D.C. Circuit Court of Appeals Rejects Secondary Market Company’s Constitutional Challenge to Consumer Financial Protection Bureau

D.C. Circuit Court of Appeals Rejects Secondary Market Company’s Constitutional Challenge to Consumer Financial Protection Bureau

A federal appellate court has rejected a secondary market company’s constitutional challenge to the federal  Consumer Financial Protection Bureau’s authority to investigate the company.

The opinion of the U.S. Court of Appeals for the District of Columbia in Doe Co. v. Cordray, No. 17-5206 (D.C. Cir. Mar. 3, 2017) – decided with two judges in the majority, and one dissenting – is one of the latest developments in multiple fronts alleging that the actions or authority of the Consumer Financial Protection Bureau violate separation of powers doctrines or other principles set forth in the U.S. Constitution.

The unidentified company in January filed a lawsuit (John Doe Company v. Consumer Financial Protection Bureau, et al., Civil Docket No. 1:17-cv-00049-RC, U.S. Dist. Ct., District of Columbia) against the Consumer Financial Protection Bureau (CFPB) and its director, Richard Cordray, arguing that the CFPB’s set up was unconstitutional.

The company, which filed its papers under seal and sought to proceed under a pseudonym, said in its complaint that its lawsuit “is an action to prevent the Bureau from imposing irreparable harm on Plaintiff unless and until the Bureau is subject to the checks and balances required by the U.S. Constitution’s separation of powers . . . .”

The company identified itself as a Philippines-based business that “purchases income streams from individuals who are entitled to receive periodic payments from a pension or similar source and who wish to sell a portion of the income stream derived from those payments.”

The CFPB in November, 2016, issued a civil investigative demand (CID) to look into possible violations of consumer protection laws.  In response, the company “did not wait for the [CFPB] to seek enforcement of the CID [by obtaining a court order], but instead filed a pre-enforcement suit in district court challenging the constitutionality of the [CFPB’s] structure and seeking to halt any and all” CFPB actions that might be “adverse” to the company.  The company sought to enjoin enforcement of the CID and requested an order forbidding disclosure of the company’s identity.  The district court rejected the request for a preliminary injunction, on the grounds that the company had not met its burden of showing either a likelihood of success or irreparable harm.  The company then made a request for an emergency injunction pending appeal.

In the appeals court’s majority opinion, Judges Patricia Ann Millet and Robert L. Wilkins said the company did not show that it was entitled to the extraordinary remedy of preliminary injunctive relief.  Said the majority:

A preliminary injunction is ‘an extraordinary remedy that may only be awarded upon a clear showing that the [movant] is entitled to such relief.’ . . . .  ‘A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest.’  Because the Company seeks the exceptional remedy of an injunction pending appeal, the Company faces the difficult task of coming forward with evidence and argument showing that it is ‘likel[y]’ that the district court ‘abused its discretion’ in denying a preliminary injunction.

The two-judge majority said that the company’s only argument was based on a well-known but vacated opinion concerning the authority of the CFPB:

The Company’s sole argument regarding likelihood of success on the merits before this court and the district court has been to point to the now-vacated majority opinion in PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (D.C. Cir. 2016), vacated, reh’g en banc granted, No. 15-1177, 2017 U.S. App. LEXIS 2733 (D.C. Cir. Feb. 16, 2017).  But remember: the Company has to show not just that there is potentially persuasive authority for its legal position, but that the district court abused its discretion in not sufficiently crediting that showing in the balancing of equities that preliminary injunctive relief requires.

The appellate majority said that the arguments made by the company based on PHH were not enough for four reasons.

First, the PHH decision on which the Company relies has been vacated” and that, “even within that decision, panel members differed on the appropriateness or necessity of issuing the separation-of-powers ruling given predicate statutory issues in the case. . . .”  Said the majority: it could not be said, then, that the district court abused its discretion when it determined that the company could not simply point to the vacated majority opinion in PHH to “establish the likelihood of an identical constitutional ruling by the en banc court in PHH or the court in this case.”

Second, even if the PHH ruling were not vacated, the company was “not remotely in the same constitutional position” as the company challenging the CFPB’s authority in PHH where – after a “completed law enforcement proceeding” by the CFPB – there was an order to pay a $109 million fine.  In contrast to PHH – where the “majority opinion repeatedly emphasized its view of the Constitution’s assignment of ‘law enforcement’ authority to the Executive Branch” – in the present case, the company, “filed a pre-enforcement suit to stop a non-self-executing investigative demand for regulatory information.”  The majority said that the company had voiced “no objection here to the scope or content of the CID” and did not argue that the CID was beyond the CFPB’s statutory authority, but solely argued that “the Bureau’s single-Director structure is unconstitutional.”  The only injury complained of, said the majority, was “the harm occasioned by having to respond to a non-self-executing CID.”  Based on these facts, said the majority, the company “has to demonstrate that the action of merely requesting information from private entities subject to regulation is by itself exclusively confined to the Executive Branch, and thus that issuance of this CID by the Bureau violates the separation of powers” – and in that context, the majority said that the “company has utterly failed that task.”  In this regard, the majority said that “[t]o obtain an injunction pending appeal on the ground that the Bureau transgresses the separation of powers just by issuing a CID — just by investigating a regulated entity’s compliance with federal law — the Company would have to show that only the Executive Branch can demand information from regulated businesses or take such investigative steps.”

“Third, the Company’s argument that the alleged separation-of- powers violation requires that the Bureau be stopped in its tracks ignores traditional constraints on separation-of-powers remedies,” wrote the majority.  “Often in separation-of-powers cases, severance of the unconstitutional provision is the chosen remedy” – a remedy that “the now-vacated majority opinion in PHH” chose when it decided to sever “the Director’s for-cause removal provision, making him removable by the President at will” and allowing the CFPB to “continue its work apace. . . .”

Fourth, the majority said that “the Company’s prospects of success stumble in yet another respect: this court is not the proper forum for the Company to press its separation of powers claim” because the company failed to raise its constitutional argument within the context of an administrative enforcement proceeding.  In this situation, the majority said that the company can raise its arguments in the CFPB’s enforcement action.

The two-judge majority also said that the company had not established irreparable harm based on “unsubstantiated and conclusory assertions that its customers and employees will flee and its reputation will be materially harmed if word of the Bureau’s investigation gets out.”  Said the court majority: “Tellingly, the Company does not suggest that customers or employees defected after six state regulatory investigations, an adverse GAO report, and the ‘considerable negative publicity’ that has already surrounded the Company . . . .”  Accordingly, the district court thus did not abuse its discretion in finding that these “conclusory assertions of reputational and economic harm, unaccompanied by any relevant declarations, did not establish” irreparable injury – and, further, even if it had, economic injury alone would not necessarily constitute irreparable harm, “especially when it is nothing more than speculation about how third parties might respond to routine regulatory investigations.”

In addition, “[f]or those same reasons, the Company has failed to demonstrate why the district court abused its discretion in holding that its name need not be kept confidential in public court proceedings.”

The majority also said that “[g]iven the Company’s failure to establish a likelihood of success on the merits of its pre-enforcement challenge and irreparable harm, the balance of equities — especially when it comes to consumer protection — weighs against granting an injunction pending appeal.”

Judge Brett M. Kavanaugh dissented, saying that the the company has standing to challenge the constitutionality of the CFPB’s structure and need not wait for an enforcement action before raising the challenge.

The PHH opinion that was vacated and will be reheard en banc was called a landmark ruling and has been closely followed.  Other pending cases also have involved constitutional challenges to the CFPB structure or authority.

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