November is the best month of the year for many reasons; it is my birthday month and the month of Thanksgiving. I’ll be celebrating for all 30 days and spending my big day in Barcelona, Spain. I would be curious to know what is your favorite country you’ve ever visited and why. I’m always looking to add to my list. Send me your suggestions.
Miriah’s Take: Thankful for Regulatory Relief
Using this month’s theme of gratitude, this blog is taking a look at some recent regulatory relief items the financial services industry is thankful for this month.
1. Guidance on banking hemp businesses: The U.S. Department of Agriculture (USDA) has finally released its interim final rule on establishing and administering hemp production in the United States pursuant to the 2018 Farm Bill, which removed hemp from the Controlled Substances Act. The USDA’s interim final rule is effective October 31, 2019 through November 1, 2021. The agency is collecting public comments on the interim final rule until December 30. This interim final rule will now help entities, like financial institutions, understand which hemp business are legitimate and not likely running afoul of federal and/or state law. In August, the National Credit Union Administration (NCUA) issued guidance for those credit unions seeking to provide legitimate banking services to hemp businesses. As expected, the guidance puts emphasis on the Bank Secrecy Act and Anti-Money Laundering obligations. Now that the USDA has issued its interim final rule, it is likely NCUA will update its guidance.
Hemp banking, while legal under federal law, could demand its own section in this blog as it is more complex than some articles and compliance companies may lead one to believe. While hemp banking is arguably now legal, it is not that simple. A few points for your consideration:
• There is a strict regulatory program and licensing scheme that will come to fruition now that USDA released its rule. If your financial institution currently has hemp accounts, those hemp businesses may not be miraculously legitimate due to the 2018 Farm Bill or the USDA interim final rule. Is the existing hemp business operating under the 2014 Farm Bill (which licenses a very narrow set of hemp business) or is that hemp business operating without the appropriate license? If the answer is the latter, you may consider taking a second look at that account.
• Hemp has a chemical definition. Hemp is not allowed to contain more than .3 percent TCH (tetrahydrocannabinol). Thus, any hemp business that is selling or producing hemp above that threshold may be triggering the Controlled Substances Act, because it would no longer be defined as hemp but as marijuana. Is it appropriate for financial institutions to monitor this? How much due diligence should financial institutions undertake to ensure a hemp business remains legitimate?
• CBD (cannabidiol) oil is not carte blanche legal. Essentially, if the CBD product is derived from hemp that is produced in a consistent manner with the 2018 Farm Bill, then the CBD oil is classified as hemp and legal. Otherwise, CBD generally remains a Schedule I substance under federal law.
Here are two really good articles on hemp banking:
2. Extending the open-end line of credit threshold: The Consumer Financial Protection Bureau (CFPB) issued its 2019 final rule amending the Home Mortgage Disclosure Act (HMDA) which extends the open-end line of credit threshold. Previously, the CFPB did not require financial institutions to collect and report HMDA data points if the financial institution originated less than 500 open-end lines of credit. This threshold exemption would have expired on January 1, 2020 under the previous rule. The 2019 rule extends this threshold exemption until January 1, 2022. You can read more about that here.
3. Expanding flexibility in NCUA’s PAL Program: NCUA’s Payday Alternative Loan (PAL) Program has been expanded to allow more flexibility to credit unions who seek to provide consumers an alternative to predatory payday lending shops. The final rule expands the PAL program by adding a PAL II, which allows credit unions to offer a PAL loan up to $2,000. The previous maximum amount was $1,000.
4. Finalizing the long awaited and litigated Overtime Rule: If you recall, the Obama Administration’s final rule on the annual salary threshold for which a professional employee is exempt from overtime payment was $47,476 (or $913/week). Previously, the rule set the annual salary threshold at $23,660 (or $455/week), which was established in 2004. The Obama Administration rule was effective December 1, 2016 but was not implemented and enforced due to litigation. That litigation resulted in a consolidated case in the U.S. District Court for the Eastern District of Texas, which issued a preliminary injunction to halt the implementation. Subsequently, the judge ruled in favor of the plaintiffs’ motion for summary judgement holding that the Department of Labor exceeded its statutory authority by increasing the minimum salary exemptions to $913 per week. Since then, the Trump Administration finalized its rule and set the salary threshold exemption at $35,568 (or $684/week). This rule will be effective on January 1, 2020.
Miriah’s Hot Topic: USAA Patent Win
Do you remember about two years ago when many financial institutions received demand letters from USAA claiming the financial institutions were violating USAA’s trademark rights, specifically its remote deposit capture (RDC) portfolio? We have a significant update on that battle. USAA is winning to the tune of $200 million.
USAA owns about 50 patents which it says are related to RDC technology and alleged that, because it owns these patents, it owns the RDC technology as the inventor. Previous demand letters requested financial institutions to pay requisite licensing fees. Many of these financial institutions ignored said demand letters and/or sent them to their vendors pursuant to indemnification clauses in their contracts.
Punching back, USAA sued Wells Fargo for using USAA’s patented technologies without its permission and thus infringing upon USAA’s intellectual property rights. At the time of filing the lawsuit, many in the industry were shocked that a bank sued another bank over patents, especially massive behemoth Wells Fargo. The jury (literally and figuratively) decided that USAA is a formidable opponent. In a jury trial, USAA was awarded $200 million in damages.
The complaint: In the complaint, USAA focuses on four patents and the timeline of each parties’ mobile banking platform, specifically RDC. These four patents were issued to USAA between 2014 and 2017. USAA hones in on four patents in its portfolio which cover technical functions which instructed the computer to align the camera in a certain manner with the check to capture the necessary information, known as an alignment guide. USAA developed its technology and introduced it to the market as Deposit@Home and Deposit@Mobile which USAA claims was the first time consumers were able to deposit checks anytime in any place by simply taking pictures through a mobile phone. USAA noted that Wells Fargo introduced similar technology to the market years later. In 2017, USAA approached Wells Fargo to engage in negotiations over a licensing fee. Wells Fargo never paid any licensing fee. USAA asked for a slew of damages, including that the company be awarded three times the amount of damages, as Wells Fargo’s infringement was willful.
Verdict: The jury found for USAA in all three questions the jury was asked to determine:
- Did USAA prove by a preponderance of the evidence that Wells Fargo infringed ANY of the Asserted Claims?
- The jury answered yes.
- Did USAA prove by a preponderance of the evidence that Wells Fargo willfully infringed ANY of the Asserted Claims that you found were infringed?
- The jury answered yes.
- What sum of money, if any, paid now in cash, has USAA proven by a preponderance of the evidence would compensate USAA for its damages resulting from infringement through the date of trial?
- The jury answered $200,000,000.00.
What’s Next: USAA still has a second case outstanding involving other patents related to mobile deposit against Wells Fargo, which it filed in August, 2018. The jury selection and trial will begin in January, 2020, unless the parties reach a settlement in the next two months. Surely, USAA’s win will strongly encourage other financial institutions to pay USAA a licensing fee for RDC technology the next time it sends out demand letters. When USAA originally filed this lawsuit, a company employee noted that 87 million consumers use RDC, and the industry has saved billions by utilizing RDC. USAA has 12 million members; Wells Fargo has 21 million online banking customers, leaving 54 million consumers using RDC, and the industry reaping the benefits of saving billions. Now that a court has determined USAA has a legal claim to a licensing fee, how will USAA recoup costs from financial institutions representing those 54 million consumers?
If you are interested in the recent trend of large banks filing business method patents and what the intersection of banking and patents might mean, check out this law review article.
I was recently in Atlanta for a day. Never having been in the city before, I set out to experience a few things, one of which, was the National Center for Civil and Human Rights. If you ever have the opportunity, I encourage you to experience the museum and spend two hours learning about the fundamental rights of all humans connecting the American Civil Rights Movement to today’s struggle for Global Human Rights.
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