People of the State of California, acting by and through San Francisco City Attorney David Chiu v. InComm Financial Services, Inc. et al

Filing 37

ORDER GRANTING MOTION TO REMAND. The case shall be REMANDED to the California Superior Court for the County of San Francisco. Signed by Judge William H. Orrick on 03/26/2024. (jmd, COURT STAFF) (Filed on 3/26/2024)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 PEOPLE OF THE STATE OF CALIFORNIA, ACTING BY AND THROUGH SAN FRANCISCO CITY ATTORNEY DAVID CHIU, 7 8 9 Plaintiff, 10 United States District Court Northern District of California ORDER GRANTING MOTION TO REMAND Re: Dkt. No. 28 v. 11 Case No. 3:23-cv-06456-WHO INCOMM FINANCIAL SERVICES, INC., et al., 12 Defendants. 13 14 The People of the State of California, by and through San Francisco City Attorney David 15 16 Chiu (“the City”), filed this lawsuit against defendants InComm Financial Services, Inc. 17 (“InComm”), TBBK Card Services, Inc. (“TBBK”), Sutton Bank (“Sutton”) and Pathward N.A. 18 (“Pathward”) in state court. The defendants removed the case to federal court based on diversity 19 jurisdiction, and now the City moves to remand it. Because the State of California is the real party 20 in interest here, and California is not a citizen of any state for the purposes of diversity 21 jurisdiction, there is no federal jurisdiction to hear this suit. For that and the following reasons, 22 the City’s motion is granted. BACKGROUND 23 24 25 I. FACTUAL BACKGROUND The following facts are alleged in the plaintiff’s complaint. (“Compl.”) [Dkt. No. 1-1] Ex. 26 B. Defendant InComm is a South Dakota corporation headquartered in Georgia that provides 27 “payment-related services” to consumers and business. Id. ¶ 9. One of its products is called a 28 “Vanilla card.” Id. ¶ 9. These cards function as nonreloadable debit cards and, like debit cards, United States District Court Northern District of California 1 can be used as an alternative to cash. Id. ¶¶ 1, 21–22. They are sold directly to consumers and are 2 not intended or designed to be used for business purposes. Id. ¶ 26. They are sold in-store at 3 retailers throughout California and in San Francisco, and they can also be purchased online. Id. 4 ¶ 31. The other defendants--TBBK, a South Dakota corporation headquartered in South Dakota; 5 Sutton, an Ohio corporation headquartered in Ohio; and Pathward, a Delaware corporation 6 headquartered in South Dakota--issue the Vanilla cards sold and serviced by Incomm, including 7 cards sold in San Francisco and throughout California. Id. ¶¶ 10–12. 8 The City alleges that Vanilla card purchasers and consumers have, since at least 2013, been 9 impacted by a practice called “card draining.” Id. ¶¶ 41, 43. This occurs when the funds on a card 10 are used or drained by a third-party without the cardholder’s permission, and often before the 11 cardholder has ever had the chance to use the card. Id. ¶¶ 41-43. The City alleges that this 12 “relatively unsophisticated crime” is made possible by InComm’s lax and inadequate security 13 measures. Id. ¶ 50. It asserts that InComm knows about the card draining, and knows how and 14 why its cards are drained, but has failed to implement reasonable security measures to make its 15 products less susceptible to theft. Id. ¶¶ 53–73. The City also alleges that the defendants fail to 16 provide refunds to Vanilla card consumers, in contravention of their legal obligations. Id. ¶¶ 74– 17 93. 18 The complaint asserts that consumers are likely to be misled about the security of the 19 Vanilla cards and about InComm’s refund process. See id. ¶¶ 94–103. It also alleges that the 20 defendants’ conduct harms consumers by forcing them to spend time and money waiting for 21 refunds, by shaming consumers when their cards are declined for lack of funds, and by 22 embarrassing consumers that give the cards as gifts, only to be told by the recipient that there were 23 no funds on the card. Id. ¶¶ 104–11. 24 II. 25 PROCEDURAL BACKGROUND This lawsuit was filed in state court, alleging that the defendants violated California’s 26 Unfair Competition Law (“UCL”), Cal. Bus. & Prof. Code § 17200, et seq; see Compl. ¶¶ 118–24. 27 The City seeks an injunction, restitution, and civil penalties. See Compl. at pp. 41–42. 28 InComm removed the case to this court with the consent of the other defendants. [Dkt. No. 2 1 1.]. The City has moved to remand the case to state court. (“Mot.”) [Dkt. No. 28.]. InComm filed 2 an opposition. (“InComm Oppo.”) [Dkt. No. 30.]. Pathward also filed an opposition. (“Pathward 3 Oppo.”) [Dkt. No. 31.]. The City replied. (“Repl.”) [Dkt. No. 33.]. I vacated the hearing because 4 the motion was adequately presented on the papers. 5 United States District Court Northern District of California 6 LEGAL STANDARD Generally, a case can only be removed from state to federal court when the federal court 7 would have had original jurisdiction over it. 28 U.S.C. § 1441(a). Under 28 U.S.C. § 1332(a)(1), 8 federal diversity jurisdiction exists when each plaintiff is a citizen of a different state from each 9 defendant and the amount in controversy exceeds $75,000. Natural persons are the citizens of the 10 state in which they are domiciled—that is, the state in which they reside with intent to remain 11 permanently. See Adams v. W. Marine Prod., Inc., 958 F.3d 1216, 1221 (9th Cir. 2020). 12 But a state is not considered to be a citizen of anywhere, and where a state brings a case 13 under its own state law, federal courts do not have diversity jurisdiction. See Mississippi ex rel. 14 Hood v. AU Optronics Corp., 571 U.S. 161, 174 (2014) (citing Mo., Kan. & Tex. Ry. Co. v. 15 Hickman, 183 U.S. 53, 57 (1901) (“Missouri Railway”)). Therefore “neither a state nor a state 16 agency [can] be a party to a diversity action.” Dep’t of Fair Emp. & Hous. v. Lucent Techs., Inc., 17 642 F.3d 728, 737 (9th Cir. 2011) (“Lucent”) (citation omitted). However, the “mere presence” of 18 the state as the party plaintiff does not defeat diversity jurisdiction unless its interests “satisfy the 19 real party to the controversy requirement.” Id. (citations omitted). 20 Whether a state is the real party in interest for diversity jurisdiction purposes is a question 21 of federal law, although the inquiry is informed by state law. In re Facebook, Inc., Consumer 22 Priv. User Profile Litig., 354 F. Supp. 3d 1122, 1124 (N.D. Cal. 2019). This rule is the same 23 when the plaintiff is not the state itself but has brought suit on behalf of the state, so long as the 24 state is the “real party in interest.” Id. at 1124. 25 “[R]emoval statutes should be construed narrowly in favor of remand to protect the 26 jurisdiction of state courts.” Cnty. of San Mateo v. Chevron Corp., 32 F.4th 733, 764 (9th Cir. 27 2022) (citation omitted). “The defendant has the burden of proving by a preponderance of the 28 evidence that the requirements for removal jurisdiction have been met.” Id. at 746 (citation 3 1 omitted). DISCUSSION 2 The crux of the motion requires me to decide whether the City or the State of California is United States District Court Northern District of California 3 4 the real party in interest. The parties agree that a state is not a citizen for diversity jurisdiction 5 purposes and agree that if a state brings a lawsuit under state law, there is no basis for federal 6 jurisdiction. See Mississippi, 571 U.S. at 174. The City argues that California is the real party in 7 interest given the nature of the proceedings, the UCL’s goal of protecting the public’s economic 8 and social well-being, the statutory authorization allowing the City to step into the shoes of the 9 State, and the relief requested. See generally Mot. In opposition, the defendants argue that the 10 City is the real party in interest because the lawsuit protects and promotes only San Francisco’s 11 interests and seeks relief that will benefit only the City. See generally Oppo. Two cases guide the determination of whether the state is the real party in interest: Lucent, 12 13 642 F.3d 728, and Nevada v. Bank of America Corp., 672 F.3d 661 (9th Cir. 2012). See 14 California v. Purdue Pharma L.P., No. SACV 14-1080-JLS DFM, 2014 WL 6065907, at *2 (C.D. 15 Cal. Nov. 12, 2014). “[T]he overall test is whether the government official or entity’s lawsuit 16 would primarily vindicate state interests and primarily obtain relief for the state, rather than 17 serving primarily parochial interests and obtaining parochial relief.” In re Facebook, 354 F. Supp. 18 3d at 1129. This inquiry requires courts to consider the case as a whole and examine “the essential 19 nature and effect of the proceeding as it appears from the entire record.” Nevada, 672 F.3d at 670 20 (quoting Lucent, 642 F.3d at 740). 21 I. 22 THE NATURE OF THE PROCEEDINGS AS A WHOLE The defendants argue that the City fails to allege any harm to the state as a whole and 23 instead presumes that the State is always a real party in interest whenever a government entity 24 brings suit under the UCL. Pathward Oppo. 5–6, 10; InComm Oppo. 8–11. In turn, the City 25 asserts that this lawsuit protects and promotes California consumers as a whole and so primarily 26 vindicates the State’s interest in enforcing its consumer protection laws. Mot. 7–10. 27 28 In examining the nature and proceedings as a whole, the guiding inquiry asks “what interest California has in this litigation pursuant to its laws.” Lucent, 642 F.3d at 738. Though a 4 1 state’s quasi-sovereign interest in enforcing state law does not necessarily make it the real party, 2 see id., it is sufficient when that interest is the primary one in the case, Nevada, 672 F.3d at 671. 3 4 civil action brought by a governmental entity under [the UCL] is “fundamentally a law 5 enforcement action designed to protect the public and not to benefit private parties.”’” California 6 v., Inc., No. 2:22-CV-02578-FLA-JPRX, 2023 WL 2497862, at *2 (C.D. Cal. 7 Mar. 14, 2023) (citing City & Cnty. of San Francisco v. PG & E Corp., 433 F.3d 1115, 1125–26 8 (9th Cir. 2006)). “The public has a substantial and specific interest in enforcing consumer 9 protection laws.” Id. (citing Vasquez v. Super. Ct., 4 Cal. 3d 800, 808 (1971) (subsequent history 10 11 United States District Court Northern District of California Additionally, “the California Supreme Court and the Ninth Circuit have confirmed that ‘a omitted)). In Lucent, 642 F.3d at 735–36, the Ninth Circuit determined that the state agency, rather 12 than the State itself, was the real party in interest, where the discrimination lawsuit alleged that a 13 single individual was subjected to disability discrimination and retaliation at work. The plaintiff- 14 state agency argued that the State was the real party in interest because the statute at issue, the Fair 15 Employment and Housing Act, “state[d] that California has its own interest in such litigation,” 16 including “to protect and safeguard the right and opportunity of all persons to seek . . . 17 employment without discrimination,” avoid domestic unrest, support full utilization of workers, 18 and protect the interests of employees, employers, and the public in general. Id. at 738 (citing Cal. 19 Gov’t Code § 12920). But the Ninth Circuit determined that these were “general government 20 interest[s]” insufficient to satisfy the real party in interest requirement. Id. at 738–39 (citing 21 Missouri Railway, 183 U.S. at 60). 22 In contrast, in Nevada, 672 F.3d at 664, 670–71, the Ninth Circuit determined that the 23 State of Nevada was the real party in interest in a lawsuit brought by the state Attorney General 24 against an out-of-state bank for allegedly fraudulent mortgage and foreclosure practices. The 25 court noted that the Attorney General sued pursuant to a statute that specifically authorized it to 26 bring an action in the name of the state as a whole, and that the suit sought to protect hundreds of 27 thousands of aggrieved homeowners, which affected the state economy as a whole. See id. at 665, 28 670. Looking at the “case as a whole” and the “essential nature and effect of the proceeding,” the 5 1 United States District Court Northern District of California 2 court determined that Nevada was the real party in interest. Id. at 670. The Central District reached similar conclusions in two suits brought under the UCL. In 3 Purdue Pharma, 2014 WL 6065907, at *1–3, county counsel sued pharmaceutical manufacturers 4 for allegedly deceptive marketing that created an “epidemic” of opioid abuse. The court reasoned 5 that the UCL permits local prosecutors to bring cases in the name of the people of the State and 6 that this lawsuit sought to address harm ““jeopardizing the health and safety of all Californians,” 7 so the State was the real party in interest. Id. at *3 (citations omitted). Similarly in HomeAway, 8 2023 WL 2497862, at *1, the City Attorney sued an online platform for short-term housing rentals 9 for allegedly violating local law by failing to properly register hosts. The court again noted that a 10 suit brought by the government under the UCL is “fundamentally a law enforcement action 11 designed to protect the public,” and that because the lawsuit sought to eliminate unlawful business 12 practices that contributed to the statewide housing crisis, the State had a concrete interest in the 13 lawsuit. See id. at *2–3, 10 (citations omitted). 14 Here, the proceedings are akin to Nevada, Purdue Pharma, and, because 15 they seek to assert statewide protections under the UCL and protect California consumers as a 16 whole. See id. at *2. The alleged harms widely affect California consumers and the state 17 economy, including the risk of serious financial harms created by unpaid or late bills, Compl. 18 ¶¶ 109–10, embarrassment to consumers, id. ¶¶ 105–08, time wasted with customer service, id. 19 ¶¶ 105–06, and the impact of unfair and fraudulent business practices on the state, id. ¶¶ 112–24. 20 By seeking to ameliorate these harms to state consumers, this lawsuit emphasizes and promotes 21 California’s strong state interest in ensuring a fair marketplace and effectively enforcing its 22 consumer protection laws—much like the state in Nevada, Purdue Pharma, and Homeaway, and 23 unlike the overly “general” interest discussed in Lucent, 642 F.3d at 740. 24 Importantly too, the statutory authorization to bring this suit on behalf of California shows 25 that the “essential nature” of the proceeding benefits state interests. See Nevada, 672 F.3d at 670. 26 The UCL specifically authorizes the city attorney of any “city and county”—like San Francisco— 27 to bring suits “in the name of the people of the State of California” against entities that engage in 28 6 United States District Court Northern District of California 1 unfair competition. Cal. Bus. & Prof. Code § 17206(a).1 This parallels the statute in Nevada, 2 which allowed the attorney general to “bring an action in the name of the State of Nevada” against 3 entities that “engaged or [are] engaging in a deceptive trade practice.” 672 F.3d at 671 (quoting 4 Nev. Rev. Stat. § 598.0963(3)); see also In re Facebook, 354 F. Supp. 3d at 1125 (similar, under 5 Illinois law). It is unlike the general-purpose language of the statute in Lucent, which did not 6 specifically authorize suits on behalf of the state but rather merely explained the importance of 7 protecting and safeguarding the rights of the public. 642 F.3d at 738 (citing Cal. Gov’t Code 8 § 12920). And it also counters the defendants’ arguments that the plaintiffs are improperly 9 assuming that all UCL lawsuits are brought on behalf of the state: instead, the Ninth Circuit and 10 California Supreme Court “have confirmed that a civil action brought by a governmental entity 11 under [this statute] is fundamentally a law enforcement action designed to protect the public and 12 not to benefit private parties.”, Inc., 2023 WL 2497862, at *2 (quoting PG&E 13 Corp., 433 F.3d at 1125–26) (quotation marks omitted)(emphasis supplied); see also People v. 14 Pac. Land Rsch. Co., 20 Cal. 3d 10, 17 (1977). The State is the real party in interest. The defendants also argue that the complaint fails to allege sufficient harm to California 15 16 citizens as opposed to residents in other states, but this is unpersuasive. First, contrary to 17 InComm’s assertion, the complaint names specific California residents allegedly harmed by the 18 defendants’ practices. See, e.g., Compl. ¶ 106. Second, the defendants cite no law to support their 19 argument that the plaintiff must show a certain proportion of harmed consumers reside in 20 California. See Pathward Oppo. 11; see also Cnty. of San Mateo, 32 F.4th at 764 (noting the 21 burden is on the defendant to show that the requirements for removal are met). Indeed, the 22 examples of alleged harm against consumers in other states are included to describe the harm, its 23 widespread nature, and the defendants’ knowledge; they do not preclude the State of California 24 from being the real party in interest. See Compl. ¶ 104-11. These arguments do not show that the 25 26 27 28 The defendants’ assertion that San Francisco’s population has fallen below the 750,000-person threshold required by another subsection of this statute is unpersuasive, because the statute clearly authorizes the city attorney of any “city and county” to bring such suits. Cal. Bus. & Prof. Code § 17206(a). The defendants do not appear to contest authorization under this subsection. 1 7 1 State is not the real party in interest.2 The nature of the proceedings show that California is the real party in interest. 2 3 II. 4 The City seeks three types of relief: injunctive relief under California Business and 5 Professions Code section 17200, restitution under section 17203, and civil penalties under 6 sections 17200 and17206. The defendants argue that these requests are available to many parties, 7 including private individuals, but that the State can only be the real party in interest where the 8 relief sought is available to the State alone. Pathward Oppo. 11. As a preliminary matter, and contrary to the defendants’ framing, the nature of the relief 9 United States District Court Northern District of California NATURE OF THE RELIEF SOUGHT 10 requested is neither a standalone element nor dispositive for determining the real party in interest. 11 All cases discussing this jurisdictional inquiry address the relief requested as one consideration 12 among many, though it is often one of the most important. See, e.g.,, Inc., 2023 13 WL 2497862, at *4 (assessing the relief requested as well as other considerations in concluding 14 that the state was the real party in interest); Purdue Pharma, 2014 WL 6065907, at *3 (same); see 15 also Lucent, 642 F.3d at 738–39 (agreeing with defendants that the relief requested supported the 16 finding that the individual was the real party in interest, but relying on other considerations in final 17 determination). Recognizing its importance to the inquiry, I discuss it separately here. The relief requested here favors finding that California is the real party in interest. First, 18 19 under the statute at issue, civil penalties are available only to the government, not to private 20 litigants. See Cal. Bus. & Prof. Code § 17206. Where relief is “available to [the government] 21 alone” rather than “to individual consumers,” this favors finding the State is the real party in 22 interest. Nevada, 672 F.3d at 671–72; see also, Inc., 2023 WL 7497862, at *3 23 (reaching same conclusion based in part on relief requested); Purdue Pharma, 2014 WL 6065907, 24 at *3 (same). And though the defendants argue that the State cannot be the real party in interest 25 26 27 28 InComm’s extended arguments that the City’s allegations are merely “conclusory” and lack merit, InComm Oppo. 3-5, are, of course, not arguments that I consider on a motion to remand when determining if I have subject matter jurisdiction to even consider the merits of the case. See In re Facebook, 354 F. Supp. 3d at 1136 (“Of course, we don’t yet know if [the plaintiff]’s claims have merit, but that’s not the point. The point is that she has the right, on behalf of the State of Illinois, to assert these claims and attempt to vindicate these interests.”). 8 2 United States District Court Northern District of California 1 where penalties flow to the city, I agree with the court in, Inc., 2023 WL 2 7497862, at *3, which rejected that argument and determined that where the money flows is less 3 important than what it is used for. Here, as there, the money is statutorily required to be used “to 4 advance a State interest—the enforcement of consumer protection laws.” Id. (citing Cal. Bus. & 5 Prof. Code § 17206(c)(4)). This supports the finding that the State is the real party in interest. 6 Second, while injunctive relief is available to individuals and the government, the State is 7 subject to a lower evidentiary standard, which other courts have found sufficient for serving state 8 interests. See Purdue Pharma, 2014 WL 6065907, at *3 (finding the relief sought showed that 9 California was the real party in interests because “as in Nevada, Plaintiff seeks injunctive relief 10 that is subject to a lesser evidentiary standard than for private individuals” (first citing Cal. Bus. & 11 Prof. Code §§ 17204, 17535; and then citing Nevada, 672 F.3d at 671)). Here, too, the relief 12 benefits state interests, which shows that the State is the real party in interest. 13 Third, the fact that the lawsuit seeks restitution for individual consumers does not negate 14 the state interest in this case. Indeed, the Ninth Circuit in Nevada rejected this very argument and 15 held that the state’s “sovereign interest in protecting its citizens and economy … is not diminished 16 merely because it has tacked on a claim for restitution.” Nevada, 672 F.3d 671 (9th Cir. 2012); 17 see also In re Facebook, 354 F. Supp. 3d at 1127 (same). 18 Finally, the defendants cite a case from the Eastern District of Pennsylvania that applied 19 California law and reached a contrary conclusion with respect to the real party in interest. See In 20 re Avandia Mktg., Sales Pracs. & Prod. Liab. Litig., 238 F. Supp. 3d 723, 729 (E.D. Pa. 2017). 21 But in a well-reasoned opinion, the Hon. Vince Chhabria determined that it likely misapplied the 22 law. See In re Facebook, 354 F. Supp. 3d at 1135. It is apparently the only case to find diversity 23 jurisdiction on parallel facts under California law. Judge Chhabria’s analysis is persuasive and 24 defendants’ reliance on that case is misplaced. 25 26 27 28 Accordingly, the requested relief supports my conclusion that the State is the real party in interest. * * * The State of California, therefore, is the real party in interest in this lawsuit. Because 9 1 California is not a citizen, and this case was brought under California law, I do not have 2 jurisdiction. See Mississippi, 571 U.S. at 174. 3 CONCLUSION 4 For those reasons, the motion to remand is GRANTED. I ORDER that this case be 5 6 7 REMANDED to the California Superior Court for the County of San Francisco. IT IS SO ORDERED. Dated: March 26, 2024 8 9 William H. Orrick United States District Judge 10 United States District Court Northern District of California 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 10

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