Will Hunstein Require a Reset?

 

By Caren D. Enloe

Last month, the entire ARM industry was caught by surprise when the Eleventh Circuit held that a debt collector’s transmittal of information to a third-party letter vendor violated Section 1692c(b) of the FDCPA.  Hunstein v. Preferred Collection and Management Services, Inc., 2021 U.S. App. LEXIS 11648, 994 F.3d 1341 (11^th Cir. 2021).  While the case will continue to be contested in the Eleventh Circuit, collection agencies and others who rely upon third party vendors have been left to contemplate what comes next.  This article will examine the decision, its immediate impacts, and considerations for the industry as it moves toward implementation of the debt collection rule.

A Quick Summary

In Hunstein, the debt collector engaged a third-party vendor to prepare and send its demand letter.  In doing so, the debt collector electronically transmitted certain information to its letter vendor, including: (1) the consumer’s name and address; (2) the balance owed; (3) the name of the creditor; “(4) that the debt concerned his son’s medical treatment;” and (5) his son’s name.  Id., 2021 U.S. App. LEXIS 11648 at *4.  The consumer sued the debt collector, alleging that the transmittal of that information was a communication in connection with the collection of a debt and violated 15 U.S.C. §1692c(b).  The District Court dismissed the complaint concluding that the transmittal of information did not qualify as a communication ‘in connection with the collection of a[ny] debt.” Id., at *3-4.  On appeal, the Eleventh Circuit reversed and held: (a) that that the plaintiff had standing to sue because the transmittal of the information was an invasion of privacy; and (b) that the transmittal of such information to a letter vendor stated a claim for a violation of Section 1692c(b). In doing so, the Court recognized the impact of its decision, stating

It's not lost on us that our interpretation of § 1692c(b) runs the risk of upsetting the status quo in the debt-collection industry. We presume that, in the ordinary course of business, debt collectors share information about consumers not only with dunning vendors like Compumail, but also with other third-party entities. Our reading of § 1692c(b) may well require debt collectors (at least in the short term) to in-source many of the services that they had previously outsourced, potentially at great cost. We recognize, as well, that those costs may not purchase much in the way of "real" consumer privacy, as we doubt that the Compumails of the world routinely read, care about, or abuse the information that debt collectors transmit to them.

 

 

What are the Immediate Impacts of the Decision?

 

It’s important to note a couple of things regarding Hunstein and its immediate impact.  First and foremost, it’s not over.  While the decision has precedential value in the Eleventh Circuit, the battle rages on.  The debt collector is petitioning for an en banc review which, if granted, will give the industry an opportunity to change the Court’s mind.  Moreover, the collection agency has the support of the industry and several trade associations and other interested parties intend to file amicus briefs in support of the collection agency’s position.  While that petition is pending (it’s due to be filed in late May), lower courts in the Eleventh Circuit will likely encounter copycat suits and will have the choice to follow Hunstein or to stay the case pending the outcome of Hunstein. 

 

Secondly, while the opinion may be binding in the Eleventh Circuit, that’s not the case in other circuits.  In other jurisdictions, the case would only constitute “persuasive” authority, meaning courts may consider it but are not bound by it. Debt collectors need to expect copycat cases to continue popping up in other jurisdictions as the consumer bar tries to leverage this legal theory and the ARM industry pushes back seeking a different result in other jurisdictions.

 

Finally, it’s important to keep in mind that the Court’s ruling simply means that the complaint’s allegations were enough to state a claim.  It does not mean that the consumer is entitled to a judgment for damages or will ultimately prevail.

 

 

What Does this Mean Regarding Collection Agencies’ Current Use of Third Party Vendors?

 

For now, Hunstein calls into question the sharing of certain consumer specific communications with third-party vendors.  But are all third-party vendors created equal for purposes of Hunstein?  The answer is likely no. Compliance teams therefore will need to assess their third-party vendor relationships and assess each one under the microscope of Hunstein.  In doing so, it’s important to remember that the Court in Hunstein was concerned that the information transmitted to the letter vendor rose to the level of being a communication “in connection with the collection of a debt.”  That information included not only the consumer’s name and address but also the amount of the debt, the name of the creditor and the nature of the debt. 

 

Moving forward, compliance teams will need to review and assess the specific information shared with each of their third party vendors and ascertain whether it rises to the same level as Hunstein such that it would be considered a communication in connection with the collection of a debt.  Communications with, for instance, a third-party company scrubbing for location information may not require the sharing of the same level of information as that provided to a letter vendor and therefore may carry a lesser risk.  Similarly, working with a letter vendor to set up a form letter does not require the conveyance of any information specific to a consumer and likely would not meet the same scrutiny.  For now, compliance departments will have to assess the risk associated with each of its third-party vendors by reviewing the information shared with each and ascertain whether it rises to the level of a communication. Depending upon their level of risk tolerance and the amount of information conveyed, debt collectors may consider bringing some backroom services back inhouse for the time being.

 

How Does Hunstein Align With or Impact the Debt Collection Rule?

 

Interestingly, the CFPB’s views do not appear to align with those of the Eleventh Circuit.  The CFPB has always understood and contemplated the use of third-party vendors.  As early as 2012, the CFPB recognized that the use of service providers “is often an appropriate business decision.”  CFPB Bulletin 2012-03; see also CFPB Bulletin 2016-02.  The CFPB went as far as to say that “[s]upervised…nonbanks may outsource certain functions to service providers due to resource constraints… or relay on expertise from service providers that would not otherwise be available without significant investment.”  Id.  Consistent with this, the CFPB set forth guidelines for vendor risk management to protect consumers from harm and ensure vendors are complying with federal consumer financial law.  In setting out these guidelines, the CFPB, however, was quick to point out that “the mere fact that a supervised… [entity] enters into a business relationship with a service provider does not absolve the supervised…[entity] of responsibility for complying with Federal consumer financial law to avoid consumer harm.”  Id. at p. 3. 

 

All of this aligns with the CFPB’s views of third-party vendors in the context of the Debt Collection Rule (the “Rule”).  The CFPB expressly contemplated and seemingly endorsed the use of third-party vendors in the final version of the Rule. 

 

The Rule in fact discusses and contemplates the use of data vendors for skip tracing, as well as for letters.  With respect to letter vendors, the CFPB is aware of the prevalence of the practice.  Its Operations Study undertaken during the formulation of the Rule noted that 85% of debt collectors surveyed used letter vendors.  In its in its Section by Section Analysis of the debt validation provisions, the CFPB contemplated this practice continuing when it stated that the costs associated with reformatting validation notices and understanding the requirements could reasonably be borne by debt collectors and their vendors.  Carrying this further, the Rule expressly allows debt collectors to include a vendor’s mailing address if that is an address at which the debt collector accepts disputed and requests for original-creditor information. See Section 1006.34(c)(2)(i) and Comment 34(c)(2)(i)-2. 

 

How Hunstein will impact the Debt Collection Rule remains to be seen.  When it published the Rule, the CFPB clearly did not see the use of letter vendors as violating Section 1692c and it will be interesting to see (although unlikely) if they submit an amicus brief taking a position either way.  While the CFPB has already proposed pushing back the Rule’s effective date until January 2022, there is nothing thus far that would indicate they will push it back further.

 

Conclusion

 

Hunstein has opened Pandora’s box and the industry’s use of third-party vendors will now have be defended through the courts.  In the interim, compliance departments should be discussing their tolerance for risk and reviewing their use of other third- party vendors and the amount of information shared to ascertain whether they run similar risks.

The Supreme Court Weighs in on the Telephone Consumer Protection Act

 

By: Caren D. Enloe

On April 1, 2021, the United States Supreme Court unanimously held that in order to qualify as an automated telephone dialing system under the Telephone Consumer Protection Act (the “TCPA”), a device must have the capacity either to store a telephone number using a random or sequential number generator or to produce a telephone number using a telephone number using a random or sequential number generator.  Facebook, Inc. v. Duguid, 592 U.S. __, 41 S. Ct. 1163, 2021 U.S. LEXIS 1742 (Apr. 1, 2021).  The decision will have significant ramifications on TCPA litigation nationwide.

Historical Background

The TCPA was passed in 1991 to address the “proliferation of intrusive, nuisance calls” from telemarketers. In doing so, the TCPA prohibited, with limited exceptions, calls made using an automated telephone dialing system (“ATDS”) or “equipment which has the capacity—(A) to store or produce telephone numbers to be called, using a random or sequential number generator; and (B) to dial such numbers.” Id. §227(a)(1).   For years, parties have debated what constitutes an ATDS.  In 2015, a split FCC issued an Omnibus Declaratory Ruling and Order in which it broadly interpreted an ATDS to include dialing equipment that generally has the capacity to store or produce, and dial random or sequential numbers (and thus meets the TCPA’s definition of “autodialer”) even if it is not presently used for that purpose, including when the caller is calling a set list of consumers.  In the Matter of Rules & Regulations Implementing the Telephone Consumer Protection Act of 1991, Declaratory Ruling & Order, 30 FCC Rcd, 7961 (2015).  The FCC 2015 Order rejected any “present use” or current capacity test and held that capacity of an autodialer is not limited to its current configuration and includes its potential functionalities even if it currently lacks the requisite software. Thus, the FCC affirmed that “dialing equipment that has the capacity to store or produce, and dial random or sequential numbers… [is an autodialer] even if it is not presently used for that purpose.” FCC 2015 Order at ¶ 10 (emphasis supplied).  The Order further confirmed the majority’s focus on whether the equipment can dial without human intervention and whether it can “dial thousands of numbers in a short period of time”.  Id. at ¶ 17.  In 2018, the D.C. Circuit set aside the FCC’s interpretation, calling it an “eye-popping sweep.”  ACA International v. Federal Communications Commission, 885 F.3d 687, 697 (D.C. Cir. 2018).  Since then, the definition of an ATDS has been rigorously debated in the courts, creating a split.  See Dominguez v. Yahoo, Inc., 894 F.3d 116 (3^rd Cir. 2018) (SMS Service did not qualify as an ATDS because it did not have the present capacity to function as an ATDS); but see Marks v. Crunch San Diego, 904 F.3d 1041 (9^th Cir. 2019) (holding that the statutory definition of ATDS includes a device that stores telephone numbers to be called, whether or not those numbers have been generated by a random or sequential number generator).

Factual Background

Enter Noah Duguid who received several text messages from Facebook notifying him that someone was attempting to access his Facebook account from an unknown device or browser.  Duguid, who did not have an account with Facebook and had not provided his phone number or consent to be contacted by Facebook, brought a putative class action alleging violations of the TCPA.  Facebook moved to dismiss arguing that Duguid had failed to allege that the numbers were randomly or sequentially generated.  The trial court agreed and dismissed.  On appeal, the Ninth Circuit reversed and in keeping with its prior decision in Marks, held that an ATDS does not have to use a random or sequential generator to store numbers – it only has to have the capacity to “store numbers to be called” and “to dial such numbers automatically.” Duguid v. Facebook, Inc., 926 F. 3d 1146, 1151 (2019).  The Supreme Court granted Facebook’s petition for certiorari on a single issue: whether the definition of ATDS in the TCPA encompasses any device that can “store” and “automatically dial” telephone numbers, even if the device does not “us[e] a random or sequential number generator.”

The Court’s Holding

In a unanimous decision by Justice Sotamayor, the Court  reversed.  In doing so, the Court first examined the text of the statute in the context  of conventional rules of grammar and punctuation.  The Court concluded that the qualifying phrase “using a random or sequential number generator” applies to both verbs – store and produce.  Slip Op. at 5. Simply put, “Congress’ definition of an autodialer requires that in all cases, whether storing or producing numbers to be called, the equipment in question must use a random or sequential number generator.”  Id. at 7. 

The Court went on to examine the definition in the statutory context and likewise concluded that it likewise affirmed their conclusion.  The Court noted that the other prohibitions within the TCPA target a unique type of telemarketing equipment that risks dialing emergency lines or tying up all sequentially numbered lines of a single entity.  “[E]xpanding the definition of an autodialer to encompass any equipment that merely stores and dials telephone numbers would take a chainsaw to these nuanced problems when Congress meant to use a scalpel.” Id. at 8.  The Court additionally found problematic a definition which would encompass all modern-day cell phones as autodialers. Id. at 9.

The Decision’s Impact

The impact of the decision remains to be seen, but it will not eliminate TCPA litigation which has proven itself to be a profitable business for the consumer bar.  A number of cases were stayed pending the outcome of Facebook. While many of the cases may be resolved by the Court’s decision.  Others will not be.  See, e.g., McEwen v. National Rifle Assoc., 2021 U.S. Dist. LEXIS 72133 (D. Me. Apr. 14, 2021) (dismissing four of six claims and allowing the remaining two to proceed forward).  Cases involving automated messages, automated voices and the Do Not Call List will continue forward as they are not impacted by the Court’s decision.  Additionally, it is likely that consumer litigants will continue to poke holes in the definition of an ATDS by examining the boundaries of capacity and the role of human intervention. Finally, with a Democratic majority, it would not be surprising to see Congress revisit the TCPA in response to the Court’s decision.