Supplemental Brief in Support of [24] Motion to Dismiss filed byJacob A Appelsmith, Edmund Brown, Jr, William Haraf, Kamala Harris, Traci Stevens, Robert Venchiarutti. (Marcroft, Ryan) (Filed on 4/2/2015) Modified on 4/3/2015 linking entry to document #24 (dhmS, COURT STAFF).
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Page 1 Case5:11-cv-05496-HRL Document62 Filed04/02/15 Page1 of 18
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KAMALA D. HARRIS
Attorney General of California
MARC A. LEFORESTIER
Supervising Deputy Attorney General
RYAN MARCROFT
Deputy Attorney General
State Bar No. 230952
1300 I Street, Suite 125
P.O. Box 944255
Sacramento, CA 94244-2550
Telephone: (916) 323-5313
Fax: (916) 324-8835
E-mail: Ryan.Marcroft@doj.ca.gov
Attorneys for All Defendants
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IN THE UNITED STATES DISTRICT COURT
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FOR THE NORTHERN DISTRICT OF CALIFORNIA
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SAN JOSE DIVISION
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Think Computer Corporation,
5:11-cv-05496-HRL
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Plaintiff,
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v.
SUPPLEMENTAL BRIEF IN SUPPORT
OF DEFENDANTS’ MOTION TO
DISMISS
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ROBERT VENCHIARUTTI, in his official
capacity as Deputy Commissioner of the
Judge:
The Honorable Howard R. Lloyd
California Department of Financial
Trial Date:
Not Set
Institutions; WILLIAM HARAF, in his
Action Filed: 11/14/2011
official capacity as Commissioner of the
California Department of Financial
Institutions; TRACI STEVENS, in her
official capacity as Acting Secretary of the
California Business, Transportation and
Housing Agency; JACOB A.
APPELSMITH, in his official capacity as
Senior Advisor to the Governor of the State
of California; EDMUND G. BROWN, JR.,
in his official capacity as Governor of the
State of California; and KAMALA
HARRIS, in her official capacity as
Attorney General of the State of California,
Defendants.
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TABLE OF CONTENTS
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Page
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INTRODUCTION ........................................................................................................................
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BACKGROUND ........................................................................................................................
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I.
Factual and procedural background ........................................................................ 1
II.
Amendments to the Money Transmission Act ........................................................ 4
ARGUMENT ........................................................................................................................
5
I.
The amendments to the Money Transmission Act demonstrate that this
action is not ripe ...................................................................................................... 5
II.
Plaintiff’s due process claims are moot and meritless ............................................ 9
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III.
Plaintiff’s equal protection claim fails for the same reasons as the due
process claims ....................................................................................................... 12
CONCLUSION ........................................................................................................................
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TABLE OF AUTHORITIES
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Page
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CASES
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City of New Orleans v. Dukes 427 U.S. 297 (1976) ................................................................................................................ 12
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F.C.C. v. Beach Commc’ns, Inc. 508 U.S. 307 (1993) ................................................................................................................ 12
Freedom to Travel Campaign v. Newcomb 82 F.3d 1431 (9th Cir. 1996)................................................................................................. 6, 7
Halverson v. Skagit Cnty. 42 F.3d 1257 (9th Cir. 1994)................................................................................................... 10
Johnson v. Rancho Santiago Cmty. Coll. Dist. 623 F.3d 1011 (9th Cir. 2010)........................................................................................... 12, 13
Kawaoka v. City of Arroyo Grande 17 F.3d 1227 (9th Cir. 1994)............................................................................................. 10, 11
Matter of Bunker Ltd. Partnership 820 F.2d 308 (9th Cir. 1987)..................................................................................................... 9
Merrifield v. Lockyer 547 F.3d 978 (9th Cir. 2008)................................................................................................... 11
Native Village of Noatak v. Blatchford 38 F.3d 1505 (9th Cir. 1994)..................................................................................................... 9
Pac. Gas & Elec. Co. v. State Energy Res. Conserv. & Dev. Comm’n 461 U.S. 190 (1983) .................................................................................................................. 6
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21
22
23
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Pac. Legal Found. v. State Energy Resources Conserv. & Dev. Comm’n 659 F.2d 903 (9th Cir. 1981)................................................................................................. 6, 8
Principal Life Ins. Co. v. Robinson 394 F.3d 665 (9th Cir. 2005)..................................................................................................... 7
Pub. Serv. Comm’n of Utah v. Wycoff Co., Inc. 344 U.S. 237 (1952) .................................................................................................................. 8
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Pub. Utilities Comm’n v. U.S. 355 U.S. 534 (1958) .................................................................................................................. 6
Spoklie v. Montana 411 F.3d 1051 (9th Cir. 2005)........................................................................................... 10, 11
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TABLE OF AUTHORITIES
(continued)
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Page
Think Computer Corp. v. Dwolla, Inc.,et al.
Case No. 5:13-CV-02054-EJD, 2014 WL 1266213 (N.D.Cal. Mar. 24, 2014).................... 2, 3
Thomas v. Union Carbide Agric. Prods. Co. 473 U.S. 568 (1985) .................................................................................................................. 6
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U.S. v. Salerno 481 U.S. 739 (1987) ................................................................................................................ 10
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STATUTES
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California Financial Code
§ 300(b) ........................................................................................................................
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§ 320(a) ........................................................................................................................
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§ 321(b) ........................................................................................................................
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§§ 2000-2176 ........................................................................................................................
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§ 2001(c) ........................................................................................................................
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§ 2001(d) ........................................................................................................................
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§ 2002 ........................................................................................................................
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§ 2003(g) ........................................................................................................................
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§ 2010(l) ........................................................................................................................
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§ 2010(l) ........................................................................................................................
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§ 2010(l) ........................................................................................................................
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§ 2032(b)(3) ........................................................................................................................
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§ 2032(b)(21) ........................................................................................................................
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§ 2033(b) ........................................................................................................................
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§ 2033(c) ........................................................................................................................
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§ 2040 ........................................................................................................................
passim
§ 2040(c) ........................................................................................................................
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§ 2172(b) ........................................................................................................................
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CONSTITUTIONAL PROVISIONS
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U.S. Const. art. III ........................................................................................................................
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U.S. Const.
amend. XI ........................................................................................................................
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COURT RULES
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Federal Rules of Civil Procedure rule 12(b)(1) ........................................................................................................................
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Federal Rules of Civil Procedure rule 12(b)(6) ........................................................................................................................
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INTRODUCTION
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Think Computer’s claims for relief are not ripe for review, because they are all predicated
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on the outcome of a state administrative proceeding that has yet to occur. Think alleges that its
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business involved an in-person payment system called “FaceCash,” which allowed consumers to
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purchase items from participating merchants, and that it was subject to state licensure. After the
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action commenced, the law was amended to carve out an exemption for goods or services
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payment activities. The law was also amended to repeal the minimum shareholder equity
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requirement for licensure and replaced it with reduced and clarified requirements. But because
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Think has never applied for a license under the amended statute, the state department responsible
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for administering the Money Transmission Act has never received sufficient information or had
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an opportunity to determine whether Think’s activities would qualify for the licensure exemption,
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or how the new requirements would apply to Plaintiff’s proposed business activity. Moreover,
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the money transmission act is now administered by a new state Department, the Department of
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Business Oversight, with a new Commissioner of Business Oversight, who is vested with the
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authority to make final license application determinations. The substantive changes to state law,
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and the reorganization of the relevant state agencies both underscore the need for Plaintiff to
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submit an application for licensure and obtain a final agency decision in order to ripen its claims.
The recent statutory amendments also moot Plaintiff’s due process and equal protection
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challenges to the former law. But even if the claims were not moot, those challenges would fail
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on the merits. Plaintiff’s dormant Commerce Clause claim fails for the reasons previously
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discussed in defendants’ motion to dismiss papers. Because none of Plaintiff’s claims are ripe or
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valid, the amended complaint should be dismissed without leave to amend.
BACKGROUND
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I.
FACTUAL AND PROCEDURAL BACKGROUND
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Think Computer Corporation is a privately-held Delaware Corporation that reportedly
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developed a payment system called “FaceCash” to provide money transmission services on a
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limited scale prior to June 30, 2011, but then stopped when it had to comply with the Money
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Transmission Act. (FAC, ¶¶ 2, 8, 17, 26, 40-42; Cal. Fin. Code, §§ 2000-2176 .)1 Up to that
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date, Think’s money transmission activity “was close to zero as Plaintiff had only successfully
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finished the merchant side of the product two days prior.” (FAC, ¶ 42.) FaceCash was an “in-
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person” payment system that allowed a consumer to purchase items from a participating merchant
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by presenting the merchant with a barcode. (FAC, ¶ 2.) When the merchant scanned the barcode,
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an image of the person’s face would appear on the merchant’s register for the merchant to
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confirm. (FAC, ¶ 2.) “Working on a pre-paid debit model, FaceCash involved holding consumer
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deposits in a pooled bank account until such time as a consumer requested a withdrawal . . . or the
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money was spent at a participating merchant.” (FAC, ¶ 41.)
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The former California Department of Financial Institutions, which previously
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administered and enforced the Money Transmission Act, allegedly frustrated the Plaintiff’s
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attempts to obtain a state license and threatened to refer Plaintiff to law enforcement if it violated
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the law. (FAC, ¶¶ 4, 46-58.) Think’s chief challenge to the Money Transmission Act is that it
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could not determine, prior to applying for a license, what the minimum tangible shareholder
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equity amount necessary to obtain a license would be under the discretionary standard set out in
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California Financial Code section 2040. (FAC, ¶¶ 49(j) (referring to defendants’ alleged
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“unwritten policy”), 50, 72, 77; see Docket No. 30, pp. 14-18.) Plaintiff does not allege,
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however, that it could not satisfy the minimum statutory licensure requirements.
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Plaintiff also averred that it filed tens of complaints with the former Department of
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Financial Institutions that colleges, universities, and other companies were not complying with
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the law, to purportedly highlight that the department was arbitrarily singling out Think for
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enforcement.2 (FAC, ¶¶ 9-10, 59-72.) It also alleges a “non-evenhanded and discriminatory”
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nationwide financial regulatory structure that hinders the ability of smaller financial institutions to
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The operative pleading is the First Amended Complaint filed on January 31, 2012, and is
designated “FAC.” (Docket No. 23.)
2
Think subsequently filed a separate lawsuit against its purported competitors, contending
that they were violating the Money Transmission Act. Think Computer Corp. v. Dwolla, Inc.,et
al., Case No. 5:13-CV-02054-EJD. The action was dismissed and judgment was entered for
defendants on March 24, 2014. Think Computer Corp. v. Dwolla, Inc.,et al., Case No. 5:13-CV02054-EJD, Docket Nos. 158 & 159.
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compete against larger entities and banks in providing money transfer services. (FAC, ¶¶ 11, 24,
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28-39.)
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On June 30, 2011, Plaintiff “opted to shut down FaceCash” rather than apply for a license,
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which would have allowed Think to continue operations while its license application was
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pending. (FAC, ¶¶ 52, 72; Cal. Fin. Code, § 2172(b); see Think Computer Corp. v. Dwolla,
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Inc.,et al., Case No. 5:13-CV-02054-EJD, 2014 WL 1266213, at *1 (N.D.Cal. Mar. 24, 2014)
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(Plaintiff “voluntarily pulled its FaceCash service from all its customers as of June 30, 2011, the
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day before the MTA went into effect”).) Nonetheless, on October 11, 2011, the former state
9
department exempted the Plaintiff’s business operations from the Money Transmission Act to the
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extent that Plaintiff operated outside California. (FAC, ¶ 56.) In other words, the department
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does not purport to regulate Think’s out-of-state activity. (Docket No. 30, p. 24 (noting that the
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department’s order “resolved this particular dilemma for Plaintiff”.) Think, however, was still
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required to comply with the law to the extent it provided its money transmission services to
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persons located within California. (FAC, ¶ 56.)
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In three claims for relief, Plaintiff alleged violations of the United States Constitution’s
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Due Process and Equal Protection Clauses for allegedly extinguishing Plaintiff’s property rights
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and frustrating its efforts at state licensure, and violations of the Commerce Clause for allegedly
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regulating interstate commerce and burdening interstate commerce. (FAC, ¶¶ 73-108.) Plaintiff
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sought a declaratory judgment that the former Money Transmission Act was unconstitutional and
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unenforceable, and an injunction enjoining the former law’s enforcement. (FAC, p. 28.)
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In response, Defendants filed a motion to dismiss under rule 12(b)(1) of the Federal Rules
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of Civil Procedure, for lack of subject matter jurisdiction, and rule 12(b)(6) for failure to state a
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claim upon which relief can be granted, on the grounds that most of the defendants were immune
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from suit under the Eleventh Amendment, the claims were not ripe for review, Plaintiff did not
25
have a protected property right, the challenged laws were rationally related to legitimate
26
government interests, and Congress authorized the states to license and regulate money
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transmission businesses. (Docket Nos. 24, 31.) The hearing on Defendants’ motion occurred on
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April 17, 2012. (Docket No. 40.)
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On February 26, 2015, the Court ordered the parties to submit supplemental briefing
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regarding amendments to the Money Transmission Act that were enacted after the amended
3
complaint was filed, Cal. Fin. Code §§ 2010(l) and 2040, and how the amendments affect the
4
issues in the case.
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II.
AMENDMENTS TO THE MONEY TRANSMISSION ACT
Since this Court heard argument on defendants’ motion to dismiss, California law has
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7
been amended in three significant respects:
8
(1)
9
services payment activities from the Money Transmission Act, including its licensure
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California Financial Code section 2010(l) was amended to exempt certain goods or
requirements:
11
This division does not apply to the following:
12
…
(l) A transaction in which the recipient of the money or other monetary value is an
agent of the payee pursuant to a preexisting written contract and delivery of the
money or other monetary value to the agent satisfies the payor’s obligation to the
payee.
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14
15
…
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(2) For purposes of this subdivision, “payee” means the provider of goods or
services, who is owed payment of money or other monetary value from the payor
for the goods or services.
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(3) For purposes of this subdivision, “payor” means the recipient of goods or
services, who owes payment of money or monetary value to the payee for the
goods or services.
19
20
21
(2)
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equity required for licensure from not less than $500,000 under the former law, to between
23
$250,000-$500,000, depending upon the projected transaction volume:
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25
26
27
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Section 2040 was amended to reduce and clarify the amount of tangible shareholder
(a) An applicant shall possess, and a licensee shall maintain at all times, tangible
shareholder’s equity of two hundred fifty thousand dollars ($250,000) to five hundred
thousand dollars ($500,000), depending on estimated or actual transaction volume, as
determined by the commissioner based on the factors described in subdivision (c).
(b) The commissioner may increase the amount of net worth required of an applicant or
licensee if the commissioner determines, with respect to the applicant or licensee, that a
higher net worth is necessary to achieve the purposes of this division based on the factors
described in subdivision (c).
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(c) When making a determination pursuant to subdivision (a) or (b), the commissioner
shall consider the following factors:
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(1) The nature and volume of the projected or established business.
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4
(2) The number of locations at or through which money transmission is or will be
conducted.
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(3) The amount, nature, quality, and liquidity of its assets.
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(4) The amount and nature of its liabilities.
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(5) The history of its operations and prospects for earning and retaining income.
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(6) The quality of its operations.
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(7) The quality of its management.
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(8) The nature and quality of its principals.
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(9) The nature and quality of the persons in control.
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(10) The history of its compliance with applicable state and federal law.
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(11) Any other factor the commissioner considers relevant.
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(3)
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Institutions were abolished. Cal. Fin. Code, § 321(b). Their respective powers, duties,
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responsibilities, and functions were transferred to the newly-formed Department of Business
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Oversight and the Department’s chief public officer, the Commissioner of Business Oversight.
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Cal. Fin. Code, §§ 300(b), 320(a), 321(b). As defendants reported in the Joint Case Management
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Statement, the present Commissioner of Business Oversight is Jan Lynn Owen. (Docket No. 58, 20
p. 4.) The Commissioner of Business Oversight is now the public officer responsible for issuing
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money transmission licenses. Cal. Fin. Code, §§ 2003(g), 2033(b).
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I.
The Department of Financial Institutions and the office of the Commissioner of Financial
ARGUMENT
THE AMENDMENTS TO THE MONEY TRANSMISSION ACT DEMONSTRATE THAT THIS
ACTION IS NOT RIPE
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Each of the amendments to the Money Transmission Act demonstrate that this action is
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not ripe for review and should be dismissed. As discussed in detail in defendants’ motion to
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dismiss, a district court’s role is neither to issue advisory opinions nor to declare rights in
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hypothetical cases, but to adjudicate live “cases or controversies” consistent with the powers
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granted the judiciary in Article III of the Constitution. (Docket No. 24, pp. 9-14; Docket No. 31,
2
pp. 1-6.) The basic rationale of the ripeness doctrine “is to prevent the courts, through premature
3
adjudication, from entangling themselves in abstract disagreements.” Thomas v. Union Carbide
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Agric. Prods. Co., 473 U.S. 568, 580 (1985).
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In its opposition to the motion, Think asserted a number of ill-defined issues that it
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claimed were sufficiently concrete for this Court’s review, such that a final license application
7
decision is not necessary to create a case or controversy. (Docket No. 30, p. 6.) The statutory
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amendments to the Money Transmission Act, however, make clear that all of the claims for relief
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are purely hypothetical and contingent on the outcome of an administrative proceeding that has
10
yet to occur. “[A] case or controversy is not presented simply because a party is subject to a
11
general regulatory process which, when applied to the specific facts developed in some future
12
administrative proceeding, might cause a state agency to take a particular action which some
13
court might thereafter determine to be unconstitutional.” Pac. Legal Found. v. State Energy
14
Resources Conserv. & Dev. Comm’n, 659 F.2d 903, 916 (9th Cir. 1981); Pac. Gas & Elec. Co. v.
15
State Energy Res. Conserv. & Dev. Comm’n, 461 U.S. 190, 203 (1983) (purely legal challenge to
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state statute requiring a case-by-case evaluation of nuclear power plants was not ripe where state
17
agency had not made final determination). Here, the law has changed since Think initiated this
18
action. The changes wholly exempt certain goods or services payment activities from the Money
19
Transmission Act, reduce and clarify the amount of tangible shareholder equity required for
20
licensure, and vest a new Commissioner with authority to decide license applications. The need
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for Plaintiff to apply for a license before its claims ripen is even more evident now than when this
22
case was originally filed.
23
Indeed, Plaintiff’s own authorities on ripeness confirm that it must apply for a license to
24
ripen its claims. In Freedom to Travel Campaign v. Newcomb, 82 F.3d 1431, 1435 (9th Cir.
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1996), the court recognized the general rule that applicants must actually apply for a permit
26
before their claims will ripen—even in the context of pure questions of law that require no factual
27
development. See also Pub. Utilities Comm’n v. U.S., 355 U.S. 534, 540 (1958) (where “an
28
administrative proceeding might leave no remnant of the constitutional question, the
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administrative remedy plainly should be pursued”). The court, however, adopted a narrow
2
exception to the general rule: if “the court can make a firm prediction that the plaintiff will apply
3
for the benefit, and that the agency will deny the application by virtue of the rule-then there may
4
be a justiciable controversy that the court may find prudent to resolve.” Id. at 1436 (italics
5
added).
6
In Freedom to Travel, the plaintiffs challenged the facial validity of federal regulations
7
requiring individuals to obtain a specific license to travel to Cuba. Id. at 1434. The court noted
8
that under the governing regulations, to obtain a license applicants had to show a compelling need
9
to travel to Cuba for certain specified reasons, such as educational activities. Id. at 1434, 1436.
10
The regulations expressly defined what activities would qualify as educational activities. Id. The
11
plaintiffs did not plan to engage in these activities, and for this reason, the court concluded that
12
plaintiff’s claims were ripe, because it could “firmly predict” that the plaintiffs’ application would
13
be “summarily rejected” under the regulations in these circumstances. Id.at 1436.
14
The statutory amendments at issue here make it impossible to predict the potential
15
outcome of Think’s yet-to-be-submitted license application. The state department never
16
determined, prior to the commencement of this lawsuit, whether and to what extent Plaintiff’s
17
business plan would qualify under the licensing exemption in section 2010(l). It never took any
18
evidence, made any findings of fact or issued any orders on the subject. This factual development
19
and legal evaluation would be performed as part of the license application process.
20
License applicants must describe “any money transmission services previously provided
21
by the applicant and the money transmission services that the applicant seeks to provide in this
22
state.” Cal. Fin. Code, § 2032(b)(3). Further, they must describe their “plan for engaging in
23
money transmission business.” Cal. Fin. Code, § 2032(b)(21). And before the state department
24
could ever deny Plaintiff’s license application, the Plaintiff would receive notice and a hearing.
25
Cal. Fin. Code, § 2033(c). To be sure, Plaintiff could be granted a license, permitting it to engage
26
in money transmission activities and avoiding the need for this Court to rule on the constitutional
27
claims in the complaint. Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 670 (9th Cir. 2005)
28
(noting that the “value[] of avoiding unnecessary constitutional determinations . . . lie[s] at the
7
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core of ripeness policies”). Moreover, that decision would be made by the new Commissioner of
2
Business Oversight, Jan Lynn Owen, who is now the public officer responsible for issuing money
3
transmission licenses. Cal. Fin. Code, §§ 2003(g), 2033(b). If, however, this matter is not
4
dismissed, this Court would be required to decide in the first instance the scope of the state’s new
5
licensing exemption under section 2010(l), and whether Plaintiff is subject to it—but without the
6
benefit of the state agency’s prior findings and application of state law. Pub. Serv. Comm’n of
7
Utah v. Wycoff Co., Inc., 344 U.S. 237, 247 (1952) (“State administrative bodies have the initial
8
right to reduce the general policies of state regulatory statutes into concrete orders and the
9
primary right to take evidence and make findings of fact”).
10
Particularly now that the law has changed, Plaintiff should not be permitted to skip the
11
state application process and remove the state department’s ability to first consider the statute’s
12
application to Think’s proposed business activity. Without a completed application and final
13
agency decision, all of Plaintiff’s claims are premature.
14
Think also challenges the former version of section 2040, which previously required
15
license applicants to have minimum tangible shareholder equity in an amount not less than
16
$500,000. That section was amended to repeal the $500,000 minimum equity requirement, and
17
replace it with a scalable $250,000 to $500,000 requirement, based on an entity’s estimated or
18
actual transaction volume. Cal. Fin. Code, § 2040. Because the current statute was enacted after
19
this case was initiated, it has also never been applied to Plaintiff. Pac. Legal Found., 659 F.2d at
20
916 (“[a] case or controversy is not presented simply because a party is subject to a general
21
regulatory process which, when applied to the specific facts developed in some future
22
administrative proceeding, might cause a state agency to take a particular action which some
23
court might thereafter determine to be unconstitutional”). Moreover, there is no allegation that
24
Plaintiff could not satisfy the minimum statutory threshold. To the contrary, Think alleged that it
25
surpassed the statutory threshold. (Docket No. FAC, ¶¶ 50 [“Think had raised approximately
26
$500,000 in additional funding . . . placing Plaintiff’s tangible shareholder equity well above the
27
written statutory minimum of $500,000”]; 55 [Think’s net worth was “well above the statutory
28
threshold”].) Because the statute has never been applied to Think, and it is impossible to know
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what the state department might conclude in some future potential administrative proceeding,
2
Think cannot make out any ripe challenges.
3
II.
PLAINTIFF’S DUE PROCESS CLAIMS ARE MOOT AND MERITLESS
4
For the reasons discussed in the motion to dismiss, Plaintiff does not have a protected
5
property interest in state licensure, and therefore does not have any viable due process claim.
6
(Docket No. 24, pp. 14-16; Docket No. 31, pp. 6-8.) But even if Think identified a
7
constitutionally protected property interest in licensure, its claims fail because they are now moot
8
and the current law is rationally related to legitimate state interests.
9
Plaintiff contends that section 2040, governing minimum tangible shareholder equity, is
10
arbitrary on its face and as applied to Think, because it is not rationally related to legitimate state
11
interests and subject to arbitrary enforcement. (Docket No. 30, pp. 14-18.) While defendants
12
dispute those assertions (Docket No. 24, pp. 16-18; Docket 31, pp. 8-10), this claim is moot now
13
that the Legislature has amended section 2040 to repeal the $500,000 minimum equity
14
requirement, and replaced it with a scalable $250,000 to $500,000 requirement, based on an
15
entity’s estimated or actual transaction volume. Native Village of Noatak v. Blatchford, 38 F.3d
16
1505, 1510 (9th Cir. 1994) (“A statutory change . . . is usually enough to render a case moot, even
17
if the legislature possesses the power to reenact the statute after the lawsuit is dismissed”); Matter
18
of Bunker Ltd. Partnership, 820 F.2d 308, 312 (9th Cir. 1987) (new legislation which superseded
19
prior law rendered arguments based on superseded law moot).)
20
In amending section 2040, the Legislature both reduced the minimum amount of tangible
21
shareholder equity necessary to apply for a license, placed an initial cap on the maximum amount
22
of equity necessary to apply for a license, and established detailed criteria for evaluating whether
23
to increase the amount. Cal. Fin. Code, § 2040. Thus, Think’s arguments that the former statute
24
is uncertain or irrational are mooted by the legislative amendments.
25
Even if the claim is not moot, it would fail on the merits. The standards governing
26
Plaintiff’s substantive due process claim are extraordinarily lenient.3 (See Docket No. 24, pp. 16-
27
28
3
The parties agree that Think’s due process and equal protection claims are subject only
to rational level review. (Docket 30, pp. 2, 17.)
9
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1
18; Docket No. 31, pp. 8-11.) “Substantive due process provides no basis for overturning validly
2
enacted state statutes unless they are clearly arbitrary and unreasonable, having no substantial
3
relation to the public health, safety, morals, or general welfare.” Spoklie v. Montana, 411 F.3d
4
1051, 1059 (9th Cir. 2005) (internal quotation omitted). “If the legislature could have concluded
5
rationally that certain facts supporting its decision were true, courts may not question its
6
judgment.” Id. (internal quotation omitted). Moreover, Plaintiff’s challenge fails as long as the
7
law has any conceivably legitimate government purpose. Halverson v. Skagit Cnty., 42 F.3d
8
1257, 1262 (9th Cir. 1994). The Plaintiff carries a “heavy burden” because “[i]f it is ‘at least
9
fairly debatable’ that the [government’s] conduct is rationally related to a legitimate
10
governmental interest, there has been no violation of substantive due process.” Id. Thus, the
11
court’s focus is not whether the legislative act “actually advance[s] its stated purposes, but instead
12
. . . whether the governmental body could have had no legitimate reason for its decision.”
13
Kawaoka v. City of Arroyo Grande, 17 F.3d 1227, 1234 (9th Cir. 1994) (internal quotation
14
omitted).
15
The standards governing facial challenges are also deferential. Facial challenges are “the
16
most difficult challenge[s] to mount successfully, since the challenger must establish that no set
17
of circumstances exists under which the Act would be valid. The fact that the [legislative act]
18
might operate unconstitutionally under some conceivable set of circumstances is insufficient to
19
render it wholly invalid.” U.S. v. Salerno, 481 U.S. 739, 745 (1987).
20
In light of these deferential standards, any argument that the current law violates due
21
process must fail. At the outset, the licensure requirement rationally advances many legitimate
22
government interests. (See Docket No. 24, pp. 17-18; Docket No. 31, p. 10.) They include
23
“[p]rotect[ing] the interests of consumers of money transmission businesses in this state, . . .
24
maintain[ing] public confidence in financial institutions doing business in this state, and . . .
25
preserv[ing] the health, safety, and general welfare of the people of this state.” Cal. Fin. Code, §
26
2001(d); see also Cal. Fin. Code, § 2002. The Legislature found that the “failure of money
27
transmission businesses to fulfill their obligations would cause loss to consumers, disrupt the
28
payments mechanism in this state, undermine public confidence in financial institutions doing
10
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1
business in this state, and adversely affect the health, safety, and general welfare of persons in this
2
state.” Cal. Fin. Code, § 2001(c). These are legitimate government interests, a point which
3
Plaintiff does not contest. (See Docket No. 30, pp. 14-16; Merrifield v. Lockyer, 547 F.3d 978,
4
986 (9th Cir. 2008) (finding health, safety and consumer protection to be legitimate government
5
interests).)
6
Moreover, the Legislature’s requirement that money transmitters—non-bank entities
7
entrusted to hold or transmit citizens’ money to others—maintain their own minimum levels of
8
equity is entirely rational to ensure that such entities are financially stable, solvent and reliable,
9
that their shareholders are actually invested in their own financial institutions, and that licensed
10
businesses engage in safe and sound business practices. It matters not whether the legislative act
11
“actually advance[s] its stated purposes, but instead . . . whether the governmental body could
12
have had no legitimate reason for its decision.” Kawaoka, 17 F.3d at 1234 (internal quotation
13
omitted). Plaintiff cannot meet its “heavy burden” to show that the Legislature “could have had
14
no legitimate reason” for establishing minimum requirements.
15
As discussed in the motion to dismiss, Plaintiff disagrees with the Legislature’s decision
16
that minimum equity requirements actually advance the state’s legitimate interests. (Docket No.
17
30, pp. 17-18 (noting that the Legislature “still heeds to the same antiquated and completely
18
discredited system of risk management”).) But Plaintiff’s disagreement is simply an argument
19
over legislative judgment as to how to best regulate the money transmission industry, an
20
argument that has no place in rational basis review. Spoklie, 411 F.3d at 1059 (“If the legislature
21
could have concluded rationally that certain facts supporting its decision were true, courts may
22
not question its judgment”).4
23
24
25
26
27
28
4
The Commissioner retains discretion to determine what amount would be appropriate for
each licensee based on their unique circumstances after considering 11 different factors. Cal. Fin.
Code, § 2040(c). This approach cannot be assailed where the Commissioner’s final determination
has a “rational connection with the applicant’s fitness or capacity to practice the profession.”
Merrifield v. Lockyer, 547 F.3d 978, 986 (9th Cir. 2008). Until the Plaintiff applies for a license,
however, the Commissioner has no cause to exercise her discretion.
11
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1
III. PLAINTIFF’S EQUAL PROTECTION CLAIM FAILS FOR THE SAME REASONS AS THE
DUE PROCESS CLAIMS
2
3
Plaintiff’s equal protection claim is also moot and without merit. The claim is governed by
4
similarly deferential standards and fails for essentially the same reasons as its due process claims.
5
Think avers that the Money Transmission Act violates the Equal Protection Clause because the
6
minimum equity requirements in section 2040 “illegitimately and arbitrarily” discriminate against
7
smaller, newer, businesses. (FAC, ¶ 76; Docket No. 30, p. 17 (“the special threat posed to
8
California consumers by money transmitters with net worth between $0 and $500,000 . . . is no
9
greater than the threat posed by larger entities”).) 5
10
As with Think’s due process claim, this claim is moot because it hinges on a statute that
11
has been repealed and reenacted with different standards. The state department no longer
12
enforces the former law. Thus, Think’s claims for declaratory and injunctive relief are moot.
13
Even if the claim was not rendered moot, any argument as to the validity of the current
14
statute would be meritless. “In areas of social and economic policy, a statutory classification that
15
neither proceeds along suspect lines nor infringes fundamental constitutional rights must be
16
upheld against equal protection challenge if there is any reasonably conceivable state of facts that
17
could provide a rational basis for the classification.” F.C.C. v. Beach Commc’ns, Inc., 508 U.S.
18
307, 313 (1993); see City of New Orleans v. Dukes, 427 U.S. 297, 303 (1976). Courts do not
19
evaluate the “wisdom, fairness, or logic of legislative choices,” and the Plaintiff bears the burden
20
to “negative every conceivable basis” which might support the class distinction. F.C.C., 508 U.S.
21
at 313, 315; Johnson v. Rancho Santiago Cmty. Coll. Dist., 623 F.3d 1011, 1031 (9th Cir. 2010).
22
Even “rational speculation unsupported by evidence or empirical data” will pass constitutional
23
muster. F.C.C., 508 U.S. at 315. The Legislature’s decision may also “only partially ameliorate
24
a perceived evil,” “deferring complete elimination of the evil to future regulations.” City of New
25
Orleans, 427 U.S. at 303. Moreover, to survive rational basis scrutiny, the state action “need not
26
actually further a legitimate interest; it is enough that the governing body could have rationally
27
28
5
Notably, Plaintiff is not even a part of its purported class, since it has alleged that it can
satisfy the minimum requirements. (FAC, ¶ 50.)
12
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1
decided that the action would further that interest.” Johnson, 623 F.3d at 1031 (internal
2
quotations omitted).
3
Think’s equal protection claim fails because the Legislature rationally concluded that
4
minimum equity requirements advance the state’s legitimate interests in protecting citizens that
5
use money transmission services from unstable and unreliable businesses, and in preserving the
6
public’s confidence in the state’s licensed businesses. Even if the Legislature was incorrect in its
7
assumption, as Think asserts, it undoubtedly “could have rationally believed that the
8
[requirements] would promote its legitimate interest.” Johnson, 623 F.3d at 1031. The minimum
9
statutory requirements easily satisfy this constitutional standard.
10
CONCLUSION
11
With the amendments to the Money Transmission Act, Plaintiff’s claims are either
12
premature or moot. Even if this case presented a live case or controversy, the claims would be
13
meritless. The Court should dismiss this action without leave to amend.
14
Dated: April 2, 2015
Respectfully Submitted,
15
KAMALA D. HARRIS
Attorney General of California
MARC A. LEFORESTIER
Supervising Deputy Attorney General
16
17
18
19
s/ Ryan Marcroft
RYAN MARCROFT
Deputy Attorney General
Attorneys for All Defendants
20
21
22
SA2011103690
11823482.doc
23
24
25
26
27
28
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CERTIFICATE OF SERVICE
Case Name:
Think Computer Corporation v.
Venchiarutti, et al.
No.
5:11-cv-05496-HRL
I hereby certify that on April 2, 2015, I electronically filed the following documents with the
Clerk of the Court by using the CM/ECF system:
SUPPLEMENTAL BRIEF IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS
I certify that all participants in the case are registered CM/ECF users and that service will be
accomplished by the CM/ECF system.
I declare under penalty of perjury under the laws of the State of California the foregoing is true
and correct and that this declaration was executed on April 2, 2015, at Sacramento, California.
Janice Titgen
Declarant
11665068.doc
s/ Janice Titgen
Signature
PDF Page 1
PlainSite Cover Page
PDF Page 2
Case5:11-cv-05496-HRL Document62 Filed04/02/15 Page1 of 18
1
2
3
4
5
6
7
KAMALA D. HARRIS
Attorney General of California
MARC A. LEFORESTIER
Supervising Deputy Attorney General
RYAN MARCROFT
Deputy Attorney General
State Bar No. 230952
1300 I Street, Suite 125
P.O. Box 944255
Sacramento, CA 94244-2550
Telephone: (916) 323-5313
Fax: (916) 324-8835
E-mail: Ryan.Marcroft@doj.ca.gov
Attorneys for All Defendants
8
9
IN THE UNITED STATES DISTRICT COURT
10
FOR THE NORTHERN DISTRICT OF CALIFORNIA
11
SAN JOSE DIVISION
12
13
Think Computer Corporation,
5:11-cv-05496-HRL
14
Plaintiff,
15
v.
SUPPLEMENTAL BRIEF IN SUPPORT
OF DEFENDANTS’ MOTION TO
DISMISS
16
17
18
19
20
21
22
23
24
25
26
ROBERT VENCHIARUTTI, in his official
capacity as Deputy Commissioner of the
Judge:
The Honorable Howard R. Lloyd
California Department of Financial
Trial Date:
Not Set
Institutions; WILLIAM HARAF, in his
Action Filed: 11/14/2011
official capacity as Commissioner of the
California Department of Financial
Institutions; TRACI STEVENS, in her
official capacity as Acting Secretary of the
California Business, Transportation and
Housing Agency; JACOB A.
APPELSMITH, in his official capacity as
Senior Advisor to the Governor of the State
of California; EDMUND G. BROWN, JR.,
in his official capacity as Governor of the
State of California; and KAMALA
HARRIS, in her official capacity as
Attorney General of the State of California,
Defendants.
27
28
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TABLE OF CONTENTS
2
Page
3
INTRODUCTION .......................................................................................................................... 1
BACKGROUND ............................................................................................................................ 1
I.
Factual and procedural background ........................................................................ 1
II.
Amendments to the Money Transmission Act ........................................................ 4
ARGUMENT .................................................................................................................................. 5
I.
The amendments to the Money Transmission Act demonstrate that this
action is not ripe ...................................................................................................... 5
II.
Plaintiff’s due process claims are moot and meritless ............................................ 9
4
5
6
7
8
9
10
III.
Plaintiff’s equal protection claim fails for the same reasons as the due
process claims ....................................................................................................... 12
CONCLUSION ............................................................................................................................. 13
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
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TABLE OF AUTHORITIES
2
Page
3
CASES
4
City of New Orleans v. Dukes
427 U.S. 297 (1976) ................................................................................................................ 12
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
F.C.C. v. Beach Commc’ns, Inc.
508 U.S. 307 (1993) ................................................................................................................ 12
Freedom to Travel Campaign v. Newcomb
82 F.3d 1431 (9th Cir. 1996)................................................................................................. 6, 7
Halverson v. Skagit Cnty.
42 F.3d 1257 (9th Cir. 1994)................................................................................................... 10
Johnson v. Rancho Santiago Cmty. Coll. Dist.
623 F.3d 1011 (9th Cir. 2010)........................................................................................... 12, 13
Kawaoka v. City of Arroyo Grande
17 F.3d 1227 (9th Cir. 1994)............................................................................................. 10, 11
Matter of Bunker Ltd. Partnership
820 F.2d 308 (9th Cir. 1987)..................................................................................................... 9
Merrifield v. Lockyer
547 F.3d 978 (9th Cir. 2008)................................................................................................... 11
Native Village of Noatak v. Blatchford
38 F.3d 1505 (9th Cir. 1994)..................................................................................................... 9
Pac. Gas & Elec. Co. v. State Energy Res. Conserv. & Dev. Comm’n
461 U.S. 190 (1983) .................................................................................................................. 6
20
21
22
23
24
Pac. Legal Found. v. State Energy Resources Conserv. & Dev. Comm’n
659 F.2d 903 (9th Cir. 1981)................................................................................................. 6, 8
Principal Life Ins. Co. v. Robinson
394 F.3d 665 (9th Cir. 2005)..................................................................................................... 7
Pub. Serv. Comm’n of Utah v. Wycoff Co., Inc.
344 U.S. 237 (1952) .................................................................................................................. 8
25
26
27
28
Pub. Utilities Comm’n v. U.S.
355 U.S. 534 (1958) .................................................................................................................. 6
Spoklie v. Montana
411 F.3d 1051 (9th Cir. 2005)........................................................................................... 10, 11
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1
TABLE OF AUTHORITIES
(continued)
2
3
4
5
6
Page
Think Computer Corp. v. Dwolla, Inc.,et al.
Case No. 5:13-CV-02054-EJD, 2014 WL 1266213 (N.D.Cal. Mar. 24, 2014).................... 2, 3
Thomas v. Union Carbide Agric. Prods. Co.
473 U.S. 568 (1985) .................................................................................................................. 6
7
U.S. v. Salerno
481 U.S. 739 (1987) ................................................................................................................ 10
8
STATUTES
9
California Financial Code
§ 300(b) ..................................................................................................................................... 5
§ 320(a) ..................................................................................................................................... 5
§ 321(b) ..................................................................................................................................... 5
§§ 2000-2176 ............................................................................................................................ 2
§ 2001(c) ................................................................................................................................. 11
§ 2001(d) ................................................................................................................................. 10
§ 2002 ...................................................................................................................................... 10
§ 2003(g) ............................................................................................................................... 5, 8
§ 2010(l) .................................................................................................................................... 8
§ 2010(l) .................................................................................................................................... 7
§ 2010(l) .................................................................................................................................... 4
§ 2032(b)(3) .............................................................................................................................. 7
§ 2032(b)(21) ............................................................................................................................ 7
§ 2033(b) ............................................................................................................................... 5, 8
§ 2033(c) ................................................................................................................................... 7
§ 2040 ............................................................................................................................... passim
§ 2040(c) ................................................................................................................................. 11
§ 2172(b) ................................................................................................................................... 3
10
11
12
13
14
15
16
17
18
19
20
CONSTITUTIONAL PROVISIONS
21
22
U.S. Const. art. III ........................................................................................................................... 6
23
U.S. Const.
amend. XI .................................................................................................................................. 3
24
COURT RULES
25
26
27
28
Federal Rules of Civil Procedure
rule 12(b)(1) .............................................................................................................................. 3
Federal Rules of Civil Procedure
rule 12(b)(6) .............................................................................................................................. 3
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INTRODUCTION
2
Think Computer’s claims for relief are not ripe for review, because they are all predicated
3
on the outcome of a state administrative proceeding that has yet to occur. Think alleges that its
4
business involved an in-person payment system called “FaceCash,” which allowed consumers to
5
purchase items from participating merchants, and that it was subject to state licensure. After the
6
action commenced, the law was amended to carve out an exemption for goods or services
7
payment activities. The law was also amended to repeal the minimum shareholder equity
8
requirement for licensure and replaced it with reduced and clarified requirements. But because
9
Think has never applied for a license under the amended statute, the state department responsible
10
for administering the Money Transmission Act has never received sufficient information or had
11
an opportunity to determine whether Think’s activities would qualify for the licensure exemption,
12
or how the new requirements would apply to Plaintiff’s proposed business activity. Moreover,
13
the money transmission act is now administered by a new state Department, the Department of
14
Business Oversight, with a new Commissioner of Business Oversight, who is vested with the
15
authority to make final license application determinations. The substantive changes to state law,
16
and the reorganization of the relevant state agencies both underscore the need for Plaintiff to
17
submit an application for licensure and obtain a final agency decision in order to ripen its claims.
The recent statutory amendments also moot Plaintiff’s due process and equal protection
18
19
challenges to the former law. But even if the claims were not moot, those challenges would fail
20
on the merits. Plaintiff’s dormant Commerce Clause claim fails for the reasons previously
21
discussed in defendants’ motion to dismiss papers. Because none of Plaintiff’s claims are ripe or
22
valid, the amended complaint should be dismissed without leave to amend.
BACKGROUND
23
24
I.
FACTUAL AND PROCEDURAL BACKGROUND
25
Think Computer Corporation is a privately-held Delaware Corporation that reportedly
26
developed a payment system called “FaceCash” to provide money transmission services on a
27
limited scale prior to June 30, 2011, but then stopped when it had to comply with the Money
28
1
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Transmission Act. (FAC, ¶¶ 2, 8, 17, 26, 40-42; Cal. Fin. Code, §§ 2000-2176 .)1 Up to that
2
date, Think’s money transmission activity “was close to zero as Plaintiff had only successfully
3
finished the merchant side of the product two days prior.” (FAC, ¶ 42.) FaceCash was an “in-
4
person” payment system that allowed a consumer to purchase items from a participating merchant
5
by presenting the merchant with a barcode. (FAC, ¶ 2.) When the merchant scanned the barcode,
6
an image of the person’s face would appear on the merchant’s register for the merchant to
7
confirm. (FAC, ¶ 2.) “Working on a pre-paid debit model, FaceCash involved holding consumer
8
deposits in a pooled bank account until such time as a consumer requested a withdrawal . . . or the
9
money was spent at a participating merchant.” (FAC, ¶ 41.)
10
The former California Department of Financial Institutions, which previously
11
administered and enforced the Money Transmission Act, allegedly frustrated the Plaintiff’s
12
attempts to obtain a state license and threatened to refer Plaintiff to law enforcement if it violated
13
the law. (FAC, ¶¶ 4, 46-58.) Think’s chief challenge to the Money Transmission Act is that it
14
could not determine, prior to applying for a license, what the minimum tangible shareholder
15
equity amount necessary to obtain a license would be under the discretionary standard set out in
16
California Financial Code section 2040. (FAC, ¶¶ 49(j) (referring to defendants’ alleged
17
“unwritten policy”), 50, 72, 77; see Docket No. 30, pp. 14-18.) Plaintiff does not allege,
18
however, that it could not satisfy the minimum statutory licensure requirements.
19
Plaintiff also averred that it filed tens of complaints with the former Department of
20
Financial Institutions that colleges, universities, and other companies were not complying with
21
the law, to purportedly highlight that the department was arbitrarily singling out Think for
22
enforcement.2 (FAC, ¶¶ 9-10, 59-72.) It also alleges a “non-evenhanded and discriminatory”
23
nationwide financial regulatory structure that hinders the ability of smaller financial institutions to
24
1
25
26
27
28
The operative pleading is the First Amended Complaint filed on January 31, 2012, and is
designated “FAC.” (Docket No. 23.)
2
Think subsequently filed a separate lawsuit against its purported competitors, contending
that they were violating the Money Transmission Act. Think Computer Corp. v. Dwolla, Inc.,et
al., Case No. 5:13-CV-02054-EJD. The action was dismissed and judgment was entered for
defendants on March 24, 2014. Think Computer Corp. v. Dwolla, Inc.,et al., Case No. 5:13-CV02054-EJD, Docket Nos. 158 & 159.
2
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compete against larger entities and banks in providing money transfer services. (FAC, ¶¶ 11, 24,
2
28-39.)
3
On June 30, 2011, Plaintiff “opted to shut down FaceCash” rather than apply for a license,
4
which would have allowed Think to continue operations while its license application was
5
pending. (FAC, ¶¶ 52, 72; Cal. Fin. Code, § 2172(b); see Think Computer Corp. v. Dwolla,
6
Inc.,et al., Case No. 5:13-CV-02054-EJD, 2014 WL 1266213, at *1 (N.D.Cal. Mar. 24, 2014)
7
(Plaintiff “voluntarily pulled its FaceCash service from all its customers as of June 30, 2011, the
8
day before the MTA went into effect”).) Nonetheless, on October 11, 2011, the former state
9
department exempted the Plaintiff’s business operations from the Money Transmission Act to the
10
extent that Plaintiff operated outside California. (FAC, ¶ 56.) In other words, the department
11
does not purport to regulate Think’s out-of-state activity. (Docket No. 30, p. 24 (noting that the
12
department’s order “resolved this particular dilemma for Plaintiff”.) Think, however, was still
13
required to comply with the law to the extent it provided its money transmission services to
14
persons located within California. (FAC, ¶ 56.)
15
In three claims for relief, Plaintiff alleged violations of the United States Constitution’s
16
Due Process and Equal Protection Clauses for allegedly extinguishing Plaintiff’s property rights
17
and frustrating its efforts at state licensure, and violations of the Commerce Clause for allegedly
18
regulating interstate commerce and burdening interstate commerce. (FAC, ¶¶ 73-108.) Plaintiff
19
sought a declaratory judgment that the former Money Transmission Act was unconstitutional and
20
unenforceable, and an injunction enjoining the former law’s enforcement. (FAC, p. 28.)
21
In response, Defendants filed a motion to dismiss under rule 12(b)(1) of the Federal Rules
22
of Civil Procedure, for lack of subject matter jurisdiction, and rule 12(b)(6) for failure to state a
23
claim upon which relief can be granted, on the grounds that most of the defendants were immune
24
from suit under the Eleventh Amendment, the claims were not ripe for review, Plaintiff did not
25
have a protected property right, the challenged laws were rationally related to legitimate
26
government interests, and Congress authorized the states to license and regulate money
27
transmission businesses. (Docket Nos. 24, 31.) The hearing on Defendants’ motion occurred on
28
April 17, 2012. (Docket No. 40.)
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On February 26, 2015, the Court ordered the parties to submit supplemental briefing
2
regarding amendments to the Money Transmission Act that were enacted after the amended
3
complaint was filed, Cal. Fin. Code §§ 2010(l) and 2040, and how the amendments affect the
4
issues in the case.
5
II.
AMENDMENTS TO THE MONEY TRANSMISSION ACT
Since this Court heard argument on defendants’ motion to dismiss, California law has
6
7
been amended in three significant respects:
8
(1)
9
services payment activities from the Money Transmission Act, including its licensure
10
California Financial Code section 2010(l) was amended to exempt certain goods or
requirements:
11
This division does not apply to the following:
12
…
(l) A transaction in which the recipient of the money or other monetary value is an
agent of the payee pursuant to a preexisting written contract and delivery of the
money or other monetary value to the agent satisfies the payor’s obligation to the
payee.
13
14
15
…
16
(2) For purposes of this subdivision, “payee” means the provider of goods or
services, who is owed payment of money or other monetary value from the payor
for the goods or services.
17
18
(3) For purposes of this subdivision, “payor” means the recipient of goods or
services, who owes payment of money or monetary value to the payee for the
goods or services.
19
20
21
(2)
22
equity required for licensure from not less than $500,000 under the former law, to between
23
$250,000-$500,000, depending upon the projected transaction volume:
24
25
26
27
28
Section 2040 was amended to reduce and clarify the amount of tangible shareholder
(a) An applicant shall possess, and a licensee shall maintain at all times, tangible
shareholder’s equity of two hundred fifty thousand dollars ($250,000) to five hundred
thousand dollars ($500,000), depending on estimated or actual transaction volume, as
determined by the commissioner based on the factors described in subdivision (c).
(b) The commissioner may increase the amount of net worth required of an applicant or
licensee if the commissioner determines, with respect to the applicant or licensee, that a
higher net worth is necessary to achieve the purposes of this division based on the factors
described in subdivision (c).
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(c) When making a determination pursuant to subdivision (a) or (b), the commissioner
shall consider the following factors:
2
(1) The nature and volume of the projected or established business.
3
4
(2) The number of locations at or through which money transmission is or will be
conducted.
5
(3) The amount, nature, quality, and liquidity of its assets.
6
(4) The amount and nature of its liabilities.
7
(5) The history of its operations and prospects for earning and retaining income.
8
(6) The quality of its operations.
9
(7) The quality of its management.
10
(8) The nature and quality of its principals.
11
(9) The nature and quality of the persons in control.
12
(10) The history of its compliance with applicable state and federal law.
13
(11) Any other factor the commissioner considers relevant.
14
(3)
15
Institutions were abolished. Cal. Fin. Code, § 321(b). Their respective powers, duties,
16
responsibilities, and functions were transferred to the newly-formed Department of Business
17
Oversight and the Department’s chief public officer, the Commissioner of Business Oversight.
18
Cal. Fin. Code, §§ 300(b), 320(a), 321(b). As defendants reported in the Joint Case Management
19
Statement, the present Commissioner of Business Oversight is Jan Lynn Owen. (Docket No. 58,
20
p. 4.) The Commissioner of Business Oversight is now the public officer responsible for issuing
21
money transmission licenses. Cal. Fin. Code, §§ 2003(g), 2033(b).
22
23
I.
The Department of Financial Institutions and the office of the Commissioner of Financial
ARGUMENT
THE AMENDMENTS TO THE MONEY TRANSMISSION ACT DEMONSTRATE THAT THIS
ACTION IS NOT RIPE
24
25
Each of the amendments to the Money Transmission Act demonstrate that this action is
26
not ripe for review and should be dismissed. As discussed in detail in defendants’ motion to
27
dismiss, a district court’s role is neither to issue advisory opinions nor to declare rights in
28
hypothetical cases, but to adjudicate live “cases or controversies” consistent with the powers
5
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granted the judiciary in Article III of the Constitution. (Docket No. 24, pp. 9-14; Docket No. 31,
2
pp. 1-6.) The basic rationale of the ripeness doctrine “is to prevent the courts, through premature
3
adjudication, from entangling themselves in abstract disagreements.” Thomas v. Union Carbide
4
Agric. Prods. Co., 473 U.S. 568, 580 (1985).
5
In its opposition to the motion, Think asserted a number of ill-defined issues that it
6
claimed were sufficiently concrete for this Court’s review, such that a final license application
7
decision is not necessary to create a case or controversy. (Docket No. 30, p. 6.) The statutory
8
amendments to the Money Transmission Act, however, make clear that all of the claims for relief
9
are purely hypothetical and contingent on the outcome of an administrative proceeding that has
10
yet to occur. “[A] case or controversy is not presented simply because a party is subject to a
11
general regulatory process which, when applied to the specific facts developed in some future
12
administrative proceeding, might cause a state agency to take a particular action which some
13
court might thereafter determine to be unconstitutional.” Pac. Legal Found. v. State Energy
14
Resources Conserv. & Dev. Comm’n, 659 F.2d 903, 916 (9th Cir. 1981); Pac. Gas & Elec. Co. v.
15
State Energy Res. Conserv. & Dev. Comm’n, 461 U.S. 190, 203 (1983) (purely legal challenge to
16
state statute requiring a case-by-case evaluation of nuclear power plants was not ripe where state
17
agency had not made final determination). Here, the law has changed since Think initiated this
18
action. The changes wholly exempt certain goods or services payment activities from the Money
19
Transmission Act, reduce and clarify the amount of tangible shareholder equity required for
20
licensure, and vest a new Commissioner with authority to decide license applications. The need
21
for Plaintiff to apply for a license before its claims ripen is even more evident now than when this
22
case was originally filed.
23
Indeed, Plaintiff’s own authorities on ripeness confirm that it must apply for a license to
24
ripen its claims. In Freedom to Travel Campaign v. Newcomb, 82 F.3d 1431, 1435 (9th Cir.
25
1996), the court recognized the general rule that applicants must actually apply for a permit
26
before their claims will ripen—even in the context of pure questions of law that require no factual
27
development. See also Pub. Utilities Comm’n v. U.S., 355 U.S. 534, 540 (1958) (where “an
28
administrative proceeding might leave no remnant of the constitutional question, the
6
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administrative remedy plainly should be pursued”). The court, however, adopted a narrow
2
exception to the general rule: if “the court can make a firm prediction that the plaintiff will apply
3
for the benefit, and that the agency will deny the application by virtue of the rule-then there may
4
be a justiciable controversy that the court may find prudent to resolve.” Id. at 1436 (italics
5
added).
6
In Freedom to Travel, the plaintiffs challenged the facial validity of federal regulations
7
requiring individuals to obtain a specific license to travel to Cuba. Id. at 1434. The court noted
8
that under the governing regulations, to obtain a license applicants had to show a compelling need
9
to travel to Cuba for certain specified reasons, such as educational activities. Id. at 1434, 1436.
10
The regulations expressly defined what activities would qualify as educational activities. Id. The
11
plaintiffs did not plan to engage in these activities, and for this reason, the court concluded that
12
plaintiff’s claims were ripe, because it could “firmly predict” that the plaintiffs’ application would
13
be “summarily rejected” under the regulations in these circumstances. Id.at 1436.
14
The statutory amendments at issue here make it impossible to predict the potential
15
outcome of Think’s yet-to-be-submitted license application. The state department never
16
determined, prior to the commencement of this lawsuit, whether and to what extent Plaintiff’s
17
business plan would qualify under the licensing exemption in section 2010(l). It never took any
18
evidence, made any findings of fact or issued any orders on the subject. This factual development
19
and legal evaluation would be performed as part of the license application process.
20
License applicants must describe “any money transmission services previously provided
21
by the applicant and the money transmission services that the applicant seeks to provide in this
22
state.” Cal. Fin. Code, § 2032(b)(3). Further, they must describe their “plan for engaging in
23
money transmission business.” Cal. Fin. Code, § 2032(b)(21). And before the state department
24
could ever deny Plaintiff’s license application, the Plaintiff would receive notice and a hearing.
25
Cal. Fin. Code, § 2033(c). To be sure, Plaintiff could be granted a license, permitting it to engage
26
in money transmission activities and avoiding the need for this Court to rule on the constitutional
27
claims in the complaint. Principal Life Ins. Co. v. Robinson, 394 F.3d 665, 670 (9th Cir. 2005)
28
(noting that the “value[] of avoiding unnecessary constitutional determinations . . . lie[s] at the
7
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core of ripeness policies”). Moreover, that decision would be made by the new Commissioner of
2
Business Oversight, Jan Lynn Owen, who is now the public officer responsible for issuing money
3
transmission licenses. Cal. Fin. Code, §§ 2003(g), 2033(b). If, however, this matter is not
4
dismissed, this Court would be required to decide in the first instance the scope of the state’s new
5
licensing exemption under section 2010(l), and whether Plaintiff is subject to it—but without the
6
benefit of the state agency’s prior findings and application of state law. Pub. Serv. Comm’n of
7
Utah v. Wycoff Co., Inc., 344 U.S. 237, 247 (1952) (“State administrative bodies have the initial
8
right to reduce the general policies of state regulatory statutes into concrete orders and the
9
primary right to take evidence and make findings of fact”).
10
Particularly now that the law has changed, Plaintiff should not be permitted to skip the
11
state application process and remove the state department’s ability to first consider the statute’s
12
application to Think’s proposed business activity. Without a completed application and final
13
agency decision, all of Plaintiff’s claims are premature.
14
Think also challenges the former version of section 2040, which previously required
15
license applicants to have minimum tangible shareholder equity in an amount not less than
16
$500,000. That section was amended to repeal the $500,000 minimum equity requirement, and
17
replace it with a scalable $250,000 to $500,000 requirement, based on an entity’s estimated or
18
actual transaction volume. Cal. Fin. Code, § 2040. Because the current statute was enacted after
19
this case was initiated, it has also never been applied to Plaintiff. Pac. Legal Found., 659 F.2d at
20
916 (“[a] case or controversy is not presented simply because a party is subject to a general
21
regulatory process which, when applied to the specific facts developed in some future
22
administrative proceeding, might cause a state agency to take a particular action which some
23
court might thereafter determine to be unconstitutional”). Moreover, there is no allegation that
24
Plaintiff could not satisfy the minimum statutory threshold. To the contrary, Think alleged that it
25
surpassed the statutory threshold. (Docket No. FAC, ¶¶ 50 [“Think had raised approximately
26
$500,000 in additional funding . . . placing Plaintiff’s tangible shareholder equity well above the
27
written statutory minimum of $500,000”]; 55 [Think’s net worth was “well above the statutory
28
threshold”].) Because the statute has never been applied to Think, and it is impossible to know
8
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what the state department might conclude in some future potential administrative proceeding,
2
Think cannot make out any ripe challenges.
3
II.
PLAINTIFF’S DUE PROCESS CLAIMS ARE MOOT AND MERITLESS
4
For the reasons discussed in the motion to dismiss, Plaintiff does not have a protected
5
property interest in state licensure, and therefore does not have any viable due process claim.
6
(Docket No. 24, pp. 14-16; Docket No. 31, pp. 6-8.) But even if Think identified a
7
constitutionally protected property interest in licensure, its claims fail because they are now moot
8
and the current law is rationally related to legitimate state interests.
9
Plaintiff contends that section 2040, governing minimum tangible shareholder equity, is
10
arbitrary on its face and as applied to Think, because it is not rationally related to legitimate state
11
interests and subject to arbitrary enforcement. (Docket No. 30, pp. 14-18.) While defendants
12
dispute those assertions (Docket No. 24, pp. 16-18; Docket 31, pp. 8-10), this claim is moot now
13
that the Legislature has amended section 2040 to repeal the $500,000 minimum equity
14
requirement, and replaced it with a scalable $250,000 to $500,000 requirement, based on an
15
entity’s estimated or actual transaction volume. Native Village of Noatak v. Blatchford, 38 F.3d
16
1505, 1510 (9th Cir. 1994) (“A statutory change . . . is usually enough to render a case moot, even
17
if the legislature possesses the power to reenact the statute after the lawsuit is dismissed”); Matter
18
of Bunker Ltd. Partnership, 820 F.2d 308, 312 (9th Cir. 1987) (new legislation which superseded
19
prior law rendered arguments based on superseded law moot).)
20
In amending section 2040, the Legislature both reduced the minimum amount of tangible
21
shareholder equity necessary to apply for a license, placed an initial cap on the maximum amount
22
of equity necessary to apply for a license, and established detailed criteria for evaluating whether
23
to increase the amount. Cal. Fin. Code, § 2040. Thus, Think’s arguments that the former statute
24
is uncertain or irrational are mooted by the legislative amendments.
25
Even if the claim is not moot, it would fail on the merits. The standards governing
26
Plaintiff’s substantive due process claim are extraordinarily lenient.3 (See Docket No. 24, pp. 16-
27
28
3
The parties agree that Think’s due process and equal protection claims are subject only
to rational level review. (Docket 30, pp. 2, 17.)
9
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18; Docket No. 31, pp. 8-11.) “Substantive due process provides no basis for overturning validly
2
enacted state statutes unless they are clearly arbitrary and unreasonable, having no substantial
3
relation to the public health, safety, morals, or general welfare.” Spoklie v. Montana, 411 F.3d
4
1051, 1059 (9th Cir. 2005) (internal quotation omitted). “If the legislature could have concluded
5
rationally that certain facts supporting its decision were true, courts may not question its
6
judgment.” Id. (internal quotation omitted). Moreover, Plaintiff’s challenge fails as long as the
7
law has any conceivably legitimate government purpose. Halverson v. Skagit Cnty., 42 F.3d
8
1257, 1262 (9th Cir. 1994). The Plaintiff carries a “heavy burden” because “[i]f it is ‘at least
9
fairly debatable’ that the [government’s] conduct is rationally related to a legitimate
10
governmental interest, there has been no violation of substantive due process.” Id. Thus, the
11
court’s focus is not whether the legislative act “actually advance[s] its stated purposes, but instead
12
. . . whether the governmental body could have had no legitimate reason for its decision.”
13
Kawaoka v. City of Arroyo Grande, 17 F.3d 1227, 1234 (9th Cir. 1994) (internal quotation
14
omitted).
15
The standards governing facial challenges are also deferential. Facial challenges are “the
16
most difficult challenge[s] to mount successfully, since the challenger must establish that no set
17
of circumstances exists under which the Act would be valid. The fact that the [legislative act]
18
might operate unconstitutionally under some conceivable set of circumstances is insufficient to
19
render it wholly invalid.” U.S. v. Salerno, 481 U.S. 739, 745 (1987).
20
In light of these deferential standards, any argument that the current law violates due
21
process must fail. At the outset, the licensure requirement rationally advances many legitimate
22
government interests. (See Docket No. 24, pp. 17-18; Docket No. 31, p. 10.) They include
23
“[p]rotect[ing] the interests of consumers of money transmission businesses in this state, . . .
24
maintain[ing] public confidence in financial institutions doing business in this state, and . . .
25
preserv[ing] the health, safety, and general welfare of the people of this state.” Cal. Fin. Code, §
26
2001(d); see also Cal. Fin. Code, § 2002. The Legislature found that the “failure of money
27
transmission businesses to fulfill their obligations would cause loss to consumers, disrupt the
28
payments mechanism in this state, undermine public confidence in financial institutions doing
10
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business in this state, and adversely affect the health, safety, and general welfare of persons in this
2
state.” Cal. Fin. Code, § 2001(c). These are legitimate government interests, a point which
3
Plaintiff does not contest. (See Docket No. 30, pp. 14-16; Merrifield v. Lockyer, 547 F.3d 978,
4
986 (9th Cir. 2008) (finding health, safety and consumer protection to be legitimate government
5
interests).)
6
Moreover, the Legislature’s requirement that money transmitters—non-bank entities
7
entrusted to hold or transmit citizens’ money to others—maintain their own minimum levels of
8
equity is entirely rational to ensure that such entities are financially stable, solvent and reliable,
9
that their shareholders are actually invested in their own financial institutions, and that licensed
10
businesses engage in safe and sound business practices. It matters not whether the legislative act
11
“actually advance[s] its stated purposes, but instead . . . whether the governmental body could
12
have had no legitimate reason for its decision.” Kawaoka, 17 F.3d at 1234 (internal quotation
13
omitted). Plaintiff cannot meet its “heavy burden” to show that the Legislature “could have had
14
no legitimate reason” for establishing minimum requirements.
15
As discussed in the motion to dismiss, Plaintiff disagrees with the Legislature’s decision
16
that minimum equity requirements actually advance the state’s legitimate interests. (Docket No.
17
30, pp. 17-18 (noting that the Legislature “still heeds to the same antiquated and completely
18
discredited system of risk management”).) But Plaintiff’s disagreement is simply an argument
19
over legislative judgment as to how to best regulate the money transmission industry, an
20
argument that has no place in rational basis review. Spoklie, 411 F.3d at 1059 (“If the legislature
21
could have concluded rationally that certain facts supporting its decision were true, courts may
22
not question its judgment”).4
23
24
25
26
27
28
4
The Commissioner retains discretion to determine what amount would be appropriate for
each licensee based on their unique circumstances after considering 11 different factors. Cal. Fin.
Code, § 2040(c). This approach cannot be assailed where the Commissioner’s final determination
has a “rational connection with the applicant’s fitness or capacity to practice the profession.”
Merrifield v. Lockyer, 547 F.3d 978, 986 (9th Cir. 2008). Until the Plaintiff applies for a license,
however, the Commissioner has no cause to exercise her discretion.
11
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III. PLAINTIFF’S EQUAL PROTECTION CLAIM FAILS FOR THE SAME REASONS AS THE
DUE PROCESS CLAIMS
2
3
Plaintiff’s equal protection claim is also moot and without merit. The claim is governed by
4
similarly deferential standards and fails for essentially the same reasons as its due process claims.
5
Think avers that the Money Transmission Act violates the Equal Protection Clause because the
6
minimum equity requirements in section 2040 “illegitimately and arbitrarily” discriminate against
7
smaller, newer, businesses. (FAC, ¶ 76; Docket No. 30, p. 17 (“the special threat posed to
8
California consumers by money transmitters with net worth between $0 and $500,000 . . . is no
9
greater than the threat posed by larger entities”).) 5
10
As with Think’s due process claim, this claim is moot because it hinges on a statute that
11
has been repealed and reenacted with different standards. The state department no longer
12
enforces the former law. Thus, Think’s claims for declaratory and injunctive relief are moot.
13
Even if the claim was not rendered moot, any argument as to the validity of the current
14
statute would be meritless. “In areas of social and economic policy, a statutory classification that
15
neither proceeds along suspect lines nor infringes fundamental constitutional rights must be
16
upheld against equal protection challenge if there is any reasonably conceivable state of facts that
17
could provide a rational basis for the classification.” F.C.C. v. Beach Commc’ns, Inc., 508 U.S.
18
307, 313 (1993); see City of New Orleans v. Dukes, 427 U.S. 297, 303 (1976). Courts do not
19
evaluate the “wisdom, fairness, or logic of legislative choices,” and the Plaintiff bears the burden
20
to “negative every conceivable basis” which might support the class distinction. F.C.C., 508 U.S.
21
at 313, 315; Johnson v. Rancho Santiago Cmty. Coll. Dist., 623 F.3d 1011, 1031 (9th Cir. 2010).
22
Even “rational speculation unsupported by evidence or empirical data” will pass constitutional
23
muster. F.C.C., 508 U.S. at 315. The Legislature’s decision may also “only partially ameliorate
24
a perceived evil,” “deferring complete elimination of the evil to future regulations.” City of New
25
Orleans, 427 U.S. at 303. Moreover, to survive rational basis scrutiny, the state action “need not
26
actually further a legitimate interest; it is enough that the governing body could have rationally
27
28
5
Notably, Plaintiff is not even a part of its purported class, since it has alleged that it can
satisfy the minimum requirements. (FAC, ¶ 50.)
12
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decided that the action would further that interest.” Johnson, 623 F.3d at 1031 (internal
2
quotations omitted).
3
Think’s equal protection claim fails because the Legislature rationally concluded that
4
minimum equity requirements advance the state’s legitimate interests in protecting citizens that
5
use money transmission services from unstable and unreliable businesses, and in preserving the
6
public’s confidence in the state’s licensed businesses. Even if the Legislature was incorrect in its
7
assumption, as Think asserts, it undoubtedly “could have rationally believed that the
8
[requirements] would promote its legitimate interest.” Johnson, 623 F.3d at 1031. The minimum
9
statutory requirements easily satisfy this constitutional standard.
10
CONCLUSION
11
With the amendments to the Money Transmission Act, Plaintiff’s claims are either
12
premature or moot. Even if this case presented a live case or controversy, the claims would be
13
meritless. The Court should dismiss this action without leave to amend.
14
Dated: April 2, 2015
Respectfully Submitted,
15
KAMALA D. HARRIS
Attorney General of California
MARC A. LEFORESTIER
Supervising Deputy Attorney General
16
17
18
19
s/ Ryan Marcroft
RYAN MARCROFT
Deputy Attorney General
Attorneys for All Defendants
20
21
22
SA2011103690
11823482.doc
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25
26
27
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CERTIFICATE OF SERVICE
Case Name:
Think Computer Corporation v.
Venchiarutti, et al.
No.
5:11-cv-05496-HRL
I hereby certify that on April 2, 2015, I electronically filed the following documents with the
Clerk of the Court by using the CM/ECF system:
SUPPLEMENTAL BRIEF IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS
I certify that all participants in the case are registered CM/ECF users and that service will be
accomplished by the CM/ECF system.
I declare under penalty of perjury under the laws of the State of California the foregoing is true
and correct and that this declaration was executed on April 2, 2015, at Sacramento, California.
Janice Titgen
Declarant
11665068.doc
s/ Janice Titgen
Signature
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