court refuses to enjoin consumer protection law on First Amendment grounds

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 13^th 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.”