A recent decision by a panel of the United States Court of Appeals for the Fourth Circuit interpreting the Telephone Consumer Protection Act (TCPA) has significant – and possibly costly – implications for loan servicers and debt collectors seeking to collect on loans owed to or guaranteed by the United States. On April 24, the Fourth Circuit issued its published decision in American Association of Political Consultants, Inc. v. Federal Communications Commission, holding that the TCPA’s exemption for automated phone calls to cell phones related to the collection of debts owed to or guaranteed by the United States violated the First Amendment because it caused the statute to unconstitutionally discriminate against other forms of speech, which did not enjoy the same exemption. Servicers and debt collectors relying on the TCPA’s government debt collection exemption for their calls to borrowers living in the states of Virginia, West Virginia, Maryland, North Carolina, and South Carolina now need to make sure that their practices comply with the statute.

If the panel’s decision stands, the order striking down the exemption will require any loan servicers or debt collectors for debts owed to or guaranteed by the United States to reevaluate their practices for contacting borrowers by telephone in order to avoid potential liability for significant statutory damages. Most notably, the decision affects collection of pre-2010 federally guaranteed student loans and post-2010 federal student loans under the William D. Ford Federal Direct Loan Program, as well as federally guaranteed mortgage loans.

The TCPA, as enacted in 1991, contained only two statutory exemptions for automated phone calls made to cell phones using an Automatic Telephone Dialing System (commonly called an “autodialer”): calls made for “emergency purposes” and calls made with “the prior express consent of the called party.” In 2015, Congress created a third statutory exemption for calls made “solely to collect a debt owed to or guaranteed by the United States.”

In American Association of Political Consultants, four entities that engaged in political activities and contacted individuals by telephone for the purposes of furthering political causes sued the Federal Communications Commission (FCC) and the attorney general, arguing that that the TCPA’s ban on the use of autodialers to make phone calls to cell phones without prior consent was an unlawful content-based restriction on speech, in light of the regulatory and statutory exemptions permitting such calls in certain circumstances (including the statutory exemption for the collection of debts owed to or guaranteed by the United States). The plaintiffs claimed that the ban on the use of autodialers was “underinclusive” and thus not narrowly tailored in light of the regulatory and statutory exemptions. Notably, the plaintiffs requested that the proper remedy was for the court to strike down the entire autodialer ban.

On cross motions for summary judgment, the district court ruled in favor of the government. The district court first accepted the plaintiffs’ position that the TCPA’s government debt exemption was a “content-based speech restriction,” which invoked the rigorous strict scrutiny standard (meaning that the government had to demonstrate that “the restriction furthers a compelling interest and is narrowly tailored to achieve that interest,” and that the government had to use the “least restrictive means” to achieve that interest). The district court divided its strict scrutiny analysis into two steps. First, the district court identified a compelling interest justifying the autodialer ban: the privacy rights of individuals who are protected by the statutory ban on the use of autodialers without prior consent. Second, the district court identified a governmental “compelling interest” in “collecting debts owed to it.” The district court concluded that the autodialer ban was narrowly tailored to achieve the compelling interest of protecting consumer privacy, and that the exemption for calls made for the purpose of collecting debts owed to or guaranteed by the United States was not impermissibly “underinclusive” in a way that constituted unconstitutional discrimination. The district court declined to address the regulatory exemptions to the autodialer ban, noting that it lacked jurisdiction to review the propriety of the FCC’s rules interpreting the TCPA, as the Administrative Procedures Act provided the exclusive procedure for review of those rules.

On appeal, the Fourth Circuit reversed. The Fourth Circuit agreed with the district court’s determination that the TCPA’s ban on the use of autodialers for calls made to cell phones for purposes other than the collection of debts owed to or guaranteed by the United States was content-based discrimination that triggered strict scrutiny. But the court rejected the district court’s conclusion that debt-collection exemption was narrowly tailored to serve a compelling interest. The Fourth Circuit specifically identified the volume of federal student loan debt (noting a report from the FCC that reported that there were over 41 million borrowers who owed over $1 trillion on federal student loans) as evidence that the government debt exemption was not “narrow.” The Fourth Circuit further concluded that the government debt exemption was different in both scope and effect from the other statutory exemptions allowing autodialer calls with prior consent and in the event of an emergency.

Having accepted the plaintiffs’ arguments that the TCPA autodialer ban was unconstitutional in light of the government debt exemption, the court then addressed the proper remedy. The Fourth Circuit first noted the Supreme Court’s “strong preference for a severance in these circumstances,” as opposed to an order striking down the entire provision. The court further noted the express severance provision in the original 1934 Communications Act, of which the TCPA became a part when it was enacted. In light of the “strong preference” for severability and the express severability provision, as well as the fact that the statute had operated for 24 years without an exemption for the collection of government debts, the court succinctly concluded that the proper remedy was striking only the government debt exemption and leaving the autodialer ban intact.

Although not wholly surprising, the outcome of the case could not have possibly been what the plaintiffs wanted. The plaintiffs may have been vindicated on their arguments that the government debt exemption caused the statute to discriminate based on the content of calls, but they are in the same position after the Fourth Circuit’s decision as they were before: subject to the autodialer ban. Thus, instead of the outcome they really wanted – an order striking down the autodialer ban in full, which would have been widely celebrated by the business community – the plaintiffs ended up with an order striking down a broad statutory exemption relied upon by numerous companies.

The Fourth Circuit issued its decision on April 24. Because a government agency is a party, the parties have until June 10 to seek rehearing or rehearing en banc.

As of now, the case does not appear to be a strong candidate for further review on a petition for a writ of certiorari to the Supreme Court. But the Ninth Circuit is currently considering the same issue in Gallion v. Charter Communications Inc., No. 18-55667 (as well as a few other cases that have been stayed pending the decision in Gallion). The Ninth Circuit heard oral arguments in Gallion on March 11; if it issues a decision creating a circuit split with American Association of Political Consultants, then either case becomes a much stronger candidate for review on a writ of certiorari.

The most significant question about the effect of the Fourth Circuit’s ruling was not addressed in the decision: whether the court’s holding would have a retroactive effect. In other words, if prior to the decision companies had been seeking to collect federally owned or guaranteed debts by using autodialers or prerecorded audio recordings can they now be held liable under the TCPA for that conduct (at least to the extent it falls within the statute of limitations)? Unfortunately, the opinion is silent on that question, and the guiding decisions from the Supreme Court regarding the retroactive effect of an order striking a statutory provision as unconstitutional are far from a model of clarity. But one possible articulation of the applicable rule was stated in Justice Thomas’ majority opinion in Harper v. Virginia Department of Taxation:

When this Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule.

Shortly after the Harper decision, the Fourth Circuit expressed some confusion as to whether the Harper Court had overruled the Supreme Court’s earlier decision in Chevron Oil Co. v. Huson, which laid out a more flexible balancing test for determining when a ruling would be given retroactive effect (see Fairfax Covenant Church v. Fairfax County School Board). Neither the Supreme Court nor the Fourth Circuit appears to have settled on a final explanation of the appropriate guiding principle. We anticipate that the TCPA plaintiffs bar will be ready to put that issue to the test very soon.