Loan Payment Administration LLC v. Hubanks, 2015 WL 1245895,
No. 14-CV-04420 (N.D. Cal. Mar. 17, 2015)
A misinterpretation of nominative fair use mars this
otherwise quite sensible rejection of a First Amendment challenge to a consumer
protection law.
LPA is a subsidiary of Nationwide Biweekly Administration,
whose sole shareholder is Daniel Lipsky.
Defendants are deputy DAs with the Monterey and Marin County DA’s
offices.
Nationwide, perhaps unsurprisingly, administers biweekly
loan repayment programs and has approximately 125,000 customers around the
country, including over 10,000 in California. The current litigation revolves
around its “Interest Minimizer” biweekly program, targeted at borrowers with
home mortgages. Nationwide allegedly acts as an intermediary between a borrower
and a mortgage servicer, collecting one-half of a monthly mortgage payment from
the borrower’s checking account every other week. This results in a 13th annual
payment, which allegedly saves customers money by helping them pay off their
mortgage loans faster than they otherwise would. Nationwide charges a “deferred enrollment fee”
equal to one biweekly debit, six months after enrollment in the program.
Nationwide’s written solicitations do not disclose the existence of this fee,
and the DAs alleged that Nationwide employees “responding to calls from
borrowers are carefully trained to obscure the existence or amount of this
fee.”
The DAs submitted three consumer complaints filed with the
Better Business Bureau about Nationwide’s business practices. One consumer who
was charged over $1500 complained that Nationwide “never told [the consumer]
that there will be [a] deferred enrollment fee and I am sure of it because if
they ever mentioned a fee I would immediate[ely] drop discussion and wouldn’t
proceed to this program.” According to the consumer’s complaint, Nationwide’s
investigation determined that although the Nationwide employee who handled the
consumer’s call “did disclose the fact that there was a ‘deferred fee’ that would
be collected in 6 months, the manner in which the fee was disclosed was not
compliant with [Nationwide’s] policies and procedures.”
Nationwide solicits customers by mailing letters to
them. For example, a homeowner received
an envelope with the return address of Nationwide Biweekly Administration, Inc.
Above the homeowner’s address, the letter stated in large bold font: “Loan
Payment Change Request.” To the far right, the letter stated in smaller,
non-bolded font: “Nationwide Biweekly Administration is not affiliated with the
lender.” The letter used the name of the homeowner’s specific servicer at the
top of the letter, in the first sentence of the letter, and at least two other
times in the letter. It also referred to the specific amount of the homeowner’s
loan several times, often in connection with explicit references to the
mortgage servicer. (Nationwide gets consumer loan information from public
records.) There was a disclaimer at the bottom of the letter, in smaller font, that
Nationwide “is not affiliated, connected, associated with, sponsored, or
approved by the lender listed above.”
There was an attached Q&A document with questions such
as “Does my Lender or loan change?” answered: “No. The bi-weekly program is
administered to your current lender. There is no change in your interest rate or
the terms of your loan.” (Administered
“to”—not “by.” I smell
misleadingness.) Another question, “Who
is Nationwide Biweekly Administration?” was answered “one of the nation’s
largest and most recognized Independent processors.”
Another letter sent to the same homeowner was similar; it
advised that “[i]f you waive the biweekly option, you will be asked to confirm
that you understand that you are voluntarily waiving the interest savings and
loan term reduction achieved through the biweekly option.” It contained a
comparison chart comparing the homeowner’s “Current Monthly Payment” to the
“NEW BIWEEKLY Option.” It had a similar disclaimer.
Another consumer complaint to the BBB said that the consumer
received a letter “featuring my lender’s name, Mountain West Financial Inc.,
above my name and address on the top left corner and assumed wrongly that it
was coming from my lender.” The consumer said that Nationwide didn’t disclose
the deferred enrollment fee; he wrote that “[s]ince I still thought they were
affiliated [with] my mortgage company, I assumed no fees were involved and
cooperated with them.” The consumer further stated that he was a “[n]ative
French speaker” and “I am not comfortable speaking in English, especially on
the phone where I may not properly understand and interpret what I am being
told.”
In 2013, Nationwide got a letter from Hubanks, a deputy DA in
the Consumer Protection Unit of the Monterey County District Attorney’s Office.
It said that numerous consumer complaints “indicate a pattern of deceptive
business practices having an adverse impact on California consumers,” based on
Nationwide’s practice of referencing the names of consumers’ lenders and the
consumers’ loan information in Nationwide’s solicitation letters. The letter said that Nationwide’s
solicitations violated Business and Professions Code § 14701(a), which
prohibits a person from using the “name, trade name, logo, or tagline of a
lender in a written solicitation ... without the consent of the lender,” unless
the letter is accompanied by a statutorily-prescribed disclaimer. In addition,
the letter said that Nationwide’s use of consumers’ loan amounts in Nationwide’s
solicitation letters violated Business and Professions Code § 14702, which
prohibits a person from using a consumer’s “loan amount, whether or not
publicly available, in a solicitation for services or products without the
consent of the consumer,” unless the solicitation contains a
statutorily-prescribed disclaimer. The
letter continued that these acts were deceptive and misleading; in addition, it
stated that “the placement of the lender’s name in the header of the letter may
lead the consumer to believe their lender is, in fact, the originator of the
correspondence or affiliated with Nationwide.”
It concluded by saying that the DAs were considering what action to
take. (It also mentioned another law,
not at issue in this litigation.)
Nationwide then stopped using actual consumer loan
information in its solicitation letters and changed the comparison chart to use
the “typical monthly repayment plan” of the borrower’s lender instead of the
borrower’s actual amount. The letters
also added: “As always we work for you and not the lender. Partnering only with
you the customer who we provide all the savings benefit to, is why we do not
contract or partner with the lender.”
Nationwide had been the subject of similar enforcement
actions or inquiries in other states. In 2010, it entered into a stipulated
judgment with the Ohio AG; in 2011, it entered into a consent order with New
Hampshire’s Banking Department; and in 2012, it entered into a similar consent
order in Georgia. Nonetheless, Nationwide sued here, arguing that the relevant
California laws unconstitutionally restrained its speech.
The speech here was commercial, and the court determined
that Zauderer, rather than Central Hudson, applied. This is not a
ban on speech, but a disclosure requirement, and commercial disclosure
requirements must merely meet the reasonable relationship test, which is more
like rational basis review. A disclosure
requirement is valid if its requirements aren’t unduly burdensome and “reasonably
related to the State’s interest in preventing deception of consumers.” A
commercial speaker’s interest in not providing truthful information is minimal,
especially if that protects consumers.
The laws at issue required that a person who uses a
“solicitation for financial services” and isn’t affiliated with the lender must
disclose additional factual information: (1) if a solicitor uses the name,
trade name, logo, or tagline of a lender, that the solicitor state the
solicitor is “not sponsored by or affiliated with the lender and that the
solicitation is not authorized by the lender”; and (2) if the solicitor uses a
consumer’s loan number or loan amount, that the solicitor state that the
solicitor “is not sponsored or affiliated with the lender and that the
solicitation is not authorized by the lender.” The legislative history made clear that these
were anti-deception measures.
Nationwide argued that Zauderer
didn’t apply because “the Zauderer
standard only applies to disclosures about a company’s own products or
services.” It relied on Safelite Group v.
Jepsen, 764 F.3d 258 (2d Cir. 2014), where a Connecticut law required that
an insurance company, if it referred a policy holder to an affiliated company
for auto repairs, must also refer the policy holder to at least one other
company that was not affiliated with the insurance company. The Second Circuit
held that Zauderer didn’t apply because
the “law does not mandate disclosure of any information about products or
services of affiliated glass companies or of the competitor’s products or
services.”. Instead, the law “requires that insurance companies or claims
administrators choose between silence about the products and services of their
affiliates or give a (random) free advertisement for a competitor.”
Safelite was
different. The Second Circuit found that “[p]rohibiting a business from
promoting its own product on the condition that it also promote the product of
a competitor is a very serious deterrent to commercial speech.” Here, Nationwide didn’t have to disclose any
information about a competitor, but rather about Nationwide’s own business,
specifically that Nationwide wasn’t affiliated with a consumer’s lender.
There was a reasonable relationship here between the purpose
of the law and its requirements. The legislature’s goal was “prevent[ing] the
deceptive use of lenders’ trade names in consumer solicitations” and
prohibiting a person from using “an identical or similar name to a lender in a
solicitation where that use confuses consumers as to the lender’s sponsorship
of the person or its services.” The mechanisms were restricting uses of
lenders’ “name, trade name, logo, or tagline” without a clear and conspicuous
statutorily-prescribed disclaimer, and the same with a consumer’s loan number
or loan amount. The mechanism bore a reasonable relationship with the statute’s
goals.
Undue burden: an undue burden exists if the “detail required in the disclaimer ...
effectively rules out” the commercial speech in the first place. Here, the
required disclaimer requires the solicitor to state that it is “not sponsored
by or affiliated with the lender,” and that “the solicitation is not authorized
by the lender, which shall be identified by name.” The disclaimer must be made
“in close proximity to, and in the same or larger font size as, the first and
the most prominent use or uses of the” lender’s name or logo. The requirements
are similar for the use of consumer loan information, including a disclaimer
that the information “was not provided by that lender.” These were relatively
brief disclosures in the context of Nationwide’s letters, which were one or two
full pages of text. They wouldn’t “effectively
rule[ ] out” Nationwide’s use of solicitation letters.
Nationwide argued that the laws unconstitutionally
prohibited the republication of publicly available information. But disclosure requirements
aren’t bans.
Nationwide also argued that its speech qualified for a
statutory exemption. The law provided
that it was “not a violation of this chapter” for “a person in an advertisement
or solicitation for services or products to use the name, trade name, logo, or
tagline of a lender” without the statutorily-prescribed disclaimer (1) if the
person’s “use is exclusively part of a comparison of like services or products
in which the person clearly and conspicuously identifies itself,” or (2) if the
person’s use “otherwise constitutes nominative fair use.” Nationwide argued that it used lenders’ names
in comparing the Interest Minimizer with “the typical monthly repayment option
offered by most mortgage lenders.” The
court disagreed—first, Nationwide only adopted that new comparison chart after
receiving the enforcement letter.
Second, the use wasn’t “exclusively part of a comparison of like
services.” “In fact, the very beginning of Nationwide’s solicitation letters
(the part which is visible through the envelope window) list the ‘Lender’ of
the recipient by name above the recipient’s address.”
And nominative fair use?
The court first expressed uncertainty whether this defense only applied
when the asserted claim was trademark infringement, rather than violation of
these disclosure rules or other non-trademark claims. Even assuming Nationwide could use nominative
fair use, the defense failed. The
elements: (1) the “product or service in question must be one not readily
identifiable without use of the trademark;” (2) “only so much of the mark or
marks may be used as is reasonably necessary to identify the product or
service;” and (3) the user does “nothing that would, in conjunction with the
mark, suggest sponsorship or endorsement by the trademark holder.”
The court held that, to satisfy the first element, “the
party asserting a nominative fair use defense must show that it is not
‘reasonably possible’ to refer to the party’s product or service without use of
the trademark.” But it was “reasonably possible” for Nationwide to explain its
Interest Minimizer service without using lenders’ names. That’s not the New Kids standard, though the court says it’s applying New Kids. New
Kids asks whether it’s reasonably possible to refer to the trademark
owner/subject of discussion without use of the TM owner’s mark. The Third Circuit asks whether it’s possible
for the defendant to refer to its own
product or service without using the mark, which is the standard Judge Koh
applies here. Not that the ultimate
decision is wrong! But the problem is
part (3) of the test, not part (1).
Under Abdul-Jabbar v. General Motors, I
would argue, the appearance in a commercial solicitation creates the problem. (Indeed, the court’s reasoning is
particularly dangerous insofar as it rejected Nationwide’s argument that its
solicitations worked better by using the lender’s name, conferring an advantage
relative to “non-targeted mass mailers.”
By accepting the argument that Nationwide’s Interest Minimizer itself
was still readily identifiable without use of the name, the court made it seem
like use of a mark has to be necessary,
not just helpful in conveying a message.)
With the merits out of the way, the court then found that
Nationwide hadn’t satisfied the requirements for a preliminary injunction.
Without likely violation of First Amendment rights, there was no irreparable
injury. Nationwide also argued that an
injunction was necessary to prevent its business from being destroyed, because
its president Lipsky declared that “[t]he filing of an enforcement action by
the District Attorneys ...may result in [Nationwide’s] bank partners refusing
to do business with Nationwide,” could lead regulators to suspend or revoke its
licenses, and would likely lead consumers to demand refunds, which could
bankrupt the company.
None of these were real and immediate threats, rather than
conjectural or hypothetical. Lipsky offered no facts in support of his
assertions that an enforcement action “may” result in the suspension or
revocation of Nationwide’s licenses to operate in other states, or that an
enforcement action is “likely” to result in customers demanding refunds of
their fees, or “may” result in Nationwide’s bank partners refusing to do
business with Nationwide. Plus, the fact that irreparable harm depended on the
actions of independent third parties lessened the credibility of the claim.
Moreover, the fact that Nationwide’s business wasn’t destroyed by the other
consent orders in at least three other states undermined the claim of harm
here.
And the public interest disfavored an injunction, which
would “prohibit local officials from enforcing statutes designed to protect
consumers from the risk of fraud.”
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