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On March 19, the United States District Court for the Western District of New York granted summary judgment to a debt collector who was sued for allegedly violating the Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692-1692p, by including language in a form letter that referred to the tax implications of accepting a settlement offer. 

The underlying facts are that on or around July 13, 2015, debt collector Financial Recovery Services, Inc. (“FRS”) sent a form collection letter to plaintiff Mary Rozzi Church, stating that she owed $2,170.50, and offering her three separate “settlement opportunities” to pay the balance for less than what was owed.  Following the details of the settlement offers, the letter stated the following: 

These settlement offers may have tax consequences.  We recommend that you consult independent tax counsel of your own choosing if you desire advice about any tax consequences which may result from this settlement.  FRS is not a law firm and will not initiate any legal proceedings or provide you with legal advice.  The offers of settlement in this letter are merely offers to resolve your account for less than the balance owed. 

Church argued that the language contained in the letter, wherein FRS stated that “these settlement offers may have tax consequences,” was a false representation or deceptive means in connection with the collection of a debt in violation of 15 U.S.C. § 1692e because an unaccepted offer does not have any tax consequences and the least sophisticated consumer would be confused by the statement. 

The Court, however, agreed with FRS and found that even the least sophisticated consumer would read the entirety of the statement and understand that any potential tax consequences attach only once the offer has been accepted and, as such, the statement was neither deceptive nor misleading in violation of the FDCPA. 

A copy of the entire opinion can be found here. 

This decision is part of a growing body of cases centering around similar language regarding potential tax consequences on settlement offers made by debt collectors.  Debt collectors should evaluate this decision and review their policies and procedures to minimize potential liability under the FDCPA for “tax consequences” disclosures.  We will continue to monitor court decisions to identify and advise on new compliance risks and strategies.

 

According to a recent decision from the California Court of Appeal, mortgage lenders and servicers can, at least under certain circumstances, be “debt collectors” under the California Rosenthal Fair Debt Collection Practices Act, frequently referred to as the “Rosenthal Act.”.

In the case, plaintiff Edward Davidson filed a putative class action suing his mortgage servicer, Seterus, Inc., after allegedly receiving hundreds of phone calls from employees of Seterus demanding mortgage payments that Davidson had already paid or that were not yet due.  The alleged calls included threats to report negative credit information to the credit bureaus and to foreclose on Davidson’s home.  The trial court sustained Seterus’s demurrer, dismissing the complaint with prejudice based on the fact that a mortgage servicer may not be considered a debt collector under the Rosenthal Act.

The California Court of Appeal reversed the trial court’s ruling and held that Seterus and its parent company were subject to the Rosenthal Act for these alleged collection activities.

The Court noted that there is a split in authority among federal district courts that have interpreted the Rosenthal Act, that there is no California authority on the issue, and that there is no language specific to whether entities attempting to collect mortgage debt are subject to, or exempt from, the Rosenthal Act.  However, in adhering to the general principle that civil statutes enacted for the protection of the public should be broadly construed in favor of protecting the public, the Court held that the definitional language in the Rosenthal Act was sufficiently broad to include mortgage lenders and mortgage servicers.  The Court further discussed that collecting on a mortgage is the same as collecting on a consumer debt, which is governed by the Rosenthal Act.  The Court also noted that the definition of a “debt collector” under the Rosenthal Act is broader than its counterpart under the federal Fair Debt Collection Practices Act, which excludes mortgage servicers in certain circumstances.

The Court distinguished the body of case law holding that the foreclosure on a deed of trust does not constitute debt collection activity under the Rosenthal Act.  The Court noted that the present action does not involve foreclosure allegations and that it was not deciding whether a mortgage lender or mortgage servicer can be sued under the Rosenthal Act for any activity that the mortgage servicer undertakes with respect to a mortgage.  The Court held that this was a different question from the one they were currently addressing: whether a mortgage lender or mortgage servicer may ever be considered a debt collector under the Rosenthal Act, the answer to which is “yes.”

Mortgage lenders and mortgage servicers should evaluate this decision and review their policies and procedures in California to minimize potential liability under the Rosenthal Act.  Troutman Sanders is experienced in California debt collection and will continue to provide updates on new legislation, court decisions, and other legal developments in this area of law.

Please join us on Tuesday, April 17th from 2:00 – 3:00 PM ET for a complimentary webinar with speakers Chad Fuller, David Gettings, Alan Wingfield and Virginia Bell Flynn.

So often the defense of consumer class actions focuses on the substance of the law. Was my consumer report accurate? Was my collection letter misleading or deceptive? Did I have consent to place a call using an ATDS?

Please join Troutman lawyers for a discussion of some recent developments in procedure that could be game-changers. These are legal developments that do not turn on the substance of the claim, but could raise effective defenses if used appropriately. We will discuss the impact the Bristol-Myers Squibb decision has had on personal jurisdiction in nationwide class actions, the tolling effect of pending class actions on future lawsuits, and the impact of Spokeo arguments in practice. For good measure, we will also discuss the impact that the D.C. Circuit’s landmark ruling in ACA v. FCC has had on Telephone Consumer Protection Act individual lawsuits and class actions in the first month since the decision.

Click here to register.

The Supreme Court recently held that civil actions consolidated under Rule 42(a) retain their separate identities, so that a final decision in one action is immediately appealable by the losing party, even if other actions in the consolidated proceeding remain.

Consumer litigation often lends itself to consolidation under Federal Rule of Civil Procedure 42 because defendants tend to see multiple lawsuits – often filed by the same opposing counsel – on the same issue. Although it didn’t arise from a consumer lawsuit, Hall v. Hall addresses an important issue regarding finality and appeal of consolidated civil actions in federal court.

The case arises from a family dispute that found its way into the courts. Although the facts are interesting, the procedural posture of underlying case is at issue. At bottom, two cases involving a family dispute were consolidated in the United States District Court of the Virgin Islands. One of the consolidated cases reached final judgment while the other was still going through post-trial motions. The losing party immediately filed an appeal after the first final judgment order only to have the United States Court of Appeals for the Third Circuit immediately dismiss the appeal under the theory that the court lacked jurisdiction while the other case was still pending.

On further appeal, the Supreme Court reversed the Third Circuit.  Chief Justice Roberts, writing for the unanimous court, began with the premise that had the actions not been consolidated, there would be no question that the plaintiff could have appealed the ruling, which ended the litigation and triggered the entry of judgment. According to Chief Justice Roberts, the question was whether the consolidation of the cases merged them into a single case, so that the judgment in one case was interlocutory because work remained to be done in the other case.  Rejecting this notion, the Court held that consolidated cases retain their separate identities, so that a final decision in one action is immediately appealable by the losing party, even if other actions in the consolidated proceeding remain.

The court did allow that a district court could consolidate cases for “all purposes” in appropriate circumstances. However, all-purpose consolidation likely does not create a unified action, at least as it relates to a losing party being able to immediately appeal an adverse judgment.

On March 12, Judge Eldon E. Fallon of the U.S. District Court for the Eastern District of Louisiana tossed a plaintiff’s putative class action lawsuit against the American Heart Association (“AHA”), Anthem Foundation, Inc., and Anthem, Inc. under the Telephone Consumer Protection Act relating to text messages sent to a consumer following her attendance at a CPR training course. This decision provides some additional clarity for health care companies in distinguishing between informational and telemarketing outreach under the TCPA.

The underlying facts are straightforward. The plaintiff attended a CPR training event and provided her cellular telephone number to the AHA to receive content including “monthly CPR reminders” and “healthy messaging information.” She subsequently received “more than 20 text messages” from AHA, such as “AHA/Anthem Foundation: Memorize your work address. You may need to recite it to a dispatcher should you have to call 9-1-1 from the office.” Each of the roughly two dozen text message included “AHA/Anthem Foundation” at the beginning of the message. Although the text messages generally provided health-related informational content, one text message provided a link to the AHA’s website to find available CPR courses in a specific geographic area—some of which were free, and others available for a fee.

The plaintiff’s theories of liability were that (1) the messages were telemarketing, and thus the prior express consent she provided to AHA was not sufficient for the at-issue text messages; (2) nonprofit Anthem Foundation was vicariously liable for text messages sent by AHA because “Anthem Foundation” was included in the body of the message; and (3) Anthem, Inc. was vicariously liable because the inclusion of Anthem Foundation in the text messages was a “purely commercial plug” of its corporate parent. The defendants jointly moved to dismiss the complaint, claiming that the consent provided to AHA was sufficient for the whole of the communications with the plaintiff, and submitted the entire text-message log between the plaintiff and AHA.

The lawsuit attempted to broaden the TCPA in two key ways: (1) expanding vicarious liability to brands allegedly affiliated with the communications, and (2) applying the TCPA’s prior express written consent standard for telemarketing to text messages providing information about local CPR classes—neither of which Judge Fallon was willing to indulge. On the vicarious liability point, the Court found that “although the text messages reference Anthem Foundation, this is irrelevant because the sender was, in fact, AHA.” The Court further noted the lack of any authority suggesting that “a nonprofit’s association with a donor or another charitable entity—i.e., Anthem Foundation—gives rise to a TCPA claim when she voluntarily sought to receive certain communications and information.”

As to the content of the messages, Judge Fallon examined the text message relating to CPR courses, which contained a link to a search function allowing users to find nearby classes. The Court visited the link and provided screenshots of the website in its ruling. It observed that “[t]o sign up for a CPR class—whether for-pay or free—a visitor must click on one of the providers, in which the [visitor] is taken to the provider’s Website.” The Court wrote, “[I]n this case, common sense tells the Court that the information in which Plaintiff labels as ‘commercial’ is undoubtedly informational. Defendants AHA and Anthem Foundation provide individuals with a public resource to seek CPR training. This resource is the type of communications Plaintiff wanted and signed up to receive: information about CPR and healthy living. Her complaint is thus unwarranted.”

With this dismissal and others like it, health care companies can be heartened that multiple courts have taken a “common sense” approach interpreting the TCPA to permit beneficial, health-related outreach to their members and consumers. However, this area of law remains murky, and thus companies are reminded of the importance of maintaining accurate records to minimize litigation risks.

The defendants were jointly represented by Covert J. Geary of Jones Walker LLP in New Orleans, Louisiana. Anthem Foundation, Inc. and Anthem, Inc. were also represented by Chad R. Fuller, Virginia Bell Flynn, and Justin M. Brandt of Troutman Sanders LLP.

 

In a unanimous decision on March 20, 2018, the United States Supreme Court held in Cyan, Inc. et al. v. Beaver County Employees Retirement Fund, et al., 583 U.S. ____ (2018) that state and federal courts retain concurrent jurisdiction to adjudicate class actions brought under the Securities Act of 1933 (the “Securities Act”) and such claims may not be removed to federal court. The opinion, delivered by Justice Elena Kagan, affirms the decision of the California Court of Appeals First Appellate District and settles a long-standing circuit split over whether the Securities Litigation Uniform Standards Act of 1998 (the “SLUSA”) divested state courts of subject matter jurisdiction over “covered class actions” where plaintiffs allege only Securities Act claims and no state law claims.

The decision was largely based on the statutory interpretation and legislative history of SLUSA—namely, its amendments to the jurisdictional provisions of the Securities Act. Indeed, the crux of this case lies in the interpretation of SLUSA’s amendment stating:

The district courts of the United States . . . shall have jurisdiction . . . , concurrent with State and Territorial courts, except as provided in section 77p of this title with respect to covered class actions, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter. [1]

Defendants argued that this provision strips state courts of concurrent jurisdiction over Securities Act claims because of the “except as provided” clause’s reference to “covered class actions.” Plaintiffs argued that this provision maintains state courts’ jurisdiction over all suits – including “covered class actions” – alleging only Securities Act claims. Notably, the U.S. government, which filed an amicus brief at the Court’s request, took a third approach, arguing that SLUSA does not deprive state courts of concurrent jurisdiction over cases brought under the Securities Act but does allow defendants to remove these cases to federal court.

The Court found that class actions asserting only Securities Act claims are unaffected by SLUSA, and thus, can be brought in state court – Section 77p “says nothing, and so does nothing, to deprive state courts of jurisdiction over class actions based on federal law.” The Court concluded that “SLUSA’s text, read most straightforwardly,” leaves state court jurisdiction intact and, if Congress wanted to deprive state courts of jurisdiction, it could have inserted an exclusive federal jurisdiction provision. Additionally, the Court held that SLUSA does not permit defendants to remove class actions alleging only Securities Act claims from state to federal court. Finally, the Court concluded that, “[i]f further steps are needed, they are up to Congress.”

The practical impact of the Court’s ruling is a likely increase in Securities Act claims brought in state court, with defendants potentially having to litigate these federal securities claims in federal and state courts simultaneously and in various venues. Given that plaintiffs may continue to argue for the application of certain state courts’ more lenient pleading standards and discovery procedures, defendants may be exposed to protracted, expensive, and cumbersome litigation in various courts across the country.

[1] 15 U.S.C. § 77v(a) (emphasis added).

On March 12, Judge Thomas Durkin in the Northern District of Illinois became the most recent federal judge to dismiss class claims by non-resident putative plaintiffs against non-resident defendants, holding that the Court did not have personal jurisdiction over such claims.  The case is Practice Management Support Services, Inc. v. Cirque Du Soleil Inc., No. 1:14-cv-2032 (N.D. Ill. Mar. 12, 2018).  This holding is based on the personal jurisdiction principles outlined last year in the United States Supreme Court decision Bristol-Myers Squibb Company v. Superior Court of California, San Francisco County, 137 S. Ct. 1773 (2017).

In Bristol-Myers, a group of plaintiffs, consisting of 86 California residents and 592 residents from 33 other states, brought product liability claims in California state court against an out-of-state defendant. The California Supreme Court held that there was no general personal jurisdiction over the defendant, but applied a “sliding scale” to find that there was specific personal jurisdiction for the claims alleged by the non-resident plaintiffs. On appeal, the United States Supreme Court applied “settled principles” regarding specific personal jurisdiction to hold that a state court’s attempt to exercise jurisdiction over claims by non-resident plaintiffs against a non-resident defendant violated the Due Process Clause of the Fourteenth Amendment.

Since the Bristol-Myers decision, lower federal courts have reached differing conclusions regarding whether the holding should be extended to class actions or is only applicable to mass tort and product liability actions. For example, in Fitzhenry-Russell v. Dr. Pepper Snapple Grp., Inc., No. 17-cv-564, 2017 WL 4224723, at *5 (N.D. Cal. Sept. 22, 2017), the court held that the reasoning of Bristol-Myers was not applicable to class action cases.  In contrast, in DeBernardis v. NBTY, Inc., No. 17-cv-6125, 2018 WL 461228, at *2 (N.D. Ill. Jan. 18, 2018), the court ruled that the reasoning of Bristol-Myers applied to class action cases.

In Practice Management, Judge Durkin joined colleagues in the Northern District of Illinois in holding that the reasoning of Bristol-Myers applies to class actions, as was found in Anderson v. Logitech, Inc., No. 17-cv-6104 (N.D. Ill. Mar. 7, 2018) (Leinenweber, J.), and McDonnell v. Nature’s Way Prod., LLC, No. 16-cv-5011 (N.D. Ill. Oct. 26, 2017) (Ellis, J.).  Such personal jurisdiction holdings are not new in Illinois, as demonstrated by Judge Darrah’s opinion in Demedicis v. CVS Health Corp., No. 16-cv-5973 (N.D. Ill. Feb. 13, 2017), finding even prior to Bristol-Meyers that “[b]ecause specific personal jurisdiction is based on claims arising out of a defendant’s conduct within the forum state, this Court has no jurisdiction over claims based on out-of-state consumer fraud laws” alleged by non-resident putative plaintiffs in a class action.

Practice Management attempted to distinguish the Bristol-Myers holding as not applicable to class actions, but Judge Durkin rejected such argument. According to Judge Durkin, Bristol-Myers held that the Fourteenth Amendment “precludes nonresident plaintiffs injured outside the forum from aggregating their claims with an in-forum resident,” and “it not clear how Practice Management can distinguish the Supreme Court’s basic holding in Bristol-Myers simply because this is a class action.” He observed that Rule 23 class action requirements must be interpreted in keeping with Article III constraints and, under the Rules Enabling Act, cannot “abridge, enlarge, or modify any substantive right.” Consequently, if a Rule 23 class action cannot abridge, enlarge, or modify a substantive right, then bringing a matter as a Rule 23 class action cannot make a material distinction for purposes of determining a defendant’s due process rights as protected by the requirement that a court have personal jurisdiction over the defendant.

Having found that the reasoning of Bristol-Myers applied to class actions, in evaluating Practice Management’s motion for class certification, Judge Durkin dismissed the claims of the non-Illinois-resident class members “[b]ecause these nonresidents’ claims do not relate to defendants’ contacts with Illinois, [and therefore] exercising specific personal jurisdiction over defendants with respect to them would violate defendants’ due process rights.”

The reasoning of Bristol-Myers has the potential to be an effective argument in dismissing claims in nationwide class actions. However, there are risks with this argument as well—such as plaintiffs’ counsel bringing multiple state-specific cases or an increase in cases filed in a defendant’s home state where it is subject to general personal jurisdiction. This will be a developing area of the law to watch as federal courts continue to weigh in with opinions analyzing this issue.

We are proud to announce that Troutman Sanders partner David Anthony will be a featured speaker at the Practising Law Institute’s 23rd Annual Consumer Financial Services Institute at the Practising Law Institute (PLI) Center in New York City on March 26-27, 2018.

In its 23rd year, topics will focus on a broad array of recent regulatory, enforcement and litigation issues relating to mortgages; auto finance; credit, debit and prepaid cards; marketplace lending and Fintech; deposit accounts; student loans; and other products and services. We will also focus on new developments pertaining to fair lending, and the TCPA, FDCPA, FCRA, Military Lending Act and SCRA. Join us and our esteemed faculty for an insightful review of this dynamic area of legal practice.

David will speak on a panel entitled “Fair Credit Reporting Act & Debt Collection Issues” on Monday, March 26 from 4:00 – 5:00 p.m. The panel will discuss reporting on authorized user accounts, and what it means for defining “accuracy,” viability of standalone disclosure claims, dangers of class trials on statutory damages claims, impact of the Equifax data security breach on FCRA litigation, and increasing public and private litigation directed at debt collection mills.

For more information regarding this conference or to register, please click here.

In November, we identified an emerging trend involving Article III standing in cases brought under Illinois’ Biometric Information Protection Act (“BIPA”). The Northern District of California’s recent decision in Patel v. Facebook Inc., No. 3:15-cv-03747-JD, 2018 U.S. Dist. LEXIS 30727 (N.D. Cal. Feb. 26, 2018), denying Facebook’s motion to dismiss for lack of subject matter jurisdiction, demonstrates that the trend is persisting.

BIPA’s Requirements

BIPA requires entities collecting, using, and storing biometric data (such as face, retina, and fingerprint scans) to, among other things, inform and obtain consent from the owners of the data. BIPA also requires the entity to establish a retention schedule such that the biometric data is destroyed when the purpose for its use has been satisfied or within three years, whichever occurs first. Users must be informed of this retention schedule.

Facebook Plaintiffs Have Standing

Patel originated as three separate cases filed in Illinois. After the parties stipulated transfer of the cases to California, they were consolidated into a single class action. The named plaintiffs allege that Facebook, through its “tag suggestions,” which employs “state-of-the-art facial recognition technology,” secretly collected plaintiffs’ biometric data without their consent.

Facebook moved to dismiss the class action complaint for lack of subject matter standing, arguing that plaintiffs’ alleged injury was not sufficiently concrete under Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016). Pursuant to Spokeo, a plaintiff must demonstrate standing to sue by alleging the “irreducible constitutional minimum” of (1) an “injury in fact” (2) that is “fairly traceable to the challenged conduct of the defendants” and (3) “likely to be redressed by a favorable judicial decision.”

After clarifying that Spokeo “did not announce new standing requirements,” but instead “sharpened the focus on when an intangible harm such as the violation of a statutory right is sufficiently concrete to rise to the level of an injury in fact,” the Northern District of California in Patel found that Illinois’ legislature clearly desired to vest in Illinois residents “the right to control their biometric information by requiring notice before collection and giving residents the power to say no by withholding consent.” According to the court, that right “vanishes into thin air” when an on-line company like Facebook disregards the procedures—such as requiring consent and establishing a retention schedule—set forth in BIPA. The Court wrote, “The precise harm the Illinois legislature sought to prevent is then realized,” and that harm, though intangible, “quintessentially” constitutes a concrete injury, satisfying Article III standing. 

Comparing Patel With Previous BIPA Decisions 

At first blush, the Patel decision may appear inconsistent with recent decisions on Article III standing in BIPA cases, most notably, the Second Circuit’s recent decision in Santana v. Take-Two Interactive Software, No. 17-303, 2017 U.S. App. LEXIS 23446 (2d Cir. Nov. 21, 2017). In Take-Two, the plaintiffs alleged the video game developer violated BIPA when it failed to inform them of (1) the collection of their biometric data, and (2) its biometric data retention schedule, when the plaintiffs provided facial scans to create a 3-D rendition of their faces in order to generate personal avatars. Unlike in Patel, the Take-Two court affirmed the lower court’s decision in granting Take-Two’s motion to dismiss for lack of Article III standing. The Take-Two court explained that the alleged violations of BIPA, as stated by the plaintiffs, “fail[ed] to raise a material risk of harm.”

Essential to the Take-Two decision was the court’s rejection of allegations that Take-Two collected consumers’ biometric data without authorization. To create the avatar, the plaintiffs were required to agree to terms and conditions explaining that their avatar would be visible to other users and may be recorded. Then the plaintiffs had to place their faces within 6 to 12 inches of the camera and slowly turn their heads to the left and right for approximately 15 minutes. The court held that “no reasonable person” would believe that Take-Two was conducting anything other than a facial scan. Also notable was that the plaintiffs did not allege Take-Two lacked sufficient protocols, that its policies were inadequate, or that it was unlikely to abide by its internal procedures. The Second Circuit found that the plaintiffs’ allegations amounted to “only a bare procedural violation.”

Similar reasoning was applied in McCollough v. Smarte Carte, Inc., 2016 U.S. Dist. LEXIS 100404 (N.D. Ill. Aug. 1, 2016). In Smarte Carte, plaintiff Adina McCollough used her fingerprint to rent a locker at Chicago’s Union Station. In order to rent the locker, she was prompted to place her finger on a fingerprint scanner; thereafter, a rendition of her fingerprint appeared on a touchscreen. In order to unlock the locker, McCullough again had to place her finger on the scanner and her print displayed on the screen. A matched fingerprint unlocked the locker. McCollough claimed Smarte Carte violated BIPA by not informing her that her biometric data was being collected and by not obtaining her consent. Like Take-Two, the Smarte Carte court held that McCollough “undoubtedly understood” that her fingerprint was being retained so that she could retrieve her belongings from the locker and thus there was no concrete injury and no Article III standing.

The Patel court distinguished these cases, explaining that the harm alleged in Take-Two and Smarte Carte was a “far cry” from plaintiffs’ allegations in Patel, reasoning that, in both Take-Two and Smarte Carte, “plaintiffs had sufficient notice to make a meaningful decision about whether to permit the data collection.” In Patel, however, the plaintiffs alleged they were afforded “no notice and no opportunity to say no.” The court’s decision to deny Facebook’s motion to dismiss seemed to turn on that critical distinction.

The Emerging (Persistent) Trend

Comparing Patel, Smarte Carte, and Take-Two, the emerging trend we identified last year is holding up. Where a plaintiff can show she had no meaningful opportunity to withhold consent for the collection of her biometric data, she will likely have Article III standing. However, unless she can show her biometric data was stolen or was at risk of being stolen, where a plaintiff gives her biometric information knowingly and willingly, the technical failure to obtain consent or otherwise inform the user will likely be insufficient to assert Article III standing.

In the student loan market, servicers play a critical role. These entities maintain account records regarding borrowers, send periodic statements advising borrowers about amounts due and outstanding balances, receive payments from borrowers, allocate those payments among various loans and loan holders, answer borrowers’ questions, report to creditors and investors, and strive to prevent default by delinquent borrowers via so-called “diversion aversion assistance.”

For each loan it backs, the Department of Education selects a servicer, to be changed only upon the occurrence of certain specified conditions. Currently, the DOE contracts with eight private servicers.

As the conduits between borrowers and lenders, servicers often are the most visible targets for overburdened borrowers and zealous regulators. Bills come under their letterheads and collection calls originate in their offices. As such, in recent years, servicers have increasingly become the subject of lawsuits based on state consumer protection laws as well as regulatory action by state actors.

On March 12, in order to address the concerns of servicers, lenders, borrowers, and state regulators, the DOE posted a formal notice contending that, under its interpretation of federal statutory and regulatory law, the DOE alone possesses the power to regulate student loan servicers.

The DOE acknowledged the notice was motivated by the fact that several states recently had “enacted regulatory regimes that impose new regulatory requirements on servicers of loans” under the DOE’s Direct Loan Program. Other states had imposed disclosure requirements on loan servicers for loans made under the Higher Education Act of 1965 (“HEA”), and some states had adopted regulations addressing servicing for the Federal Family Education Loan (“FFEL”) Program.

In the DOE’s view, such regulations – and claims based thereon – “are preempted because . . . state[s have] sought to proscribe conduct Federal law requires and to require conduct Federal law prohibits.” “This is not a new position,” the DOE argues in the notice.

This position echoes the DOE’s interpretation of regulations governing the FEFL Program, issued on October 1, 1990, as well as its stated position in Chae v. SLM Corporation, 593 F.3d 936 (9th Cir. 2010). (SLM Corporation, more commonly known as Sallie Mae, spun off its loan servicing operation and most of its loan portfolio into a separate, publicly traded entity called Navient Corporation on April 30, 2014. Navient is the largest servicer of federal student loans and acts as a collector on behalf of the DOE.)

In Chae, the Ninth Circuit reaffirmed its earlier conclusion that “field preemption does not apply to the HEA.”  In other words, federal education policy regarding private lending to students was deemed not so extensive as to occupy the entire regulatory field.

The Ninth Circuit also concluded, however, that (1) the HEA expressly preempted the plaintiffs’ allegations that a student loan servicer made fraudulent misrepresentations in its billing statements and coupon books, and (2) conflict preemption prohibited the plaintiffs from bringing their remaining business, contract, and consumer-protection law claims because, if successful, they would create an obstacle to the achievement of congressional purpose.

Apparently, “[t]he statutory design, its detailed provisions for the FFELP’s operation, and its focus on the relationship between borrowers and lenders persuade[d]” the appellate panel in Chae “that Congress intended to subject FFELP participants to uniform federal law and regulations,” a conclusion from which conflict preemption naturally followed.

With such precedents in mind, the DOE is now seemingly preparing to take on the more activist states on behalf of the servicers that it fought during the Obama Administration.