Last week, the Ninth Circuit Court of Appeals affirmed a lower court’s denial of preliminary injunctive relief to plaintiffs challenging Nevada Senate Bill 248 (S.B. 248), which places new restrictions on the collection of consumer medical debt. In doing so, the court found the bill neither ran afoul of the First Amendment, nor was preempted by the federal Fair Debt Collection Practices Act (FDCPA) or Fair Credit Reporting Act (FCRA). Read on for further analysis.
By way of background, S.B. 248 amended chapter 649 of the Nevada Revised Statutes governing debt collection agencies. Passed in response to the uptick in needed medical care caused by the COVID-19 pandemic, S.B. 248 was designed to protect Nevada consumers from potential financial ruin caused by medical debt by imposing new restrictions on the collection of such debt. Among other provisions of the bill, § 7 requires debt collection agencies to send written notification to medical debtors 60 days before taking any action to collect such debt (Section 7 Notice). The Section 7 Notice must inform the debtor that the “medical debt has been assigned to the collection agency” for collection or that the “collection agency has otherwise obtained the medical debt for collection.” During the 60-day period following the notice, a collection agency cannot take “any action to collect a medical debt.” Voluntary payments during the 60-day period are permitted, but a debt collector must disclose to the debtor that “payment is not demanded or due,” and that the “medical debt will not be reported to any credit reporting agency during the 60-day notification period.” Implementing regulations define “action to collect a medical debt” as “any attempt by a collection agency or its manager or agents to collect a medical debt from a medical debtor” and provide examples of what are, and are not, “attempts” to collect such debt.
After S.B. 248 was enacted, but before it went into effect, an assortment of debt collection firms doing business in Nevada filed suit in federal court — arguing that S.B. 248 was unconstitutionally vague in its use of the phrase “action to collect a medical debt,” constituted a prior restraint on speech in violation of the First Amendment, and was preempted by the FDCPA and FCRA. The plaintiffs moved for a temporary restraining order and preliminary injunction, which the district court denied after finding the plaintiffs were unlikely to succeed on the merits. An appeal to the Ninth Circuit followed.
In an opinion dated June 15, 2023, a majority of the three-judge panel affirmed the district court’s order. The panel addressed the constitutional arguments first; finding that the regulations setting forth examples of actions that do, and do not, constitute “actions to collect a medical debt” clarified any ambiguity in that phrase. The panel further found that S.B. 248 did not impermissibly burden the plaintiffs’ speech in violation of the First Amendment. As debt-related communications constituted commercial speech, the panel found S.B. 248 was not subject to strict scrutiny. Because Nevada’s interest in protecting consumers with medical debts from financial ruin was substantial, and S.B. 248 directly advanced that substantial government interest, the panel held the legislation did not run afoul of the First Amendment.
As to FDCPA preemption, the plaintiffs argued that the Section 7 Notice conflicted with the so-called “mini-Miranda” disclosures required under § 1692e(11), in which debt collectors must disclose in their “initial communication” that they are attempting to collect a debt. In a similar vein, the plaintiffs argued that the 60-day moratorium on collection activities conflicted with § 1692g’s requirement that a validation notice be sent within five days after the initial communication in connection with the collection of any debt. Not so, according to the panel — reasoning that that Section 7 Notice is not an attempt to collect a debt and, therefore, does not trigger the mini-Miranda and validation notices required under the FDCPA.
The panel also rejected the plaintiffs’ argument that S.B. 248’s 60-day moratorium was expressly preempted under FCRA § 1681t(b)(1)(F), which preempts any state law relating to the duties of persons who furnish information to consumer reporting agencies. The panel found that S.B. 248 merely imposed a 60-day waiting period on the furnishing of medical debt information, which in no way conflicted with a furnisher’s duties imposed under § 1681s-2.
Writing in dissent, Judge Lawrence VanDyke disagreed that the plaintiffs were unlikely to prevail on their preemption arguments. As to the FDCPA, Judge VanDyke found the majority’s conclusion that S.B. 248’s 60-day notice was not an attempt to collect a debt disingenuous. After all, “there is only one reason debt collectors reach out to debtors — to collect debts.” Because the 60-day notice would preclude a debt collector from providing mini-Miranda and validation notices, Judge VanDyke found S.B. 248 impliedly preempted by the FDCPA. According to Judge VanDyke, a 60-day notice from a debt collector that no attempt will be made to collect a debt would also likely confuse consumers and, therefore, ran afoul of the FDCPA’s prohibition on misleading communications. Judge VanDyke similarly found that the plaintiffs would likely prevail on their preemption arguments under the FCRA; concluding that the FCRA expressly preempted S.B. 248, which was a law “with respect to” the same subject matter regulated by § 1681s-2.
S.B. 248 is but one example of a slew of state consumer protection legislation passed in response to the COVID-19 pandemic amid the heightened scrutiny surrounding credit reporting on and collection of medical debts. As the Ninth Circuit’s opinion demonstrates, courts will be reluctant to overturn such consumer-oriented, emergency legislation. However, while the COVID-19 emergency fades, laws like S.B. 248 will remain on the books and leave the collections industry (and courts) with the unenviable task of squaring new rules with those already in place. As Judge VanDyke’s dissent points out, the efforts to comply may, paradoxically, result in communications that are more confusing for consumers.