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Second Circuit Overturns Credit Card Antitrust Violation
On September 26, the U.S. Court of Appeals for the Second Circuit ruled that a credit card company did not unreasonably restrain trade in violation of the Sherman Act by prohibiting merchants from directing customers to use other, less costly forms of payment. The appeals court reversed based on the lower courts definition of the market as limited to the “core enabling functions provided by networks which allow merchants to capture, authorize, and settle transactions for customers who elect to pay with their credit or charge card.” According to the decision, this definition was too limited in this case, because the credit card network derived its market share from cardholder satisfaction, providing “no reason to intervene and disturb the present functioning of the payment‐card industry.” The court noted that the outcome in this case is different than in previous credit card exclusionary rule cases because here, the payment clearing network and the card issuing function are completely integrated, meaning that the issuer and the network are the same company.
SCOTUS Vacates First Circuit Ruling, Holds Scope of FCA Materiality Requirement is "Demanding"
On June 16, the United States Supreme Court issued an opinion vacating a First Circuit ruling on the grounds that the appellate court’s interpretation of the False Claims Act’s (FCA) materiality requirement to include any statutory, regulatory, or contractual violation is overly broad. Universal Health Servs., Inc. v. U.S. ex rel. Escobar, No. 15-7 (U.S. June 16, 2016). In a unanimous opinion delivered by Justice Clarence Thomas, the Court held that the implied false certification theory can be a basis for liability under the FCA when (i) the defendant submits a claim for payment to the government that makes specific representations about the goods or services provided; and (ii) the defendant’s failure to disclose noncompliance with material statutory, regulatory, or contractual requirements make its representations misleading half-truths. However, the Court did not adopt the appellate court’s expansive interpretation of what constitutes a “false or fraudulent claim” under this theory, concluding:
A misrepresentation cannot be deemed material merely because the Government designates compliance with a particular statutory, regulatory, or contractual requirement as a condition of payment. Nor is it sufficient for a finding of materiality that the Government would have the option to decline to pay if it knew of the defendant’s noncompliance. Materiality, in addition, cannot be found where noncompliance is minor or insubstantial.
In Escobar, respondents filed a qui tam suit against a health services clinic, alleging that it violated Massachusetts Medicaid regulations, which were designated as express conditions of payment for the Medicaid program, by allowing unqualified staff to provide mental health counseling and knowingly misrepresenting compliance with the regulations when submitting reimbursement claims. According to respondents, a misrepresentation can be deemed material so long as the defendant “knows that the Government would be entitled to refuse payment were it aware of the violations.” The Supreme Court disagreed and held that, under 31 U.S.C. §3729(a)(1)(A), the FCA “does not adopt such an extraordinary expansive view of liability.” Rather, the Court reiterated that the materiality standard is demanding and the key determinant is whether the misrepresentation, i.e., the defendant’s failure to comply with particular statutory, regulatory or contractual requirements, is likely to influence the government’s payment decision. Because the First Circuit had not applied this standard, the Court remanded the case for the lower courts to reconsider whether the materiality threshold was met.
Ninth Circuit Bars Qui Tam Relator's Whistleblower Recovery in False Claims Act Suit Over Conviction
On July 16, the U.S. Court of Appeals for the Ninth Circuit affirmed a district court’s dismissal of a qui tam relator from a False Claims Act suit, holding that the False Claims Act requires dismissal of a relator convicted of any conduct giving rise to the fraud at issue, however minor, and prevents the relator from collecting any share of a whistleblower award. United States ex rel. Schroeder v. CH2M Hill, No. 13-35479 (9th Cir. July 16, 2015). The relator submitted false time cards while working for a contractor who engaged in fraudulent billing practices. The Ninth Circuit held that the False Claims Act permits reducing relator awards for planners and initiators of the subject fraud, but dismisses and does not permit collection by all “relators convicted of criminal conduct arising from the fraudulent conduct at issue in the qui tam suit,” even those that did not plan or initiate the fraud. Congress’s hierarchy for relator awards, reasoned the court, “may satisfy other values, such as the deterrent effect of preventing criminally culpable individuals from gaining from their conduct, and the investigatory benefits of actions brought by planners and initiators who often have greater knowledge about co-conspirators and the scope of a fraudulent scheme.” The court rejected the idea that the statute “contain[s] an exception for minor participants” who were nonetheless convicted of the subject criminal conduct.
Special Alert: Second Circuit Decision Threatens to Upset Secondary Credit Markets
The Second Circuit Court of Appeals’ recent decision in Madden v. Midland Funding, LLC held that a nonbank entity taking assignment of debts originated by a national bank is not entitled to protection under the National Bank Act (“NBA”) from state-law usury claims. In reaching this conclusion, the Court appears to have not considered the “Valid-When-Made Doctrine”—a longstanding principle of usury law that if a loan is not usurious when made, then it does not become usurious when assigned to another party. If left undisturbed, the Court’s decision may well have broad and alarming ramifications. The decision could significantly disrupt secondary markets for consumer and commercial credit, impacting a broad cross-section of financial services providers and other businesses that rely on the availability and post-sale validity of loans originated by national or state-chartered depository institutions.
Click here to view the full special alert.
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Questions regarding the matters discussed in this Alert may be directed to any of our lawyers listed below, or to any other BuckleySandler attorney with whom you have consulted in the past.
- Walter E. Zalenski, (202) 461-2910, wzalenski@buckleyfirm.com
- Jeffrey P. Naimon, (202) 349-8030, jnaimon@buckleyfirm.com
- John P. Kromer, (202) 349-8040, jkromer@buckleyfirm.com
Supreme Court Grants Cert. to Decide if Offer of Complete Relief Moots Case
On May 18, the Supreme Court granted certiorari to resolve a circuit split as to whether an offer of complete relief to a plaintiff seeking to represent a putative class moots the case. Campbell-Ewald Co. v. Gomez, 2015 WL 246885 (U.S. May 18, 2015). According to the cert. petition, the plaintiff received an unsolicited text message in 2006 from the petitioner, a firm hired by the U.S. Navy to assist with its recruitment efforts. The plaintiff claimed that the text message violated the Telephone Consumer Protection Act, and sought to represent a class of all non-consenting recipients of the recruitment text. Before the plaintiff had moved for class certification, the petitioner tendered an offer of judgment pursuant to Fed. R. Civ. P. 68 and a separate informal settlement offer, both of which would have fully satisfied the plaintiff’s individual claim by offering more than the maximum statutory damages plus reasonable costs and injunctive relief. The plaintiff rejected the offers and moved for class certification. The district court rejected the petitioner’s claim that the claim was moot, but eventually granted the petitioner summary judgment on the merits on the ground that the petitioner was entitled to “derivative sovereign immunity.” The Ninth Circuit reversed, holding that the case was not moot and that the district court had improperly applied the derivative sovereign immunity doctrine. The Supreme Court granted cert. to consider both questions. As to the mootness issue, the Court will also consider whether the resolution depends on whether or not the class has been certified at the time of the offer.
SDNY Grants DOJ's Request To Add Bank Executive To Pending FCA/FIRREA Litigation
On December 12, the U.S. District Court for the Southern District of New York granted the DOJ’s motion to add a bank executive to a civil fraud suit it filed over a year earlier against a mortgage lender alleged to have falsely certified loans under the FHA’s Direct Endorsement Lender Program. U.S. v. Wells Fargo Bank, N.A., No. 12-7527, slip op. (S.D.N.Y. Dec. 12, 2013). The government alleges that the bank’s vice president in charge of quality control purposefully failed to self-report bad loans to HUD, despite having knowledge of HUD’s reporting requirements, and that he signed annual certifications misrepresenting to HUD that the bank complied with those reporting requirements. The court agreed with the government’s contentions that amending the complaint to add the individual defendant was permissible because (i) the bank would not be unduly prejudiced because the allegations were already at issue in the pending suit and the parties had yet to begin discovery; (ii) the claims that the government would assert were not futile, as the court had already ruled on the validity of the government’s theories of liability under the FCA and FIRREA, and the new defendant would have the opportunity to seek dismissal on other grounds; (iii) there had been no undue delay, because the government had not received authority to add the executive until after the bank’s motion to dismiss was fully submitted, and had not made a final determination to bring the proposed action against the executive until the day it informed the bank of its intention to do so; and (iv) the interests of judicial economy supported joinder insofar as a separate suit against the executive for conduct already at issue here would have been inefficient. The court did not address the bank’s argument that the government knew sooner of its authority to add the executive, ultimately and improperly electing to do so because the bank suspended settlement negotiations.
Federal Court Allows FDIC D&O Suit Involving Business Judgment Rule To Proceed
On November 14, the U.S. District Court for the Southern District of West Virginia denied motions to dismiss filed by former officers and directors of a failed federal thrift who allegedly contributed to the bank’s collapse by failing to exercise due diligence and monitor the bank’s relationship with a third party mortgage loan originator. FDIC v. Baldini, No. 12-0750, 2013 WL 6044412 (S.D. W.Va. Nov. 14, 2013). The former bank officers and directors moved to dismiss the FDIC’s negligence claims, filed as conservators for the failed thrift, arguing that the business judgment rule operates as a substantive rule of law that immunizes the directors and officers from liability for the alleged ordinary negligence. The court held that it is too early in the case to decide whether the officers and directors are entitled to business judgment rule protection. The court reasoned that determining whether the rule applies requires a fact-intensive investigation that is not appropriate for resolution on a 12(b)(6) motion to dismiss. The court noted that even if the rule applies, the FDIC should be permitted an opportunity to rebut that presumption. The court also held that the FDIC’s claims satisfy Twombly and Iqbal pleading requirements by sufficiently alleging that the directors and officers “essentially abdicated oversight completely” in the context of the thrift’s relationship with the third-party broker, which the court held was enough to support claims of not only ordinary, but gross negligence.
SCOTUS To Hear Recess Appointment Case, Potential Implications for CFPB Director
This morning, the U.S. Supreme Court agreed to hear the federal government’s challenge to a January 2013 decision by the Court of Appeals for the D.C. Circuit that appointments to the National Labor Relations Board (NLRB) made by President Obama in January 2012 during a purported Senate recess were unconstitutional. NLRB V. Noel Canning, No. 12-1281. Last month, the Third Circuit similarly invalidated a different NLRB recess appointment made by President Obama.
CFPB Director Richard Cordray was appointed in the same manner and on the same day as the NLRB members, and his appointment is the subject of a lawsuit currently pending in the U.S. District Court for the District of Columbia. Mr. Cordray, whose recess appointment is due to expire at the end of this year, was re-nominated by President Obama this year to serve a full term as director, but his confirmation is being held up in the Senate. All but two Senate Republicans have pledged to oppose Mr. Cordray for the position unless oversight of the CFPB is altered, including by changing its governance structure to a commission structure.
In its review, the Supreme Court will address two questions presented by the government, as well as a third the Court added. The government’s petition asked the court to determine (i) whether the President’s recess appointment power may be exercised during a recess that occurs within a session of the Senate, or is instead limited to recesses that occur between enumerated sessions and (ii) whether the President’s recess appointment power may be exercised to fill vacancies that exist during a recess, or is instead limited to vacancies that first arose during that recess. The Court also signaled its intent to address the issue of Senate pro forma sessions with a question it added - whether the President's recess appointment power may be exercised when the Senate is convening every three days in pro forma sessions. The Court is likely to hear the case in the fall and issue its opinion next year.
Supreme Court Narrows Application of Alien Tort Statute
The Supreme Court recently sharply narrowed the potential application of the Alien Tort Statute (ATS), which allows foreign plaintiffs to bring civil actions in U.S. district courts for torts committed in violation of the law of nations or a treaty of the United States. Kiobel v. Royal Dutch Petroleum Co., No. 10-1491, 2013 WL 1628935 (Apr. 17, 2013). Foreign plaintiffs traditionally have sought to use the ATS to hold firms liable for alleged human rights abuse committed by foreign governments. Here, a district court dismissed several claims brought by Nigerian nationals who alleged that several non-U.S. oil companies had aided and abetted the Nigerian government in committing human rights violations. On interlocutory appeal, the Second Circuit dismissed the entire complaint, reasoning that the law of nations does not recognize corporate liability. The Supreme Court unanimously affirmed on different grounds, focusing on when courts can recognize a cause of action under the ATS for violation of the law of nations occurring in a non-U.S. sovereign territory. The Court held that the presumption against extraterritorial jurisdiction applied to claims under the ATS, and nothing in the statute rebutted that presumption; even where claims touch and concern the territory of the United States, they must do so with sufficient force to displace the presumption against extraterritorial application, which requires more than mere corporate presence. The Court’s ruling further limits the risk that foreign plaintiffs might expand ATS claims into new industries, including by bringing claims against financial institutions for global financial crime such as fraud and money laundering, or for financing projects during which alleged human rights abuses are committed.
Supreme Court Agrees to Review Standard for Enforcement of Forum Selection Clauses
On April 1, the U.S. Supreme Court agreed to review a decision from the U.S. Court of Appeals for the Fifth Circuit that denied a mandamus petition against a district court that held that when a forum-selection clause designates a specific federal forum or allows the parties to select the federal courts of a different forum, the federal change of venue statute, 28 U.S.C. § 1404(a),—as opposed to Rule 12(b)(3) and 28 USC § 1406—is the proper procedural mechanism for the clause’s enforcement. Atl. Marine Constr. Co., Inc. v. U.S. Dist. Ct. for the W. Dist. of Tex., No. 12-929, 2013 WL 1285318 (cert. granted Apr. 1, 2013). This issue is significant because § 1404(a) applies when venue is proper but a transfer is sought, whereas Rule 12(b)(3) and § 1406 provide for dismissal or transfer of an action that has been brought in an improper venue. Thus, this question turns on whether private parties can, through a forum-selection clause, render venue improper in a court in which it is otherwise proper. The grant of certiorari notes that the majority of federal circuit courts hold that a valid forum-selection clause renders venue “improper” in a forum other than the one designated by the contract and that, in those circuits, the clauses are routinely enforced by motions to dismiss or transfer venue under Rule 12(b)(3) and § 1406. In addition to the Fifth Circuit, the Third and Sixth Circuits follow a contrary rule. The Supreme Court has requested that the parties address two issues in their briefs: (i) whether the Courts decision in Stewart Organization, Inc. v. Ricoh Corp., 487 U.S. 22 (1988), changed the standard for enforcement of clauses that designate an alternative federal forum, limiting review of such clauses to a discretionary, balancing-of-conveniences analysis under 28 U.S.C. § 1404(a); and (ii) if so, how should district courts allocate the burdens of proof among parties seeking to enforce or to avoid a forum-selection clause?