Consumer Finance Law Blog : Washington D.C. Consumer Finance Lawyer & Attorney : Kelley Drye & Warren Law Firm : Financial Privacy & Security

A federal court in California recently sided with twenty-six state attorneys general and several objectors in rejecting a proposed class action settlement that called for Honda to provide over 175,000 Honda Civic Hybrid owners a coupon worth no more than $1,000 toward purchasing a new Honda vehicle. In True v. American Honda Motor Co., No. EDCV07-0287-VAP(OPX) (C.D. Cal. Feb. 26, 2010), the plaintiffs alleged that Honda used false and misleading advertisements regarding the fuel efficiency of its Honda Civic Hybrid to induce customers to pay $2,500 more for the Hybrid than for the comparably equipped standard-engine Honda Civic, even though the Hybrid gets only marginally better gas mileage. Under the proposed settlement, class members were to receive a DVD with tips on how to improve their gas mileage, an opportunity to receive a rebate on the future purchase of another Honda, and, for less than two percent of the class, an opportunity to make a claim for $100. The settlement also provided that Honda would not oppose class counsel’s motion for nearly $3 million in attorneys’ fees.

In an order entered on February 26, 2010, the court denied final approval of the settlement. Specifically, the court held that the proposed settlement’s award of a cash payment to only a select group of the class “creates the most significant obstacle to approval” of the settlement, and that the members of this sub-group were the only class members who would receive a true cash award in the settlement.

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In a unanimous decision Tuesday in Hertz v. Friend, -- U.S. --, No. 08-1107, 2010 WL 605601 (Feb. 23, 2010), the Supreme Court clarified the test federal courts should apply to determine a corporation’s citizenship for purposes of diversity jurisdiction, holding that corporations are citizens of the state of their “nerve center” – usually their corporate headquarters – not of any state where a plurality of their business activity occurs.

As explained in a recent Kelley Drye client advisory, the Hertz decision resolves years of uncertainty about how to determine a corporation’s “principal place of business” for purposes of diversity jurisdiction. Numerous circuits, including the Ninth Circuit, have applied the so-called “total activity” test, which assessed the amount of the corporation’s activity in each state and deemed the corporation a citizen of any state in which its activity was “significantly larger” or “substantially predominates” over its activity in other states. This test left many national companies, including Hertz, unable to remove state-court class actions to federal court in populous states such as California, where they are not headquartered but do a large amount of business. The Hertz decision rejects the “total activity” test and adopts a simpler test, applied in the Seventh Circuit, known as the “nerve center” test. Under this approach, a corporation’s “principal place of business” is “the place where a corporation’s officers direct, control, and coordinate the corporation’s activities… [which] should normally be the place where the corporation maintains its headquarters.”

The Court’s decision should be welcome news to corporate defendants, as it will provide greater certainty and predictability about where major litigation affecting multi-state businesses will be litigated, and is likely to limit the need for costly jurisdictional discovery in many cases going forward.

(Kelley Drye & Warren LLP Associate Joanna Baden-Mayer contributed to this post.)
 

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Major provisions of a new law related to credit and gift cards take effect today. The Credit CARD Act, which was signed by President Obama in May 2009, marked the culmination of several legislative efforts to reform certain practices of card issuers. The law provisions related to credit cards, discussed in this Kelley Drye client advisory, are comprehensive and include new restrictions and requirements related to, among other things, rates, fees, billing and payment practices, disclosures and marketing, as well as additional rules specific to young consumers and college students.

The Act directed the Federal Reserve to develop implementation guidance and requirements, which were finalized on January 12, 2010. While most credit card issuers have been working for several months to comply with the Act, the Fed rules provide further detailed guidance. For example, the rules outline factors issuers should consider when determining a consumer’s ability to repay.

Notably, the Fed rules impact Regulation Z and, therefore, do not relate to debit card overdraft fees. Those fees fall under Regulation E, which is subject to a separate ongoing rulemaking process.

Nor do the portions of the CARD Act that take effect today relate to gift cards. Another Fed rulemaking to provide guidance related to gift cards is underway. Those Fed rules should be finalized soon, and together with the gift card provisions of the Act will take effect in August 2010. We will keep you posted on further developments.
 

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Numerous class action suits have been brought over the past several years under the Telephone Consumer Protection Act (“TCPA”) against entities that fax unsolicited advertisements (so-called “blast faxes”) to individuals and businesses.  Companies facing such suits in turn have sought insurance coverage under their comprehensive general liability (“CGL”) policies for costs incurred defending TCPA suits, and for indemnification of any liability.

While coverage disputes in blast faxing cases have historically yielded mixed results, a series of recent rulings have tilted the scales in favor of policyholders.  For example, the Florida Supreme Court decided on January 28, 2010 in Penzer v. Transportation Ins. Co., No. SC08-2068, 2010 WL 308043, that a standard CGL policy provided coverage for a suit brought under TCPA for alleged blast fax activities.  While other recent decisions have yielded similar results, Penzer is significant because it held that the plain language of the insurance policy compels coverage.

Despite the holding in Penzer, insurers will likely use the lack of unanimity among courts, and the potential for inconsistent results in jurisdictions yet to address the issue, as a basis to deny claims going forward.  Policyholders would be well served to not take these denials at face value, but rather should demand the coverage to which they are entitled.

A client advisory prepared by Kelley Drye & Warren LLP’s Insurance Recovery Group summarizes recent coverage decisions regarding blast faxing, including the Penzer decision, and discusses the implications of those cases for policyholders.

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The recently filed case of First Bank v. Federal Insurance Company  reflects yet another financial services provider that was the subject of a data breach incident, and was forced into litigation with its insurers as a result. As detailed in our recent article, First Bank is not alone in having their insurance company deny the claim for coverage arising from the data breach. In this area of privacy and data security, anecdotally at least, it appears that many insurers are "underwriting at the point of claim" -- that is, denying coverage in the hope that the policyholder will abandon pursuit of the coverage.

However, you may be covered, even if you do not have a "cyber" or "data security" policy. In fact, the label or title on the policy matters little, as Federal had issued a policy impressively titled, “Cybersecurity by Chubb for Financial Institutions,” yet disclaimed coverage. That old standby -- Comprehensive General Liability (better known as "CGL") policies -- may well provide you with the coverage you need to defend litigation arising from a data breach.
 

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Recently, the United States Supreme Court, in its decision styled Andrew M. Cuomo v. The Clearing House Association, L.L.C., No. 08-453, reaffirmed that federal banking regulations do not pre-empt states from enforcing their own fair-lending laws against national banks.

This dispute arose following the New York State Attorney General’s attempt to investigate several banks’ residential real-estate lending practices in 2005. The Attorney General’s office had suspected discriminatory lending practices after reviewing reports that showed minority borrowers received a larger percentage of high-interest home loans than white borrowers. As part of that probe, the Attorney General sent letters to several national banks, in lieu of a subpoena, requesting that they provide certain non-public information regarding their mortgage lending practices. In response, the federal Office of the Comptroller of the Currency (“OCC,” the chartering authority and federal regulator of national banks) and the Clearing House Association (a banking trade group) sued to block the Attorney General’s investigation, claiming that an OCC regulation promulgated under the National Bank Act pre-empted any state regulation or enforcement against national banks.

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Last week , the Federal Trade Commission, jointly with other federal agencies that regulate financial institutions, released "frequently asked questions" designed to provide additional assistance to companies required to comply with new identity theft rules pursuant to the Fair and Accurate Credit Transactions Act ("FACTA") . 

Those rules were issued in November 2007. Under the regulations, financial institutions are required to develop and implement written programs to detect and respond to possible identity theft as indicated by certain "red flags." These newly required programs were to be in place on or before November 1, 2008.

The FAQs are the latest step in a number of efforts by the FTC and others to assist companies in complying with the new FACTA rules. For instance, in July 2008, the FTC launched an outreach program to explain the rules in greater detail, to clarify the types of institutions to which the rules apply, and to offer guidance as to how these institutions can comply. That outreach effort included an alert providing information relating to definitions and terms used in the rules, including the definitions of “financial institution,” “creditor,” “transaction account,” and “covered account.” In addition, the alert addressed five categories of “red flag” activities.

Financial institutions should continue to monitor for guidance from the federal agencies, and/or consult with counsel, regarding their compliance with the new FACTA rules.

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If your company collects customers’ personal data in the course of its business, be aware of the wave of class actions that have recently been filed arising out of data security breaches. Finkelstein Thompson, a DC-based law firm, over the past year has filed a series of class actions against businesses that have fallen victim to such data breaches.

One such suit, filed in the Northern District of Georgia, asserts claims against RBS WorldPay, Inc. for negligence, breach of implied contracts, and violation of state unfair trade law, after hackers allegedly gained access to the personal information of approximately 1.5 million RBS cardholders. In an incident apparently related to this security breach, Fox News reported -- citing FBI sources-- that thieves, using cloned ATM cards with the stolen data, withdrew $9 million from ATMs in a coordinated attack in 49 cities, including Atlanta, Chicago, New York, Montreal, Moscow, and Hong Kong. This incident has garnered considerable media attention and will likely result in similar suits being filed against RBS across the country as a result of the security breach.

While this sort of case is extremely difficult to sustain given the absence of actual harm, the litigation and reputational costs associated with them are significant for businesses targeted by this litigation, particularly given the resulting media attention. Therefore, be forewarned, and regularly evaluate your data collection, data use, and data maintenance procedures and infrastructure with both your IT personnel and legal counsel.

For further discussion of this case, see our recently published piece in the ABA “Secure Times” newsletter. And for a broader discussion of how other cases have addressed these types of claims, please see our article published in Andrews Litigation Reporter.

(Kelley Drye & Warren LLP Associate Veronica D. Jackson contributed to this post.)

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A number of class action lawsuits recently have been filed in California state court in San Diego County against a wide range of merchants as well as gift card issuers alleging, among other things, that the defendants have violated the California Civil Code by issuing gift cards that bear either an obscured expiration date, or an expiration date that is not as prominently displayed as is required under California state law. Section 1749.5 of the California Civil Code makes it unlawful to sell gift certificates or gift cards that contain an expiration date unless the expiration date appears in capital letters in at least 10-point font on the front of the gift card. So far retailers such as Saks, Staples, Borders, Visa, and American Express, among others, have been sued in separate class actions alleging violations of Section 1749.5, as well as the Business and Professions Code and the California Consumer Legal Remedies Act.

For example, in Michaelson v. Staples, Inc., Case No. 37-2009-00083487 (Cal. Super. Ct., San Diego Cty.), plaintiff alleges that an expiration date on a Staples gift card, mailed to the plaintiff as part of a promotion, was in less than 10-point font. Plaintiff alleges the card expired before he noticed the expiration date. In Robert Loiseau v. Visa U.S.A. Inc., Case No. 37-2009-00085443 (Cal. Super. Ct., San Diego Cty.), plaintiff alleges that a gift card, purchased for its face value, improperly contained an obscured expiration date, charged a processing fee, and required other allegedly unreasonable terms and conditions.

Gift cards are a tricky business when it comes to complying with the patchwork quilt of state-by-state regulations (as well as FTC oversight) over them. The permissibility of expiration dates, redemption in cash once a minimum balance has been reached, disclosures of terms and conditions, and escheatment of remaining balances are just some of the issues that businesses must confront and address. This new wave of lawsuits serves as a reminder to merchants and gift card issuers of the need to monitor state and federal regulations, as well as to periodically evaluate their gift card programs with counsel.

(Kelley Drye & Warren LLP Associate Elissa O. Tomanda contributed to this post.)

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