Opinion
No. 2:16-cv-02141-JAM-KJN
11-07-2016
CALIFORNIA PAWNBROKERS ASSOCIATION, INC., a California Non-Profit Corporation, on behalf of itself and its members, Plaintiff, v. ASHTON B. CARTER, in his official capacity as Secretary of Defense; and THE UNITED STATES DEPARTMENT OF DEFENSE, Defendants.
ORDER DENYING PLAINTIFF'S MOTION FOR PRELIMINARY INJUNCTION
This matter is before the Court on California Pawnbrokers Association's ("Plaintiff") Motion for Preliminary Injunction against Ashton B. Carter and the United States Department of Defense (collectively "Defendants"). A hearing on this Motion took place on November 1, 2016. For the reasons set forth below, Plaintiff's Motion for Preliminary Injunction is denied. /// ///
I. FACTUAL ALLEGATIONS AND PROCEDURAL BACKGROUND
The Department of Defense ("Department") is responsible for promulgating regulations to implement the Military Lending Act ("MLA"). The purpose of the MLA is to protect members of the military and their dependents from the financial pitfalls related to consumer credit and ensure military readiness. See Memorandum Opinion, Huntco Pawn Holdings, LLC v. U.S. Department of Defense, Civil Action No. 16-cv-1433 (CKK) (D.D.C. Oct. 3, 2016) at 3 ("Huntco"). The MLA achieves this by limiting the interest-rates that lenders can impose on loans and requiring lenders to fulfill certain other terms and conditions when extending credit to covered borrowers. See Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 80 Fed. Reg. 43560, 43560 (Jul. 22, 2015) (to be codified at 32 C.F.R. pt. 232) ("2015 Rule"). Prior to 2015, the Department limited the definition of consumer credit to payday loans, vehicle title loans, and refund anticipation loans. Opp. at 3. The Department also created a safe harbor by which creditors could avoid the MLA's restrictions and penalties if they obtained a disclosure statement from the applicant stating that the applicant was not a covered borrower ("self-certification"). Id. Use of the self-certification was entirely optional and creditors were free to use other means to determine whether an applicant would be covered under the MLA, though other means would not qualify for the safe harbor. Id.
In 2015, after notice-and-comment rulemaking, the Department changed its regulations, expanding the definition of consumer credit and changing the terms of the safe harbor provision. 2015 Rule, 80 Fed. Reg. 43560. "Consumer credit" now includes all credit currently "subject to the disclosure requirements of the Truth in Lending Act [("TILA")], codified in Regulation Z." Id.; 32 C.F.R. § 232.3(f)(1). With this expansion, the MLA, for the first time, covers pawn transactions. Mot. at 4; see Truth in Lending, 61 Fed. Reg. 14952 (Apr. 4, 1996) (to be codified at 12 C.F.R. § 226) (amending official staff interpretation to include pawn transactions). The new safe harbor "permits a creditor to legally conclusively determine whether a consumer is a covered borrower by using information obtained either: (i) Directly or indirectly from the MLA Database or (ii) in a consumer report from a nationwide consumer reporting agency or a reseller who provides such a consumer report." 2015 Rule, 80 Fed. Reg. 43560, 43577; 32 C.F.R. § 232.5(b). "A search of the Department's database requires the entry of the consumer's last name, date of birth, and Social Security number." 32 C.F.R. § 232.5(b)(2)(i)(A).
CAPA filed the present suit seeking to stay and ultimately enjoin enforcement of the sections of the 2015 Rule that include pawn transactions and pawnbrokers in their definitions of consumer credit and creditor. Mot. at 1. Alternatively, CAPA seeks to stay the new safe harbor provision and restore the borrowers' self-certification from the prior rule. Id. CAPA filed an Ex Parte Application for Temporary Restraining Order on September 16, 2016, to stop the 2015 Rule from going into effect on October 3rd. ECF No. 11. This Court denied the Ex Parte Motion and set the matter for hearing to determine whether the Court should issue a preliminary injunction. ECF No. 15. On October 12, 2016, the District Court for the District of Columbia made a final ruling on the merits in Huntco, a case raising similar challenges to the 2015 Rule. See Order Granting Joint Motion to Convert Opinion and Order into Final Judgment, Huntco Pawn Holdings, LLC v. U.S. Department of Defense, Civil Action No. 16-cv-1433 (CKK) (D.D.C. Oct. 3, 2016). This Court ordered supplemental briefing with respect to Defendants' Motion to Change Venue (not at issue here) and the preclusive effect, if any, of the Huntco decision on this matter. ECF 21.
The Court and the parties lack sufficient information about the parties to determine res judicata at this time.
II. OPINION
A. Legal Standard
A preliminary injunction is "an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief." Winter v. Natural Resources Defense Counsel, Inc., 555 U.S. 7, 22 (2008). To obtain a preliminary injunction, a plaintiff must demonstrate that: (1) it is likely to succeed on the merits, (2) it is likely to suffer irreparable harm in the absence of preliminary relief, (3) the balance of equities tips in its favor, and (4) an injunction is in the public interest. Boardman v. Pacific Seafood Grp., 822 F.3d 1011, 1020 (9th Cir. 2016) (quoting Winter, 555 U.S. at 20).
B. Analysis
Applying the Winter factors to the present matter, the Court finds that CAPA has not shown it is likely to succeed on the merits or that it is likely to suffer irreparable harm. Given that these conclusions warrant denial of Plaintiff's motion, the Court need not and will not also address the balance of the equities and public interest factors.
1. Likelihood of Success On the Merits
CAPA's Complaint contains four separate counts each of which CAPA argues is likely to succeed on the merits. Mot. at 17-18.
a. CAPA Is Not Likely to Succeed On the Merits of Count 1
Under Count 1, CAPA claims that the 2015 Rule's "inclusion of non-resource pawn loans within the scope of the MLA is arbitrary, capricious and an abuse of discretion not in accordance with law." Compl. at 19.
Preliminarily the Court finds that CAPA may challenge the 2015 Rule based on the inclusion of pawn transactions because other pawnbrokers groups raised the issue during the notice-and-comment rulemaking process. See Natural Resources Defense Council, Inc. v. U.S. EPA, 824 F.2d 1146, 1151 (D.C. Cir. 1987) ("This court has excused the exhaustion requirements for a particular issue when the agency has in fact considered the issue."); 2015 Rule, 80 Fed. Reg. 43560, 43562.
As for judicial review of agency action, federal courts first ask whether Congress has directly spoken to the precise question at issue. Providence Yakima Med. Ctr. v. Sebelius, 611 F.3d 1181, 1189 (9th Cir. 2010) (quoting Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 842 (1984)). "[I]f the statute is silent or ambiguous with respect to the specific issue, the question for the court is whether the agency's answer is based on a permissible construction of the statute." Chevron, 467 U.S. at 843. "If Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation. Such legislative regulations are given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute." Id. at 843-44. The Ninth Circuit has further explained:
An arbitrary and capricious challenge requires us to adhere to a narrow scope of review, wherein we are not to substitute our judgment for that of the agency. The agency, however, is required to examine the relevant data and articulate a satisfactory explanation for its action including a rational connection between the facts found and the choices made and we in turn must review that explanation, considering whether the decision was based on a consideration of the relevant factors and whether there has been a clear error of judgment. A rule is arbitrary and capricious if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.Providence Yakima Med. Ctr., 611 F.3d at 1190 (internal citations and quotation marks omitted).
Congress delegated the authority to promulgate regulations to effectuate the Military Lending Act to the Department of Defense. See 2015 Rule, 80 Fed. Reg. 43560, 43567. This authority includes the authority to define "consumer credit" and therefore the MLA's application to different lenders. See 10 U.S.C. § 987(i)(6).
CAPA argues that the inclusion of nonrecourse pawn loans within the scope of the MLA is arbitrary and capricious. CAPA points out that the 2015 Rule "includes nonrecourse pawn transactions within the scope of the MLA even though payment is not 'deferred.'" Mot. at 9 (citing 32 C.F.R. § 232.3(f)(1)). The same 2015 Rule defines "credit" as "the right granted to a consumer by a creditor to defer payment of debt or to incur debt and defer its payment." Id. (citing 32 C.F.R. § 232.3(h)). CAPA claims that redemption and payment of a pawn loan is optional and there is no cognizable "debt" assignable to the pledger. Id. It further argues that the 2015 Rule does not provide "any logical reasoning articulating how pawn transactions are 'predatory'" or "why pawn transactions are now included under the definition of 'consumer credit.'" Id. CAPA argues that the Department failed to review relevant data and provide any explanation for the application of the 2015 Rule to pawn transactions. Id. Further, CAPA points out that Congress passed the MLA in response to a Department report on predatory lending practices and pawn transactions were not included in that report; only a few practices were identified and the first Rule promulgated by the Department to enforce the MLA only addressed those identified practices. Id. at 8-9.
Defendants argue that the Department "reasonably explained its decision to expand the MLA protections to include any credit transaction subject to the requirements of the TILA regulation, including pawn loans, and to exclude only those types of credit transactions exempted by Congress itself in the MLA." Opp. at 9. Even if the Department did not include a specific explanation as to why pawn loans would be covered under the 2015 Rule, Defendants argue that the Department addressed the pawnbrokers' request "as part of its broader discussion to reject any exceptions not required by statute." Id. (citing 2015 Rule, 80 Fed. Reg. 43560, 43561-62, 43568-69). The 2015 Rule explicitly acknowledged the pawnbrokers' request for exemption and thus the Departments' broad discussion of its reasoning applied to that request. Id.
Judge Kollar-Kotelly evaluated a claim substantially similar to CAPA's in Huntco and found that the Huntco plaintiffs were not likely to succeed on the merits of the claim. Huntco at 19-20. In that case, plaintiffs Huntco Pawnholdings, LLC, and the National Pawnbrokers Association ("NPA") argued, inter alia, that the 2015 Rule is arbitrary and capricious. Huntco at 15. Even though that decision is not binding on this Court, Judge Kollar-Kotelly's reasoning provides guidance to the Court on this issue.
The analysis in Huntco tracks Defendants' arguments in the present case. Judge Kollar-Kotelly recognized:
The Department expressly noted that pawnbrokers were among the commenters requesting exemptions, stating that "pawnbrokers and their representatives explain that traditional pawn transactions are different in kind from other types of credit transactions, principally because a pawn transaction typically is a non-recourse loan, and should be exempt from the scope of 'consumer credit' regulated under the MLA."Huntco at 17; 2015 Rule, 80 Fed. Reg. 43560, 43562. The court held that the "Department's failure to specifically discuss its rationale for denying pawn loans a special exemption from the Final Rule does not render the rule arbitrary or capricious." Id. at 16. It found that the Department "discussed" the comments from financial institutions requesting exemptions, including pawnbrokers, "as a group," id. at 17, and accepted the Department's response to those exemptions as a "reasoned explanation," id. at 18. The Huntco court pointed out that the Department particularly took note of the comment submitted by U.S. Senators "that urged the Department to widely expand the definition of 'consumer credit' to close the 'existing MLA loopholes'" and "asserted that creditors were able to evade the law by crafting loans that fell just barely outside the parameters of the definition of 'consumer credit.'" Id. Noting the Department's reasoning that "all 'high cost loans' pose some 'risks to covered borrowers,'" the Huntco court concluded that "[t]his rationale applies with full force to pawn loans, which, despite the NPA's attempt to distinguish them in numerous ways from other types of harmful lending, are indisputably 'high cost.'" Id. at 18-19. It found the Department's general response in the 2015 Rule adequate to address the pawnbrokers' exemption request and stated that "Plaintiffs cite[d] no authority requiring the Department to separately address each and every exemption requested, especially where approximately fifty such requests were made." Id. at 19.
The 2015 Rule provides a lengthy explanation of the Department's purpose and justification for expanding the scope of the regulation. Based on comments submitted on the Proposed Rule, its consultations with a number of other federal agencies, and "its experience administering the existing regulation for over seven years," the Department decided to broaden the regulation to cover credit that is already subject to the Truth in Lending Act. 2015 Rule, 80 Fed. Reg. 43560, 43560. The Department "believes that this final rule is appropriate in order to address a wider range of credit products[.]" Id. The Department cited to hundreds of comments, the majority of which expressed support for the new Rule, including support from a number of U.S. Senators and Attorneys General. Id. at 43561-62. It further stated that over 350 groups, trade associations, and business submitted comments, many of which expressed concerns or opposition to the new Rule. Id. "Most financial institutions, through approximately 50 comments, urge[d] the [Department] to adopt in the final rule an exemption for certain types of creditors or, more narrowly, one or more exemptions for certain types of credit products." Id. at 43561. After describing some of these specific requests, the Department noted the specific exemption requested by pawnbrokers. Id. at 43562.
As background, the Department explained that "the narrowly defined parameters of the credit products regulated as 'consumer credit' under the [previous] rule [did] not effectively provide the protections intended to be afforded to Service members and their families under the MLA." Id. at 43563. Particularly, the Department discussed the "need to address risks posed by high cost consumer credit" and rejected the position that the enabling statute is intended solely to address so-called "predatory" loan products:
Even though the Department's initial proposal, issued in April 2007, referred to various studies and reports (including reports and other initiatives by the Department) that describe 'predatory' lending 'practices,' the Department broadly described its overarching aim, namely, to promote readiness by taking steps to reduce the risk that a Service member or his or her family could get caught in a 'debt trap.' . . . When implementing the regulation in 2007, the Department acted in light of the short timetable for the effective date of 10 U.S.C. 987 and the instruction to act swiftly[.] . . . Still, the Department elected to act judiciously by initially regulating only certain
credit products that, at that time, the Department believed posed the most severe risks to Service members and their families. . . . As the Department explained when issuing the Proposed Rule, 'a broader range of closed-end and open-end credit products carry high costs, many of which far exceed the interest rate limit established in 10 U.S.C. 987(b), and thereby pose risks to Service members and their families.' The Department believes, and comments amply support the view, that the scope of consumer credit reasonably could apply to credit products that are subject to the requirements of Regulation Z in order to reduce the risks to covered borrowers posed by high-cost loans, and still preserve access to a wide range of products, including 'much needed, good, small-dollar credit options,' for those borrowers.Id. at 43566-68. The Department went on to specifically discuss why it chose not to create an exemption for an insured depository institution or insured credit union and then also explained its reasons for creating conditional exclusions for credit card accounts. Id. at 43568. It did not specifically explain its reasoning for including pawn transactions in the 2015 Rule, but neither did it explain its basis for including every other creditor or credit device that the 2015 Rule ultimately swept into its coverage.
The Department has provided an adequate explanation of its reasons for expanding the definition of the rule. The Department specifically acknowledged that pawnbrokers were one of the many affected creditors that requested an exemption and provided a rationale—though general—explanation for why it chose to expand the regulation to the extent that it did. This decision does not appear arbitrary or capricious and CAPA is not likely to succeed on the merits of this claim.
b. CAPA Is Not Likely to Succeed On the Merits of Count 2
Under Count 2, CAPA claims that the 2015 Rule violates equal protection and is thus unconstitutional. Compl. at 22. CAPA argues that the 2015 Rule impacts California pawnbrokers differently than it does pawnbrokers elsewhere because California pawnbrokers are subject to the California Unruh Civil Rights Act ("Unruh Act"). Mot. at 11 (citing Cal. Civ. Code §§ 51(b), 51.5(a)). Under the Unruh Act, one who denies or discriminates against a consumer based on that consumer's immigration status may be subject to a fine of $4,000 or more. Mot. at 11-12 (citing Cal. Civ. Code § 52(a)). CAPA argues that the Unruh Act will prevent California pawnbrokers from being able to utilize the 2015 Rule's safe harbor provision without facing liability, thus denying them equal protection of the law. Id. at 10-12. CAPA acknowledges that if the safe harbor is mandatory, it preempts state law. Rep. at 5; 10 U.S.C. § 987(d). CAPA argues that it is precisely due to the fact that the safe harbor is "optional" that it violates their constitutional rights because CAPA members cannot avail themselves of the safe harbor's protection without violating the Unruh Act. Id.
Defendants argue that CAPA's equal protection claim fails because nothing in the 2015 Rule prohibits the extension of credit to individuals who lack a SSN. Opp. at 13. Building on this point, they argue that the alleged injury to CAPA's members follows from California state law, not the 2015 Rule. Id. at 13-14. Further, even if CAPA has an equal protection claim, Defendants argue the 2015 Rule would survive rational basis review. Id. at 14.
Although the Court acknowledges that CAPA members face a bit of a Morton's Fork, CAPA's equal protection theory is not likely to succeed. An equal protection claim typically arises where the government makes a distinction between groups that burdens some but not others. See, e.g., Williamson v. Lee Optical of Okla. Inc., 348 U.S. 483 (1955). The 2015 Rule does not distinguish between lenders in different states or single out lenders in California in particular. The Rule applies to all covered creditors all over the United States. CAPA's argument rests on the premise that a rule that applies to creditors across the nation but impacts pawnbrokers in California in a different way violates equal protection. Although disparate impact may trigger a heightened standard of review in discrimination cases, Cf., Village of Arlington Heights v. Metro. Hous. Dev. Corp., 429 U.S. 252 (1977), CAPA has failed to provide this Court with any jurisprudence or special facts that supports their theory. Furthermore, CAPA members are still able to minimize their risk of liability by continuing to use a self-certification or other method to verify covered borrower status. See 32 C.F.R. § 232.5(a). While they may choose not to use the legally conclusive safe harbor due to fear of liability under California law, they are still authorized to use other means of verification to all but ensure compliance with the MLA.
Moore v. Czerniak, 574 F.3d 1092, 1166 (9th Cir. 2009) (Callahan, J., dissenting) ("'Morton's Fork'-a choice between two equally unpleasant alternatives.").
Even if the 2015 Rule does raise equal protection concerns, the parties agree that rational basis is the appropriate standard of review. Rational basis is a highly deferential standard: "The burden [on the challenger] is to negative every conceivable basis which might support [the law] whether or not the basis has a foundation in the record." Golinski v. U.S. Office of Pers. Mgmt., 824 F. Supp.2d 968, 995 (N.D. Cal. 2012) (citations and quotation marks omitted). The Department offered a lengthy explanation for its decision to promulgate the new safe harbor provision and move away from the self-certification procedure. 2015 Rule, 80 Fed. Reg. 43560, 43576-77. This explanation withstands rational basis review.
c. CAPA Is Not Likely to Succeed On the Merits of Count 3
Under Count 3, CAPA claims that the safe harbor provision of the 2015 Rule contravenes Section 7 of The Privacy Act of 1974. Compl. at 24. Section 7 of that Act states: "It shall be unlawful for any Federal, State or Local Government Agency to deny to any individual any right, benefit, or privilege provided by law because of such individual's refusal to disclose his social security account number." 5 U.S.C. § 552a note. The Section does not apply to disclosures required by federal statute. Id. CAPA argues that this Section applies to pawnbrokers because under the 2015 Rule pawnbrokers are "deputized" as government agents when they obtain SSNs from their customers. Mot. at 12-13. Because, CAPA argues, SSN collection is essentially mandatory due to the safe harbor provision, there is a close nexus or impetus for collection that stems from the regulation. As such, CAPA claims that the safe harbor violates the Privacy Act and must be declared void. Id. at 13-16.
Defendants argue that the Privacy Act applies to government agencies, not private businesses. Opp. at 15. They reiterate that collection of SSNs is not compelled and that pawnbrokers are free to reduce their risk of liability via the safe harbor or choose not to do so. Id. at 12-13. Turning to the cases CAPA's theory of deputization is premised on, Defendants argue that any perceived obligation on the part of the pawnbrokers to collect SSNs does not give rise to the type of government commandeering of private entities that has only been found in extreme situations. Id. at 15.
The Department went to great lengths in the 2015 Rule to explain that use of the safe harbor, and collection of SSNs, is not mandatory. 2015 Rule, 80 Fed. Reg. 43560, 43576. It pointed out that nothing in the MLA "mandates the provision of any safe harbor for a covered borrower check." Id. Rather, the Department has chosen to provide a safe harbor on its own volition. Use of the provision is optional and the 2015 Rule does not prescribe a method for a covered borrower check: "A creditor is permitted to apply its own method to assess whether a consumer is a covered borrower." 32 C.F.R. § 232.5(a).
CAPA cites two district court cases to support its argument. First, in Joliet Oil Corp. v. Brown, 55 F. Supp. 876 (N.D. Ill. 1943), gasoline dealers were found to be agents of the government where they were required to follow orders of the president during the president's wartime rationing program. Second, in Yeager v. Hackensack, 615 F. Supp. 1087 (D. N.J. 1985), a private water company's collection of SSNs from customers during a drought emergency was imputed to the state for Privacy Act purposes. In that case, after declaring a drought emergency, the Governor ordered certain government agents to take whatever steps were necessary to alleviate the emergency. Id. at 1088. The relevant Administrative Order delegated primary monitoring and threshold enforcement function to individual water purveyors and local governments, permitting the purveyor to require names of individuals in residential units and directing those purveyors to provide appropriate officials with information needed to carry out enforcement actions. Id. at 1089. Defendant, a purveyor, sent out postcards seeking the names of individual household members and SSNs. Id. Even though the Administrative Order did not specifically authorize collection of SSNs, the postcards indicated that a failure to provide such information could result in sanction. Id. The Yeager court concluded: "In short, [defendant] was authorized by the state to take whatever action it deemed necessary, including the collection of its customers' social security numbers, to enforce the state's water rationing program. Sufficiently onerous punitive measures were threatened to insure compliance with [defendant's] requests for information." Id. at 1089-90. Citing to Jackson v. Metropolitan Edison Co., 419 U.S. 345 (1974), the court reasoned that "in certain situations, where there is a close nexus between the state and an action by a regulated entity, the action of the latter may be fairly treated as that of the state itself" and held that the defendant's action would be imputed to the state. Id. at 1091.
CAPA has not shown that its members face an analogous situation. The availability of an optional safe harbor provision in the 2015 Rule, which involves entering SSNs into a database to check for covered borrower status, does not parallel the situations presented in Joliet Oil and Yeager. Each of those cases involved the effectuation of emergency government actions through private businesses where those businesses provided some sort of necessity (gasoline, water) that the government aimed to closely regulate and provide access to. CAPA's inability to present authority much more analogous to its situation in the instant case leads this Court to conclude that CAPA is unlikely to prevail on this claim.
d. CAPA Is Not Likely to Succeed On the Merits of Count 4
Under Count 4, CAPA claims that the safe harbor provision contravenes The Right to Financial Privacy Act ("RFPA") of 1978. Compl. at 27. The RFPA makes it unlawful for any government authority "to have access to or obtain copies of, or the information contained in the financial records of any customer from a financial institution" unless certain conditions are met. 12 U.S.C. § 3402. CAPA argues that pawnbrokers are "financial institutions" for the purposes of the RFPA, Mot. at 16, and that pawnbrokers choosing to avail themselves of the safe harbor—thus collecting, maintaining, and disseminating personal information like the name, birthday, and SSNs from every potential customer—would be in violation of the RFPA. Mot. at 16-17. In support of its argument, CAPA cites only Black's Law Dictionary, which defines financial institution as "a business, organization, or other entity that manages money, credit or capital, such as a bank, credit union, savings-and-loan association, securities broker or dealer, pawnbroker, or investment company." Rep. at 7.
Defendants argue that pawnbrokers do not fall within the legal definition of a "financial institution." Opp. at 16. They point to "the only court of appeals decision on point," which squarely rejected CAPA's argument herein. Id. (citing Winters v. Bd. of Cty. Comm'rs, 4 F.3d 848 (10th Cir. 1993)). Furthermore, Defendants argue that the 2015 Rule does not authorize the government to obtain customers' records; rather, the database is a tool for the pawnbroker to use to check for a covered borrower and does not send information collected by the pawnbroker to the Department. Opp. at 16-17.
Under the RFPA, a financial institution is defined as "any office of a bank, savings bank, card issuer . . ., industrial loan company, trust company, savings association, building and loan, or homestead association (including cooperative banks), credit union, or consumer finance institution[.]" 12 U.S.C. § 3401. Defendants are correct that the Winters court explicitly found that pawnshops are not considered financial institutions under the RFPA. The recent inclusion of pawnbrokers in the MLA regulations may cast some doubt on that conclusion. Even so, Defendants have the stronger argument that the safe harbor provision does not involve the transfer of financial records from pawnbrokers to a government authority and, therefore, does not violate the RFPA.
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e. CAPA's Arguments On Counts 2, 3, and 4 Are Waived
Defendants argue that CAPA waived their equal protection, Privacy Act, and RFPA claims because neither CAPA nor anyone else raised these issues during the notice-and-comment rulemaking process. Opp. at 11. CAPA does not assert that any such arguments were presented to the Department during that period. CAPA argues that "a failure to object during the rulemaking process [cannot] waive unforeseen unconstitutional consequences of a proposed rule for all of time." Rep. at 2. It cites Wind River Min. Corp. v. U.S., 946 F.2d 710 (9th Cir. 1991), for the proposition that "an action challenging the constitutional or statutory authority of an agency to promulgate a rule has no statute of limitations." Id.
The Ninth Circuit has unequivocally held that, unless there are exceptional circumstances, a party's failure to make an argument before the administrative agency in notice-and-comment on a proposed rule bars it from raising that argument on judicial review. Universal Health Servs., Inc. v. Thompson, 363 F.3d 1013, 1019 (9th Cir. 2004) (citing Exxon Mobil Corp. v. EPA, 217 F.3d 1246, 1249 (9th Cir. 2000)). In so holding, the court noted that its decision is "consistent with the decisions of every other circuit to have addressed the issue of waiver in notice-and-comment rulemaking." Id. (collecting cases).
The only authority CAPA cites to the contrary is Wind River. Rep. at 2. CAPA reads too much into that decision. The Wind River court dealt with a statute of limitations question, holding that "a substantive challenge to an agency decision alleging lack of agency authority may be brought within six years of the agency's application of that decision to the specific challenger." Wind River, 946 F.2d at 716. Thus, Wind River stands for the proposition that the statute of limitations to challenge the agency's decision as exceeding constitutional or statutory authority runs from the date of the adverse application to that particular challenger, rather than from the date that the agency's decision was first made (i.e. publication in the Federal Register). Id. at 15-16. Wind River does not address the question of issue waiver.
This Court agrees with Defendants that the waiver rule applies to CAPA's claims. Although neither party could point the Court to a completely analogous case, Ninth Circuit precedent weighs in favor of application in these circumstances. See Universal Health Servs., 363 F.3d 1013 (9th Cir. 2004) (finding the hospitals' arguments waived because they were not raised in the annual notice-and-comment rulemakings); Exxon Mobil Corp v. U.S. EPA, 217 F.3d 1246, 1249 (9th Cir. 2000) ("Petitioners have waived their right to judicial review of these final two arguments as they were not made before the administrative agency, in the comment to the proposed rule, and there are no exceptional circumstances warranting review."); see also Huntco at 32-33 (finding that Plaintiffs' arguments that the Department failed to consider pawnshops an "affected business" in the Final Rule and that the Department failed to consider the Final Rule's impact on small businesses in different geographic locations were each waived because they were not presented to the Department during the rulemaking process). The strongest authority supporting CAPA's contrary position is Reid v. Engen where the Ninth Circuit stated:
We may decide an issue not raised in an agency action if the agency lacked either the power or the jurisdiction to decide it. This situation is typified by challenges to the constitutionality of a statute or challenges to the constitutionality of a regulation promulgated by the agency.765 F.2d 1457, 1461 (9th Cir. 1985). Reid, however, involved an enforcement action against the petitioner and her subsequent appeal from the Administrative Law Judge's ruling, not a facial challenge to a rule or regulation like CAPA's challenges in this case. If an enforcement action or lawsuit is brought against a CAPA member they may have an opportunity to raise the claims asserted here. But for the purposes of this action, the Court finds that CAPA's claims under Counts 2, 3, and 4 are waived unless CAPA can direct this Court to evidence that the Department had an opportunity to consider them. See Portland Gen. Elec. Co. v. Bonneville Power Admin., 501 F.3d 1009, 1024 (9th Cir. 2007) ("In general, we will not invoke the waiver rule in our review of a notice-and-comment proceeding if an agency has had an opportunity to consider the issue.").
2. Likelihood Of Irreparable Harm
"[P]laintiffs may not obtain a preliminary injunction unless they can show that irreparable harm is likely to result in the absence of the injunction." Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1135 (9th Cir. 2011). "A plaintiff must do more than merely allege imminent harm sufficient to establish standing; a plaintiff must demonstrate immediate threatened injury as a prerequisite to preliminary injunctive relief." Caribbean Marine Serv. Co., Inc. v. Baldrige, 844 F.2d 668 (9th Cir. 1988). "[M]onetary injury [from lost revenues] is not normally considered irreparable." Los Angeles Memorial Coliseum Commission v. National Football League, 634 F.2d 1197, 1202 (9th Cir. 1980). A court may also consider timing; a delay in seeking a preliminary injunction "implies a lack of urgency and irreparable harm." Oakland Trubune, Inc. v. Chronicle Pub. Co., Inc., 762 F.2d 1374, 1377 (9th Cir. 1985).
CAPA has an uphill battle because it waited until September 16, 2016, to file its Ex Parte Motion for Temporary Restraining Order (here considered as a Motion for Preliminary Injunction) even though the 2015 Rule was published on July 22, 2015. ECF No. 11; 2015 Rule, 80 Fed. Reg. 43560. Over a year passed between publication and the October 3, 2016 compliance date. Furthermore, the Proposed Rule, which included the new definition of consumer credit and the new safe harbor provision, was published on September 29, 2014, giving affected parties an additional nine months' notice. Limitations on Terms of Consumer Credit Extended to Service Members and Dependents, 79 Fed. Reg. 58602 (Sep. 29, 2014) (proposed rule). Just as the delay justified this Court's denial of TRO, it weakens CAPA's irreparable harm argument here.
CAPA alleges that its members will suffer irreparable harm because they will lose business due to having to use the safe harbor, will suffer a constitutional equal protection violation, and will face criminal and civil penalties either under Federal or California law. Mot. at 18-19. CAPA argues that "California pawnbrokers are going to face substantial business losses due to having to utilize the 'safe harbor' and necessarily deny loans to individuals without Social Security numbers." Mot. at 19. It offers several declarations in support of these contentions. Declaration of Israel Adato ("Adato Decl."), ECF No. 11-2; Declaration of Pat Rogers ("Rogers Decl."), ECF No. 11-5; Declaration of Tony DeMarco ("DeMarco Decl."), ECF No. 11-6; Declaration of Stan Lukowicz ("Lukowicz Decl."), ECF No. 11-7. These declarations suggest that pawnbrokers will feel compelled to use the safe harbor to protect themselves from liability under the MLA and will have to turn away customers who are unable to provide SSNs. Mot. at 19. For example, Israel Adato states that he owns pawnshops near the Mexico border and estimates that 40-50% of his loans are issued to immigrants. Adato Decl. at ¶¶ 6, 11. Adato declares that he will avail himself of the safe harbor provision of the 2015 Rule in order to avoid liability under the MLA and will decline to offer loans to immigrants and foreign nationals who do not have SSNs, thus causing him to lose half of his business and close some or all of his stores. Id. at ¶¶ 12-14. Adato also fears suit under California's Unruh Act. The other three declarations make similar claims regarding lost business and their intent to make use of the safe harbor provision. See Rogers Decl., DeMarco Decl., & Lukowicz Decl. Additionally, two of the declarations allege that many of their customers (25% to 33%) will not be willing to provide their SSNs for fear of identity theft. See Rogers Decl. at ¶ 7; Lukowicz Decl. at ¶ 7.
Defendants argue that the harm CAPA alleges is not irreparable because use of the safe harbor is not mandatory; CAPA members are free to use other means to reduce the risk of lending to a covered borrower. Opp. at 19-20. Defendants contend that the argument regarding business losses in pawnshops serving many immigrants and foreign nationals should fail because such individuals are highly unlikely to be covered borrowers; pawnbrokers can assess this risk by looking at the identification each borrower already presents pursuant to state law. Opp. at 20-21. Defendants argue that pawnbrokers are still free to verbally confirm or use a check box on a loan application to determine whether an applicant is a covered borrower and that business loss is not necessary. Opp. at 21. Furthermore, Defendants point out that pawnbrokers only risk committing a misdemeanor if they "knowingly" violate the statute. Opp. at 22 (citing 10 U.S.C. § 987(f)(1)). As for civil liability, the MLA provides a defense for unintentional violations that "result from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error." Id. at 22-23 (citing 10 U.S.C. § 987(f)(5)(D)). Finally, Defendants argue that CAPA's equal protection allegations do not constitute irreparable harm because where plaintiffs fail to demonstrate a sufficient likelihood of success on the merits of their constitutional claims, the presumption of irreparable harm is inapposite. Id. at 23.
The Huntco court decided that the Huntco plaintiffs would not suffer irreparable harm due to the safe harbor provision because the plaintiffs' arguments were "based on the false premise that the Final Rule requires creditors to search the MLA Database." Huntco at 45. It further asserted that "there are a number of other ways to lessen th[e] risk, if not eliminate it altogether, without using a covered borrower check, such as continuing to use self-certifications." Id. The court pointed to the "knowingly" standard for criminal penalties and the "bona fide error" defense for civil penalties. Id. The court also found that the plaintiffs failed to demonstrate certain economic harm and loss of customer goodwill. Huntco at 46-47.
Irreparable injury due to lost business is not clear in this case. Many of the declarants' concerns are speculative: customers not being willing to provide SSNs, lawsuits under the Unruh Civil Rights Act. More importantly, the alleged harm would be due to the pawnbrokers' choice to only extend loans to borrowers willing to provide an SSN; the 2015 Rule does not require collection. See Citizens of the Ebey's Reserve for a Healthy, Safe, & Peaceful Env't v. U.S. Dept. of the Navy, 122 F.Supp. 3d 1068 (W.D. Wash. 2015) ("Not surprisingly, a party may not satisfy the irreparable harm requirement if the harm complained of is self-inflicted."). Although it is understandable that a shop owner would choose to collect SSNs from every customer out of an abundance of caution, the shop owner could mitigate its risk by utilizing other means of coverage assessment for those customers who do not wish to provide one.
On the question of potential liability, the Huntco court's analysis is instructive, but only to a certain extent. As that court recognized, use of the safe harbor is not technically mandatory and the availability of other risk reduction methods cuts against CAPA's concern that its members will face criminal and civil liability. Despite the protections against liability built into the MLA, this Court remains concerned that the "bona fide error" defense will not actually protect pawnbrokers from civil liability where they use their own method to determine covered borrower status. The "bona fide error" defense, 10 U.S.C. § 987(f)(5)(D), reads:
A person may not be held liable for civil liability under this paragraph if the person shows by a preponderance of evidence that the violation was not intentional and resulted from a bona fide error notwithstanding the maintenance of procedures reasonably adapted to avoid any such error. Examples of a bona fide error include clerical, calculation, computer malfunction and programming, and printing errors, except that an error of legal judgment with respect to a person's obligations under this section is not a bona fide error.(Emphasis added.) Neither the Huntco court nor Defendants address the final sentence of this subsection or explain how a pawnbroker's use of a different covered borrower determination method (i.e. self-certification) would qualify as a "bona fide error." It appears to this Court that a "bona fide error" would be an inadvertent mistake—like punching in the wrong SSN or a software malfunction—and may not offer much civil liability protection. Even so, CAPA members' potential civil liability under the statute is not an imminent, irreparable harm warranting preliminary injunctive relief.
For example, before a pawnbroker utilizing a self-certification method would face civil liability it would have to extend a loan to a covered borrower who lied about their covered borrower status and that covered borrower would then have to file a lawsuit against that pawnbroker. CAPA has not demonstrated that such an event is likely. --------
On the equal protection challenge, CAPA is correct that an alleged constitutional infringement may constitute irreparable harm. See Goldies Bookstore, Inc. v. Super. Ct. of State of Cal., 739 F.2d 466, 472 (9th Cir. 1984). Where the constitutional claim is tenuous, however, irreparable harm will not be found likely to occur. See id. CAPA's equal protection claim is unlikely to succeed on the merits. Thus, CAPA members are not likely to suffer constitutional harm constituting irreparable injury.
Finally, CAPA contends that this Court must issue injunctive relief for its Privacy Act claim because damages are not available as a remedy under the legislative scheme. Rep. at 8. CAPA states: "injunctive relief is the necessary and proper relief granted to citizens by the Privacy Act." Id. But CAPA does not bring this suit on behalf of individuals who have been denied a right due to their refusal to disclose a SSN. In each case CAPA cites, injunctive relief was awarded to an individual where an authority required that individual to give their SSN in order to receive a right or privilege. Ingerman v. Del. River Port Auth., 630 F. Supp. 2d 426 (D. N.J. 2009) (senior citizen required to provide SSN for senior citizen discount program); Stollenwerk v. Miller, No. Civ.A. 04-5510, 2006 WL 463393 (E.D. Penn. Feb. 24, 2006) (Pennsylvania citizen required to provide an SSN to buy a hand gun under state law); Pontbriand v. Sundlun, 699 A.2d 856 (R.I. 1997) (depositors whose names, SSNs, and account balances were released to the media by the governor had standing to sue for injunctive relief under the Privacy Act). These cases do not support CAPA's argument that this Court must award injunctive relief where business owners fear they may be held liable for violating the Privacy Act when they ask borrowers for their SSN to check their covered borrower status.
On the whole, CAPA's delay in bringing this action, the fact that CAPA members are not required to collect SSNs, and the fact that CAPA's constitutional claim is not likely to succeed on the merits weigh against a finding that irreparable harm is likely.
III. ORDER
For the reasons set forth above, the Court DENIES Plaintiff's Motion for Preliminary Injunction:
IT IS SO ORDERED.
Dated: November 7, 2016
/s/ _________
JOHN A. MENDEZ,
UNITED STATES DISTRICT JUDGE