Opinion ID: 2828218
Heading Depth: 2
Heading Rank: 2

Heading: Preemption & the “Disguised Claim” Theory

Text: We next examine whether federal law preempts or otherwise displaces Bible’s state law claim. “Preemption can take on three different forms: express preemption, field preemption, and conflict preemption.” Aux Sable Liquid Products v. Murphy, 526 F.3d 1028, 1033 (7th Cir. 2008). USA Funds relies on conflict preemption. It also argues that the breach of contract claim is nothing more than a “disguised claim” for a violation of the Higher Education Act and is thus “preempted” by the HEA. Neither theory has merit. Federal law does not preempt or otherwise displace Bible’s breach of contract claim.
Conflict preemption can occur in two situations: (1) when “it is impossible for a private party to comply with both state and federal requirements,” or (2) when “state law stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress.” Freightliner Corp. v. Myrick, 514 U.S. 280, 287 (1995) (citations and internal quotation marks omitted). USA Funds does not contend that it would be impossible, without violating federal law, for it to comply with the state law duty Bible’s suit seeks to impose. Instead, it invokes the second species of conflict preemption known as “obstacle” preemption. USA Funds argues that entertaining Bible’s breach of contract claim would frustrate No. 14-1806 31 Congress’s goal of “uniformity” because it would require many state and federal courts to interpret HEA regulations in potentially inconsistent ways. We reject this contention. This argument proves far too much. Under this theory, conflict preemption would occur any time a court would be required to interpret a regulation to decide a case arising under the common law or other sources of law independent of the regulation itself. But courts interpret federal regulations all the time without triggering preemption concerns. The mere possibility that a court would need to interpret a regulation does not itself establish preemption. See CSX Transportation, Inc. v. Eastwood, 507 U.S. 658, 664 (1993) (“To prevail on the claim that the regulations have pre-emptive effect, petitioner must establish more than that they ‘touch upon’ or ‘relate to’ that subject matter … .”), citing Morales v. Trans World Airlines, Inc., 504 U.S. 374, 383–84 (1992); English v. General Electric Co., 496 U.S. 72, 87 (1990) (“Ordinarily, the mere existence of a federal regulatory or enforcement scheme, even one as detailed as § 210 [of the Energy Reorganization Act of 1974], does not by itself imply pre-emption of state remedies.”); Hillsborough County v. Automated Medical Laboratories, Inc., 471 U.S. 707, 717 (1985) (“To infer preemption whenever an agency deals with a problem comprehensively is virtually tantamount to saying that whenever a federal agency decides to step into a field, its regulations will be exclusive.”); Keams v. Tempe Technical Institute, Inc., 39 F.3d 222, 226–27 (9th Cir. 1994) (holding that detailed regulatory scheme under the HEA did not imply preemption of state tort remedies against accreditors). That is the very point of 34 C.F.R. § 682.410(b)(8), which provides that paragraphs (b)(2), (5), and (6)—the provisions at issue here—preempt only “State law … that would conflict with or hinder satisfac32 No. 14-1806 tion of the requirements of these provisions.” (Emphasis added.) The real question is whether entertaining Bible’s breach of contract claim actually conflicts with the HEA and its associated regulations. It does not. We begin with Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), where we dealt with a nearly identical issue in the context of the federal Home Affordable Mortgage Program (HAMP). In Wigod, the plaintiff brought state law claims against her mortgage service provider, including a breach of contract claim alleging that the defendant breached a written agreement that incorporated the HAMP requirements. Like USA Funds in this case, the defendant in Wigod argued that the state law claims were preempted by the federal guidelines under principles of conflict preemption. We rejected the argument. 673 F.3d at 577–81. Although Wigod dealt with a different regulatory framework, its reasoning applies directly here. Bible’s claim is that USA Funds breached the MPN by acting contrary to the federal regulations incorporated into the contract. Just as in Wigod, “the state-law duty allegedly breached is imported from and delimited by federal standards.” Wigod, 673 F.3d at 579. In this situation, federal law simply provides the standard of compliance, and the parties’ duties are actually enforced under state law. See id. at 579–80. There is no conflict. The Fourth Circuit reached the same conclusion regarding the HEA in College Loan Corp. v. SLM Corp., 396 F.3d 588 (4th Cir. 2005). In that case, the plaintiff sued Sallie Mae and its affiliates under state law, alleging that they had a contract that incorporated the requirements of the HEA and its regulations. The district court held that the state law claims were No. 14-1806 33 preempted. The Fourth Circuit reversed. The court held that the plaintiff’s state law claims were not preempted even though they relied on establishing a violation of the HEA and its regulations: This point is particularly obvious in relation to [plaintiff’s] contract claim. As parties to the Agreement, [the parties] voluntarily included federal standards (the HEA) in their bargained- for private contractual arrangement. Both ex- pressly agreed to comply with the HEA. In that context, [defendants’] argument that enforce- ment of the Agreement’s terms is preempted by the HEA boils down to a contention that it was free to enter into a contract that invoked a fed- eral standard as the indicator of compliance, then to proceed to breach its duties thereunder and to shield its breach by pleading preemp- tion. In this case at least, federal supremacy does not mandate such a result. Id. at 598 (citations omitted). The Fourth Circuit’s reasoning applies with equal force here. Unable to distinguish Wigod or College Loan Corp. in meaningful ways, USA Funds seeks help from Chae v. SLM Corp., 593 F.3d 936 (9th Cir. 2010). But Chae actually reinforces our conclusion. There, borrowers sued Sallie Mae under state law for its handling of their student loans. Applying principles of conflict preemption, the Ninth Circuit held that the claims were preempted by the HEA because “[p]ermitting varying state law challenges across the country, with state law standards that may differ and impede uniformity” would pose an obstacle to Congress’s purpose in 34 No. 14-1806 creating the FFELP. Chae, 593 F.3d at 945. The Ninth Circuit, however, carefully distinguished College Loan Corp. on grounds directly applicable here, saying that the plaintiff in College Loan Corp. had “sought to enforce FFELP rules, not to vary them.” Id. at 946, citing 396 F.3d at 591–94. In Chae, though, the plaintiffs were “not seek[ing] to buttress the FFELP framework, but rather to alter it in their home state.” Id. They were asking the court to impose a higher standard of compliance than was required by federal law. Such claims are preempted, held Chae, but that reasoning does not apply here. Like the plaintiff in College Loan Corp. and unlike those in Chae, Bible is not attempting to require more of the defendant than was already required by the HEA and its regulations. She seeks only to enforce the federal standards that the parties agreed to in their contract. This case is therefore not different from Wigod, where we held that state law claims attempting to enforce the requirements of the HAMP guidelines were not preempted by federal law. In Wigod, College Loan Corp., and now this case, the plaintiffs’ state law claims were complementary to, not in conflict with, the federal requirements. Bible’s claim is not preempted by federal law.
In addition to its formal preemption argument, USA Funds argues that Bible’s state law claim is “preempted” because it is nothing more than a “disguised claim” for a violation of the HEA, and the HEA does not provide a private right of action. We considered and rejected this same theory in Wigod. There the defendant-lender referred to it as an “end-run” theory rather than a “disguised claim” theory. The difference is merely semantic. The defense theory in No. 14-1806 35 both cases is that the lack of a private right of action under a regulatory statute necessarily preempts or otherwise displaces a state law cause of action that makes the violation of that regulatory statute an element of the claim. This theory is mistaken at its core: “The absence of a private right of action from a federal statute provides no reason to dismiss a claim under a state law just because it refers to or incorporates some element of the federal law. To find otherwise would require adopting the novel presumption that where Congress provides no remedy under federal law, state law may not afford one in its stead.” Wigod, 673 F.3d at 581 (citation omitted). USA Funds attempts to distinguish Wigod on two grounds. First, it says there was no administrative enforcement scheme under the HAMP. That is simply not true as a matter of fact. See Spaulding v. Wells Fargo Bank, N.A., 714 F.3d 769, 773–74 (4th Cir. 2013) (describing administrative enforcement scheme under HAMP); Wigod, 673 F.3d at 556– 57 (same). Second, USA Funds contends that Wigod is distinguishable because there the Secretary of the Treasury had issued a directive saying that the HAMP must be implemented in compliance with state common law and statutes. See Wigod, 673 F.3d at 580. This does not distinguish Wigod either. We noted that the directive was additional evidence that federal law did not preempt state law. See id. (noting that Department of Treasury’s “tacit view of its program’s lack of preemptive force” was entitled to “some weight”). We did not suggest that our rejection of the end-run theory depended on this supplemental directive. (In fact, we discussed the supplemental directive in a different section in the opinion.) 36 No. 14-1806 If anything, there is even less reason to find preemption in this case because USA Funds voluntarily agreed to comply with the only federal requirements that Bible is attempting to enforce. In Wigod, by contrast, the plaintiff had brought claims against the defendant under state tort law in addition to her breach of contract claim. We reiterate the lesson from Wigod. The absence of a private right of action under federal law provides no reason to dismiss a state law claim just because the claim refers to or incorporates some element of the federal law. Congress’s decision not to supply a remedy under federal law does not necessarily mean that it also intended to displace state law remedies. The lack of a private right of action under the HEA itself does not preclude Bible’s breach of contract claim.