Banks' Setback on Late Fees Casts Doubt on Texas Strategy (1)

A Texas judge risks upending a popular legal strategy after he decided to transfer an industry challenge to the Consumer Financial Protection Bureau’s credit card late fee rule to Washington, D.C.

The US Chamber of Commerce, the American Bankers Association, and the Consumer Bankers Association, along with a trio of Texas industry groups, rushed to ask the US District Court for the Northern District of Texas on March 7 to block the CFPB’s late fee rule, just two days after the agency finished it.

The idea of racing to a business-friendly courthouse in the Lone Star State is a familiar strategy for industry groups seeking to challenge Biden administration rules—one that has been largely successful so far.

But the groups fighting the CFPB weren’t counting on a judge questioning their venue choice. Nor did they expect Judge Mark Pittman and to ultimately decide late last week to move the case to Washington, the CFPB’s headquarters, rather than issue a preliminary injunction to pause the late fee rule.

The Fifth Circuit stayed the move to Washington until the end of the day Tuesday for now, though a judge in the D.C. Circuit has already been assigned the case.

The banking industry now must see whether trade groups can successfully appeal the venue move and pause the rule, while banks and other companies rethink their instinct to head to Texas.

“Banks and other trade associations will need to ensure that they have members in the local area where the lawsuit is brought that are directly impacted by the regulation,” said Alan Kaplinsky, senior counsel at Ballard Spahr LLP who advises banks regulated by the CFPB. “Hindsight being 20-20, the banks chewed up lots of valuable time fighting over a procedural issue, and they are in a sense back to square one.”

The bureau’s final rule is set to cap credit card late fees at $8, down from the current $30 maximum charge for the first missed payment, and $41 for additional missed payments over the subsequent six months. Industry groups say the CFPB exceeded its authority and used faulty economic analysis to develop the rule, and want to convince a court to pause or scrap it before it takes effect May 14.

See earlier: Banks Prepare Legal Assault on CFPB Credit Card Late Fee Rule

No ‘Continental Breakfast’

What tripped up the challenge to the late fee rule is that no banks subject to the regulation are based in the Northern District of Texas. The rule only applies to credit card issuers with 1 million or more open accounts, and no such banks are based in Texas.

Draper, Utah-based Synchrony Bank N.A., a unit of Synchrony Financial, became a member of the Fort Worth Chamber of Commerce, one of the plaintiffs, to gain standing to sue in the Northern District of Texas.

The CFPB argued that link wasn’t sufficient and asked for the case to be heard in Washington, where the US Chamber, ABA, CBA, and the agency are based, along with nearly all the attorneys involved.

Pittman sided with the CFPB.

“Venue is not a continental breakfast; you cannot pick and choose on a Plaintiffs’ whim where and how a lawsuit is filed,” Pittman, a Trump-appointed judge, wrote in his ruling last week.

Pittman’s order highlights the risk of rushing to court without taking time to carefully read an agency rule or plot out how to avoid challenges over standing and venue, said Joann Needleman, the head of Clark Hill PLC’s financial services regulatory and compliance practice.

“The bureau kind of got them at their own game,” she said of the US Chamber and its co-plaintiffs.

Rule’s Uncertain Fate

Just because the CFPB won on venue doesn’t mean the regulator’s late fee rule will take effect as scheduled.

The Chamber and its co-plaintiffs on March 25 appealed Pittman’s denial of their request for an injunction to the US Court of Appeals for the Fifth Circuit. They’re now asking the appellate court to stay his transfer order.

The Fifth Circuit in an order March 30 granted an administrative stay on the transfer until end of business on Tuesday, and said it would expedite hearing oral arguments on the issue.

Meanwhile, the transferred case has hit the docket in the US District Court for the District of Columbia, where it was assigned to Judge Amy Berman Jackson.

It’s likely the Fifth Circuit will lose jurisdiction now that the D.C. district court has accepted and assigned the case, said Lisa Lawless, senior counsel in Husch Blackwell LLP’s appellate practice.

There’s also a good chance Jackson will decide to put the rule on hold while the US Supreme Court considers a challenge to the CFPB’s independent funding.

See also: CFPB’s Survival Odds Improve After Supreme Court Hears Challenge

If the high court upholds the CFPB’s funding, the D.C. district court would then have to rule on procedural challenges to the late fee rule. If the Supreme Court rules against the CFPB, the late fee cap would likely be struck down.

“It is easier to stay the rule now then to try and put the cow back in the barn,” said Scott Talbott, executive vice president of the Electronic Transactions Association.

Judge Shopping

The surprise industry setback is likely to reverberate beyond the late fee fight.

Both lawmakers and judges have increasingly raised concerns about so-called judge shopping, where plaintiffs choose to file a case based on the likelihood of getting a friendly judge.

The Judiciary Council, the judiciary branch’s policy arm, in March issued a policy aimed at addressing such actions. Justice Neil Gorsuch railed against the practice during oral arguments last month in a case involving the Food and Drug Administration’s approval of abortion medication.

Also in March, the Fifth Circuit upheld a lower court ruling transferring Space Exploration Technologies Corp.’s challenge to the constitutionality of the National Labor Relations Board from Texas to a California court. The issue in that case, much like the credit card late fee suit, was that SpaceX is based in California, so the case had no real connection to Texas, the Fifth Circuit ruled.

In contrast, the ABA, US Chamber, and the Texas Bankers Association, along with other local Texas chambers of commerce and banking trade groups, were able to secure a preliminary injunction on a Community Reinvestment Act overhaul that was set to take effect on Monday.

The Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency— the three agencies that oversee the anti-redlining law—had challenged trade groups’ standing to bring the case on the grounds that no individual bank was a named plaintiff, but there was no fight about venue. Texas banks are members of the Texas Bankers Association, and many of them would be subject to the CRA rewrite.

The different results in the credit card late fee and Community Reinvestment Act lawsuits show that each case has its own specific facts that will ultimately determine the proper venue. But if litigants aren’t based in the judicial district where they file a regulatory challenge, they’re going to have to hope for a sympathetic judge when venue questions arise, said Chris Friedman, a Husch Blackwell LLP partner who advises financial institutions.

“This reminds us that courts are unpredictable,” he said.

The case is US Chamber of Commerce v. CFPB, N.D. Tex., No. 4:24-cv-00213, Order on Motion to Transfer 3/28/24 and US Chamber of Commerce v. CFPB, D.D.C., No. 1:24-cv-00915, 3/29/24.