Decision enjoins attorney general’s enforcement of emergency Regulation 940 CMR 35.00. Editor’s note: This article is available for members only.
5/7/2020 11:20
On Wednesday, May 6, Judge Richard G. Stearns of the U.S. District Court for the District of Massachusetts issued a memorandum opinion and order granting ACA International’s motion for a temporary restraining order (TRO) and preliminary injunction in ACA’s civil action challenging Massachusetts Attorney General Maura T. Healey’s emergency regulation, 940 CMR 35.00, (the “Regulation”), which halted almost all debt collection activities in the state, including agencies’ unsolicited calls to consumer debtors. The Regulation had been in effect since March 26, 2020.
The Regulation comprises two primary prohibitions: Section 35.03, which prevented debt collectors and creditors from filing new lawsuits and pursuing judicial remedies, e.g., garnishments and levies; and Section 35.04, which prevented debt collectors from making telephone calls to consumers except where a consumer had specifically invited a call.
After an incisive analysis (discussed at length below), the opinion concluded with the court’s order imposing preliminary relief:
[T]he court hereby enters a temporary restraining order enjoining the attorney general from enforcing the provisions of the Regulation that ban telephonic communications initiated by the defined debt collectors with consumers in connection with the payment of a debt that is due and owing (the entirety of 940 CMR 35.04). The court also enjoins the Attorney General from enforcing 940 CMR 35.03 in so far as it bars the defined debt collectors from bringing enforcement actions in the state and federal courts of Massachusetts. This Order is intended to have no impact on any other law or Regulation regarding debt collection that is now in force.
Based on the terms above, the order is expected to remain in effect until a further order of the court modifies or lifts the order, or until the court issues a permanent injunction against the Regulation, which would occur only by agreement of the parties or following a full trial on the merits.
The Standard for Preliminary Relief (TRO or PI)
The court began its analysis by noting that the standard of preliminary relief, whether it be a temporary restraining order or a preliminary injunction, requires a plaintiff to establish that it will likely succeed on the merits; that it will suffer irreparable harm absent the preliminary relief; that the balance of the equities tip in its favor; and that the preliminary relief would serve the public interest. As the court observed, however, constitutional jurisprudence demands that in the First Amendment context, the likelihood of success on the merits is the “linchpin” of the preliminary injunction analysis.
First Amendment Protection and the Central Hudson Test
Moving into its First Amendment analysis, the court felt it “apparent” that the Regulation did not impose a constitutionally permissible “time, place, and manner” restriction but rather “a flat ban on a particular medium of speech (telephone communications) involving a particular subject matter (the solicitation of payment of a debt) by a particular subset of those persons (debt collectors) who engage in that type of speech.”
The court discussed whether ACA’s members’ speech should be treated as “pure” speech rather than commercial speech. The former benefits from the protection of a higher constitutional standard of review (so-called “strict scrutiny”), while the latter benefits only from “intermediate” scrutiny. But, as the court noted, “the speech at question was entitled [only] to the protections given to commercial speech . . . .” Where an economic motivation lies at the heart of speech, the speech will be defined as commercial speech. And the court observed that even where an ACA member has contacted a consumer not to request payment but to offer relief, e.g., by offering forbearance, the ultimate goal of the call remains economic.
In the commercial speech analysis, the court reiterated some well-trod ground: while commercial speech that is misleading may be banned altogether, a state has no constitutional power to suppress truthful, nonmisleading commercial messages on the grounds that they have the potential to mislead. And under the long-established Central Hudson test—so named after the case that spawned it, Central Hudson Gas & Electric Corporation v. Public Service Commission, 447 U.S. 557 (1980)—if the commercial speech in question merits First Amendment protection, i.e., if it is not false or misleading, then “there are three more questions to be answered: (1) is the asserted governmental interest substantial; (2) does the disputed Regulation advance that governmental interest; and (3) is the Regulation no more extensive than necessary to serve that interest.”
Insofar as the debt collection speech, “in its normal practice,” only has the potential to mislead—as opposed to being inherently false, misleading, or deceptive—the court acknowledged that it must be entitled to First Amendment protection. As a result, the court turned to the three additional questions of the Central Hudson test.
The First Central Hudson Factor: Substantial Government Interests
With respect to the first question of the three Central Hudson factors, the court considered the governmental interests that the attorney general asserted to support the Regulation: “(1) shielding consumers from aggressive debt collection practices that wield undue influence in view of the coronavirus pandemic; (2) protecting residential tranquility while citizens have largely had to remain at home during the coronavirus pandemic; and (3) temporarily vouchsafing citizens’ financial wellbeing during the coronavirus pandemic.”
Finding that the attorney general had offered no empirical evidence to support the proposition that “consumers are more susceptible to undue influence exerted by debt collectors during a pandemic than would ordinarily be the case,” the court dismissed the first asserted governmental interest. As for the third asserted governmental interest, “vouchsafing the financial wellbeing of Massachusetts residents,” the court saw little connection to prohibiting telephone collection agency’s telephone calls.
The court allowed, however, that there might be sufficient governmental interest in “preserving residential tranquility” to support the Regulation, and for the purposes of its TRO decision, assumed without deciding that this interest would be enough to satisfy the second prong of the Central Hudson test.
The Second Central Hudson Factor: Advancing the Government Interest to a “Material Degree”
The assumption of a “substantial” government interest in preserving residential tranquility merely brought the court’s analysis to a more difficult hurdle for the attorney general: demonstrating that the Regulation advances the goal of preserving domestic tranquility “to a material degree” and, at the same time, showing that this goal could not have been achieved “in a manner that restricts speech, or that restricts less speech.” As the court found, quoting Chief Judge Saylor’s opinion in Massachusetts Association of Private Careers Schools v. Healey, 159 F. Supp. 3d 173 (D. Mass. 2016), “these final two steps of Central Hudson are complementary.”
Considering the effect of the Regulation on domestic tranquility, “[t]he best that can be said for the Regulation is that it decreases incrementally the number of times that a phone might ring in a debtor’s home with a wanted or unwanted call from one species of debt collector—although in this day and age of cell phones and caller ID the option of simply not answering the phone or placing it in silent mode is a viable alternative for consumers.”
And, according to the court, even that incremental benefit would have to be deemed minimal, as existing Massachusetts law already imposes a limit of two calls per week. (In fact, 940 CMR 7.00 limits collection agencies to two “communications”—in person or via text message or telephone call, including audio recordings—for each debtor.) And given that the Regulation carves out exceptions for mortgagors, landlords, and nonprofit entities, the Regulation clearly “singles out one group, debt collectors, and imposes a blanket suppression order on their ability to use what they believe is their most effective means of communication, the telephone.”
The Third Central Hudson Factor: No More Extensive Than Necessary
To the extent that the attorney general meant to accomplish a strict liability ban on all deceptive and misleading phone calls from debt collectors, “the Regulation is redundant,” as existing state and federal law contain such prohibitions. In this vein, while the court found the “Attorney General’s desire to protect citizens of Massachusetts during a time of financial and emotional stress created by the COVID-19 pandemic” to be a laudable goal, the court concluded that the Regulation did not add “anything” to the protections already afforded to debtors under state and federal law—except the “unconstitutional ban on one form of communication.”
At the same time, the court—quoting ACA’s argument verbatim—found the prohibition on filing lawsuits and pursuing post-judgment remedies to be impermissible under federal law, noting that “[t]he constitutional guarantee of the right of citizen access to the courts, state and federal, has been identified by the United States Supreme Court as ‘among the most precious of the liberties safeguarded by the Bill of Rights.’”
Although the attorney general attempted to raise some cases to defend this overreach, the court found them all inapposite. Even in the closest case, the court still found ample ground to reject the attorney general’s assertion of power to limit access to the courts: “the mere fact of an emergency does not increase constitutional power, nor diminish constitutional restrictions.”
Irreparable Harm to Support Preliminary Relief
With respect to the “irreparable harm” prong of the Central Hudson test, the court noted the deep-seated rule that “a finding of a First Amendment violation obviates the need for an additional showing of irreparable harm.” But the court further noted in a footnote the economic harm that ACA’s member-declarants have already suffered because of the Regulation.
Balancing the Equities and Public Interest
Finally, in balancing the equities of the case and considering the public interest, the court presented three reasons, in one succinct paragraph, for granting the TRO at this stage of the case (quoted verbatim here, but enumerated for clarity):
- Given the plethora of protection provided to debtors by the laws and Regulations the court has previously cited, the interest a debtor may have in the Regulation may not weigh as heavily as the threat of extinction faced by smaller collection agencies who have been effectively put out of business.
- Of perhaps greater concern is the impact the Regulation may have on hospitals and utilities who depend on collection agencies to remain solvent.
- Finally, the court recognizes the argument advanced by ACA that a capitalist society has a vested interest in the efficient functioning of the credit market which depends in no small degree on the ability to collect debts.
The court further noted that the Massachusetts Division of Banks had declared collection agencies to be “essential businesses,” presumably with the expectation that they will keep their doors open and staff employed.”
State Law Claims and the Eleventh Amendment
Before addressing ACA’s constitutional arguments, the court did take a moment to dispatch the several state-law claims that ACA had asserted, writing that although they were “matters of genuine importance,” the court felt that in light of the Eleventh Amendment “it is not for a federal court to police the boundaries of a state constitution for violations by its officials.” This left for the court the more substantial First Amendment arguments that ACA raised against the Regulation. Yet on the federal constitutional claims that ACA raised under the First Amendment, the court comprehensively found in ACA’s favor, as discussed above.
Next Steps
Now, with the TRO in place, the litigation will proceed with the court and the attorney general’s office to dictate the most likely next steps: potential discovery, a possible interlocutory appeal, or a possible nonjudicial resolution (e.g., the AG’s withdrawal of the Regulation). Until further notice, however, the attorney general may not enforce the Section 35.04 of Regulation that bans telephonic communications initiated by debt collectors or Section 35.03 in so far as it bars debt collectors from bringing enforcement actions in the state and federal courts of Massachusetts. Collection agencies may resume their normal activities in accordance with this order, but would be wise to pay close attention to the litigation in case the TRO is withdrawn for any reason. In addition, members would be well advised to continue to tread lightly as they resume collections and to treat consumers with the same empathy and courtesy that has become the hallmark of ACA members’ collections activities.
