InfoBytes Blog
Filter
Subscribe to our InfoBytes Blog weekly newsletter and other publications for news affecting the financial services industry.
California Appellate Court Enforces Email Agreement
On August 30, the California Court of Appeals for the Second Circuit held that a company was bound by the terms of an unexecuted agreement sent via email because it accepted the email offer through performance. DC Media Capital v. Imagine Fulfillment Services, No. B239081, 2013 WL 4665219 (Cal. Ct. App., Aug. 30, 2013). Notably, the court also found that a subsequent email exchange between the parties about modifying a contract term effectively amended the contract such that the company could be held liable for breach. We note that this decision is not certified for publication.
Federal District Court Grants FTC Request, Halts Online Payday Operation
On August 29, the U.S. District Court for the Northern District of Illinois ordered an online payday loan operation to cease business activities and freeze assets in response to a complaint and memorandum filed by the FTC on August 27. Federal Trade Commission v. Caprice Marketing, LLC, No. 13-cv-6072 (N. Dist. Ill. Aug. 29, 2013). The FTC alleges that the defendants obtained sensitive personal and financial information from consumers by falsely representing that such information would be used to match consumers with payday lenders but instead used the information to make unauthorized withdrawals from consumer accounts.
Tenth Circuit Asks Oklahoma Supreme Court to Decide Application of Internet Based Terms to Written Contract
On August 15, the U.S. Court of Appeals for the Tenth Circuit asked the Oklahoma Supreme Court to decide whether a written consumer contract for the sale of goods incorporates by reference a separate document entitled “Terms of Sale” available on the seller’s website, when the contract states that it is “subject to” the seller’s “Terms of Sale” but does not specifically reference the website. Walker v. BuildDirect.com Techs., Inc., No. 12-6261, slip op. (10th Cir. Aug. 15, 2013). In this case, the plaintiffs filed a putative class action over allegedly defective home building products they ordered from the seller by telephone and subsequently agreed to purchase by written contract. The seller moved to compel arbitration, arguing that the written contract for the sale of goods incorporated by reference the Terms of Sale provided on the seller’s website, which included an arbitration clause. The district court denied the motion to compel, holding that the contract was ambiguous and that it could not determine as a matter of law that the contract incorporated the Internet-based terms. On appeal, the court noted that, although Oklahoma courts have held that a written contract can incorporate an extrinsic document by reference, the state’s highest court has not set standards for incorporation by reference that would resolve this case, nor has it addressed a case similar to this one. Finding no precedent in Oklahoma state law, and that the question can be resolved on the undisputed facts presented, the appeals court certified the question to the Oklahoma Supreme Court.
New York Joins Ranks of State AGs Suing Internet Payday Lenders
On August 12, New York Attorney General (AG) Eric Schneiderman announced a lawsuit against payday lending firms and their owners for allegedly violating the state’s usury and licensed lender laws in connection with their issuing of personal loans over the Internet. The AG claims that the companies charged annual interest rates from 89% to more than 355% to thousands of New York consumers, which rates far exceed the 16% rate cap set by state law. The AG joins the FTC and other state attorneys general who have acted against some of these and other Internet lending companies. Federal and state authorities more generally have been ratcheting up their scrutiny of online lending, and the AG’s action follows an inquiry initiated last week by the New York Department of Financial Services concerning payday lending. The AG states that his investigation began last fall. He is seeking a court order prohibiting the companies and individuals from engaging in further illegal lending or enforcing existing usurious loan contracts, cancellation of all outstanding loans, restitution for borrowers of all interest collected above the legal limit of 16% interest, disgorgement of profits, and penalties of up to $5,000 per violation for deceptive acts and practices.
Senate Committee Expands Review of Virtual Currency Policies
On August 12, Senators Tom Carper (D-DE) and Tom Coburn (R-OK), the leaders of the Senate Committee on Homeland Security and Government Affairs, sent a letter to Secretary of Homeland Security Janet Napolitano regarding federal virtual currency policy. The committee reportedly sent similar letters to the DOJ, the Federal Reserve Board, the Treasury Department, the SEC, the CFTC, and the OMB. Citing a federal court’s recent holding that virtual currency Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans” “strategies” or “ongoing initiatives” regarding virtual currencies. This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system. For a review of those actions and other state and federal regulatory challenges facing emerging payment providers, please see a recent article by BuckleySandler attorney and Ian Spear.
August Beach Read Series: Growing Mobile Technology Impacts the Financial Services Industry
As the technology continues to grow and become a part of day-to-day life, smartphones and tablets are reshaping the delivery of financial services to consumers. The mobile device is quickly becoming a full-fledge platform for electronic financial services, especially for mobile payments.
The variety and number of mobile devices and service providers to support them has introduced new and different stakeholders – all of whom are competing with traditional financial institutions for dominance in the mobile commerce/mobile payment space. This new and rapidly evolving environment presents new and operational risks for consumers, payment providers, and the recipients of the payments. It will be vital to identify who has legal responsibility and liability for the various risks associated with payment platforms and payment transactions.
To learn more about the mobile technology issues impacting the financial services industry, please review some of our recent articles on the issue. In “Federal Regulators Issue Guidance on Social Media and Mobile Privacy” Ian Spear discussed the recent guidance and flexible guidelines issued by the FFIEC and FTC.
State, Federal Authorities Increase Scrutiny of Virtual Currencies, Emerging Payment Providers
On August 12, New York Department of Financial Services (NY DFS) Superintendent Benjamin Lawsky issued a notice of inquiry about the “appropriate regulatory guidelines that [the NY DFS] should put in place for virtual currencies.” The NY DFS notes the emergence of Bitcoin and other virtual currency as the catalyst for its inquiry, and the notice states that the NY DFS already has “conducted significant preliminary work.” That preliminary work includes 22 subpoenas the NY DFS reportedly issued last week to companies associated with Bitcoin.
The NY DFS is concerned that virtual currency exchangers may be engaging in money transmission as defined in New York. Under existing New York law, and the laws of a majority of other states, companies engaged in money transmission must obtain a license, post collateral, submit to periodic examinations, and comply with anti-money laundering laws. However, the NY DFS also suggests that regulating virtual currency under existing money transmission rules may not be the most beneficial approach. Instead, it is considering “new guidelines that are tailored to the unique characteristics of virtual currencies.” The NY DFS notice does not provide any timeline for further action on these issues.
Meanwhile, the U.S. Senate Committee on Homeland Security and Government Affairs is reviewing federal policy as it relates to virtual currencies. On August 12, the leaders of that committee, Senators Tom Carper (D-DE) and Tom Coburn (R-OK), sent a letter to Secretary of Homeland Security Janet Napolitano regarding federal virtual currency policy. The committee reportedly sent similar letters to the DOJ, the Federal Reserve Board, the Treasury Department, the SEC, the CFTC, and the OMB. Citing a federal court’s recent holding that Bitcoin is money or currency for the purpose of determining jurisdiction under the Securities Act of 1933, as well as other recent developments related to virtual currencies, the lawmakers seek information about (i) the agencies’ existing policies on virtual currencies, (ii) coordination among federal or state entities related to the treatment of virtual currencies, and (iii) “any plans,” “strategies,” or “ongoing initiatives” regarding virtual currencies. The letter specifically notes the importance of balancing the need to deal with “potential threats and risks . . . swiftly” with the goal of ensuring that “rash or uninformed actions don’t stifle a potentially valuable technology.”
This recent scrutiny of virtual currencies follows regulatory and enforcement actions taken earlier this year, including guidance issued by FinCEN and federal criminal charges against a digital currency issuer and money transfer system. For a review of those actions and other state and federal regulatory challenges facing emerging payment providers, please see a recent article by BuckleySandler attorney and Ian Spear.
CFPB Updates Remittance Rule Resources
On August 8, the CFPB released an updated small business guide for the remittance transfer rule it finalized last year and revised in May 2013. The updated guide summarizes the remittance rule and discusses the new requirements, which take effect on October 28, 2013. The CFPB also issued technical corrections to the May 2013 amendments, and released a video that provides an overview of the rule and the recent changes, as well as implementation guidance.
Federal District Court Holds Bitcoin is Money, SEC Can Pursue Bitcoin-Based Securities Charges
On August 6, the U.S. District Court for the Eastern District of Texas held that the court has subject matter jurisdiction over the SEC’s claims that a Texas man and his company defrauded investors in a Ponzi scheme involving Bitcoin. SEC v. Shavers, No. 13-416, 2013 WL 4028182 (E.D. Tex. Aug. 6, 2013). The SEC filed suit last month alleging that the man misled investors with false assurances about the investment opportunity in Bitcoin-denominated investments he offered and sold through the Internet, while actually using Bitcoin payments received from new investors to make purported interest payments and to cover investor withdrawals. In addressing subject matter jurisdiction, the court held that the institution’s investments meet the definition of investment contract, and are securities because, among other things, Bitcoin is within the definition of “money” for purposes of the rules governing investment contracts – Bitcoin can purchase goods or services, and can be exchanged for conventional government-backed currencies. Therefore, the court held that investors who provided Bitcoin investments provided “money,” and the court has jurisdiction to hear the case under the Securities Act of 1933 and the Exchange Act of 1934.
White House Outlines Potential Cybersecurity Incentives
On August 6, the White House released proposed incentives to drive participation in the cybersecurity program framework under development by the National Institute of Standards and Technology. Both the framework and the incentives were directed by an Executive Order (EO) issued earlier this year by President Obama. The administration notes that while some of the proposed incentives can be adopted soon after the voluntary framework is established, others will require legislative action. The policy options under consideration include, among others, (i) encouraging cybersecurity insurance, (ii) offering critical infrastructure grants, (iii) limiting liability of participating companies, (iv) streamlining regulations, and (v) providing public recognition.