PAYDAY LOAN BAR ASSOCIATION
ANNUAL CONFERENCE
Constitutional Issues Raised by State
Regulation Of Interstate Lending
Stephen G. Harvey
harveys@pepperlaw.com
www.pepperlaw.com
November 14, 2006
Three Separate But Closely
Related Constitutional Issues
• When can a lender can be subject to suit
in a foreign jurisdiction (personal
jurisdiction).
• When can the law of a foreign jurisdiction
be applied to a transaction with a lender
(choice of law)?
• When can a foreign jurisdiction regulate a
lender (adjudicative jurisdiction)?
Relevant Constitutional Provisions
• The Full Faith and Credit Clause
• The Due Process Clause of the 5th
Amendment
• The Commerce Clause
Constitutional Limitations on
Personal Jurisdiction
• Traditional test of minimum contacts with forum
state.
• In the Internet context, the leading case is Zippo
Mfg. Co. v. Zippo Dot Com, Inc. 952 F. Supp. 1119
(W.D. Pa. 1997).
Constitutional Limitations on
Choice of Law
“[F]or a State’s substantive law to be selected in
a constitutionally permissible manner, that State
must have a significant contact or aggregation of
contacts, creating state interests such that
choice of its law is neither arbitrary nor
fundamentally unfair.” Allstate Ins. Co. v. Hague,
49 U.S. 302, 312-13 (1981).
Constitutional Limitations on
Choice of Law
In the class action context, one State’s law
cannot be applied to the claims of persons in
other States without “a significant contact or
significant aggregation of contacts of contacts to
the claims asserted by each member of the
plaintiff class.” Phillips Petroleum Co. v. Shutts,
472 U.S. 797, 821 (1985).
Constitutional Limitations on
Adjudicative Jurisdiction
• In addition to the limitations imposed by the Full
Faith and Credit and Due Process Clauses, the
Commerce Clause imposes a significant
limitation on States’ effort to regulate out-of-state
conduct.
• Dormant Commerce Clause prohibits
protectionist state legislation that discriminates
against out-of-staters.
• Discriminatory state laws are subject to strict
scrutiny.
Constitutional Limitations on
Adjudicative Jurisdiction
For state laws that appear non-discriminatory on
their face but nonetheless impinge on interstate
commerce, courts apply a balancing test:
“Where the statute regulates evenhandedly to
effectuate a legitimate local public interest, and
its effects on interstate commerce are only
incidental, it will be upheld unless the burden
imposed on such commerce is clearly excessive
in relation to the putative local benefits.” Pike v.
Bruce Church, Inc., 397 U.S. 137, 142 (1970).
Constitutional Limitations on
Adjudicative Jurisdiction
• In addition to strict scrutiny and the Pike
balancing test, there are two other tests.
• Dormant Commerce Clause prohibits legislation
that regulates extraterritorially. See, e.g., Healy v.
Beer Institute, 491 U.S. 324 (1989).
• It also prohibits state regulations that “adversely
affect interstate commerce by subjecting
activities to inconsistent regulations.” CTS Corp.
v. Dynamics Corp. of America, 481 U.S. 69, 88
(1987).
Constitutional Limitations on
Adjudicative Jurisdiction
• Federal district court in American Libraries Ass’n
v. Pataki, 969 F. Supp. 160 (S.D.N.Y. 1997), applied
Dormant Commerce Clause to enjoin
enforcement of a New York statute that prohibited
the intentional use of the Internet “to initiate or
engage” in certain pornographic communications
deemed to be “harmful to minors.”
• Conventional wisdom is that the Dormant
Commerce Clause requires invalidation of state
Internet communication regulations.
Constitutional Limitations on
Adjudicative Jurisdiction
• Pioneer Military Lending, Inc. v. Dufauchard, 2006
WL 2053486 (E.D. Ca. July 21, 1996), applied the
Dormant Commerce Clause in the military lending
context and enjoined the Commissioner of the
California Department of Corporations from
requiring the plaintiff military lenders to obtain
licensure.
• Pioneer Military Lending, Inc. made loans through
third party agents in California from its
headquarters in Tacoma, WA, to U.S. military
personnel stationed in California who were not
state residents pursuant to their Leave and
Earning Statements.
Constitutional Limitations on
Adjudicative Jurisdiction
• The court applied the Pike balancing test and
considered the burden to the lender in the form of
excessive start-up costs versus California’s
interest in protecting non-residents from the
activities of a lender regulated by another state.
• “[D]efendant has provided no evidence to
support how plaintiff’s activities constitute unfair
lending practices or hurt California’s sound
economic climate. Nor does the evidence
suggest how Pioneer’s ‘ReadiLoan’ program
might circumvent California law or negatively
affect its residents.”
Constitutional Limitations on
Adjudicative Jurisdiction
• Pioneer Military Lending of Nevada, Inc. made
loans through the Internet from its headquarters
in Las Vegas, Nevada, to military borrowers
whose physical location is unknown at the time of
the loan.
• The court declined to apply the “extraterritorial
effects” or “inconsistent regulations” tests, and
permitted defendant to regulate transactions with
borrowers who indicated that their residence was
California on their Leave and Earning Statements.