Ninth Circuit Finds ‘Truthful Disclosure’ Rule Constitutional

SAN FRANCISCO (CN) — Laws requiring truthful disclosure are not unconstitutional forced speech, the Ninth Circuit ruled Tuesday, reversing and remanding dismissal of two cases against financial firms.

The appeals court also vacated the trial court’s denial of a preliminary injunction in Loan Payment Administration and its corporate parent Nationwide Biweekly Administration the Marin and Monterey County District Attorney’s Offices; and affirmed denial of an injunction in Nationwide Biweekly Administration v. California’s Department of Business Oversight.

Nationwide runs a program called “Interest Minimizer,” which operates by deducting biweekly payments from customer’s bank accounts and sending the payments to the lender on a monthly basis.

Because months are slightly longer than four weeks, the effect is that customers pay slightly more on their mortgages each year than they would under a traditional monthly payment plan.

When Marin and Monterey counties claimed that Nationwide’s solicitation letters violated state law by not disclosing that its payment program was not authorized by the lenders, Nationwide filed an injunction against enforcement of the law, calling such required disclosure unconstitutional forced speech.

Shortly thereafter, Loan Payment Administration sought an injunction against the requirement that it obtain a prorater license to operate in California, claiming that limiting the licenses to California companies violates the Dormant Commerce Clause.

U.S. district courts denied both injunctions, and Nationwide/LPA appealed and filed for joint enforcement in Superior Court. While that was being litigated, the district courts dismissed both cases, and Nationwide/LPA appealed the dismissals.

In reviewing the linked cases, the opinion by Ninth Circuit Judge Stephen Reinhardt was joined by Ninth Circuit Judge Marsha Berzon. U.S. District Judge Ann Montgomery, sitting by designation from the District of Minnesota, dissented.

Reinhardt and Berzon found that the First Amendment argument raised by Nationwide was not likely to succeed, so the injunction it filed was properly denied.

Reinhardt wrote that “despite complaining about the term ‘authorized,’ Nationwide admits in its brief that it already uses almost identical language: ‘At the bottom of every version of the Offer Letters, Nationwide states that it is ‘not affiliated, connected, or associated with, sponsored, or approved by the lender listed above,’ or equivalent language.’ Nationwide cannot credibly hold out this disclaimer as evidence that it is already providing potential customers with accurate information while also claiming that the required disclosures are misleading. We cannot discern any meaningful difference between not being ‘approved’ by a lender and not being ‘authorized’ by one that would make the former accurate and the latter misleading.”

The Dormant Commerce argument, however, was found to have merit. Article I, Section 8 of the Constitution authorizes Congress “to regulate Commerce with foreign Nations, and among the several States, and with Indian Tribes.” The Dormant Commerce Clause is an implied prohibition of state laws and regulations that interfere with or discriminate against interstate commerce.

Reinhardt wrote that the Dormant Commerce Clause is violated when state laws mandate “differential treatment of in-state and out-of-state economic interests that benefits the former and burdens the latter.” Because in California an in-state prorater corporation may obtain a license directly, while the out-of-state corporation must either incorporate in California or create a subsidiary incorporated in California, Reinhardt found that the statute discriminates against out-of-state economic interests. Therefore, the panel found that the injunction in this case was improperly denied.

In reversing dismissals in both cases, the majority relied upon the 1971 case Younger v. Harris, finding that the trial court erred by abstaining under Younger because the cases had proceeded beyond the “embryonic stage” in U.S. District Court before the appeal in state court. Because the district court had spent a substantial amount of time evaluating the merits of the cases in considering and denying Nationwide’s motions for preliminary injunctions, the panel reversed and remanded.

Judge Montgomery dissented, also citing Younger.

I respectfully dissent from the majority’s conclusion that the first element of Younger abstention — ongoing state proceedings — is not satisfied in the two cases before us. At the time the state case was filed, no proceedings of substance on the merits had taken place in either of the federal lawsuits, and those cases remained in an embryonic stage.”

She would have affirmed the judgment of the District Court.

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