The U.S. Court of Appeals for the Ninth Circuit, in a 2-1 decision, recently affirmed the district court’s decision denying the plaintiffs’ motion for a temporary restraining order and preliminary injunction to block enforcement of Nevada Senate Bill 248 (S.B. 248).  S.B. 248, which took effect on July 1, 2021, was enacted in response to the COVID-19 pandemic and requires debt collectors to provide written notification to debtors 60 days “before taking any action to collect a medical debt.”

The written notification required by S.B. 248 must include: (1) the name of the medical facility or health care provider that provided the goods or services for which the medical debt is owed; (2) the date on which the goods or services were provided; (3) the principal amount of the debt; (4) the name of the collection agency; and (5) as applicable, either that the debt has been assigned to the collection agency for collection or that the collection agency has otherwise obtained the debt for collection.  To accept a voluntary payment during the 60-day period, the debtor must have initiated the contact with the collector and the collector must disclose that “payment is not demanded or due” and that the “medical debt will not be reported to any credit reporting agency during the 60-day notification period specified in  [S.B. 248].”  Collection agencies are prohibited from taking any action to collect a medical debt during the 60-day period, including reporting a debt to a consumer reporting agency (CRA).

In Aargon Agency, Inc. v. Sandy O’Laughlin, the plaintiffs are a group of debt collectors.  In June 2021, they filed a lawsuit in federal district court in Nevada against the Commissioner of the Financial Institutions Division of Nevada’s Department of Business and Industry seeking to have S.B. 248 declared invalid.  Their complaint alleges that S.B. 248 is  unconstitutionally vague, violates the First Amendment, and is preempted by the Fair Debt Collection Practices Act and the Fair Credit Reporting Act.  The plaintiffs moved for a temporary restraining order and preliminary injunction which the district court denied.  The plaintiffs appealed the denial of the preliminary injunction to the Ninth Circuit.

The Ninth Circuit majority agreed with the district court that none of the plaintiffs’ arguments were likely to succeed on the merits.  The majority concluded as follows:

  • The plaintiffs argue that S.B. 248 is unconstitutionally vague because it fails to define the term “before taking any action to collect a medical debt” and therefore allows arbitrary enforcement by the State.  The majority ruled that the term was not unconstitutionally vague and that any doubt about the correctness of the district court’s holding was removed by the regulations that were adopted to implement S.B. 248 after briefing in the Ninth Circuit but before oral argument.  The regulations define the term “action to collect a medical debt” and include examples of actions that do, and do not, constitute an “action to collect a medical debt.”
  • The plaintiffs argue that S.B. 248 impermissibly burdens their speech in violation of the First Amendment.  The majority rejected the plaintiffs’ argument that S.B 248 is subject to strict scrutiny because debt collection communications are not commercial speech.  They also rejected the plaintiffs’ argument that even if debt collection communications are commercial speech, the district court’s analysis was incorrect.  Applying the test established in the U.S. Supreme Court’s 1980 Central Hudson decision for evaluating restrictions on commercial speech, the majority found that Nevada had a substantial interest in protecting medical debtors in Nevada from financial ruin, that the 60-day notification period directly advanced that interest and was not constitutionally underinclusive by not restricting collections by medical providers, and the law was not a more restrictive than necessary to serve the State’s interest.
  • The plaintiffs argue that S.B. 248 was expressly preempted by the FCRA to the extent it prohibits a debt collector from reporting a medical debt until 60 days after providing notice pursuant to S.B. 248.  According to the plaintiffs, the FCRA expressly preempts any state law that relates to furnishers’ duties.  The majority read the FCRA to only expressly preempt state laws that affect furnishers obligations as set forth in the FCRA to provide accurate information to CRAs and to take certain actions upon receiving notice of consumer disputes.  The majority concluded that S.B. 248 did not affect or interfere with any of such obligations.  They noted that furnishers’ reporting obligations set forth in the FCRA do not include a deadline for when furnishers must report a debt to a CRA.
  • The plaintiffs argue that S.B. 248 was impliedly preempted by the FCRA because it stands “as an obstacle” to the accomplishment of the FCRA’s purposes and objectives.  The majority concluded that S.B. 248 does not interfere with debt collectors’ responsibility to furnish fair and accurate information to CRAs and, by giving debtors a 60-day window after receiving notification under S.B. 248 to verify their debts, might improve the accuracy of information that debt collectors furnish to CRAs.
  • The plaintiffs also argue that the FDCPA impliedly preempts S.B. 248 because it is impossible to comply with both the FDCPA and S.B. 248.  According to the plaintiffs, S.B. 248 prevents debt collectors from providing the “mini-Miranda warning” required in the initial communication which must state that “the debt collector is attempting to collect a debt.”  The majority was unwilling to treat the S.B. 248 notification as a communication in connection with the collection of a debt that would trigger the mini-Miranda warning requirement because, in the majority’s view, the notification is not an attempt to collect a debt.  The majority noted that when sending a notification, a debt collector must inform the debtor that the notification “is not a demand for payment.”  Thus, according to the majority,  “[d]ebt collectors can easily comply with both S.B. 248 and the mini-Miranda warning requirement by first sending out a [S.B. 248] notification and later providing the mini-Miranda warning.”  Also, according to the majority, debt collectors can comply with both S.B. 248 and the FDCPA requirement to send a validation notice within five days of the initial communication with a consumer in connection with the collection of a debt.  Since the S.B. 248 notification is not a communication in connection with the collection of a debt, S.B. 248 does not prevent a debt collector from sending a validation notice within five days after an initial communication in connection with the collection of a debt.  In addition, the majority determined that because S.B. 248 protects consumers for an additional 60-day period, it provides more protection to consumers than the FDCPA provides standing alone.

In his dissent, Judge VanDyke disagreed with the majority’s conclusion that the plaintiffs were unlikely to succeed on the merits of their preemption claims.  With respect to the FDCPA, Judge VanDyke found the S.B. 248 notification to be a communication “in connection with the collection of a debt.”  In his view, it was “silliness [to] pretend[] that a debt collector would send a [S.B. 248 notification] for any reason other than to collect a debt….”  Thus, according to Judge VanDyke, “a debt collector cannot both initiate contact with a debtor by providing the [S.B. 248 notification] and then not further contact that debtor for sixty days [in compliance with the S.B. 248 prohibition] while also giving the FDCPA’s requiring warnings within five days of the ‘initial communication.’”

Judge VanDyke also concluded that S.B. 248 conflicts with the FDCPA prohibition against debt collectors sending misleading communications by requiring a collector, as a condition of accepting  a voluntary payment during the 60-day period, to disclose that “payment is not demanded or due.”  According to Judge VanDyke, a debtor is likely to be misled by this statement because the debtor, “who likely already received several notices from the creditor that payment is due or past-due…might think that the creditor forgave the debt or, at the very least, wonder who she is supposed to pay: the original medical provider or this new agency.”

With respect to the FCRA, Judge VanDyke concluded that the FCRA both expressly and impliedly preempts S.B. 248.  According to Judge VanDyke, the FCRA’s express preemption provision should be read broadly to apply to any state law that relates to the subject of furnishers’ legal responsibilities when reporting information on payment or nonpayment of debts to CRAs.  In his view, S.B. 248 is such a state law because it relates to how furnishers report information on delinquent accounts by requiring a debt collector who wants to furnish information to a CRA to first issue a notification and then wait 60 days before reporting the debt.  Judge VanDyke also concluded that the FCRA impliedly preempts S.B. 248 because, in his view, S.B. 248’s mandatory 60-day delay in credit reporting “stands as an obstacle to the accomplishment of Congress’s ‘accuracy’ goals in the FCRA.”  He observed that the FCRA does not have a waiting period comparable to S.B. 248 and stated that it can thus be inferred  “that a waiting period causing financial institutions to suffer delayed (and thus inaccurate) assessments of Nevada residents’ medical debt ‘would be inconsistent with federal policies and objectives.’”