MoFo’s State + Local Government Enforcement Newsletter

Morrison Foerster’s State and Local Government Task Force is pleased to provide our bimonthly newsletter summarizing some of the most important and interesting developments from state attorneys general across the country and local government agencies and legislative bodies, with links to primary resources. This month’s topics include the following:

• Ongoing regulatory litigation following Dobbs
• New York announces proposed consumer protection expansion for financial services industry customers
• The denial of a media company’s bid to remove New York attorney general’s consumer protection suit to federal court
• Texas and Tennessee attorneys general continue to challenge ESG practices
• Expansion of the scope of the California’s prohibition on noncompete agreements

1. Ongoing regulatory litigation following Dobbs

On February 1, 2024, a federal district court in the Northern District of California denied Yelp Inc.’s motion for a preliminary injunction seeking to prevent Texas Attorney General Ken Paxton from prosecuting the company for publishing information about crisis pregnancy centers based on the abstention doctrine set forth in Younger[1] and the absence of any applicable exception to the doctrine.[2]

As background, in September 2023, Yelp filed a federal lawsuit in the Northern District of California against Texas Attorney General Paxton seeking a preliminary injunction to prevent further action by that office that would see to penalize Yelp for the publication of “truthful speech about crisis pregnancy centers.” On September 28, 2023, Attorney General Paxton sued Yelp in the state court in Bastrop County, Texas, for allegedly misleading consumers by posting notices stating that crisis pregnancy centers provide limited medical services.

The district court found that its abstention as a federal court was appropriate because (1) there was an ongoing state proceeding, (2) the state proceeding was a quasi-criminal enforcement action involving sanctions, (3) the state proceeding implicated an important state interest, and (4) the federal action would have the practical effect of enjoining the state proceeding. Id. Moreover, the district court found that the bad-faith exception did not apply because Attorney General Paxton’s suit was not facially meritless and he did not fail to conduct an investigation. Id. While the district court was not convinced that Attorney General Paxton “acted entirely in good faith” in bringing the case, “Yelp [did] not provide[] enough concrete evidence of his subjective motivations to prove otherwise.” Id.

On Wednesday, February 28, 2024, the Texas state court dismissed all claims brought by Attorney General Paxton against Yelp with prejudice, but did not offer an explanation for its decision in the dismissal order.

These cases demonstrate the continued development of novel legal issues and related litigation risks arising in both federal and state courts related to the Dobbs decision and its aftermath.

2. New York announces proposed consumer protection expansion for financial services industry customers

On January 2, 2024, New York State Governor Kathy Hochul unveiled a new consumer protection agenda that included an expansion of New York’s consumer protection laws designed to protect consumers from unfair and abusive practices. The governor’s agenda was particularly focused on the financial services industry and identified debt collectors and student loan service providers as industry segments that may face enforcement actions in the future.

Governor Hochul also announced her support for new restrictions on “buy now pay later” lending in New York State, which would require lenders to apply for state licenses. In December 2023, the Office of the Comptroller of the Currency (OCC) announced new consumer-oriented risk management guidance for “buy now pay later” lenders. Governor Hochul indicated that she would authorize the New York State Department of Financial Services (NYDFS) to create new regulations [relating to these types of loans] as a means of increasing protections for consumers.

Consistent with her stated consumer protection agenda for 2024, on January 17, 2024, Governor Hochul included new legislation, the “Buy Now Pay Later Act” and the “Consumer Protection Act,” in the Proposed 2024–2025 Transportation, Economic Development and Environmental Conservation (TED) Bill. The proposed “Buy Now Pay Later Act” includes licensing restrictions and books and records examinations for “buy now pay later” lenders operating in New York State and identifies NYDFS as the primary enforcement agency for the new regulations. The legislation limits the charges and fees lenders may charge, prohibits excessive and unfair fees, and mandates transparent disclosure of interest and fees to consumers. Violations of the law would be a misdemeanor, with a penalty not to exceed $500 or six months in jail. After a notice hearing, however, NYDFS may impose additional penalties for violations.

The “Consumer Protection Act” seeks to amend New York’s General Business Law § 349, which governs trade practices, to prohibit “unfair, deceptive, and abusive” acts or practices. Previously the wording of the law only covered “deceptive” practices. The addition of the “unfair” and “abusive” language was supported by New York State Attorney General Letitia James. The new language would enable the New York attorney general to bring enforcement actions against companies that are alleged to be unfairly pressuring consumers to make “upsell” purchases, or that otherwise allegedly harass consumers in an abusive manner. Such activities are perceived as harmful to consumers, but do not fit neatly under the definition of “deception.” Significantly, in addition to allowing potential enforcement by the New York attorney general, the Consumer Protection Act creates a private right of action.

If enacted, this law not only will provide even broader powers to the New York attorney general but also may result in a wave of potential consumer class actions, given the private right of action provision.

3. District court denies media company’s bid to remove New York attorney general’s consumer protection suit to federal court

The New York attorney general’s petition alleges that Sirus XM automatically renews subscriptions to its service and makes cancellation of service excessively burdensome by requiring customers to speak with customer service agents. The New York attorney general asserted that 578,000 customers gave up on cancellation attempts after waiting on hold to connect to a customer service agent. Then, once connected, the customer service agents were allegedly instructed not to allow customers to decline to hear additional offers and were trained using scripts designed to frustrate customer attempts to cancel the service. The petition alleges Sirius XM committed fraud under New York’s General Business Law § 349 and violated New York Executive Law § 63(12), as well as ROSCA.

On January 19, 2024 Sirius XM sought to remove a New York state lawsuit brought by the New York attorney general for alleged violations of the Restore Online Shoppers Confidence Act (ROSCA) against Sirius XM relating to the company’s subscription cancellation policies and practices. In opposing removal, the New York attorney general argued that Sirius XM did not identify a federal question in dispute and that no claim of federal law was included within New York state’s claim for relief.

On February 23, 2024, the Honorable Jed Rakoff of the Southern District of New York rejected Sirius XM’s bid to remove the case to federal court, siding with the New York attorney general. Judge Rakoff rejected Sirius XM’s arguments that the New York attorney general’s action raised federal questions and relied on the federal Electronic Fund Transfer Act as “essential” to the state claims.

This litigation is another reminder that litigants will have an uphill battle when seeking to challenge a state attorney general’s venue selection, particularly when the action is focused on alleged violations of state law.

4. Texas and Tennessee attorneys general continue to challenge ESG practices

Texas Attorney General Ken Paxton has continued to aggressively enforce anti-“fossil fuel boycott” contracting rules against banks providing municipal bond services to the state of Texas. On January 26, 2024 the Texas Attorney General moved to exclude a large bank from participating in the underwriting of Texas state municipal bonds based on purported violations of the Texas state law that restricts the state from contracting with businesses that are classified as “fossil fuel boycotter[s].” When approached by the Texas attorney general’s office about its “net zero” commitments, the bank declined to provide additional information. The Texas attorney general then sought to exclude the bank from municipal bond underwriting contracts, due to Texas’s alleged inability to determine whether the bank was a fossil fuel boycotter.

This action is the most recent in a series of actions by Attorney General Paxton to bar businesses from municipal bond work based on purported violations of Texas’s anti-boycott laws, while these businesses are making efforts to the benefit of ESG compliance. Previously, in January 2023, the Texas attorney general excluded a different large bank from the Texas municipal bond underwriting market alleging that the bank “discriminated” against firearms companies, in violation of the state’s contracting law. Since 2018, the bank has required new retail gun seller clients to not sell firearms to persons who have failed background checks, and to not sell bump stocks. In 2022, the Texas state comptroller barred state contracts, including municipal bond underwriting, with financial firms purported to “boycott” fossil fuels.

The Tennessee attorney general also has targeted financial services entities in connection with ESG-related issues, using a distinct consumer protection theory. On December 18, 2023, Tennessee Attorney General Jonathan Skrmetti filed a state consumer protection lawsuit against BlackRock Inc., claiming BlackRock “deceiv[ed] consumers about the company’s extensive commitment to fulfilling ESG claims” in violation of the Tennessee Consumer Protection Act. The Tennessee attorney general alleged that BlackRock falsely stated that certain funds it manages do not consider ESG factors in making decisions about investment strategy, while making voting decisions that indicate the opposite. Additionally, the Tennessee attorney general alleged that BlackRock overstated ESG factors’ impact on BlackRock’s overall financial performance.

In the complaint against BlackRock, Skrmetti categorized BlackRock’s alleged ESG-related activities as “unlawful misrepresentations and omissions” connected to offering investment products to Tennessee consumers. The suit specifically states that joining such ESG initiatives such as the “Climate Action 100+” “would divert BlackRock’s attention away from a sole focus on financial returns, possibly causing BlackRock to lose business from investors focused on those returns.” The Tennessee attorney general also alleged BlackRock made misleading claims about countries’ participation in net zero targeting because net zero commitments included “non-binding pledges and mere policy documents.”

These actions demonstrate the continuation of certain state attorneys general challenges to ESG-related activities, putting businesses who are advancing their ESG compliance in a dilemma situation.

5. California expands the scope of its prohibition on noncompete agreements

At the close of 2023, California passed two new laws expanding the scope of the state’s prohibition on noncompete agreements. Each of the new laws went into effect as of January 1, 2024. AB 1076 voids all noncompete agreements in employment contracts and requires employers to notify current and former employes with such provisions in their contracts that the provisions have been voided.[3] Senate Bill 699 amends California Business & Professions Code 16600 and prohibits employers from entering into or enforcing noncompete agreements even with respect to contracts signed outside California.

AB 1076 codified Edwards v. Arthur Andersen LLP,[4] a California Supreme Court decision that held that noncompete agreements are invalid even if they are narrowly drawn. AB 1076 also provides for a notice requirement, which requires employers to individually inform current and former employees who have or had noncompete agreements in their contracts that those provisions are no longer valid. This applies to all employees located in California, employed by companies after January 1, 2022, and whose employment agreements contain noncompete clauses. The statute requires notice to be completed by February 14, 2024.

Senate Bill 699, codified as Section 16600.5 of the Business and Professions Code, prohibits employers from entering into or enforcing noncompete agreements, regardless of whether the contracts were entered into in California. Senate Bill 699 adds the following provisions:

• Any contract that is void is unenforceable regardless of where and when the contract was signed
• An employer or former employer shall not attempt to enforce a contract that is void regardless of whether the contract was signed and the employment was maintained outside of California
• An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void
• An employer that enters into a contract that is void or attempts to enforce a contract that is void commits a civil violation
• An employee, former employee, or prospective employee may bring a private action for injunctive relief or the recovery of actual damages, or both, and shall be entitled to recover reasonable attorneys’ fees and costs

California is just the latest state to follow a growing trend of bans on noncompete agreements. Colorado, Oklahoma, North Dakota, and Minnesota all ban such agreements. In December 2023, New York Governor Kathy Hochul vetoed a bill that would have banned noncompete agreements in New York. A revised bill is expected later this year.

[1] 401 U.S. 37, 41 (1971).

[2] Yelp Inc. v. Paxton, in his official capacity as Attorney General of Texas, Docket No. 3:23-cv-04977 (N.D. Cal. Sep 27, 2023), ECF No. 16.

[3] A narrow subset of noncompete agreements that fall within one of the exemptions authorized by statute, relating to the sale of the goodwill of a business or of a substantial ownership stake in the business, remains in effect.

[4] 189 P.3d 285, 296 (Cal. 2008).