Earlier this month, in Schweitzer v. Comenity Bank, the Eleventh Circuit held that a consumer can partially revoke consent to be called under the Telephone Consumer Protection Act (TCPA), This decision will only further complicate the already complex and treacherous net of liability cast by that statute.
What to do now about the new CFPB rule on arbitration? (1) begin planning now and (2) begin actual preparation after the 60 days runs.
Congress has 60 days after publication of the new CFPB rule to take action to stop the application of this rule. Publication occurred on Wednesday (July 19th). It is impossible to predict what Congress will do. However, we can be virtually certain that absent such Congressional action, this new rule will apply 180 days after those 60 days expire. While there are other possible hurdles for this rule (for instance, an expected lawsuit challenging the rule; a possible new CFPB Director in the future; a challenge to the CFPB’s structure, etc.), these other impacts are unlikely to prevent the rule from beginning to have application.
We suggest you use the next 60 days to plan but wait to make any substantial expenditures until it is certain what Congress will do. Here are some key questions which financial institutions should consider during those 60 days:
The Dodd Frank Act expressly provided that any CFPB rule on arbitration would not apply to existing contracts. 12 U.S.C. § 5518(d). Therefore, the CFPB rule released last week will only bar class action waivers for contracts “entered into after” the applicable date for the regulation (60 days after publication of the rule in the Federal Register and then 180 days after that date).
However, the CFPB has taken an aggressive position on what is an existing contract. Therefore, for existing customers, lenders and other “covered persons” will need to examine every change in any product or services they offer that is subject to the arbitration rule. If any “new product or service” is given to an existing customer, the new regulation applies to that product or service even if it is covered by the terms of an existing contract (assuming that the new product or service is within the scope of the rule). In such a case, the lender would need to amend the previous agreement or provide a new agreement for the new product and could not rely on the arbitration clause to avoid a class action.
The Consumer Financial Protection Bureau (CFPB) issued a rule on Monday prohibiting class action waivers in arbitration provisions of certain consumer contracts. The rule—to be codified at 12 C.F.R. § 1040—also requires covered businesses to submit records to the CFPB regarding any arbitration filed by or against their customers regarding covered products and services. The provided records will be made public and hosted by the CFPB on a searchable database. The likely impact of this rule (should it be allowed to go into effect) will be significant for financial institutions and dramatically alter their relationships with their customers.
Last week, the Second Circuit Court of Appeals, in Reyes v. Lincoln Automotive Financial Services, held that contractual consent—once given—cannot be unilaterally revoked. The landmark Telephone Consumer Protection Act (TCPA) case gives a potent tool against the flood of TCPA cases based on the revocation of consent, at least for businesses with well documented relationships with their customers.
In reaching its ultimate conclusion, the Reyes court acknowledged the seemingly contrary case law from the Courts of Appeal for the Third and Eleventh Circuits. According to Reyes, Gager v. Dell Fin. Servs., LLC (Third Circuit) and Osorio v. State Farm Bank, F.S.B. (Eleventh), as well as the 2015 FCC Declaratory Ruling which relied on Gager and Osorio, “considered a narrow question: whether the TCPA allows a consumer who has freely and unilaterally given his or her informed consent to be contacted [to] later revoke that consent.” Reyes “present[ed] a different question . . . : whether the TCPA also permits a consumer to unilaterally revoke his or her consent to be contacted by telephone when that consent is given, not gratuitously, but as bargained-for consideration in a bilateral contract.”
The key to framing the question in this light comes from the distinction “between tort and contract law. In tort law, ‘consent’ is generally defined as a gratuitous action . . . .” On the other hand, “[i]t is black-letter law that one party may not alter a bilateral contract by revoking a term without the consent of a counterparty.” In addressing the policy arguments mounted by Reyes, the Court declined to step into a role it found more suited for Congress:
We are sensitive to the argument that businesses may undermine the effectiveness of the TCPA by inserting ‘consent’ clauses of the type signed by Reyes into standard sales contracts, thereby making revocation impossible in many instances. . . . But this hypothetical concern, if valid, is grounded in public policy considerations rather than legal ones; if the abuse came to pass, it would therefore be ‘for the Congress to resolve—not the courts.’
Reyes adds more weight to the already existing incentive for businesses to capture written consent. However, it is not panacea for TCPA liability. First, at present, it is confined to the Second Circuit. Second, it applies to those businesses who have a contractual relationship with the plaintiff. Third, plaintiffs may argue—like they would in fighting arbitration—that the call must relate to or fall within the scope of the contract and the consent provision under which a business seeks to invoke Reyes. Fourth, certain scenarios, like debt collection, may fall outside of Reyes. While consent already transfers from a business relationship to debt collection activities, that is a revocable form of consent. Reyes arguably makes that consent non-revocable if contracted. However, a plaintiff may argue that a contractual default and the subsequent election to pursue default remedies terminates the contract.
In light of the above, businesses may want to consider just how broad their consent language is in their contracts and just how they may seek to capture a written relationship in as many instances as possible. Undoubtedly, TCPA defendants will look to Reyes when able and plaintiffs will push back. Monitoring how and if the decision gains traction across the country will be one of the more important TCPA trends for the second half of 2017.
Late December, the Fourth Circuit Court of Appeals (Fourth Circuit), in Lovegrove v. Ocwen Home Loans Srvs., upheld summary judgment in favor of a mortgage servicer against allegations under the Fair Debt Collection Practices Act (FDCPA), under which courts generally apply a “least sophisticated consumer” standard. The plaintiff in Lovegrove alleged that monthly mortgage statements he received from the servicer violated the FDCPA because they attempted to collect a debt which had been discharged in a recent bankruptcy. The notices, however, contained the familiar and—here, exposure limiting—disclosures that “if the debt is in active bankruptcy or has been discharged through bankruptcy, this communication is not intended as and does not constitute an attempt to collect a debt.” In following its own recent case law, the Fourth Circuit applied a “commonsense inquiry” into whether these notices, in light of the quoted disclaimer, attempted to collect debt, ultimately deciding that they did not. Of further note is the passing comment by the Fourth Circuit that “there is an argument that sophisticated and high-dollar loan arrangements should not be analyzed under the least sophisticated consumer standard. Perhaps, sophisticated consumers should not get the benefit of the lenient standard when they are part of a complex relationship or situation that may be confusing to less sophisticated individuals.”
The clear take away is that disclaimers that can be easily disregarded as boilerplate still have significant meaning, and, as in this case, may form the basis for escaping liability altogether. Further, while debt collectors still have to strictly comply with all requirements under the FDCPA, the wildly lenient “least sophisticated consumer standard” may give way under certain circumstances.
Few issues involving the Fair Debt Collection Practices Act (FDCPA) are more hotly contested than whether filing a proof of claim on a time-barred debt violates the FDCPA. In bankruptcy, creditors have a right to file proofs of claim outlining the debt owed to them by the bankrupt debtor. In some instances, the statute of limitations for filing a lawsuit on that debt has run, and up until July 10, 2014, when the Eleventh Circuit Court of Appeals issued its decision in Crawford v. LVNV Funding, LLC, it was common practice to file a proof of claim on such a time-barred debt. Crawford—for the first time—likened the filing of a proof of claim to the filing of a lawsuit, finding that if one is wrongful, so is the other. After Crawford, debt collectors have faced a tidal wave of cases across the country, raising numerous defenses, one of which is res judicata. The argument goes like this: if a debt collector files a proof of claim to which neither the debtor nor the trustee objects and the court subsequently confirms the debtor’s plan, then a final judgment exists stating the debt is valid. Thus the debtor is barred by res judicata from further challenging the debt.
Despite a chorus of cases adopting this reasoning, the United States District Court for the Southern District of Georgia recently dealt a blow to the res judicata argument, finding that the grounds upon which the FDCPA claim was raised and the grounds upon which the proof of claim was confirmed were not sufficiently similar such that one could foreclose the other. For two years the so-called Crawford cases have raged; circuit splits exist; and this recent decision from the Southern District of Georgia shows that further disagreement is likely. Creditors and debt collectors alike should monitor the development of these cases to ensure they know how their claims will be treated in the bankruptcy courts.
Balch recently authored an article for Law 360 regarding the conundrum the Telephone Consumer Protection Act poses for electric utilities. While their article does not involve the financial industry, it does shed insight on the many problems created by the TCPA. For example, electric utilities are often required by state law to call customers before turning off their electrical service. However, if the utility calls the customer’s cell phone using an autodialer, then the utility could be subject to statutory damages under the TCPA. An industry group has requested further guidance from the Federal Communications Commission about the proper course of action when faced with this scenario. Hopefully, the FCC will exempt such calls from the TCPA’s scope, but that is not guaranteed. As the above example shows, the TCPA can be a difficult statute to navigate, especially as businesses increasingly communicate with their customers exclusively through mobile phones.
The bottom line is this: “Every company in every industry needs to have strong TCPA compliance procedures in place for communicating with customers.” Balch has advised numerous clients both inside and outside the utility industry on how to develop TCPA compliance procedures. If you believe our expertise could benefit your company, please do not hesitate to contact us.
The full text of the article is available here.
In Walker v. Financial Recovery Services, Inc., No. 14-13769 (11th Cir. March 27, 2015), the court addressed the impact of an offer of judgment under Federal Rule of Civil Procedure 68 on both a putative class and its named representative’s complaint. In the district court below, Financial Recovery Services, Inc. (“FRS”) successfully dismissed Walker’s complaint as moot by making an offer of judgment which “provide[d] Walker with complete [statutory] relief.” Id. at 3. In reversing the lower court, the court in Walker relied on and declined to “reconsider or modifv” Stein v. Buccaneers Ltd. P’ship, a recent Eleventh Circuit Court of Appeals case that Walker found controlling. Id.
In Stein, the plaintiffs filed a proposed class action alleging that the defendant violated the Telephone Consumer Protection Act when it sent unsolicited faxes advertising tickets to NFL games. See Stein v. Buccaneers Ltd. P’ship, 772 F.3d 698, 700–01 (11th Cir. 2014). Prior to the plaintiffs filing a class-certification motion, the defendant made offers of judgment under Rule 68 for full statutory damages plus reasonable attorneys’ fees to all named plaintiffs. See id. Two days later the defendant moved to dismiss the case for lack of subject matter jurisdiction arguing that the unaccepted Rule 68 offers rendered the case moot. See id. at 701. Unconvinced, the court held alternatively that (1) an unaccepted Rule 68 offer of judgment does not moot a named plaintiff’s complaint, and (2) even if it did, “a Rule 68 offer of full relief to the named plaintiff does not moot a class action, even if the offer precedes a class-certification motion, so long as the named plaintiff has not failed to diligently pursue class certification.” Id. at 707.
In Walker, FRS attempted to distinguish Stein by arguing that, unlike Stein where the offers “were deemed revoked if not accepted and the defendant did not request that the district court enter judgment on the terms of its offers, FRS continued to stand behind its offer and requested that the district court provide Walker with complete relief by entering judgment.” Walker, No. 14-13769, at 2–3. However, the court was “not persuaded that these factual differences should alter [its] analysis.” Id. at 3. The court continued, stating, “[e]ven if there were a persuasive way to distinguish the facts of this case from Stein’s first alternative holding, Stein’s second alternative holding would still bind us.” Id.
Stein and Walker make clear that absent an en banc decision overruling Stein or Supreme Court intervention, in the Eleventh Circuit, an offer of judgment providing complete relief to a named plaintiff will not moot that plaintiff’s complaint, nor will it defeat a class action, “even if the offer preceded a class-certification motion, so long as the named plaintiff has not failed to diligently pursue class certification.” Stein, 772 F.3d at 707.