Response and Opposition to State Defendants' Motion to Dismiss re [24] filed by Think Computer Corporation. (Carroll, Michael) (Filed on 2/28/2012) Modified on 3/1/2012 (bw, COURT STAFF).
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Page 1 San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
300 Montgomery Street, Suite 650
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‘OF California; EDMUND G. BROWN, JR. in
Case5:11-cv-05496-HRL Document25 Filed02/28/12 Pagel of 26
Michael Brooks Carroll (Bar #54904)
Kevin A. Flautt (Bar #257892)
LAW OFFICES OF MICHAEL BROOKS CARROLL
300 Montgomery Sireet, Suite 650
San Francisco, California 94104
Telephone: (415) 788-7600
Facsimile: (415) 421-7379
carroll law@sbeglobal.net
Attorneys for Plaintiff
| THINK COMPUTER CORPORATION
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
San Jose Division
THINK COMPUTER CORPORATION, Case No. CV11-05496-HRL
Plaintiff, PLAINTIFF’S RESPONSE AND OPPOSITION
TO STATE DEFENDANTS’ MOTION TO
v. DISMISS |
ROBERT VENCHIARUTTI, in his official
capacity as Deputy Commissioner of the
California Department of Financial
Institutions, WILLIAM HARATF, in his officia’
capacity as Commissioner of the California
Departinent 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
Before the Honorable Howard R. Lloyd
Hearing Date: March 27, 2012 |
Hearing Time: 10:00 a.m. .
Courtroom: 2
Complaint Filed: November 14, 2011
Trial Date: None Yet Set
his official capacity as Governor of the State oi
California; and KAMALA HARRIS, in her
official capacity as Attorney General of the
State of California,
Some Smet Sart” cat! ee! Sie Sage” Sel Se age Set! Sel! Ne! Scat Nam! Nase Nas Mage Mal Neer Nee” eae! anemia
Defendants.
»
4
t RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Gase No. CV11-05496-HRL
First Amended Complaint Filed: January 31, 2012
4Page 2 300 Montgomery Street, Suite 650
San Francisco, CA 94104
LAW OFFICES OF MICHAEL BROOKS CARROLL
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Case5:11-cv-05496-HRL Document25 Filed02/28/12 Page2 of 26
TABLE OF CONTENTS
STATEMENT OF THE CASE AND OPPOSITION TO MOTION TO DISMISS
CUE EEE EE EERE EE ETTORE DERE ODED CEASERS EOD L LENE RESELL EEE EASES OETA EEG EEE EEL E EE ECL E EE CEd ELE EERE EE EEE !
MATERIAL FACTS ALLEGED IN THE COMPLAINT THAT ARE DISPOSITIVE OF
AND NEGATE THE STATE DEFENDANTS’ CONTENTIONS THAT
PLAINTIFF’S COMPLAINT HAS FAILED TO STATE A CLAIM
Le EEE EE EEE EEE EE EEE OLE EEE CREE ADEE ELEC DOE EAE COE EE EEE Een EEE ree EERE EERE HER GEE EES 3
ARGUMENT
PEE eee EEE EEE ERAT EEE EERE EERE EEE E EEL DELTA DEAE EE EEE EASA EE EI SOLER ADELE TELE ET EEE EEE EE DEEL EERE EEE EES 4
I The Settled Law Governing The Determination Of Motions To Dismiss.
4
SOOO ROO OR ae CREEP OO TER EAA OE REE
Il. Contrary To The State Defendants’ Assertions, This Action Is Currently Ripe For Review
Since This Action Includes Both “Facial” And “As Applied” Challenges To The MTA, Any
Exhaustion Of Administrative Remedies By Plaintiff Would Be Futile, And Any Delay In
Adjudicating Plaintiff’s Challenge To The MTA Would Cause Plaintiff Substantial
Hardship._
Denne ANU E ENE DE OE RE EH OEE EE SEES EERE EE EEA EEE ETE DROSS CUILO EL ESOS OLASL LIS EEE ELSA ESSE SAFES CE Soe EEG ESE EEE EE EE aE 5
A. Plaintiff's Challenges To The Facial Unconstitutionality Of The MTA Are
Inherently Ripe For This Court’s Determination.
' 5
B, Plaintiff?s Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Are Ripe Since Controlling Law Establishes That Plaintiff Is Not Required
to Exhaust Administrative Processes Where, As Here, The Challenged Statute (The
MTA) Imposes A Substantial Hardship Or Burden Upon Plaintiff In Even
Participating In The Administrative Processes And Any Attempted Exhaustion Of
Administrative Remedies By Plaintiff Would Be Futile.
i Plaintiff's Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Onder the Facts Alleged In This Action Are Concrete And Sufficiently
Focused So As To Permit Judicial Resolution.
Cee eee ee ee EE OE Oa Ee ORTOP
ii, Plaintiff Will Suffer Substantial Hardship Lf Judicial Review Of This Action Is
Delayed.
CENCE ENCE ERENCE EEDA EEE EEE CLE E EERE EEE A EDO EEE EASES AEARTSA EEE OA ER OGO TSOP Raa EEE ES 9
IT. Plaintiff Has Alleged Facts Sufficient To State A Due Process/Equal Protection Claim.
Deen EE ELLE LE RA EERE REE E EE EU SEEDS LUCENE EE EEE EE DESDE EASES EUSA SDS SOS EA LEED E DOES EOE REDE EASE SHES EEE SEEEHE DESH SAAS 11
A. Plaintiff Has a Vested Property Right Which Has Been Interfered With By The
MTA And The Actions Of The State Defendants.
Cee eee EE ERLE SEE E EU EAE EERE ESE EA DAES E Ge LE EE EEE EEE ET ED ELE ER EES O EAS EE DEER SEERA EE EEE ESET EEE ERAGE LE ERE SEAS EES 11
RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Case No. CV11-05496-HRLPage 3 LAW OFFICES OF MICHAEL BROOKS CARROLL
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Case5:11-cv-05496-HRL Document25 Filed02/28/12 Page3 of 26
B, The Licensing Requirements Of The MTA Are Not Related to a Legitimate State
Purpose, And Are Applied By The State Defendants In a Completely Arbitrary and
Capricious Manner Designed to Stifle Competition and Chill Interstate Commerce.
— C, ~The MTA As Applied To Plaintiff By The State Defendants F urther Violates _
Plaintiff’s Procedural Due Process Rights.
IV. The MTA Violates The Dormant Commerce Clause And Is Not “Invulnerable” To A
Dormant Commerce Clause Challenge As The State Defendants Assert.
i ee 0
A. The State Defendants Fail to Cite any Explicit or Implicit Congressional
Endorsement of the Money Transmission Act and its Unconstitutional
Requirements for Licensure, Nor Can They Since The Purported Authorizing
Statute, the Patriot Act, Was Never Intended To Authorize Or Enable The MFA
Regulatory Scheme Enacted By The State Defendants.
COL Ee EE LC TEER EEE EAE A EEE RE EES EE ELE EE SSA O SASSO L LEER S CA SEEA LEE OT ERE COOSGEEE ECE E CASES DE EEECENOREDEEEGES 18
B. The State Defendants Have Attempted And Plaintiff Has Alleged They Will |
Continue To Attempt To Regulate Commerce Occurring Outside Of Califernia In
Violation Of The Commerce Clause.
ee ee ee ee er
Vv. Settled Federal Law And Procedure Requires That Plaintiff Be Allowed To Amend Even If
The Court Were To Grant The Motion To Dismiss On Any Of The Grounds Being
Asserted By The State Defendants.
PEE LENE E eRe ELEN EERE EE EEA ERISA SNS DU NOES SEE ES EAE EE EERO ESSE SE ERE EG EOD GEEESssedGeUuCLOaEsseNeEDGeEEnenNEsS 22
+
DISPOSITION REQUESTED
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RESPONSE AND OPPOSITION TOG MOTION TO DISMISS- Case No. CV11-05496-HRLPage 4 300 Montgomery Street, Suite 650
LAW OFFICES OF MICHAEL BROOKS CARROLL
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Case5:11-cv-05496-HRL Document25 Filed02/28/12 Page4 of 26
STATEMENT OF THE CASE AND OPPOSITION TO MOTION TO DISMISS
This is an action by a relatively small business entity, Plaintiff Think Computer Corporation,
which was already in business and had invested more than 1 million dollars to establish itself as a
money transmitting business in the e-commerce industry, who has been effectively put out of business
by the State of California’s Money Transmission Act (the “MTA”), Plaintiff asserts that the MTA is not
only unconstitutional on its face, but further is unconstitutional as it is being applied to the Plaintiff
because such MTA and the actions of the State Defendants enforcing such state statute and regulations
have imposed a disparate impact upon small business entities like Plaintiff, to the benefit of large
business entities, without any rational justification or constitutionally permissible basis for such
regulation and disparate impact upon small business entities like Piaintiff, and the restraint of interstate
commerce in the money transmission industry.
The “State Defendants” (defined at page 1, lines 4-13 of the Motion to Dismiss} have moved to
dismiss Plaintiff's First Amended Complaint’ (the “Complaint”) on the erroneously asserted grounds
that: 1) the Complaint is barred by the Eleventh Amendment as against the Governor, Defendants
Appelsmith, the Attorney General, and Acting Secretary Stevens; 2) the claims asserted in Plaintiff's |
Complaint are not ripe for review; 3) The first claim in the Complaint does not identify a protected
property right and the challenged MTA is rationally related to a legitimate government interest; and
4) The second and third claims for relief fail to state claims upon which relief can be granted based
upon the fact that Congress has purportedly authorized the states to license and regulate the Plaintiff’s e-
commerce business activities.
' Plaintiff voluntarily amended his Complaint “of course” pursuant to FRCP 15 following counsel’s appearance on January
31, 2012.
? Based upon Defendants’ judicial representations regarding the identity of the State Defendants who are in charge of the
enforcement of the MTA and their judicial representations that the Governor, Attorney General and Acting Secretary are not,
and without conceding that the joinder of the Governor, Attorney General and Acting Secretary in either the original
Complaint or First Amended Complaint was in any way improper, Plaintiff does not oppose the dismissal, without prejudice,
of the Governor, Attorney General and Acting Secretary; provided , however, Plaintiff expressly reserves the right to re-file
against such Defendants should further discovery jn this action reveal that such Defendants were, contrary to Defendants’
representations, directly involved in the enforcement process. Moreover, as to Defendant Appelsmith, although his name still
appears in the caption {as it was in the Complaint originally filed naming Appelsmith), he was removed from the charging
allegations by Plaintiffs First Amended Complaint. The defendant’s motion to dismiss as to Mr. Appelsmith was
unnecessary, and the State Defendants’ assertion that he must be dismissed (again) is therefore moot.
t
‘ RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Case No. CV11-05496-HRLPage 5 300 Montgomery Street, Suite 636
LAW OFFICES OF MICHAEL BROOKS CARROLL
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As will be demonstrated hereinbelow, such motion to dismiss must be denied as to each and
every one of the State Defendants’ mistaken, non-compelling and non-conclusive assertions for each of
the following reasons:
First, contrary to the State Defendants’ assertions, Plaintiff's action is currently ripe for review
since this action is a facial challenge to the unconstitutionality of the MTA, any exhaustion of
administrative remedies by Plaintiff would be futile (as alleged by Plaintiff in his Complaint), and any
delay in adjudicating Plaintiff's challenge to the MTA would cause Plaintiff further substantial
hardship. Indeed, Plaintiff has already suffered substantial financial hardship and will continue to suffer
such hardship as long as the MTA continues to be enforced by the State Defendants, as alleged in the
Complaint.
Second, Plaintiff has sufficiently alleged facts in its Complaint to state a claim for denial of its
due process rights in that it has identified its vested property rights in the continuation of its money
transmission business which have been interfered with by the MTA and the actions of the State
Defendants. Moreover, as specifically alleged in the Complaint, the MTA further violates Plaintiff's due
process rights in that the licensing requirements of such MTA are not related to a legitimate state
purpose, but rather such MTA imposes arbitrary and prohibitively high prerequisite financial net worth
figures for licensure (thereby effectively forcing Plaintiff out of business and excluding other relatively
small business entities) which have no rational relationship to the business being licensed, Further, as
specifically alleged in the Complaint, the MTA has been and continues to be applied by the State
Defendants against Plaintiff in a completely arbitrary and capricious manner designed to stifle
competition and chill interstate commerce;
Third, contrary to the State Defendants’ assertions, in passing the USA PATRIOT Act in 2002,
Congress did not intend to authorize or sanction a regulatory system such as the MTA which in effect
gives states carte blanche to criminalize true technological and financial innovation, by permitting
' *
states to completely ignore federal regulations promulgated by the Department of the Treasury and
allowing such regulatory systems to impose a disparate impact upon small business entities like Plaintiff
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RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Case No, CV11-05496-HRLPage 6 LAW OFFICES OF MICHAEL BROOKS CARROLL
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to the benefit of large business entities financing the enactment of regulations such as the MTA. Rather,
Congress solely desired to outlaw financing operations which were solely intended to support terrorism:
Fourth, the State Defendants’ bald assertion that their clear (and undisputed) continuing
violation of the dormant commerce clause alleged by Plaintiff (namely, that the State Defendants sought
and continue to seek to enforce the MTA in such a way as to regulate commerce outside of California)
essentially has been “fixed” through their voluntary decision to not engage in such unconstitutional
activity only as against Plaintiff and only in exchange for Plaintiff's agreement to not operate in
Califernia- even while other businesses continued to operate unlicensed under the MTA in blatant
violation of such MTA as alleged in the Complaint is a classic and ineffective “moving target” defense
which must fail.
Fifth, even if this Court were to grant the State Defendants’ Motion To Dismiss on any of the
grounds being asserted by the State Defendants, Plaintiff respectfully submits that settled federal law
and procedure requires that Plaintiff be allowed to amend its Complaint.
MATERIAL FACTS ALLEGED IN THE COMPLAINT THAT ARE DISPOSITIVE OF
AND NEGATE THE STATE DEFENDANTS’ CONTENTIONS THAT
PLAINTIFE’S COMPLAINT HAS FAILED TO STATE A CLAIM
As a preliminary matter, the following factual allegations in Plaintiff's Complaint, which must
be deemed true for purpose of the motion to dismiss, directly address and negate the erroneous
arguments that Plaintiff has failed to state facts sufficient to state a claim:
L, Contrary to the State Defendants' contention that Plaintiff has failed to allege a claim ripe
for determination by this Court, Plaintiff has alleged in the Complaint not only that the
MTA is facially unconstitutional, FAC, § 75) but also that the MTA and the State
Defendant's actions in applying such regulatory scheme to Plaintiff have already caused
Plaintiff present and continuing harm and forced him out of the business of money
- transmission. (FAC, { 62-69).
2. Contrary to the State Defendants’ contention that Plaintiff has failed to allege a claim for
violation of its due process rights, Plaintiff has alieged in the Complaint not only that a
protected property right but further that the challenged MTA is not rationally reiated to a
legitimate government interest by alleging, “Because the MTA effectively extinguishes a
legally valid, vested right to use of property in interstate commerce, the MTA is facially
unconstitutional as a violation of Plaintiff's rights to due process under the Fourteenth
Amendment to the United States Constitution,” (FAC, 4 75) and (FAC, 4 76).
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3, Contrary to the State Defendants’ assertion that Plaintiff's second and third claims for
relief fail to state claims upon which relief can be granted based upon the State
Defendants’ factual contention that Congress purportedly has authorized the states to
license and regulate the Plaintiff's e-commerce/money transmission business activities
(with a statute and regulatory scheme imposing substantial financial barriers to obtaining
the state’s permission to conduct such business), Plaintiff has alleged in the Complaint
not only that the State Defendants’ regulatory scheme goes far beyond any intelligible
principle for delegation of authorization set out in the Patriot Act, but further that the
intent behind such Act was and remains a desire to outlaw financing operations which
were intended to support terrorism. (FAC, § 88, 90, 92, 102, 103).
4, Contrary to the State Defendants’ contention that Plaintiffs allegations regarding the
State Defendants’ attempts to use the MTA to regulate commerce occurring entirely
outside of California are “speculation” “wholly unsupported by any factual allegations,
Plaintiff has pled specific facts, and specific statements and communications made by the
State Defendants supporting such allegations by alleging, infer alia: “the DFI issued an
“Order” (the “October Order”) purporting to exempt Think alone from having to comply
with the provisions of the MTA in providing money transmission services to consumers,
merchants and anyone outside of the State of California, so that Think could conduct
operations in states where it already had valid MTLs, but conditional on Think not
providing money transmission services to persons, consumers, merchants and anyone
located in California and Plaintiff not advertising, soliciting or holding itself out as
providing money transmission services to persons, consumers, merchants and anyone
located in California. Such Order necessarily meant that regardless of Think’s
application status, the California DFI intended and still intends to enforce the MTA
beyond the State of California’s borders on transactions originating and existing in -
interstate commerce. The DFI’s and Defendants’ position is that the California law it is
authorized to enforce has supremacy over the laws of any other states under which the
money transmitter may be in compliance. “(FAC, ] 56).
ARGUMENT
I, The Settled Law Governing The Determination Of Motions To Dismiss.
In considering a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure,
a court “must accept all well-pleaded facts alleged in the Complaint as true and draw all reasonable _
inferences in favor of the plaintiff.” Day v. Fallon Cty. Health Plan Ine. 917 F. Supp. 72, 75 (D. Mass
1996); see also, Watterson y. Page 987 F. 2d 1, 3(1“ Cir. 1993) The trial court must “neither weigh the
evidence nor rule on the merits because the issue is not whether the plaintiffs will ultimately prevail, but
whether they are entitled to offer evidence in support of their claims.” Day, 917 F.Supp. at 75. Claims
in a complaint need not be absolutely conclusive, but merely plausible. Bel/ Atl, Corp v. Twombley, 127
S. Ct. 1955, 1965 (2007).
The trial court may also consider documents outside of the pleadings in certain circumstances
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when ruling on a motion to dismiss. See, Watterson, 987 F.2d at 3. There is a “narrow exception for
’ }
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documents the authenticity of which are not disputed by the parties; for official public records; for
documents central to plaintiff's claim; or for document sufficiently referred to in the complaint.” Z/. 3-
4. If“a complaint’s factual allegations are expressly linked to—and admittedly dependent upon—a
document the authenticity of which is not challenged, that document effectively merges into the
pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6).” Beddall
y, State Street Bank and Trust Co. 137 F.3d 12, 16-17 (1" Cir. 1998).
I. Contrary To The State Defendants’ Assertions, This Action Is Currently Ripe For Review
Since This Action Includes Both “Facial” And “As Applied” Challenges To The MTA, Any
Exhaustion Of Administrative Remedies By Plaintiff Would Be Futile, And Any Delay In
Adjudicating Plaintiff's Challenge To The MTA Would Cause Plaintiff Substantial
Hardship.
This action is currently ripe for review as it meets the controlling ripeness doctrine set out by our
Supreme Court in Abbot Laboratories v, Gardner and its progeny, 387 U.S, 136, 148-49 (1967), Abbot
Labs. and the successive cases interpreting the ripeness doctrine mandate that this case be found ripe for
three concrete reasons: (1) facial challenges to a statute or regulation that even has not yet been applied
are generally considered fit for judicial determinatign because the issue raised is a “purely legal one,”
and can be decided by the court without further factual development. /d.; (2) “as-applied” challenges
are ripe when the exhaustion of administrative remedies would be futile. Samnmon v. New Jersey Bd. of
Med. Examiners, 66 F.3d 639, 643 (d Cir. 1995); and (3) “as-applied” challenges are also ripe when a
hardship would result to one of the parties, such as the continuing hardship resulting to and specifically
alleged by Plaintiff. See, Cofwell v. Dep’t of Health and Human Serys., 558 F.3d 1112, 1123-1124 (9%
Cir, 2009),
A. Plaintiff's Challenges To The Facial Unconstitutionality Of The MTA Are
Inherently Ripe For This Court’s Determination.
The issues presented here are fit for immediate review because the causes of action alleged
involve facial challenges to the MTA under the procedural due process, substantive due process, equal
protection, and commerce clause provisions--- which challenges are inherently ripe when the issues are
sufficiently focused without further substantial factual development. P. Leg. Found. v. State Energy
Resources Conservation & Dev, Commn., 659 F.2d 903, 915 (9th Cir, 1981) affd sub nom. P. Gas and
’ '
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Elec. Co. v. State Energy Resources Conservation & Dev. Commn., 461 U.S. 190 (1983).
Moreover, the judicial review sought now does not threaten “abstract disagreements over
administrative policies,” Abbott, 387 U.S. at 148, as the disagreements are extremely concrete and
sufficiently focused. It is well-settled that where, as here, a party challenges the statutory or
constitutional authority of the defendants to enact a licensing or regulatory scheme, the party need not
“submit to the administrative procedures incident thereto” prior to bringing an action. City of Chicago v.
Atchison, Topeka & Santa Fe Ry., 357 U.S. 77, 89 (1958) (constitutional challenge to licensing scheme
proper). Indeed, as stated by our Supreme Court in Public Utilities Comm'n v. United States, 355 U.S.
534, 540 (1958), as well as elsewhere, “where the only question is whether it is constitutional to fasten
the administrative procedure onto the litigant, the administrative agency may be defied and judicial
relief sought as the only effective way of protecting the asserted constitutional right.”
It is likewise established doctrine that when a party challenges a regulatory scheme on its face
‘for lack of licensing standards, the party need not first apply for and be denied a license. CITE. As this
is precisely the case here, Plaintiffs challenges to the facial unconstitutionality of the MTA are fit for
immediate judicial review. Indeed, it would be an inefficient use of judicial resources to adjudicate by
piecemeal Plaintiff's contentions that the State Defendants lack the constitutional and statutory
authority to regulate money transmissions, while at the same time arbitrarily abstaining from
considering Plaintiff's facial challenge to the regulatory scheme for its lack of standards. Moreover, the
latter presents a narrower ground for decision in this action.
B. Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Are Ripe Since Controlling Law Establishes That Plaintiff Is Not Required
to Exhaust Administrative Processes Where, As Here, The Challenged Statute (The
MTA) Imposes A Substantial Hardship Or Burden Upon Plaintiff In Even
Participating In The Administrative Processes And Any Aftempted Exhaustion Of
Administrative Remedies By Plaintiff Would Be Futile.
Plaintiff is not required to exhaust administrative proceedings before making a claim because
Plaintiff is directly challenging the MTA itself in this action “as-applied.” Our Ninth Circuit Court of
3 See also Gary D. Peake Excavating Inc. v. Town Bd. of Town of Hancock, 93 F.3d 68, 71-73 (2d Cir. 1996) (finding ripe a
Commerce Chuuse challenge to a municipal ordinance imposing permit requirements that were stricter than those of a state
agency). ’ '
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Appeals has held that administrative exhaustion is only required to make a due process or equal
protection claim ripe when it arises in certain narrow categorical circumstances relating to, or arising -
from, a land-use or takings claim. Norco Construction, Inc. v. King County, 801 F.2d 1143, 1146 (9th
Cir. 1986). The flaw in the State Defendants’ overly broad assertion that Plaintiff must categorically
exhaust all administrative remedies prior to bringing this action is that Plaintiff's procedural due
process, substantive due process, equal protection claims and commerce clause claims do not involve
land-use or takings claims. Carpinteria Valley Farms, Ltd. vy. County of Santa Barbara, 344 F.3d 822,
831 (9th Cir, 2003); see also Triple G Landfills, Inc. v. Board of Cominissioners, 977 F.2d 287, 289 (7th
Cir, 1992) (explaining why a final decision is not necessary for challenging permit requirements)."
Rather, for Plaintiff's “as-applied” claims, the traditional determination of ripeness mandates an
analysis of “whether the relevant issues are sufficiently focused so as to permit judicial resolution
without further factual development and whether the parties would suffer any hardship by the
postponement of judicial action.” Abbot, 387 U.S. 136. Each of these criteria are satisfied in this action.
i, Plaintiff’s:Challenges To The Uncenstitutionality Of The MTA As Applied Ta
Plaintiff Under the Facts Alleged In This Action Are Concrete And Siufficiently
Focused So As To Permit Judicial Resolution.
Here, the relevant issues are sufficiently focused and concrete. The State Defendants’ specious
assertion that, because the FDI has not made an administrative decision on Plaintiff's application the
issue are impermissibly abstract, simply does not hold water against the strong line of circuit court
decisions cited above. In fact, Plaintiff's Complaint sets out multiple attempts to engage in the DFI’s
administrative process, and Plaintiff did in fact start such process by attending the mandatory pre-filing
meeting”, but Plaintiff’s efforts were ultimately frustrated due to DFI’s hostile and uncooperative
* The Court in Triple G Landfills, Inc. found the challenge ripe the permit applicant had a direct and tangible interest in the
subject matter of the litigation and because ‘[p]ostponing judicial action ... would force an unwarranted dilemma upon [the
applicant]: either scuttle its development plans altogether in deference to a potentially invalid county regulation, or complete
the expensive and time-consuming state permit process, submit an permit application that [the county] is almost certain to
reject, and then, after incurring substantial sunk costs, bring a facial challenge to the ordinance.” 977 F.2d at 291, 289, and
290. See also Skull Valley Band Of Goshute Indians v. Nielson, 376 F.3d 1223 (10th Cir, 2004) (a party seeking a license
from a governmental agency generally is ripe when challenging an allegedly invalid law that either imposes substantial
burdens upon the applicant or flatly prohibits the activity in question).
The State Defendants have made clear that the MTA regulatory “process” begins well before the paper application is filed.
As acknowledged by the State Defendants and as this Court can verify on the DFI’s website dedicated to money transmitters
(emphasis added): s
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interactions with Plaintiff. (FAC, 9 47, 51, 53-5, 57-8.) Between the DFT’s October Order, its
unwillingness to communicate further with Plaintiff, and the jeopardy of risking a negative outcome
nationwide by applying in California, the Complaint demonstrates that Plaintiff had no further recourse
except these proceedings.° (FAC, § 52),
“Once the prospective applicant for a new money transmitter license or acquisition of control has become
thoroughly familiar with the laws and regulations that govern this activity, the next step is to arrange for a pre-
filing meeting with the Money Transmitter Division staff. The prospective applicant should contact Mr. Julio Prada
at (415) 263-8540 or by email at jprada@dfi.ca.gov to arrange for an appointment. The successful applicant wil! be
able to demonstrate a working knowledge of the laws and regulations that govern money transmitters and be ready
to present a proposed business plan. Meetings are conducted in person at the San Francisco Office. Ad prospective
applicants for a new money transmitter must have a pre-filing meeting with the Money Transmitter Division staff
before filing an application, for acquisition of control applicants, this step is highly recommended, especially if the
applicants are not known to the Money Transmitter Division staff.”
(See, RIN at Exhibit B, p. {). In this particular case, due process was owed to Plaintiff at least as early as the minute on April
1, 2011 when Mr, Greenspan initially e-mailed Mr. Prada inquiring as to the status of California’s money transmission
statutes. The pre-filing interview fook place more than two months later, well after this point in time.
* Moreover, other courts of appeal in other circuits have previously encountered almost identical situations involving
licensure and found the challenges to such licensure “processes” to be ripe for review, Thus, in ‘Skull Valley Band Of
Goshute Indians v, Nielson, 376 F.3d 1223, 1234-35 (10th Cir. 2004), the Tenth Circuit Court of Appeal cogently opined::
“PFS’s and the Skull Valley Band’s alleged injury is much more than a generally available grievance about the
government or a tactical disadvantage. Instead, they have alleged that the Utah statutes have affected them
concretely. In particular, PFS has alleged that the statutes impose substantial burdens upon it because of the SNF
storage project that it has proposed (requiring, for example, the payment of a five inillion dollar nonrefimdable
application fee, compliance with complex state regulatory requirements, and the posting of a two billion dollar
bond), ‘The Skull Valley Band has alleged that the Utah statutes infringe upon its ‘inherent tribal sovereignty,’
Aplts' App. at 39. Moreover, according to PFS and the Skull Valley Band, the extensive obligations created by the
Utah statutes are preempted by federal law.
We agree with PFS and the Skull Valley Band that a party seeking a license from a governmental agency generally
has standing to challenge an allegedly invalid law that either imposes substantial burdens upon the applicant or
flatly prohibits the activity in question. Several courts have suggested that conclusion in addressing ripeness
challenges, and, although “standing and ripeness are technically different doctrines, they are closely related in that
-each focuses on whether the harm asserted has matured sufficiently to warrant judicial intervention.” JoAnson y.
Missouri, 142 F.3d 1087, 1090 n. 4 (8th Cir. 1998) (quoting Warth v, Seldin, 422 U.S. 490, 499 n. 10, 95 S.Ct. 2197,
45 L.Ed.2d 343 (1975)); see also Morgan y. McCoiter, 365 F.3d 882, 887 (10th Cir.2004) (finding issues of
standing and ripeness ‘particularly difficult te divorce’).” fd. at 47-48 (emphasis added)..
Plaintiff here faces the very same dilemma: Plaintiff's plans have already been scuttled, but even applying now
anyway, ignoring concerns about prerequisites, would likely require waiting for a year or more for a license, and a denial in
California will prejudice Plaintiff's status in other states where the denial ofa license in California would have to be
disclosed. . (Plaintiff's application for a license in Lousiana, where there are no known issues, has been pending since
August, 2011, when the State of Louisiana informed Plaintiff that its application was complete.) It is thus exceedingly clear
that Plaintiff's situation is ripe for review.
f
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Moreover, the adjudication of these issues by this Court would not inappropriately interfere with
further administrative action because the State has not indicated that it has any plans to take any further
action, and the State has in fact indicated just the opposite. (FAC, 57. Indeed, the State has no interest
in further engaging Plaintiff, to the point where Mr. Greenspan cannot even get the DFI to take his
phone cails. /@ In completely shutting down an enterprise based upon Defendant Venchiarutti’s
ultimatum, Plaintiff has clearly had to “modify its behavior in order to avoid future adverse
consequences,” Ohio Forestry Assn., Inc., 523 U.S. 726, 733 (1977). These prior interactions actions
with the DFT clearly indicate that Plaintiff's efforts to proceed with the application process would be in
vain, Based on these facts, Plaintiff is not required to make the futile gesture of applying on paper,
merely to subject itself to DFI’s arbitrary and discriminatory process in order for its claims to be ripe.
i, Plaintiff Will Suffer Substantial Hardship If Judicial Review Of This Action Is
Delayed.
Plaintiff will unquestionably be harmed if the Court fails to act or delays its review. In Freedom
fo Travel Campaign v, Newcomb, the Ninth Circuit Court of Appeals held that:
t +
If it is ‘inevitable’ that the challenged rule will ‘operat[e]’ to the plaintiffs disadvantage-
if the court can make a firm prediction that the plaintiff will apply for the benefit, and that
the agency will deny the application by virtue of the rule-then there may be a justiciable
controversy that the court may find prudent to resolve. 82 F.3d 1431, 1436 (9th Cir. 1996), Furthermore, the Supreme Court has held that "one does not have
to await the consummation of threatened injury to obtain preventive relief. If the injury is certainly
impending that is enough." Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm'n, 461 U.S. 190, 201-202 (1983).
In Pac. Gas & Elec. Co., the Court rejected a ripeness objection to an action challenging a state
statute imposing a moratorium on nuclear plant construction, noting the hardship that would be imposed
if a judicial decision were delayed: The utilities who had challenged the state law would be required to
expend a substantial amount of time and money over a number of years without knowing whether that
/ expenditure was entirely futile. “To require the industry to proceed without knowing whether the
} t
moratorium is valid would impose a palpable and considerable hardship on the utilities, and may
) t
ultimately work harm on the citizens of California.” P. Gas and Elec. Co., 461 US, at 201-02.
: +
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Here, the facts make it clear that the Plaintiff could not and cannot now apply for a license in
California on paper, because ----without first knowing the absolute requirements of the licensure
process and without those requirements being subject to being changed by the State Defendants ---- the
risk of denial—even with a hearing—would mean the subsequent denial of similar applications in other
states, even in states where Plaintiff easily meets those other states’ application requirements, because
Plaintiff's denial of a license in California must be affirmatively disclosed to the other states and can be
used by those states to deny or revoke Plaintiff s licenses there. (FAC, § 52). This specter of adverse
consequences is substantiated by the actual content and layout of various states’ application forms,
which inquire as to whether or not an applicant has been rejected in any other state, directly adjacent to
questions regarding principals’ criminal records. (FAC, § 52). More egregious, the cost of compliance
of the MTA would be considerably great to a relatively small business entity such as Plaintiff, but the
penalty for noncompliance would subject Plaintiff to disqualification and possibly criminal and civil
penalties. (FAC, 4 49, 69), Indeed, this threat of criminal penalty is considered sufficient hardship to
make, the claim ripe. Freedom to Travel Campaign, 82 F.3d at 1436. Where the agency has threatened
enforcement, the actual commencement of administrative enforcement proceedings is not necessary.
Pacific Gas & Elec. Co., 461 U.S., at 201.7
When the plaintiffs were presented with such an equivalent Hobson’s choice in Hote/
Employees & Restaurant Employees International Union, the Ninth Circuit held that the impact of a
regulation is sufficiently direct and immediate as to render the issue ripe for judicial review when: “The
cost of compliance with the [regulation] is not particularly great, but the penalty for noncompliance is
7 Already, Plaintiff has invested more than one million dollars in its proprietary intellectual property and is at increasing risk
of its technology becoming obsolete the longer the State interferes. (FAC, 4 66). Plaintiff's investment of time, energy,
money and property is all for naught without the legal right to operate as a money transmitter, as Plaintiff did lawfully and
without any forma! complaint prior te July 1, 2011. “Indeed, fhe State’s apparent lack of interest in enforcing the MTA on any
of the unlicensed money transmitters disclosed to the DFT by Plaintiff, a lack of judicial review in these circumstances would
effectively grant Plaintiff's unlicensed competitors the effective right to continue operating unlawfully without fear of any
repercussions. (FAC, 60, 61, 70). As such, a delay in the judicial review of this action would cause Plaintiff to lose its
competitive edge in the money transmissions market. (FAC, § | 1). In contrast, hearing the maiter would open the possibility
that, in the event the MTA is found to be unconstitutional, all aspiring or current money transmitters, including Plaintiff,
would once again have a true legal right to operate.
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disqualification, and the union itself may be penalized if it allows disqualitied employees to continue to
perform their union duties.” 984 F.2d 1507, 1513 (9" Cir,1993).
Here, the facts are even more compelling since the cost of compliance was never made clear to
Piaintiff, (FAC, 7 49, subd. (a), (c)). After expending substantial amounts of money (amounting to one
million dollars) prior to the effective date of the MTA, Plaintiff's business plans were scuttled by the
DFI’s refusal to so much as clearly define its “unwritten policy” to Plaintiff concerning the
requirements of approval monetary and otherwise—forcing Plaintiff to shut down its enterprise to avoid
administrative action and criminal prosecution. (FAC, ¥ 49, 50, 51, 52). Even if Plaintiff applied now
without knowing the unwritten requirements, Plaintiff risks substantial hardship in the collateral effects
of the almost certain denial of its California application on other pending state applications. (FAC, at §
52.) As such, Plaintiffs action, and the continuing harm inflicted upon it by the State Defendants as
alleged therein, is ripe for review.
Ata minimum, Plaintiff has pled facts sufficient to state a claim against the State Defendants
and to establish the ripeness of Plaintiff's claims and continuing damages incurred as a direct result of
the MTA, and as such the State Defendants’ Motion to Dismiss must be denied.
Iii. Plaintiff Has Alleged Facts Sufficient To State A Due Process/Equal Protection Claim.
A. Plaintiff Has a Vested Property Right Which Has Been Interfered With By The
MTA And The Actions Of ‘The State Defendants.
In their Memorandum, the State Defendants make the misleading assertion that Plaintiff's do not
have a protected property right (specifically alleged at FAC { 75) sufficient to support a due process
claim stating that, “There is certainly no California statute or case law stating ‘in mandatory terms’ that
the plaintiff be allowed to continue engaging in this business activity without regulation.” In fact,
Plaintiff never argued that “in mandatory terms” it should be allowed to continue operating as a money
transmitter without regulation, so the point and ensuing discussion are moot®- regulation may very well
* In support of their erroneous argument that Plaintiff purportedly does not have a vested property right the divesting of
which would constitute a due process claim, the State Defendants cite to,Spoklie v. Montana 411 F.3d 1051 (9" Cir. 2005)
for the proposition that a “state may outlaw a formerly legal business even if it causes hardship to those who relied on the
earlier law.” Stafe Defendants’ Memorandum, at p. 15. However, Spokiie is conclusively distinguishable on its facts, as it
dealt with and only expressly addressed issues of the constitutionality of the retroactivity of a statute in the context of a
takings claim, Here, as set forth above and in the Complaint, Plaintiff is challenging the unconstitutionality of the MTA
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be appropriate, so long as it has an “intelligible principle” to guide it- the State Defendants argue no
such principle, but rather belabor the “invulnerability” of the MTA without acknowledging the fact that
the genesis and intent of the purportedly authorizing law lies solely in protecting the nation from
terrorism, as demonstrated below.’
Indeed, the State Defendants’ assertion misses the point--Plaintiff has argued that it should be
allowed to continue operating as a money transmitter either under a federal regulatory regime that has a
legitimate right to regulate interstate commerce, or that in the event Congress is found to have delegated
that right to the respective states, that such a process for regulatory approval must be rationally related,
on a Constitutionally consistent basis involving due process, to the nominal goal of consumer
protection, or indeed at a minimum to the policies and principles embodied by the Act purportedly
rendering the MTA invulnerable to constitutional challenge--- bluntly stated the MTA as enacted and
specifically as applied by the State Defendants goes too far, and certainly well past any permissible
congressional delegation of authority that arguably, if at all, could be found in the PATRIOT Act. The
present patchwork of state laws further fails to further the underlying congressional policy of such Act,
and in particular, the MTA’s convoluted and unlawful application process (especially in the context of
the forty-six other state money transmission laws with different requirements and different processes)
has wrongfully denied Plaintiff the use of its tangible and intellectual property as set forth herein and
alleged in the Complaint. (See, e.g. FAC, and specifically at { 61, 63, 64, 66, 67, 69, 70).
facially and as it has been applied to Plaintiff, in a manner which is arbitrary and irrational and further interferes with and
applies to his prospective commerce in other states. Indeed, as directly asserted in | 52 of Plaintiff's Complaint, the
cascading effect of the threatened denial of Plaintiff's application in California would preclude its successful applications in
other states. As such. Plaintiff's property rights have been and continue to be interfered with by the State Defendants.
° Congress’ prerogative to grant authorization to regulate interstate commerce, or infringe upon interstate commerce to the
States is not without limit, but rather is guided by the “intelligible principle” doctrine. Under the intelligible principle
doctrine, the delegation of congress’ authority must not grant the delegate “unrestrained freedom of choice.” Zemel v. Rusk 381 U.S. 1, 17 (1965). Rather, the delegation must have an "intelligible principle" to direct the delegated authority with a
guiding principle of how or to what extent it can frustrate interstate commerce. Freedom to Travel Campaign v, Newcomb, 82 F.3d 1431, 1437 (9th Cir. 1996). Additionally, the level of delegation, must meet the "public interest" standard. id, See,
also Panama Refining Co. v. Ryan, 293 U.S. 388 (1935) (striking down delegation to President to criminalize the
interstate transport of petroleum without limiting his power at all). ,
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B. The Licensing Requirements Of The MTA Are Not Related to a Legitimate State
Purpose, And Are Applied By The State Defendants In a Completely Arbitrary and
Capricious Manner Designed to Stifle Competition and Chill Interstate Commerce.
The DFI openly acknowledges the confusing and arbitrary nature of its application procedures
by having posted a new official “Frequently Asked Questions” page on its web site'® that was published
only after the instigation of these proceedings, and was therefore unavailable and/or unknown to
Plaintiff at the time that Plaintiff filed its initial Complaint and First Amended Complaint, This web
page confirms Plaintiff's allegations that the DFI has operated and continues to operate according to an
arbitrary rule that up until the creation of this (undated) web page, was completely unwritten and
unavailable to the public. (FAC, 49). In response to the question, “What is the capital requirement?” -
--this official California government web page states: “The capital requirement varies based on the
licensee’s plan of operation and risk profile. The amount of tangible net worth stated in the Financial
Code, $500,000, is not the amount required for licensing, but rather the minimum allowed for existing
licensees. A new licensee would fypically be required to have more tangible net worth, at least $1
million, to offset the expected losses of a new transmitter and support its operational needs at all times”
(emphasis added). From a due process standpoint, this statement (“the Policy”) is so problematic that it
is frankly shocking that the DFI ultimately (and presumably due to these proceedings) decided to post-it
publicly.
The Policy appears to vary according to two completely subjective variables: the licensce’s
“plan of operation” and so-called “risk profile.” How a licensee’s risk profile is determined, or who
should prepare such a risk profile, is not specified anywhere, let alone who examines the profile and
what credentials the examiner has for doing so, The Policy then notes that the DF I does not actually
pay any attention to the $500,000 minimum tangible shareholder equity figure contained within § 2037
of the MTA, but instead makes up its own rules as it goes along, free from the burden of a notice and
comment period explicitly required by 1 CCR § 44. The Policy then hedges further, indicating that
“typically” applicants need additional net worth, but without specifying the particular cireumstances
that would lead to an exception from the “typical” case. (Given how few licensees and applicants there
See, http:/Avww.dfi.ca.gov/resources/faqs/faqs_tms.asp, a copy of which is attached and submitted herewith as Exhibit B
to the concurrently filed Request for Judicial Notice. '
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are in the first place, it is hard to even imagine what the word “typical” might mean—perhaps “a
corporation with a net worth of greater than one billion dollars?”). A new minimum figure of $1
million in net worth is then put forth without any justification for that particular number, leaving
applicants to wonder if perhaps the DFI really believes that doubling an arbitrary value in an arbitrary
statute will keep consumers’ funds safe.
Were there truly an underlying rationale for this number, it would not vary by hundreds of
thousands of dollars from state to state. The State Defendants therefore promote the interests of a select
| group of extremely wealthy and entrenched corporations, by asserting an illogical and irrational basis
for consumer protection in truth premised upon an impermissible presumption that “big companies with
big money” are less likely to harm consumers than “smal! companies with small money,” when they
incorrectly assert that a rational relationship exists between the MTA’s requirements and the state’s
interest in protecting consumers.
The State Defendants’ faulty argument is presumably premised on the wholly incorrect belief
that adding equity to an enterprise makes it more stable and trust worthy. The recent and well-
publicized catastrophic implosions of MF Giobal, Inc. (“MF Global”) and Bernard L. Madoff
Investment Securities LLC Scandal should conclusively disprove this absurd theory. MF Global was
reportedly worth $42.46 billion as of 2010, and though it was not specifically classified or marketed as a
“money services businesses,” it generally operated from a theoretical accounting standpoint in the same
way that a money services business does, holding funds on behalf of consumers. Somehow, despite its
enormous amount of net worth, MF Global still managed to “lose” almost a billion dollars of consumer
funds for reasons that have yet to be determined conclusively, and which are at issue in pending
bankruptcy litigation. It should be noted that MF Global’s principals, including the former Governor of
New Jersey, were also exceedingly wealthy, and even without corporate backing more than able to meet
any state’s minimum net worth requirements for money transmission.
The fanciful notion that $500,000, or $1 million, or even any amount of minimum capital
actually protects consumers is consequently demonstrably false. Minimum capital requirements do
? 4
nothing to protect consumers who deposit money in financial institutions so long as those institutions do
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not make loans or issue credit. As the MF Global, Madoff Scandai and other recent scandals indicate,
what matters is the honesty and integrity of the principals involved, and the rigor of their auditors in
highlighting potential operational defects—not the amount of capital ascribed to the firms or their
principals."
The utter lack of substantive support for the MTA’s financial capital prerequisites, aside from
the discriminatory, anti-competitive and protectionist desires of the MTA’s sponsors, puts the MTA ina
rarefied class of laws that fail the rational review test. In City of Cleburne v. Cleburne Living Center,
Inc, 473 US. 432., the Court opined: “The mentally retarded, as a group, are indeed different from
others not sharing their misfortune, and in this respect they may be different from those who would
oceupy other facilities that would be permitted in an R-3 zone without a special permit, But this
difference is largely irrelevant unless the Featherston home and those who would occupy it would
threaten legitimate interests of the city in a way that other permitted uses such as boarding houses and
hospitals would not. Because, in our view, the record does not reveal any rational basis for believing
that the Featherston home would pose any special threat to the city's legitimate interests, we affirm the
Judgment below insofar as it holds the ordinance invalid as applied in this case.”
Here, as in Cleburne, it is evident from the lack of complaints about and subsequent prosecution
of small money transmitters that the special threat posed to California consumers by money transmitters
with net worth between $0 and $500,000 (or $1 million, or some other figure that State Defendants may
wish to invent) is no greater than the threat posed by larger entities. Given the competitive drive of new _
market entrants that can lead to fewer, lower fees and better service, the threat may even be less. After
the 2008 financial crisis, there is considerably greater public outrage at large financial institutions than
small ones. Literally all of the capital in the world was not enough to save some of the largest banks in
"! Though the efficacy of financial regulation continues to be the subject of national debate, it is the opinion of Plaintiff that
the best solution to the real problem of ensuring the security of consumer deposits involved in money transmission sis not an
arbitrary threshold that restricts entry into the market (accomplishing nothing thereafter), but rather a mechanism te ensure
real-time data transparency, The technology necessary to facilitate such transparency has existed for more than a decade.
Simply requiring licensees to disclose balance sheet data in a standardized, digital format on a regular basis, requiring little
to no manual intervention (perhaps with frequency of disclosure dependent upon company size) would both teli the
Government what it needs to know, and eliminate unnecessary burdens to industry. Such approach would of course level the
playing field for both the relatively small money transmitters and the mega-businesses which the current MTA favors, 5
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the nation from collapse and mismanagement of client funds—and yet the State of California still heeds
to the same antiquated and completely discredited system of risk management that was in-use before the
crisis as demonstrated by the arbitrarily applied and irrational Policy.
For all of these reasons, it is not meritorious, but specious, for Defendants to argue that the
financial requirements of the MTA are “rationally related” to the purpose of consumer protection even
if such requirements were evenly applied--- which they are not. (FAC, { 60, 61 70). For now, the
minimum requirements are certainly present, and these proceedings continue due to their onerous
nature, but nowhere in the MTA is there a stated rationale for a) the $500,000 figure in the statute; b)
the $1 miilion figure (finally) stated on the DFI web site; c) the DFI’s practice of ignoring both of these
figures in certain, unspecified situations where a “plan of operation” or “risk profile” might override
them; d) the DFI’s demonstrably false belief that all new applicants must suffer “expected losses;” or e)
that such expected losses will, on average, by definition, or otherwise reach $500,000. Each instance of
uncertainty in a procedure such as this one introduces the possibility of subjective human error or bias.
Whether intentional or not, such subjectivity is the opposite of rationality. The State cannot, and
therefore its argument must fail.
Indeed, at a minimum, Plaintiff has pled facts sufficient to state a claim against the State
Defendants for their violations of Plaintiff's due process rights in that the MTA does not have a rational
basis related to a legitimate state interest, and as such the State Defendants’ Motion to Dismiss must be
denied.
C. The MTA As Applied To Plaintiff By The State Defendants Further Violates
Plaintiff's Procedural Due Process Rights.
Finally, Plaintiffs procedural due process rights have also been violated by the State
Defendants’ arbitrary and capricious application of the MTA to Plaintiff. As stated by the Court in
Mathews y. Eldridge, 424 U.S. 319:
“Although respondent concededly did not exhaust the Secretary's internal review procedures,
and ordinarily only the Secretary has the power to waive exhaustion, this is a case where the
claimant’s interest in having a particular issue promptly resolved is so great that deference to
the Secretary's judgment is inappropriate. The facts that respondent’s constitutional chalienge
was collateral to his substantive claim of entitlement, and that (contrary to the situation in Salfi)
he celorably claimed that an erroneous termination would damage him in a way not
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compensable through retroactive payments warrant the conclusion that the denial of his claim to
continued benefits was a sufficiently Final decision’ with respect to his constitutional claim to
satisfy the statutory exhaustion requirement.” (emphasis added)
Mathews further established a three-part test for determining “the constitutional sufficiency of
administrative procedures.” The first part of this test assesses “the private interest that will be affected
| by the official action;” the second, “the risk of an erroneous deprivation of such interest through the
procedures used, and probable value, if any, of additional procedural safeguards;” and the third, “the
Govermment's interest, including the fiscal and administrative burdens that the additional or substitute
procedures would entail.” fd.
The private interest affected by official action here is obvious and substantial. Plaintiff Think
Computer Corporation has been required, as a direct result of the process adopted by the DF, to
completely cease operating the mobile payment system in which it invested significant resources, and
which constitutes its primary product offering. (FAC, 62-69).
The risk of erroneous deprivation of such interest, through the inherently subjective and
confusing process that includes a mandatory “pre-filing interview,” combined with the additionally
vague and subjective monetary pre-requisites for filing, is enormous. It is easy to conceive of presently
lacking procedural safeguards that would offset such risk, including but not limited to more definite
written pre-requisites, and the requirement that pre-filing interviews be recorded, if such meetings are
even truly necessary
such additional safeguards would actually benefit the Government. Considerable taxpayer
resources have been invested in the slow (and pointlessly subjective) process of evaluating money
transmission applications, allowing the Government to discriminate against those businesses it does not
“like” without any stated criteria. Eliminating the licensure process completely or allowing recordings
to be made with off-the-shelf equipment wouid either save the State of California an enormous amount
of money (which it desperately needs), or cost the State virtually nothing.
As such, at a minimum Plaintiff has alleged facts sufficient to support its claim for violation of
its rights to procedural due process, and accordingly, the State Defendants Motion to Dismiss must be
denied, , :
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TV. The MTA Violates The Dormant Commerce Clause And Is Not “Invulnerable” To A
Dormant Commerce Clause Challenge As The State Defendants Assert.
A, The State Defendants Fail to Cite any Explicit or Implicit Congressional
Endorsement of the Money Transmission Act and its Unconstitutional
Requirements for Licensure, Nor Can They Since The Purported Authorizing
Statute, the Patriot Act, Was Never Intended To Authorize Or Enable The MTA
Regulatory Scheme Enacted By The State Defendants.
In its Memorandum, the State Defendants boldly label the MTA “invulnerable” to a dormant
Commierce Clause challenge, citing 18 U.S.C. § 1960 as purported proof that Congress implicitly
endorses every requirement in the MTA. However, Congress clearly did not intend to give the states
carte blanche to enforce a regulatory scheme in the manner that the State Defendants have done here,
and indeed such a grant of power as the State Defendants argue that the State of California has received-
-- which would render the MTA “invulnerable” to constitutional challenge-- would itself be
unconstitutional as set forth above. See, Zemel, supra, 381 U.S. at 17. The State Defendants’ reasoning
that the MTA is authorized by 18 U.S.C. § 1960 fails to withstand even a cursory level of scrutiny when
evidence of the congressional intent and motivations behind such regulation, adopted in the wake of and
in reaction to the terrorist attacks of September 11, 2001, is more closely examined, ,
Congress amended 18 U.S.C. § 1960 in 2002 as part of the USA PATRIOT Act, a sweeping law
designed to counter terrorism in the wake of the September 11, 2001 terrorist attacks. Far from
intending to describe a financial regulatory regime for the future of commerce, Congress was primarily
interested in outlawing the use of traditional Islamic hawala financial networks as vehicles to fund
terrorism, and so it designated the operation of an unlicensed money transmission service to be a federal
crime. Congress’s intent in this regard, and the federal government’s motivations in enacting such
provision are described in a report submitted to Congress by the United States Department of the
Treasury in November, 2002 in accordance with Section 359 of the USA PATRIOT Act (the
“Report”).'” The Report focuses in great detail on terrorist financing (not once referring to new
payment technologies) and explains:
“Informal Value Transfer Systems (IVTS) is a term used to describe those money or value
transfer systems that operate informally to transfer money as a business, In the past, some of
, I
" See hitp://www.fincen.govw/news_room/rp/files/hawalarptfinal | 1222002.pdf. The full text of the Report is also attached as
Exhibit C to the Request for Judicial Notice submitted herewith. r
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these informal! networks have been labeled by various terms including ‘alternative remittance
systems’ and ‘underground banks.’ Within the broad realm of informal institutions there exist
more detailed descriptors for specific value transfer mechanisms, such as hawala, hundi, fei
ch’ien, hoe kuan, hui k’aun, and many others. For the purpose of consistency and inclusiveness,
IVTS is the primary term of art used in this report...
In order to better understand this issue, FinCEN looked closely at the workings of the hawala
system, a widely used form of VTS. Hawala means “transfer” in Arabic and the system works
by transferring money without actually moving it. The basic hawala transaction involves a
sender, two trusted intermediaries, and a recipient. For example, a U.S. resident who wanis to
send money to a friend in another jurisdiction (Country B) would give it to a U.S. hawaladar,
who typically gives the sender a code or identification mechanism. The U.S. hawaladar then
contacts a local hawaladar in Country B by telephone, fax, or e-mail, and the sender contacts the
intended recipient to convey the code. The local hawaladar in Country B then delivers the
specified funds to the recipient upon presentation of the code. The hawaladar charges a flat fee,
a commission, or may alternatively or in addition, profit from the exchange rate differential
between the official and black market price of U.S. dollars in Country B. The accounts between
the two operators may be settled various ways including through compensatory payments (i.c.,
when someone from Country B sends money to the U.S.), conventional wire transfers or checks,
physical movement of money (by courier), invoice manipulation or other trade- based
mechanisms, and the trade/smuggling of gold and precious gems...
Section 359(a) of the Patriot Act amended the definition of money transmitter to encompass
‘any person who engages as a business in an informal money transfer system or any network of
people who engage as a business in facilitating the transfer of money domestically or
internationally outside of the conventional financial institution system.’ These amendments
make clear that under U.S. law all money transfer remitters, including those that operate on an
informal basis, or outside the scope of the conventional financial sector, are subject to the BSA.”
In the Report, the entirety of Appendix B, “Basic Hawala and Sample Account Settling,” is
devoted to diagrams of Hawala networks involving fictitious actors with Muslim names. Appendix C
involves the “Use of Cash Intenstve Businesses In Ethnic Communities to Facilitate [VTS Activities.”
In the section entitled “Recommendations,” the Report states:
“The U.S. approach of regulating informal value transfer activity is preferable to outlawing the
activity altogether, a course chosen by some nations. Attempting to outiaw IVTS ultimately
deprives law enforcement of potentially valuable information and drives the informal remittance
providers further “underground.” Outlawing the activity also deprives the mostly law-abiding
IVTS customers of the primary channel through which they transfer funds.
In addition, the U.S. approach to regulation is consistent with emerging international standards
such as the Special Recommendations on Terrorist Financing, issued in November 2001, by the
Financial Action Task Force (FATF) on Money Laundering. The FATF’s Special
Recommendation VI on Alternative Remittance calls on nations to ‘take measures to ensure that
persons or legal entities, including agents, that provide a service for the transmission of money
or value, including transmission through an informal value transfer system or network, should be
licensed or registered and subject to all the FATF Recommendations that apply to banks and
non-bank financial institutions,’” «
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To baldly state, as the State Defendants boldly contend here, that Congress intended to halt the
creation of new payment technologies in the United States by passing the USA PATRIOT Act is
therefore a gross mischaracterization of the legislative record. It is clear that the present situation is one
that Congress did not intend, nor authorize and in fact is simply one in which the State Defendants seek
to stretch federal law to defend an unconstitutional money transmission regulatory scheme.
Even were it not abundantly clear what Congress sought to accomplish by strengthening the
penalties for unlawful money transmission—namely, the prevention of another terrorist attack
facilitated by United States financial systems—enormous changes in computer technology have
completely transformed the landscape of interstate commerce since 2002. In 2007, the advent of the
iPhone, a device manufactured by Appie, Inc,, completely changed the way that many Americans
communicate by making “smartphones” capable of myriad tasks commonplace. Smartphones also
provided a new platform for mobile commerce that has little regard for state boundaries.
Such rapid change has swept across thé country in the past, such as with the advent of the
Dwight D, Eisenhower National System of Interstate and Defense Highways in the 1950s. Regarding
that particular development, the Court stated in Aflanta Motel v. United States, 379 U.S. 241 (1964):
“Our populace had not reached its present mobility, nor were facilities, goods and services .
circulating as readily in interstate commerce as they are today. Although the principles which
we apply today are those first formulated by Chief Justice Marshall in Gibbons v. Ogden, 9
Wheat. 1 (1824), the conditions of transportation and commerce have changed dramatically, and
we must apply those principles to the present state of commerce. The sheer increase in volume
of interstate traffic alone would give discriminatory practices which inhibit travel a far larger
impact upon the Nation's commerce than such practices had on the economy of another day.”
The same language applies almost verbatim to the changes that have occurred in the United
States over the past five years—long after Congress passed the PATRIOT Act. There is simply no way
that Congress could have foreseen the future of mobile commerce, let alone mobile payments, in 2002,
and as such it is impossible that the criminal penalties stipulated by 18 U.S.C. § 1960 even come close
to “expressly endorsing state-by-state licensing requirements” determined by California in 2010, or that
the “regulation of money transmission activities by enforcing state licensing provisions through that
federal law” makes sense in a new and different era of commerce.
’
,
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The State Defendants cite Sofe v. Tu Phitoc Nguyen, 634 F.Supp.2d 1096, 1100 (E.D. Cal. 2009)
as evidence that Congress can delegate power to states, but this case is not analogous to the present
situation. As the State Defendants point out, “there were no federal safety standards governing
passenger seat belts on busses.” In the case of money transmission, there are ample federal standards
designed to keep consumers safe—but the State of California, and Defendant Venchiarutti in particular-
--- knowingly ignores them. Thus, for example, 31 C.F.R. § 1010, a federal standard, covers general
provisions related to the Financial Crimes Enforcement Network (FinCEN), a division of the United
States Department of the Treasury. FinCEN has issued several regulations and rulings directly relevant
to money transmission over the years, such as FinCEN ruling FIN-2009-R001 (“on Whether Certain
Operations of a Service Provider to Prepaid Stored Value Program Participants is a Money Services
Business”), (attached as Exhibit D to the Request for Judicial Notices submitted herewith) FIN-2008-
ROOS5 (“on Whether Certain Reloadable Card Operations are Money Services Businesses”) (Exhibit E to
the Request for Judicial Notices submitted herewith), and 2003-8 (“Definition of Money Transmitter
(Merchant Payment Processory”) (Exhibit F to the Request for Judicial Notices submitted herewith), but
while some states have honored these standards, others, such as the State of California, have not.
Congress expressly delegated authority to the United States Department of the Treasury to handle
matters relating to money transmission in 31 U.S.C. § 310 (concerning the powers delegated to
FinCEN). As alleged in the Complaint, the State Defendants have stretch whatever congressional
authority was given to them under the Patriot Act far past the scope of congressional authorization in
enacting their regulatory scheme under the MTA, and as such Plaintiff has pled facts sufficient to state a
claim against the State Defendants for their violations of the dormant commerce clause, and the State
Defendants’ Motion to Dismiss must be denied.
B. The State Defendants Have Attempted And Plaintiff Has Alleged They Will
Continue To Attempt To Regulate Commerce Occurring Outside Of California In
Violation Of The Commerce Clause.
The State Defendants’ Memorandum further fails to address the behavior of the DFI prior to the
k +
October Order, when Piaintiff was uncertain as to whether or not it could operate in Alabama and
' '
Idaho—jurisdictions where Plaintiff possessed valid money transmission licenses—because of
i
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California law. The October Order resolved this particular dilemma for Plaintiff, but not for any other
potential applicant for licensure under the MTA, and so it remains at issue.!? Indeed, even if Congress’s
delegation of authority to the states over money transmission and interstate were explicit and
complete—which is certainly not the case—such a grant would stil/ not permit the states to pass
arbitrary, capricious and discriminatory laws such as the MTA employing subjective and vague
procedures that infringed on the sovereignty of other states. Accordingly, Plaintiff has pled facts
sufficient to state a claim against the State Defendants for their violations of the dormant commerce
clause, and the State Defendants’ Motion to Dismiss must be denied.
Vv. Settled Federal Law And Procedure Requires That Plaintiff Be Allowed To Amend Even If
The Court Were To Grant The Motion To Dismiss On Any Of The Grounds Being
Asserted By The State Defendants,
Even if this Court were to grant the State Defendants’ Motion to Dismiss on any of the grounds
asserted by the State Defendants, Plaintiff respectfully submits that well settled federal law and
procedure require that Plaintiff be granted leave to amend its Complaint. See, Schwarzer, Tashima &
Wagstaffe, California Practice Guide: Federal Civil Proceduye Before Trial (The Rutter Group 2010) §
9:286 (“As a practical matter, leave to amend his almost always granted by the court.”); see, also Id, at
§ 9:287 (“Where a more carefully drafted complaint might state a claim, a plaintiff must be given at
least one more chance to amend the complaint before the district court dismisses the action with
prejudice.”) (emphasis in original), !4
As such, should this Court grant the State Defendants’ Motion to Dismiss, Plaintiff respectfully
requests leave to amend its Complaint,
'S Indeed, in this regard the State Defendants’ argument that the Court should not consider this blatant violation of the
commerce clause because they have ceased to engage in such acts against the Plaintiff only (at the price of Plaintiffs activity
in California) essentially amounts to a “moving target” defense, and completely ignores the plain factual allegations of the
DFi’s intentions, actions and violations of the commerce clause as fully alleged in { 56 of the Complaint with regard to, infer
alia, the October Order, Plaintiff's communications with the State Defendants and the State Defendants’ statements.
"Indeed, this rule applies even in cases involving affirmative bars to relief such as sovereign immunity. See, Doe v. United
States (9" Cir. 1995) 58 F.3d 494, 497 (“We are unwilling to anticipate what theory an ingenious but fair pleader might
produce and what constellation of facts might be alleged that might overcome the bar [of sovereign immunity]... "a district
court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the
pleading could not possibly be cured by the allegation of other facts.") ’
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DISPOSITION REQUESTED
Plaintiff respectfully requests this Court deny the Motion to Dismiss filed by all Defendants.
Dated: February 28, 2012
Respectfully submitted,
LAW OFFICES OF MICHAEL BROOKS
CARROLL
By: /s/ Kevin A. Flautt
Kevin A. Flautt, Esq.
Attorneys for Plaintiff THINK COMPUTER
CORPORATION
t
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. RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Case No, CV11-05496-HRL
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PlainSite Cover Page
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‘OF California; EDMUND G. BROWN, JR. in
Case5:11-cv-05496-HRL Document25 Filed02/28/12 Pagel of 26
Michael Brooks Carroll (Bar #54904)
Kevin A. Flautt (Bar #257892)
LAW OFFICES OF MICHAEL BROOKS CARROLL
300 Montgomery Sireet, Suite 650
San Francisco, California 94104
Telephone: (415) 788-7600
Facsimile: (415) 421-7379
carroll law@sbeglobal.net
Attorneys for Plaintiff
| THINK COMPUTER CORPORATION
UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
San Jose Division
THINK COMPUTER CORPORATION, Case No. CV11-05496-HRL
Plaintiff, PLAINTIFF’S RESPONSE AND OPPOSITION
TO STATE DEFENDANTS’ MOTION TO
v. DISMISS |
ROBERT VENCHIARUTTI, in his official
capacity as Deputy Commissioner of the
California Department of Financial
Institutions, WILLIAM HARATF, in his officia’
capacity as Commissioner of the California
Departinent 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
Before the Honorable Howard R. Lloyd
Hearing Date: March 27, 2012 |
Hearing Time: 10:00 a.m. .
Courtroom: 2
Complaint Filed: November 14, 2011
Trial Date: None Yet Set
his official capacity as Governor of the State oi
California; and KAMALA HARRIS, in her
official capacity as Attorney General of the
State of California,
Some Smet Sart” cat! ee! Sie Sage” Sel Se age Set! Sel! Ne! Scat Nam! Nase Nas Mage Mal Neer Nee” eae! anemia
Defendants.
»
4
t RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Gase No. CV11-05496-HRL
First Amended Complaint Filed: January 31, 2012
4
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TABLE OF CONTENTS
STATEMENT OF THE CASE AND OPPOSITION TO MOTION TO DISMISS
CUE EEE EE EERE EE ETTORE DERE ODED CEASERS EOD L LENE RESELL EEE EASES OETA EEG EEE EEL E EE ECL E EE CEd ELE EERE EE EEE !
MATERIAL FACTS ALLEGED IN THE COMPLAINT THAT ARE DISPOSITIVE OF
AND NEGATE THE STATE DEFENDANTS’ CONTENTIONS THAT
PLAINTIFF’S COMPLAINT HAS FAILED TO STATE A CLAIM
Le EEE EE EEE EEE EE EEE OLE EEE CREE ADEE ELEC DOE EAE COE EE EEE Een EEE ree EERE EERE HER GEE EES 3
ARGUMENT
PEE eee EEE EEE ERAT EEE EERE EERE EEE E EEL DELTA DEAE EE EEE EASA EE EI SOLER ADELE TELE ET EEE EEE EE DEEL EERE EEE EES 4
I The Settled Law Governing The Determination Of Motions To Dismiss.
4
SOOO ROO OR ae CREEP OO TER EAA OE REE
Il. Contrary To The State Defendants’ Assertions, This Action Is Currently Ripe For Review
Since This Action Includes Both “Facial” And “As Applied” Challenges To The MTA, Any
Exhaustion Of Administrative Remedies By Plaintiff Would Be Futile, And Any Delay In
Adjudicating Plaintiff’s Challenge To The MTA Would Cause Plaintiff Substantial
Hardship._
Denne ANU E ENE DE OE RE EH OEE EE SEES EERE EE EEA EEE ETE DROSS CUILO EL ESOS OLASL LIS EEE ELSA ESSE SAFES CE Soe EEG ESE EEE EE EE aE 5
A. Plaintiff's Challenges To The Facial Unconstitutionality Of The MTA Are
Inherently Ripe For This Court’s Determination.
' 5
B, Plaintiff?s Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Are Ripe Since Controlling Law Establishes That Plaintiff Is Not Required
to Exhaust Administrative Processes Where, As Here, The Challenged Statute (The
MTA) Imposes A Substantial Hardship Or Burden Upon Plaintiff In Even
Participating In The Administrative Processes And Any Attempted Exhaustion Of
Administrative Remedies By Plaintiff Would Be Futile.
i Plaintiff's Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Onder the Facts Alleged In This Action Are Concrete And Sufficiently
Focused So As To Permit Judicial Resolution.
Cee eee ee ee EE OE Oa Ee ORTOP
ii, Plaintiff Will Suffer Substantial Hardship Lf Judicial Review Of This Action Is
Delayed.
CENCE ENCE ERENCE EEDA EEE EEE CLE E EERE EEE A EDO EEE EASES AEARTSA EEE OA ER OGO TSOP Raa EEE ES 9
IT. Plaintiff Has Alleged Facts Sufficient To State A Due Process/Equal Protection Claim.
Deen EE ELLE LE RA EERE REE E EE EU SEEDS LUCENE EE EEE EE DESDE EASES EUSA SDS SOS EA LEED E DOES EOE REDE EASE SHES EEE SEEEHE DESH SAAS 11
A. Plaintiff Has a Vested Property Right Which Has Been Interfered With By The
MTA And The Actions Of The State Defendants.
Cee eee EE ERLE SEE E EU EAE EERE ESE EA DAES E Ge LE EE EEE EEE ET ED ELE ER EES O EAS EE DEER SEERA EE EEE ESET EEE ERAGE LE ERE SEAS EES 11
RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Case No. CV11-05496-HRL
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B, The Licensing Requirements Of The MTA Are Not Related to a Legitimate State
Purpose, And Are Applied By The State Defendants In a Completely Arbitrary and
Capricious Manner Designed to Stifle Competition and Chill Interstate Commerce.
— C, ~The MTA As Applied To Plaintiff By The State Defendants F urther Violates _
Plaintiff’s Procedural Due Process Rights.
IV. The MTA Violates The Dormant Commerce Clause And Is Not “Invulnerable” To A
Dormant Commerce Clause Challenge As The State Defendants Assert.
i ee 0
A. The State Defendants Fail to Cite any Explicit or Implicit Congressional
Endorsement of the Money Transmission Act and its Unconstitutional
Requirements for Licensure, Nor Can They Since The Purported Authorizing
Statute, the Patriot Act, Was Never Intended To Authorize Or Enable The MFA
Regulatory Scheme Enacted By The State Defendants.
COL Ee EE LC TEER EEE EAE A EEE RE EES EE ELE EE SSA O SASSO L LEER S CA SEEA LEE OT ERE COOSGEEE ECE E CASES DE EEECENOREDEEEGES 18
B. The State Defendants Have Attempted And Plaintiff Has Alleged They Will |
Continue To Attempt To Regulate Commerce Occurring Outside Of Califernia In
Violation Of The Commerce Clause.
ee ee ee ee er
Vv. Settled Federal Law And Procedure Requires That Plaintiff Be Allowed To Amend Even If
The Court Were To Grant The Motion To Dismiss On Any Of The Grounds Being
Asserted By The State Defendants.
PEE LENE E eRe ELEN EERE EE EEA ERISA SNS DU NOES SEE ES EAE EE EERO ESSE SE ERE EG EOD GEEESssedGeUuCLOaEsseNeEDGeEEnenNEsS 22
+
DISPOSITION REQUESTED
ee ee ee ee 0
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RESPONSE AND OPPOSITION TOG MOTION TO DISMISS- Case No. CV11-05496-HRL
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STATEMENT OF THE CASE AND OPPOSITION TO MOTION TO DISMISS
This is an action by a relatively small business entity, Plaintiff Think Computer Corporation,
which was already in business and had invested more than 1 million dollars to establish itself as a
money transmitting business in the e-commerce industry, who has been effectively put out of business
by the State of California’s Money Transmission Act (the “MTA”), Plaintiff asserts that the MTA is not
only unconstitutional on its face, but further is unconstitutional as it is being applied to the Plaintiff
because such MTA and the actions of the State Defendants enforcing such state statute and regulations
have imposed a disparate impact upon small business entities like Plaintiff, to the benefit of large
business entities, without any rational justification or constitutionally permissible basis for such
regulation and disparate impact upon small business entities like Piaintiff, and the restraint of interstate
commerce in the money transmission industry.
The “State Defendants” (defined at page 1, lines 4-13 of the Motion to Dismiss} have moved to
dismiss Plaintiff's First Amended Complaint’ (the “Complaint”) on the erroneously asserted grounds
that: 1) the Complaint is barred by the Eleventh Amendment as against the Governor, Defendants
Appelsmith, the Attorney General, and Acting Secretary Stevens; 2) the claims asserted in Plaintiff's |
Complaint are not ripe for review; 3) The first claim in the Complaint does not identify a protected
property right and the challenged MTA is rationally related to a legitimate government interest; and
4) The second and third claims for relief fail to state claims upon which relief can be granted based
upon the fact that Congress has purportedly authorized the states to license and regulate the Plaintiff’s e-
commerce business activities.
' Plaintiff voluntarily amended his Complaint “of course” pursuant to FRCP 15 following counsel’s appearance on January
31, 2012.
? Based upon Defendants’ judicial representations regarding the identity of the State Defendants who are in charge of the
enforcement of the MTA and their judicial representations that the Governor, Attorney General and Acting Secretary are not,
and without conceding that the joinder of the Governor, Attorney General and Acting Secretary in either the original
Complaint or First Amended Complaint was in any way improper, Plaintiff does not oppose the dismissal, without prejudice,
of the Governor, Attorney General and Acting Secretary; provided , however, Plaintiff expressly reserves the right to re-file
against such Defendants should further discovery jn this action reveal that such Defendants were, contrary to Defendants’
representations, directly involved in the enforcement process. Moreover, as to Defendant Appelsmith, although his name still
appears in the caption {as it was in the Complaint originally filed naming Appelsmith), he was removed from the charging
allegations by Plaintiffs First Amended Complaint. The defendant’s motion to dismiss as to Mr. Appelsmith was
unnecessary, and the State Defendants’ assertion that he must be dismissed (again) is therefore moot.
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As will be demonstrated hereinbelow, such motion to dismiss must be denied as to each and
every one of the State Defendants’ mistaken, non-compelling and non-conclusive assertions for each of
the following reasons:
First, contrary to the State Defendants’ assertions, Plaintiff's action is currently ripe for review
since this action is a facial challenge to the unconstitutionality of the MTA, any exhaustion of
administrative remedies by Plaintiff would be futile (as alleged by Plaintiff in his Complaint), and any
delay in adjudicating Plaintiff's challenge to the MTA would cause Plaintiff further substantial
hardship. Indeed, Plaintiff has already suffered substantial financial hardship and will continue to suffer
such hardship as long as the MTA continues to be enforced by the State Defendants, as alleged in the
Complaint.
Second, Plaintiff has sufficiently alleged facts in its Complaint to state a claim for denial of its
due process rights in that it has identified its vested property rights in the continuation of its money
transmission business which have been interfered with by the MTA and the actions of the State
Defendants. Moreover, as specifically alleged in the Complaint, the MTA further violates Plaintiff's due
process rights in that the licensing requirements of such MTA are not related to a legitimate state
purpose, but rather such MTA imposes arbitrary and prohibitively high prerequisite financial net worth
figures for licensure (thereby effectively forcing Plaintiff out of business and excluding other relatively
small business entities) which have no rational relationship to the business being licensed, Further, as
specifically alleged in the Complaint, the MTA has been and continues to be applied by the State
Defendants against Plaintiff in a completely arbitrary and capricious manner designed to stifle
competition and chill interstate commerce;
Third, contrary to the State Defendants’ assertions, in passing the USA PATRIOT Act in 2002,
Congress did not intend to authorize or sanction a regulatory system such as the MTA which in effect
gives states carte blanche to criminalize true technological and financial innovation, by permitting
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states to completely ignore federal regulations promulgated by the Department of the Treasury and
allowing such regulatory systems to impose a disparate impact upon small business entities like Plaintiff
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to the benefit of large business entities financing the enactment of regulations such as the MTA. Rather,
Congress solely desired to outlaw financing operations which were solely intended to support terrorism:
Fourth, the State Defendants’ bald assertion that their clear (and undisputed) continuing
violation of the dormant commerce clause alleged by Plaintiff (namely, that the State Defendants sought
and continue to seek to enforce the MTA in such a way as to regulate commerce outside of California)
essentially has been “fixed” through their voluntary decision to not engage in such unconstitutional
activity only as against Plaintiff and only in exchange for Plaintiff's agreement to not operate in
Califernia- even while other businesses continued to operate unlicensed under the MTA in blatant
violation of such MTA as alleged in the Complaint is a classic and ineffective “moving target” defense
which must fail.
Fifth, even if this Court were to grant the State Defendants’ Motion To Dismiss on any of the
grounds being asserted by the State Defendants, Plaintiff respectfully submits that settled federal law
and procedure requires that Plaintiff be allowed to amend its Complaint.
MATERIAL FACTS ALLEGED IN THE COMPLAINT THAT ARE DISPOSITIVE OF
AND NEGATE THE STATE DEFENDANTS’ CONTENTIONS THAT
PLAINTIFE’S COMPLAINT HAS FAILED TO STATE A CLAIM
As a preliminary matter, the following factual allegations in Plaintiff's Complaint, which must
be deemed true for purpose of the motion to dismiss, directly address and negate the erroneous
arguments that Plaintiff has failed to state facts sufficient to state a claim:
L, Contrary to the State Defendants' contention that Plaintiff has failed to allege a claim ripe
for determination by this Court, Plaintiff has alleged in the Complaint not only that the
MTA is facially unconstitutional, FAC, § 75) but also that the MTA and the State
Defendant's actions in applying such regulatory scheme to Plaintiff have already caused
Plaintiff present and continuing harm and forced him out of the business of money
- transmission. (FAC, { 62-69).
2. Contrary to the State Defendants’ contention that Plaintiff has failed to allege a claim for
violation of its due process rights, Plaintiff has alieged in the Complaint not only that a
protected property right but further that the challenged MTA is not rationally reiated to a
legitimate government interest by alleging, “Because the MTA effectively extinguishes a
legally valid, vested right to use of property in interstate commerce, the MTA is facially
unconstitutional as a violation of Plaintiff's rights to due process under the Fourteenth
Amendment to the United States Constitution,” (FAC, 4 75) and (FAC, 4 76).
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3, Contrary to the State Defendants’ assertion that Plaintiff's second and third claims for
relief fail to state claims upon which relief can be granted based upon the State
Defendants’ factual contention that Congress purportedly has authorized the states to
license and regulate the Plaintiff's e-commerce/money transmission business activities
(with a statute and regulatory scheme imposing substantial financial barriers to obtaining
the state’s permission to conduct such business), Plaintiff has alleged in the Complaint
not only that the State Defendants’ regulatory scheme goes far beyond any intelligible
principle for delegation of authorization set out in the Patriot Act, but further that the
intent behind such Act was and remains a desire to outlaw financing operations which
were intended to support terrorism. (FAC, § 88, 90, 92, 102, 103).
4, Contrary to the State Defendants’ contention that Plaintiffs allegations regarding the
State Defendants’ attempts to use the MTA to regulate commerce occurring entirely
outside of California are “speculation” “wholly unsupported by any factual allegations,
Plaintiff has pled specific facts, and specific statements and communications made by the
State Defendants supporting such allegations by alleging, infer alia: “the DFI issued an
“Order” (the “October Order”) purporting to exempt Think alone from having to comply
with the provisions of the MTA in providing money transmission services to consumers,
merchants and anyone outside of the State of California, so that Think could conduct
operations in states where it already had valid MTLs, but conditional on Think not
providing money transmission services to persons, consumers, merchants and anyone
located in California and Plaintiff not advertising, soliciting or holding itself out as
providing money transmission services to persons, consumers, merchants and anyone
located in California. Such Order necessarily meant that regardless of Think’s
application status, the California DFI intended and still intends to enforce the MTA
beyond the State of California’s borders on transactions originating and existing in -
interstate commerce. The DFI’s and Defendants’ position is that the California law it is
authorized to enforce has supremacy over the laws of any other states under which the
money transmitter may be in compliance. “(FAC, ] 56).
ARGUMENT
I, The Settled Law Governing The Determination Of Motions To Dismiss.
In considering a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure,
a court “must accept all well-pleaded facts alleged in the Complaint as true and draw all reasonable _
inferences in favor of the plaintiff.” Day v. Fallon Cty. Health Plan Ine. 917 F. Supp. 72, 75 (D. Mass
1996); see also, Watterson y. Page 987 F. 2d 1, 3(1“ Cir. 1993) The trial court must “neither weigh the
evidence nor rule on the merits because the issue is not whether the plaintiffs will ultimately prevail, but
whether they are entitled to offer evidence in support of their claims.” Day, 917 F.Supp. at 75. Claims
in a complaint need not be absolutely conclusive, but merely plausible. Bel/ Atl, Corp v. Twombley, 127
S. Ct. 1955, 1965 (2007).
The trial court may also consider documents outside of the pleadings in certain circumstances
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when ruling on a motion to dismiss. See, Watterson, 987 F.2d at 3. There is a “narrow exception for
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documents the authenticity of which are not disputed by the parties; for official public records; for
documents central to plaintiff's claim; or for document sufficiently referred to in the complaint.” Z/. 3-
4. If“a complaint’s factual allegations are expressly linked to—and admittedly dependent upon—a
document the authenticity of which is not challenged, that document effectively merges into the
pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6).” Beddall
y, State Street Bank and Trust Co. 137 F.3d 12, 16-17 (1" Cir. 1998).
I. Contrary To The State Defendants’ Assertions, This Action Is Currently Ripe For Review
Since This Action Includes Both “Facial” And “As Applied” Challenges To The MTA, Any
Exhaustion Of Administrative Remedies By Plaintiff Would Be Futile, And Any Delay In
Adjudicating Plaintiff's Challenge To The MTA Would Cause Plaintiff Substantial
Hardship.
This action is currently ripe for review as it meets the controlling ripeness doctrine set out by our
Supreme Court in Abbot Laboratories v, Gardner and its progeny, 387 U.S, 136, 148-49 (1967), Abbot
Labs. and the successive cases interpreting the ripeness doctrine mandate that this case be found ripe for
three concrete reasons: (1) facial challenges to a statute or regulation that even has not yet been applied
are generally considered fit for judicial determinatign because the issue raised is a “purely legal one,”
and can be decided by the court without further factual development. /d.; (2) “as-applied” challenges
are ripe when the exhaustion of administrative remedies would be futile. Samnmon v. New Jersey Bd. of
Med. Examiners, 66 F.3d 639, 643 (d Cir. 1995); and (3) “as-applied” challenges are also ripe when a
hardship would result to one of the parties, such as the continuing hardship resulting to and specifically
alleged by Plaintiff. See, Cofwell v. Dep’t of Health and Human Serys., 558 F.3d 1112, 1123-1124 (9%
Cir, 2009),
A. Plaintiff's Challenges To The Facial Unconstitutionality Of The MTA Are
Inherently Ripe For This Court’s Determination.
The issues presented here are fit for immediate review because the causes of action alleged
involve facial challenges to the MTA under the procedural due process, substantive due process, equal
protection, and commerce clause provisions--- which challenges are inherently ripe when the issues are
sufficiently focused without further substantial factual development. P. Leg. Found. v. State Energy
Resources Conservation & Dev, Commn., 659 F.2d 903, 915 (9th Cir, 1981) affd sub nom. P. Gas and
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Elec. Co. v. State Energy Resources Conservation & Dev. Commn., 461 U.S. 190 (1983).
Moreover, the judicial review sought now does not threaten “abstract disagreements over
administrative policies,” Abbott, 387 U.S. at 148, as the disagreements are extremely concrete and
sufficiently focused. It is well-settled that where, as here, a party challenges the statutory or
constitutional authority of the defendants to enact a licensing or regulatory scheme, the party need not
“submit to the administrative procedures incident thereto” prior to bringing an action. City of Chicago v.
Atchison, Topeka & Santa Fe Ry., 357 U.S. 77, 89 (1958) (constitutional challenge to licensing scheme
proper). Indeed, as stated by our Supreme Court in Public Utilities Comm'n v. United States, 355 U.S.
534, 540 (1958), as well as elsewhere, “where the only question is whether it is constitutional to fasten
the administrative procedure onto the litigant, the administrative agency may be defied and judicial
relief sought as the only effective way of protecting the asserted constitutional right.”
It is likewise established doctrine that when a party challenges a regulatory scheme on its face
‘for lack of licensing standards, the party need not first apply for and be denied a license. CITE. As this
is precisely the case here, Plaintiffs challenges to the facial unconstitutionality of the MTA are fit for
immediate judicial review. Indeed, it would be an inefficient use of judicial resources to adjudicate by
piecemeal Plaintiff's contentions that the State Defendants lack the constitutional and statutory
authority to regulate money transmissions, while at the same time arbitrarily abstaining from
considering Plaintiff's facial challenge to the regulatory scheme for its lack of standards. Moreover, the
latter presents a narrower ground for decision in this action.
B. Plaintiff’s Challenges To The Unconstitutionality Of The MTA As Applied To
Plaintiff Are Ripe Since Controlling Law Establishes That Plaintiff Is Not Required
to Exhaust Administrative Processes Where, As Here, The Challenged Statute (The
MTA) Imposes A Substantial Hardship Or Burden Upon Plaintiff In Even
Participating In The Administrative Processes And Any Aftempted Exhaustion Of
Administrative Remedies By Plaintiff Would Be Futile.
Plaintiff is not required to exhaust administrative proceedings before making a claim because
Plaintiff is directly challenging the MTA itself in this action “as-applied.” Our Ninth Circuit Court of
3 See also Gary D. Peake Excavating Inc. v. Town Bd. of Town of Hancock, 93 F.3d 68, 71-73 (2d Cir. 1996) (finding ripe a
Commerce Chuuse challenge to a municipal ordinance imposing permit requirements that were stricter than those of a state
agency). ’ '
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Appeals has held that administrative exhaustion is only required to make a due process or equal
protection claim ripe when it arises in certain narrow categorical circumstances relating to, or arising -
from, a land-use or takings claim. Norco Construction, Inc. v. King County, 801 F.2d 1143, 1146 (9th
Cir. 1986). The flaw in the State Defendants’ overly broad assertion that Plaintiff must categorically
exhaust all administrative remedies prior to bringing this action is that Plaintiff's procedural due
process, substantive due process, equal protection claims and commerce clause claims do not involve
land-use or takings claims. Carpinteria Valley Farms, Ltd. vy. County of Santa Barbara, 344 F.3d 822,
831 (9th Cir, 2003); see also Triple G Landfills, Inc. v. Board of Cominissioners, 977 F.2d 287, 289 (7th
Cir, 1992) (explaining why a final decision is not necessary for challenging permit requirements)."
Rather, for Plaintiff's “as-applied” claims, the traditional determination of ripeness mandates an
analysis of “whether the relevant issues are sufficiently focused so as to permit judicial resolution
without further factual development and whether the parties would suffer any hardship by the
postponement of judicial action.” Abbot, 387 U.S. 136. Each of these criteria are satisfied in this action.
i, Plaintiff’s:Challenges To The Uncenstitutionality Of The MTA As Applied Ta
Plaintiff Under the Facts Alleged In This Action Are Concrete And Siufficiently
Focused So As To Permit Judicial Resolution.
Here, the relevant issues are sufficiently focused and concrete. The State Defendants’ specious
assertion that, because the FDI has not made an administrative decision on Plaintiff's application the
issue are impermissibly abstract, simply does not hold water against the strong line of circuit court
decisions cited above. In fact, Plaintiff's Complaint sets out multiple attempts to engage in the DFI’s
administrative process, and Plaintiff did in fact start such process by attending the mandatory pre-filing
meeting”, but Plaintiff’s efforts were ultimately frustrated due to DFI’s hostile and uncooperative
* The Court in Triple G Landfills, Inc. found the challenge ripe the permit applicant had a direct and tangible interest in the
subject matter of the litigation and because ‘[p]ostponing judicial action ... would force an unwarranted dilemma upon [the
applicant]: either scuttle its development plans altogether in deference to a potentially invalid county regulation, or complete
the expensive and time-consuming state permit process, submit an permit application that [the county] is almost certain to
reject, and then, after incurring substantial sunk costs, bring a facial challenge to the ordinance.” 977 F.2d at 291, 289, and
290. See also Skull Valley Band Of Goshute Indians v. Nielson, 376 F.3d 1223 (10th Cir, 2004) (a party seeking a license
from a governmental agency generally is ripe when challenging an allegedly invalid law that either imposes substantial
burdens upon the applicant or flatly prohibits the activity in question).
The State Defendants have made clear that the MTA regulatory “process” begins well before the paper application is filed.
As acknowledged by the State Defendants and as this Court can verify on the DFI’s website dedicated to money transmitters
(emphasis added): s
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interactions with Plaintiff. (FAC, 9 47, 51, 53-5, 57-8.) Between the DFT’s October Order, its
unwillingness to communicate further with Plaintiff, and the jeopardy of risking a negative outcome
nationwide by applying in California, the Complaint demonstrates that Plaintiff had no further recourse
except these proceedings.° (FAC, § 52),
“Once the prospective applicant for a new money transmitter license or acquisition of control has become
thoroughly familiar with the laws and regulations that govern this activity, the next step is to arrange for a pre-
filing meeting with the Money Transmitter Division staff. The prospective applicant should contact Mr. Julio Prada
at (415) 263-8540 or by email at jprada@dfi.ca.gov to arrange for an appointment. The successful applicant wil! be
able to demonstrate a working knowledge of the laws and regulations that govern money transmitters and be ready
to present a proposed business plan. Meetings are conducted in person at the San Francisco Office. Ad prospective
applicants for a new money transmitter must have a pre-filing meeting with the Money Transmitter Division staff
before filing an application, for acquisition of control applicants, this step is highly recommended, especially if the
applicants are not known to the Money Transmitter Division staff.”
(See, RIN at Exhibit B, p. {). In this particular case, due process was owed to Plaintiff at least as early as the minute on April
1, 2011 when Mr, Greenspan initially e-mailed Mr. Prada inquiring as to the status of California’s money transmission
statutes. The pre-filing interview fook place more than two months later, well after this point in time.
* Moreover, other courts of appeal in other circuits have previously encountered almost identical situations involving
licensure and found the challenges to such licensure “processes” to be ripe for review, Thus, in ‘Skull Valley Band Of
Goshute Indians v, Nielson, 376 F.3d 1223, 1234-35 (10th Cir. 2004), the Tenth Circuit Court of Appeal cogently opined::
“PFS’s and the Skull Valley Band’s alleged injury is much more than a generally available grievance about the
government or a tactical disadvantage. Instead, they have alleged that the Utah statutes have affected them
concretely. In particular, PFS has alleged that the statutes impose substantial burdens upon it because of the SNF
storage project that it has proposed (requiring, for example, the payment of a five inillion dollar nonrefimdable
application fee, compliance with complex state regulatory requirements, and the posting of a two billion dollar
bond), ‘The Skull Valley Band has alleged that the Utah statutes infringe upon its ‘inherent tribal sovereignty,’
Aplts' App. at 39. Moreover, according to PFS and the Skull Valley Band, the extensive obligations created by the
Utah statutes are preempted by federal law.
We agree with PFS and the Skull Valley Band that a party seeking a license from a governmental agency generally
has standing to challenge an allegedly invalid law that either imposes substantial burdens upon the applicant or
flatly prohibits the activity in question. Several courts have suggested that conclusion in addressing ripeness
challenges, and, although “standing and ripeness are technically different doctrines, they are closely related in that
-each focuses on whether the harm asserted has matured sufficiently to warrant judicial intervention.” JoAnson y.
Missouri, 142 F.3d 1087, 1090 n. 4 (8th Cir. 1998) (quoting Warth v, Seldin, 422 U.S. 490, 499 n. 10, 95 S.Ct. 2197,
45 L.Ed.2d 343 (1975)); see also Morgan y. McCoiter, 365 F.3d 882, 887 (10th Cir.2004) (finding issues of
standing and ripeness ‘particularly difficult te divorce’).” fd. at 47-48 (emphasis added)..
Plaintiff here faces the very same dilemma: Plaintiff's plans have already been scuttled, but even applying now
anyway, ignoring concerns about prerequisites, would likely require waiting for a year or more for a license, and a denial in
California will prejudice Plaintiff's status in other states where the denial ofa license in California would have to be
disclosed. . (Plaintiff's application for a license in Lousiana, where there are no known issues, has been pending since
August, 2011, when the State of Louisiana informed Plaintiff that its application was complete.) It is thus exceedingly clear
that Plaintiff's situation is ripe for review.
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Moreover, the adjudication of these issues by this Court would not inappropriately interfere with
further administrative action because the State has not indicated that it has any plans to take any further
action, and the State has in fact indicated just the opposite. (FAC, 57. Indeed, the State has no interest
in further engaging Plaintiff, to the point where Mr. Greenspan cannot even get the DFI to take his
phone cails. /@ In completely shutting down an enterprise based upon Defendant Venchiarutti’s
ultimatum, Plaintiff has clearly had to “modify its behavior in order to avoid future adverse
consequences,” Ohio Forestry Assn., Inc., 523 U.S. 726, 733 (1977). These prior interactions actions
with the DFT clearly indicate that Plaintiff's efforts to proceed with the application process would be in
vain, Based on these facts, Plaintiff is not required to make the futile gesture of applying on paper,
merely to subject itself to DFI’s arbitrary and discriminatory process in order for its claims to be ripe.
i, Plaintiff Will Suffer Substantial Hardship If Judicial Review Of This Action Is
Delayed.
Plaintiff will unquestionably be harmed if the Court fails to act or delays its review. In Freedom
fo Travel Campaign v, Newcomb, the Ninth Circuit Court of Appeals held that:
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If it is ‘inevitable’ that the challenged rule will ‘operat[e]’ to the plaintiffs disadvantage-
if the court can make a firm prediction that the plaintiff will apply for the benefit, and that
the agency will deny the application by virtue of the rule-then there may be a justiciable
controversy that the court may find prudent to resolve.
82 F.3d 1431, 1436 (9th Cir. 1996), Furthermore, the Supreme Court has held that "one does not have
to await the consummation of threatened injury to obtain preventive relief. If the injury is certainly
impending that is enough." Pac. Gas & Elec. Co. v. State Energy Res. Conservation & Dev. Comm'n,
461 U.S. 190, 201-202 (1983).
In Pac. Gas & Elec. Co., the Court rejected a ripeness objection to an action challenging a state
statute imposing a moratorium on nuclear plant construction, noting the hardship that would be imposed
if a judicial decision were delayed: The utilities who had challenged the state law would be required to
expend a substantial amount of time and money over a number of years without knowing whether that
/ expenditure was entirely futile. “To require the industry to proceed without knowing whether the
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moratorium is valid would impose a palpable and considerable hardship on the utilities, and may
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ultimately work harm on the citizens of California.” P. Gas and Elec. Co., 461 US, at 201-02.
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Here, the facts make it clear that the Plaintiff could not and cannot now apply for a license in
California on paper, because ----without first knowing the absolute requirements of the licensure
process and without those requirements being subject to being changed by the State Defendants ---- the
risk of denial—even with a hearing—would mean the subsequent denial of similar applications in other
states, even in states where Plaintiff easily meets those other states’ application requirements, because
Plaintiff's denial of a license in California must be affirmatively disclosed to the other states and can be
used by those states to deny or revoke Plaintiff s licenses there. (FAC, § 52). This specter of adverse
consequences is substantiated by the actual content and layout of various states’ application forms,
which inquire as to whether or not an applicant has been rejected in any other state, directly adjacent to
questions regarding principals’ criminal records. (FAC, § 52). More egregious, the cost of compliance
of the MTA would be considerably great to a relatively small business entity such as Plaintiff, but the
penalty for noncompliance would subject Plaintiff to disqualification and possibly criminal and civil
penalties. (FAC, 4 49, 69), Indeed, this threat of criminal penalty is considered sufficient hardship to
make, the claim ripe. Freedom to Travel Campaign, 82 F.3d at 1436. Where the agency has threatened
enforcement, the actual commencement of administrative enforcement proceedings is not necessary.
Pacific Gas & Elec. Co., 461 U.S., at 201.7
When the plaintiffs were presented with such an equivalent Hobson’s choice in Hote/
Employees & Restaurant Employees International Union, the Ninth Circuit held that the impact of a
regulation is sufficiently direct and immediate as to render the issue ripe for judicial review when: “The
cost of compliance with the [regulation] is not particularly great, but the penalty for noncompliance is
7 Already, Plaintiff has invested more than one million dollars in its proprietary intellectual property and is at increasing risk
of its technology becoming obsolete the longer the State interferes. (FAC, 4 66). Plaintiff's investment of time, energy,
money and property is all for naught without the legal right to operate as a money transmitter, as Plaintiff did lawfully and
without any forma! complaint prior te July 1, 2011. “Indeed, fhe State’s apparent lack of interest in enforcing the MTA on any
of the unlicensed money transmitters disclosed to the DFT by Plaintiff, a lack of judicial review in these circumstances would
effectively grant Plaintiff's unlicensed competitors the effective right to continue operating unlawfully without fear of any
repercussions. (FAC, 60, 61, 70). As such, a delay in the judicial review of this action would cause Plaintiff to lose its
competitive edge in the money transmissions market. (FAC, § | 1). In contrast, hearing the maiter would open the possibility
that, in the event the MTA is found to be unconstitutional, all aspiring or current money transmitters, including Plaintiff,
would once again have a true legal right to operate.
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disqualification, and the union itself may be penalized if it allows disqualitied employees to continue to
perform their union duties.” 984 F.2d 1507, 1513 (9" Cir,1993).
Here, the facts are even more compelling since the cost of compliance was never made clear to
Piaintiff, (FAC, 7 49, subd. (a), (c)). After expending substantial amounts of money (amounting to one
million dollars) prior to the effective date of the MTA, Plaintiff's business plans were scuttled by the
DFI’s refusal to so much as clearly define its “unwritten policy” to Plaintiff concerning the
requirements of approval monetary and otherwise—forcing Plaintiff to shut down its enterprise to avoid
administrative action and criminal prosecution. (FAC, ¥ 49, 50, 51, 52). Even if Plaintiff applied now
without knowing the unwritten requirements, Plaintiff risks substantial hardship in the collateral effects
of the almost certain denial of its California application on other pending state applications. (FAC, at §
52.) As such, Plaintiffs action, and the continuing harm inflicted upon it by the State Defendants as
alleged therein, is ripe for review.
Ata minimum, Plaintiff has pled facts sufficient to state a claim against the State Defendants
and to establish the ripeness of Plaintiff's claims and continuing damages incurred as a direct result of
the MTA, and as such the State Defendants’ Motion to Dismiss must be denied.
Iii. Plaintiff Has Alleged Facts Sufficient To State A Due Process/Equal Protection Claim.
A. Plaintiff Has a Vested Property Right Which Has Been Interfered With By The
MTA And The Actions Of ‘The State Defendants.
In their Memorandum, the State Defendants make the misleading assertion that Plaintiff's do not
have a protected property right (specifically alleged at FAC { 75) sufficient to support a due process
claim stating that, “There is certainly no California statute or case law stating ‘in mandatory terms’ that
the plaintiff be allowed to continue engaging in this business activity without regulation.” In fact,
Plaintiff never argued that “in mandatory terms” it should be allowed to continue operating as a money
transmitter without regulation, so the point and ensuing discussion are moot®- regulation may very well
* In support of their erroneous argument that Plaintiff purportedly does not have a vested property right the divesting of
which would constitute a due process claim, the State Defendants cite to,Spoklie v. Montana 411 F.3d 1051 (9" Cir. 2005)
for the proposition that a “state may outlaw a formerly legal business even if it causes hardship to those who relied on the
earlier law.” Stafe Defendants’ Memorandum, at p. 15. However, Spokiie is conclusively distinguishable on its facts, as it
dealt with and only expressly addressed issues of the constitutionality of the retroactivity of a statute in the context of a
takings claim, Here, as set forth above and in the Complaint, Plaintiff is challenging the unconstitutionality of the MTA
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be appropriate, so long as it has an “intelligible principle” to guide it- the State Defendants argue no
such principle, but rather belabor the “invulnerability” of the MTA without acknowledging the fact that
the genesis and intent of the purportedly authorizing law lies solely in protecting the nation from
terrorism, as demonstrated below.’
Indeed, the State Defendants’ assertion misses the point--Plaintiff has argued that it should be
allowed to continue operating as a money transmitter either under a federal regulatory regime that has a
legitimate right to regulate interstate commerce, or that in the event Congress is found to have delegated
that right to the respective states, that such a process for regulatory approval must be rationally related,
on a Constitutionally consistent basis involving due process, to the nominal goal of consumer
protection, or indeed at a minimum to the policies and principles embodied by the Act purportedly
rendering the MTA invulnerable to constitutional challenge--- bluntly stated the MTA as enacted and
specifically as applied by the State Defendants goes too far, and certainly well past any permissible
congressional delegation of authority that arguably, if at all, could be found in the PATRIOT Act. The
present patchwork of state laws further fails to further the underlying congressional policy of such Act,
and in particular, the MTA’s convoluted and unlawful application process (especially in the context of
the forty-six other state money transmission laws with different requirements and different processes)
has wrongfully denied Plaintiff the use of its tangible and intellectual property as set forth herein and
alleged in the Complaint. (See, e.g. FAC, and specifically at { 61, 63, 64, 66, 67, 69, 70).
facially and as it has been applied to Plaintiff, in a manner which is arbitrary and irrational and further interferes with and
applies to his prospective commerce in other states. Indeed, as directly asserted in | 52 of Plaintiff's Complaint, the
cascading effect of the threatened denial of Plaintiff's application in California would preclude its successful applications in
other states. As such. Plaintiff's property rights have been and continue to be interfered with by the State Defendants.
° Congress’ prerogative to grant authorization to regulate interstate commerce, or infringe upon interstate commerce to the
States is not without limit, but rather is guided by the “intelligible principle” doctrine. Under the intelligible principle
doctrine, the delegation of congress’ authority must not grant the delegate “unrestrained freedom of choice.” Zemel v. Rusk
381 U.S. 1, 17 (1965). Rather, the delegation must have an "intelligible principle" to direct the delegated authority with a
guiding principle of how or to what extent it can frustrate interstate commerce. Freedom to Travel Campaign v, Newcomb,
82 F.3d 1431, 1437 (9th Cir. 1996). Additionally, the level of delegation, must meet the "public interest" standard. id, See,
also Panama Refining Co. v. Ryan, 293 U.S. 388 (1935) (striking down delegation to President to criminalize the
interstate transport of petroleum without limiting his power at all). ,
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B. The Licensing Requirements Of The MTA Are Not Related to a Legitimate State
Purpose, And Are Applied By The State Defendants In a Completely Arbitrary and
Capricious Manner Designed to Stifle Competition and Chill Interstate Commerce.
The DFI openly acknowledges the confusing and arbitrary nature of its application procedures
by having posted a new official “Frequently Asked Questions” page on its web site'® that was published
only after the instigation of these proceedings, and was therefore unavailable and/or unknown to
Plaintiff at the time that Plaintiff filed its initial Complaint and First Amended Complaint, This web
page confirms Plaintiff's allegations that the DFI has operated and continues to operate according to an
arbitrary rule that up until the creation of this (undated) web page, was completely unwritten and
unavailable to the public. (FAC, 49). In response to the question, “What is the capital requirement?” -
--this official California government web page states: “The capital requirement varies based on the
licensee’s plan of operation and risk profile. The amount of tangible net worth stated in the Financial
Code, $500,000, is not the amount required for licensing, but rather the minimum allowed for existing
licensees. A new licensee would fypically be required to have more tangible net worth, at least $1
million, to offset the expected losses of a new transmitter and support its operational needs at all times”
(emphasis added). From a due process standpoint, this statement (“the Policy”) is so problematic that it
is frankly shocking that the DFI ultimately (and presumably due to these proceedings) decided to post-it
publicly.
The Policy appears to vary according to two completely subjective variables: the licensce’s
“plan of operation” and so-called “risk profile.” How a licensee’s risk profile is determined, or who
should prepare such a risk profile, is not specified anywhere, let alone who examines the profile and
what credentials the examiner has for doing so, The Policy then notes that the DF I does not actually
pay any attention to the $500,000 minimum tangible shareholder equity figure contained within § 2037
of the MTA, but instead makes up its own rules as it goes along, free from the burden of a notice and
comment period explicitly required by 1 CCR § 44. The Policy then hedges further, indicating that
“typically” applicants need additional net worth, but without specifying the particular cireumstances
that would lead to an exception from the “typical” case. (Given how few licensees and applicants there
See, http:/Avww.dfi.ca.gov/resources/faqs/faqs_tms.asp, a copy of which is attached and submitted herewith as Exhibit B
to the concurrently filed Request for Judicial Notice. '
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are in the first place, it is hard to even imagine what the word “typical” might mean—perhaps “a
corporation with a net worth of greater than one billion dollars?”). A new minimum figure of $1
million in net worth is then put forth without any justification for that particular number, leaving
applicants to wonder if perhaps the DFI really believes that doubling an arbitrary value in an arbitrary
statute will keep consumers’ funds safe.
Were there truly an underlying rationale for this number, it would not vary by hundreds of
thousands of dollars from state to state. The State Defendants therefore promote the interests of a select
| group of extremely wealthy and entrenched corporations, by asserting an illogical and irrational basis
for consumer protection in truth premised upon an impermissible presumption that “big companies with
big money” are less likely to harm consumers than “smal! companies with small money,” when they
incorrectly assert that a rational relationship exists between the MTA’s requirements and the state’s
interest in protecting consumers.
The State Defendants’ faulty argument is presumably premised on the wholly incorrect belief
that adding equity to an enterprise makes it more stable and trust worthy. The recent and well-
publicized catastrophic implosions of MF Giobal, Inc. (“MF Global”) and Bernard L. Madoff
Investment Securities LLC Scandal should conclusively disprove this absurd theory. MF Global was
reportedly worth $42.46 billion as of 2010, and though it was not specifically classified or marketed as a
“money services businesses,” it generally operated from a theoretical accounting standpoint in the same
way that a money services business does, holding funds on behalf of consumers. Somehow, despite its
enormous amount of net worth, MF Global still managed to “lose” almost a billion dollars of consumer
funds for reasons that have yet to be determined conclusively, and which are at issue in pending
bankruptcy litigation. It should be noted that MF Global’s principals, including the former Governor of
New Jersey, were also exceedingly wealthy, and even without corporate backing more than able to meet
any state’s minimum net worth requirements for money transmission.
The fanciful notion that $500,000, or $1 million, or even any amount of minimum capital
actually protects consumers is consequently demonstrably false. Minimum capital requirements do
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nothing to protect consumers who deposit money in financial institutions so long as those institutions do
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not make loans or issue credit. As the MF Global, Madoff Scandai and other recent scandals indicate,
what matters is the honesty and integrity of the principals involved, and the rigor of their auditors in
highlighting potential operational defects—not the amount of capital ascribed to the firms or their
principals."
The utter lack of substantive support for the MTA’s financial capital prerequisites, aside from
the discriminatory, anti-competitive and protectionist desires of the MTA’s sponsors, puts the MTA ina
rarefied class of laws that fail the rational review test. In City of Cleburne v. Cleburne Living Center,
Inc, 473 US. 432., the Court opined: “The mentally retarded, as a group, are indeed different from
others not sharing their misfortune, and in this respect they may be different from those who would
oceupy other facilities that would be permitted in an R-3 zone without a special permit, But this
difference is largely irrelevant unless the Featherston home and those who would occupy it would
threaten legitimate interests of the city in a way that other permitted uses such as boarding houses and
hospitals would not. Because, in our view, the record does not reveal any rational basis for believing
that the Featherston home would pose any special threat to the city's legitimate interests, we affirm the
Judgment below insofar as it holds the ordinance invalid as applied in this case.”
Here, as in Cleburne, it is evident from the lack of complaints about and subsequent prosecution
of small money transmitters that the special threat posed to California consumers by money transmitters
with net worth between $0 and $500,000 (or $1 million, or some other figure that State Defendants may
wish to invent) is no greater than the threat posed by larger entities. Given the competitive drive of new _
market entrants that can lead to fewer, lower fees and better service, the threat may even be less. After
the 2008 financial crisis, there is considerably greater public outrage at large financial institutions than
small ones. Literally all of the capital in the world was not enough to save some of the largest banks in
"! Though the efficacy of financial regulation continues to be the subject of national debate, it is the opinion of Plaintiff that
the best solution to the real problem of ensuring the security of consumer deposits involved in money transmission sis not an
arbitrary threshold that restricts entry into the market (accomplishing nothing thereafter), but rather a mechanism te ensure
real-time data transparency, The technology necessary to facilitate such transparency has existed for more than a decade.
Simply requiring licensees to disclose balance sheet data in a standardized, digital format on a regular basis, requiring little
to no manual intervention (perhaps with frequency of disclosure dependent upon company size) would both teli the
Government what it needs to know, and eliminate unnecessary burdens to industry. Such approach would of course level the
playing field for both the relatively small money transmitters and the mega-businesses which the current MTA favors, 5
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the nation from collapse and mismanagement of client funds—and yet the State of California still heeds
to the same antiquated and completely discredited system of risk management that was in-use before the
crisis as demonstrated by the arbitrarily applied and irrational Policy.
For all of these reasons, it is not meritorious, but specious, for Defendants to argue that the
financial requirements of the MTA are “rationally related” to the purpose of consumer protection even
if such requirements were evenly applied--- which they are not. (FAC, { 60, 61 70). For now, the
minimum requirements are certainly present, and these proceedings continue due to their onerous
nature, but nowhere in the MTA is there a stated rationale for a) the $500,000 figure in the statute; b)
the $1 miilion figure (finally) stated on the DFI web site; c) the DFI’s practice of ignoring both of these
figures in certain, unspecified situations where a “plan of operation” or “risk profile” might override
them; d) the DFI’s demonstrably false belief that all new applicants must suffer “expected losses;” or e)
that such expected losses will, on average, by definition, or otherwise reach $500,000. Each instance of
uncertainty in a procedure such as this one introduces the possibility of subjective human error or bias.
Whether intentional or not, such subjectivity is the opposite of rationality. The State cannot, and
therefore its argument must fail.
Indeed, at a minimum, Plaintiff has pled facts sufficient to state a claim against the State
Defendants for their violations of Plaintiff's due process rights in that the MTA does not have a rational
basis related to a legitimate state interest, and as such the State Defendants’ Motion to Dismiss must be
denied.
C. The MTA As Applied To Plaintiff By The State Defendants Further Violates
Plaintiff's Procedural Due Process Rights.
Finally, Plaintiffs procedural due process rights have also been violated by the State
Defendants’ arbitrary and capricious application of the MTA to Plaintiff. As stated by the Court in
Mathews y. Eldridge, 424 U.S. 319:
“Although respondent concededly did not exhaust the Secretary's internal review procedures,
and ordinarily only the Secretary has the power to waive exhaustion, this is a case where the
claimant’s interest in having a particular issue promptly resolved is so great that deference to
the Secretary's judgment is inappropriate. The facts that respondent’s constitutional chalienge
was collateral to his substantive claim of entitlement, and that (contrary to the situation in Salfi)
he celorably claimed that an erroneous termination would damage him in a way not
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compensable through retroactive payments warrant the conclusion that the denial of his claim to
continued benefits was a sufficiently Final decision’ with respect to his constitutional claim to
satisfy the statutory exhaustion requirement.” (emphasis added)
Mathews further established a three-part test for determining “the constitutional sufficiency of
administrative procedures.” The first part of this test assesses “the private interest that will be affected
| by the official action;” the second, “the risk of an erroneous deprivation of such interest through the
procedures used, and probable value, if any, of additional procedural safeguards;” and the third, “the
Govermment's interest, including the fiscal and administrative burdens that the additional or substitute
procedures would entail.” fd.
The private interest affected by official action here is obvious and substantial. Plaintiff Think
Computer Corporation has been required, as a direct result of the process adopted by the DF, to
completely cease operating the mobile payment system in which it invested significant resources, and
which constitutes its primary product offering. (FAC, 62-69).
The risk of erroneous deprivation of such interest, through the inherently subjective and
confusing process that includes a mandatory “pre-filing interview,” combined with the additionally
vague and subjective monetary pre-requisites for filing, is enormous. It is easy to conceive of presently
lacking procedural safeguards that would offset such risk, including but not limited to more definite
written pre-requisites, and the requirement that pre-filing interviews be recorded, if such meetings are
even truly necessary
such additional safeguards would actually benefit the Government. Considerable taxpayer
resources have been invested in the slow (and pointlessly subjective) process of evaluating money
transmission applications, allowing the Government to discriminate against those businesses it does not
“like” without any stated criteria. Eliminating the licensure process completely or allowing recordings
to be made with off-the-shelf equipment wouid either save the State of California an enormous amount
of money (which it desperately needs), or cost the State virtually nothing.
As such, at a minimum Plaintiff has alleged facts sufficient to support its claim for violation of
its rights to procedural due process, and accordingly, the State Defendants Motion to Dismiss must be
denied, , :
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TV. The MTA Violates The Dormant Commerce Clause And Is Not “Invulnerable” To A
Dormant Commerce Clause Challenge As The State Defendants Assert.
A, The State Defendants Fail to Cite any Explicit or Implicit Congressional
Endorsement of the Money Transmission Act and its Unconstitutional
Requirements for Licensure, Nor Can They Since The Purported Authorizing
Statute, the Patriot Act, Was Never Intended To Authorize Or Enable The MTA
Regulatory Scheme Enacted By The State Defendants.
In its Memorandum, the State Defendants boldly label the MTA “invulnerable” to a dormant
Commierce Clause challenge, citing 18 U.S.C. § 1960 as purported proof that Congress implicitly
endorses every requirement in the MTA. However, Congress clearly did not intend to give the states
carte blanche to enforce a regulatory scheme in the manner that the State Defendants have done here,
and indeed such a grant of power as the State Defendants argue that the State of California has received-
-- which would render the MTA “invulnerable” to constitutional challenge-- would itself be
unconstitutional as set forth above. See, Zemel, supra, 381 U.S. at 17. The State Defendants’ reasoning
that the MTA is authorized by 18 U.S.C. § 1960 fails to withstand even a cursory level of scrutiny when
evidence of the congressional intent and motivations behind such regulation, adopted in the wake of and
in reaction to the terrorist attacks of September 11, 2001, is more closely examined, ,
Congress amended 18 U.S.C. § 1960 in 2002 as part of the USA PATRIOT Act, a sweeping law
designed to counter terrorism in the wake of the September 11, 2001 terrorist attacks. Far from
intending to describe a financial regulatory regime for the future of commerce, Congress was primarily
interested in outlawing the use of traditional Islamic hawala financial networks as vehicles to fund
terrorism, and so it designated the operation of an unlicensed money transmission service to be a federal
crime. Congress’s intent in this regard, and the federal government’s motivations in enacting such
provision are described in a report submitted to Congress by the United States Department of the
Treasury in November, 2002 in accordance with Section 359 of the USA PATRIOT Act (the
“Report”).'” The Report focuses in great detail on terrorist financing (not once referring to new
payment technologies) and explains:
“Informal Value Transfer Systems (IVTS) is a term used to describe those money or value
transfer systems that operate informally to transfer money as a business, In the past, some of
, I
" See hitp://www.fincen.govw/news_room/rp/files/hawalarptfinal | 1222002.pdf. The full text of the Report is also attached as
Exhibit C to the Request for Judicial Notice submitted herewith. r
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these informal! networks have been labeled by various terms including ‘alternative remittance
systems’ and ‘underground banks.’ Within the broad realm of informal institutions there exist
more detailed descriptors for specific value transfer mechanisms, such as hawala, hundi, fei
ch’ien, hoe kuan, hui k’aun, and many others. For the purpose of consistency and inclusiveness,
IVTS is the primary term of art used in this report...
In order to better understand this issue, FinCEN looked closely at the workings of the hawala
system, a widely used form of VTS. Hawala means “transfer” in Arabic and the system works
by transferring money without actually moving it. The basic hawala transaction involves a
sender, two trusted intermediaries, and a recipient. For example, a U.S. resident who wanis to
send money to a friend in another jurisdiction (Country B) would give it to a U.S. hawaladar,
who typically gives the sender a code or identification mechanism. The U.S. hawaladar then
contacts a local hawaladar in Country B by telephone, fax, or e-mail, and the sender contacts the
intended recipient to convey the code. The local hawaladar in Country B then delivers the
specified funds to the recipient upon presentation of the code. The hawaladar charges a flat fee,
a commission, or may alternatively or in addition, profit from the exchange rate differential
between the official and black market price of U.S. dollars in Country B. The accounts between
the two operators may be settled various ways including through compensatory payments (i.c.,
when someone from Country B sends money to the U.S.), conventional wire transfers or checks,
physical movement of money (by courier), invoice manipulation or other trade- based
mechanisms, and the trade/smuggling of gold and precious gems...
Section 359(a) of the Patriot Act amended the definition of money transmitter to encompass
‘any person who engages as a business in an informal money transfer system or any network of
people who engage as a business in facilitating the transfer of money domestically or
internationally outside of the conventional financial institution system.’ These amendments
make clear that under U.S. law all money transfer remitters, including those that operate on an
informal basis, or outside the scope of the conventional financial sector, are subject to the BSA.”
In the Report, the entirety of Appendix B, “Basic Hawala and Sample Account Settling,” is
devoted to diagrams of Hawala networks involving fictitious actors with Muslim names. Appendix C
involves the “Use of Cash Intenstve Businesses In Ethnic Communities to Facilitate [VTS Activities.”
In the section entitled “Recommendations,” the Report states:
“The U.S. approach of regulating informal value transfer activity is preferable to outlawing the
activity altogether, a course chosen by some nations. Attempting to outiaw IVTS ultimately
deprives law enforcement of potentially valuable information and drives the informal remittance
providers further “underground.” Outlawing the activity also deprives the mostly law-abiding
IVTS customers of the primary channel through which they transfer funds.
In addition, the U.S. approach to regulation is consistent with emerging international standards
such as the Special Recommendations on Terrorist Financing, issued in November 2001, by the
Financial Action Task Force (FATF) on Money Laundering. The FATF’s Special
Recommendation VI on Alternative Remittance calls on nations to ‘take measures to ensure that
persons or legal entities, including agents, that provide a service for the transmission of money
or value, including transmission through an informal value transfer system or network, should be
licensed or registered and subject to all the FATF Recommendations that apply to banks and
non-bank financial institutions,’” «
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To baldly state, as the State Defendants boldly contend here, that Congress intended to halt the
creation of new payment technologies in the United States by passing the USA PATRIOT Act is
therefore a gross mischaracterization of the legislative record. It is clear that the present situation is one
that Congress did not intend, nor authorize and in fact is simply one in which the State Defendants seek
to stretch federal law to defend an unconstitutional money transmission regulatory scheme.
Even were it not abundantly clear what Congress sought to accomplish by strengthening the
penalties for unlawful money transmission—namely, the prevention of another terrorist attack
facilitated by United States financial systems—enormous changes in computer technology have
completely transformed the landscape of interstate commerce since 2002. In 2007, the advent of the
iPhone, a device manufactured by Appie, Inc,, completely changed the way that many Americans
communicate by making “smartphones” capable of myriad tasks commonplace. Smartphones also
provided a new platform for mobile commerce that has little regard for state boundaries.
Such rapid change has swept across thé country in the past, such as with the advent of the
Dwight D, Eisenhower National System of Interstate and Defense Highways in the 1950s. Regarding
that particular development, the Court stated in Aflanta Motel v. United States, 379 U.S. 241 (1964):
“Our populace had not reached its present mobility, nor were facilities, goods and services .
circulating as readily in interstate commerce as they are today. Although the principles which
we apply today are those first formulated by Chief Justice Marshall in Gibbons v. Ogden, 9
Wheat. 1 (1824), the conditions of transportation and commerce have changed dramatically, and
we must apply those principles to the present state of commerce. The sheer increase in volume
of interstate traffic alone would give discriminatory practices which inhibit travel a far larger
impact upon the Nation's commerce than such practices had on the economy of another day.”
The same language applies almost verbatim to the changes that have occurred in the United
States over the past five years—long after Congress passed the PATRIOT Act. There is simply no way
that Congress could have foreseen the future of mobile commerce, let alone mobile payments, in 2002,
and as such it is impossible that the criminal penalties stipulated by 18 U.S.C. § 1960 even come close
to “expressly endorsing state-by-state licensing requirements” determined by California in 2010, or that
the “regulation of money transmission activities by enforcing state licensing provisions through that
federal law” makes sense in a new and different era of commerce.
’
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The State Defendants cite Sofe v. Tu Phitoc Nguyen, 634 F.Supp.2d 1096, 1100 (E.D. Cal. 2009)
as evidence that Congress can delegate power to states, but this case is not analogous to the present
situation. As the State Defendants point out, “there were no federal safety standards governing
passenger seat belts on busses.” In the case of money transmission, there are ample federal standards
designed to keep consumers safe—but the State of California, and Defendant Venchiarutti in particular-
--- knowingly ignores them. Thus, for example, 31 C.F.R. § 1010, a federal standard, covers general
provisions related to the Financial Crimes Enforcement Network (FinCEN), a division of the United
States Department of the Treasury. FinCEN has issued several regulations and rulings directly relevant
to money transmission over the years, such as FinCEN ruling FIN-2009-R001 (“on Whether Certain
Operations of a Service Provider to Prepaid Stored Value Program Participants is a Money Services
Business”), (attached as Exhibit D to the Request for Judicial Notices submitted herewith) FIN-2008-
ROOS5 (“on Whether Certain Reloadable Card Operations are Money Services Businesses”) (Exhibit E to
the Request for Judicial Notices submitted herewith), and 2003-8 (“Definition of Money Transmitter
(Merchant Payment Processory”) (Exhibit F to the Request for Judicial Notices submitted herewith), but
while some states have honored these standards, others, such as the State of California, have not.
Congress expressly delegated authority to the United States Department of the Treasury to handle
matters relating to money transmission in 31 U.S.C. § 310 (concerning the powers delegated to
FinCEN). As alleged in the Complaint, the State Defendants have stretch whatever congressional
authority was given to them under the Patriot Act far past the scope of congressional authorization in
enacting their regulatory scheme under the MTA, and as such Plaintiff has pled facts sufficient to state a
claim against the State Defendants for their violations of the dormant commerce clause, and the State
Defendants’ Motion to Dismiss must be denied.
B. The State Defendants Have Attempted And Plaintiff Has Alleged They Will
Continue To Attempt To Regulate Commerce Occurring Outside Of California In
Violation Of The Commerce Clause.
The State Defendants’ Memorandum further fails to address the behavior of the DFI prior to the
k +
October Order, when Piaintiff was uncertain as to whether or not it could operate in Alabama and
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Idaho—jurisdictions where Plaintiff possessed valid money transmission licenses—because of
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California law. The October Order resolved this particular dilemma for Plaintiff, but not for any other
potential applicant for licensure under the MTA, and so it remains at issue.!? Indeed, even if Congress’s
delegation of authority to the states over money transmission and interstate were explicit and
complete—which is certainly not the case—such a grant would stil/ not permit the states to pass
arbitrary, capricious and discriminatory laws such as the MTA employing subjective and vague
procedures that infringed on the sovereignty of other states. Accordingly, Plaintiff has pled facts
sufficient to state a claim against the State Defendants for their violations of the dormant commerce
clause, and the State Defendants’ Motion to Dismiss must be denied.
Vv. Settled Federal Law And Procedure Requires That Plaintiff Be Allowed To Amend Even If
The Court Were To Grant The Motion To Dismiss On Any Of The Grounds Being
Asserted By The State Defendants,
Even if this Court were to grant the State Defendants’ Motion to Dismiss on any of the grounds
asserted by the State Defendants, Plaintiff respectfully submits that well settled federal law and
procedure require that Plaintiff be granted leave to amend its Complaint. See, Schwarzer, Tashima &
Wagstaffe, California Practice Guide: Federal Civil Proceduye Before Trial (The Rutter Group 2010) §
9:286 (“As a practical matter, leave to amend his almost always granted by the court.”); see, also Id, at
§ 9:287 (“Where a more carefully drafted complaint might state a claim, a plaintiff must be given at
least one more chance to amend the complaint before the district court dismisses the action with
prejudice.”) (emphasis in original), !4
As such, should this Court grant the State Defendants’ Motion to Dismiss, Plaintiff respectfully
requests leave to amend its Complaint,
'S Indeed, in this regard the State Defendants’ argument that the Court should not consider this blatant violation of the
commerce clause because they have ceased to engage in such acts against the Plaintiff only (at the price of Plaintiffs activity
in California) essentially amounts to a “moving target” defense, and completely ignores the plain factual allegations of the
DFi’s intentions, actions and violations of the commerce clause as fully alleged in { 56 of the Complaint with regard to, infer
alia, the October Order, Plaintiff's communications with the State Defendants and the State Defendants’ statements.
"Indeed, this rule applies even in cases involving affirmative bars to relief such as sovereign immunity. See, Doe v. United
States (9" Cir. 1995) 58 F.3d 494, 497 (“We are unwilling to anticipate what theory an ingenious but fair pleader might
produce and what constellation of facts might be alleged that might overcome the bar [of sovereign immunity]... "a district
court should grant leave to amend even if no request to amend the pleading was made, unless it determines that the
pleading could not possibly be cured by the allegation of other facts.") ’
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RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Case No. CV11-05496-HRL
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300 Montgomery Street, Suite 650
LAW OFFICES OF MICHAEL BROOKS CARROLL
San Francisco, CA 94104
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DISPOSITION REQUESTED
Plaintiff respectfully requests this Court deny the Motion to Dismiss filed by all Defendants.
Dated: February 28, 2012
Respectfully submitted,
LAW OFFICES OF MICHAEL BROOKS
CARROLL
By: /s/ Kevin A. Flautt
Kevin A. Flautt, Esq.
Attorneys for Plaintiff THINK COMPUTER
CORPORATION
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. RESPONSE AND OPPOSITION TO MOTION TO DISMISS- Case No, CV11-05496-HRL
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