Consumer Finance Insights
December 15, 2016

Court Applies Heightened Pleading Standard to CFPB Complaint Alleging Deceptive Practices

On November 15, 2016, the Central District of California issued a ruling (subscription required) in CFPB v. Prime Marketing Holdings, LLC dismissing without prejudice four out of five claims on grounds that plaintiff CFPB had not satisfied the heightened pleading standard of Federal Rule of Civil Procedure 9(b).  The court held that the stringent Rule 9(b) standard—which generally applies to claims of fraud — also applied to the CFPB’s claims of unfair, deceptive or abusive acts or practices (UDAAP) because, taken as a whole, the CFPB’s allegations constituted a “unified course of fraudulent conduct,” even though the complaint had not explicitly alleged that defendant Prime Marketing had engaged in fraud.

In order to survive a motion to dismiss, a complaint must satisfy one of two different pleading standards set out by the Federal Rules of Civil Procedure.  The less-stringent Rule 8(a) — which applies to the majority of civil claims —requires the plaintiff to allege facts which, if accepted as true, would state a claim that is plausible on its face.  The Rule 9(b) standard is more demanding, but applies only where the complaint alleges “circumstances constituting fraud.”  To satisfy Rule 9(b), the plaintiff must allege specific details about the alleged fraudulent conduct, such as when and where the conduct occurred, and the specific content of any alleged false representations.  In some circumstances, the difference in the pleading standard can determine whether a complaint survives a motion to dismiss, though courts typically allow plaintiffs at least one chance to file an amended complaint to correct such deficiencies.

In Prime Marketing, the CFPB challenged the practices of Prime Marketing, a credit repair service that offered to remove negative items from consumers’ credit reports in exchange for recurring fees.  The CFPB alleged that Prime Marketing exaggerated the potential results that its credit repair services could achieve (e.g., what types of credit reporting items it could demand that the credit bureaus delete), that it misled consumers about the fees it would charge before it could produce a credit report showing the promised results, and that it misrepresented the terms of its money-back guarantee.  As a result, the CFPB claimed, Prime Marketing’s actions were unfair and deceptive under provisions of the Consumer Financial Protection Act (CFPA) and violated several sections of the Telemarketing Sales Rule (TSR).

The court determined that Ninth Circuit precedent holds that the Rule 9(b) pleading standard applies to claims to the extent that the allegations, taken together, constitute “a unified course of fraudulent conduct” which “sound[s] in fraud.”  The CFPB had argued that the Ninth Circuit had not previously applied the heightened Rule 9(b) standard to CFPA claims.  But the district court found one instance where the Ninth Circuit had applied Rule 9(b) to a claim brought under the Federal Trade Commission Act that also involved unfair or deceptive acts or practices.  Turning to the Prime Marketing complaint, the court found that Rule 9(b) applied to the CFPB’s claims because, taking all of the allegations together, the complaint alleged that Prime Marketing “participated in a unified course of fraudulent conduct, multiple portions of which violated the TSR.”  Applying Rule 9(b), the court dismissed the complaint without prejudice because the allegations did not include any specific examples of the complained-of conduct.

The Prime Marketing decision is potentially broad in scope, opening the door for litigants to argue that Rule 9(b)’s heightened pleading standard applies every time the CFPB alleges a UDAAP claim.  At the very least, the opinion suggests that Rule 9(b) may now apply to UDAAP claims in the Central District of California, because the CFPB opted to amend its complaint without appealing the decision.  But even if the Prime Marketing case does set a new pleading standard for UDAAP claims more broadly, it is unlikely that such a standard would pose an insurmountable obstacle to the CFPB.  The CFPB has the advantage of being able to aggregate consumer complaints against large consumer financial services companies, which the agency can cite in order to meet the Rule 9(b) standard.  And that is exactly what the CFPB appears to have done in the Prime Marketing case, having filed its amended complaint (subscription required) — which is two-and-a-half times the length of the original complaint, and is full of additional details from consumer complaints — on November 28, 2016.

LenderLaw Watch will continue to monitor this issue and, to the extent that this ruling represents the start of a new trend, will bring you updates as they arise.

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