No, a Pandemic Doesn’t Overturn the First Amendment: Massachusetts Enjoined From Banning Debt-Collection Calls or Lawsuits During COVID-19

On March 26, 2020, AG Healey promulgated a new regulation entitled, “Unfair and Deceptive Debt Collection Practices During the State of Emergency Caused by COVID-19” (the Rule).[1]

The principal purpose and effect of the Rule were to immediately bar any telephone calls or legal actions by debt-collection agencies (“Agencies”) to collect debts from consumers. The Rule did not ban written communications with consumers about debts, nor calls from certain classes of exempted debt collectors, including mortgagors, landlords, nonprofit entities, federal employees, persons collecting escrow- or fiduciary-related debts, anyone serving legal process to judicial enforce a debt, and others. The Rule had a stated term of 90 days or until the end of the state of emergency announced by the Massachusetts governor. 

The effect of the Rule was devastating on Agencies and other companies heavily involved in consumer debt collection. Significant and immediate loss of revenue and layoffs potentially resulted. Secondary negative effects on creditors (e.g., hospitals and medical professionals, banks, credit card companies, educational institutions, utilities, private businesses, and the Commonwealth of Massachusetts) followed.

ACA International, a national trade association whose members are credit and collection professionals, filed suit seeking a temporary restraining order and preliminary injunction (ACA International v. Healey, 1:20-cv-10767-RGS). The association contends that the Rule will irreparably harm its members as it prohibited them from conducting their business with the likely result of bankruptcy. The complaint alleged violations of the First and Fourteenth Amendments, denials of due process and equal protection, violation of the separation of powers under the state and federal constitutions, unlawful expansion of the AG’s regulatory authority under MGL c. 93A, and violations of the Massachusetts common-law litigation privilege and the Massachusetts Anti-SLAPP statute. On May 6, 2020, Judge Stearns granted the motion for injunctive relief.

The court declined to rule on whether the AG’s action was in compliance with state law. As to grounds for emergency or injunctive relief, Judge Stearns found that Massachusetts consumers are already protected from abusive collection practices by several state and federal statutes, including prominently the Federal Fair Debt Collection Practices Act, and that the existing AG regulations already prohibit any more than two telephone calls weekly to a consumer. And other governmental bodies already play a protective role, including the Consumer Financial Protection  Bureau, the Federal Communications Commission, the Federal Trade Commission, and the Massachusetts Division of Banks.

The court held: “While I laud the Attorney General’s desire to protect citizens of Massachusetts during a time of financial and emotional stress created by the Covid-19 pandemic, I do not believe that [the Rule] adds anything to their protections that the existing comprehensive scheme of law and regulation already affords to debtors, other than an unconstitutional ban on one form of communication.”

First Amendment Issue

A key aspect of the court’s rationale was the analysis of the trade association’s demonstration of the likelihood of success on the merits of the First Amendment claim. ACA International argued that the Rule was tantamount to an unconstitutional infringement on Agencies’ right to free speech. Unlike non-commercial speech, which is reviewed for strict scrutiny, commercial speech is in the category of “intermediate scrutiny.” Judge Stearns found that even when Agencies are working collaboratively “with consumers and their creditor-clients to exhaust all options before resorting to litigation and to honor crisis-related requests to forbear on existing legal remedies during national or state-specific emergencies,” such speech “cannot be categorized as anything but commercial speech.” Judge Stearns noted that to pass intermediate scrutiny, AG Healey’s Rule must meet the following three prongs: (1) the asserted governmental interest is substantial, (2) the disputed Rule advances the governmental interest, and (3) the Rule is no more extensive than necessary to serve that interest.

Judge Stearns held that the asserted state interests were insufficient to overcome the protection of commercial free speech. In doing so, the court rejected each of the three reasons offered as to the specific reasons why the governmental interests were “substantial.” First, AG Healey explained that the government’s interest is to shield consumers from “aggressive debt collection practices that wield undue influence” given COVID-19. The court held that AG Healey offered no empirical support to show why consumers are more susceptible to undue influence during a pandemic than in non-pandemic times. The court also determined that no evidence suggested that Agencies are more likely than other commercial businesses to defy the social distancing rules by chasing debtors down in person. Second, AG Healey explained the government’s interest is to “temporarily vouchsafe[]” the financial wellbeing of citizens in the Commonwealth during the pandemic. Judge Stearns concluded that the substance of the Rule—banning a single form of communication (e.g., telephone calls)—had little to do with vouchsafing the financial wellbeing of residents. The Rule did not “pretend to offer any relief from the debt itself or the obligation to repay it in full.”

Third, AG Healey argued that the government’s interest is to “protect residential tranquility while citizens have largely had to remain at home” during COVID-19. Judge Stearns found that this argument stood on firmer ground than the prior two, but that even if there were a state interest to protect domestic tranquility, to defeat the TRO, AG Healey must show that the Rule advanced that interest to a “material degree” and that the Rule’s restriction on speech is not more extensive than necessary. In that regard, the court reasoned, AG Healey’s rationale failed. Judge Stearns determined that “in this day and age of cell phones and caller ID[,] the option of simply not answering the phone or placing it in silent mode is a viable alternative for consumers.” The Rule also signals out one group of debt collectors and imposes a “blanket suppression order” on their ability to use the telephone, which is what they believe to be their most effective means of communication. Further, because the prior regulation already imposed a limit of two calls per week, the Rule in question only incrementally reduced the number of times the phone might ring, in any event.

Finally, irreparable harm was clearly established for both the collectors and their customers, the creditors. The ruling enjoined the AG from enforcing the Rule.

Conclusion

While the litigation resulted, for the time being, in a temporary restraining order issued against AG Healey’s enforcement of the Rule, the case is a larger exemplar of how courts and consumer financial industry actors are responding to the COVID-19 crisis.

In the age of pandemic, it’s easy for consumers, businesses, lawmakers, or regulators to jump to conclusions before having all the facts. Judge Stearns’s order demonstrates that courts remain well-equipped to serve as a safety net against knee-jerk reactions, instilling in regulators and industry alike a measure of discipline to ensure that data and evidence are driving decision-making regarding any necessary consumer-protection efforts.

When it comes to broadly written bans on business activity, especially, discipline is necessary to strike the correct balance between government interests to protect consumers, Agencies’ interests to communicate with the consumer and seek accurate resolution of debts, and constitutional protections afforded to businesses. In these difficult and unprecedented times, it seems clear, at least from this TRO issuance, that courts serve as an effective backstop and help ensure that the exigencies of crisis do not thwart rule of law.

Arent Fox’s Consumer Financial Services group will continue to monitor developments in this area. If you have any questions, please contact Jenny Lee, Steven S. Broadley, or the Arent Fox professional who usually handles your matters.

[1] See 940 CMR 35.03 and 35.04.