Yet Another Reason to Handle Consumer Electronic Consents Correctly

From time to time, clients balk when I describe the components of an effective consumer consent to an electronic transaction.  They say "I've seen lots of other websites, and they don't require this." 

They are correct, in part.  Most websites do not do what I advise my clients to do, because most websites have deficient disclosures and consent language.  Most of the time, these do not result in anything catastrophic.  But that does not make it legal...or smart. 

One aspect of consumer electronic transactions that people question most often is affirmative consent.  They ask whether it is truly necessary to provide detailed disclosures and obtain affirmative consent from consumers when entering into agreements through electronic means.   Affirmative consent means that the consumer expressly agrees to the terms, or "opts in."  An example of affirmative consent is the following:

"By clicking the button labelled 'Accept' below, you agree to the terms and conditions of this Agreement and acknowledge that you have read and understand the disclosures provided above."

Most businesses would generally prefer negative consent, also referred to as "constructive" consent or "opt out."   An example of negative consent is the following:

"By using this website, you are agreeing to these Terms and Conditions."

Obviously, negative consent is easier for businesses to handle than getting affirmative consent.  The question, however, is whether a negative consent is effective for all purposes.

The (federal) E-SIGN Act and the (state) Uniform Electronic Transaction Act require that if any other statute, regulation, or rule requires that a consumer be given a document or disclosure in writing, then in order to for a consumer to effectively agree to receive it in electronic format, the consumer must affirmatively consent after having been given very specific disclosures.  In some circumstances, it may be difficult to identify a specific law requiring a written disclosure in connection with the contemplated transaction.  You may think, "we are not under any legal obligation to give any notices or disclosures to these customers after this transaction."  However, there are a large number of disclosure requirements contained within the millions of pages of law affecting consumer transactions.  Just because you can't think of one off the top of your head doesn't mean none exist.  For this reason, I almost always advise my clients to obtain affirmative consent from consumers for online agreements.

In this post, I'm going to give you a real-world example of a situation in which obtaining a proper consumer electronic consent could save a lot of money:

ABC Corp. (fictional) sells products and services to consumers in North Carolina through its website and the telephone.  It has collected information from tens of thousands of consumers over the past few years, and stores that information on its database on its own server.  Included in the information are the consumers' credit card numbers (so that regular customers will not have to provide all of their information with every order).  The credit card numbers are not encrypted on the database.  ABC Corp. becomes aware of an incident of unauthorized access to its database.  Customer information likely has been accessed, and the available information indicates that the person who accessed the information has nefarious intent. 

Under North Carolina law, ABC Corp. is obligated to notify each consumer of the data security breach.  The North Carolina Identity Theft Protection Act says that ABC Corp. can notify the consumers via email only if the consumer's consent has been properly obtained in accordance with the E-SIGN Act.  If ABC Corp. has records of consumers' email addresses, but has not obtained the proper consent to provide subsequent legally-mandated notices by email, ABC Corp. cannot satisfy its obligations by providing the notice by email.  Instead, the Identity Theft Protection Act requires that the notice be provided in hard copy (if mailing addresses are available).  In this situation, because ABC Corp. has failed to obtain consumer consent in the proper way at the outset, the cost of responding to a subsequent data security breach will be tens of thousands of dollars more as a result printing and postage costs alone. 

This is just one example of the many ways in which handling consumer consent carefully at the start of an electronic relationship with a consumer can pay off for a business later.

Public Service Announcement: "Combatting Financial Exploitation: A New Tool"

Regular readers of this blog know that preventing the financial exploitation of older or disabled folks is something that I am passionate about.  I've written and spoken on the topic frequently over the past couple of years.

This week, I had the privilege to join a distinguished panel of experts for a series of training webinars on combatting financial exploitation of the elderly and disabled.  The webinar was coordinated by the NC Administrative Office of the Courts (specifically, the inimitable Lori Cole), and included representatives of the NC Department of Justice (the ever-risible Raj Premakumar), UNC School of Government (the erudite Aimee Wall), NC Bankers Association (the staid Jan Dillon), and NC Department of Health and Human Services (the passionate triumverate of Nancy Warren, Renae Minor and LeShana Baldwin).  More than 300 participants registered, most of whom were lawyers, judges, clerks of court, financial professionals, and social services officials from all across North Carolina.

Here are a few quotes from participants who contacted us after the webinar to profide feedback:

"Thank you so much for all the great information I received with the combatting financial exploitation webinar class. This will help me to stay up to date with the new change." - an Assistant Clerk of Court

 "Thank you for an informative CLE!" - a County Attorney

 "Thanks for the program and the info!" - a County Attorney

 "The webinar today was a very good introduction." - an Assistant Clerk of Court

 "It was a very good program." - a Social Services Attorney

"The information was very helpful." - an Assistant Clerk of Court

For those who were unable to join us, a copy of the materials from the presentation is available here.

A video of the presentation will be available soon, and I will update this post to include it.

If you encounter circumstances that lead you to suspect the financial exploitation of an older or disabled person, whether in your professional life or your personal life, please report your suspicions appropriately. 

 

 

A Message to New North Carolina Lawyers

The following article was published by the NC Bar Association in The Advocate earlier this month.  If you know any newly-licensed lawyers in North Carolina, I encourage you to share it with them:

Welcome to the YLD

by Matt Cordell, Division Director

Welcome to the Young Lawyers Division, which is affectionately known as the “YLD”! If you are younger than 36 or in your first three years in the practice of law in North Carolina (regardless of your age), you have been inducted automatically into the YLD effective upon joining the North Carolina Bar Association. Make no mistake—despite the fact that admission did not require much effort on your part, YLD membership is something from which you should derive great pride. (Second-career lawyers tend to be eager to call themselves members of the Young Lawyers Division—a feeling you will understand one day if you do not already—but this is not the sort of pride to which I refer.) You have joined the ranks of a dynamic, transformative organization that will ask for your talent and enthusiasm and, in return, give you meaningful experiences, skills, and relationships. The YLD has a tremendous legacy of developing effective young lawyers and serving our communities in powerful ways. In this special issue of The Advocate, we hope to show you how the YLD makes a difference in the world and can make a difference in your career.

The Young Lawyers Division Yields Lasting Dividends
The YLD is the largest division of the NCBA, with 6,500 members. It is also widely acknowledged that the YLD is the most active service arm of the NCBA. It is the source of many of the NCBA’s service initiatives, and has provided an enthusiastic workforce to carry out virtually all of the Association’s service projects—service to our members, our neighbors, and our communities. The YLD’s heritage of service dates back to its founding in 1954 and is the first goal expressed in its mission statement:

To promote the general welfare of the public, advance the professional education and welfare of young lawyers, involve young lawyers in the activities of the NCBA, promote fellowship among all members of the bar, and advance the standards of both the legal profession and the administration of justice. 

On our strong backs rest the responsibility and opportunity to carry out the vital work of the profession for the public good. The YLD has risen to the challenge in many ways, and most of its 21 committees are oriented toward service. From Murphy to Manteo, YLD members are effecting positive change across our state.

The YLD is where the future leaders of the NCBA, the State, and the nation gain valuable leadership experience. This is evident from a brief summary of the accomplishments of the prior YLD chairs:

• Six prior YLD chairs have become presidents of this Association.
• One became president of the ABA.
• Nine became NCBA Section chairs.
• Seven chaired NCBA committees.
• Two became president of the State Bar.
• Two more took the helm of Legal Aid.
• A significant number went on to hold public office.

To underscore the point, note that these accomplishments reflect only the Division Chairperson—one person each year. Scores of other YLD officers and committee chairs honed leadership skills in the YLD that enabled them to accomplish great things later in life.

The YLD is Important for Your Legal Development

Legal publications and the editorial pages of newspapers have recently made common knowledge something we in the profession have known for some time: many law schools do not fully prepare students for the practice of law. As a new lawyer, you need practical experience and opportunities to develop leadership and other skills. These can be acquired in countless ways through the YLD’s many committees. You can watch more experienced lawyers counsel clients, and practice doing so yourself, through Wills for Heroes clinics or Project Grace clinics. You can develop your public speaking skills through any number of committees and events. You also can sharpen your writing by joining for the Newsletter Committee. Take advantage of opportunities to hone a host of additional skills—advocacy, event planning, speaking, or drafting—while making a difference in your community. The YLD is where newly-minted lawyers acquire the skills and experience to lead their communities, organizations, the legal profession, and society.  

This brings me to another significant benefit of YLD involvement: relationships. I have made many great friends through the YLD, and continue to encounter exceptional people each time I participate in a YLD event. If you have not discovered it already, you will learn that relationships matter tremendously in your professional life, just as they do in your personal life. The YLD is a great way to meet the very best young lawyers in the state—young lawyers who are motivated, committed, and service-oriented…and fun to be around. Basically, if you want to make friends with the leaders of the future, it is easy to do. Sign up for a YLD committee or service project. You will be surrounding yourself with some of the best young minds and hearts in this great state. But, as LeVar Burton used to say on Reading Rainbow, “you don’t have to take my word for it.” Give it a try. If you don’t make friends with lots of other bright, friendly, committed young lawyers, we’ll refund your membership fee. (Your first year of NCBA dues have already been waived!)  

Matt Cordell practices in the areas of banking, corporate, and privacy law with Ward and Smith, P.A., and serves as a YLD Division Director. This bar year marks his eighth year as an active member of the YLD. He looks forward to meeting each of you at a YLD event soon.

Bank Holding Companies, It Is Time To Update Your Tax Sharing Agreements

It is time to update tax allocation agreements between bank holding companies and affiliated entities, say the federal regulators.  According to guidance issued this summer, examiners will be looking for updated tax allocation agreements beginning this fall. 

photo by Phillip via on flickr/Foter

Bank holding companies usually own all of the outstanding stock of their depository institutions, which means that the holding companies and their banks are deemed to be "affiliated groups" within the meaning of Section 1504 of the Internal Revenue Code. Accordingly, they often choose to file consolidated federal income tax returns, and in some states, they are required to file consolidated state income tax returns. To address the allocation of the tax liability and the timing of contributions, bank holding companies and their banks are required* to enter into tax allocation agreements.

In 1998, the federal financial institution regulatory agencies jointly issued an Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure ("Interagency Statement") to provide guidance to insured depository institutions and their holding companies and other affiliates regarding the payment of taxes on a consolidated basis. 

In 2014, an addendum to the Interagency Statement became effective.  The addendum was intended to clarify the agencies' existing positions and to add new requirements in light of the FDIC's recent disputes with holding companies of failed banks for which it acted as receiver.  According to the amended guidance, a tax allocation agreement should explicitly address the following issues:

• Calculation of Tax Allocation.  A subsidiary depository institution must compute its income taxes (both current and deferred) on a separate entity basis, regardless of whether the actual returns will be consolidated.  This is done both for purposes of preparing regulatory reports and to ensure the insured depository institution does not pay more than its own share of the tax liability. Certain adjustments that arise in a consolidated return, such as the application of graduated tax rates, may be made to the separate entity calculation as long as they are done consistently and fairly.
• Current Taxes Only.  A bank should not pay its deferred tax liabilities or to its holding company, because the deferred tax account is not a tax liability required to be paid in the current reporting period. The regulators frown on this.
• Timing of Payments to the Holding Company.  Tax payments from a bank to a holding company should never exceed the amount the bank's current tax expense calculated on a separate entity basis, nor should they be made before the bank would have been obligated to pay as a separate entity. The regulators consider any advance payments to be extensions of credit from the bank to the holding company (which are restricted by the Federal Reserve Act and regulations).
• Tax Refunds from the Holding Company.  A bank incurring a loss for tax purposes should record a current income tax benefit and receive a refund--within a reasonable timeframe--from its holding company in an amount no less than the amount the bank would have been entitled to receive as a separate entity.  If the refund is not passed along to the bank within a reasonable period, regulators may consider it either an extension of credit or a dividend.  If, however, on a separate entity basis, the bank would not be entitled to a current refund because it has no carryback benefits available, its holding company can still use the bank's tax loss to reduce the consolidated group's current tax liability. In this situation, the holding company may reimburse the bank for the use of the tax loss.
• Agency Relationship.  Because of recent litigation by the FDIC-R over tax assets, regulators emphasize that one of the most important provisions in a tax allocation agreement is the clear statement of an agency relationship between the bank and holding company.  The agreement should clearly state that a holding company that receives a tax refund from a taxing authority holds the funds as an agent for the subsidiary(ies). 
• Board Approval.  All tax sharing agreements should be approved by the boards of directors of each holding company and insured depository institution in the consolidated group.

The agencies' addendum states that the agencies expect tax sharing agreements to be updated by October 31, 2014 (although it is not a true deadline).  Therefore, bank holding companies should update their tax sharing agreements and obtain board approvals promptly, if they have not already done so.

To Register Your Arbitration Clauses with AAA or Not to Register? That Is the Question!

art by Todd Berman / flickr

Does your organization have consumer contracts that include an arbitration clause?  Does the clause reference the American Arbitration Association?

You may already know that the American Arbitration Association ("AAA") recently announced that it would require registration of all consumer arbitration clauses incorporating its rules, apparently in response to pressure from the Consumer Financial Protection Bureau, which recently conducted a study of consumer arbitration clauses.  The requirement became effective in September.

Consumer Contracts

The AAA's new registration requirement applies to any arbitration clause in a consumer contract that invokes the AAA’s Consumer Rules or refers to the AAA. The rule change does not affect commercial contracts. As always, the distinction between consumer and commercial is a test of fact, regardless of the language of the document. If a consumer signs a document that purports to be an agreement for use with commercial customers and references the commercial arbitration rules, the consumer may nonetheless invoke the AAA Consumer Rules when bringing a claim.

Public Information

Registered arbitration provisions become publicly-accessible information. According to the AAA, “[b]y accessing the Registry, parties will be able to search businesses by name to determine if the AAA has reviewed their consumer arbitration clause and will administer their consumer arbitrations.” Moreover, according to the AAA, “the Registry will include online access to the arbitration clause reviewed by the AAA and may also include other documents related to the arbitration clause.” 

The Registry is available on the AAA website, and a password is not required to search it and view clauses that have been submitted. As of the date of this post, only a small number of arbitration provisions appear to be registered, and some clauses are not visible.  It is unclear to me whether this is simply because the website is new and still being populated.

Effect of Registration

 Rule 12 of the amended Consumer Rules states that beginning on September 1st, a business that “provides for or intends to provide for” AAA administration in a consumer contract “should notify the AAA of the existence of such a consumer contract or of its intention to do so at least 30 days before the planned effective date of the contract” and provide a copy of the arbitration clause to the AAA.  Rule 12 further states that the AAA will review the clause for material compliance with the Due Process Protocol and the amended Consumer Rules (including consumer fee limits). The Rule and the AAA website call for registration of existing clauses rather than just newly-adopted clauses.  (See, for example, Rule 55(viii).) The AAA may determine that additional, related provisions or documents are necessary in order to properly evaluate the clause, and may request them and post them on the Registry.

For arbitration clauses submitted to the AAA during 2014, the registration fee is $650, which will maintain the clause on the Registry through 2015. An annual fee of $500 is imposed thereafter.

Each arbitration provision used will require a separate registration and registration fee. The AAA's Rule states that "[a]ny different arbitration agreements submitted by the same business or its subsidiaries must be submitted for review and are subject to the current review fee." Therefore, it might make sense to use only one clause, or some other limited number of standard clauses, throughout your organization.

Effect of Not Registering

If a business has not registered its consumer clause prior to the filing of a consumer case, the AAA will require that the business register its clause at that time, and will "conduct an expedited review.” The expedited review costs an additional $250. The primary risk associated with not registering the clause in advance is the chance that the AAA will determine that it does not comply with the AAA Due Process Protocols or fee limitations, and therefore decline to arbitrate.

Updating Requirement

If an arbitration provision is updated or revised, it will require a subsequent registration with the AAA. Rule 55 purports to require re-registration and an additional $500 fee for "[a]ny subsequent changes, additions, deletions, or amendments." Despite the strict language of the Rule, it is unclear to me whether the AAA would take the position that a minor, non-substantive change would trigger the re-registration requirement; one would hope that a non-substantive change would not require an additional filing and $500 fee.

Conclusions and Additional Considerations

Based upon the new Rules and the analysis above, you might conclude that it is most cost-effective, and administratively useful, to standardize an arbitration clause (or a limited number of clauses) across the organization, whether or not you intend to register the clause in advance of a dispute. In making these determinations, you may want to consider the risk of the AAA rejecting the clause, the frequency with which your organization has historically been subject to arbitration demands, the benefits and burdens of standardizing an arbitration clause(s) across your organization, and (for heavily-regulated entities like banks) the risk of criticism for failing to register in advance, among other factors.

An Important Decision from the North Carolina Surpreme Court

image by Silver Season

In February, I wrote about an important case for lenders in North Carolina. The North Carolina Supreme Court has issued a highly-anticipated opinion that is important for lenders in North Carolina to understand.

Under North Carolina law, real estate can be held by married couples in a form known as "tenancy by the entireties," which means that the property cannot be reached by creditors of only one spouse. Therefore, lenders often obtain guarantees from the spouses of borrowers (or the spouses of individuals who own borrowing entities) to ensure that real estate assets (that might be necessary to satisfy a debt if the borrower or guarantor does not pay as agreed) will be availalbe as a source of repayment. Without spousal guarantees, lenders would often be unable to rely upon many real estate assets when underwriting a loan. Accordingly, the ability to obtain a guaranty of a spouse sometimes means the difference between a lender being able to make a loan and being forced to decline a loan application. 

The Equal Credit Opportunity Act ("ECOA") and its implementing regulation, Regulation B ("Reg B") were intended to prohibit gender-based discrimination in lending. Its original intent was to prevent married women who were qualified borrowers from being refused credit because they did not have their husbands' approval. (This was apparently a problem in the early 1970s!) Over time, the ECOA was amended and interpreted to generally prohibit, among other things, requiring a spousal guarantee absent a showing both that the borrowing spouse is not independently creditworthy enough for the loan and that the guaranteeing or supporting spouse was not selected only on the basis of his or her status as a spouse. Put simply, if an individual seeks a loan from a lender, the lender cannot automatically require that the borrower have his or her spouse co-sign or guarantee the loan. The ECOA provides for the assertion of a claim against the lender if the ECOA is violated.

In August of last year, a panel of the North Carolina Court of Appeals had opined that a violation of the ECOA not only gave a spouse the right to assert a claim against the lender, it also allowed the spouse to escape the guaranty entirely. (RL REGI North Carolina, LLC v. Lighthouse Cove, LLC, COA12–1279.)

The case at issue involved a lending arrangement where most of the assets were held by the owner of the borrowing entity, while the borrowing entity itself had comparatively few assets. The lender required not only the borrower's owner to provide a guarantee, but also the owner's spouse. The borrower defaulted. A forbearance agreement was entered into in which both the owner and the spouse acknowledged the validity of the debt and waived any and all claims against the lender. The borrower defaulted again later. The lender sought to recover against both the owner and the spouse pursuant to the guarantees. The spouse asserted the ECOA as a defense and both the trial court and the Court of Appeals agreed that the guarantee was unenforceable against the spouse.


The North Carolina Supreme Court then agreed to hear the appeal of the creditor. Because of the harmful precedent that would be established if the Court of Appeals' ruling was upheld, one of my colleagues and I filed an amicus curiae (friend of the court) brief on behalf of the North Carolina Bankers Association in support of the creditor, asking the Court to reverse the Court of Appeals' decision. We argued both the creditor's position (i.e., that the ECOA cannot be asserted as a defense and that, in any regard, the borrowers had waived any such claim or defense) and policy arguments supporting the creditor's position. In an unanimous opinion authored by Justice Newby, the Supreme Court reversed the Court of Appeals. The Court did not address the affirmative defense issue, instead finding that the spouse-guarantor waived any potential defense by signing an agreement containing a broad waiver clause. The Supreme Court thereby left for another day the issue of whether the ECOA can be asserted as a defense to a guarantee. You can read the full opinion here.

As a result of this decision, lenders are well-advised to seek broad waivers (such as those covering "any and all claims, defenses, or causes of action") in forbearance agreements and loan modification agreements.

   

Panel Discussion: Data Security, Breach Response, and Emergency Management

 I was honored to be asked by The Infusion Group to participate in a panel discussion on business security issues with some top thought leaders in North Carolina for the Innovate Work Summit Digital Series. Topics included data security, risk management, breach response, and emergency management. I enjoyed hearing the insights of these three smart, accomplished people. Please feel free to view the video on YouTube and share it with others who might be interested.