In a recent press release, the Pennsylvania Attorney General announced that settlements have been reached with Delaware and Florida lenders who made allegedly usurious loans to Pennsylvania residents. In apparent support of the settlement, the press release cites the Third Circuit’s decision in TitleMax of Delaware, Inc. v. Weissman, in which an out-of-state lender unsuccessfully sought to enjoin the Pennsylvania Department of Banking from investigating loans made to Pennsylvania residents.
Not mentioned in the press release is the Seventh Circuit’s 2010 decision in Midwest Title Loans, Inc. v. Mills. In that case, the Seventh Circuit handed a major victory to Ballard Spahr’s client by holding that Indiana was precluded from applying its usury law to auto title loans made in person in Illinois to Indiana residents. Ballard’s client also obtained a $440,000 payment from the State of Indiana to resolve its claim for attorneys’ fees as a “prevailing party” in a federal Civil Rights Act lawsuit that it brought following that ruling.
A question in both Midwest Title and TitleMax was whether the “dormant Commerce Clause” prohibited the state activity complained of, given the facts presented. The Commerce Clause (U.S. Const. art. I, § 8, cl. 3) grants Congress the power “[t]o regulate Commerce . . . among the several States[.]” Because the Commerce Clause gives Congress exclusive legislative jurisdiction over interstate commerce, states may not enact laws that unduly restrict or burden interstate commerce. This restriction on state power is commonly referred to as the “dormant Commerce Clause.”
Companies that engage in cross-border lending should continue to closely monitor decisions involving the dormant Commerce Clause since the law in this area continues to evolve. Moreover, dormant Commerce Clause issues can arise not only in auto title loan cases, but also in cases involving other types of loans and other sales of goods and services.
For example, this past August, the Eighth Circuit held that a Minnesota statute requiring out-of-state bullion dealers to obtain regulatory approval from the Minnesota Commissioner of Commerce before transacting business with Minnesota consumers in other states violated the dormant Commerce Clause. The court expressly agreed with the Seventh Circuit’s reasoning in Midwest Title, which it found “persuasive”:
In that case [Midwest Title], an Indiana statute deemed title loan transactions to have occurred in Indiana—and thus be subject to Indiana’s loan laws—if a resident of Indiana 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 the statute was extraterritorial, reasoning:
To allow Indiana to apply its law against title loans when its residents transact in a different state that has a different law would be arbitrarily to exalt the public policy of one state over that of another …. The same could be said here. To allow Minnesota to apply its bullion regulatory scheme to transactions its residents conduct wholly in South Dakota, South Carolina, or South Korea would be to ‘arbitrarily  exalt the public policy’ of Minnesota over those jurisdictions.
Also, just last week, the U.S. Supreme Court heard oral argument in a case raising the question of whether a California statute discriminates against interstate commerce by prohibiting the sale of pork products in California when the seller knows or should know that the meat came from the offspring of a breeding pig that was confined “in a cruel manner.” Petitioners argue that states cannot constitutionally condition in-state sales on requiring out-of-state businesses to operate in a particular way. The Court’s ruling is expected to illuminate the continuing efficacy of the dormant Commerce Clause, which the Ninth Circuit found was a virtual “dead letter.”
We will continue to keep you updated about legal developments in this important area.