We previously reported that the Connecticut Attorney General, on behalf of himself and the Attorneys General of Indiana, Kansas and Vermont (the “state AGs”), had filed a joint motion to intervene in a CFPB enforcement action against Sprint to request a Consent Order modification permitting unused settlement funds to be paid to the National Association of Attorneys General (“NAAG”). Under the proposed modification, the undistributed settlement funds would be used by NAAG for the purpose of developing the National Attorneys General Training and Research Institute Center for Consumer Protection (“NAGTRI”).
Subsequently, in February 2017, the state AGs and the defendant filed a joint submission seeking to allocate $14 million of the unused settlement funds from the U.S. Treasury to NAAG and to redirect the remaining $1.14 million to a community organization that provides internet access to underprivileged high school students. The court thereafter directed the CFPB and the DOJ to state, in separate submissions, their positions with respect to the modified proposal to redirect the unused settlement funds.
The CFPB filed what the court characterized as “a gossamer two-page memorandum, modifying its previous position of indifference to one of steadfast opposition to the State AGs’ proposal.” In a “Statement of Interest of the United States of America,” which the court characterized as “a thoughtful submission,” the DOJ likewise opposed the proposal. “If NAAG wishes to fund its program with federal dollars,” remarked the DOJ, “it may seek a Congressional appropriation, but no portion of the Redress Amount may be diverted for that purpose.” Although still advocating for the proposed modification, the defendant “took a more measured tone” in its responsive memorandum, “in essence deferring to the Court on the issue.” The State AGs filed a responsive memorandum, maintaining what the court characterized as “a full-court press, infusing their brief with a new basis to substantiate their modification request.”
In a well-reasoned Opinion and Order, the court recently granted the joint motion to intervene, and denied the modification request. The court analyzed the proffered alternative bases for modification separately.
Rule 60(a) – Modification to Correct an Inadvertent Error: In their motion and supporting memorandum, the State AGs asserted that their proposed modification was permissible, pursuant to Fed. R. Civ. P. 60(a), because it would correct an inadvertent error. Specifically, they argued that “wiring the remaining funds to the U.S. Treasury contravenes the parties’ intent to use all funds for consumer protection purposes.” The CFPB ultimately opposed the proposed modification on the basis that there is no clerical mistake or inadvertent error in the Consent Order.
The court framed “the critical question” with respect to the inadvertent error argument as whether the Final Judgment, which incorporates the Redress Plan by reference, establishes an intent “for the settlement funds to be used generally toward consumer protection initiatives, untethered to [the defendant’s] third-party billing practices.”
Under the Residual Clause of the Redress Plan, the Bureau was the only party that could apply the unused settlement funds toward other equitable relief. The Residual Clause relegated the Federal Communications Commission (“FCC”) and the State AGs, which had been involved in parallel litigation with the defendant, to consulting with the Bureau concerning whether unused settlement funds might be used for other equitable relief. However, with respect to the State AGs’ motion to redirect the unused settlement funds, the court noted “that the CFPB’s involvement at this juncture in the litigation has been underwhelming.”
The court observed that, “[u]ntil this Court issued its April 10 Order, the CFPB appeared uninterested in the fate of the unexpended funds.” In the view of the court, this disinterest was evidenced by the fact that the unexpended funds still reside in the defendant’s account notwithstanding a Redress Plan provision directing the defendant to wire any remaining balance to the CFPB after nine months from the Claims Deadline. The court perceived this as an abdication of responsibility that “leads this Court to ask who will guard the guardians.”
Secondly, the court noted that the Residual Clause expressly required that any other equitable relief must be “reasonably related to the allegations set forth in the Complaint” (i.e., the alleged third-party billing practices of the defendant). “Nowhere in the Final Judgment or the Redress Plan,” the court stated, “is there any language supporting the State AGs’ view that leftover funds should broadly aid consumers.” The absence of any such language may have prompted the court, in its Memorandum and Order directing the CFPB and the DOJ to address the State AGs’ proposal, to characterize the clerical error argument as “particularly galling.”
Rule 60(b)(6) – Modification Due to Extraordinary Circumstances or Extreme Hardship: The court next addressed a new argument asserted by the State AGs in their response to the CFPB and DOJ submissions – that the proposed modification was authorized by Fed. R. Civ. P. 60(b)(6) for other reasons that justify awarding the relief requested. In this regard, the State AGs noted “the Consent Order represents a global settlement involving” the parties to the CFPB enforcement action, the FCC and the state attorneys general. They further noted that, “should the Court deny the proposed modification, consumers, like those harmed by the acts and practices alleged in the Complaint, may not have the full benefit of a valuable resource for consumers – consumer protection attorneys well-trained by the NAGTRI Center for Consumer Protection.”
The court stated, however, that Rule 60(b) required the moving party to demonstrate extraordinary circumstances or extreme hardship and concluded that “[t]he equities in this action do not weigh in favor of the relief the State AGs seek.” After acknowledging that the proposed alternative use of the funds “is perhaps a noble undertaking,” the court nevertheless concluded that the State AGs should seek a Congressional appropriation if they wish to fund the NAGTRI with federal dollars. Absent other equitable relief reasonably related to the challenged third-party billing practices, noted the court, “[c]ondoning an unintended use of the settlement funds . . . . would circumvent ‘the congressional appropriations process under the guise of Article III’ and invoke questions regarding ‘the proper relationship of our Federal government’s three branches when dealing with the People’s money.’” Observing that “[t]he proper body to which the State AGs must make their appeal is Congress,” the court stated that “[t]here is simply no extraordinary hardship or circumstance to justify re-writing the negotiated terms of the Redress Plan and Final Judgment.”
Finally, the court noted that the State AGs could have negotiated the requested relief in their separate settlement with the defendant. Permitting them to do so now in the federal enforcement action by the Bureau would “hollow out the terms of the Final Judgment” and “permit State actors with, at best, a collateral interest in this Federal action to hijack a significant portion of the settlement funds under the guise of ‘consumer protection,’ . . . for the purpose of underwriting a project that principally benefits the states.” In the view of the court, this result would erode the “extraordinary circumstances” standard for a modification pursuant to Rule 60(b) and “deprive the Federal agency here of its responsibility to monitor and enforce the settlement’s terms to completion.”
Accordingly, the court concluded that “[t]he time when these funds should have been remitted to the People is long past,” and directed the Bureau to deposit the unused settlement funds, including any accrued interest, with the U.S. Treasury as disgorgement forthwith.
Analogizing to the Sessions Memorandum: One of our colleagues recently reported on the U.S. Attorney General’s memorandum (the “Sessions Memorandum”) prohibiting “payments to various non-governmental, third-party organizations as a condition of settlement with the United States.” In the aftermath of its issuance, the Chair of the Senate Judiciary Committee sent a letter to Attorney General Sessions inquiring as to whether payments made to non-governmental third parties pursuant to Obama-era settlements with the DOJ “could lawfully be rescinded and re-directed back into the General Fund of the U.S. Treasury.”
In its decision, the court analogized to the Sessions Memorandum. Although acknowledging that the Sessions Memorandum was not directly on point, the court nevertheless characterized it as instructive. Specifically, the court noted that the Sessions Memorandum “recognizes that the ‘goals of any settlement are, first and foremost, to compensate victims, redress harm, or punish and deter unlawful conduct,’ and seeks to end the practice of using settlements to provide ‘payment or loan to any non-governmental person or entity that is not a party to the dispute.’” (emphasis in original).
