May 27, 2022 - This Week at the Ninth

This Week at The Ninth: E-Scooters and Usury

This week, the Ninth Circuit examines whether a city’s collection of location data from electronic scooters violates the Fourth Amendment, and whether a consumer lender can circumvent state usury laws by making loans through a tribal intermediary.

SANCHEZ V. LADOT

The Court holds that a Los Angeles program regulating e-scooters does not violate the Fourth Amendment.

Panel: Judges Wardlaw, Hurwitz, and Rosenthal (S.D. Tex.), with Judge Hurwitz writing the opinion.

Key Highlight: “[T]he considerations animating the Court’s ‘narrow’ decision in Carpenter declining to apply the third-party doctrine are not present here. . . . Because the third-party doctrine squarely applies to Sanchez’s voluntary agreement to provide location data to the e-scooter operators, the collection of that data by LADOT is not a search, and does not violate the Fourth Amendment or the California Constitution”

Background: In 2018, the City of Los Angeles created a program to regulate rentable e-scooters from companies such as Bird, Lime, and Lyft. The purpose of this program was to keep e-scooters from cluttering the sidewalk and blocking street access. The program required companies to obtain permits from the Los Angeles Department of Transportation (“LADOT”). As part of the permit application, LADOT required e-scooter companies to share real-time location data for every scooter.

Plaintiff Justin Sanchez is a frequent e-scooter rider. He was concerned that location data from e-scooters would enable the City of Los Angeles to track individual riders, including their transportation history. He sued on the basis that LADOT’s permitting program—specifically, its regulations around location tracking—violated the Fourth Amendment, a similar provision of the California Constitution, and the California Electronic Communications Privacy Act (CalECPA). The district court granted LADOT’s motion to dismiss without leave to amend.

Result: The Ninth Circuit affirmed. First, the Court addressed standing. LADOT argued that Sanchez lacked standing because he alleged only a speculative injury—that the City might one day track e-scooter riders. Sanchez countered that simply collecting location data was a concrete injury for purposes of standing, and the Ninth Circuit agreed.

Turning to the merits, the panel next assessed whether LADOT’s collection of location data is a search under the Fourth Amendment. Following Supreme Court precedent, that analysis turns on whether LADOT’s e-scooter program violates “a subjective expectation of privacy that society recognizes as reasonable.” Kyllo v. United States, 533 U.S. 27, 33 (2001). The Ninth Circuit held that it does not because of the third-party doctrine. As the panel explained, individuals have no expectation of privacy when they voluntarily disclose information to third parties, such as banks and telephone companies. In Carpenter v. United States, 138 S. Ct. 2206 (2018), the Supreme Court held that government collection of cell site location information (“CSLI”) violated a reasonable expectation of privacy and that the third-party doctrine did not apply in that instance. But the Ninth Circuit distinguished Carpenter, explaining why the CSLI at issue there was different than the location data that an e-scooter rider voluntarily shares with scooter companies.

Next, the Court affirmed the district court’s dismissal of Sanchez’s CalECPA claim. CalECPA limits how the state handles “electronic device information.” It contains a citizen suit provision allowing private enforcement only in certain situations, i.e. when individuals are targeted by warrants that are inconsistent with CalECPA. Cal. Penal Code § 1546.4(c). The Court held that Sanchez could not sue under CalECPA. And finally, the Court affirmed the district court’s decision to dismiss without leave to amend, holding that no additional facts could cure the defects in Sanchez’s complaint.

CFPB V. CASHCALL, INC.

The Court holds that a consumer loan company was properly held liable for issuing loans that circumvented state usury and licensing laws, but remanded for further proceedings on the appropriate remedy.

Panel: Judges Owens, Nelson, and Miller, with Judge Miller writing the opinion.

Key Highlight: “[P]arties cannot circumvent limits on their ability to specify the governing law simply by structuring their agreement so that it has some nominal—but entirely artificial—relationship to the desired jurisdiction.”

Background: CashCall, Inc. makes high-interest consumer loans. Originally operating primarily in California, CashCall sought to expand to other states, but was concerned that those states’ usury laws would make its business unprofitable. To get around that problem, CashCall made an arrangement with Western Sky, a South Dakota LLC based on the Cheyenne River Sioux Reservation. CashCall would immediately purchase every loan Western Sky made. All economic benefits and risks passed to CashCall, which serviced the loans. None of Western Sky’s borrowers lived on the reservation, nor applied for loans on tribal land. Borrowers signed the loan agreements electronically on Western Sky’s website, which was hosted by CashCall’s servers in California. The loan agreements contained a choice of law provision designating Indian law, not the law of any state, as governing the loans.

The CFPB brought this enforcement action against CashCall and its CEO, alleging that they had engaged in “unfair, deceptive, or abusive” practices in violation of the Consumer Financial Protection Act. The district court found CashCall liable, concluding that the choice of law provision was unenforceable because CashCall was the true lender, and applied the law of the borrowers’ home states. It also concluded CashCall’s CEO could be individually liable because of his direct involvement with the scheme. After a bench trial, the district court concluded that CashCall’s violation was not knowing or reckless, and imposed a $10.3 million penalty, but declined to order restitution. The parties cross-appealed.

Result: The Ninth Circuit affirmed in part, vacated in part, and remanded for further proceedings. First, the Court rejected CashCall’s argument that the CFPB could not pursue enforcement because it was unconstitutionally structured. While the Supreme Court had held that CFPB’s structuring statute unconstitutionally limited the President’s power to remove the agency’s single director, both the complaint and the notice of appeal here were filed while the Bureau was headed by a lawfully appointed director.

As for CashCall’s liability, the Ninth Circuit rejected CashCall’s argument that tribal law (as opposed to state law) applied. Applying federal common law choice of law principles, the Court concluded that state law governed the loans. While choice of law provisions generally govern parties to a contract, the Court held that was not the case here because “the chosen [jurisdiction] has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties’ choice.” “In substance, all of the loan transactions at issue here were conducted by CashCall, not Western Sky.” And there was no “basis for finding a relationship between the Tribe and the transactions.”

The Court likewise rejected CashCall’s argument that CFPA liability for a deceptive practice cannot be predicated on a violation of state law. CFPA’s prohibition on unfair and deceptive practices “easily encompasses leading a consumer to believe that an invalid debt is actually a legally enforceable obligation,” the Court said. And it did not matter that the reason the debt was invalid was state law. Similar prohibitions in the Fair Debt Collection Practices Act apply to “attempts to collect a debt that state law has made invalid,” the Court reasoned. It also rejected CashCall’s argument that relying on state law in this context would create constitutional problems by federalizing usury laws—CashCall’s multi-jurisdictional scheme involved interstate commerce, a federal concern.

Turning to the issue of remedy, the Ninth Circuit held that Cashcall had not acted recklessly at first, because it had followed the advice of competent regulatory counsel. But starting in September 2013, the Court noted, regulatory counsel had advised CashCall that its scheme was likely unlawful. And while CashCall shut down new loans, it continued to collect on existing ones. Given those circumstances, the Ninth Circuit vacated the civil penalty and remanded with instructions for the district court to reassess recklessness—and thus potentially higher penalties—for the period starting in September 2013. CashCall’s CEO could be held individually liable for the same reason, the Court said: “continuing to collect loans after September 2013 was reckless.”

Finally, the Ninth Circuit vacated the district court’s order denying restitution because it rested on legal error. The district court had denied restitution because it found that CashCall had not acted in bad faith, borrowers had received the benefit of their bargain—loan proceeds—and because the CFPB had not established the amount of restitution that would be appropriate. But those were not appropriate grounds for denying restitution, the Ninth Circuit said. Scienter is not required for restitution, the Court explained. And whether borrowers received loan proceeds was irrelevant—restitution is appropriate under the CFPA where it achieves the statutory goals to protect consumer and promote transparency. And the amount of restitution could be (at least initially) determined by CashCall’s net revenues. The Court remanded for further proceedings on restitution as well.