurity and privacy laws  in both Canada and the United States are on the rise. Canada has one federal statute governing commercial privacy matters across the country, except in three provinces where “substantially similar” legislation governs, and by specific requirements for particular industries (i.e., banking and health). This approach differs from the United States, where there are multiple federal laws and a growing number of state statutes and regulations that govern privacy and cyber security. For businesses engaged in Canada-U.S. cross-border transactions understanding the laws and regulations on both sides of the border and having an appropriate cybersecurity compliance program in place are imperative to assuring that personal and proprietary information are protected and to minimizing the legal, financial, and operational risks to businesses that may occur through noncompliance with laws.

In the United States, no single federal law regulates the privacy and security of personal information and confidential business data. Instead, a complex combination of federal and state laws and regulations overlap and sometimes contradict one another. Data breach disclosure obligations have expanded significantly as data breaches continue to dominate the news. In addition, government agencies and industry groups have developed guidelines and self-regulatory frameworks that create what amounts to privacy and security best practices. These new laws, coupled with the tremendous increase in data collection and processing, result in a greater risk of privacy and security law violations and create significant compliance challenges.

The U.S. Federal Trade Commission Act, The Health Information Portability and Accountability Act (HIPPA), the Graham-Leach-Bliley Act (GLBA), The Electronic Communications Privacy Act (ECPA), and the Children’s Online Privacy Protection Act (COPPA) are several, but not all, U.S. federal laws that govern certain actions or set out procedures that must be followed to protect certain kinds of personal information. The California Consumer Privacy Act (CCPA) and the Massachusetts Data Security Regulation are two state statutes that include greater data protection provisions than those found in the federal laws. The CCPA creates the most stringent data privacy regime and will force most companies doing business in the U.S. to change their models of data collection and processing. Legislative proposals regarding data privacy are currently under consideration in several other states and in the U.S. Congress.

The Canadian legal framework for the private sector is generally built around the federal Personal Information Protection and Electronic Documents Act (PIPEDA), except for the provinces with “substantially similar” legislation. The three provinces with “substantially similar” legislation are Alberta, British Columbia, and Québec, which operate mostly independently from PIPEDA. PIPEDA, and the provincial laws, apply regardless of a business’ physical residency within the country.

There are some differences between PIPEDA and the provincial laws. For example, British Columbia’s law is more comprehensive, covering unincorporated associations, trade unions, trusts, political parties, and not-for-profits, in addition to commercial organizations. Some provinces also have separate laws that govern how health- and employment-related personal information must be handled. Canada also has federal and provincial laws that govern privacy for public bodies. Of particular note is British Columbia’s law that restricts the storage and access of personal information to inside Canada.

 If a commercial organization operates within Canada, PIPEDA or the provincial law applies. Some important organizational obligations under PIPEDA include the designation of one or more individuals responsible for compliance with the law, notification of data breaches to individuals and the privacy commissioner if the breach causes a real risk of significant harm, and a duty to maintain certain standards of security safeguards commiserate with the sensitivity of the data. Commercial organizations must also develop policies that reflect the principles underlying PIPEDA. These principles are included in the law itself. Development of a compliance program to implement those policies will be a significant step to further assuring that a business is compliant with PIPEDA and other applicable laws.

The Canadian Anti-Spam Legislation (CASL), another federal statute, addresses the way electronic communications of a commercial nature to consumers are to be handled. Concepts of consent and a requirement to identify the party sending notices are part of CASL. CASL requires that communications must include an unsubscribe feature, and it applies even to messages sent from outside of Canada to Canadian recipients.

Canadian privacy laws include accountability as a key concept. The Canadian Privacy Commissioner has stated: “Accountability in relation to privacy is the acceptance of responsibility for personal information protection. An accountable organization must have in place appropriate policies and procedures that promote good practices which, taken as a whole, constitute a privacy management program.”

Development of an effective compliance program, whether in Canada or in the United States, requires the commitment of business leaders and the dedication of resources. All businesses should designate a person or team responsible for managing cybersecurity and privacy compliance programs. In a large business, a separate organization focused on compliance may be appropriate. The compliance person, team, or organization should have significant authority and status, either as part of or with direct access to senior management, and should have direct access to the board of directors. Leadership must embrace the concept that cyber security is an enterprise risk—not just the responsibility of the IT or security departments.

The first steps toward developing an effective cybersecurity compliance program are to:

• map the personal data held by the organization in terms of its location, lifecycle and sensitivity;
• conduct a risk assessment;
• develop processes and implementation plans to assure that existing security gaps are closed;
• establish a plan for ongoing assessments to provide monitoring and possible warnings of new gaps or risks;
• develop and implement training programs to educate management and employees about risks, security processes, and compliance expectations; and
• adopt an audit program to assure that monitoring, training, and compliance are occurring.

Failure to develop and implement an appropriate program for compliance with privacy and cybersecurity requirements subjects a business to significant risks. Not only are there legal risks of failing to comply with laws, including possible fines and third-party lawsuits, but there are also risks to a business’ reputation, potential financial losses, harm to its network, and potential loss of intellectual property and strategic information.

“Cooperation Revolution” Shifts Focus to Executives and Managers

In 1999, then-U.S. Attorney General Eric Holder issued an internal Justice Department memo entitled: Bringing Criminal Charges Against Corporations. It laid the groundwork for policies that allowed more leeway in bringing criminal charges against large firms.

By 2002, the Enron and WorldCom failures had occurred, and Arthur Andersen had imploded after it was indicted. The firm was ultimately acquitted of criminal misconduct, but innocent partners, employees, and others suffered severe losses as a result of Andersen’s demise.

Congress acted promptly. The Sarbanes-Oxley Act (SOX) became law in 2002, with the express goal of improving the quality of public company financial reporting. SOX imposed on senior executives enhanced disclosure and certification obligations, eliminated accountants’ potential conflicts of interest, and established a new federal regulatory body, the PCAOB, to police the quality of public company audits. The ABA created a task force to consider the impact of SOX on executives. That task force later became the Director’s and Officer’s Liability Committee of the Business Law Section.

At the same time, the Internal Revenue Service had begun investigating the involvement of major accounting firms, law firms, the investment arms of banks, and securities firms in promoting allegedly abusive tax shelters. The tax shelters under investigation had operated to shield from taxes billions of dollars of taxpayer income generated in the years leading up to the dot.com crash of 2000. The IRS referred the matters to the Department of Justice (DOJ). The DOJ brought or threatened criminal proceedings against both taxpayers and major accounting firms as well as other participants in the tax-shelter industry. The criminal cases were plowing new legal ground in that they sought for the first time to criminalize conduct that had been exclusively the province of highly disputed areas of civil tax law. With only four major accounting firms left, the Andersen experience gave rise to an acute need to balance the interests of law enforcement and erosion of federal revenue against a desire to avoid the severely negative damage to innocent bystanders that followed Andersen’s collapse.

In 2003, the DOJ issued a second memo that superseded the 1999 Holder Memo. This memo, known as the “Thompson Memo” after its author Deputy Attorney General Larry Thompson, was entitled Federal Prosecution of Business Organizations. The memo specifically held out the possibility that large organizations could escape criminal charges completely by “cooperating” with law enforcement. The Thompson Memo listed nine specific factors for DOJ lawyers to consider before filing criminal charges against business entities. It indicated that to avoid prosecution, entities must turn over to the government materials they obtain as a result of an internal investigation of the alleged misconduct, waive attorney-client privilege, and refrain from providing company-paid lawyers to executives targeted for individual prosecution.

The U.S. Chamber of Commerce, the ABA, and others immediately lodged vociferous objections to the Thompson Memo with Congress. The objectors focused on what they characterized as a wholesale assault by the DOJ on the sanctity of the attorney-client privilege. The DOJ responded by issuing the 2006 McNulty Memo. That memo, entitled Principles of Federal Prosecution of Business Organizations, restrained the ability of line prosecutors to demand the turnover of privileged materials. It also scaled back the importance of an entity’s advancement of attorney’s fees to its executives as a factor militating in favor of the filing of criminal charges against an entity.

The DOJ’s Filip Memo of 2008 bore the same title as the Thompson Memo. It clarified that the quality of an entity’s cooperation would be measured by the extent to which it discloses facts, as opposed to waives privileges, and that the DOJ would no longer consider advancement of attorney’s fees or the existence of joint defense agreements between a company and its executives as factors demonstrating a lack of cooperation. The same year, in US v. Stein, the U.S. Court of Appeals Second Circuit affirmed a ruling of the U.S. District Court for the Southern District of New York that held unconstitutional the efforts by the DOJ to pressure KPMG to cut off defense funding of its tax partners on the eve of their 2005 criminal trial for promoting allegedly abusive tax shelters.

This chain of developments set the stage for the last major DOJ memo in the sequence significant to our subject, the Yates Memo of 2015.[1] By this time, the DOJ had announced that it would no longer consider an entity’s advancement of defense costs to its executives as a factor favoring criminal indictment of a company; it had relinquished much of its ability to force wholesale waivers of privilege; and it had announced that it would no longer view negatively the existence of joint defense agreements between companies and potentially targeted individuals. By this time, large commercial entities were accustomed to cooperating with the government to obtain deferred prosecution agreements to avoid their own prosecution.  Entities typically would agree to pay a substantial fine or make restitution, institute internal reforms, finance internal investigations of potential misconduct by individual executives and employees, and turn the results of their investigations over to the government. The establishment of a “culture of compliance” in large business entities was well underway. What was required was a clear means of meeting the public need for retribution and deterrence. The Yates Memo made clear that those objectives were to be met by prosecuting individual executives.

Indeed, the Yates Memo’s very title emphasized this objective: Individual Accountability for Corporate Wrongdoing. It outlined six steps designed to enhance the DOJ’s “pursuit of corporate wrongdoing”: (1) to be deemed cooperative an entity must designate the individuals involved; (2) DOJ prosecutors should target individuals from the outset; (3) DOJ civil and criminal staff should share information; (4) there were to be no tradeoffs between a larger fine for the entity in exchange for a release of individual responsibility; (5) there were to be no entity settlements without a “clear plan” for individual responsibility; and (6) civil staff should pursue individuals with civil charges regardless of the individuals’ ability to pay.

Today, the concept of entity cooperation is established and has gone global. Scarcely a day goes by without a major entity telling the press in respect to some scandal or charge that it is “cooperating” with the government. An industry of former prosecutors in private practice has sprung up to cover the demand for internal investigations. Through this “cooperation revolution,” the burden of the criminal law is now placed squarely on individual executives. The higher profile they are, the more they are exposed. Indeed, heavily footnoted law review articles going back years—one written by an insightful observer who later became a major prosecutor himself—argue that massive unfairness to innocent executives is highly likely given the enormity of the government’s leverage in persuading business entities to cooperate. Anecdotal evidence suggests that this unfairness can even extend to entities’ selective disclosure of facts to prosecutors that conceal potentially exculpatory Brady and Jencks Act evidence. To the extent this exists, central elements of the U.S. criminal justice system are being compromised.

The enormity of the government’s leverage in these negotiations derives from two factors: (1) U.S. Supreme Court precedent from the early 20th century imposes vicarious liability for criminal conduct on entities for the smallest infractions of low-level agents who may be acting only in part for the benefit of the entity; and (2) the “egg shell” status of large entities that cannot—a la Arthur Andersen—even risk a criminal charge. As a result, the onus of the criminal law now falls primarily on individuals. Indeed, a recent ABA panel listed 12 “Best Practices Take-Aways” for internal investigations. Number six is: “Throw the guilty under the bus.”[2]

Application to Business Lawyers

The application of these developments to business lawyers is plain. As a result of the cooperation revolution, the interests of entities and the executives who serve them can now become adverse once a potential violation of criminal law becomes subject to internal investigation. This potential adversity of interest has direct application to business lawyers who are charged with responsibility for the creation or renewal of any component of an executive protection program. The fact that the lawyer’s real client—the corporation or alternative entity—asks him or her to draft a plan that protects nonclients—individual board members and officers—raises pointed questions of legal ethics.

From the Commencement of an Investigation, the Individual Executive Is Placed under Extreme Duress

Before addressing the ethical conflicts in detail, we point out an experiential reality. Individuals  undergoing investigation for criminal charges (which often involve gray areas of fact and/or law) are subject to intense stress, regardless of their ultimate guilt or innocence. Most executives believe when they accept a management position (often without investigating their rights to litigation protection) that their company will stand behind them in any case of legal doubt or inquiry.

However, the cooperation revolution described above proceeds on the exact opposite assumption. It assumes that under governmental pressure to cooperate, otherwise presumptively innocent executives will be identified by the entity they serve as candidates for potential criminal prosecution. Once so identified, investigated or charged executives frequently lose the ability to sleep or to concentrate. Their health and family relationships deteriorate. They feel shunned by their colleagues. If they insist on legal protections like Fifth Amendment privileges when interviewed by company investigators, they are typically fired. Any professional designations or licenses they hold are placed in jeopardy. They lose their incomes and employment benefits. They may need to sell their home(s). They sometimes lose their health coverage or other critical benefits for their dependents. Many white collar practitioners, when commencing their representation, direct their clients to seek immediate psychological counseling, another major cost item, precisely because the stress is so severe.  Of course, this stress pales in significance to that of a catastrophic legal outcome. An adverse legal outcome is far more likely if their executive protection program fails to afford them enforceable advancement rights to hire competent counsel to defend their individual interests.

Business Lawyer Conflict at the Drafting Stage

Faced with the above realities, what ethical rules apply to the business lawyer tasked with the creation or renewal of an executive protection program? An executive protection program refers to the documents that corporations and alternative entities adopt for the protection of their directors, officers, and other managers that, in combination, cover four legally distinct subjects: (1) exculpation of corporate directors from liability in damages for breach of the fiduciary duty of due care; (2) advancement, i.e., the financing of a covered executive’s defense costs while an underlying criminal or civil case or investigation is proceeding against him or her; (3) indemnification, i.e., reimbursement for all defense costs not advanced and the forgiveness of any duty to repay previously advanced defense costs after the underlying proceeding is concluded; and (4) director and officer liability insurance that backstops and supplements the above benefits in the event that they are defectively drafted or incomplete, or in the event that the entity is unable or unwilling to provide them due to perceived government pressure or otherwise. 

These documents are put into place on the “clear day,” i.e., before any civil claim or criminal charge or investigation is in the offing, but they are designed to cover what happens on the “stormy day,” i.e., after a claim or charge is made or investigation commenced. THUS, ALL THE CONFLICTS BETWEEN THE ENTITY AND THE EXECUTIVE THAT MAY ARISE ON THE STORMY DAY SHOULD BE ANTICIPATED AND DRAFTED FOR ON THE CLEAR DAY.

The complexities of the law in this area are intense. At least four substantive legal specialties are implicated: the law of advancement and indemnification with and without a corporate law overlay; the law of preliminary injunctions to the extent necessary to enforce advancement rights; the complex law of D&O liability insurance; and the law and practice of white collar criminal defense and Fifth Amendment privilege protection. The task of drafting is not for amateurs or legal tourists. 

The Applicable Ethical Rules and Law of Professional Liability to Nonclients

So our in-house or outside business lawyer is asked by the board of a corporation or managing body of an alternative entity to review and evaluate, or even just comment on, the firm’s executive protection program. Alternatively, for example, one or more directors ask for the lawyer’s opinion on the scope or adequacy of its coverage of them personally, or to consider revising a bylaw provision, to review and comment on some provision of a firm’s insurance policy incident to its initial negotiation or renewal, to explain an existing set of articles/bylaws/policies to a new director, or to put together new bylaws or a new operating agreement for a recently formed alternative entity that is about to receive outside financing from a venture capital firm. The list goes on and on.

On each occasion, the lawyer is being asked to create, evaluate, draft, or counsel as to the renewal of an executive protection program. By definition, these requests implicate Model Rules 1.1 and 1.3, the rules mandating competency and diligence. Demonstrating competency is no small matter, given that the subject matter transcends existing legal silos. Complicating the matter is the fact that the lawyer’s exclusive de jure client is the entity, but either the entity or one of its most senior constituents is asking him or her for advice on protecting nonclients—the directors and other potentially covered executives in their individual capacities—from personal, potentially catastrophic loss. In such a case, additional rules of ethics come to bear. They are:

• Model Rule 1.13 (Organization as Client). The lawyer represents the organization acting through its authorized “constituents”—its board or equivalent. Assuming the lawyer knows that the organization’s interests are adverse to the interests of any of the individuals, Rule 1.13 requires the lawyer to point out that he or she represents the organization, not the individuals who are the very people whom the executive protection program is supposed to benefit. Once the stormy-day conflicts are brought forward to the clear day on which the program is drafted, the drafting conflicts are intense and numerous.[3] The lawyer has no conflict because he or she represents only the entity. The law permits the board to resolve the conflict even though the individual directors are beneficiaries of the program personally because the board acts collectively as the embodiment of the corporation. The rules of ethics require the lawyer to be careful how he or she deals with the board’s members individually, however, because they are entity “constituents” whom the rules single out for special treatment. 
• Model Rule 2.1 (Counselor). In rendering candid advice to the board, the lawyer may refer not only to the law and practice of cooperation as we did above, but also to the moral, social, and economic factors relevant to the drafting of the program. The latter may well favor vigorous protection of directors and officers. Most states’ laws recognize that without adequate protection from litigation, including advancement of legal fees and expenses, most entities will have difficulty in attracting and retaining executives. It is easy to see why that is so upon consideration of the experiential factors listed above. Most states’ laws also recognize that executives who defeat meritless litigation against them arising from their service to an entity should be indemnified by the entity for the costs they incur in the effort. Most boards opt to select in principle a grant of both advancement and indemnification “to the fullest extent permitted by law” once they are told that in the event of a change in control, any of them, or all of them, and their insurers to boot, may be in the sights of new, sometimes hostile, managers. However, rarely do they (and shareholders) feel so magnanimous after a real threat arises when they are in charge. The devil, then, is seen as lurking in the drafting details, and blame is frequently laid on the drafting lawyer for facilitating what is viewed as the unjust protection of a miscreant.
• Model Rule 2.3 (Evaluation for Use by Third Persons). This rule may be implicated when the board, the personification of the entity, asks the lawyer to evaluate the corporation’s existing or new executive protection program for personal consideration by directors and other covered executives. The rule permits a lawyer at the request of the corporate client to make the evaluation for the benefit of individual nonclients if the lawyer reasonably believes the evaluation is “compatible” with his or her relationship with the client. Given that an entity’s clear-day agreement to protect executives from some of the adverse consequences of the cooperation revolution furthers the entity’s ability to attract and retain talented management, “compatibility” of interest to that extent is self-evident. On the other hand, at a later time, some of the protections adopted for executives may be perceived as hampering the corporation’s ability to later throw a perceived miscreant director or officer “under the bus.” On the stormy day, shareholders may criticize the board for excessive liberality, and the board may criticize drafting counsel. Permitting perceived miscreants to “lawyer up” at company expense may be seen as both a waste of corporate assets and as hampering the entity’s ability to achieve appropriate “cooperation credit” to avoid a catastrophic indictment. To that extent, the interests of the client and the nonclient may be distinctly adverse even on the clear day. As a result, the client’s “informed consent” may be required. See articles cited in footnote 3 for ideas about how to do that.
• Model Rule 4.1 (Truthfulness in Statements to Others). Lawyers are charged ethically with a duty to speak truthfully and to refrain from assisting a client in a criminal or fraudulent act by remaining silent and thereby failing to disclose a material fact. An entity lawyer’s failure to disclose the risks inherent in serving as a business executive in the era of the cooperation revolution to a group of directors voting on a protection program is akin to remaining silent when a corporate HR representative in the lawyer’s presence extolls a health insurance program to a group of employees while failing to reveal that it contains a cancer exclusion.
• Model Rule 4.3 (Dealing with Unrepresented Person). In the executive protection context, this rule supplements Rule 1.13. Given that the directors are (usually) not personally represented in the drafting of the protection program, the lawyer must disclose the lawyer’s obligations to the entity client; thus, the lawyer ordinarily should not give the individual beneficiaries legal advice (other than to retain personal counsel), and must do what is necessary to “correct” any “misunderstanding” of the lawyer’s role by the individuals. We believe that a misunderstanding of the business lawyer’s role in this area is extremely difficult to avoid, particularly if the lawyer deals with any entity constituent one-on-one. We thus suggest that to minimize liability risks to counsel, (1) the lawyer should always remind constituents that he or she represents the entity, not the individual officer or director; and (2) entities should retain separate representation for beneficiaries of the executive protection program as a group to address any questions. We believe strongly that business lawyers may not avoid this issue by deferring to an entity’s risk manager where the lawyer is involved in any way in the drafting of advancement or indemnification provisions or the review or negotiating of liability insurance protection. 
• Sections 51(2) and (3) (Duty of Care to Certain Nonclients) of the Restatement (Third) of the Law Governing Lawyers. These sections supplement and support Rule 2.3 and raise the consequences for an ethical breach to the level of possible civil liability. Subsection (4) of section 51 creates a similar duty of care to a nonclient who is the beneficiary of a client’s fiduciary duty. Ordinarily, entities are not fiduciaries for their own directors and managers personally, but is that true when the entity undertakes to obtain D&O liability insurance for the personal benefit of constituents where the beneficiaries have no control or influence over the process? There is anecdotal evidence of entities refusing to produce D&O insurance policies to covered executives on the stormy day or denying them access to important coverage and claims information. Can a lawyer ethically assist such conduct under subsection (4)?
• Section 95 (An Evaluation Undertaken for a Third Person) of the Restatement. This section supports Rules 2.3 and 4.1 and makes clear that a duty of care exists in the event of their violation.

In sum, after the cooperation revolution, the evaluation and drafting of the component documents of an executive protection program require specialized knowledge and skill overlapping four discrete areas of legal practice. The ethical duty of competency plainly comes into play. Further, by definition, drafting for the cooperation revolution is required whenever a lawyer is asked by an entity client to prepare, comment on, or oversee the renewal of a protection program for the benefit of constituents who may well rely, however inappropriately, on the entity lawyer. This situation is governed by discrete ethics rules and principles of law governing lawyers’ responsibilities to nonclients.

The cooperation revolution can yield catastrophic consequences for today’s presumptively innocent executives. It cannot safely be ignored by legal practitioners.

[1] We do not view the November 2018 remarks of Deputy Attorney General Ron Rosenstein as signaling a major retreat from the Yates Memo. The DOJ’s emphasis on individual responsibility remains applicable to highly visible senior executives who are typically the particular objects of executive protection programs. The question of the degree to which the DOJ can direct or influence internal investigations without rendering them state action for Constitutional purposes was recently addressed in U.S. v. Connolly, one of the Libor cases before the U.S. District Court for the Southern District of New York. The issue is likely to be appealed to the Second Circuit.

[2] Krantz, E., Spring 2019 ABA BLS Vancouver Spring Meeting materials for program: “Conducting an Effective Internal Investigation — One Chance to Get It Right.”  https://www.americanbar.org/groups/business_law/resources/materials/2019/spring_materials/internal_investigation/

[3] Wing, J. and Oringer, A., “Discipline Involving Multiple Disciplines — Protecting Innocent Executives in the Age of “Cooperation,” ABA The Business Lawyer, Vol 70, Issue 4, Fall 2015, pp 1123-1138. James Wing, Training for Tomorrow: 2013 Checklist for Corporate Counsel Supervising the Creation or Renewal of an Executive Protection Program, Business Law Today (2013). https://www.americanbar.org/content/dam/aba/publications/blt/2013/09/full-issue-201309.pdf

Businesses often operate with their legal departments as an afterthought. This obviously isn’t ideal in that legal issues can cost businesses thousands of dollars, but there are much cheaper ways businesses can protect themselves on the front end, especially when it comes to the legality of online marketplaces.

Many companies produce a lot of content and save time by using a content management system (CMS). These systems allow businesses to easily update content from blogs to landing pages, but they aren’t great for everything—specifically, hosting any type of legal content.

Most CMS tools benefit the marketing and sales teams within a company, but the impact of using them for legal content can affect the entire organization. Although the legal team usually does not provide input in purchasing new tools or software, especially those primarily used by marketing and sales, it matters at the end of the day. If a legal issue arises and you end up in court, a judge or a lawyer will not care that your company’s legal team wasn’t involved in purchasing a system or a tool like a CMS.

“Legal content” is a broad term, but some common areas where it appears on a website are terms of use, disclaimers, privacy, and refund policies—all of those boxes you probably click without reading. These may seem like a nuisance for consumers, but they are necessary for businesses to protect themselves from unnecessary risk. The protections they provide, however, are only as good as the format and presentation. These are some major reasons why a CMS is not the ideal platform to host legal content and terms:

• It is difficult to keep a record. A CMS will track changes made to a website over a certain period of time, but changes made to legal content often fall outside of what is tracked because it typically is kept in text files. It is difficult to keep track of records that are not there, and staying up to date on all changes made to legal content is crucial to protect yourself if you end up in a courtroom. Fortunately, there is software that allows businesses to better track the changes made to hosted legal content.
• It is difficult for consumers to find your legal terms. All legal content must be disclosed to every customer. Although a CMS can certainly present the legal content, the design and placement usually make it difficult to find, let alone navigate. A hard-to-find tab might lead to another window that displays a link to “Website Terms,” or the legal content might end up buried in the footer of the website in a color that matches the website background, making it virtually impossible to read. This is important to note because burying your browsewrap or clickthrough might leave them unenforceable, which could land you in some pretty hot water. Lack of constructive notice that the use of a website is subject to legal terms can be disastrous for your company.
• It is difficult to show proof. Should the unfortunate need arise for a company to enforce its legal terms, the company will be expected to provide evidence that a user accepted its legal agreements. A CMS will not be able to produce a listing of who signed the legal agreements, which can end up being a nightmare. Even if a CMS does a decent job of hosting legal content, it certainly is not going to create any type of self-contained, durable record of consent. Businesses need a solution that will store and allow easy access to the signed legal agreements so they can defend themselves if needed.
• It is difficult to stay updated. The best place to present legal content and have it accepted by a user is during a clickthrough process (think: registration forms, opt-ins, check-out flows). A CMS is of little help when integrating legal content into this type of clickthrough process, and there is no fast or efficient way to make regular updates to legal content, which must be a priority. The legal team can save time, money, and resources by finding a better host that allows it to easily update the content of the legal agreements without having to involve developers.

CMS tools are undoubtedly useful for most businesses, but they just are not the best option for hosting legal content. It can lead to a world of trouble for a legal team and ultimately puts your business at risk—something to avoid at all costs.

Utilize solutions designed with the legal team in mind and built specifically to manage and track website legal content. These tools will implement best practices for design, assist in publishing legal content, and store information from clickthrough agreements, allowing businesses to obtain the contract acceptance they need.

Lawyers and modern technology are a fascinating—and complicated—combination. On one side is a unique business model that is owned and led by partners and provides professional services. On the other side is an ever-changing industry that sells products and services aimed at disrupting the way things are done. And stuck in the middle? Lawyers.

The crux of the problem is that many law firms just are not making the investments in modern technology fast enough to remain competitive and deliver success for their clients. The fact that you are reading this article likely means you are in this situation yourself or acutely aware of it.

Further complicating things is the fact that running a law firm is uniquely challenging. There is the firm partnership structure, which is much different than the typical corporate model where a small group at the top consisting of board members, a C-team, and senior executives run things. The complex, nonlinear relationships that law firms have differ greatly from the top-down, linear structure that most corporations employ. There is also a fee-based revenue model for firms, as opposed to straight product and service (e.g., SaaS) revenue, and let’s not even get into all the regulations and conflicts that must be addressed!

Hundreds of lawyers in the United States and the United Kingdom—many of them partners with ownership stakes in their respective firms—weighed in on their attitudes toward technology in a survey recently conducted by Intapp in partnership with YouGov. The survey polled 258 lawyers at firms with 50+ employees: 133 in the United States and 125 in the United Kingdom.

The survey shows that lawyers recognize the importance of using software that is purpose-built for their needs and those of their clients as opposed to generic solutions. Yet, despite the growing awareness of the need for modern technology solutions that help deliver a level of service that delights clients (in the hopes of doing more work to help them solve complicated issues), the survey reveals that law firm use of technology designed specifically for legal applications is lagging.

Here are some of the key findings from U.S. lawyers:

Lawyers are not happy with the tech they have.

• Forty percent said little to none of the software they use regularly has been designed with a law firm in mind.

There is great hope for artificial intelligence (AI).

• Thirty percent said that AI could help draft legal documents.
• Another 30 percent said AI could help track billable time.
• Others said AI’s value lies in conflicts clearance (25 percent), compliance with client billing requirements (20 percent), and estimating fees of an engagement (19 percent).

The tech must change.

• Forty-one percent indicate that user interface is a problem, followed by a need for software more tailored to the business of law (29 percent) and more intuitive operation of the software (29 percent).

What U.S. lawyers say their clients want.

• Thirty-five percent reported that clients are demanding faster service, whereas 24 percent say their clients want more transparency about the status of matters.
• Regarding fees, 25 percent identified lower fees as a client demand.
• Unsurprisingly, the opinions on lower fees vary between large and other-sized firms, with large law firms valuing lower fees at 33 percent versus 15 percent for other-sized firms.

The survey results map closely to what I hear from clients, colleagues, and industry thought leaders every day. They also align with the larger business trend of organizations recognizing the need to shift to industry-vertical technology solutions and away from the one-size-fits-all model. Given their unique structures, law firms require more collaboration among those who run and own the firms and the professionals who staff the functional areas like IT, HR, business development, marketing, and practice management. Thus, the technology they use must reflect this business model.

The legal game has changed. One of the biggest catalysts is the ongoing upheaval in the way legal services are delivered. The competition from other law firms, the Big Four consulting firms, online legal service providers, and in-house attorneys is too fierce to not take advantage of modern, purpose-built technology.

Based on the survey results and my own deep experience in the legal tech space, I can say with confidence that the “modern” law firm is one that integrates people, processes, and data. Doing so fosters collaboration, fuels growth, and delivers client success.

The good news is that the technology is available for firms to modernize their tech stacks. There are purpose-built solutions that span the entire client lifecycle, from business development to client service and internal processes. Do your homework and go into the search and procurement process with an open mind. Your ideal modern tech stack is out there waiting for you, but you must move quickly or your firm will be left behind.

I. Introduction[1]

Since President Gerald Ford signed it into law on December 22, 1974, the Real Estate Settlement Procedures Act (RESPA)[2] has been amended to cover many diverse yet related “real estate” subjects. In its present iteration, only sections 2605(g) and 2609 deal with mortgage escrow accounts, with much of RESPA’s escrow-themed jurisprudence centering on the former.[3] Despite its sparsity,[4] this precedent’s perusal reveals the popularity of a peculiar interpretation of section 2605(g) within the federal judiciary[5]—namely, “[]though . . . [it] does not explicitly set this out as a pleading standard,” section 2605(f) impliedly requires a showing of pecuniary damages in order to state a claim under section 2605’s every subpart, including its escrow-centric section 2605(g).[6] As a result of this extrapolation’s increasing sway, another weapon for use by the many subject to RESPA’s positive commands and plain prohibitions has been forged, one too often unexploited by defendants and forgotten by plaintiffs.

II. Snapshots of RESPA in Operation[7]

A. Forgotten Obligations

Organized under the laws of the state of Maryland in 1995, New Century Financial Corporation (New Century) sited its headquarters in Irvine, California. In 2004, New Century converted itself into a real estate investment trust; in 2006, it ranked second only to HSBC Finance Corporation in the issuance of subprime mortgages. By the spring of 2006, this phoenix’s death spiral had commenced, culminating in its filing of Chapter 11 bankruptcy on April 2, 2007. Among one portfolio of assets subsequently sold by New Century’s bankruptcy trustee sat an outstanding mortgage owed by Demonfort and Leandra Carter (Carters, collectively).

In the months after this interest’s acquisition, this mortgage’s new owner unwittingly repeated its predecessors’ blunders. Most notably, it too neglected to supply the Carters with notice of all changes in the identities of the loan’s servicers or of the trustees authorized to commence a nonjudicial foreclosure. In so doing, as the Carters alleged, their debt’s most recent possessor had clearly violated section 2605(b). Soon after a court so concluded, however, a singular realization upended proceedings: for all their efforts, the Carters would never be able to adduce proof of a single computable injury or monetizable harm.

B. Misplaced Letters

A decade later, due to a married couple’s erratic payment history, another mortgagee exercised its right under a duly executed deed of trust (DOT) to mandate the creation and upkeep of a mortgage escrow account. At the same time, this entity promised the mortgagors that it would make timely disbursements from this regularly replenished account for the payment of their mortgage insurance. Pursuant to these representations, first the DOT’s two holders and then the obligation’s servicer diligently sent the necessary sums to a small insurance company headquartered in the Virginian swamplands, month after month and year after year. As the servicer likely knew, section 2605(g) required no less.

This process broke down in the course of one muggy, three-month stretch. Beginning in June of 2016, the property’s longtime insurer sent renewal notices to the servicer warning of the policy’s imminent expiration in August. Inexplicably, these missives failed to induce a response, whether an acknowledgement of receipt or an application for the policy’s renewal, from the servicer’s appointed staff. Hence, once the deadline passed without receipt of a wired or mailed payment, the mortgagors’ insurance automatically lapsed.

Soon thereafter, a hurricane besieged the mortgagors’ ramshackle home, prompting the servicer first to discover the policy’s termination and then to respond in two conspicuous ways. Within days, it force-placed coverage, backdated to the former policy’s date of expiration, on the now-battered home; within weeks, it ordered its chosen adjustor to utilize the formula for reimbursement set out in the expired policy. Maybe inevitably, once this expert submitted his valuation, the mortgagors proffered their own, and the parties began feuding over manifold objects’ appropriate valuation. As these disagreements’ intractability spiked, the mortgagors, at their new lawyer’s behest, pondered the potential of a section 2605(g) claim.

III. Statutory Scheme

A. RESPA’s Origins and Objectives

In the 1950s, an increase in the settlement costs incurred by home purchasers first garnered a modicum of Congress’s attention.[8] Nevertheless, it took until 1969 for the rash of consumer complaints over these fees to prod a congressional subcommittee to more than perfunctorily wade into this fraught area of law and finance.[9] In the aftermath of the extensive public hearings that followed, Congress empowered the Secretary of the U.S. Department of Housing and Urban Development and the Administrator of Veterans Affairs to conduct an official study of settlement costs on certain government-insured loans[10] in section 701 of the Emergency Home Finance Act of 1970.[11] From the written peroration produced by these agencies came RESPA.[12]

Since its effective date of June 20, 1975,[13] RESPA has regulated the conduct of the varied participants in “the settlement process for residential real estate,”[14] governing this “narrow field of financial transactions” but affecting “a broad group of financial institutions.”[15] In relevant part, RESPA then defined, and still does, a real estate “settlement service” as “any service provided in connection with a real estate settlement, including, but not limited to” title searches, title insurance, attorney services, document preparation, credit reports, appraisals, property surveys, loan processing and underwriting, and the like,[16] relating to “a[ny] federally related mortgage loan,” itself an expressly delineated term.[17] From 1975 through today, RESPA has obligated the entities offering such services and dealing with such loans to deliver “greater and more timely information on the nature and costs of the settlement process” to consumers and to forsake the “abusive practices” blamed for “unnecessarily high settlement charges.”[18] A certain belief underlay, and still accounts for, these sections: “that those who pay settlement costs rarely understand them and have little ability to affect their imposition through consumer choice.”[19]

A similar view has always animated section 2609, one of RESPA’s original parts.[20] As its legislative record amply confirms, Congress crafted section 2609 to “attack[]” and “outlaw[]” some lenders’ practice of “maintaining an overlarge ‘cushion’ of borrowers’ tax and insurance premiums [in mortgage escrow accounts] to profit from the interest gained by investing it.”[21] Whatever their original defensibility, these accounts had “developed into a lucrative source of interest-bearing capital for mortgage lenders” in the decades since their emergence in the 1930s, a transformation little noticed, for good or ill, until the late 1960s.[22] At that point, and for years afterward, borrowers brought hundreds of suits to recoup their lost interest income or recover the profits that they believed lenders had so illicitly accumulated.[23] “[T]he consumer movement” had recently “singled out the escrow account for particular attention,” one knowledgeable observer reflected in 1972, “the probable result of a sense of frustration on the part of the average borrower and the deep-seated feeling that he[, she, or them] is being gypped and the industry is taking advantage of him [her, or them].”[24] Due to a surfeit of such unequivocally telling evidence, section 2609’s impetus and mark—“[t]he common practice of profiting by overcharging and investing escrow funds”—have never been in doubt.[25]

In 1991, Congress extended RESPA to the “servicing” of “federally related mortgage loans” with the enactment of section 2605.[26] It did so in response to a major study of mortgage loan servicing practices, conducted by the U.S. General Accounting Office, that collected a substantial number of consumer grievances regarding abusive practices by certain servicers.[27] In pained and thorough detail, testimonial after testimonial documented perpetual “mistakes in calculating escrow account payments, unresponsiveness to inquiries”, and failures “to make timely property tax and hazard insurance premium payments” as well as “to provide adequate notice of a mortgage loan servicing transfer.”[28] Other protests “pointed out that these errors . . . [could] potentially result in the imposition of late payment charges and payments to the wrong parties.”[29] These writers’ excoriations naturally fixated upon servicers of residential loans or mortgages, the typical point of contact for the average borrower.[30] To address these apprehensions, Congress opted to expansively define “servicing” for purposes of section 2605 as “receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts described in section [2609] . . . , and making the payments of principal and interest and such other payments with respect to the amounts received from the borrower as may be required pursuant to the terms of the loan.”[31] As the practice of loan servicing by parties other than the original lender has become more commonplace, and as servicers’ ability to initiate foreclosures has been more firmly established,[32] section 2605’s prominence has mushroomed.

Cognizant of this history, courts tag RESPA in toto as a remedial consumer protection statute[33] and correspondingly construe its provisions.[34] Thus, because “[t]he express terms of RESPA clearly indicate that it is . . . a consumer protection statute,”[35] its every clause must be “read remedially . . . to further its goals of providing more information for consumers and preventing abusive practices by servicers.”[36] To these jurists, this view can (and often does) warrant capacious explications of RESPA’s scope and duties.[37] RESPA’s evolution into a “comprehensive law that covers virtually every loan secured by residential real property” by 1993[38] has only reinforced this interpretive predilection.

B. RESPA’s Escrow Provisions: Sections 2605 and 2609

RESPA imposes disparate duties on lenders and servicers with respect to mortgage escrow accounts. As to the former, it (1) limits the amount that lenders can require current or prospective borrowers to deposit into them, but (2) forces loan servicers (a) to deliver borrowers with account statements and notifications of shortage, and (b) to make timely payments from the escrow account for taxes, insurance premiums, and other charges in certain situations.[39] Applicable far beyond the date of the closing, the RESPA escrow provisions binding upon servicers appear in sections 2609 and 2605(g).[40]

Strictly tailored, section 2609 polices “when, what, and how much a servicer may collect from a borrower for deposit in an escrow account.”[41] In particular, it (1) prohibits the imposition of certain requirements on “the borrower or prospective borrower”;[42] (2) compels a servicer to “notify the borrower not less than annually of any shortage in the escrow account”;[43] and (3) enumerates a multitude of specifications as to escrow accounts’ initial and annual statements[44] whenever a lender forces a borrower to make advance deposits in a mortgage escrow account. By targeting these practices, section 2609 attempts to “relieve[] the home buyer of the burden of making advance deposits covering long periods of time, while [still] assuring lenders that these charges will be paid.”[45] As commonly parsed, however, this escrow provision awards no private cause of action, a conclusion[46] that has arguably limited its utility.[47]

In contrast, section 2605, which broadly focuses upon the servicing of mortgages, has long been held to provide exactly such a prerogative.[48] Among its various paragraphs, section 2605(g) alone “governs when a servicer is required to pay taxes and insurance premiums on a mortgaged property where there has been no escrow waiver.”[49] In accordance with this subsection, a servicer must “make payments from the escrow account for such taxes, insurance premiums, and other charges in a timely manner as such payments become due” so long as “the mortgage loan terms require the borrower to make payments to the servicer for deposit into an escrow account to assure payment of taxes, insurance premiums, and other charges with respect to the property.”[50] As the Consumer Financial Protection Bureau has advised, a servicer must make the payment required by section 2605(g) “on or before the deadline to avoid a penalty” and thereby escape liability for its trespass.[51]

C. RESPA’s Implicit Requirement: Section 2605(g)’s Causal Prerequisite

Bereft of any direction from RESPA itself, court after court has done the same, precisely as logic and practice compel: it has imported a causal prerequisite into section 2605’s every subparagraph, including section 2605(g). Textually, however, section 2605(f) expresses no such thing,[52] and neither section 2605(b) nor section 2605(g) speak as to causation.[53] Still, assuming section 2605’s three-year statute of limitations has not yet run,[54] a defendant can only be liable for “any actual damages to the borrower as a result of the failure” to comply with “any provision” of section 2605 per section 2605(f)(1)(A).[55] Having construed this text to render damages into “an essential element in pleading a RESPA claim,”[56] much precedent now expects a plaintiff to initially allege and later prove two verities when suing for a violation of section 2605:[57] (1) “pecuniary damages” (2) traceable to the defendant’s purported noncompliance with one of section 2605’s sundry provisions.[58]

With impressive rapidity, this dualistic construction led to the derivation of a newfangled pleading requirement for section 2605(g) claims. Simply put, an actual connecting link between quantifiable damages and that subsection’s breach must first be plausibly alleged and then competently evidenced for such a claim’s dismissal to be avoided under Federal Rules of Civil Procedure 12(b) and 56.[59] A plaintiff’s failure to specify a section 2605(g) violation and some measurable harm that directly flowed from that transgression will, in turn, ensure a section 2605(g) claim’s defeat,[61] as will reliance on “general allegations of harm”[62] or “conclusory statement[s] of law.”[63]

IV. Some Real-World Guidance for Defendants and Plaintiffs

Putting aside questions as to its objective cogency, section 2605(g)’s implied causal requirement presents defendants and plaintiffs with both peril and possibility.

For a defendant, its existence affords new means for beating back any claim founded on its purported contravention. The want of plausible allegations as to causation or to a distinct harm attributable to section 2605(g)’s breach, as determined by the standard set out in Bell Atlantic Corp. v. Twombly[64] and Ashcroft v. Iqbal,[65] demands the dismissal of any such cause of action even at the pleading stage, thus justifying an early motion to dismiss or for judgment on the pleadings—or notice of that probability before a suit’s commencement. After discovery’s end, the dearth of much more than a scintilla of competent evidence of either should lead to the same result if articulated in a short motion for summary judgment. Finally, purely as a practical matter, any RESPA-covered entity that promptly corrects any section 2605(g) violation and tenders the nonbreaching plaintiff with the same kind of insurance coverage as under the lapsed policy, and actually possesses and successfully introduces evidence of such pre-suit efforts into a case’s record before or during trial,[66] will find itself well-positioned to sidestep liability under section 2605(g). The reason is simple: if a defendant can prove that it thusly acted, its breach of section 2605(g) cannot have precipitated any cognizable harm. Based on section 2605’s prevailing interpretation, such a finding abrogates any claim under section 2605(g) as a matter of law.

Meanwhile, a plaintiff must prepare to rebuff such rejoinders from first light. At a minimum, he, she, or they must not scrimp on the fashioning and propounding of allegations that, taken as a whole, depict a plausible connection between section 2605(g)’s defiance and some ultimately measurable harm in framing every pleading. Obviously, if the breaching entity quickly recovered and arranged for coverage consistent with that previously furnished, likely doom would dog any such claim; after all, the nonexistence of a true injury is not something that can be pled away, only artfully obscured for a spell. Depending on the facts, a prescient plaintiff—one who anticipates this risk—can endeavor to minimize it by (1) credibly avowing their intent to obtain potentially more generous coverage than formerly imposed pre-suit, or by demonstrating that the servicer, whether directly or indirectly, had failed (2) either to obtain at least comparable coverage prior to the initiation of any lawsuit or the threat of litigation, or (3) to utilize the more beneficial matrix or algorithm set forth in the expired policy, as it may have promised.[67] For these plaintiffs, discovery must be dedicated to the gathering of evidence so substantiating from the mortgagors, breaching party, insurer, and, if necessary, an expert or two—more than a modicum necessary to dodge a section 2605(g) claim’s dismissal on the eve of trial. To summarize, in accordance with the federal judiciary’s preferred construction of section 2605, any plaintiff should be ready first to allege and subsequently to show how a breach of section 2605(g) engendered an actual injury, one preferably reducible to paper dollars and jingling cents, before docketing a single page. The judicial penchant for “interpret[ing] this [causal] requirement liberally” will surely ease this burden,[68] but cannot fully negate it.

Aside from making the aforementioned arrangements, a plaintiff’s only option is to dispute the propriety of this causal prerequisite’s imputation into section 2605’s silent text. Such a contention arguably accords with today’s “well-established principles of statutory construction,”[69] which decidedly bar any tinkering with a statute’s enacted language.[70] Yet, considering section 2605(f)’s highly redolent language and the judiciary’s longstanding rejection of this argument, its odds of success at trial or on appeal are vanishingly small.

V. Conclusion

In its current form, section 2605(g) lacks either a palpable ambiguity or a maddening ornateness. Rather, this subsection lays out duties, the disregard of which can trigger liability in relatively transparent prose.[71] No reference to causation graces its text, and no such clear demand appears in the overall statute of which it constitutes but a part. Perhaps made uncomfortable by the omission of this common statutory element, countless courts have nonetheless implanted it within section 2605 in general and section 2605(g) in particular. Notwithstanding this decision’s soundness, its present-day ascendency is an established fact, and until courts or Congress act, its propagation invites defendants to argue for the imputation of such a condition into RESPA’s as-yet-untouched sections—and perhaps other, still unaffected consumer protection statutes.

*Amir Shachmurove is an associate at Troutman Sanders LLP and is always reachable at [email protected]. As usual, the views expressed and the mistakes made herein are his alone and should be attributed to neither friend nor employer, past or present. Lastly, this article is for general information purposes and is not intended to be, and should not be taken as, legal advice.

[1] In this article, any reference to “section []” or “§ []” is to a provision of RESPA, as codified in 12 U.S.C. §§ 2601–2617.

[2] As typically defined, an “escrow account” is “a bank account, generally held in the name of the depositor and an escrow agent, that is returnable to the depositor or paid to a third person on the fulfillment of specified conditions.” Black’s Law Dictionary 22 (10th ed. 2014). In the RESPA context, and as used in this article, the term “escrow account” is synonymous with “impound account,” defined as “[a]n account of accumulated funds held by a lender for payment of taxes, insurance, or other periodic debts against real property.” Id.

[3] The judicial consensus that section 2609 does not allow for a private cause of action likely explains this distribution. See infra note 46 and accompanying text.

[4] Cf. Hyderi v. Wash. Mut. Bank, FA, 235 F.R.D. 390, 400 (N.D. Ill. 2006) (describing section 2605(g) as “a seldom-invoked provision of RESPA”).

[5] In this article, any reference to “court” or “courts” is to one or more federal trial and appellate courts, whether operating pursuant to Article I or Article III of the U.S. Constitution, unless otherwise noted.

[6]  Allen v. United Fin. Mortg. Corp., 660 F. Supp. 2d 1089, 1097 (N.D. Cal. 2009).

[7] The tales précised in this section come from publicly available sources. Some facts have nonetheless been altered for the sake of confidentiality and readability.

[8] George S. Mahaffey Jr., A Product of Compromise: Or Why Non-Pecuniary Damages Should Not Be Recoverable under Section 2605 of the Real Estate Settlement Procedures Act, 28 U. Dayton L. Rev. 1, 6 (2002).

[9] Diana Stoppello, Federal Regulation of Home Mortgage Settlement Costs: RESPA and Its Alternatives, 63 Minn. L. Rev. 368, 374 n.20 (1979).

[10] Mahaffey, supra note 8, at 7. The U.S. Department of Housing and Urban Development today bears much of the responsibility for RESPA’s implementation and enforcement. 12 U.S.C. § 2617. In addition, RESPA is effectuated by regulations, collectively known as Regulation X, promulgated by the Consumer Financial Protection Bureau. 12 C.F.R. §§ 1024.1 et seq.

[11] Pub. L. No. 91-351, 84 Stat. 450 (1970); P. Barron, Federal Regulation of Real Estate: The Real Estate Settlement Procedures Act 11 (1975).

[12] Michael Darrow, The Real Estate Settlement Procedures Act of 1974, as Amended in 1975, 5 U. Balt. L. Rev. 383, 383–86 (1976). With RESPA’s passage, “[h]omeownership” had finally become an “American dream” worthy of federal succor. Predatory Mortgage Lending: The Problem, Impact, and Response: Hearings Before the U.S. S. Comm. on Banking, Housing, and Urban Affairs, 107th Cong. 1 (2001) (statement of Sen. Paul S. Sarbanes, Chairman, S. Comm. on Banking, Housing, and Urban Affairs).

[13] Pub. L. No. 95-533, 88 Stat. 1724 (1974).

[14] 12 U.S.C. § 2601(b); Freeman v. Quicken Loans, Inc., 626 F.3d 799, 804 (5th Cir. 2010).

[15] Flagg v. Yonkers S&L Ass’n, 396 F.3d 178, 184 (2d Cir. 2005).

[16] 12 U.S.C. § 2602(3); 12 C.F.R. § 1024.2(b); H.R. Rep. No. 102-760, at 158 (1992). Somewhat helpfully, section 2602(3) includes a nonexhaustive list of “settlement services.” 12 U.S.C. § 2602(3); Bloom v. Martin, 77 F.3d 318, 321 (9th Cir. 1996).

[17] 12 U.S.C. § 2602(1); Wilson v. Bank of Am., N.A., 48 F. Supp. 3d 787, 796 (E.D. Pa. 2014); Moses v. Citicorp Mortg., 982 F. Supp. 897, 900 n.3 (E.D.N.Y. 1997). As applied, this term’s definition has two prongs. Knowles v. Bayview Loan Servicing, LLC (In re Knowles), 442 B.R. 150, 158 (B.A.P. 1st Cir. 2011).

[18] 12 U.S.C. § 2602(3); see also Sosa v. Chase Manhattan Mortg. Corp., 348 F.3d 979, 981 (11th Cir. 2003) (explicating RESPA’s purpose); United States v. Graham Mortg. Corp., 740 F.2d 414, 419-20 (6th Cir. 1984) (same).

[19] Charles Szypszak, Real Estate Records, the Captive Public, and Opportunities for the Public Good, 43 Gonz. L. Rev. 5, 19 (2007–08); see also, e.g., Wanger v. EMC Mortg. Corp., 127 Cal. Rptr. 2d 685, 689, 693 (Cal. Ct. App. 2002); see also, e.g., Cortez v. Keystone Bank, No. 98-2457, 2000 U.S. Dist. LEXIS 5705, at *30, 2000 WL 536666, at *10 (E.D. Pa. May 2, 2000) (“The principal purpose of RESPA is to protect home buyers from material nondisclosures in settlement statements and abusive practices in the settlement process.”).

[20] Seth M. Mott, Note, Tacking the Perplexing Sound of Statutory Silence: Why Courts Should Imply a Private Right of Action Under Section 10(a) of RESPA, 64 Wash. & Lee L. Rev. 1159, 1165 (2007).

[21] Iver Peterson, Padding in the Escrow Cushion, N.Y. Times, Feb. 24, 1991, at 1.

[22] Christopher L. Sagers, Note, An Implied Cause of Action under the Real Estate Settlement Procedures Act, 95 Mich. L. Rev. 1381, 1382 (1997); Thomas H. Broad, Comment, The Attack Upon the Tax and Insurance Escrow Accounts in Mortgages, 47 Temp. L.Q. 353, 352 (1974).

[23] Charles A. Pillsbury, Note, Lender Accountability and the Problem of Noninterest-Bearing Mortgage Escrow Account, 54 B.U. L. Rev. 516, 517 (1974).

[24] Robert E. Ulbricht, Impound Accounts and After, 28 Bus. Law. 203 (Nov. 1972).

[25] Mott, supra note 20, at 1166, 1168.

[26] Cranston-Gonzalez National Affordable Housing Act of 1990, Pub. L. No. 101-625, § 941, 104 Stat. 4079, 4405; 12 U.S.C. § 2602(1); see also Cortez, 2000 U.S. Dist. LEXIS 5705, at *31–32, 2000 WL 536666, at *10 (“By its terms, however, RESPA applies not only to the actual settlement process but also to the ‘servicing’ of any ‘federally related mortgage loan.’”).

[27] Wanger, 127 Cal. Rptr. 2d at 689.

[28] John Jin Lee & John H. Mancuso, Housing Finance: Major Developments in 1989, 45 Bus. Law. 1863, 1870 (1990); see also Wanger, 127 Cal. Rptr. 2d at 689 (quoting article).

[29] Lin & Mancuso, supra note 28, at 1870.

[30] Sutton v. CitiMortgage, Inc., 228 F. Supp. 3d 254, 261 (S.D.N.Y. 2017). As time would show, investors had their own reasons to fret. Cf. Adam J. Levitin, Andrey D. Pavlov & Susan M. Wachter, The Dodd-Frank Act and Housing Finance: Can It Restore Private Risk Capital to the Securitization Market?, 29 Yale J. on Reg. 155, 156–57 (2012) (“Investors have discovered that loss severities on defaulted loans are heavily dependent on servicer behavior regarding loan modifications and foreclosures[,]” but that they “have little ability to monitor servicer conduct or discipline wayward servicers.”).

[31] 12 U.S.C. § 2605(i)(3) (emphasis added); see also, e.g., Christenson v. Citimortgage, Inc., No. 12-cv-02600-CMA-KLM, 2013 U.S. Dist. LEXIS 13344, at *17–19, 2013 WL 5291947, at *6 (D. Colo. Sept. 18, 2013) (explaining why servicing under section 2605(i)(3) cannot be read to “encompass acceleration or foreclosure issues”).

[32] Arielle L. Katzman, Note, A Round Peg for a Square Hole: The Mismatch between Subprime Borrowers and Federal Mortgage Remedies, 31 Cardozo L. Rev. 497, 518 (2009); Christopher L. Peterson, Predatory Structured Finance, 28 Cardozo L. Rev. 2185, 2210–12 (2007).

[33] Ploog v. HomeSide Lending, Inc., 209 F. Supp. 2d 863, 870 (N.D. Ill. 2002).

[34] McLean v. GMAC Mortg. Corp., 398 F. App’x 467, 471 (11th Cir. 2010) (“RESPA is a consumer protection statute”; “[c]onsequently, RESPA is to be ‘construed liberally in order to best serve Congress’ intent.’” (quoting Ellis v. Gen. Motors Acceptance Corp., 160 F.3d 703, 707 (11th Cir. 1998) (addressing the remedial nature of the Truth in Lending Act))); cf. Clemmer v. Key Bank N.A., 539 F.3d 349, 353 (6th Cir. 2008) (stating that several consumer protection statutes must be “accorded ‘a broad, liberal construction in favor of the consumer’” (quoting Begala v. PNC Bank, Ohio, Nat’l Ass’n, 163 F.3d 948, 950 (6th Cir. 1998))).

[35] Johnstone v. Bank of Am., N.A., 173 F. Supp. 2d 809, 816 (N.D. Ill. 2001).

[36] Weisheit v. Rosenberg & Assocs., LLC, JKB-17-0823, 2017 U.S. Dist. LEXIS 188605, at *8–9, 2017 WL 5478355, at *3 (D. Md. Nov. 15, 2017); see also Flagg v. Yonkers S&L Ass’n, 307 F. Supp. 2d 565, 580 (S.D.N.Y. 2004) (similarly construing RESPA).

[37] See, e.g., Rawlings v. Dovenmuehle Mortg., Inc., 64 F. Supp. 2d 1156, 1166 n.7 (M.D. Ala. 1999) (broadly construing section 2605, “clearly a remedial, consumer-protection statute,” and disagreeing with Katz, 992 F. Supp. at 254–56); Dujanovic v. MortgageAmerica, Inc., 185 F.R.D. 660, 669 (N.D. Ala. 1999) (observing that Congress enacted RESPA “to protect borrowers from brokers” and that “Congress clearly stated that RESPA was designed to protect consumers”).

[38] Mary S. Robertson, The “New and Improved” Real Estate Settlement Procedures Act and Regulation X, 47 Consumer Fin. LQ. Rep. 272, 273 (1993).

[39] Flagg, 307 F. Supp. 2d at 578–81. RESPA does so in some of the same sections applicable to servicers. E.g., 12 U.S.C. §§ 2605, 2607, 2609(a).

[40] Bryce v. Lawrence (In re Bryce), 491 B.R. 157, 179 (Bankr. W.D. Wash. 2013); MorEquity, Inc. v. Naeem, 118 F. Supp. 2d 885, 900 (N.D. III. 2000).

[41] Kevelighan v. Trott & Trott, P.C., 771 F. Supp. 2d 763, 770 (E.D. Mich. 2010).

[42] 12 U.S.C. § 2609(a); Flagg, 396 F.3d at 184.

[43] 12 U.S.C. § 2609(b); Dolan v. Fairbanks Capital Corp., 930 F. Supp. 2d 396, 417 (E.D.N.Y. 2013).

[44] 12 U.S.C. § 2609(c); Hardy v. Regions Mortg., Inc., 449 F.3d 1357, 1359–60 (11th Cir. 2006).

[45] Michael S. Glassman, Note, Real Estate Settlement and Procedures Act of 1974 and Amendments of 1975: The Congressional Response to High Settlement Costs, 45 U. Cin. L. Rev. 448, 456 (1976).

[46] This construction has been chiefly based on the absence of the requisite legislative intent. E.g., Hardy, 449 F.3d at 1360; Louisiana v. Litton Mortg. Co., 50 F.3d 1298, 1304 (5th Cir. 1995); Allison v. Liberty Sav., 695 F.2d 1086, 1087 (7th Cir. 1982); McCray v. Bank of Am. Corp., No. ELH-14-2446, 2017 U.S. Dist. LEXIS 54388, at *35, 2017 WL 1315509, at *15 (D. Md. Apr. 10, 2017); Burkett v. Bank of Am., N.A., No. 1:10CV68-HSO-JMR, 2011 U.S. Dist. LEXIS 112719, at *7–8, 2011 WL 4565881, at *3 (S.D. Miss. Sept. 29, 2011); Sarsfield v. Citimortgage, Inc., 667 F. Supp. 2d 461, 467 (M.D. Pa. 2009); Birkholm v. Wash. Mut. Bank, F.A., 447 F. Supp. 2d 1158, 1163 (W.D. Wash. 2006); McAnaney v. Astoria Fin. Corp., 357 F. Supp. 2d 578, 591 (E.D.N.Y. 2005); Campbell v. Machias Sav. Bank, 865 F. Supp. 26, 31 (D. Me. 1994); Bergkamp v. N.Y. Guardian Mortgagee Corp., 667 F. Supp. 719, 723 (D. Mont. 1987). Courts tend to give two reasons for this conclusion about congressional intent. First, RESPA explicitly sets forth statutes of limitations for claims brought pursuant to sections 2605, 2607, and 2608 in section 2614. 12 U.S.C. § 2614. “Had Congress intended to create a private right of action under § 2609, that section also would have been included in the statute of limitations section.” McAnaney, 357 F. Supp. 2d at 591; accord Allison, 695 F.2d at 1089; McWilliams v. Chase Home Fin., LLC, No. 4:09CV609 RWS, 2010 U.S. Dist. LEXIS 43549, at *9–12, 2010 WL 1817783, at *3–4 (E.D. Mo. May 4, 2010). Second, Congress did amend section 2609 after several circuit courts had so decided, but only added an administrative remedy to section 2609(c). McAnaney, 357 F. Supp. 2d at 591. It therefore implicitly endorsed this construction. Litton, 50 F.3d at 1301; see also Tex. Dep’t of Hous. & Cmty. Affairs v. Inclusive Cmtys. Project, Inc., 135 S. Ct. 2507, 2520 (2015) (“Congress’ decision in 1988 to amend the . . . [Fair Housing Act (FHA)] while still adhering to the operative language in §§ 804(a) and 805(a) is convincing support for the conclusion that Congress accepted and ratified the unanimous holdings of the Courts of Appeals finding disparate-impact liability.”); cf. Midlantic Nat’l Bank v. New Jersey Dep’t of Envtl. Prot., 474 U.S. 494, 501 (1986) (“The normal rule of statutory construction is that if Congress intends for legislation to change the interpretation of a judicially created concept, it makes that intent specific.”).

[47] See Mott, supra note 20, at 1191–1202 (disputing this construction for this and other reasons). This reading, of course, has not limited section 2609’s usefulness to public plaintiffs.

[48] E.g., Collins, 105 F.3d at 1367; Au v. Republic State Mortg. Co., 948 F. Supp. 2d 1086, 1101 (D. Haw. 2013); Martin v. Citimortgage, Inc., No. 1:09-cv-03410-JOF, 2010 U.S. Dist. LEXIS 43525, at *7 n.3, 2010 WL 1780076, at *3 n.3 (N.D. Ga. May 4, 2010). Per the weight of the relevant jurisprudence, there are only three private causes of action under RESPA: “actions pursuant to Sections 2605, 2607, and 2608.” Arroyo v. PHH Mortg. Corp., No. 13-CV-2335(JS) (AKT), 2014 U.S. Dist. LEXIS 68534, at *37, 2014 WL 2048384, at *13 (E.D.N.Y. May 19, 2014). Section 2607 prohibits kickbacks and unearned fees, and section 2608 bars sellers from “requir[ing] directly or indirectly, as a condition to selling a covered property, that title insurance covering the property be purchased by the buyer from any particular title company.” 12 U.S.C. §§ 2607–08.

[49] Kevelighan, 771 F. Supp. 2d at 770.

[50] 12 U.S.C. § 2605(g); Jacques v. U.S. Bank N.A. (In re Jacques), 416 B.R. 63, 70 (Bankr. E.D.N.Y. 2009); Kevelighan, 771 F. Supp. 2d at 770; see also, e.g., Burkett, 2011 U.S. Dist. LEXIS 112719, at *5, 2011 WL 4565881, at *2 (“Section 2605(g) governs the administration of escrow accounts[.]”); Girgis v. Countrywide Home Loans, Inc., 733 F. Supp. 2d 835, 848 (N.D. Ohio 2010) (same). So worded, section 2605(g) does not govern the timeliness of an initial deposit to an escrow account or when the servicer can collect funds from the borrower for such payments. Staats v. Bank of Am., N.A., No. 3:10-CV-68 (BAILEY), 2011 U.S. Dist. LEXIS 158376, at *17–18, 2011 WL 12451607, at *6 (N.D. W. Va. Aug. 23, 2011); Kevelighan, 771 F. Supp. 2d at 770.

[51] 12 C.F.R. § 1024.17(k)(1); Althaus v. Cenlar Agency, Inc., No. 17-445 (JRT/DTS), 2017 U.S. Dist. LEXIS 167475, at *2, 2017 WL 4536074, at *1 (D. Minn. Oct. 10, 2017).

[52] 12 U.S.C. § 2605(f); Christiana Tr. v. Riddle, 911 F.3d 799, 804 (5th Cir. 2018). Compounding this problem, RESPA neither denotes nor tenders an example of the term “actual damages.” Tauss v. Midland States Bank, No. 5:16-cv-00168-RLV-DSC, 2017 U.S. Dist. LEXIS 139364, at *20, 2017 WL 3741980, at *7 (W.D.N.C. Aug. 30, 2017). Formally and colloquially, this phrase means the “amount awarded to a complainant [either] to compensate for a proven injury or loss” or to “repay actual losses.” Black’s, supra note 2, at 471.

[53] Lane v. Vitek Real Estate Indus. Grp., 713 F. Supp. 2d 1092, 1101 (E.D. Cal. 2010); Allen, 660 F. Supp. 2d at 1097.

[54] 12 U.S.C. § 2614; Girgis, 733 F. Supp. 2d at 847.

[55] 12 U.S.C. § 2605(f)(1)(A) (emphasis added); see Hutchinson v. Delaware Sav. Bank, FSB, 410 F. Supp. 2d 374, 382 (D.N.J. 2006) (construing section 2605(f)(1)(A)); see also Jones v. Select Portfolio Serv., Inc., No. 08-972, 2008 U.S. Dist. LEXIS 33284, at *27, 2008 WL 1820935, at *9–10 (E.D. Pa. Apr. 22, 2008) (finding complaint to have failed to properly plead causation and specific damages to support the RESPA claim); Katz v. Dime Sav. Bank, FSB, 992 F. Supp. 250, 255–57 (W.D.N.Y. 1997) (granting summary judgment for a plaintiff’s failure to show actual pecuniary harm).

[56]  Renfroe v. Nationstar Mortg., LLC, 822 F.3d 1241, 1246 (11th Cir. 2016) (citing, among others, Toone v. Wells Fargo Bank, N.A., 716 F.3d 516, 523 (10th Cir. 2013) and Hintz v. JPMorgan Chase Bank, N.A., 686 F.3d 505, 510-11 (8th Cir. 2012)); accord, e.g., Hagan v. Credit Union of Am., No. 11-1131-JTM, 2012 U.S. Dist. LEXIS 56100, at *12–13, 2012 WL 1405734, at *5 (D. Kan. Apr. 23, 2012).

[57] McLean, 398 F. App’x at 471 (as to section 2605(e)); accord, e.g., Stevens v. Citigroup, Inc., No. 00-3815, 2000 U.S. Dist. LEXIS 18201, at *11, 2000 WL 1848593, at *3–4 (E.D. Pa. Dec. 15, 2000); see also, e.g., Quinlan v. Carrington Mortg. Servs., LLC, 2014 U.S. Dist. LEXIS 95448, at *14–15, 2014 WL 3495838, at *5 (D.S.C. July 14, 2014) (applying principle); Champion v. Bank of Am., N.A., No. 5:13-CV-00272-BR, 2014 U.S. Dist. LEXIS 78, at *7–9, 2014 WL 25582, at *3–4 (E.D.N.C. Jan. 2, 2014) (collecting cases so holding).

[58] See Allen, 660 F. Supp. 2d at 1097 (as to section 2605 generally); see also, e.g., Frazile v. EMC Mortg. Corp., 382 F. App’x 833, 836 (11th Cir. 2010) (affirming dismissal of a claim for “fail[ing] to allege facts relevant to the necessary element of damages caused by assignment [of loan servicing]” under section 2605(f)); Bishop v. Quicken Loans, Inc., No. 2:09-01076, 2010 U.S. Dist. LEXIS 93692, at *19–20, 2010 WL 3522128, at *6 (S.D. W. Va. Sept. 8, 2010) (dismissing RESPA claim due to plaintiff’s failure to allege how servicer’s noncompliance with § 2605(f) caused them harm); Singh v. Wash. Mut. Bank, No. 09-2771, 2009 U.S. Dist. LEXIS 73315, at *16, 2009 WL 2588885, at *5 (N.D. Cal. Aug. 19, 2009) (dismissing RESPA claim because, “[i]n particular, plaintiffs have failed to allege any facts in support of their conclusory allegation that as a result of defendants’ failure to respond, defendants are liable for actual damages, costs, and attorney fees”) (quotation marks and citation omitted); cf. Davis v. Bowens, No. 1:11CV691, 2012 U.S. Dist. LEXIS 101402, at *18, 2012 WL 2999766, at *5 (M.D.N.C. July 23, 2012) (dismissing claim due to complaint’s general allegations of harm from the combined actions of all defendants). When there is no allegation that a defendant engaged in “a pattern or practice of noncompliance with the requirements” of section 2605, its statutory damages provision is inapplicable. 12 U.S.C. § 2605(f)(1)(B) (emphasis added).

[59] Frazile, 382 F. App’x at 836; see also, e.g., Stefanowicz v. SunTrust Mortg., No. 3:16-CV-368, 2018 U.S. Dist. LEXIS 24274, at *18–19, 2018 WL 1385976, at *6–7 (M.D. Pa. Feb. 13, 2018) (collecting cases so holding); Yuhre v. JPMorgan Chase Bank, No. 09-CV-02369 (GEB) (JFM), 2010 U.S. Dist. LEXIS 44948, at *16, 2010 WL 1404609, at *6 (E.D. Cal. Apr. 6, 2010) (holding that any alleged loss “must be related to the RESPA violation itself”). A recent appellate opinion underscores the continuing viability of this approach. See Moore v. Wells Fargo Bank, 908 F.3d 1050, 1059 (7th Cir. 2018) (so ruling as to a claim under section 2605(e)(2)).

[61] McLean, 398 F. App’x at 471; see also, e.g., Giordano v. MGC Mortg., Inc., 160 F. Supp. 3d 778, 781 (D.N.J. 2016) (quoting Straker v. Deutsche Bank Nat’l Tr., No. 3:09-CV-338, 2012 U.S. Dist. LEXIS 187379, at *31, 2012 WL 7829989, at *11 (M.D. Pa. Apr. 26, 2012)); Gorbaty v. Wells Fargo Bank, N.A., No. 10-CV-3291 NGG SMG, 2012 U.S. Dist. LEXIS 55284, at *16, 2012 WL 1372260, at *5 (E.D.N.Y. Apr. 18, 2012); Rubio v. U.S. Bank N.A., No. C 13-05752 LB, 2014 U.S. Dist. LEXIS 45677, at *45–46, 2014 WL 1318631, at *15 (N.D. Cal. Apr. 1, 2014) (citing, for support, Lal v. Am. Home Servicing, Inc., 680 F. Supp. 2d 1218, 1223 (E.D. Cal. 2010) and Allen, 660 F. Supp. 2d at 1097).

[62] Davis v. Bowens, No. 1:11CV691, 2012 U.S. Dist. LEXIS 101402, at *18, 2012 WL 2999766, at *5 (M.D.N.C. July 23, 2012).

[63] See Garcia v. Wachovia Mortg. Corp., 676 F. Supp. 2d 895, 909 (C.D. Cal. 2009) (likewise describing a statement alleging that a RESPA violation “subjects defendant[] to actual damages”).

[64] 550 U.S. 544 (2007).

[65] 556 U.S. 662 (2009).

[66] The federal courts’ relatively generous doctrine of judicial notice and rules for the admission of business records will probably abet any such effort. See Fed. R. Evid. 201 (setting the standard and procedures for judicial notice of adjudicative facts in federal court), 803(6) (codifying the hearsay exception for records of a regularly conducted business activity); Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007) (construing Federal Rule of Evidence 201); Philips v. Pitt Cty. Mem’l Hosp., 572 F.3d 176, 180 (4th Cir. 2009) (same).

[67] Depending on the precise relationship among the insurer, servicer, and adjustor, the servicer may not have actually been responsible for the relevant oversight, but so long as one (or both) took place, the plain language of section 2605(g) renders it legally liable.

[68] Yulaeva v. Greenpoint Mortg. Funding, Inc., No. 09-1504, 2009 U.S. Dist. LEXIS 79094, at *44, 2009 WL 2880393, at *15 (E.D. Cal. Sept. 9, 2009) (citing, as examples, Hutchinson, 410 F. Supp. 2d at 382, and Cortez, 2000 U.S. Dist. LEXIS 5705, at *38–40, 2000 WL 536666, at *10–13); cf., e.g., Moon v. Countrywide Home Loans, Inc., No. 3:09-cv-00298, 2010 U.S. Dist. LEXIS 11281, at *13, 2010 WL 522753, at *5 (D. Nev. Feb. 9, 2010) (“Even if . . . [the defendant] was the servicer of [p]laintiff’s loan and failed to respond to a qualified written request [as required under section 2605(e)], such failure alone does not substantiate a RESPA claim.”).

[69] RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639, 649 (2012).

[70] See Amir Shachmurove, Eligibility for Attorneys’ Fees under the Post-2007 Freedom of Information Act: A Onetime Test’s Restoration and an Overlooked Touchstone’s Adoption, 85 Tenn. L. Rev. 571, 634–36 (2018) (describing this standard); cf. Amir Shachmurove, Sovereign Speech in Troubled Times: Prosecutorial Statements as Extrajudicial Admissions, 86 Tenn. L Rev. 401, 462–67 (2019) (same, but as to Federal Rules of Evidence); Amir Shachmurove, The Consequences of a Relic’s Codification: The Dubious Case for Bad Faith Dismissals of Involuntary Bankruptcy Petitions, 26 Am. Bankr. Inst. L. Rev. 115, 151–57 (2018) (same, but also advocating specific modifications in cases arising under title 11 of the U.S. Code).

[71] Cf. Mahaffey, supra note 8, at 11 (describing section 2605(f)’s “language” as “rather uncomplicated”).

The U.S. Supreme Court declined to review the decision of the Ninth Circuit Court of Appeals in Lusnak v. Bank of Am., N.A., 833 F.3d 1185 (9th Cir. 2018), which effectively overturned a national bank regulation preempting state mortgage escrow laws. At issue was California Civil Code Section 2954.8(a), which requires financial institutions to pay two-percent interest per year on funds held in mortgage loan escrow accounts. The Ninth Circuit found a way around a 2004 preemption determination by the Office of the Comptroller of the Currency, the division of the U.S. Treasury which regulates national banks, set forth in 12 C.F.R. § 34.4(a)(6), which states, “[a] national bank may make real estate loans . . . without regard to state law limitations concerning . . . [e]scrow accounts, impound accounts, and similar accounts.”

Although state laws are preempted if they prevent or significantly interfere with a national bank’s exercise of its powers, the Ninth Circuit determined “no legal authority establishes that state escrow interest laws prevent or significantly interfere with the exercise of national bank powers, and Congress itself, in enacting Dodd-Frank, has indicated they do not.” The Dodd-Frank Reform Act added section 1639(g)(3) to the Truth in Lending Act (TILA). The Dodd-Frank TILA amendment applies to only higher-priced mortgages and only requires creditors to pay interest to consumers on amounts held in any escrow account if prescribed by applicable law. Nonetheless, the Ninth Circuit applied section 1639(g)(3) to the entire Lusnak class.

In November 2018, the Supreme Court denied certiorari despite the OCC’s amicus brief urging that the case be heard. The OCC asserted that the Ninth Circuit’s decision erred in a matter of fundamental importance to the national banking system and pointed to the Supreme Court’s own decision giving the OCC authority to make preemption determinations in Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25 (1996). Bank of Am., N.A. v. Lusnak, 139 S. Ct. 567 (2018).

The immediate result of the Supreme Court’s refusal to review the case is that national banks must pay at least two-percent annual interest on escrow accounts in California. Whether the Ninth Circuit’s constrained view of preemption will be applied to other state-law requirements (for example, maximum late charges under Civil Code Section 2954.5), or be adopted by other circuits, remains to be seen.

There has been much recent media attention around the Equality Act, especially after it passed in the U.S. House of Representatives on May 17, 2019. The act has been heralded as a first-of-its-kind bill and comes at a time when, according to the New York Times, “departments across the Trump administration have dismantled policies friendly to gay, bisexual and transgender individuals, like barring transgender recruits from serving in the military or formally rejecting complaints filed by transgender students who are barred from restrooms that match their gender identity.” Recently, the Department of Justice filed an amicus brief opposing protections for LGBTQ individuals in the trio of cases now before the U.S. Supreme Court that will decide whether Title VII already prohibits sexual orientation and gender identity discrimination.

Background

Despite significant progress both legislatively and judicially, lesbian, gay, bisexual, transgender, and queer (LGBTQ) Americans still lack the most basic of legal protections in states across the country and at the federal level. This deficit in legal protection means that it is still lawful for an employer to fire or refuse to hire gay, lesbian, and bisexual people. In addition, despite federal judicial decisions that have recognized that Title VII prohibits discrimination against transgender and gender nonconforming individuals, there is no national standard, and many state laws remain hostile to transgender status.

The patchwork nature of federal and state laws providing various degrees of protection—or none at all—leaves millions of people subject to uncertainty and potential discrimination that adversely impacts their livelihoods. A common illustration of the unconscionable unfairness of the legal status quo is a gay, lesbian, or bisexual person that can legally be fired on Monday simply for lawfully marrying the person she or he loves on Sunday.

Our nation’s civil rights laws prohibit and provide remedies for discrimination in areas such as employment, public accommodations, housing, and education on the basis of certain protected classes, such as race, color, national origin, sex, disability, and religion. However, as explained above, federal law does not provide consistent nondiscrimination protections based on sexual orientation or gender identity. The need for these protections is clear, especially in light of the current political climate that has been hostile to LGBTQ rights; in fact, nearly two-thirds of LGBTQ Americans report having experienced discrimination in their personal lives. Alarmingly high percentages of that cohort report that such discrimination has adversely impacted their work environment as well as their physical, psychological, and spiritual well-being.

According to the Human Rights Campaign, the leading LGBTQ rights advocacy group in the United States, “[d]ecades of civil rights history show that civil rights laws are effective in decreasing discrimination because they provide strong federal remedies targeted to specific vulnerable groups.” Explicitly including sexual orientation and gender identity in these fundamental laws would afford LGBTQ people the exact same protections that already exist under federal law. In other words, the aim is not to seek a special class of rights for LGBTQ persons, but to guarantee that they enjoy the same protections others already have.

Further, research shows broad public support for legislation that would ensure equal protection for LGBTQ persons, including a groundswell of support in the business community.[1]

What Is the Equality Act?

If enacted, the Equality Act (H.R. 5, S. 788, 116th Congress) would provide consistent and explicit nondiscrimination protections for LGBTQ people across key areas of life, including employment, housing, credit, education, public spaces and services, federally funded programs, and jury service.

The Equality Act would amend existing civil rights law—including the Civil Rights Act of 1964, the Fair Housing Act, the Equal Credit Opportunity Act, the Jury Selection and Services Act, and several other laws regarding employment with the federal government—to explicitly include sexual orientation and gender identity as protected characteristics. The legislation also amends the Civil Rights Act of 1964 to prohibit discrimination in public spaces and services and federally funded programs on the basis of sex.

Additionally, the Equality Act would update the public spaces and services covered in current law to include retail stores, services such as banks and legal services, and transportation services. These important updates would strengthen existing protections for everyone.

Legislative History of the Act

The bipartisan Equality Act was introduced in the House of Representatives by Reps. David Cicilline (D-RI) and Brian Fitzpatrick (R-PA), and in the Senate by Sens. Jeff Merkley (D-OR), Susan Collins (R-ME), Tammy Baldwin (D-WI), and Cory Booker (D-NJ), on March 13, 2019. The bill was introduced with 287 original cosponsors—the most congressional support that any piece of pro-LGBTQ legislation has received upon introduction.

Made a legislative priority by Speaker Nancy Pelosi, the act passed the House on May 17, 2019, by a vote of 236-173. All Democratic members and eight Republicans voted for it. Its passage marked the first time legislation of its kind—that includes broad protections and remedies for LGBTQ people without religious exemptions—has ever passed in either chamber of Congress.

Why Now and Why Not?

Whether Title VII, as it is currently written, prohibits discrimination on the basis of sexual orientation and/or gender identity will soon be answered by the U.S. Supreme Court as it takes up three cases in its 2019–2020 term. Predicting what the Court will do, especially before oral argument, may be a fool’s errand, but the current conservative bent of the Court means that a broad interpretation of Title VII is unlikely. The stakes are high, however. If a majority of justices narrowly read Title VII’s prohibition against discrimination on the basis of sex, their decision would reverse two federal courts of appeal sitting en banc that have managed to find majorities across an ideological spectrum to hold that Title VII protects workers from discrimination on the basis of sexual orientation.[2] Further, one might reasonably predict that such a narrow reading of Title VII would reverse the Court’s own decision in Price Waterhouse v. Hopkins, a case decided in 1989 that broadly read Title VII’s prohibition against sex discrimination to include sex discrimination claims based on gender stereotyping.[3] A narrow decision might also upset the Court’s unanimous 1998 decision in Oncale v. Hopkins that made same-sex sexual harassment claims actionable.[4] Hopkins, Oncale, and their progeny have contributed to progress in workplace gender equality over the last few decades.[5]

A simple and unambiguous legislative solution is waiting in the wings with the Equality Act. It would appease textual conservatives who do not oppose LGBTQ rights but who chafe at the thought of judicial overreach in interpreting statutory language. It would appease progressives who are nervous at the thought that a single Supreme Court decision could turn back decades of progress in the direction of gender equality in the workplace. Finally, the business community supports it. Corporate America has led the way with inclusive nondiscrimination policies; the law must catch up.

The question is not why, but when? The answer is now. Congress must finish the task it started.

[1] The nonpartisan Public Religion Research Institute (PRRI) found that, nationally, support for a bill like the Equality Act topped 70 percent, which includes a majority of Democrats, Republicans, and Independents. In addition, the Equality Act has been endorsed by the Business Coalition for the Equality Act, a group of more than 200 major companies with operations in all 50 states, headquarters spanning 27 states, and a collective revenue of $3.8 trillion. In total, these companies employ more than 10.9 million people across the United States. See Human Rights Campaign, Business Coalition for the Equality Act.

[2] See Davis & Litchfield, 1 LGBTQ Employment Law Practice Guide §§ 1.03 (Matthew Bender 2018).

[3] Price Waterhouse v. Hopkins, 490 U.S. 228, 109 S. Ct. 1775 (1989).

[4] See Davis & Litchfield, supra note 2, at §§ 1.02.

[5] Id.