PayPal, Inc. v. CFPB ( 2023 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued February 10, 2022 Decided February 3, 2023
No. 21-5057
PAYPAL , INC.,
APPELLEE
v.
CONSUMER FINANCIAL PROTECTION BUREAU AND ROHIT
CHOPRA, IN HIS OFFICIAL CAPACITY AS DIRECTOR, CONSUMER
FINANCIAL PROTECTION BUREAU ,
APPELLANTS
Appeal from the United States District Court
for the District of Columbia
(No. 1:19-cv-03700)
Christopher Deal, Senior Counsel, Consumer Financial
Protection Bureau, argued the cause for appellants. With him
on the briefs were Kristin Bateman, Acting Assistant General
Counsel, and Julia Szybala, Senior Counsel.
Kannon K. Shanmugam argued the cause for appellee.
With him on the brief were Kelly P. Dunbar, William T. Marks,
and Brian M. Lipshutz.
Before: SRINIVASAN, Chief Judge, PILLARD and RAO,
Circuit Judges.
2
Opinion for the Court filed by Circuit Judge RAO.
RAO, Circuit Judge: The Bureau of Consumer Financial
Protection (“the CFPB”) promulgated the Prepaid Rule, which
regulates digital wallets and other prepaid accounts. As
relevant here, the Rule requires financial institutions to make
certain disclosures by using model language or other
“substantially similar” wording. Challenging the Rule on
statutory, administrative, and constitutional grounds, PayPal
sued the CFPB. The district court reached only PayPal’s
statutory claims, vacating part of the Rule because it mandated
a “model clause” in violation of the Electronic Fund Transfer
Act (“EFTA”).
In this case, PayPal and the CFPB proceed on the
assumption that EFTA prohibits mandatory model clauses and
so we consider only whether the Prepaid Rule mandates such a
clause. Answering that narrow question, we conclude EFTA’s
reference to “model clause” means specific, copiable
language—not content and formatting. Because the Prepaid
Rule does not require PayPal to use specific language, it does
not mandate a “model clause.” We therefore reverse the district
court and remand for further consideration of PayPal’s claims.
I.
A.
Recognizing the “potential for substantial benefits” from
electronic systems for transferring money, Congress enacted
EFTA to clarify and define “the rights and liabilities of
consumers, financial institutions, and intermediaries in
electronic fund transfers.” Pub. L. No. 95-630, tit. XX, § 2001,
92 Stat. 3641, 3728 (codified at 15 U.S.C. § 1693). EFTA
requires financial institutions to disclose specific “terms and
3
conditions” of electronic fund transfers “at the time the
consumer contracts for an electronic fund transfer service.” 15
U.S.C. § 1693c(a); id. § 1693c(a)(1)–(10). Where applicable,
such disclosures are mandatory and must be made using
“readily understandable language.” Id. § 1693c(a).
As part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (“Dodd-Frank”), Congress created
the CFPB and transferred to it the authority to regulate
disclosures under EFTA. Consumer Financial Protection Act
of 2010, Pub. L. No. 111-203, tit. X, §§ 1002(5), (15), 1011(a),
1032(a), 1084, 124 Stat. 1955, 1956, 1957–58, 1964, 2006–07,
2081–82. In addition, Dodd-Frank permits the CFPB to
prescribe rules to ensure the terms of consumer financial
products and services are “fully, accurately, and effectively
disclosed to consumers.” 12 U.S.C. § 5532(a).
Both EFTA and Dodd-Frank provide financial institutions
with a safe harbor from liability in certain circumstances.
EFTA obligates the CFPB to “issue model clauses” using
“readily understandable language” to “facilitate compliance
with the disclosure requirements.” 15 U.S.C. § 1693b(b).
These model clauses can shield an institution from civil and
criminal liability for “any failure to make [a] disclosure in [the]
proper form.” Id. § 1693m(d)(2). Similarly, under Dodd-Frank
the CFPB may issue “model form[s]” that can provide a safe
harbor for compliance with disclosure requirements. 12 U.S.C.
§ 5532(b)(1), (d). An institution’s use of model clauses and
forms is “optional.” 15 U.S.C. § 1693b(b) (model clauses); 12
U.S.C. § 5532(b)(1) (model forms).
B.
The CFPB promulgated a regulation addressing consumer
protections in “prepaid accounts.” Prepaid Accounts Under the
4
Electronic Fund Transfer Act (Regulation E) and the Truth In
Lending Act (Regulation Z) (“Prepaid Rule”), 81 Fed. Reg.
83,934, 83,934 (Nov. 22, 2016) (codified at 12 C.F.R. parts
1005, 1026). As relevant here, prepaid accounts allow
consumers to store money in a digital wallet that enables
financial transactions online or person-to-person. See generally
Prepaid Rule, 81 Fed. Reg. at 83,934–43; see also 12 C.F.R.
§ 1005.2(b)(3)(i)(A)–(D) (defining “prepaid account”).
The Prepaid Rule requires account providers to disclose
certain information before a consumer acquires an account and
begins transacting. These disclosures come in two forms: a
“long form disclosure,” which includes all fees that could be
imposed in connection with a prepaid account; and a “short
form disclosure,” which includes only a subset of that
information. 12 C.F.R. § 1005.18(b)(2), (4).
PayPal’s challenge concerns only the short form
disclosures, which must include a prepaid account’s “most
important fees.” Prepaid Rule, 81 Fed. Reg. at 83,934.
Providers must disclose these “static fees,” which apply to “all
prepaid account programs, even if such fees are $0 or if they
relate to features not offered by a particular program.” Id.;
accord 12 C.F.R. pt. 1005, supp. I, cmt. 18(b)(2)-1.1 Static fees
include the periodic fee charged for holding the account,
transaction fees, ATM withdrawal fees, the fee for reloading
cash into the account, ATM balance inquiry fees, customer
1
The CFPB’s “official interpretation” of the Prepaid Rule says static
fees must be listed regardless of applicability. See 12 C.F.R. pt. 1005,
supp. I, cmt. 18(b)(2)-1. The parties do not dispute that all static fees
must be listed under the Rule, so we do not address PayPal’s
argument that the CFPB’s interpretation is inconsistent with the
regulation.
5
service fees, and fees for inactivity. 12 C.F.R.
§ 1005.18(b)(2)(i)–(ix). If a fee on the short form may
fluctuate, the Rule requires the highest amount to be listed with
a symbol, such as an asterisk, linking to a statement explaining
that a lower fee could apply depending on how the product is
used. Id. § 1005.18(b)(3)(i).
The general structure of the disclosure requirements is the
same. For each static fee, the Prepaid Rule suggests a specific
word or phrase to describe the fee and directs providers to use
that language or something “substantially similar.” For
example, a “Per purchase fee” must be disclosed “using the
term ‘Per purchase’ or a substantially similar term.”
Id. § 1005.18(b)(2)(ii). An “Inactivity fee” must be disclosed
“using the term ‘Inactivity’ or a substantially similar term.”
Id. § 1005.18(b)(2)(vii).
The Prepaid Rule also imposes formatting requirements.
These include how the disclosures must be structured, where
each fee must appear in relation to the others, and the font size
and emphasis given to each fee. See, e.g.,
id. § 1005.18(b)(6)(iii)(A), (7)(i)(A), (7)(ii)(B)(1)–(3). The
Rule illustrates how the formatting requirements could be
implemented. Static fees are listed above the bolded line, and
additional fees are listed below it.
6
12 C.F.R. pt. 1005, app. A-10(d).
C.
PayPal is one of the largest providers of digital wallets.
PayPal’s digital wallets allow users to store funds for later use,
a capability that sweeps the wallets into the ambit of the
Prepaid Rule. PayPal sued the CFPB, challenging the Rule
under the Administrative Procedure Act (“APA”) and the
Constitution. PayPal first alleged the Prepaid Rule exceeded
the CFPB’s statutory authority because the agency effectively
mandated the adoption of a model clause in contravention of
EFTA, which authorizes only “optional” clauses. PayPal also
argued the Prepaid Rule was arbitrary and capricious as applied
7
to its service, because unlike other financial products, PayPal
does not generally charge fees for using its financial products
and only a small percentage of digital wallet transactions use
stored funds. The Prepaid Rule therefore failed to account for
the differences between PayPal and other prepaid account
providers, whose services are closer substitutes for traditional
checking accounts. Moreover, by requiring PayPal to list even
irrelevant static fees, as well as the highest value that those fees
could reach, the Rule “risk[ed] consumer confusion and
impose[d] substantial cost without a commensurate consumer
benefit.” PayPal also argued that the Rule’s cost-benefit
analysis was arbitrary and capricious and that the Rule violated
PayPal’s First Amendment rights.
The district court granted summary judgment for PayPal,
holding the Prepaid Rule’s short form disclosure requirements
exceeded the CFPB’s statutory authority under EFTA. 2
PayPal, Inc. v. CFPB, 512 F. Supp. 3d. 1, 9 (D.D.C. 2020). The
court explained that while EFTA requires the disclosure of
certain “‘terms and conditions of electronic fund
transfers,’ … it does not require that providers adhere to a
specific form for these disclosures.” Id. at 7 (quoting 15 U.S.C.
§ 1693c(a)(4)). Instead, the CFPB can only “‘issue model
clauses for optional use by financial institutions’” because “the
plain text [of EFTA] does not permit the Bureau to issue
mandatory clauses.” Id. (quoting 15 U.S.C. § 1693b(b)). The
court considered whether the Prepaid Rule’s short form
disclosure requirements “exceed[] the Bureau’s statutory
authority by effectively creating mandatory disclosure
2
The district court also concluded the Prepaid Rule exceeded the
CFPB’s authority under the Truth In Lending Act. PayPal, Inc. v.
CFPB, 512 F. Supp. 3d. 1, 12 (D.D.C. 2020). The CFPB does not
appeal that holding.
8
clauses.” Id. at 9. “Undoubtedly so!” the court exclaimed,
finding the Rule’s requirements mandatory because they
“provide[] the specific form, structure, and contents of
disclosures that providers must use.” Id. The court emphasized
the CFPB lacked authority under either EFTA or Dodd-Frank
to issue mandatory model clauses. The court vacated the
Prepaid Rule “to the extent that the short-form disclosure
requirement provides [for] mandatory disclosure” and declined
to reach the remainder of PayPal’s claims. Id. at 12. The CFPB
appealed.
II.
The legal question presented on appeal is a narrow one.
The CFPB does not dispute, for the purposes of this case, that
it lacks the statutory authority to issue mandatory model
clauses. Oral Arg. Tr. 9:3–10. Rather, the CFPB maintains the
Prepaid Rule does not in fact impose mandatory model clauses.
In response, PayPal argues the Rule effectively imposes
mandatory model clauses for which the CFPB has no authority
under either EFTA or Dodd-Frank.
In light of the parties’ arguments and the district court’s
decision, we begin by considering whether the Prepaid Rule
imposes mandatory model clauses. We first consider the text
and structure of EFTA, which establishes that the term “model
clause” means specific, copiable language—not content or
formatting requirements. Applying this definition, we conclude
the Prepaid Rule does not impose mandatory model clauses.3
3
In its briefing before us, PayPal argues only that the CFPB lacks
statutory authority to impose formatting and content requirements
because these requirements constitute mandatory model clauses.
This opinion therefore does not address the district court’s
9
A.
“Model clause” is not defined in EFTA, so we look to the
meaning of the term in its statutory context. See Robinson v.
Shell Oil Co., 519 U.S. 337, 341 (1997). In EFTA, “model
clause” has a particularized legal meaning. Model clauses must
be designed “to facilitate compliance with the disclosure
requirements of section 1693c” and “to aid consumers in
understanding the rights and responsibilities of participants in
electronic fund transfers.” 15 U.S.C. § 1693b(b). The model
clauses serve important legal functions—to ensure financial
institutions are complying with their statutory disclosure
requirements and to help protect the legal rights of consumers
who make electronic fund transfers. In addition, a model clause
provides a safe harbor from liability for financial institutions.
Id. § 1693m(d)(2). Within EFTA, a “model clause” serves to
disclose and protect legal rights and therefore the term has a
distinct legal meaning.
In legal parlance, “model clause” has a particular meaning.
A “model” legal instrument usually refers to text that is specific
enough either to be adopted in full or adapted as needed. For
example, the “Model Rules of Professional Conduct” are a
uniform set of “ethical guidelines for lawyers” that can be
“adopted as law, sometimes with modifications.” Model Rules
of Professional Conduct, BLACK’ S LAW D ICTIONARY (11th ed.
2019). The “Model Penal Code” is “[a] criminal code drafted
and proposed by the American Law Institute” that is “used as
the basis for criminal-law revision by many states.” Model
Penal Code, BLACK’S LAW DICTIONARY (11th ed. 2019). And
a “model act” is a bill that is “proposed as guideline legislation
for the states to borrow from or adapt to suit their individual
conclusion that the CFPB lacks statutory authority to impose
mandatory clauses. See PayPal, 512 F. Supp. 3d at 7–9.
10
needs.” Model Act, BLACK’ S LAW D ICTIONARY (11th ed. 2019).
Model legal documents refer to specific, copiable language that
lawyers, legislators, and contracting parties can adopt in full or
adapt as needed.
When Congress used the phrase “model clause” in the
context of EFTA’s legal liabilities, obligations, and
protections, it adopted the legal understanding of the term. See
ANTONIN SCALIA & BRYAN A. GARNER, READING LAW 73
(2012) (“[W]hen the law is the subject, ordinary legal meaning
is to be expected, which often differs from common
meaning.”). EFTA provides that financial institutions must
disclose “terms and conditions … in readily understandable
language.” 15 U.S.C. § 1693c(a). Mirroring this requirement,
the CFPB must “issue model clauses … by utilizing readily
understandable language.” Id. § 1693b(b). Financial
institutions are protected against liability if they “utilize[] an
appropriate model clause.” Id. § 1693m(d)(2). Read together,
these provisions demonstrate that a “model clause” is a
particular set of words, namely “readily understandable
language,” that prepaid account providers can adopt to satisfy
their disclosure obligations and to benefit from the Act’s safe-
harbor provision.4
4
Citing City of Arlington v. FCC, 569 U.S. 290 (2013), the CFPB
maintains we should defer to its “interpretation of the scope of its
rulemaking authority” because “Congress has not directly spoken to
the precise question [of] whether the Bureau may regulate the content
and formatting of disclosures.” We reject that invitation. The
meaning of “model clause” is clear from the statutory text and
context, and “deference does not apply where the statute is clear.”
Johnson v. Guzman Chavez, 141 S. Ct. 2271, 2291 n.9 (2021).
11
B.
Assuming the CFPB lacks authority to impose mandatory
model clauses and applying the above understanding of “model
clause,” we hold the Prepaid Rule did not mandate model
clauses.
The Prepaid Rule requires financial providers to disclose
certain fees by using a suggested phrase “or a substantially
similar term.” For example, providers “shall provide a
disclosure” for a “[c]ash reload fee … using the term ‘Cash
reload’ or a substantially similar term.” 12 C.F.R.
§ 1005.18(b)(2)(iv). They must also disclose a “periodic
fee … using the term ‘Monthly fee,’ ‘Annual fee,’ or a
substantially similar term.” Id. § 1005.18(b)(2)(i). In each
instance, the Rule suggests the use of a particular word or
phrase, but also provides an option to use terms that are
“substantially similar.” The CFPB interprets the Prepaid Rule
to require the disclosure of certain enumerated fees. See 12
C.F.R. pt. 1005, supp. I, cmt. 18(b)(2)-1. But the CFPB has not
mandated that financial providers use specific, copiable
language to describe those fees. Rather, providers can choose
to use the CFPB’s model clauses or they can use other language
that is “substantially similar.” Because the Prepaid Rule does
not mandate the use of specific language, the CFPB has not
mandated a “model clause” in contravention of EFTA.
C.
PayPal maintains the Prepaid Rule mandates a “model
clause,” but its arguments fail to account for EFTA’s text and
structure. First, PayPal contends the Rule’s allowance for
“substantially similar language” unduly narrows the field of
usable language and effectively mandates a model clause. We
recognize that, as a practical matter, the range of permissible
12
wording available to satisfy a short form disclosure
requirement may be quite limited. There are, after all, only so
many ways to describe the fee charged for account inactivity or
the frequency with which a fee is charged. The limited range of
permissible wording, however, stems not from the model
clauses, but from the legally required disclosures. EFTA
requires financial providers to make certain disclosures of fees
and terms, disclosures that are further specified in the Rule. As
PayPal concedes, “the Bureau can require financial institutions
to disclose certain information.” The specific statutory and
regulatory disclosure requirements may at times constrain the
range of disclosure language, but that does not convert optional
model clauses into mandatory ones.
Second, although PayPal does not offer a clear definition
of “model clause,” it assumes that model clauses include some
combination of specific wording, content, and formatting
requirements. PayPal also relies on the district court’s
conclusion that the CFPB’s model clauses are mandatory
because they “provide[] the specific form, structure, and
contents of disclosures that providers must use.” PayPal, 512
F. Supp. 3d at 9. Because the Prepaid Rule imposes certain top-
line requirements, such as particular content and formatting
obligations, PayPal maintains the Rule impermissibly
mandates a model clause.
In EFTA, however, “model clause” means specific
copiable language. PayPal’s interpretation of model clause to
include content and formatting requirements cannot be
reconciled with the statute. With respect to the content of
model clauses, specific information “shall be disclosed.” 15
U.S.C. § 1693c(a). And separately, the CFPB must issue
“model clauses” suggesting language providers can use to
satisfy the disclosure requirements. Id. § 1693b(b). The model
13
clauses must be designed to “facilitate compliance” with
“disclosure requirements.” Id. EFTA makes clear that model
clauses and disclosure requirements are discrete terms.
Disclosure requirements regulate content, while model clauses
suggest the language that may be used for the disclosure. The
fact the Prepaid Rule requires the disclosure of certain content
does not, standing alone, mandate a model clause.
Formatting is similarly not part of a “model clause.” As we
have already explained, a model clause, in legal parlance, does
not ordinarily include formatting requirements. For example, a
judge could copy verbatim the words of a model jury
instruction, but this ordinarily would not include any particular
typeface, indentation, or structure. Specific, copiable language
is the essential element of a model clause. The Prepaid Rule
mandates certain formatting, but such requirements fall outside
the ambit of a “model clause.”
Other statutory provisions underscore the limits of a model
clause. Congress frequently provides for formatting
requirements as part of the definition of a “model form.” For
example, in the private education loan context, the CFPB must
develop “model forms” to aid regulatory compliance, and those
forms must, among other things, have “a clear format and
design” and “use an easily readable type font.”
Id. § 1638(e)(5). Dodd-Frank defines “model form” to include
“a clear format and design, such as an easily readable type font”
and “plain language comprehensible to consumers.” 12 U.S.C.
§ 5532(b)(2). In some instances, Congress directed the CFPB
to issue both model clauses and model forms. See
id. § 4308(b)(1) (providing in the Truth in Savings Act that the
CFPB “shall publish model forms and clauses”). By contrast,
in EFTA Congress simply required the CFPB to issue “model
clauses” and made no reference to “model form[s].”
14
PayPal maintains the Prepaid Rule mandates model
clauses because it “dictates the organization of the short-form
disclosure clauses in painstaking detail, down to the pixel.” In
Dodd-Frank and other statutes, such formatting requirements
are often included as part of the definition of a “model form,”
suggesting that they are not part of a typical model clause.
Because PayPal’s reading would collapse the distinction
between model clauses and forms, we decline to adopt it.
* * *
Addressing the narrow issue before us, we conclude the
CFPB’s Prepaid Rule does not mandate a “model clause” in
contravention of EFTA. That the Rule’s content and formatting
requirements do not fall within the meaning of “model clause”
does not necessarily mean the CFPB can impose whatever
content and formatting requirements it chooses. On remand, the
district court may consider PayPal’s other challenges to the
Rule, including the APA and constitutional claims, which
remain to be addressed.
For the foregoing reasons, we reverse the judgment of the
district court and remand for further proceedings consistent
with this opinion.
So ordered.