Client Alert

Financial Services Report, Winter 2006


In this issue:


Editor's Note

As lawyers, we envy business people their word choices. So we dedicate this issue to business jargon. To a business person, the entire universe is a verb-in-waiting. Let’s whiteboard that.

Do we occupy this space? We do. In fact, our mission statement is to occupy all spaces that aren’t blank.

Speaking of blank spaces, Congress was preoccupied this quarter with getting itself reelected, or not, so it never got around to enacting a national breach-notification law. Bills affecting data security and GSE reform were pushed into next term or may die. Apologists say Congress enacted regulatory relief, but there, the regulators relieved themselves; the regulated will still need Pepto-Bismol. Still, Congress found time to leave behind several small messes like the inaptly-named Talent Amendment. All of these we modularize.

In other news, we can thank Hewlett-Packard for making pretexting a verb, which we conjugate in these pages. The Supreme Court will take on “adverse action” in the Fair Credit Reporting Act. And as the High Court considers altering National Bank Act preemption landscape, Justice Scalia vexes: “What is a functionally regulated subsidiary of a depository institution?” As counsel for the bank clarified: “That is the concept as I understand it.” Maybe in our next issue we will have a solve.

Are we adding value yet? Stay focused. We will develop new skill sets together.

In the meantime, have a joyous holiday and optimize your New Year.

William L. Stern, Editor



MoFo Metrics

1 > Finland’s ranking, least corrupt countries in the world
20 > U.S.A.’s ranking, same list
27 >
Seats in the House of Representatives that switched to the new majority party
29 > Percentage of San Francisco electorate who voted for Arnold Schwarzenegger
9.5 > Population of Los Angeles County, in millions
9.5 >
Votes cast, in millions, for all Senate candidates in Florida, Montana, North Dakota and Texas
1 > Number of Americans, out of five, who have been notified of a data breach
63 >
Percentage of corporate security execs who don’t believe they can prevent a data breach
1 > Number of attorneys disbarred due to obsession over Pearl Jam




Beltway Report

Hello? Anyone Home?

Hate those pesky prerecorded telephone solicitations? So does the FTC. On October 4, the FTC announced it would begin aggressive enforcement against telemarketers of prerecorded voice messages—even where the called party has an established business relationship (“EBR”) with the caller. Compare this to the FCC’s telemarketing rule, which has an EBR exception. The FTC’s comment period expires December 18, 2006.

The full text of this article is available at:

Ahead of the Summons

Is Reliance the New Arbitration?

The typical consumer arbitration provision nowadays is usually accompanied by a “class action waiver” clause. These clauses provide that neither party to the agreement will have the right, either in court or in an arbitration proceeding, to participate in a class action, as either a class representative or class member, or act as a “private Attorney General.” But arbitration clauses and “class action waivers” are under attack. The First Circuit and at least five states (California, New Jersey, West Virginia, Illinois, and Missouri) have declined to enforce them. (See “Arbitration Report.”) So, even with the majority of jurisdictions still enforcing class action waivers, arbitration has lost some luster, as least for companies who do business in multiple states.

The full text of this article is available at:

Privacy Report

Feds Fold

This is an election year, as if anyone needed reminding, so Congress was unable to pass much-needed national legislation governing consumer notification about breaches of security involving the disclosure of customers’ personal information. Currently, two-thirds of the states have breach-notification laws but they are a nightmare, making compliance next to impossible. Once the new Congress convenes, the debate will reemerge over a wide range of proposals.

The full text of this article is available at:


Preemption Report

Stormy Watters

The U.S. Supreme Court held oral argument on November 29 in Watters v. Wachovia Bank. The issue is whether the National Bank Act and OCC regulations preempt state regulation of operating subsidiaries of national banks as the Second, Fourth, Sixth, and Ninth Circuits have held. Recall, certiorari had been granted on two issues: (1) Is the interpretation that 12 C.F.R. § 7.4006 preempts Michigan’s law purporting to regulate mortgage lending by national bank operating subsidiaries entitled to deference under Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984)? (2) Does the OCC regulation violate the 10th Amendment by treating op-subs the same as their national bank parents for purposes of federal preemption?

The full text of this article is available at:


Operations Report

Miller Reversed

You can exhale. On November 20, a California appellate court reversed a judgment against Bank of America in Miller v. Bank of America. The trial court had held that a bank may not cover debits owing for overdrafts and overdraft fees against credits held in checking accounts that include direct-deposited Social Security and other public benefit payments. Bankers everywhere had reason for concern because compliance—short of flat out prohibiting direct deposits of government benefit payments—would be nearly impossible.

The full text of this article is available at:


Arbitration Report

Illinois and Missouri Jump on the Bandwagon

Joining California and New Jersey, the Illinois Supreme Court ruled that the class action waiver included in a cell phone service agreement is substantively unconscionable if it does not inform the consumer of the arbitration costs and provides no cost-effective mechanism for a judicial or arbitration remedy. (Kinkel v. Cingular Wireless LLC, __N.E.2d__, 2006 WL 2828664 (Ill. Oct. 5, 2006).) The Court affirmed the decision of the appellate court to sever the classwide arbitration ban and order the case to arbitration, leaving it up to the arbitrator to decide whether classwide arbitration was appropriate.

A month later, a Missouri district court found that a provision calling for the payment of arbitration fees by a consumer was essentially a fee-shifting provision that would improperly insulate companies from small damages claims. (Doerhoff v. General Growth Properties, Inc., 2006 WL 3210502 (W.D. Mo. Nov. 6, 2006).)

For more information, contact Nancy Thomas at


Mortgage Report

The Latest in "Firm Offer" News

The Firm serves as coordinating counsel to the Mortgage Bankers Association in the so-called “firm offer of credit” class actions, so each issue we track the developing case law under the FCRA relating to this latest Pet Rock of the class action bar.

The full text of this article is available at:

Creditor's Report

To Sue Or Not To Sue, The Threat Is The Question

In Brown v. Card Service Center, 464 F.3d 450 (3rd Cir. 2006), the Third Circuit held that it can be deceptive under the FDCPA (Fair Debt Collection Practices Act) for a collection agency to send a letter to a debtor threatening to sue on the debt, when the collection agency has no actual intention of filing suit. The letter in question demanded payment within five days, or the matter “could” be referred to an attorney for further action. Applying the “least sophisticated debtor” test, the Court reversed the district court’s dismissal of the debtor’s FDCPA action after concluding that the collection letter could be found to be “deceptive” or “misleading” under the FDCPA. Moral of the story: if you threaten legal action when collecting a debt covered by the FDCPA, mean what you say.

Put Down That Phone

In Clark v. Capital Credit & Collection Services, Inc., 460 F.3d 1162 (9th Cir. 2006), the Ninth Circuit addressed a tricky question for collection agencies and attorneys under the FDCPA. Clark involved the collection of a debt incurred for medical bills. The debtors had previously sent a letter disputing the debt and demanding that collection telephone calls cease. Months later, the debtor called the collection agency’s attorney for information about the debt; the attorney passed the message to the collection agency, which returned the debtor’s call—which allegedly drove the debtor to therapy. Applying the “least sophisticated debtor” test, the Ninth Circuit held, in a split decision, that the collection agency’s attorney could have returned the debtor’s call, but that it might have been a violation of the FDCPA for the collection agency itself to return the call. The Court held that consent for the attorney to call cannot necessarily be imputed to the attorney’s principal, the collection agency.

For more information, contact Eric Olson at  

California Report

What's New in 17-Two?

Stuff happens. That’s why we compile our annual summary of the key developments in California’s unfair competition and false advertising laws, (Cal. Bus. & Prof. Code §§ 17200 and 17500). This year, a lot of stuff happened.

If you would like a copy of the paper, contact Will Stern at

Does Prop 64 Require Reliance?

In our Fall issue, we reported on two sweeping pro-defense rulings under California’s Unfair Competition Law, Bus. & Prof. Code § 17200 (“UCL”). Both cases held that Proposition 64, approved by the voters in 2004, required proof of reliance on the alleged actionable practice or misstatement. (See Pfizer, Inc. v. Superior Court, 141 Cal.App.4th 290 (2006); In re Tobacco II Cases, 142 Cal.App.4th 891 (2006).) The stakes are huge, because reliance ensures that only persons actually harmed get compensated, and it makes class actions more difficult to certify.

It’s too early to wave the foam finger just yet. Since then, the California Supreme Court granted review of both cases, meaning that Pfizer and Tobacco II Cases can no longer be relied upon as precedent. It designated Tobacco II Cases as the lead, which means that the issue of whether “reliance” is a necessary element of a UCL claim risks getting swamped by anti-tobacco rhetoric. The Supreme Court will also decide shortly whether to expedite the briefing. If they don’t, expect to wait until early 2008 at the earliest.

The federal courts are filling the vacuum, but they are split. Two district courts have held that reliance is required to bring a UCL claim. (Laster v. T-Mobile USA, Inc., 407 F.Supp. 2d 1181 (S.D. Cal. 2005); Brown v. Bank of America, ___ F.Supp.2d ___ (D. Mass. 2006), 2006 WL 2989031).) But two others disagree. (Anunziato v. eMachines, Inc., 402 F.Supp. 2d 1133 (C.D. Cal. 2005); Brothers v. Hewlett-Packard Co., ___ F. Supp. 2d ___, 2006 WL 3093685 (N.D. Cal. 2006).) Until the California Supreme Court straightens this out, financial institutions sued under California’s UCL should continue to make the “reliance” argument.

For more information, or for a copy of the article “The Reliance Element In State Consumer-Fraud Class Actions,” to be published in the Review of Banking and Financial Services, contact Will Stern at

Reverse Mortgages

A California new state law, SB 1609, prohibits lenders and brokers from requiring a borrower to purchase an annuity as a condition of obtaining a reverse mortgage loan, applies the foreign-language translation requirement to reverse mortgage transactions, and requires borrowers to obtain counseling prior to obtaining a reverse mortgage.



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