Ninth Circuit Claims California Licensing Law Violates Dormant Commerce Clause

Courts Appellate Licensing Ninth Circuit

On October 10, the U.S. Court of Appeals for the Ninth Circuit handed down an opinion concerning alleged violations of certain California statutes by an Ohio-based mortgage servicer (plaintiff). The panel held that the plaintiff is likely to prevail in its bid for a court order blocking the enforcement of the state’s financial code by certain California district attorneys because the law violates the Dormant Commerce Clause—a legal doctrine that prohibits states from unduly burdening interstate commerce. The defendants allege that the plaintiff violated Section 12200 of the California Financial Code, which requires a prorater—a person who is compensated for receiving monies from debtors and distributing the funds to creditors—to obtain a California prorater license and be incorporated in the state before conducting business on an interstate basis. The panel determined that “[t]his 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 . . . [what] the Dormant Commerce Clause exists to prevent.” Consequently, the panel vacated the district court’s order denying a preliminary injunction, and remanded for further proceedings.

The panel also affirmed the district court’s ruling that the plaintiff was required to disclose in its mail solicitations to homeowners that it “lacked authorization from lenders,” and opined that the plaintiff would most likely not prevail in its effort to challenge allegations that it violated sections of the California Business and Professions Code on a First Amendment basis. The First Amendment, the panel reasoned, “does not generally protect corporations from being required to tell prospective customers the truth.”

Finally, in a portion of the opinion in which one of the circuit judges dissented, the panel reversed a district court’s order dismissing both cases under Younger v. Harris “because the cases had proceeded beyond the ‘embryonic stage’ in the district court before the corresponding state cases were filed.” Judge Montgomery—who otherwise joined the opinion with respect to the Dormant Commerce Clause and First Amendment questions—argued that the district court's dismissal under Younger should have been upheld because “[b]oth cases arrived in federal court…as a preemptive strike by [the plaintiff] to enjoin state district attorneys from enforcing state statutes in state court.”