In a recent press release, the Attorney General of Pennsylvania announced that settlements had been reached with lenders in Delaware and Florida that allegedly provided loan sharking to residents of Pennsylvania. Seemingly in support of the settlement, the press release cites the Third Circuit’s decision in TitleMax of Delaware, Inc. c. Weissmannin which an out-of-state lender unsuccessfully sought to bar the Pennsylvania Banking Department from investigating loans made to Pennsylvania residents.
The Seventh Circuit’s 2010 decision is not mentioned in the press release. Midwest Title Loans, Inc. v. Mills. In that case, the Seventh Circuit awarded a major victory to Ballard client Spahr by ruling that Indiana was not allowed to apply its usury law to auto title loans made in person in Illinois to residents from Indiana. Ballard’s client also obtained a $440,000 payment from the State of Indiana to settle his claim for attorney fees as a “winning party” in a federal lawsuit under the federal civil rights that he brought following this decision.
A question in both Midwestern title and TitleMax was whether the “dormant commerce clause” prohibited the impugned state activity, given the facts presented. The Commerce Clause (US Const. Art. I, § 8, cl. 3) grants Congress the power to “[t]o regulate trade. . . between the various states[.]“Because the Commerce Clause gives Congress exclusive legislative jurisdiction over interstate commerce, states cannot enact laws that unduly restrict or burden interstate commerce. This restriction of state power is commonly referred to as the “dormant commerce clause”.
Companies engaging in cross-border lending should continue to closely monitor decisions involving the dormant commerce clause, as the law in this area continues to evolve. Additionally, dormant commerce clause issues can arise not only in auto title lending cases, but also in cases involving other types of loans and other sales of goods and services.
For example, last August the Eighth Circuit ruled that a Minnesota law requiring out-of-state bullion dealers to obtain regulatory approval from the Minnesota Commissioner of Commerce before doing business with Minnesota consumers in other states violated the dormant Commerce Clause. The court expressly endorsed the reasoning of the Seventh Circuit in Midwestern titlewhich he found “persuasive”:
In this case [Midwest Title], an Indiana statute considered title loan transactions to have taken place in Indiana—and thus were subject to Indiana lending laws—if an Indiana resident was part of the transaction and if the creditor had advertised or solicited business in Indiana, regardless of where the transaction took place…. The Seventh Circuit held that the law was extraterritorial, reasoning:
Allowing Indiana to apply its law against securities lending when its residents are transacting in a different state that has a different law would be to arbitrarily exalt the public order of one state over that of another. …. The same could be said here. Allowing Minnesota to apply its bullion regulatory regime to transactions that its residents conduct entirely in South Dakota, South Carolina or South Korea would amount to “arbitrarily [] exalt Minnesota public policy on these jurisdictions.
Additionally, just last week, the U.S. Supreme Court heard oral argument in a case raising the issue of whether a California law discriminates against interstate commerce by banning the sale of pork products in California. where the seller knows or should know that the meat is from the offspring of a breeding pig that has been confined “in a cruel manner”. The petitioners argue that states cannot constitutionally condition in-state sales on requiring out-of-state businesses to operate in a particular manner. The court’s decision should shine a light on the continued effectiveness of the dormant Commerce Clause, which the Ninth Circuit has deemed a virtual “dead letter.”
We will continue to keep you informed of legal developments in this important area.
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