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Think Computer Corp. v. Venchiarutti

United States District Court, N.D. California

May 7, 2015

ROBERT VENCHIARUTTI, et al., Defendants.


HOWARD R. LLOYD, Magistrate Judge.

Plaintiff Think Computer Corp. ("Think") brings this action against two California state officials for federal constitutional violations arising out of California's Money Transmission Act ("MTA"), and application of the MTA to Plaintiff's proposed money transmission business. See Dkt. No. 23. Plaintiff seeks declaratory and injunctive relief. Id. Defendants have moved to dismiss Plaintiff's first amended complaint ("FAC"), Dkt. No. 24. Plaintiff filed an opposition, Dkt. No. 30, [1] and Defendants filed a reply, Dkt. No. 31. On April 17, 2012, the court held a hearing on this motion. Dkt. No. 40. Following amendments to the MTA, the court ordered supplemental briefing. Dkt. No. 59. Plaintiff and Defendants each filed a supplemental brief, see Dkt. Nos. 62, 63, and a response, see Dkt. Nos. 64, 65.


Plaintiff Think Computer Corporation is a privately-held Delaware Corporation that developed a money transmission system, "FaceCash, " as an alternative to traditional plastic payment cards. FAC ¶¶ 2, 17. Plaintiff brings this suit against Defendants Robert Venchiarutti, in his official capacity as the Deputy Commissioner of the California Department of Financial Institutions ("DFI") and William Haraf, in his official capacity as the Commissioner of the DFI.[2] Id. ¶¶ 18-19.

The FAC describes the FaceCash system as an in-person payment system which operates by using a barcode and a digital image of the consumer's face. Id. ¶ 2. To make a purchase, a consumer supplies his or her barcode to a merchant, either on a smartphone or piece of paper, and after scanning the barcode, the merchant's FaceCash-enabled cash register would display an image of the consumer's face for the merchant to confirm the consumer's identity. Id. FaceCash would then debit funds from the consumer's pre-paid account and transfer the funds to the merchant. Id.

The FAC alleges that Think began designing and investing in the FaceCash system in late 2008, before the adoption of a money transmission licensing statute in California, and officially launched FaceCash in May 2010. Id. ¶ 40. Around that time, Plaintiff contacted the DFI to ensure it was in compliance with applicable state laws, and was informed that, as of that time, no license was necessary for domestic money transmission. Id. ¶ 44. However, as Plaintiff continued to develop FaceCash over the next year, California enacted the Money Transmission Act, which implemented a licensing scheme for domestic money transmission in the state. The MTA went into effect on January 1, 2011. Id. ¶ 26.

As enacted, the MTA imposed the following minimum requirements on applicants for a money transmission license in California: (1) applicants were required to hold at least $500, 000 in "tangible net worth, " or shareholder equity, at all times; (2) a $250, 000 surety bond for companies engaging in money transmission, or a $500, 000 surety bond for companies providing stored value products; (3) a non-refundable $5, 000 application fee; (4) a criminal background check; (5) a business plan; (6) pro-forma financial statements for three years and audited past financial statements; (7) a formal application; and (8) a pre-application interview. Id. The FAC alleges that many other states have less onerous requirements. Id. ¶ 33. According to the FAC, the MTA requires all entities wishing to do business in California and with California residents to obtain a license. Id. ¶ 39. The MTA provided existing, unlicensed money transmitters with a 180-day grace period through July 1, 2011, after which time they would need to apply for a license with the DFI to continue to operate legally in California. Id. ¶ 26.

Following the enactment of the MTA, Plaintiff again contacted the DFI and was told a license was now required for domestic money transmission in California, and DFI scheduled a pre-filing interview for June 14, 2011. Id. ¶ 45. At around the time of Plaintiff's pre-filing interview, Plaintiff's average daily money transmission volume was "close to zero, " and Plaintiff only finished development of the merchant side of FaceCash at the end of June, 2011. Id. ¶ 42.

In advance of its pre-filing meeting with DFI, Plaintiff provided the DFI with its audited 2010 financial statements. Id. ¶ 48. The FAC alleges that the statements contained an inadvertent error which made it appear that FaceCash had $145, 000 less in tangible shareholder equity than it should have. Id. Plaintiff provided the DFI with corrected set of statements three months later, on September 12, 2011. Id.

The FAC alleges that at Plaintiff's pre-filing interview, Defendant Venchiarutti expressed hostility toward Plaintiff and Plaintiff's business. Id. ¶ 49. The FAC alleges that at the meeting, Defendant Venchiarutti: (1) informed Plaintiff that he would likely need to raise twenty million dollars of venture capital given that in his experience money transmitters required at least three years of business to achieve profitability; (2) expressed his opinion that Plaintiff had indicated an intent to violate the MTA, and allegedly informed Plaintiff that he would "call the Sheriff;" (3) expressed the opinion that Plaintiff was already insolvent and unable to control its rate of spending; (4) highlighted the MTA's power to audit and the MTA's requirement that the reasonable cost of DFI audit examinations be borne by audited companies; (5) stated that the DFI had an unwritten policy of not approving applications filed by money transmission entities with tangible net worth less than one million dollars; (6) when asked if the DFI had received any complaints about FaceCash, told Plaintiff that he thought he had received a complaint about FaceCash from Plaintiff's competitors; and (7) informed Plaintiff at the conclusion of the meeting that he was still welcome to apply for a license in a way that Plaintiff interpreted as indicating that his application would be denied. Id.

The FAC alleges that Plaintiff attempted to establish the "true minimum net worth required by the DFI" but was rebuffed by Defendant Venchiarutti. Id. ¶ 51. On June 30, 2011, Plaintiff elected to shut down FaceCash in California and nationwide. Id. ¶ 52. The FAC alleges that a primary reason for the shutdown was Plaintiff's perception that FaceCash's application would be denied by the DFI. Id. Although Plaintiff never submitted an application for a license in California (and was consequently was never rejected), the FAC alleges that Plaintiff feared nationwide rejection because money license applications in other states generally require applicants to indicate if it has ever had a license application rejected. Id.

Following the June 14, 2011 meeting and the June 30, 2011 shutdown of FaceCash, Plaintiff raised approximately $500, 000 in additional funding, placing Plaintiff's tangible shareholder equity well above the $500, 000 statutory minimum at the time. Id. ¶ 50.

On October 13, 2011, in response to Plaintiff's "repeated requests, " Defendant Venchiarutti issued an order on behalf of the DFI exempting Plaintiff from having to comply with the provisions of the MTA outside of California. Id. ¶ 56. According to the FAC, the order was "conditional on Think not providing money transmission services to persons, consumers, merchants and anyone located in California and Plaintiff not advertising, soliciting or holding itself out as providing money transmission services to persons, consumers, merchants and anyone located in California." Id. The FAC alleges that this order indicates that the DFI intends to enforce the MTA beyond the state of California on transactions "originating and existing in interstate commerce." Id. Plaintiff alleges that further attempts at communication with the DFI were unsuccessful and Plaintiff concluded that the October order was final. Id. ¶ 57. Plaintiff alleges that he was left with no further recourse except to apply for a license without knowing the funding requirements in advance. Id. ¶ 57.

Plaintiff alleges that as a result of the shutdown of FaceCash, Plaintiff lost actual and potential revenue streams from established FaceCash merchants, and the ability to sign up California consumers for the service. Id. ¶ 62. The FAC also alleges that "at least once prospective merchant cancelled his agreement to use Think software for purposes aside from FaceCash." Id. Furthermore, Plaintiff alleges that FaseCash's shutdown "badly damaged Think's and [FaceCash CEO] Mr. Greenspan's reputation, and many individuals who learned of the events blamed Think and its management for the interruption in service."[3] Id. Finally, FAC alleges that "[d]irectly due to the regulatory uncertainty surrounding the MTA and other MTLs, Plaintiff was subsequently rejected as an investment opportunity by several prominent venture capital firms, eliminating virtually the only source of funding large enough to realistically allow Plaintiff to comply with the MTA." Id. ¶ 64.

According to Plaintiff, following the FaceCash shutdown, its competitors were able to conduct money transmission illegally and gain an advantage over Plaintiff. Id. ¶ 66. According to the FAC, the DFI has turned a blind eye to the illegal money transmission activities of other entities, and has enforced the MTA arbitrarily. Id. ¶¶ 69-70. Plaintiff filed a separate lawsuit against its purported competitors on May 6, 2013, alleging that dozens of technology companies, venture capital firms, and other entities were violating the MTA. See Think Computer Corp. v. Dwolla, Inc., et al., Case No. 13-02054, 2014 WL 1266213 (N.D. Cal. Mar. 24, 2014). Judge Davila dismissed the action ...

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