Nationwide Biweekly Administration, Inc. v. Owen

          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 ...