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Financial Services Law Blog Legal updates, news, and commentary from the attorneys of Baker Sterchi Cowden & Rice LLC

Swift Litigation Ensues Following Equifax Data Hack

September 29, 2017 | Megan Stumph-Turner

Almost immediately upon announcement of the Equifax data breach, the plaintiff’s bar speedily initiated class litigation on behalf of consumers for purported failures by Equifax to protect its customer data. For instance, just one day after the breach became public knowledge, a multi-billion dollar class action suit was filed in Portland, Oregon.

We can undoubtedly expect to see more class action litigation crop up, as it has consistently on a daily basis since announcement of the breach.  Nevertheless, the threat to Equifax does not stop at private litigation.  Several state attorneys general have already announced plans to investigate the breach.

While the timeframe permitted to disclose a data breach varies from state to state, most states do have a requirement that the data breach be disclosed by the soonest reasonable date possible.  The delay by Equifax in announcing the breach will certainly serve as the basis for many state-level investigations and penalties.  It is reported that the breach occurred as early as May 2017, was discovered by Equifax in July 2017, but was not reported until September 7.

Several state attorneys general, including:  Tom Miller, Iowa; Derek Schmidt, Kansas; Joshua Hawley, Missouri; and Douglas Peterson, Nebraska, have joined in a letter to Equifax expressing their concerns with the manner in which Equifax has handled the breach, thus far.  Those concerns include many having to do with customer service and accessibility to information.

In particular, though, the state attorneys general have taken issue with Equifax reportedly requiring consumers to enter into mandatory arbitration agreements or pay fees for credit monitoring services that are otherwise available for free to the public.  The letter states, “The fact that Equifax’s own conduct created the need for these services demands that they be offered to consumers without tying the offer to complicated terms of service that may require them to forego certain rights,” and “We remain concerned that Equifax continues to market its fee-based services to consumers affected by its data breach.”

The letter in its entirety is available here.

In excess of 143 million consumers’ personal information may have been compromised, and a software flaw is reported to be the cause.  The compromised information includes names, dates of birth, addresses, social security numbers, credit card numbers, and even driver’s license numbers.  Experts report that the number of affected consumers will likely increase as time passes.

Eighth Circuit grants Union Pacific $75 million in Tax Relief

August 17, 2017 | Megan Stumph-Turner

Earlier this month, the Eighth Circuit Court of Appeals overturned the lower court’s decision in a case that involved a dispute over whether the Railroad Retirement Tax Act (RRTA) requires a railroad to pay taxes upon issuing stock as compensation to employees.

In an opinion mirroring, and even explicitly referencing, the textualist sentiment of Justice Gorsuch’s opinion in Hensen v. Santander, the Eight Circuit addressed the parties’ respective positions as to what the words “money” and “compensation” mean in the context of the RRTA. While the federal government argued that “money” has a broad and sometimes intangible meaning, Union Pacific maintained that “money” must refer to a “medium of exchange” – i.e., something tangible and of value that may be given in exchange for goods or services.  The Eighth Circuit found Union Pacific’s reading of the text to be more compelling than the government’s.

In its discussion, the Court further distinguished the RRTA from FICA, which includes a more all-encompassing definition for compensation subject to taxation.  The Court explained that, since the RRTA and FICA’s predecessor were drafted during the same time period, any difference or distinction between each law’s definition of compensation must have been intentional.

It is certainly worth noting that the Eighth Circuit referenced and rejected a recent holding by the Seventh Circuit in Wisconsin Cent Holding v. United States that stock may be considered “money remuneration” that is tantamount to cash, reasoning that “one cannot pay for produce at the local grocery store with stock.” 

The Eighth Circuit also reversed the lower court’s decision concerning ratification payments made pursuant to a union’s collective bargaining agreements, because those payments were not made pursuant to “employment” of the individual by Union Pacific. 

With that, the Eighth Circuit completely reversed the summary judgment rulings previously entered in favor of the United States and against Union Pacific, thus entitling Union Pacific to a $75 million refund for taxes paid over the course of 10 years on stock compensation and ratification payments.

The full text of the Eight Circuit’s opinion is available here.

New CFPB Rule Prohibits Consumer Waiver of Class Action Litigation

July 16, 2017 | Megan Stumph-Turner

In an effort to afford consumers with greater accessibility to the courtroom, the Consumer Financial Protection Bureau (the “CFPB”) has enacted a new rule that, while it does not ban arbitration clauses outright, does substantially limit a financial institution’s right to mandatory arbitration provisions. Specifically, the new rule prohibits financial institutions and consumers from contracting to waive the consumer’s right to join in class action lawsuits with other consumers against that entity.

The arbitration rule was preceded by a CFPB study, spanning several years, of the prevalence and impact of arbitration clauses in consumer financial contracts. One of the chief concerns of the CFPB is the plain ignorance of consumers with respect to arbitration clauses contained within consumer contracts.  According to the study, more than half of credit card and checking account agreements contain mandatory arbitration provisions. Yet, 3 out of 4 of consumers who entered into agreements with such arbitration clauses were not aware that they had done so. 

CFPB Director Richard Cordray, in his public statement regarding the new rule, further justified the rule on the basis that class action lawsuits are more effective in curbing unsavory lending and servicing practices than arbitration, as the penalties and damages imposed in class action litigation vastly exceed those assessed in arbitration. 

In addition to restricting arbitration provisions, the new rule requires financial institutions to report the results of arbitration to the Bureau so that the results may be assessed for fairness and effectiveness.  It is important to note that the rule only applies to new contracts between consumers and financial institutions, and not those already in effect.

Predictably, commentators and critics have already observed that the new arbitration rule truly stands to benefit the plaintiff’s class action bar, rather than the consumers being represented in class action litigation.  Some also view the arbitration rule as an unjust infringement of the freedom to contract with no rational basis under the law.  Legal challenges to the new arbitration rule in the coming months are unquestionably imminent.  The new arbitration rule may be found here.  

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About Financial Services Law Blog

The BSCR Financial Services Law Blog explores current events, litigation trends, regulations, and hot topics in the financial services industry.  This blog will inform readers of issues affecting a wide range of financial services, including mortgage lending, auto finance, and credit card/retail transactions. Learn more about the editor, Megan Stumph,  and our Financial Services practice.

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