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Argument preview: Standing to challenge kickbacks that do not directly affect price

In the second case on Monday, November 28, the Court will hear argument in First American Financial Corporation v. Edwards.  This Real Estate Settlement Procedures Act (“RESPA”) case raises fundamental questions relating to the meaning of “injury in fact” under the familiar test for determining whether a party has standing.  At issue is whether a plaintiff can bring a class action challenging unlawful kickbacks designed to steer buyers to a particular title insurance company without alleging that the kickback affected the price or quality of the service provided.

When she bought a home in Cleveland in 2006, respondent Denise Edwards was referred by her settlement agent, Tower City Title Agency, to First American Title Insurance Company.  First American charged a premium of $728.85, of which Edwards’s share was $455.43.  First American owned 17.5% of Tower City, and a diligent reader of the fine print would have known of this relationship.  But such a reader would not have known that First American allegedly paid a price that bore little relationship to the value of a 17.5% interest in Tower City, but instead reflected the value of obtaining referrals from Tower City.  Edwards alleges – and her allegations are taken as true at this point in the proceedings – that First American’s two-million-dollar payment for a 17.5% interest was more than the entire value of Tower City and was made primarily so that Tower City would refer buyers to First American.

RESPA prohibits the payment of kickbacks in connection with a “federally related mortgage loan.”  Edwards filed a class action alleging that the excess payment for the 17.5% interest and an additional payment of more than $800,000 were “kickbacks” within the meaning of the Act.  If successful, class members would receive three times the amount that they paid for title insurance, up to a cap of $500,000 or one percent of the defendant’s net value.  First American filed a motion to dismiss the case, arguing that Edwards lacks standing because she did not allege that she paid more for title insurance or received lower-quality service because of the kickbacks.  Indeed, First American claimed, Ohio law requires all title insurers to charge the same price; although Edwards now disputes that claim, the lower court decisions were decided on that basis.

Judge Otero of the Central District of California denied First American’s motion to dismiss, and the Ninth Circuit affirmed in an opinion that was written by Judge Graber and joined by Judges Fletcher and Pregerson.  Invoking Warth v. Seldin, the Ninth Circuit stated that “[t]he injury required by Article III can exist solely by virtue of ‘statutes creating legal rights, the invasion of which creates standing.’”  RESPA is such a statute, the court concluded, because it prohibits kickbacks in connection with settlement services and provides a penalty equal to three times the amount paid for the settlement service without requiring any proof that the plaintiff was overcharged for the service.  “Because RESPA gives Plaintiff a statutory cause of action,” the Ninth Circuit explained, “we hold that Plaintiff has standing to pursue her claims against Defendants.”  The court added that its decision was “in agreement with two of our sister circuits.”

First American filed a cert. petition in which it challenged both Edwards’s standing under Article III and her right to bring suit under RESPA without alleging concrete harm; the Court granted review of the constitutional question only.

Relying on Summers v. Earth Island Institute, First American argues that “injury in fact is a hard floor of Article III standing that cannot be removed by statute” and that the Ninth Circuit misread Warth v. Seldin, which requires a plaintiff to allege “a distinct and palpable injury to himself.”  Therefore, Congress’s authorization of an award of trebled settlement fees is simply not enough to allow Article III courts to adjudicate Edwards’s claim in the absence of an allegation that she paid a higher price for title services or suffered some other personal injury.  Just as the Court in Lujan rejected Congress’s creation of a “citizen suit” under the Endangered Species Act, First American argues, the Court should hold that Congress cannot create standing by providing for damages without a showing of personal harm.  First American also argues that Edwards’s claim that the kickbacks had “systemic effects” on the price of title insurance is too conjectural to amount to a showing of injury in fact, suggesting that “[w]hat the insurance market would have looked like in Ohio had First American’s relationship with Tower City been different is entirely speculative.”

First American argues that Havens Realty Corp. v. Coleman, in which the Court held that a “tester” had standing to allege racial discrimination even if he did not intend to buy or rent a home, is distinguishable because testers experience serious non-economic injury when they encounter discrimination.  First American dismisses arguments that Edwards’s allegations amount to a claim for breach of a duty of loyalty or a violation of conflict of interest rules sufficient to support standing; a ruling finding standing on such bases would, it counters, drain the “injury in fact” requirement of meaning.

Apparently for flavor, First American suggests that Edwards alleged no personal injury in large part to support her claim to represent a class, because allegations of distinct personal injury would vary from person to person and likely prevent her from going forward with a class action.  First American adds that a holding that Edwards lacks standing would not undermine enforcement of RESPA because the government could still bring criminal and injunctive actions, which do not require any showing of injury in fact.

The United States filed an amicus brief supporting Edwards in which it argues that Congress may create legally protected interests by statute without requiring a showing of personal injury.  Rather, it is enough in this case to require Edwards to show that she did not receive a “kickback-free referral”; moreover, Edwards’s personal involvement in a transaction with First American distinguishes cases such as Lujan, where virtually anyone could bring suit by claiming an interest in viewing wildlife.

In addition, the government argues, in RESPA Congress targeted practices that could harm consumers financially, although it may be difficult to show harm in particular cases.  Just as the common law allowed suit against trustees for self-dealing without any showing of harm, the government contends that it is reasonable to allow Congress to create an anti-kickback cause of action without requiring the plaintiff to show a specific harm.

Edwards elaborates on that approach.  In part because conflicts of interest may cause harm that is difficult to detect, courts have traditionally allowed cases to go forward with “no further inquiry” once a conflict is shown; an analogous rule, Edwards argues, is warranted here.  Similarly, Edwards notes that nominal damages are traditionally awarded in cases such as trespass without any showing of economic injury.

Both the federal government and Edwards argue that the class allegation has no bearing on the case except perhaps that class actions will motivate companies like First American to comply with RESPA.

The United States lists about a dozen statutes that are similar to RESPA in that they authorize damages without a showing of harm in a particular case.  The examples range from copyright law, which awards statutory damages against infringers without a showing of harm, to the Telephone Consumer Protection Act, which authorizes statutory damages for prerecorded calls to cell phones made without consent without a showing of harm.  None of the examples by itself suggests that the sky will fall if First American prevails, but collectively they make an impressive group.  Alternatively, perhaps the examples show collectively that the federal courts are hearing a lot of cases where no one is required to demonstrate concrete injury.

In the absence of a clear conflict, a grant of certiorari in a case seeking review of a Ninth Circuit decision usually means that reversal is certain.  It is possible here, however, that the Court could affirm while writing an opinion that is considerably narrower than the Ninth Circuit’s opinion, which can be read as holding broadly that standing would exist whenever Congress created a cause of action and authorized damages.  A narrower opinion would permit standing in such cases only if – as may be the case here – there is good reason to think that there is damage that is particularly difficult to demonstrate  and/or the defendant engaged in behavior, such as trespass, that ought to be discouraged even if any damage is likely not substantial.

Recommended Citation: Christopher Wright, Argument preview: Standing to challenge kickbacks that do not directly affect price, SCOTUSblog (Nov. 18, 2011, 2:28 PM),