Nationwide Biweekly Admin., Inc. v. Owen

873 F.3d 716

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.

Nos. 15-16220, 15-16253.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted April 17, 2017, San Francisco, California

Filed October 10, 2017

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.

Dissent by Judge Montgomery

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, 91 S.Ct. 746, 27 L.Ed.2d 669 (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, 105 S.Ct. 2265, 85 L.Ed.2d 652 (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....