As previously reported, the U.S. District Court for the District of Maryland denied multiple motions brought by a number of small business owners related to seeking emergency relief to enjoin Bank of America from imposing eligibility restrictions on borrowing under the Payroll Protection Program (PPP) established by the Small Business Administration (SBA), under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The decisions in Profiles, Inc., et al. v. Bank of America Corp., et al., issued most recently on April 17, 2020, were a major victory for financial institutions and lenders. On the merits, the district court held that Bank of America’s eligibility requirements for small business loans were not a violation of the CARES Act.

As important, the district court concluded that the CARES Act does not authorize a private right of action, which independently was fatal to the plaintiffs’ claims. The district court reasoned that while the CARES Act is just a few weeks old, and no other court has yet addressed whether it provides an implied private right of action, several courts have found that provisions of the SBA, which was amended by the CARES Act, do not provide a private right of action.

The district court relied on authority from the U.S. Supreme Court and the 4th, 9th and 11th U.S. Circuit Courts of Appeal for the principle that judicially created private rights of action are disfavored. The district court noted that the role of the judiciary is to interpret the statutes passed by Congress to determine whether there was an intent to create “not just a private right but also a private remedy” and that “[w]ithout it, a cause of action does not exist and courts may not create one, no matter how desirable that might be as a policy matter.” The district court expressed concern that “an expansive approach to implied rights of action cannot be squared with the doctrine of separation of powers” and cited to the lack of an implied private right of action to enforce the Home Affordable Modification Program (HAMP), the legislation passed on an emergency basis following the 2008 economic crisis, which aided homeowners in repayment of mortgages. While the court in Profiles found the absence of a private right of action based on authority that the SBA does not provide for such a right, to the extent that the CARES Act is extended to other contexts, this analysis could change.

In situations where there is found to be no private right of action to enforce certain government statutes, regulations or guidance, plaintiffs often turn to individual state consumer protection laws as a means to attempt to enforce those directives. For example, despite the fact that these do not provide for a private right of action, plaintiffs have brought claims for alleged violations of HAMP, as well as violation of Federal Housing Administration regulations, via alleged violation of broad state consumer protection statutes. Some of the statutes utilized in these contexts include the California Unfair Competition Law, the Texas Deceptive Trade Practices Law, the Illinois Consumer Fraud and Deceptive Practices Act, Massachusetts Consumer Protection Act, New Jersey Consumer Fraud Act, New York General Business Law, and the Pennsylvania Unfair Trade Practices and Consumer Protection Law.

Consistent with this anticipated strategy, on April 20, 2020, multiple small business owners filed multiple class action lawsuits in the U.S. District Court for the Central District of California on behalf of California-only classes of small businesses against a number of large lenders, alleging violation of the California Unfair Competition Law (UCL). In those cases,the plaintiffs allege that the lenders did not process applications on a “first-come, first-served” basis as allegedly required under the PPP, which they contend resulted in certain small businesses not receiving the relief for which they applied. Rather than assert a direct violation of the CARES Act, the claims assert violations of various prongs of the California UCL. The plaintiffs allege that the unfair, unlawful and fraudulent prongs of the California UCL, as well as the False Advertising Law, were violated because small business owners applied based on the understanding that PPP loan applications would be processed on a “first-come, first-served” basis when their applications were “at the back of line.” The plaintiffs allege that they would have applied to other banks had they known of this alleged practice. They seek to have the money obtained from the federal government disgorged to the plaintiffs and members of the class, as well as to enjoin any violations of the UCL in the future.

While asserting violations of individual state consumer protection laws is a strategy for circumventing the Profiles decision, these types of claims will still encounter a number of hurdles. For example, the California UCL does not permit claims of “unlawful” violations where there exists an explicit bar to private enforcement of the underlying law. However, courts have interpreted this to be a different standard than that of determining whether an affirmative private right of action exists; it depends on whether sole enforcement authority has been granted elsewhere. On the other hand, claims under the unlawful prong of the UCL can be dismissed if the derivative claims upon which they are based are dismissed or there is no violation. Thus, the plaintiffs will need to contend with the finding in Profiles that none of the alleged activity ran afoul of the CARES Act regardless of any private right of action. In addition, the California UCL does not permit the collection of compensatory damages — plaintiffs may seek only injunctive relief or restitution. The scenarios for restitution generally require a disgorgement of funds improperly obtained from the plaintiff, which is unlikely to be present in this factual scenario of a denied small business loan application. And, to have standing under the California UCL, a plaintiff must plead a loss of money or property, which also presents difficulties of showing that use of other funds to cover expenses during this period would fulfill such a requirement.

Financial institutions and lenders can expect to see more litigation under individual state consumer protection laws in the coming months as plaintiffs attempt to plead around the lack of a private right of action under the SBA to enforce the CARES Act. Although these claims no doubt create risk, plaintiffs will still need to overcome any number of additional hurdles set forth by that particular state statute’s requirements. Additionally, class actions brought under individual state consumer protection laws are generally limited to the state of the statute and typically do not apply extraterritorially except in specific circumstances. That is likely the reason that the California cases are asserted as California-only class actions, at least at this point.