Nationwide Biweekly Administration, Inc., an Ohio corporation, Plaintiff-Appellant,
v.
Jan Lynn Owen, in her official capacity as Commissioner of the Department of Business Oversight for the State of California, Defendant-Appellee. Loan Payment Administration LLC; Daniel Lipsky; Nationwide Biweekly Administration, Inc., Plaintiffs-Appellants,
v.
John F. Hubanks, Deputy District Attorney, Monterey County District Attorney's Office, in his official capacity; Andres H. Perez, Deputy District Attorney, Marin County District Attorney's Office, in his official capacity; Monterey County District Attorney's Office, a County agency; Marin County District Attorney's Office, a County agency, Defendants-Appellees.
Argued
and Submitted April 17, 2017 San Francisco, California
Appeal
from the United States District Court for the Northern
District of California D.C. Nos. 5:14-cv-05166-LHK,
5:14-cv-04420-LHK Lucy H. Koh, District Judge, Presiding
COUNSEL
Benjamin M. Flowers (argued), Jones Day, Columbus, Ohio, for
Plaintiff-Appellant Nationwide Biweekley Administration, Inc.
Amanda
R. Parker (argued), Jones Day, Cleveland, Ohio; Bruce E. H.
Johnson, Davis Wright Tremaine LLP, Seattle, Washington;
Thomas R. Burke, Nicolas A. Jampol, and Diana Palacios, Davis
Wright Tremaine LLP, San Francisco, California; for
Plaintiffs-Appellants Loan Payment Administration LLC, Daniel
Lipsky, and Nationwide Biweekly Administration, Inc.
Lucy
F. Wang (argued), Assistant Attorney General; Joyce E. Hee,
Supervising Deputy Attorney General; Diane S. Shaw, Senior
Assistant Attorney General; Xavier Becerra, Attorney General;
Office of the Attorney General, San Francisco, California;
for Defendant-Appellee Jan Lynn Owen.
Brian
Charles Case (argued), Deputy County Counsel, Office of
County Counsel, County of Marin, San Rafael, California;
William M. Litt, Deputy County Counsel; Charles J. McKee,
County Counsel; Office of County Counsel, County of Monterey,
Salinas, California; for Defendants-Appellees John F.
Hubanks, Andres H. Perez, Monterey County District
Attorney's Office, and Marin County District
Attorney's Office.
Before: Stephen Reinhardt and Marsha S. Berzon, Circuit
Judges, and Ann D. Montgomery, [*] District Judge.
SUMMARY
[**]
Civil
Rights
The
panel reversed the district court's orders dismissing two
related actions pursuant to Younger v. Harris, 401
U.S. 37 (1971), affirmed the district court's order
denying a preliminary injunction in appeal No. 15-16253, and
vacated the district court's order denying a preliminary
injunction in appeal No. 15-16220, and remanded.
In
appeal No. 15-16253, Plaintiff Nationwide Biweekly
Administration, an administrator of biweekly mortgage loan
repayment programs, sought a preliminary injunction against
Monterey and Marin County district attorneys to preclude
enforcement of California statutes, California Business &
Professions Code § 14701(a) and 14702, which required
Nationwide to disclose in its mail solicitations to
homeowners that it lacked authorization from lenders.
Nationwide alleged that enforcement of the statutes would
violate its First Amendment rights. In 15-16220, Loan Payment
Administration, a subsidiary of Nationwide, sought to enjoin
the enforcement of Cal. Fin. Code § 12200, et seq. (the
"Prorater Law"), which required that it obtain a
prorater license in order to operate in California.
Plaintiffs alleged that limiting prorater licenses to
California corporations violated the Dormant Commerce Clause.
After
the district court denied the preliminary injunctions in each
case and while the appeals from the denials were pending in
this court, defendants filed a joint enforcement suit in
California Superior Court against plaintiffs. The district
court subsequently dismissed both cases under Younger v.
Harris, 401 U.S. 37 (1971), and plaintiffs filed new
notices of appeals from the dismissals in each case.
The
panel first held that the district court erred by abstaining
under Younger because the cases had proceeded beyond
the "embryonic stage" in the district court before
the corresponding state cases were filed. The panel stated
that 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.
Turning
to the merits of the preliminary injunction orders, the panel
held that Nationwide was unlikely to succeed on its claim
that the First Amendment precluded California from requiring
it to make certain truthful disclosures in its mail
solicitations. The panel held that the required disclosures
are meant to protect against consumer confusion, and are
therefore permissible under Zauderer v. Office of
Disciplinary Counsel of Supreme Court of Ohio, 471 U.S.
626, 651 (1985). The panel therefore affirmed the district
court's order denying a preliminary injunction in appeal
No. 15-16253.
The
panel held that Nationwide was likely to succeed on its claim
that the Dormant Commerce Clause precludes California from
making in-state incorporation a prerequisite of licensure to
engage in interstate commerce. The panel held that this form
of discrimination between in-state and out-of-state economic
interests was incompatible with a functioning national
economy, and the prospect of each corporation being required
to create a subsidiary in each state was precisely the sort
of "Balkanization" that the Dormant Commerce Clause
exists to prevent. The panel vacated the district court's
order denying the preliminary injunction in 15-16220 and
remanded both cases for further proceedings.
Dissenting,
Judge Montgomery disagreed with the majority's conclusion
that the first element of Younger abstention-ongoing
state proceedings-was not satisfied in the two cases. Judge
Montgomery stated that 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 that the cases remained
in an embryonic stage.
OPINION
REINHARDT, Circuit Judge
In
these cases, we reaffirm the obligation of the federal courts
to exercise their jurisdiction in the absence of a valid
justification for not doing so. Specifically, we find that
the cases had proceeded beyond the "embryonic
stage" in the District Court before the corresponding
state cases were filed, and therefore abstention under
Younger v. Harris, 401 U.S. 37 (1971), was
inappropriate.
Turning
to the merits of the preliminary injunction motions in the
cases, we conclude that Nationwide is unlikely to succeed on
its claim that the First Amendment precludes California from
requiring it to make certain truthful disclosures in its mail
solicitations. The required disclosures are meant to protect
against consumer confusion, and are therefore permissible
under Zauderer v. Office of Disciplinary Counsel of
Supreme Court of Ohio, 471 U.S. 626, 651 (1985). The
First Amendment does not generally protect corporations from
being required to tell prospective customers the truth.
However,
Nationwide is likely to succeed on its claim that the Dormant
Commerce Clause precludes California from making in-state
incorporation a prerequisite of licensure to engage in
interstate commerce. This form of discrimination between
in-state and out-of-state economic interests is incompatible
with a functioning national economy, and the prospect of each
corporation being required to create a subsidiary in each
state is precisely the sort of "Balkanization" that
the Dormant Commerce Clause exists to prevent.[1]
BACKGROUND
I.
Nationwide's Business Model
Nationwide
(which is incorporated in Ohio) and Loan Payment, as its
subsidiary, advertise a product they call "biweekly
interest savings" to homeowners with mortgages. Under
this program, Nationwide debits half of a customer's
monthly mortgage bill from his or her account every two
weeks, and then sends payments to the lender on a monthly
basis. Because months are slightly longer than four weeks,
the effect of this is that the customer pays more on his
mortgage each year than he would under a traditional monthly
payment plan (approximately the equivalent of one extra
monthly payment each year, or an 8% increase in yearly
payments).
The
portion of this extra payment that is sent to the lender goes
to paying down the principal on the loan, which means that
the mortgage is paid off faster than it otherwise would be.
As a result, the customer pays less in total interest over
the course of the loan. Nationwide characterizes this
reduction in interest payments as "savings, " and
in fact states in one solicitation letter that it
"provide[s] a 100% SAVINGS GUARANTEE." However, the
effect of Nationwide's program is more accurately
understood as a reallocation of money across time: the
customer pays more in the present in order to pay less in the
future. In other words, Nationwide's calculation of the
customer's "savings" simply compares the
nominal total amount paid under the alternative payment plans
without accounting for the customer's "discount
rate"-that is, the extent to which having $10 today is
more valuable than having $10 a year from today.
In
effect, then, the product that Nationwide sells is a
refinancing transaction that converts a standard 30-year
mortgage into a slightly shorter mortgage. For instance, to
use an example Nationwide cites in its brief, it might
convert a 30-year mortgage into a 23.9-year mortgage. As
always happens when the term of a mortgage is reduced,
monthly payments increase and total interest payments
decrease-just as, taking the math to the extreme, a
"0-year mortgage" (that is, paying in cash)
involves the highest possible initial payment but zero
interest costs.
In
exchange for providing what is effectively a refinancing
service, Nationwide charges its customers various fees.
According to the district attorneys, these include a
"debit fee" of $3.50 (charged once every two weeks)
as well as a "set-up" fee equal to half of the
customer's monthly mortgage payment.[2] Thus, despite
Nationwide's claims in its solicitation letters that
"[t]he savings gained from the biweekly program goes
entirely to you the customer and not to the lender, "
and that "[p]artnering with you the customer, and not
your lender, ensures that you receive 100% of the savings
benefit, " in fact a portion of each payment (and thus a
portion of the "savings benefit") goes to paying
Nationwide's debit fee and the entirety of the first
extra biweekly payment (half of the "savings
benefit" for the first year) goes to paying
Nationwide's "set-up fee."
Nationwide's
solicitation letters do not disclose the fee structure, and
in fact only mention fees in a fine-print disclaimer that
"savings is net of all fees." Even the longer
version of Nationwide's solicitation letter, which
includes an entire page of "commonly asked questions and
answers, " does not include any further details about
the fees and in fact claims that the "two extra biweekly
debits every year" are "directed 100% towards the
principal of the loan" without mentioning that the first
such extra debit is in fact kept by Nationwide as its
"set-up fee."
II.
The Investigation
On July
30, 2013, Nationwide received a letter from the Monterey
County District Attorney's Office. According to the
letter, the District Attorney's Offices for Marin and
Monterey Counties were "in receipt of numerous
complaints about the marketing and business practices of
Nationwide Bi-Weekly Administration, Inc."[3] The letter then
stated that the "complaints indicate a pattern of
deceptive business practices having an adverse impact on
California consumers." The letter went on to allege or
suggest that Nationwide was violating several California
laws, including (as relevant to this appeal), California
Business and Professions Code §§ 14701(a) and
14702, and California Finance Code § 12200.
The
first provision prohibits:
includ[ing] the name, trade name, logo, or tagline of a
lender in a written solicitation for financial services
directed to a consumer who has obtained a loan from the
lender without the consent of the lender, unless the
solicitation clearly and conspicuously states that the person
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. This statement shall 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 name, trade
name, logo, or tagline in the solicitation, including on an
envelope or through an envelope window containing the
solicitation.
Cal. Bus. & Prof. Code § 14701(a).
The
second provision prohibits
includ[ing] a consumer's loan number or loan amount,
whether or not publicly available, in a solicitation for
services or products without the consent of the consumer,
unless the solicitation clearly and conspicuously states,
when applicable, that the person is not sponsored by or
affiliated with the lender and that the solicitation is not
authorized by the lender, and states that the consumer's
loan information was not provided to that person by that
lender. This statement shall be made in close proximity to,
and in the same or larger font as, the first and the most
prominent use or uses of the consumer's loan information
in the solicitation, including on an envelope or through an
envelope window containing the solicitation.
Id. § 14702. With regard to both these
provisions, the district attorneys accused Nationwide of
including lenders' names and the consumers' loan
numbers and loan amounts in its solicitations without the
required disclosures.
The
third provision prohibits (in relevant part) "acting as
a prorater . . . without first obtaining a license from the
commissioner." Cal. Fin. Code § 12200. A
"prorater" is defined as "a person who, for
compensation, engages in whole or in part in the business of
receiving money or evidences thereof for the purpose of
distributing the money or evidences thereof among creditors
in payment or partial payment of the obligations of the
debtor." Id. § 12002.1. The district
attorneys' letter indicated that "Nationwide may be
in violation" of the prohibition by acting as a prorater
without a license. However, a license to engage in this
activity is available to a corporation only if the
corporation is "organized under the laws of this State
for that purpose." Id. § 12200.1. Thus,
the statute requires that corporations seeking a California
prorater license be both (1) incorporated in California and
(2) organized for the purpose of offering prorating services.
Over
the ensuing months, Nationwide provided documents to the
district attorneys and met with them twice. The negotiations
broke down, and on October 1, 2014, the Monterey County
District Attorney emailed Nationwide's attorneys that
"Nationwide and Mr. Lipsky have had ample opportunity to
meet and communicate with us about their defenses and
explanations, " and that accordingly the district
attorneys were "done with the games." The district
attorneys then asked Nationwide's attorneys if they were
"still authorized to accept service of process on behalf
of Mr. Lipsky and Nationwide."
Three
weeks later, on October 21, 2014, the Commissioner (who had
been notified of Nationwide's activities by the district
attorneys) sent a letter to Nationwide's counsel
"notify[ing] Nationwide that an investigation is
currently underway by the Department's Enforcement
Division regarding possible unlicensed business activity by
Nationwide in California."
III.
The Federal Proceedings
On
October 2, 2014-the day after receiving the email from the
district attorneys regarding service of process- Nationwide
filed suit in the Northern District of California seeking
declaratory and injunctive relief to prevent the district
attorneys from enforcing California Business &
Professions Code §§ 14701(a) and 14702 against
Nationwide. According to the complaint, enforcement of the
statutes would violate Nationwide's First Amendment
rights and, in the alternative, Nationwide qualified for a
state-law exemption from the statutes.[4]
On
November 21, 2014-one month after receiving the
Commissioner's letter-Nationwide filed another federal
complaint, also in the Northern District of California,
seeking injunctive and declaratory relief to prevent the
Commissioner from enforcing California Financial Code §
12200 against Nationwide. The complaint alleged that limiting
prorater licenses to California corporations violates the
Dormant Commerce Clause.[5]
In both
cases (which were assigned to the same district judge),
Nationwide filed motions for preliminary injunctions on the
day the complaints were filed. The details of the procedural
history of each case then diverged slightly, though each case
involved the same general steps: the filing of various
motions to dismiss; the briefing of the motions for
preliminary injunctions and non-Younger-related
motions to dismiss; the denial of the preliminary
injunctions; the appeal of those denials; and then dismissal
under Younger after the state case was
filed.[6]
A.
The First Amendment Case
On
October 22, 2014-three weeks after the complaint in the First
Amendment case was filed-the district attorneys filed a
motion to dismiss based on a deficiency in service of
process. The parties reached an agreement regarding service
(in ...