Source: https://consumerfinancewatch.com/category/class-actions-mass-actions/
Timestamp: 2019-04-18 21:03:52+00:00

Document:
On July 10, 2017, the Consumer Financial Protection Bureau (“CFPB”) issued a final rule (“Arbitration Rule”) prohibiting banks, debt servicers, credit card companies, and a wide range of other businesses from using arbitration clauses to bar a consumer from filing a class action lawsuit to resolve any future dispute between the consumer and the consumer financial service provider. The full version of the final rule is available on the CFPB’s website: CFPB Arbitration Agreements Final Rule.
The Arbitration Rule will take effect 60 days after it is published in the Federal Register (“Effective Date”). In addition, the Arbitration Rule will only apply to agreements entered into more than 180 days after the Effective Date, which provides a short grace period for impacted businesses to comply.
Further, Congress may use the Congressional Review Act to invalidate the Arbitration Rule by voting to disapprove the regulation within “60 legislative days” of the Effective Date. Nonetheless, there is no guarantee that Congress will act.
Because the Arbitration Rule will apply prospectively to agreements entered into more than 180 days after the Effective Date, it would be prudent for consumer financial services providers to take steps to comply with the new rule and explore other ways to reduce litigation risks and costs. If the Arbitration Rule goes unchallenged by Congress, it will begin to apply to consumer financial service providers in early 2018.
Thus, the material distinction between a “debt collector” and a “creditor,” the Court noted, is whether a person’s regular collection activity is only for itself (a creditor) or for others (a debt collector), with the primary exception being an entity whose principal purpose is the collection of debts—not, as the Henson plaintiffs urged, whether the debt was in default when the person acquired it.
This is a significant development in FDCPA jurisprudence and, by moving the focus away from the status of the debt at the time of assignment, will provide lenders who seek to collect their own debts with a strong defense to future FDCPA liability.
[i] Henson v. Santander Consumer USA, Inc., —F.3d—, 2016 WL 1128419, at *3 (4th Cir. Mar. 23, 2016).
[iv] Id. at *2 (citing 15 U.S.C. § 1692a(4)) (emphasis in original).
[v] Id. at *3 (emphasis in original).
[vii] Id. at *3 (emphases in original).
In a 6-3 decision in DirectTv, Inc. v. Imburgia et al., 577 U.S. ____ (2015), the United States Supreme Court reversed the California Court of Appeal and held that state courts must enforce arbitration clauses even if a class action waiver in an arbitration clause would be unenforceable under state law, because the Federal Arbitration Act pre-empts conflicting state laws. Under the Federal Arbitration Act (“FAA”), 9 U.S.C. § 2, arbitration clauses are enforceable unless they can be revoked for the same legal or equitable reasons that allow any contract to be revoked. See 9 U.S.C. § 2.
DirecTv entered into a service agreement with a number of California customers, including the named plaintiffs, Amy Imburgia and Kathy Grenier (the “Service Agreement”). Id. at 1. Section 9 of the Service Agreement provides that any disputes would be decided by arbitration and that the parties waived the right to bring class claims. Id. Although the Service Agreement stated that it would be governed by the FAA, 9 U.S.C. § 2, it also provided that if the law of the particular state made the waiver of class arbitration unenforceable, then the entire arbitration provision would also be unenforceable. Id. at p. 2.
The plaintiffs sued DirecTv in California state court, seeking damages for early termination fees that they believe violate California law. Id. DirecTv sought to enforce the arbitration clause, but the state trial court denied that request, and DirecTv appealed. Id. On appeal, the California Court of Appeal held that the crucial issue was whether California law made the class waiver provision unenforceable, because, if the class waiver provision is not enforceable, the entire clause was unenforceable. Id. Although the California Supreme Court previously held that class waiver provisions are unenforceable because such provisions are unconscionable, the U.S. Supreme Court overturned the California court’s decision in AT&T Mobility v. Concepcion, 563 U.S. 333, 352 (2011). See DirecTv, 577 U.S. ____ (2015) at 3. In Concepcion, the U.S. Supreme Court found that the California rule was an obstacle to the accomplishment and execution of Congress’s purpose in enacting the FAA, and thus the California rule was pre-empted by federal law. DirecTv, 577 U.S. ____ (2015) at 3, citing Concepcion, 563 U.S. at 352.
Despite the U.S. Supreme Court’s ruling in Concepcion, the California Court of Appeal found that the class action waiver is unenforceable under California law. DirecTv, 577 U.S. ____ (2015) at 3. The California court found that because a California statute made class action waivers unenforceable, then the entire arbitration agreement was unenforceable under California state law. Id. Because the parties chose to have govern California law govern their agreement, the parties essentially contracted around the Concepcion decision. Id. Further, the California court found that the Service Agreement was ambiguous because the general language that the FAA would govern disputes was trumped by the specific language stating that the arbitration clause would be unenforceable if state law prevented class action waivers. Id. DirecTv appealed to the U.S. Supreme Court.
In deciding to overturn the California court, Justice Breyer explained that, although lower court judges “are certainly free to note their disagreement with a decision of this Court,” state court judges are, of course, bound by the Supremacy Clause of the Constitution. Id. at 5. The FAA is a law of the United States and Concepcion “is an authoritative provision of that Act. Consequently, the judges of every State must follow it.” Id. However, Justice Breyer noted that this elementary principle of federal law did not decide the case because the FAA allows parties to choose which law governs their agreement. Id.
Because contract interpretation is ordinarily a matter of state law, the Supreme Court needed to decide whether the California Court’s interpretation of the arbitration clause in this case was consistent with the FAA. Id. at 6. To do so, the Supreme Court considered whether the lower court opinion rested upon “grounds as exist at law or in equity for the revocation of any contract.” Id. at 6, citing 9 U.S.C. § 2 (grounds in the FAA under which a court may find that an arbitration clause is unenforceable).
The Supreme Court then considered whether the California decision was based on a valid reason for finding that the Service Agreement was unenforceable. Id. at p. 6. To make that determination, the Supreme Court considered whether California treated arbitration clauses on equal footing with all other contracts. Id. Ultimately, the Supreme Court found that the California decision had treated arbitration clauses differently from how it would interpret other contracts. Id. Specifically, the Supreme Court noted that the California court had invalidated the arbitration clause because of a perceived ambiguity. DirecTv, 577 U.S. ____ (2015) at p. 6. In contrast to the California court, the Supreme Court found that the contract is not ambiguous because the reference to state law could mean only valid state law, i.e., there was no suggestion that the parties intended to contract based on an unenforceable state law. Id. The Supreme Court evaluated several other possible scenarios for the California court’s interpretation of the phrase “law of your state” to mean a law that has been invalidated under federal law and found that none of these were valid interpretations of the phrase. Id. at 7-9.
Justice Breyer concluded that the California court’s interpretation of the phrase “law of your state” included legal principles that violate the Constitution. Id. at 10. The majority essentially found that the California court was using that phrase to strike down an otherwise enforceable arbitration clause and that this interpretation did not respect the FAA’s policy favoring arbitration; thus, the California state law against class action waivers was pre-empted. Id. at 10.
The DirecTv decision reiterates the U.S. Supreme Court’s 2011 Concepcion decision, which held that the FAA pre-empts state law bans on class action waivers. The highest court’s recent decision highlights that federal policy favors the enforceability of arbitration clauses and suggests that courts should continue to enforce such clauses.
 All citations refer to the copy of the decision that is posted on the Supreme Court’s website at http://www.supremecourt.gov/opinions/15pdf/14-462_2co3.pdf (as accessed December 14, 2015).
In Davidson v. Capital One Bank (USA), N.A., No. 14-14200 (11th Cir. Aug. 21, 2015), the Eleventh Circuit Court of Appeals held that, for purposes of the FDCPA, a person does not qualify as a “debt collector” if the person fails to satisfy the statutory definition even though the “debt on which [the person] seek[s] to collect was in default at the time they acquired it.” Id. slip op. at 12. In essence, plaintiffs cannot use other sections of the FDCPA in an attempt to enlarge the statutory definition.
Section 1692a(6) defines the term “debt collector” as “(1) any person who uses any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts, or (2) who regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” Id. at 7–8 (quoting § 1692a(6)). The first definition of “debt collector” has been denoted as the “principal purpose” definition while the latter is often termed the “regular collection” definition. Significantly, Section 1692a(6)(A)–(F) contains a list of persons that Congress intended to exclude from the application of the FDCPA. Id. at 8. Among those excluded categories are “any person collecting or attempting to collect any debt owed or due or asserted to be owed or due to another to the extent such activity . . . concerns a debt which was not in default at the time it was obtained by such person.” Id. (quoting § 1692a(6)(F)(iii)).
In Davidson, HSBC commenced a state court action against Davidson to collect on a past due credit card account that was used for “personal, family or household purposes.” Id. at 3. During the pendency of the state court proceeding, the parties executed a settlement agreement where Mr. Davidson agreed to pay HSBC $500.00. Id. However, after Mr. Davidson failed to pay the agreed amount, the court entered a judgment in favor of HSBC. Id. Subsequently, Capital One acquired a significant portfolio of HSBC’s United States-based credit card accounts, many of which were previously delinquent, including Davidson’s account. Id. In an attempt to collect the debt now owed to Capital One, it commenced its own lawsuit against Mr. Davidson to collect on the past due account that was previously the subject of litigation between HSBC and Davidson. Id. Upon being sued for a second time involving the same account, Davidson commenced a putative class action in the District Court for the Northern District of Georgia against Capital One, alleging that Capital One’s state court action violated the FDCPA. Id. at 4.
Based on certain events that occurred in the District Court action, Davidson filed an Amended Complaint. Id. The Amended Complaint alleged that Capital One “regularly acquires delinquent and defaulted consumer debts that were originally owed to others and has attempted to collect such delinquent or defaulted debt in the regular course of its business, using the mails and telephone system.” Id. at 15. Capital One moved to dismiss the Amended Complaint and argued that the Plaintiff failed to “plausibly allege that Capital One was a ‘debt collector’ for purposes of the FDCPA, and [as such, the Amended Complaint should be dismissed because] only debt collectors are subject to liability under the” FDCPA. Id. at 4. Specifically, Capital One argued that the debt at issue was owed to it and not to another, which is a requirement under the “regular collection” definition. Id. In response, Davidson asserted that [c]ompanies that regularly purchase and collect defaulted consumer debts . . . are regulated by the” FDCPA. Id. at 5. The District Court agreed with Capital One and granted its motion to dismiss, stating that Davidson failed to satisfy either the “principal purpose” or “regular collection” definitions. Id.
In affirming the District Court, the Eleventh Circuit held that a bank (or any person or entity) does not qualify as a “debt collector,” unless a plaintiff plausibly alleges the defendant’s purported collection activities satisfy the “principal purpose” or “regular collection” definitions, “even where the consumer’s debt was in default at the time the bank acquired it.” Id. at 2 (emphasis added). Davidson argued that whether Capital One qualified as a “debt collector” depended on the default status of the debt on the date of acquisition, which, in turn, would lead to the conclusion that a person was either a “creditor” or a “debt collector”. Id. at 8. In support of this argument, Davidson relied on the exclusionary language contained in section 1692a(6)(F)(iii). Davidson reasoned that if the debtor was in default on the date the debt was acquired, the exclusionary language exempted the person or entity from the statutory definition of “debt collector,” and, by default, the person or entity would be a “creditor.” Id. at 9. By contrast, Davidson asserted that where the debt was already in default on the acquisition date, the exception did not apply, and the party was a “debt collector” governed by the FDCPA. Id.
In rejecting Davidson’s arguments, the Eleventh Circuit relied on the plain and unambiguous meaning of “debt collector” set forth in section 1692a(6) and the standards contained therein. Id. at 11. Otherwise, Davidson’s interpretation would result in a strained reading of the statutory framework. Id. As a result, the Eleventh Circuit rejected Davidson’s attempt “to bring entities that do not otherwise meet the definition of ‘debt collector’ within the ambit of the FDCPA” solely due to the default status of the debt on the date it was acquired. Id. at 11–12. Critically, the Eleventh Circuit cautioned that the language contained in section 1692a(6)(F)(iii) “is an exclusion; it is not a trap door.” Id. at 12.
Since the Amended Complaint did not plausibly allege the “principal purpose” or the “regular collection” definitions, the Eleventh Circuit affirmed the District Court’s decision. Specifically, the Amended Complaint only alleged that some part of Capital One’s business was devoted to debt collection. Id. at 16. Based on the “principal purpose” definition, such allegations are insufficient to state a claim. Id. Likewise, the “regular collection” definition requires that the person or entity collect a debt “owed or due another at the time of collection” and not “debts originally owed or due another” and now owed to a subsequent entity by virtue of an acquisition. Id. at 16–17 (emphasis in original). Since Capital One’s conduct only concerned collection efforts related to a debt Davidson owed to Capital One, and not to another party, the Amended Complaint failed to plausibly state facts that would entitle Davidson to relief under the regular collection definition. Id. Consequently, the Eleventh Circuit affirmed the District Court’s dismissal of the Amended Complaint. Id. at 18.
In light of this decision, entities that engage in debt collection activities can be reassured that there are limits on the application of the FDCPA. Not all collection activity is governed by the statutory framework. This decision deals a significant blow to plaintiffs who have been attempting to expand the reach of the FDCPA. Davidson also confirms that the plain meaning doctrine is strictly enforced and courts should not allow litigants to enlarge a statute’s intended application or purpose. Entities that engage in debt collection activities should be mindful of this decision if faced with FDCPA claims.
Too many times a defendant is forced to foot the bill for costly discovery and motion practice before being able to successfully challenge class allegations. The recent decision in Bell v. Cheswick Generating Station, et al., Civ. A. No. 12-929 (W.D. Pa., January 28, 2015), however, provides some optimism that defendants faced with ill-defined class action allegations may be able to avoid the expense of class-wide discovery and briefing a class certification opposition by filing a motion to strike class allegations pre-discovery.
After examining the class definition, the Court determined that the class, as alleged, was a “fail-safe” class and was unascertainable in that the Court would be required to conduct mini-hearings to determine who belonged within the class. The Court also rejected Plaintiffs’ attempt to “amend the Complaint in their briefing,” but indicated that an amended complaint that defines the class by “clear, objective criteria” may not be futile. Accordingly, the Court granted the motion to strike without prejudice to Plaintiffs filing a motion to amend, but cautioned that no further amendments would be permitted.
While it is too early to tell, Bell could signal a shift in this District requiring greater scrutiny of class allegations at the early stages of litigation.
The Ninth Circuit recently held that a putative class action asserting violations of the federal Telephone Consumer Protection Act (“TCPA”) was not subject to arbitration because the representative plaintiff was unaware of the purported contract containing the arbitration provision.
In Knutson v. Sirius XM Radio Inc., No.12-56120 (9th Cir. Nov. 10, 2014), the plaintiff purchased a new Toyota that came with a 90-day trial subscription to Sirius XM satellite radio. After the plaintiff received the trial subscription, he received a Welcome Kit containing a Customer Agreement, which included an arbitration clause containing a class action waiver. Although the Customer Agreement in the Welcome Kit indicated that he had three days after the activation of his subscription to determine whether to cancel the subscription or it would automatically continue, the Welcome Kit arrived long after the three-day period had expired. The plaintiff did not contact Sirius XM either to continue or terminate his subscription.
During the 90-day trial subscription, he received three unauthorized telemarketing calls from Sirius XM on his cell phone, and brought a putative class action alleging violations of the TCPA. In response to the putative class action, Sirius moved to compel arbitration. The plaintiff opposed the motion, claiming that the Customer Agreement was not binding because he received it more than a month after the three-day cancellation period expired and, as a result, there was no mutual assent to the terms of the Customer Agreement. Sirius XM contended that the Customer Agreement was binding and thus the plaintiff was required to arbitrate the dispute. The trial court dismissed the case and granted Sirius XM’s motion to compel arbitration.
On appeal, the plaintiff argued that he had not entered into a binding contract with Sirius XM because there was no mutual assent to enter into the Customer Agreement, since he was not given the opportunity to accept or reject the Customer Agreement. Sirius XM asserted that after Knutson received the Customer Agreement, he had the opportunity to both review it and to notify Sirius XM if he wished to cancel his subscription, but that he had not done so. The Ninth Circuit rejected Sirius XM’s arguments, noting courts may decline to enforce these agreements if there are legal or equitable grounds to do so. Mutual assent is a principle to any contract and a party cannot be required to arbitrate a dispute if the party had not agreed to do so as part of the contract. Here, the plaintiff never agreed to the arbitration clause because he was not given the opportunity to accept or reject the Customer Agreement. Further, the Customer Agreement was within the Welcome Kit, which the plaintiff had not opened and read. The plaintiff believed that the Sirius XM trial subscription was a complimentary service for marketing purposes, and he did not know that he was entering into a contractual relationship with Sirius XM. The Court found that a reasonable person who had purchased a Toyota would not think that they had entered into a binding contract with another company, such as Sirius XM.
The Ninth Circuit also indicated that, although a “shrinkwrap agreement” (where a consumer buys a product before getting the detailed terms of the contract) is generally enforceable and a party cannot generally avoid the terms of a contract by failing to read the contract before signing it, this does not apply when the writing does not appear to be a contract and the terms are not conspicuous. Further, a “shrinkwrap agreement” is between the customer and the service provider. Here, the plaintiff had no idea that he was entering into a contract with Sirius XM, since the terms of the Customer Agreement were contained in the Welcome Kit, which the plaintiff did not think he needed to read. Because the plaintiff was not aware that he had entered into a purportedly binding contract with Sirius XM, the arbitration clause in the Customer Agreement was unenforceable.
The Ninth Circuit heavily relied on Schnabel v. Trilegiant Corp., 697 F.3d 110 (2d Cir. 2012), a Second Circuit Court of Appeals case that interpreted California law regarding the enforceability of arbitration clauses. In Schnabel, the plaintiffs clicked on a website, which indicated they had received a “Special Award.” In small print, the website advised that the customer would receive membership information and that there was no obligation to continue to receive benefits, but the plaintiffs’ credit cards were automatically charged until they cancelled their membership. Similar to Knutson, the Schanbel plaintiffs claimed that they did not intentionally or knowingly enroll into the discount service; however, unlike Knutson, the Schnabel plaintiffs entered their information into a separate enrollment form and had to click on a “Yes” button to indicate that they had read the terms and conditions of the discount membership website, which included an arbitration provision. The Second Circuit found that the arbitration provision was unenforceable because the plaintiffs received the terms of the contract after they enrolled in the service; there was no prior commercial relationship between the parties that would have suggested that terms sent after the initial enrollment would become part of their agreement with that merchant. Further, automatically charging the plaintiff’s credit cards was too “passive” to show that the plaintiffs had understood and agreed to be bound by the terms of the arbitration provision.
The Ninth Circuit found that Knutson had done even less than the Schnabel plaintiffs to manifest intent to enter into a binding contract, as he did not affirmatively enroll into a subscription service with Sirius XM, nor did he indicate that he had read the terms of the Customer Agreement. Thus, Knutson could not assent to Sirius XM’s arbitration provision because he did not know that he was entering into a contract with Sirius XM. Accordingly, the Ninth Circuit reversed the dismissal of the case and the granting of the motion to compel arbitration.
Based on Knutson, companies selling products or services to consumers with “shrinkwrap agreements” should take steps to conspicuously disclose the terms of such agreements. Consumers should receive explicit disclosures that purchasing the product or using a trial or gift subscription for a different product or service may cause a binding contract to be formed. In addition, consumers should be made aware that the product being purchased includes provisions that will control any future disputes based on the product.

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