U.S. Supreme Court Holds Municipality Can Sue Banks for Financial Injuries Under the Fair Housing Act, but Whether There is Proximate Cause is for Another Day and Another Court

In a 5-3 decision in Bank of America Corp. et al. v. City of Miami, Florida (No. 15-1111 and No. 15-1112, May 1, 2017), the United States Supreme Court held that the City of Miami (“City”) was an “aggrieved person” authorized to bring suit under the Fair Housing Act (the “FHA”) for predatory lending by defendant banks to minorities, but remanded the case on the issue of proximate cause. The City had alleged that Bank of America and Wells Fargo (the “Banks”) violated the FHA in connection with their lending to African-American and Latino residents and neighborhoods. The City alleged the Banks lent to minorities on worse terms than equally creditworthy non minorities, as well as induced minority borrowers into defaults by failing to extend refinancing and fair loan modifications. This conduct purportedly led to a concentration of foreclosures and vacancies in minority neighborhoods, which: (1) impaired the City’s racial integration efforts; (2) diminished the City’s property tax revenue; and (3) increased the demand for the City to provide municipal services.

The district court had dismissed the City’s original complaint. After the United States Court of Appeals for the Eleventh Circuit reversed the lower court’s decision, the Banks filed petitions for writ of certiorari, which were granted by the U.S. Supreme Court. In deciding the case, the Supreme Court explored two issues: 1) whether the City is authorized to sue the Banks under the FHA; and 2) whether the City established proximate cause.

As to the first issue, the Supreme Court explained that the FHA forbids racial discrimination in real estate transactions, and that it permits any aggrieved person to file a civil lawsuit for an FHA violation. The statute defines an aggrieved person as someone who claims to have been injured by a discriminatory housing practice, and prior Supreme Court decisions have interpreted this definition broadly. The Supreme Court further explained that a plaintiff must show that the statute applies to the cause of action that he or she asserts. A statute is presumed to provide a cause of action to a plaintiff whose interests fall within the zone of interests the law seeks to protect. Here, the Supreme Court likened the City’s alleged financial injuries to those sustained by the Village of Bellwood in Gladstone, Realtors v. Village of Bellwood, 441 U.S. 91 (1979). It explained that, in Gladstone, it allowed the Village of Bellwood to bring suit under the FHA for lost tax revenue and undermined racial balance. Thus, it had already ruled that the type of injuries the City sustained fell within the FHA’s zone of interests. As such, citing the principles of stare decisis, the Supreme Court held that the City is an aggrieved person authorized to bring suit under the FHA.

However, regarding the second issue, the Supreme Court found that the Eleventh Circuit erred in holding that foreseeability alone was sufficient to establish proximate cause under the FHA. Rather than mere foreseeability, the Supreme Court held that the FHA requires a direct relation between the injury asserted and the injurious conduct alleged. It declined to set forth the “precise boundaries of proximate cause under the FHA,” noting that no court of appeals has weighed in on the issue. It then instructed the lower courts to determine the “contours of proximate cause” and how it applies to the City’s claim. Thus, the Supreme Court vacated and remanded the Eleventh Circuit’s decision accordingly.

In a partial dissent, Justice Thomas, joined by Justices Kennedy and Alito, disagreed with the majority’s decision concerning the zone of interests. Justice Thomas explained that the City’s injuries were “marginally related to or inconsistent with the purposes” of the FHA, whose quintessential aggrieved person is a prospective homebuyer discriminated against during the home-buying process. According to Justice Thomas, nothing in the FHA suggests that, when Congress enacted the statute, it was concerned with decreased property values, foreclosures, urban blight, or strains on municipal budgets – the types of injuries the City allegedly sustained. For these reasons, he believed the injuries fell outside the zone of interests. As to the second issue, Justices Thomas, Kennedy, and Alito agreed with the majority that foreseeability alone was insufficient to establish proximate cause; however, they would have taken the additional step of finding that the City’s injuries were too remote to satisfy proximate cause here. Justice Gorsuch, the newest member of the Supreme Court, did not participate in the decision.

By holding that the City of Miami can sue banks under the FHA for the financial injuries it allegedly sustained, the Supreme Court’s ruling follows precedent and confirms the highest court’s broad interpretation of who is an aggrieved person under the statute. Notwithstanding this broad interpretation, its application may be limited, at least according to Justice Thomas. In Justice Thomas’s partial dissent, he opines that the majority decision “should not be read to authorize suits by local businesses alleging the same injuries,” such as restaurants, plumbers, and utility companies. He further comments that the decision does not give rise to a cause of action to neighboring homeowners whose houses have declined in value. Even if the majority’s conclusion is a narrow one as Justice Thomas suggests, it remains a significant one, especially for municipalities and banks.

False Claims Act Litigation and Implications for D&O and Professional Liability Insurers

Sedgwick attorneys Matthew Ferguson (NY) and Kimberly Forrester (SF) have published an article on the Federal False Claims Act (FCA) and its implications for D&O and professional liability insurers. The full article can be viewed here.

Among the issues discussed are the background and elements of the FCA and certain recent developments, including the increase in the number of cases filed by the U.S. Department Justice and substantial settlements against companies in a variety of different industries.

The article also references a number of recent insurance cases and coverage issues involving the FCA. These include potential limitations to the definition of “Loss” based on the damages available in FCA matters and cases addressing certain exclusions which have been considered in FCA claims, including regulatory, prior and pending and professional services exclusions.

Please contact Matthew (email: matthew.ferguson@sedgwicklaw.com; phone: 212-898-4006) or Kimberly (email: kimberly.forrester@sedgwicklaw.com; phone:415-627-3473 ) with any questions.

New York Steps Up To The Plate With Its Cybersecurity Regulations

Last fall, in response to the “ever-growing threat” posed to information and financial systems, the New York State Department of Financial Services (DFS) proposed cybersecurity regulations that were designed to “promote the protection of customer information and information technology systems of regulated entities.”  On December 28, 2016, DFS issued a press release effectively delaying the enforcement date to March 1, 2017. The postponement was the result of a notice and comment period allowing the effected industries to provide their comments on the hardships of abiding by the initial regulations. (The final version is codified under N.Y.C.R.R. Part 500)(the Rules). The Rules apply to “Covered Entities” which are defined to mean any Person operating under or required to operate under a license, registration, charter, certificate, permit, accreditation or similar authorization under the Banking Law, the Insurance Law or the Financial Services Law of New York.  The final version provides greater flexibility and discretion for businesses regulated by DFS and allow for Covered Entities to tailor a cybersecurity program that fits their business needs.

The following is a summary of the significant changes that were adopted in the Rules that highlight the corporate responsibility, including Board involvement, for developing and maintaining a cybersecurity program and the reporting requirements associated with such a program:

  1. The final regulations incorporated significant flexibility with respect to the requirements of a Covered Entity’s cybersecurity program. It is now permitted to adopt a cybersecurity program maintained by an “Affiliate”—a person under its control—instead of establishing its own cybersecurity program, so long as the Affiliate’s program meets the requirements of the rules.
  2. A qualified individual must now be designated to oversee the implementation and enforcement of the cybersecurity program. This person must now be either a chief information security officer (CISO), or a comparable position. The Covered Entity may instead utilize a “Third-Party Service Provider” or an Affiliate to carry out these responsibilities, so long as someone in a senior position at the Covered Entity will supervise them. However, the Covered Entity itself must have sufficient, trained personnel to meet and execute the requirements of the cybersecurity program.
  3. Annual reports must be made to the Covered Entity’s Board of Directors, which includes information regarding the cybersecurity program and policy, any existing cyber threats, the state of the Information Systems, and any Cybersecurity Events that have occurred in the preceding year.
  4. The sections regarding penetration testing and vulnerability assessment were changed to require that Covered Entities conduct annual penetration testing—a change from quarterly testing—based on identified risk. In addition, Covered Entities are now required to conduct biannual vulnerability assessments. Further, monitoring and testing of their cybersecurity program must now be done “periodically,” as opposed to annually. This is consistent with the new requirement that Covered Entities set up written policies and procedures regarding risk assessments, and conduct risk assessments periodically instead of annually.
  5. Covered Entities are required to maintain a reduced amount of “audit trail systems.” (down from six to three) based upon the Covered Entity’s risk assessment. Systems are to be designed to detect “‘Cybersecurity Events’ that have a ‘reasonable likelihood of materially harming any material part of the normal operations of the Covered Entity.” A Covered Entity must retain audit trail system records for five years.
  6. The Rules also set forth extensive requirements regarding the role of Third Party Service Providers. Covered Entities must now implement written policies and procedures to ensure that system security and the security of Nonpublic Information is protected. The Rules outline the types of issues to be covered in these policies and procedures, including guidelines for due diligence, encryption use, and notice requirements in case of a Cybersecurity Event.
  7. Covered Entities are given some flexibility in reporting a “Cybersecurity Event” which means an event that would “have a reasonable likelihood of materially harming any part of the normal operation(s) of the Covered Entity[,]” and that it is the type of event that requires notice to a governmental body. Covered Entities must notify DFS immediately, but no later than 72 hours, after a finding that an event has occurred.

The Rules promulgated by DFS serve as an important reminder that senior management must continue to take cybersecurity issues seriously and implement the appropriate programs for their organizations. Ensuring compliance the Rules will help minimize liability exposures that can arise from data breaches. It remains to be seen whether other states will follow New York’s lead with its own regulations. Colorado, for example, will holding a hearing on May 2, 2017, on its proposed rule requiring entities with state securities licenses to conduct an annual assessment of their cybersecurity risks. Unlike the New York regulations, the proposed Colorado rule would apply to financial advisers and broker-dealers.

The author would like to acknowledge the contributions of Danya Ahmed, associate in the Sedgwick LLP New York Office, to this article.

Drastic Increase in Number of Bank Lawsuits at London’s High Court

According to a recent report from the Financial Times, big banks were named as defendants in 157 High Court lawsuits in the 12 months preceding September 2016, causing the number of lawsuits the world’s largest banks were forced to defend at London’s High Court to increase by a third from 115 the previous year.1 A study of court filings by the law firm RPC, which is headquartered in London, found the increase resulted from the continued fallout from the 2008 financial crisis, increased litigiousness on the part of companies, and a surge in the number of third-party litigation funders, who foot expensive legal costs in exchange for a share of any award.

RPC found that during the past five years, the Royal Bank of Scotland was a defendant in the highest number of cases with Barclays coming in second. Cases against the banks include allegations relating to Libor and mis-selling of hedging products.

RPC banking disputes partner Simon Hart said, “The number of claims against banks over the past five years shows the sheer impact of the credit crunch on the litigation market. Litigation was slow to arise in the immediate aftermath of 2008, but since then the banks have borne the brunt of the resulting disputes.” Hart noted that “many financial disputes are settled by banks before lawsuits are formally lodged.”

1. Croft, Jane. “Number of bank lawsuits at London’s High Court jump by a third.” Financial Times [London] March 27, 2017.

A Recent Decision by the Seventh Circuit that an Employer’s Sexual Orientation Discrimination Violates Title VII Bolsters Protection for LGBTQ Workers

On April 4, 2017, the Seventh Circuit, sitting en banc, held that an employer’s sexual orientation discrimination violates Title VII of the Civil Rights Act of 1964.[1] Following in the footsteps of the Second Circuit,[2] the Hively majority opinion provides three different views demonstrating why discrimination based on sexual orientation is illegal under Title VII. However, the opinion includes an equally cogent dissent (in line with the Eleventh Circuit’s conflicting opinion[3]) and, therefore, this issue is one that is likely to be resolved by the Supreme Court at some point in the future. A brief overview of the decision and its potential implications for corporate decision-making is discussed below.

Largely ignoring the legislative history of Title VII,[4] the majority found that just because “Congress may not have anticipated a particular application of the law cannot stand in the way of the provisions of law that are on the books.”[5] In turn, the majority looked to the preceding 20 year history culminating in the Supreme Court’s 2015 decision in Obergefell v. Hodges,

135 S.Ct. 2584 (2015) ending state bans on same-sex couples’ marriages. In the pivotal quote from the opinion, Chief Judge Diane Wood stated:

It would require considerable calisthenics to remove the “sex” from “sexual orientation.”…But this court sits en banc to consider what the correct rule of law is now in light of the Supreme Court’s authoritative interpretations, not what someone thought it meant, one, ten, or twenty years ago. [Citations omitted.] The logic of the Supreme Court’s decisions, as well as the common-sense reality that it is actually impossible to discriminate on the basis of sexual orientation without discriminating on the basis of sex, persuade us that the time has come to overrule our previous cases that have endeavored to find and observe that line.

In light of this finding, the majority’s opinion relies heavily on recent decisions to justify and contextualize its interpretation of Title VII’s protections for discrimination in the workplace.

On the other hand, in a concurring opinion, Judge Posner takes a pragmatic approach to Title VII, finding that evolving opinions and the “sexual revolution of the 2000s” require that courts not be held to be “obedient servants of the 88th Congress…”, noting that “[a]s society progresses, so must the courts.” [6]

In another interesting take, Judge Flaum’s concurrence turns on the finding that “[f]undamental to the definition of homosexuality is the sexual attraction of individuals of the ‘same sex.’” Thus, discriminating against Hively as a woman attracted to another woman is inextricably linked to her sex.[7]

Finally, the dissent by Judge Sykes is equally compelling. Her argument is simple. Title VII does not define discrimination based on sexual orientation, and there are various opinions distinguishing between the concepts of “sex” and “sexual orientation.” If there is to be protection for an employee’s sexual orientation in federal law, the solution for the dissenters is to pass a statute confirming same.

All four opinions provide a window into future jurisprudence in employment discrimination law. While it’s unlikely any progress will be made in the near future on a federal statute codifying protections for LGBTQ employees, a court could easily take three distinctly different approaches to further bolstering LGBTQ workplace protections. While a plain and narrow reading of the statute may disfavor these methods, it could prove to be a minefield in light of developments in state law, and likely most importantly, popular opinion on protecting LGBTQ workers.[8]

In light of the tide of public opinion, as well as the potential for media backlash (especially on social media) in response to incidents of LGBTQ employment discrimination, companies would be best served by not banking on Judge Sykes’ well-reasoned but unpopular opinion winning out in the Supreme Court. Although the Supreme Court once again has a conservative tilt given the confirmation of Justice Neil Gorsuch, a Supreme Court decision overturning Hively could result in the public outcry needed for the federal legislative push demanded by Judge Sykes. Therefore, to the extent companies have not revised their policies to date, it may be advisable to implement LGBTQ workplace protections. Strengthening workplace rights and protections for LGBTQ workers not only benefits these workers, but helps avoid any potential legal exposure.

[1] Hively v. Ivy Tech Community College of Indiana, No. 15-1720 (7th Cir. April 4, 2017).
[2] Mark Hamblett, “Second Circuit Wrangles with Workplace Discrimination Question,” New York Journal, Jan. 20, 2017, http://www.newyorklawjournal.com/id=1202777310509/Second-Circuit-Wrangles-With-Workplace-Discrimination-Question?slreturn=20170307173302.
[3] Evans v. Georgia Regional Hospital, et al, No. 15-15234 (11th Cir. March 10, 2017): http://media.ca11.uscourts.gov/opinions/pub/files/201515234.pdf.
[4] Hively, supra, No. 15-1720 at 8 (“In our view, however, it is simply too difficult to draw a reliable inference from these truncated legislative initiatives to rest our opinion on them.”).
[5] Hively, supra, No. 15-1720 at 9-10 (citing Oncale v. Sundowner Offshore Services, Inc., 523 U.S. 75, 79-80 (1998)).
[6] Hively, supra, No. 15-1720 at 34.
[7] Hively, supra, No. 15-1720 at 40.
[8] Lydia Wheeler, “Poll: Seven in 10 support LGBT nondiscrimination laws,” The Hill, July 1, 2015, http://thehill.com/regulation/246683-poll-7-in-10-americans-support-lgbt-nondiscrimination-laws.

Prospective Employees Must Show Actual Harm From Failure to Properly Disclose Background Checks

Consent to a background check seems to be a part of any employment application these days, whether the job sought is with a large corporation or the corner deli. Employers gain a measure of protection from conducting background checks on prospective employees. They are useful for verifying that the prospective employee has been honest about their educational achievements and past employment, and identifying those prospective employees that may carry a risk of theft or workplace violence.

However, courts have seen a recent wave of litigation over the sufficiency of the employer’s disclosure of the background check and the prospective employee’s consent to same. The Fair Credit Reporting Act (FCRA) requires that the employer’s intent to obtain a background check be disclosed conspicuously, in a dedicated, stand-alone document:

[A]n employer or prospective employer cannot “procure, or cause a consumer report to be procured, for employment purposes with respect to any consumer, unless:

  1. a clear and conspicuous disclosure has been made in writing to the consumer at any time…before the report is procured or caused to be procured, in a document that consists solely of the disclosure, that a consumer report may be obtained for employment purposes; and
  2. the consumer has authorized in writing…the procurement of the report by that person.

In re Michaels Stores, Inc., 2017 U.S. Dist. LEXIS 9310, *10-11 (D.N.J. Jan. 24, 2017) (citing 15 U.S.C. § 1681b(b)(2)(A)).

This FCRA disclosure requirement is known as the “stand-alone disclosure requirement,” and it has been the subject of a number of recent opinions. The most recent of those is Vera v. Mondelez Global LLC, 2017 U.S. Dist. LEXIS 38328 (N.D. Ill. Mar. 17, 2017). Plaintiff Johnny Vera applied online for a job with Mondelez, an international manufacturer of food products that are marketed under a variety of brand names. As part of the application process, the website displayed a statement related to the general topic of background checks (the Statement). Vera was required to scroll down the webpage in order to read the Statement in its entirety. The Statement provided information about requesting a background check, and included an authorization for “all companies, credit agencies, educational institutions, persons, government agencies, criminal and civil courts, and former employers to release information they have about me and release them from any liability for doing so.”

In filing a putative class action lawsuit against Mondelez, Vera did not allege that the Statement failed to disclose the fact that Mondelez sought a background check as part of his employment application, nor that Vera denied Mondelez permission to conduct a background check. Instead, Vera alleged that the Statement violated FCRA’s “stand-alone disclosure requirement” because the Statement contained more information than just a disclosure that Mondelez intended to procure a consumer report about Vera.

In seeking to dismiss the putative class action, Mondelez argued that the Court did not have subject matter jurisdiction because Vera failed to allege an injury-in fact. In analyzing and ultimately accepting Mondelez’s argument, the Court drew heavily from the recent U.S. Supreme Court opinion in Spokeo, Inc. v. Robins, 136 S. Ct. 1540 (2016). Spokeo involved a FCRA provision that obligates consumer reporting agencies to follow certain procedures when collecting and reporting background and credit information about individuals. The Supreme Court noted that the clear intent of the provision was to decrease the risk of disseminating false information. Id. at 1550. The Supreme Court also noted, however, that an agency’s failure to follow the procedures may result in no harm to the consumer where the information provided was entirely accurate. Id. Accordingly, the Supreme Court held that violation of the FCRA provision, alone, was insufficient to establish constitutional harm. Id.

In Vera, the plaintiff never alleged he was deprived of information to which he was entitled under the FCRA. The pleadings were also devoid of any allegation that the receipt of such information implicated a fundamental right. The Court further noted, to the extent the FCRA establishes privacy right protections that implicate a fundamental right, such was not implicated here, as Vera admitted that he gave Mondelez permission to investigate his private information. Vera, 2017 U.S. Dist. LEXIS at *8-9. As a result, the Court concluded that the “stand-alone disclosure requirement” was akin to the FCRA provision at issue in Spokeo. Id. “A failure to comply with the procedures might cause the statutorily identified harm, i.e. inaccurate and unauthorized reporting…[b]ut a procedural violation will not necessarily cause that harm, so the procedural violation by itself is not an injury in fact.” Id. at *10. The Court proceeded to dismiss Vera’s lawsuit on the basis that it did not have subject matter jurisdiction. Id. at *11.

As noted above, the Vera opinion is not an isolated one. Several federal courts have had the opportunity to analyze whether harm is presumed from a violation of the “stand-alone disclosure requirement.” The majority appear to be in consensus in finding that the “stand-alone disclosure requirement” is procedural in nature, not substantive, and that any claimant must accordingly show harm from violation of the statute. See In re Michaels Stores, Inc., 2017 U.S. Dist. LEXIS 9310 (D.N.J. Jan. 24, 2017); Fields v. Beverly Health & Rehab. Servs., 2017 U.S. Dist. LEXIS 29771 (D. Minn. Mar. 1, 2017); Lee v. Hertz Corp., 2016 U.S. Dist. LEXIS 166911 (N.D. Cal. Dec. 2, 2016); Landrum v. Blackbird Enters., LLC, 2016 U.S. Dist. LEXIS 143044 (S.D. Tex. Oct. 3, 2016). But see Hargrett v. Amazon. Com DEDC, LLC, 2017 U.S. Dist. LEXIS 17236 (M.D. Fla. Jan. 30, 2017) (addressing an alleged violation of the “stand-alone disclosure requirement,” and finding that injury-in-fact may exist solely by virtue of the statute creating legal rights).

Employers should be careful to ensure that their application documents meet the disclosure requirements under the FCRA. While any lawsuit that may result from the failure to comply may ultimately be dismissed, it is costly and time consuming to defend against a potential class action complaint alleging violation of the “stand-alone disclosure requirement.”

Insurers’ Antitrust Exemption in Crosshairs Again as Part of Potential Health Care Overhaul

Just when you thought the health insurance legal and regulatory landscape couldn’t get any more interesting, along comes the Competitive Health Insurance Reform Act of 2017 (the Act). The Act removes a longstanding antitrust exemption and places health insurers back under federal antitrust scrutiny. The House recently passed the Act overwhelmingly (416 – 7), and the Senate’s Judiciary Committee is now weighing it.

The Act amends the 1945 McCarran-Ferguson Act, which provides that federal antitrust laws, such as the Sherman Act and Clayton Act, do not apply to the “business of insurance.” McCarran-Ferguson allows states to regulate insurance, as state regulation of insurance was commonplace for much of American history. In 1944, however, the Supreme Court decided United States v. South-Eastern Underwriters Association, 322 U.S. 533 (1944), in which it determined that insurance was “commerce among the states,” making it subject to the Sherman Act. In response, Congress passed the McCarran-Ferguson Act, which was designed to legislatively repeal South-Eastern Underwriters and restore state prominence in insurance regulation.

Despite the history of state regulation of insurance, and the prompt nature of the McCarran-Ferguson Act’s passage after the Supreme Court’s decision in South-Eastern Underwriters, the insurance exemption from federal antitrust laws has been widely criticized.  Democrats have long supported a full repeal of McCarran-Ferguson with respect to all insurance, including health insurance. For instance, in the aftermath of Hurricane Katrina, perceived abuses by insurers led to calls by lawmakers to repeal the antitrust exemption. More recently, in 2010, a similar bill to repeal the exemption specific to health insurers stalled in the Senate after passing easily in the House.

The much-publicized focus on health insurance in recent years has again caused a reconsideration of the insurance antitrust exemption. The proposed Competitive Health Insurance Reform Act would prohibit price fixing, bid rigging and market allocation, which – according to the Act’s proponents – would unlock greater competition in the health insurance marketplace. This time, there is reason to believe that attempts to repeal the antitrust exemption may be different than prior unsuccessful attempts. While Democrats have long favored repeal, Republicans are also now behind the effort. The GOP sees repeal as part of the broader health insurance overhaul and hopes the potential increases in competition will lead to lower prices, increased choice and greater innovation in the health insurance industry. The White House also supports the Act, as Trump Administration advisers have stated they would recommend signing the Act into law if presented in its current form.

Keep your eye on this issue, as it may slip through the cracks in the news due to the flurry of activity related to health insurance and the Trump Administration, generally. If passed, health insurers would require additional compliance focus, as antitrust issues involving price fixing, bid rigging and market allocation have been outside health insurers’ wheelhouse for some time.

Trump Administration Continues to Indicate Tide Change Away from Support of the CFPB

As previously reported on this blog[1], President Trump’s issuance of an Executive Order and the subsequent introduction of bills seeking to eliminate the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) signaled a dramatic shift from the Obama Administration’s support of the CFPB, which was expected to continue under Clinton.

Further evidence of this new administration’s shift came on March 3, when the Trump Administration asked for permission to file an amicus brief in the case pending before the D.C. Circuit, which may have a significant impact on the current structure of the CFPB. It will also decide whether Director Richard Cordray will remain at the helm through the remainder of his term, which is set to expire in July 2018. The case, PHH Corporation, et al v. CFPB, involves a mortgage servicer, PHH Corporation, and seeks to overturn a $109 million judgment entered against it by the CFPB.[2] Notably, this increased judgment was imposed by CFPB Director Cordray on appeal, upon review of an administrative law judge’s smaller penalty. In October 2016, a divided D.C. Circuit panel ruled in favor of PHH Corporation and gave the president authority to terminate the CFPB director at will, rather than for cause, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The D.C. Circuit subsequently granted the CFPB’s petition for hearing en banc and vacated the panel’s decision. While the Obama Administration supported the CFPB’s petition for rehearing, many questioned whether the amicus brief filed by the Department of Justice under the Trump Administration would change course and question the CFPB’s current structure.

The brief, which was filed on March 17, 2017, states that review by the full D.C. Circuit is warranted because of the panel’s flawed analysis of the constitutionality of the CFPB’s current structure. The brief argues that the structure of the CFPB violates the U.S. Constitution’s separation of powers, not because of its impact on individual liberty, as stated by the panel, but rather because it impedes the president’s executive power. The Department of Justice did, however, agree with the panel’s conclusion that the remedy for the constitutional violation was to sever the provision limiting the president’s authority to remove the CFPB Director, rather than declare the Bureau unconstitutional. The en banc hearing is scheduled for May 24, 2017.

While the Trump Administration’s amicus brief, which questions the constitutionality of the current structure, demonstrates a shift from the prior administration’s support for the Bureau, the CFPB has the support of many state attorneys general. On January 23, 2017, 16 state attorneys general filed a motion to intervene in the Bureau’s petition for rehearing en banc. While the motion to intervene was denied, foreclosing the opportunity for the attorneys general to appeal an adverse decision by the D.C. Circuit, the attorneys general may, nonetheless, have powerful enforcement tools at their disposal. Under Dodd-Frank, state attorneys general have authority to bring civil actions to enforce Dodd-Frank’s regulations against entities within their jurisdiction.[3] While timely notice to the Bureau is required prior to filing a civil action to provide the Bureau with the opportunity to intervene in the action, the Act does not appear to permit the Bureau to veto an action brought by a state attorney general thereby creating a potential “work around” in the event of a scaled-back CFPB under the Trump Administration.[4]

[1] http://www.c-suiteriskreport.com/2017/03/under-trump-administration-dodd-frank-and-the-cfpb-continue-to-face-challenges/
[2] Case No. 15-1177 (D.C. Cir. 2016).
[3] 12 U.S.C. § 5552.
[4] Melanie Brody, Stephanie C. Robinson, and Francis L. Doorley, “Consumer Financial Services Cos., Prepare for a New Dynamic,” Law360.com Mar. 6, 2017). Avail. at: https://www.law360.com/articles/892620/consumer-financial-services-cos-prepare-for-new-dynamic

Rolls-Royce Plc Motors Away from Prosecution by Paying Authorities £671m in Connection with Bribery and Corruption Offences

After a four year investigation by the UK’s Serious Fraud Office (“SFO”) into car and engine manufacturer Rolls-Royce, a UK Court approved a Deferred Prosecution Agreement (“DPA”) in January 2017.[1]  The investigation focused on bribes Rolls-Royce paid to secure valuable export contracts in various markets, including China, Brazil and Indonesia.  Although the DPA allows Rolls-Royce to avoid prosecution, the company will have to pay £671 million (approximately US $800 million) to UK, US and Brazilian authorities in order to settle its bribery and corruption offences.

After the DPA was approved, SFO director David Green explained, “I think it shows very clearly that the SFO has teeth and that the SFO will not go away.”

This is only the third DPA approved by a UK Court and is by far the largest. Before approving the agreement, the Court was required to address two issues: (1) whether the DPA was in the interest of justice; and (2) were its terms fair, reasonable and proportionate?  The Court’s positive determination of both issues will be the source of much analysis by contentious regulatory lawyers.  However the case should be of interest to the D&O insurance community, as well.   For Rolls-Royce, further investigations into individuals in connection with the case continue.  In this regard the judge noted the involvement of “senior management and, on the face of it, controlling minds of the company.”

As a result of the Rolls-Royce investigation, some points for insurers to consider include:

  1. It is settled law in England & Wales that fines and penalties are not insurable losses. However, DPAs do not prevent ancillary or subsequent investigations into individuals (indeed they may trigger them), and so Insured Persons will, in these circumstances, expect their company’s D&O policy to respond to any Defence/Investigation costs they incur as a result of the investigation.
  2. SFO investigations and DPAs can also be the trigger for parallel or subsequent civil action against individuals. Here, damages/settlement sums, as well as the costs of defending the cases could trigger D&O insurance cover (subject to relevant policy terms, conditions and exclusions).
  3. The Rolls-Royce DPA and preceding investigation shows the SFO has the appetite, but more critically, the funding to maintain large scale investigations. The SFO’s track record of high-value/high-profile investigation has been ‘mixed’ ( its troubled and later aborted action against high-profile entrepreneurs, the Tchenguiz brothers being an obvious low point), which has led some UK commentators to question if its willingness to take on expensive and highly publicized cases might wane.  After the Rolls-Royce decision, however, its director sent a positive message that such was definitely not the case.  For insurers this could signal a desire by authorities to hold more, and more high-profile individuals, as well as companies, to account.  We might reasonably expect more DPAs, and therefore, an increase in related D&O claims activity to follow.  In anticipation of this development, insurers might want to review policy wordings to consider, for example, Investigation Costs sub-limit and excess provisions, exclusions for fraud or deliberate misconduct, and whether the cost of internal investigations before SFO involvement (perhaps more prevalent in the financial sector since the introduction of new UK whistleblowing rules in 2016) would also be covered.

[1] Visit https://www.sfo.gov.uk/cases/rolls-royce-plc/ for a copy of the Deferred Prosecution Agreement, the Deferred Prosecution Agreement – Statement of Facts, and the U.K. Court’s decision approving the Deferred Prosecution Agreement in this case.

Under Trump Administration, Dodd-Frank and the CFPB Continue to Face Challenges

The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank, was enacted in 2010 in response to the financial crisis. Through Dodd-Frank, the Consumer Financial Protection Bureau (the CFPB) was created. The CFPB has the authority to pursue actions against financial institutions for unfair or deceptive practices. For instance, it was the CFPB that brought an action against Wells Fargo for opening accounts without their clients’ consent, which resulted in a $100 million fine against Wells Fargo.[1]  The CFPB contends that it has obtained $11.7 billion in relief to consumers from its enforcement actions.

Despite protecting consumers, Dodd-Frank and the CFPB are not without their critics, and continue to face challenges from the different branches of government. On February 3, 2017, President Trump commented: “we expect to be cutting a lot out of Dodd-Frank.”[2] That same day, he issued an Executive Order, only a page and a half long in length, which provides that his administration will regulate the U.S. financial system consistent with certain principles of regulation, known as the “Core Principles.”[3]  These Core Principles reportedly include: empowering Americans to make independent financial decisions; fostering economic growth and vibrant financial markets through more rigorous regulatory impact analysis; making regulation efficient, effective, and appropriately tailored; and rationalizing the federal financial regulatory framework.  The Executive Order also mandates that, within 120 days of the Order (or by June 3, 2017), the Secretary of the Treasury must consult with the heads of the member agencies of the Financial Stability Oversight Council and report back to the President. The report must advise how existing laws promote the Core Principles, what actions currently are being taken in support of them, and identify what laws inhibit them. A few weeks after the Executive Order was issued, on February 14, 2017, bills were introduced in the House (H.R. 1031) and Senate (S. 370) to eliminate the CFPB.

The CFPB’s structure is also under review by the courts. Last year, a federal appellate court found that the CFPB was unconstitutionally structured because, as an independent agency headed by a single director, it departs from “settled historical practice”.[4]  Specifically, independent agencies historically have been headed by multiple commissioners, directors, or board members. This multi-member structure provides a critical check on one’s power, which reduces the risk of arbitrary decision-making and helps protect individual liberty. The federal appellate court found that the CFPB is headed by a single director who has more unilateral authority than any other officer in the three branches of government, other than the President. Furthermore, the CFPB director is only removable for cause. In fact, not even the President can remove the CFPB director under the applicable statute. As such, the federal appellate court held that the CFPB was unconstitutionally structured, and remedied this violation by severing the for-cause removal provision in the statute. The court also determined that the CFPB should operate as an executive agency (as opposed to an independent agency), which would permit the President to supervise, direct, and remove the CFPB director at any time. However, on February 16, 2017, this ruling was vacated when the appellate court granted CFPB’s petition for a rehearing en banc. Oral argument for the rehearing en banc is set for May 24, 2017.

The recent challenges to Dodd-Frank and the CFPB have been the subject of recent media attention and public scrutiny, raising questions about the future of the Act and agency. One thing seems certain, though, Dodd-Frank and the CFPB will not be completely eliminated, or even changed, without a fight. As one article aptly recognized: “[i]t has taken seven years to put in place the regulatory strictures imposed on Wall Street… They won’t be removed fast or easily.”[5]

[1] Laurence Arnold and Elizabeth Dexheimer, “Trump’s Shot to Defang Dodd-Frank Consumer Bureau: QuickTake Q&A,” Bloomberg.com (Feb. 16, 2017). Avail. at: https://www.bloomberg.com/news/articles/2017-02-17/trump-s-shot-to-defang-dodd-frank-consumer-bureau-quicktake-q-a
[2] Remarks by President Trump in Strategy and Policy Forum. The White House, Office of the Press Secretary. (Feb. 3, 2017). Avail. at: https://www.whitehouse.gov/the-press-office/2017/02/03/remarks-president-trump-strategy-and-policy-forum
[3]Presidential Executive Order on Core Principles for Regulating the United States Financial System. The White House, Office of the Press Secretary. (Feb. 3, 2017). Avail. at: https://www.whitehouse.gov/the-press-office/2017/02/03/presidential-executive-order-core-principles-regulating-united-states
[4] PHH Corporation, et al v. CFPB, Case No. 15-1177 (D.C. Cir. 2016).
[5] Robert Schmidt, Jesse Hamilton, and Elizabeth Dexheimer, “Dodd-Frank’s Tentacles Go Deep. They Won’t Be Cut Fast or Easily,” Bloomberg.com (Feb. 6, 2017). Avail. at: https://www.bloomberg.com/politics/articles/2017-02-06/dodd-frank-s-tentacles-go-deep-they-won-t-be-cut-fast-or-easily

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