ORDER by Magistrate Judge Howard R. Lloyd granting [24] defendants' Motion to Dismiss. Plaintiff given 20 days leave to amend. Amended complaint due by 5/27/2015. (hrllc2, COURT STAFF) (Filed on 5/7/2015)
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Page 1ORDER by Magistrate Judge Howard R. Lloyd granting [24] defendants' Motion to Dismiss. Plaintiff given 20 days leave to amend. Amended complaint due by 5/27/2015. (hrllc2, COURT STAFF) (Filed on 5/7/2015): Case5:11-cv-05496-HRL Document66 Filed05/07/15 Page1 of 12
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UNITED STATES DISTRICT COURT
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NORTHERN DISTRICT OF CALIFORNIA
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THINK COMPUTER CORPORATION,
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Case No. 11-cv-05496-HRL
Plaintiff,
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United States District Court
Northern District of California
v.
ORDER GRANTING MOTION TO
DISMISS
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ROBERT VENCHIARUTTI, et al.,
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Re: Dkt. No. 24
Defendants.
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Plaintiff Think Computer Corp. (“Think”) brings this action against two California state
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officials for federal constitutional violations arising out of California’s Money Transmission Act
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(“MTA”), and application of the MTA to Plaintiff’s proposed money transmission business. See
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Dkt. No. 23. Plaintiff seeks declaratory and injunctive relief. Id. Defendants have moved to
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dismiss Plaintiff’s first amended complaint (“FAC”), Dkt. No. 24. Plaintiff filed an opposition,
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Dkt. No. 30, 1 and Defendants filed a reply, Dkt. No. 31. On April 17, 2012, the court held a
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hearing on this motion. Dkt. No. 40. Following amendments to the MTA, the court ordered
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supplemental briefing. Dkt. No. 59. Plaintiff and Defendants each filed a supplemental brief, see
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Dkt. Nos. 62, 63, and a response, see Dkt. Nos. 64, 65.
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Plaintiff filed an opposition to Defendants’ motion to dismiss the FAC on February 28, 2012,
Dkt. No. 25, and filed a corrected version on March 3, 2012. See Dkt. No. 30. Plaintiff also asks
the court to take judicial notice of several documents in connection with Plaintiff’s opposition. See
Dkt. Nos. 28, 43, 47. However, because the Court relied on none of these documents in reaching
its decision on Defendants’ motion to dismiss, the Court denies Plaintiff’s request for judicial
notice as moot.
ORDER GRANTING MOTION TO DISMISS
11-cv-05496-HRL
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I. BACKGROUND
Plaintiff Think Computer Corporation is a privately-held Delaware Corporation that
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developed a money transmission system, “FaceCash,” as an alternative to traditional plastic
payment cards. FAC ¶¶ 2, 17. Plaintiff brings this suit against Defendants Robert Venchiarutti, in
his official capacity as the Deputy Commissioner of the California Department of Financial
Institutions (“DFI”) and William Haraf, in his official capacity as the Commissioner of the DFI. 2
Id. ¶¶ 18–19.
The FAC describes the FaceCash system as an in-person payment system which operates
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United States District Court
Northern District of California
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by using a barcode and a digital image of the consumer’s face. Id. ¶ 2. To make a purchase, a
consumer supplies his or her barcode to a merchant, either on a smartphone or piece of paper, and
after scanning the barcode, the merchant’s FaceCash-enabled cash register would display an image
of the consumer’s face for the merchant to confirm the consumer’s identity. Id. FaceCash would
then debit funds from the consumer’s pre-paid account and transfer the funds to the merchant. Id.
The FAC alleges that Think began designing and investing in the FaceCash system in late
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2008, before the adoption of a money transmission licensing statute in California, and officially
launched FaceCash in May 2010. Id. ¶ 40. Around that time, Plaintiff contacted the DFI to ensure
it was in compliance with applicable state laws, and was informed that, as of that time, no license
was necessary for domestic money transmission. Id. ¶ 44. However, as Plaintiff continued to
develop FaceCash over the next year, California enacted the Money Transmission Act, which
implemented a licensing scheme for domestic money transmission in the state. The MTA went
into effect on January 1, 2011. Id. ¶ 26.
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The FAC also names the following Defendants: Traci Stevens, the Acting Secretary of the
California Business, Transportation and Housing Agency, Kamala Harris, the Attorney General of
California, Edmund G. Brown, Jr., the Governor of California, and Jacob A. Appelsmith, a Senior
Advisor to Governor Brown. FAC ¶¶ 20–22. In its opposition, Plaintiff agrees to the dismissal
without prejudice of Acting Secretary Stevens, Attorney General Harris, and Governor Brown.
Dkt. No. 30, at 1 n.2. The court therefore GRANTS the motion to dismiss as to these three
Defendants. Furthermore, Plaintiff asserts that Mr. Appelsmith was removed from the charging
allegations in the FAC and was thereby dropped as a Defendant. Id. The motion to dismiss is
therefore moot as to Mr. Appelsmith.
ORDER GRANTING MOTION TO DISMISS
11-cv-05496-HRL
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United States District Court
Northern District of California
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As enacted, the MTA imposed the following minimum requirements on applicants for a
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money transmission license in California: (1) applicants were required to hold at least $500,000 in
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“tangible net worth,” or shareholder equity, at all times; (2) a $250,000 surety bond for companies
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engaging in money transmission, or a $500,000 surety bond for companies providing stored value
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products; (3) a non-refundable $5,000 application fee; (4) a criminal background check; (5) a
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business plan; (6) pro-forma financial statements for three years and audited past financial
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statements; (7) a formal application; and (8) a pre-application interview. Id. The FAC alleges that
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many other states have less onerous requirements. Id. ¶ 33. According to the FAC, the MTA
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requires all entities wishing to do business in California and with California residents to obtain a
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license. Id. ¶ 39. The MTA provided existing, unlicensed money transmitters with a 180-day grace
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period through July 1, 2011, after which time they would need to apply for a license with the DFI
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to continue to operate legally in California. Id. ¶ 26.
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Following the enactment of the MTA, Plaintiff again contacted the DFI and was told a
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license was now required for domestic money transmission in California, and DFI scheduled a
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pre-filing interview for June 14, 2011. Id. ¶ 45. At around the time of Plaintiff’s pre-filing
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interview, Plaintiff’s average daily money transmission volume was “close to zero,” and Plaintiff
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only finished development of the merchant side of FaceCash at the end of June, 2011. Id. ¶ 42.
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In advance of its pre-filing meeting with DFI, Plaintiff provided the DFI with its audited
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2010 financial statements. Id. ¶ 48. The FAC alleges that the statements contained an inadvertent
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error which made it appear that FaceCash had $145,000 less in tangible shareholder equity than it
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should have. Id. Plaintiff provided the DFI with corrected set of statements three months later, on
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September 12, 2011. Id.
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The FAC alleges that at Plaintiff’s pre-filing interview, Defendant Venchiarutti expressed
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hostility toward Plaintiff and Plaintiff’s business. Id. ¶ 49. The FAC alleges that at the meeting,
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Defendant Venchiarutti: (1) informed Plaintiff that he would likely need to raise twenty million
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dollars of venture capital given that in his experience money transmitters required at least three
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years of business to achieve profitability; (2) expressed his opinion that Plaintiff had indicated an
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ORDER GRANTING MOTION TO DISMISS
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intent to violate the MTA, and allegedly informed Plaintiff that he would “call the Sheriff;” (3)
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expressed the opinion that Plaintiff was already insolvent and unable to control its rate of
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spending; (4) highlighted the MTA’s power to audit and the MTA’s requirement that the
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reasonable cost of DFI audit examinations be borne by audited companies; (5) stated that the DFI
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had an unwritten policy of not approving applications filed by money transmission entities with
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tangible net worth less than one million dollars; (6) when asked if the DFI had received any
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complaints about FaceCash, told Plaintiff that he thought he had received a complaint about
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FaceCash from Plaintiff’s competitors; and (7) informed Plaintiff at the conclusion of the meeting
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that he was still welcome to apply for a license in a way that Plaintiff interpreted as indicating that
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United States District Court
Northern District of California
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his application would be denied. Id.
The FAC alleges that Plaintiff attempted to establish the “true minimum net worth required
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by the DFI” but was rebuffed by Defendant Venchiarutti. Id. ¶ 51. On June 30, 2011, Plaintiff
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elected to shut down FaceCash in California and nationwide. Id. ¶ 52. The FAC alleges that a
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primary reason for the shutdown was Plaintiff’s perception that FaceCash’s application would be
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denied by the DFI. Id. Although Plaintiff never submitted an application for a license in California
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(and was consequently was never rejected), the FAC alleges that Plaintiff feared nationwide
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rejection because money license applications in other states generally require applicants to indicate
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if it has ever had a license application rejected. Id.
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Following the June 14, 2011 meeting and the June 30, 2011 shutdown of FaceCash,
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Plaintiff raised approximately $500,000 in additional funding, placing Plaintiff’s tangible
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shareholder equity well above the $500,000 statutory minimum at the time. Id. ¶ 50.
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On October 13, 2011, in response to Plaintiff’s “repeated requests,” Defendant
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Venchiarutti issued an order on behalf of the DFI exempting Plaintiff from having to comply with
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the provisions of the MTA outside of California. Id. ¶ 56. According to the FAC, the order was
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“conditional on Think not providing money transmission services to persons, consumers,
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merchants and anyone located in California and Plaintiff not advertising, soliciting or holding
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itself out as providing money transmission services to persons, consumers, merchants and anyone
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located in California.” Id. The FAC alleges that this order indicates that the DFI intends to enforce
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the MTA beyond the state of California on transactions “originating and existing in interstate
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commerce.” Id. Plaintiff alleges that further attempts at communication with the DFI were
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unsuccessful and Plaintiff concluded that the October order was final. Id. ¶ 57. Plaintiff alleges
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that he was left with no further recourse except to apply for a license without knowing the funding
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requirements in advance. Id. ¶ 57.
Plaintiff alleges that as a result of the shutdown of FaceCash, Plaintiff lost actual and
United States District Court
Northern District of California
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potential revenue streams from established FaceCash merchants, and the ability to sign up
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California consumers for the service. Id. ¶ 62. The FAC also alleges that “at least once prospective
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merchant cancelled his agreement to use Think software for purposes aside from FaceCash.” Id.
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Furthermore, Plaintiff alleges that FaseCash’s shutdown “badly damaged Think’s and [FaceCash
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CEO] Mr. Greenspan’s reputation, and many individuals who learned of the events blamed Think
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and its management for the interruption in service.” 3 Id. Finally, FAC alleges that “[d]irectly due
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to the regulatory uncertainty surrounding the MTA and other MTLs, Plaintiff was subsequently
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rejected as an investment opportunity by several prominent venture capital firms, eliminating
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virtually the only source of funding large enough to realistically allow Plaintiff to comply with the
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MTA.” Id. ¶ 64.
According to Plaintiff, following the FaceCash shutdown, its competitors were able to
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conduct money transmission illegally and gain an advantage over Plaintiff. Id. ¶ 66. According to
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the FAC, the DFI has turned a blind eye to the illegal money transmission activities of other
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entities, and has enforced the MTA arbitrarily. Id. ¶¶ 69–70. Plaintiff filed a separate lawsuit
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against its purported competitors on May 6, 2013, alleging that dozens of technology companies,
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venture capital firms, and other entities were violating the MTA. See Think Computer Corp. v.
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Dwolla, Inc., et al., Case No. 13-02054, 2014 WL 1266213 (N.D. Cal. Mar. 24, 2014). Judge
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Davila dismissed the action on March 24, 2014, finding that Plaintiff lacked standing to pursue its
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However, it is unclear how service was interrupted given that FaceCash never began operations.
See FAC ¶ 42.
ORDER GRANTING MOTION TO DISMISS
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federal law claims and that the court did not have jurisdiction over Plaintiff’s state law claims. Id.
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Following the filing of this lawsuit, the MTA was amended in several respects relevant to
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this case. See A.B. 786, 2013 Reg. Sess. (Ca. 2013). The provision governing the required
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minimum tangible shareholder equity was extensively amended. See Cal. Fin. Code § 2040.
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Whereas previously the MTA required a minimum of $500,000 in tangible shareholder equity, the
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new version of the law provides that:
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Northern District of California
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(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).
(c) When making a determination pursuant to subdivision (a) or (b),
the commissioner shall consider the following factors:
(1) The nature and volume of the projected or established
business.
(2) The number of locations at or through which money
transmission is or will be conducted.
(3) The amount, nature, quality, and liquidity of its assets.
(4) The amount and nature of its liabilities.
(5) The history of its operations and prospects for earning
and retaining income.
(6) The quality of its operations.
(7) The quality of its management.
(8) The nature and quality of its principals.
(9) The nature and quality of the persons in control.
(10) The history of its compliance with applicable state and
federal law.
(11) Any other factor the commissioner considers relevant.
Cal. Fin. Code § 2040.
The 2013 amendments to the MTA also abolished the DFI and the office of the
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Commissioner of Financial Institutions. Cal. Fin. Code, § 321(b). The DFI’s powers, duties,
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responsibilities, and functions were transferred to the newly-formed Department of Business
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Oversight (“DBO”), led by the Commissioner of Business Oversight. Cal. Fin. Code, §§ 300(b),
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ORDER GRANTING MOTION TO DISMISS
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320(a), 321(b). Jan Lynn Owen is the current Commissioner of Business Oversight, Dkt. No. 58,
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at 4, and the public officer responsible for issuing money transmission licenses. Cal. Fin. Code, §§
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2003(g), 2033(b). According to Plaintiff, Defendant Venchiarutti is now Deputy Commissioner of
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Money Transmission at the DBO’s “Division of Financial Institutions.” Dkt. No. 65, at 1 n.1.
Finally, the MTA was amended to add § 2010(l), which exempts certain goods or services
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payment activities from the MTA, including its licensure requirements. See Cal. Fin. Code § 2040.
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In particular, the MTA now does not apply to:
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(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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Northern District of California
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Cal. Fin. Code § 2010(l). “Payee” and “payor” are defined as follows”:
(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.
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Id.
The amendments to the MTA went into effect on January 1, 2014. See A.B. 786, 2013
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Reg. Sess. (Ca. 2013).
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II. ANALYSIS
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The FAC alleges three claims for relief. The first claim is for violations of the United
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States Constitution’s Due Process and Equal Protection Clauses for allegedly extinguishing
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Plaintiff’s right to use property and frustrating its efforts at state licensure. FAC, ¶¶ 73–85. The
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second and third causes of action are for violations of the Commerce Clause for allegedly
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regulating interstate and foreign commerce and burdening interstate commerce. Id. ¶¶ 86–108.
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Plaintiff seeks declaratory and injunctive relief as to the California MTA, as well as attorneys’ fees
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under 42 U.S.C. § 1988. Id. at 28.
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The MTA has undergone significant amendment since the filing of this lawsuit. Most
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importantly for purposes of this motion, the MTA was amended to exempt “transaction[s] in
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which the recipient of the money or other monetary value is an agent of the payee pursuant to a
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preexisting written contract and delivery of the money or other monetary value to the agent
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satisfies the payor’s obligation to the payee.” Cal. Fin. Code § 2010(l). In its supplemental brief,
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Plaintiff states that “[a]ccording to the plain language of § 2010(l), a payment processor, like
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Plaintiff, acting as an agent for a retailer (or any person or entity, frankly) pursuant to a written
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agency agreement that transmits money from a customer (or any person or entity) to the retailer is
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exempt from the MTA.” Dkt. No. 63, at 3. Plaintiff concludes that under this reading of § 2010(l),
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FaceCash does not need to apply for an MTA license to continue money transmission activities in
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California. Id.
If this reading is correct, and Plaintiff is now exempt from the MTA’s requirements, this
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Northern District of California
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case is moot. Plaintiff seeks only injunctive and declaratory relief, 4 and “[w]here intervening
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legislation has settled a controversy involving only injunctive or declaratory relief, the controversy
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has become moot.” Matter of Bunker Ltd. P’ship, 820 F.2d 308, 311 (9th Cir. 1987); see also
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Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 911 F.2d 1331, 1335 (9th Cir.
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1990) (“It would be pointless to enjoin enforcement of a regional plan that is no longer in effect;
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claims for such relief have been rendered moot by adoption of the [new] Plan. It would be equally
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pointless to render a declaratory judgment that the [former] Plan is null and void.”) (internal
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quotation marks omitted).
However, to either find this case moot or reach the merits of Plaintiff’s claims, the Court
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would be required to decide in the first instance both the scope of § 2010(l) generally and whether
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it applies to Plaintiff in particular. Whether this preliminary determination is now ripe for
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Plaintiff also seeks attorneys’ fees and costs under 42 U.S.C. § 1988. Section 1988 allows for the
recovery of attorneys’ fees by the prevailing party. However, Plaintiff has received no relief on the
merits of its claim, and at least one court has held that in cases where a claim is mooted by
legislative amendments following the filing of a plaintiff’s lawsuit, the plaintiff must show some
causal link between the lawsuit and the amendments to recover fees under § 1988. See Shipman v.
Missouri Dept. of Family Services, 877 F.2d 678, 681-682 (8th Cir. 1989). Plaintiff has alleged no
such link, and so has no claim for attorneys’ fees under § 1988.
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adjudication by this court depends on both “the fitness of the issues for judicial decision” and “the
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hardship to the parties of withholding court consideration.” Pac. Gas & Elec. Co. v. State Energy
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Res. Conservation & Dev. Comm’n, 461 U.S. 190, 200 (1983). “The basic rationale of the ripeness
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doctrine is to prevent the courts, through avoidance of premature adjudication, from entangling
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themselves in abstract disagreements over administrative policies, and also to protect the agencies
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from judicial interference until an administrative decision has been formalized and its effects felt
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in a concrete way by the challenging parties.” Id. at 201 (citing Abbott Laboratories v. Gardner,
8 387 U.S. 136, 148–149 (1967)).
Several factors suggest that the question of whether FaceCash is exempt from the MTA
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under § 2010(l) is not fit for judicial decision at this stage.
First, Plaintiff has not applied for a license under the new law, so the DBO has undertaken
United States District Court
Northern District of California
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no factual findings, and the law has yet to be applied to Plaintiff. Nor has the DBO yet
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promulgated regulations interpreting § 2010(l). 5
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Second, Plaintiff’s complaint largely centers on complaints about the opacity and
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arbitrariness of the $500,000 minimum shareholder equity requirement for MTA licensure in the
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former version of the law. The former version of § 2040 set no upper bound, and gave the DFI
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Commissioner authority to increase the equity required for a license at his discretion. The FAC
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alleges that while $500,000 was ostensibly the minimum, the DFI operated according to a set of
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unwritten rules that led the DFI to require far more equity than the statutory minimum. However,
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§ 2040 was also amended in 2013. Section 2040 now requires that applicants for MTA licensure
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have between $250,000 and $500,000 in shareholder equity, and the statute contains detailed
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criteria by which the Commissioner of the DBO is to determine what amount within that range a
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particular applicant must hold. Cal. Fin. Code § 2040(a), (c). While the statute apparently still
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authorizes the Commissioner to require shareholder equity above $500,000 under subsection (b), 6
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According to Defendants, the DBO is scheduled to issue regulations on the amendments to the
MTA in July, 2015. Dkt. No. 58, at 7–8.
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The parties appear to agree that the effect of § 2040(b) is to provide the Commissioner authority
to increase the amount of tangible shareholder equity required for a license beyond $500,000, the
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such a determination is to be made according to the same enumerated criteria in § 2040(c). 7 While
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the FAC contains factual allegations regarding the DFI’s enforcement of the prior version of the
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law, these allegations have little bearing on how the new version of the law will be interpreted,
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particularly in light of the fact that the MTA is now administered by a new agency, the DBO, with
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a new Commissioner, Jan Lynn Owen. See Dkt. No. 88, at 4.
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Northern District of California
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Third, while Plaintiff’s Due Process and Equal Protection claims are best characterized as
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as-applied challenges to the constitutionality of the MTA, Plaintiff’s second and third causes of
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action mount facial attacks under the Commerce Clause. As facial attacks, they rely less on the
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application of the standards under § 2040 to Plaintiff and its business. However, the uncertainty
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regarding the proper construction of § 2010(l) weighs against adjudicating Plaintiff’s Commerce
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Clause claims as well. Based on the record before the court, including Plaintiff’s description of the
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FaceCash system, which closely resembles § 2010(l), the court is inclined to agree with Plaintiff
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that § 2010(l) does indeed exempt FaceCash from licensure under the MTA. In such case, Plaintiff
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would seem to lack standing to challenge the constitutionality of the MTA. Furthermore,
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Plaintiff’s assertion that even if § 2010(l) should be read to exempt FaceCash, Plaintiff still retains
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a viable claim through the effective date of the amendments is unavailing. Dkt. No. 63, at 3–4.
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Plaintiff seeks only declaratory and injunctive relief enjoining Defendants from enforcing the
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MTA against Plaintiff. FAC, at 28. If FaceCash is exempt from the requirements of the MTA,
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such relief “is not only worthless to [Plaintiff], it is seemingly worthless to all the world.” Steel
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Co. v. Citizens for a Better Env’t, 523 U.S. 83, 106 (1998).
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Regarding the second question under the ripeness analysis—hardship to the parties—the
Court finds that while Plaintiff may suffer some additional hardship by virtue of the court
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initial cap set forth in subsection (a). See Dkt. Nos. 62, at 9, 63, at 1–2
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Plaintiff argues that because one of the enumerated criteria for increasing the required amount of
equity includes “any other factor the commissioner considers relevant,” the amount may be
increased “for no reason at all.” Dkt. No. 63, at 2. The court disagrees that this one factor renders
the equity requirement “illusory.” Plaintiff has alleged no facts suggesting this is the case, and as
Plaintiff has yet to apply for a license under the newly-amended MTA, there appears to be no basis
for Plaintiff’s conclusion.
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withholding consideration of its claims, such hardship is unlikely to be significant. Plaintiff
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already voluntarily shut down FaceCash, not only in California but nationwide. Furthermore,
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Plaintiff now appears to believe that FaceCash may resume operations without seeking a license
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under the MTA, and Plaintiff’s complaints about the opacity of the minimum equity requirement
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were largely addressed by amendments to § 2040. On the other hand, the Court’s premature
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construction of §2010(l) and application to Plaintiff’s business would preempt the ability of the
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DBO to interpret the law and render an administrative decision in Plaintiff’s case. The Court is
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mindful that the ripeness doctrine exists, in part, “to protect the agencies from judicial interference
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until an administrative decision has been formalized and its effects felt in a concrete way by the
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United States District Court
Northern District of California
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challenging parties.” Pac. Gas & Elec. Co., 461 U.S. at 200.
In sum, the Court finds that the issues presented by Plaintiff’s claims are not fit for judicial
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decision, and that withholding consideration of Plaintiff’s claims would not subject Plaintiff to
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undue hardship. The Court therefore concludes that Plaintiff’s claims are not ripe for review and
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that Defendants’ motion to dismiss should be granted.
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III. CONCLUSION
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The Court finds Plaintiff’s claims unripe for judicial review, and therefore GRANTS
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Defendants’ motion to dismiss in its entirety. Because Plaintiff may yet be able to amend its
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complaint to allege facts indicating that its claims are ripe, the Court dismisses the FAC without
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prejudice. The Court grants Plaintiff 20 days leave to amend the complaint. Plaintiff must file a
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first amended complaint no later than May 27, 2015.
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IT IS SO ORDERED.
Dated: May 7, 2015
______________________________________
HOWARD R. LLOYD
United States Magistrate Judge
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ORDER GRANTING MOTION TO DISMISS
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5:11-cv-05496-HRL Notice has been electronically mailed to:
Michael Brooks Carroll
carroll_law@sbcglobal.net
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Michael James Aschenbrener
mja@aschenbrenerlaw.com, legal@thinkcomputer.com
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Peter Keller Southworth
Peter.southworth@doj.ca.gov
Ryan Marcroft Ryan.Marcroft@doj.ca.gov, janice.titgen@doj.ca.gov,
marc.leforestier@doj.ca.gov
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United States District Court
Northern District of California
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ORDER GRANTING MOTION TO DISMISS
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ORDER by Magistrate Judge Howard R. Lloyd granting [24] defendants' Motion to Dismiss. Plaintiff given 20 days leave to amend. Amended complaint due by 5/27/2015. (hrllc2, COURT STAFF) (Filed on 5/7/2015): Case5:11-cv-05496-HRL Document66 Filed05/07/15 Page1 of 12
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UNITED STATES DISTRICT COURT
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NORTHERN DISTRICT OF CALIFORNIA
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THINK COMPUTER CORPORATION,
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Case No. 11-cv-05496-HRL
Plaintiff,
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United States District Court
Northern District of California
v.
ORDER GRANTING MOTION TO
DISMISS
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ROBERT VENCHIARUTTI, et al.,
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Re: Dkt. No. 24
Defendants.
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Plaintiff Think Computer Corp. (“Think”) brings this action against two California state
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officials for federal constitutional violations arising out of California’s Money Transmission Act
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(“MTA”), and application of the MTA to Plaintiff’s proposed money transmission business. See
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Dkt. No. 23. Plaintiff seeks declaratory and injunctive relief. Id. Defendants have moved to
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dismiss Plaintiff’s first amended complaint (“FAC”), Dkt. No. 24. Plaintiff filed an opposition,
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Dkt. No. 30, 1 and Defendants filed a reply, Dkt. No. 31. On April 17, 2012, the court held a
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hearing on this motion. Dkt. No. 40. Following amendments to the MTA, the court ordered
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supplemental briefing. Dkt. No. 59. Plaintiff and Defendants each filed a supplemental brief, see
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Dkt. Nos. 62, 63, and a response, see Dkt. Nos. 64, 65.
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Plaintiff filed an opposition to Defendants’ motion to dismiss the FAC on February 28, 2012,
Dkt. No. 25, and filed a corrected version on March 3, 2012. See Dkt. No. 30. Plaintiff also asks
the court to take judicial notice of several documents in connection with Plaintiff’s opposition. See
Dkt. Nos. 28, 43, 47. However, because the Court relied on none of these documents in reaching
its decision on Defendants’ motion to dismiss, the Court denies Plaintiff’s request for judicial
notice as moot.
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I. BACKGROUND
Plaintiff Think Computer Corporation is a privately-held Delaware Corporation that
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developed a money transmission system, “FaceCash,” as an alternative to traditional plastic
payment cards. FAC ¶¶ 2, 17. Plaintiff brings this suit against Defendants Robert Venchiarutti, in
his official capacity as the Deputy Commissioner of the California Department of Financial
Institutions (“DFI”) and William Haraf, in his official capacity as the Commissioner of the DFI. 2
Id. ¶¶ 18–19.
The FAC describes the FaceCash system as an in-person payment system which operates
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United States District Court
Northern District of California
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by using a barcode and a digital image of the consumer’s face. Id. ¶ 2. To make a purchase, a
consumer supplies his or her barcode to a merchant, either on a smartphone or piece of paper, and
after scanning the barcode, the merchant’s FaceCash-enabled cash register would display an image
of the consumer’s face for the merchant to confirm the consumer’s identity. Id. FaceCash would
then debit funds from the consumer’s pre-paid account and transfer the funds to the merchant. Id.
The FAC alleges that Think began designing and investing in the FaceCash system in late
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2008, before the adoption of a money transmission licensing statute in California, and officially
launched FaceCash in May 2010. Id. ¶ 40. Around that time, Plaintiff contacted the DFI to ensure
it was in compliance with applicable state laws, and was informed that, as of that time, no license
was necessary for domestic money transmission. Id. ¶ 44. However, as Plaintiff continued to
develop FaceCash over the next year, California enacted the Money Transmission Act, which
implemented a licensing scheme for domestic money transmission in the state. The MTA went
into effect on January 1, 2011. Id. ¶ 26.
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The FAC also names the following Defendants: Traci Stevens, the Acting Secretary of the
California Business, Transportation and Housing Agency, Kamala Harris, the Attorney General of
California, Edmund G. Brown, Jr., the Governor of California, and Jacob A. Appelsmith, a Senior
Advisor to Governor Brown. FAC ¶¶ 20–22. In its opposition, Plaintiff agrees to the dismissal
without prejudice of Acting Secretary Stevens, Attorney General Harris, and Governor Brown.
Dkt. No. 30, at 1 n.2. The court therefore GRANTS the motion to dismiss as to these three
Defendants. Furthermore, Plaintiff asserts that Mr. Appelsmith was removed from the charging
allegations in the FAC and was thereby dropped as a Defendant. Id. The motion to dismiss is
therefore moot as to Mr. Appelsmith.
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United States District Court
Northern District of California
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As enacted, the MTA imposed the following minimum requirements on applicants for a
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money transmission license in California: (1) applicants were required to hold at least $500,000 in
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“tangible net worth,” or shareholder equity, at all times; (2) a $250,000 surety bond for companies
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engaging in money transmission, or a $500,000 surety bond for companies providing stored value
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products; (3) a non-refundable $5,000 application fee; (4) a criminal background check; (5) a
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business plan; (6) pro-forma financial statements for three years and audited past financial
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statements; (7) a formal application; and (8) a pre-application interview. Id. The FAC alleges that
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many other states have less onerous requirements. Id. ¶ 33. According to the FAC, the MTA
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requires all entities wishing to do business in California and with California residents to obtain a
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license. Id. ¶ 39. The MTA provided existing, unlicensed money transmitters with a 180-day grace
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period through July 1, 2011, after which time they would need to apply for a license with the DFI
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to continue to operate legally in California. Id. ¶ 26.
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Following the enactment of the MTA, Plaintiff again contacted the DFI and was told a
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license was now required for domestic money transmission in California, and DFI scheduled a
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pre-filing interview for June 14, 2011. Id. ¶ 45. At around the time of Plaintiff’s pre-filing
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interview, Plaintiff’s average daily money transmission volume was “close to zero,” and Plaintiff
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only finished development of the merchant side of FaceCash at the end of June, 2011. Id. ¶ 42.
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In advance of its pre-filing meeting with DFI, Plaintiff provided the DFI with its audited
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2010 financial statements. Id. ¶ 48. The FAC alleges that the statements contained an inadvertent
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error which made it appear that FaceCash had $145,000 less in tangible shareholder equity than it
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should have. Id. Plaintiff provided the DFI with corrected set of statements three months later, on
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September 12, 2011. Id.
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The FAC alleges that at Plaintiff’s pre-filing interview, Defendant Venchiarutti expressed
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hostility toward Plaintiff and Plaintiff’s business. Id. ¶ 49. The FAC alleges that at the meeting,
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Defendant Venchiarutti: (1) informed Plaintiff that he would likely need to raise twenty million
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dollars of venture capital given that in his experience money transmitters required at least three
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years of business to achieve profitability; (2) expressed his opinion that Plaintiff had indicated an
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intent to violate the MTA, and allegedly informed Plaintiff that he would “call the Sheriff;” (3)
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expressed the opinion that Plaintiff was already insolvent and unable to control its rate of
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spending; (4) highlighted the MTA’s power to audit and the MTA’s requirement that the
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reasonable cost of DFI audit examinations be borne by audited companies; (5) stated that the DFI
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had an unwritten policy of not approving applications filed by money transmission entities with
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tangible net worth less than one million dollars; (6) when asked if the DFI had received any
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complaints about FaceCash, told Plaintiff that he thought he had received a complaint about
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FaceCash from Plaintiff’s competitors; and (7) informed Plaintiff at the conclusion of the meeting
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that he was still welcome to apply for a license in a way that Plaintiff interpreted as indicating that
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United States District Court
Northern District of California
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his application would be denied. Id.
The FAC alleges that Plaintiff attempted to establish the “true minimum net worth required
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by the DFI” but was rebuffed by Defendant Venchiarutti. Id. ¶ 51. On June 30, 2011, Plaintiff
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elected to shut down FaceCash in California and nationwide. Id. ¶ 52. The FAC alleges that a
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primary reason for the shutdown was Plaintiff’s perception that FaceCash’s application would be
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denied by the DFI. Id. Although Plaintiff never submitted an application for a license in California
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(and was consequently was never rejected), the FAC alleges that Plaintiff feared nationwide
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rejection because money license applications in other states generally require applicants to indicate
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if it has ever had a license application rejected. Id.
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Following the June 14, 2011 meeting and the June 30, 2011 shutdown of FaceCash,
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Plaintiff raised approximately $500,000 in additional funding, placing Plaintiff’s tangible
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shareholder equity well above the $500,000 statutory minimum at the time. Id. ¶ 50.
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On October 13, 2011, in response to Plaintiff’s “repeated requests,” Defendant
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Venchiarutti issued an order on behalf of the DFI exempting Plaintiff from having to comply with
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the provisions of the MTA outside of California. Id. ¶ 56. According to the FAC, the order was
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“conditional on Think not providing money transmission services to persons, consumers,
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merchants and anyone located in California and Plaintiff not advertising, soliciting or holding
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itself out as providing money transmission services to persons, consumers, merchants and anyone
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located in California.” Id. The FAC alleges that this order indicates that the DFI intends to enforce
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the MTA beyond the state of California on transactions “originating and existing in interstate
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commerce.” Id. Plaintiff alleges that further attempts at communication with the DFI were
4
unsuccessful and Plaintiff concluded that the October order was final. Id. ¶ 57. Plaintiff alleges
5
that he was left with no further recourse except to apply for a license without knowing the funding
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requirements in advance. Id. ¶ 57.
Plaintiff alleges that as a result of the shutdown of FaceCash, Plaintiff lost actual and
United States District Court
Northern District of California
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potential revenue streams from established FaceCash merchants, and the ability to sign up
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California consumers for the service. Id. ¶ 62. The FAC also alleges that “at least once prospective
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merchant cancelled his agreement to use Think software for purposes aside from FaceCash.” Id.
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Furthermore, Plaintiff alleges that FaseCash’s shutdown “badly damaged Think’s and [FaceCash
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CEO] Mr. Greenspan’s reputation, and many individuals who learned of the events blamed Think
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and its management for the interruption in service.” 3 Id. Finally, FAC alleges that “[d]irectly due
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to the regulatory uncertainty surrounding the MTA and other MTLs, Plaintiff was subsequently
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rejected as an investment opportunity by several prominent venture capital firms, eliminating
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virtually the only source of funding large enough to realistically allow Plaintiff to comply with the
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MTA.” Id. ¶ 64.
According to Plaintiff, following the FaceCash shutdown, its competitors were able to
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conduct money transmission illegally and gain an advantage over Plaintiff. Id. ¶ 66. According to
20
the FAC, the DFI has turned a blind eye to the illegal money transmission activities of other
21
entities, and has enforced the MTA arbitrarily. Id. ¶¶ 69–70. Plaintiff filed a separate lawsuit
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against its purported competitors on May 6, 2013, alleging that dozens of technology companies,
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venture capital firms, and other entities were violating the MTA. See Think Computer Corp. v.
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Dwolla, Inc., et al., Case No. 13-02054, 2014 WL 1266213 (N.D. Cal. Mar. 24, 2014). Judge
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Davila dismissed the action on March 24, 2014, finding that Plaintiff lacked standing to pursue its
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However, it is unclear how service was interrupted given that FaceCash never began operations.
See FAC ¶ 42.
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federal law claims and that the court did not have jurisdiction over Plaintiff’s state law claims. Id.
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Following the filing of this lawsuit, the MTA was amended in several respects relevant to
3
this case. See A.B. 786, 2013 Reg. Sess. (Ca. 2013). The provision governing the required
4
minimum tangible shareholder equity was extensively amended. See Cal. Fin. Code § 2040.
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Whereas previously the MTA required a minimum of $500,000 in tangible shareholder equity, the
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new version of the law provides that:
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Northern District of California
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(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).
(c) When making a determination pursuant to subdivision (a) or (b),
the commissioner shall consider the following factors:
(1) The nature and volume of the projected or established
business.
(2) The number of locations at or through which money
transmission is or will be conducted.
(3) The amount, nature, quality, and liquidity of its assets.
(4) The amount and nature of its liabilities.
(5) The history of its operations and prospects for earning
and retaining income.
(6) The quality of its operations.
(7) The quality of its management.
(8) The nature and quality of its principals.
(9) The nature and quality of the persons in control.
(10) The history of its compliance with applicable state and
federal law.
(11) Any other factor the commissioner considers relevant.
Cal. Fin. Code § 2040.
The 2013 amendments to the MTA also abolished the DFI and the office of the
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Commissioner of Financial Institutions. Cal. Fin. Code, § 321(b). The DFI’s powers, duties,
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responsibilities, and functions were transferred to the newly-formed Department of Business
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Oversight (“DBO”), led by the Commissioner of Business Oversight. Cal. Fin. Code, §§ 300(b),
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320(a), 321(b). Jan Lynn Owen is the current Commissioner of Business Oversight, Dkt. No. 58,
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at 4, and the public officer responsible for issuing money transmission licenses. Cal. Fin. Code, §§
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2003(g), 2033(b). According to Plaintiff, Defendant Venchiarutti is now Deputy Commissioner of
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Money Transmission at the DBO’s “Division of Financial Institutions.” Dkt. No. 65, at 1 n.1.
Finally, the MTA was amended to add § 2010(l), which exempts certain goods or services
5
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payment activities from the MTA, including its licensure requirements. See Cal. Fin. Code § 2040.
7
In particular, the MTA now does not apply to:
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(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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United States District Court
Northern District of California
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Cal. Fin. Code § 2010(l). “Payee” and “payor” are defined as follows”:
(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.
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Id.
The amendments to the MTA went into effect on January 1, 2014. See A.B. 786, 2013
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Reg. Sess. (Ca. 2013).
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II. ANALYSIS
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The FAC alleges three claims for relief. The first claim is for violations of the United
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States Constitution’s Due Process and Equal Protection Clauses for allegedly extinguishing
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Plaintiff’s right to use property and frustrating its efforts at state licensure. FAC, ¶¶ 73–85. The
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second and third causes of action are for violations of the Commerce Clause for allegedly
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regulating interstate and foreign commerce and burdening interstate commerce. Id. ¶¶ 86–108.
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Plaintiff seeks declaratory and injunctive relief as to the California MTA, as well as attorneys’ fees
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under 42 U.S.C. § 1988. Id. at 28.
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The MTA has undergone significant amendment since the filing of this lawsuit. Most
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importantly for purposes of this motion, the MTA was amended to exempt “transaction[s] in
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which the recipient of the money or other monetary value is an agent of the payee pursuant to a
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preexisting written contract and delivery of the money or other monetary value to the agent
4
satisfies the payor’s obligation to the payee.” Cal. Fin. Code § 2010(l). In its supplemental brief,
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Plaintiff states that “[a]ccording to the plain language of § 2010(l), a payment processor, like
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Plaintiff, acting as an agent for a retailer (or any person or entity, frankly) pursuant to a written
7
agency agreement that transmits money from a customer (or any person or entity) to the retailer is
8
exempt from the MTA.” Dkt. No. 63, at 3. Plaintiff concludes that under this reading of § 2010(l),
9
FaceCash does not need to apply for an MTA license to continue money transmission activities in
10
California. Id.
If this reading is correct, and Plaintiff is now exempt from the MTA’s requirements, this
United States District Court
Northern District of California
11
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case is moot. Plaintiff seeks only injunctive and declaratory relief, 4 and “[w]here intervening
13
legislation has settled a controversy involving only injunctive or declaratory relief, the controversy
14
has become moot.” Matter of Bunker Ltd. P’ship, 820 F.2d 308, 311 (9th Cir. 1987); see also
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Tahoe-Sierra Pres. Council, Inc. v. Tahoe Reg’l Planning Agency, 911 F.2d 1331, 1335 (9th Cir.
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1990) (“It would be pointless to enjoin enforcement of a regional plan that is no longer in effect;
17
claims for such relief have been rendered moot by adoption of the [new] Plan. It would be equally
18
pointless to render a declaratory judgment that the [former] Plan is null and void.”) (internal
19
quotation marks omitted).
However, to either find this case moot or reach the merits of Plaintiff’s claims, the Court
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would be required to decide in the first instance both the scope of § 2010(l) generally and whether
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it applies to Plaintiff in particular. Whether this preliminary determination is now ripe for
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Plaintiff also seeks attorneys’ fees and costs under 42 U.S.C. § 1988. Section 1988 allows for the
recovery of attorneys’ fees by the prevailing party. However, Plaintiff has received no relief on the
merits of its claim, and at least one court has held that in cases where a claim is mooted by
legislative amendments following the filing of a plaintiff’s lawsuit, the plaintiff must show some
causal link between the lawsuit and the amendments to recover fees under § 1988. See Shipman v.
Missouri Dept. of Family Services, 877 F.2d 678, 681-682 (8th Cir. 1989). Plaintiff has alleged no
such link, and so has no claim for attorneys’ fees under § 1988.
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adjudication by this court depends on both “the fitness of the issues for judicial decision” and “the
2
hardship to the parties of withholding court consideration.” Pac. Gas & Elec. Co. v. State Energy
3
Res. Conservation & Dev. Comm’n, 461 U.S. 190, 200 (1983). “The basic rationale of the ripeness
4
doctrine is to prevent the courts, through avoidance of premature adjudication, from entangling
5
themselves in abstract disagreements over administrative policies, and also to protect the agencies
6
from judicial interference until an administrative decision has been formalized and its effects felt
7
in a concrete way by the challenging parties.” Id. at 201 (citing Abbott Laboratories v. Gardner,
8
387 U.S. 136, 148–149 (1967)).
Several factors suggest that the question of whether FaceCash is exempt from the MTA
9
10
under § 2010(l) is not fit for judicial decision at this stage.
First, Plaintiff has not applied for a license under the new law, so the DBO has undertaken
United States District Court
Northern District of California
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no factual findings, and the law has yet to be applied to Plaintiff. Nor has the DBO yet
13
promulgated regulations interpreting § 2010(l). 5
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Second, Plaintiff’s complaint largely centers on complaints about the opacity and
15
arbitrariness of the $500,000 minimum shareholder equity requirement for MTA licensure in the
16
former version of the law. The former version of § 2040 set no upper bound, and gave the DFI
17
Commissioner authority to increase the equity required for a license at his discretion. The FAC
18
alleges that while $500,000 was ostensibly the minimum, the DFI operated according to a set of
19
unwritten rules that led the DFI to require far more equity than the statutory minimum. However,
20
§ 2040 was also amended in 2013. Section 2040 now requires that applicants for MTA licensure
21
have between $250,000 and $500,000 in shareholder equity, and the statute contains detailed
22
criteria by which the Commissioner of the DBO is to determine what amount within that range a
23
particular applicant must hold. Cal. Fin. Code § 2040(a), (c). While the statute apparently still
24
authorizes the Commissioner to require shareholder equity above $500,000 under subsection (b), 6
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According to Defendants, the DBO is scheduled to issue regulations on the amendments to the
MTA in July, 2015. Dkt. No. 58, at 7–8.
6
The parties appear to agree that the effect of § 2040(b) is to provide the Commissioner authority
to increase the amount of tangible shareholder equity required for a license beyond $500,000, the
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such a determination is to be made according to the same enumerated criteria in § 2040(c). 7 While
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the FAC contains factual allegations regarding the DFI’s enforcement of the prior version of the
3
law, these allegations have little bearing on how the new version of the law will be interpreted,
4
particularly in light of the fact that the MTA is now administered by a new agency, the DBO, with
5
a new Commissioner, Jan Lynn Owen. See Dkt. No. 88, at 4.
United States District Court
Northern District of California
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Third, while Plaintiff’s Due Process and Equal Protection claims are best characterized as
7
as-applied challenges to the constitutionality of the MTA, Plaintiff’s second and third causes of
8
action mount facial attacks under the Commerce Clause. As facial attacks, they rely less on the
9
application of the standards under § 2040 to Plaintiff and its business. However, the uncertainty
10
regarding the proper construction of § 2010(l) weighs against adjudicating Plaintiff’s Commerce
11
Clause claims as well. Based on the record before the court, including Plaintiff’s description of the
12
FaceCash system, which closely resembles § 2010(l), the court is inclined to agree with Plaintiff
13
that § 2010(l) does indeed exempt FaceCash from licensure under the MTA. In such case, Plaintiff
14
would seem to lack standing to challenge the constitutionality of the MTA. Furthermore,
15
Plaintiff’s assertion that even if § 2010(l) should be read to exempt FaceCash, Plaintiff still retains
16
a viable claim through the effective date of the amendments is unavailing. Dkt. No. 63, at 3–4.
17
Plaintiff seeks only declaratory and injunctive relief enjoining Defendants from enforcing the
18
MTA against Plaintiff. FAC, at 28. If FaceCash is exempt from the requirements of the MTA,
19
such relief “is not only worthless to [Plaintiff], it is seemingly worthless to all the world.” Steel
20
Co. v. Citizens for a Better Env’t, 523 U.S. 83, 106 (1998).
21
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Regarding the second question under the ripeness analysis—hardship to the parties—the
Court finds that while Plaintiff may suffer some additional hardship by virtue of the court
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27
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initial cap set forth in subsection (a). See Dkt. Nos. 62, at 9, 63, at 1–2
7
Plaintiff argues that because one of the enumerated criteria for increasing the required amount of
equity includes “any other factor the commissioner considers relevant,” the amount may be
increased “for no reason at all.” Dkt. No. 63, at 2. The court disagrees that this one factor renders
the equity requirement “illusory.” Plaintiff has alleged no facts suggesting this is the case, and as
Plaintiff has yet to apply for a license under the newly-amended MTA, there appears to be no basis
for Plaintiff’s conclusion.
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withholding consideration of its claims, such hardship is unlikely to be significant. Plaintiff
2
already voluntarily shut down FaceCash, not only in California but nationwide. Furthermore,
3
Plaintiff now appears to believe that FaceCash may resume operations without seeking a license
4
under the MTA, and Plaintiff’s complaints about the opacity of the minimum equity requirement
5
were largely addressed by amendments to § 2040. On the other hand, the Court’s premature
6
construction of §2010(l) and application to Plaintiff’s business would preempt the ability of the
7
DBO to interpret the law and render an administrative decision in Plaintiff’s case. The Court is
8
mindful that the ripeness doctrine exists, in part, “to protect the agencies from judicial interference
9
until an administrative decision has been formalized and its effects felt in a concrete way by the
10
United States District Court
Northern District of California
11
challenging parties.” Pac. Gas & Elec. Co., 461 U.S. at 200.
In sum, the Court finds that the issues presented by Plaintiff’s claims are not fit for judicial
12
decision, and that withholding consideration of Plaintiff’s claims would not subject Plaintiff to
13
undue hardship. The Court therefore concludes that Plaintiff’s claims are not ripe for review and
14
that Defendants’ motion to dismiss should be granted.
15
III. CONCLUSION
16
The Court finds Plaintiff’s claims unripe for judicial review, and therefore GRANTS
17
Defendants’ motion to dismiss in its entirety. Because Plaintiff may yet be able to amend its
18
complaint to allege facts indicating that its claims are ripe, the Court dismisses the FAC without
19
prejudice. The Court grants Plaintiff 20 days leave to amend the complaint. Plaintiff must file a
20
first amended complaint no later than May 27, 2015.
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IT IS SO ORDERED.
Dated: May 7, 2015
______________________________________
HOWARD R. LLOYD
United States Magistrate Judge
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5:11-cv-05496-HRL Notice has been electronically mailed to:
Michael Brooks Carroll
carroll_law@sbcglobal.net
3
Michael James Aschenbrener
mja@aschenbrenerlaw.com, legal@thinkcomputer.com
4
5
6
Peter Keller Southworth
Peter.southworth@doj.ca.gov
Ryan Marcroft Ryan.Marcroft@doj.ca.gov, janice.titgen@doj.ca.gov,
marc.leforestier@doj.ca.gov
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United States District Court
Northern District of California
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ORDER GRANTING MOTION TO DISMISS
11-cv-05496-HRL
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Third party AI contribution in government documents
Possible
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