State AG Monitor

State AGs in the News

Posted in Antitrust, Charities, Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, State AGs in the News


AT&T Inches Closer to Approval for DirecTV Acquisition

  • The U.S. Department of Justice (DOJ) stated that it will not challenge AT&T’s proposed acquisition of DirecTV, and the Federal Communication Commission (FCC) has indicated, subject to specific conditions, that it is likely to approve the deal that would join the country’s largest satellite television provider with the second-largest wireless communication company.
  • FCC Chairman Wheeler has issued a proposed order, currently awaiting approval from the other commissioners, in which he outlined the conditions upon which he would approve the merger.
  • The order would require that AT&T increase investment in high-speed fiber connections, avoid policies that favor affiliated video services and content, and submit all completed interconnection agreements and network performance reports to the FCC. The chairman also proposed the appointment of an independent officer to help ensure compliance with the proposed conditions.

Oklahoma Gives AG Enhanced Powers Over Professional Boards

  • Oklahoma Governor Mary Fallin issued an executive order providing the State AG’s office with the power to oversee state regulatory boards. The boards, many of which regulate professional standards and licensing, are now required to submit “all proposed licensure or prohibition actions” to the AG for legal review.
  • Earlier this month, AG Scott Pruitt wrote a letter to the governor, warning that many Oklahoma professional boards and commissions were at risk of antitrust liability in light of the recent decision in North Carolina State Board of Dental Examiners v F.T.C. decided earlier this year. In that case, the Supreme Court held that a state licensing board consisting of active participants in the regulated occupation cannot maintain immunity from antitrust liability if it is not actively supervised by the state.
  • AG Pruitt noted in his letter that many of Oklahoma’s professional boards are at risk of antitrust liability, as they are comprised of members from the profession they regulate, yet do not have sufficient state oversight. Although the AG had previously provided legal advice to various state boards, the governor’s executive order gives him the power to remove those board members who do not follow the AG’s directives.

Another Senator Seeks Antitrust Investigation Into Airlines

  • This week U.S. Senator, Charles Schumer called for greater federal scrutiny into the airlines’ sales practices, urging the DOJ and Department of Transportation to investigate whether certain airlines are violating antitrust laws by “freezing out” third-party travel websites. Senator Schumer’s request comes on the heels of Senator Richard Blumenthal’s letter to the DOJ alleging potential collusion among major air carriers.
  • According to Senator Schumer, a growing number of airlines are withholding information from third-party websites, such as TripAdvisor, Expedia, and Orbitz, or charging extra fees for tickets purchased through them. Senator Schumer argues that these changes in policy deny consumers the opportunity to compare different flights and airlines side by side, resulting in reduced competition and higher prices.
  • Airlines for America, an industry group, responded in favor of the airlines, pointing out that “[a]irlines like any other company that sells consumer goods, should be able to sell their products where they believe they are best suited for their customers.”


New York AG Puts Greater Focus on Charity

  • New York AG Eric Schneiderman filed a lawsuit to close the National Children’s Leukemia Foundation (NCLF) and to hold its founder Zvi Shor accountable for failing to conduct most of the programs advertised on its website, for failing to provide more than a tiny fraction of the money raised toward the charitable causes the donors intended to support, and for ignoring state filing obligations.
  • The NCLF had indicated that it used donations to create a bone marrow registry, an umbilical cord blood banking program, and its own cancer research center. It also told its donors that it had filed a patent application for a new lifesaving treatment for leukemia.
  • The lawsuit alleges that during a five-year period, NCLF raised $9.7 million; $8.9 million of which was raised by professional fundraisers hired by NCLF, who in turn were paid approximately $7.5 million. The AG also alleges that the organization spent less than one percent of the money raised on direct cash assistance to leukemia patients and transferred another five percent to a shell organization in Israel run by Shor’s sister, allegedly for research purposes.

Consumer Financial Protection Bureau

CFPB Adds $70 Million in Penalties Onto $700 Million Restitution for Alleged Deceptive Credit Add-ons

  • The Consumer Financial Protection Bureau (CFPB) announced that it had reached an agreement with Citibank, N.A., Department Stores National Bank, and Citicorp Credit Services, Inc., (together “Citi”) to resolve allegations that Citi violated the Consumer Financial Protection Act and the Telemarketing Sales Rule through aggressive marketing, billing, and collection practices associated with credit card add-on products and services.
  • The CFPB alleged that Citi engaged in myriad unfair or deceptive practices associated with its credit card accounts, including the following claims:
    • Deceptive marketing, where Citi misrepresented or failed to inform consumers about the true cost of the services offered, and also misrepresented the benefits and scope of the add-on products and services.
    • Unfair billing practices, where Citi either charged consumers for debt protection and credit monitoring services they did not receive, or charged consumers without express authorization.
    • Deceptive collection practices, where Citi misled consumers to believe that additional, optional, fees were unavoidable processing fees.
  • The consent order requires Citi to provide $700 million in relief to approximately 8.8 million customer accounts. Citi must also pay $35 million to the CFPB, and a separate $35 million to the Comptroller of the Currency as civil penalties.
  • The consent order also requires Citi to cease billing for credit monitoring products that do not provide the claimed benefits and precludes Citi from marketing or selling credit card add-on products and services by telephone or at point-of-sale without prior approval of its compliance plan by the CFPB. In addition, for a period of five years, Citi must keep detailed records on every enrollment in consumer credit add-on products and services.

Consumer Protection

FTC Seeks Enforcement Against Alleged Repeat Offender

  • The Federal Trade Commission (FTC) filed an enforcement action under seal in federal court against Lifelock, Inc., alleging that the company violated the terms of its 2010 settlement with the FTC and 35 State AGs.
  • The 2010 settlement required Lifelock and its principals, among other things, to stop making any further deceptive claims, including falsely advertising that it protected consumer data with the same high-level safeguards as financial institutions; and to establish a comprehensive information security program to protect the sensitive personal data, including credit card, social security, and bank account numbers it collects from its users. The FTC now alleges that Lifelock has failed to satisfy either.
  • The FTC is asking the court to order LifeLock to provide full redress to all consumers affected by the company’s ongoing violations.

Forty-Five AGs Call for Call-Blocking

  • Indiana AG Greg Zoeller led a group of 45 AGs asking telecom service providers to offer technology to their consumers that would allow customers to request automatic call-blocking of robo-calls and other mass call efforts.
  • The AGs’ letter, which was sent through the collaborative forum of the National Association of Attorneys General, is addressed to the CEOs of five major telecom service providers. It highlights recent events, including AGs efforts in requesting the Federal Communications Commission (FCC) to provide clarification, and the FCC’s guidance that expressly permits telecom companies to offer their customers the ability to block robo- and autodialed calls, as well as other unwanted spam calls and texts.
  • Previously, representatives of the telecom industry had testified in front of a Senate sub-committee that “legal barriers prevent carriers from implementing advanced call-blocking technology to reduce the number of unwanted telemarketing calls.”

Data Privacy

Seventh Circuit Clarifies “Impending Certainty” Defense for Data-Breached Companies

  • The Seventh Circuit has ruled that victims of the 2013 Neiman Marcus data breach adequately alleged standing to sue the retailer, even if they have not yet suffered any fraudulent charges, identity theft, or other damages from the information taken by hackers.
  • The Seventh Circuit decision reversed the trial court (N.D. Ill.), which had ruled that the plaintiff’s theory of damages, based on the risk of future harm, was too remote to grant Article III standing. The trial court dismissed the lawsuit based in large part on a 2013 Supreme Court decision, Clapper v Amnesty International, which held that plaintiffs must show that a future injury is “certainly impending” in order to bring claims.
  • The Seventh Circuit distinguished the Clapper holding significantly in the context of a consumer data breach, and indicated that a plaintiff can demonstrate standing, even if there is only a “substantial risk” of future harm, and the plaintiff is compelled to “reasonably incur costs to mitigate or avoid that harm.”
  • The court also weakened one other potential challenge to consumers claiming standing in data breach lawsuits: it indicated that even though other major retailers suffered similar breaches that may have exposed plaintiff’s private information, for pleading causation, the plaintiffs’ injuries were still “fairly traceable” to Neiman based on the retailer’s “admissions and actions” following the breach.

Facebook Loses Appeal, Lacks Standing to Challenge Search Warrants on Behalf of Users

  • A New York state appeals court upheld the trial court’s determination that Facebook, Inc. lacked standing to challenge, on behalf of its users, the state prosecutor’s search warrants demanding access to user account information.
  • The warrants were issued in support of the state’s investigation into disability fraud, and sought information on 381 Facebook users alleged to have led active lives despite collecting state disability payments. Facebook argued that the warrants were overly broad as they requested information regarding users’ ages, religions, cities of birth, educational affiliations, family members, partners, friends, favorite music, political “liked” things, photographs, private chats, and messages. Although the court ruled against Facebook on standing, it indicated that it was troubled by the scope of the warrants.
  • Facebook also argued that because it was required to participate in the search and provide the information stored on its servers to the state, the warrants were the legal equivalent of a civil subpoena, which an Internet service provider can challenge under the U.S. Stored Communications Act. The five judge panel, however, ruled that a social media company has “no constitutional or statutory right to challenge an allegedly defective warrant before it is executed.” The court indicated that under state and federal law, only defendants could challenge search warrants, and only after they have been executed in a pre-trail hearing.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, Employment, State AGs in the News


FTC Investigation Looks to Take Another Bite Out of Apple

  • According to sources, the Federal Trade Commission (FTC) is looking into whether Apple Inc. (“Apple”), is violating antitrust laws with its streaming music service, Apple Music. Unlike prior reports of investigations into whether Apple was engaging in anticompetitive actions by negotiating with record labels to cancel “freemium” music streaming services, this new inquiry addresses subscription service pricing through Apple’s iOS platform.
  • When a consumer purchases a subscription to a rival streaming service through the Apple App Store, Apple receives a 30 percent royalty. Thus if a rival charges $10 per month, it only nets $7 and pays the other $3 to Apple. By contrast, when Apple charges $10 per month for Apple Music, it keeps the entire $10. Given that the streaming companies must all pay similar licensing fees for the music they stream, Apple’s competitors claim they must either increase prices (and be uncompetitive), or have their margins compressed (and be unprofitable). A similar issue may also be brewing with the much-rumored Apple streaming TV service.
  • Yet some factors argue against liability: Apple’s iOS is estimated to only comprise about 17 percent of the market for mobile operating systems. In addition, the competing streaming services can sell their subscription services at a slight discount payable through their website where they keep all of the fee, instead of through the App Store. (But this is hampered by restrictions Apple places on all apps sold in the App Store, precluding third-party marketing and linking to the company’s website.)

DOJ Gets Requests to Embark on Expedition Into Amazon

  • Groups of authors, booksellers, and literary agents (together, “publishing industry groups”) are asking the U.S. Department of Justice (DOJ) to investigate for violations of antitrust laws, arguing that “Amazon’s dominant position makes it a monopoly as a seller of books and a monopsony as a buyer of books.”
  • The publishing industry groups point to Amazon’s 40% market share in new books and 65% market share in e-books. Their letters state that Amazon abuses its market power in a variety of ways, including:
    • selling books below cost as “loss leaders” for other higher margin items sold on Amazon;
    • delaying delivery and removing books from preorder status (or delisting them altogether);
    • directing buyers to other titles, including its own books; and
    • requiring self-published authors to price their books within a specific range or be subjected to a significant cut in royalties.
  • The European Commission, the antitrust enforcement body of the European Union, has already opened a formal investigation into Amazon over its e-book distribution agreements. The Commission is investigating whether Amazon is abusing a dominant position by contractually requiring publishers to inform Amazon about more favorable terms offered to competitors or offer Amazon similar terms.

Consumer Financial Protection Bureau

CFPB and DOJ Resolve Claims Against Auto Lender for Discriminatory Practices

  • The Consumer Financial Protection Bureau (CFPB) and the U.S. Department of Justice (DOJ) resolved a joint investigation into whether American Honda Finance Corporation, as a captive auto finance company and ninth largest auto lender in the market, violated the Equal Credit Opportunity Act (ECOA) through lending practices that allegedly resulted in higher interest rates for certain groups of minority car buyers.
  • At the core of the investigation was a practice through which Honda created a minimum interest rate for a consumer application, based on objective risk-based criteria, but then afforded dealers discretion to increase or “mark up” the minimum rate using dealer specific factors, and then receive extra compensation from Honda based on the markup. The CFPB and DOJ’s findings indicated that under the dealer discretion model certain minority groups paid from .25 to .36 percent higher interest rates.
  • The consent order requires Honda to deposit $24 million into escrow for consumer redress, and to create a plan detailing the process of how it will provide redress funds to overcharged consumers. Honda must also modify its lending practices and guidelines to limit dealer discretion to increase the minimum rate, and must form a compliance committee to ensure that the consent order is properly implemented.

Consumer Protection

New York AG Continues to Scratch Away at Deceptive Auto Sales Practices

  • New York AG Eric Schneiderman reached a settlement with Atlantic Automotive Group resolving an investigation into 22 auto dealerships’ alleged violations of the AG’s Auto Advertising Guidelines and a previous Assurance of Discontinuance.
  • The AG’s investigation was in response to many different alleged violations, including “jamming” style practices; where the dealer has customers sign blank documents, later filling in terms other than what was agreed upon, and charging consumers for unrequested extended warranties or vehicle maintenance contracts.
  • The investigation also addressed the use of direct mail advertisements, purporting to offer consumers the opportunity to play a game—for example, a lottery-style scratch off card—where consumers could allegedly win a cash prize, a flat-screen television, an Apple iPad, and the like. The tickets, however, did not tell the consumer if they won, but instead required them to come to the dealership to claim their prize, where the dealer would inform them that they had not won, and proceed to try to sell them a car.
  • As a result of this action Atlantic will pay $310,000 in restitution and penalties. Atlantic did not admit any liability or wrongdoing, and indicated that the majority of the conduct came from “rogue employees,” who it has since “g[o]t rid of.” Atlantic cooperated with the AG’s investigation and is implementing the necessary fixes, including hiring an advertising compliance officer.

New Jersey AG Settles Lawsuit Against “As Seen on TV” Company

  • New Jersey Acting AG John Hoffman reached a settlement with Telebrands, Corp., resolving litigation that alleged that the maker of “As Seen on TV” products violated the New Jersey Consumer Fraud Act, state advertising regulations, and a 2001 consent order, through the use of aggressive sales practices.
  • AG Hoffman claimed that consumers ordering a product from Telebrands would be subjected to a lengthy and automated ordering process, during which they would be aggressively upsold additional products without providing a way for the caller to decline. Customers were allegedly not allowed to confirm the total cost of their order before authorizing charges, often resulting in unwanted products and hidden shipping and handling charges. The complaint also alleged that the company made it difficult to return products or contact a customer service representative.
  • According to the consent judgment, Telebrands will pay $550,000 to cover attorneys’ fees and investigative costs, but does not admit fault or liability. Telebrands agreed to implement internal auditing processes, and to hire a special liaison to monitor the company’s compliance with the settlement terms and applicable laws. In addition the company will provide information to consumers as to the total cost of their order prior to authorizing payment, the option to speak with a live customer service representative if there is a problem with the order, and a clear method to decline solicitations for additional merchandise.

Data Privacy

FCC Continues to Expand Role in Enforcing Data Security

  • The Federal Communications Commission (FCC) reached an agreement with TerraCom, Inc., and YourTel America, Inc., resolving claims that the companies failed to protect the personal information of more than 300,000 consumers in violation of a carrier’s duty under the Communications Act (the “Act”) and counter to the Act’s prohibition on unjust and unreasonable practices.
  • The FCC alleged that the companies failed to protect customer personal information—including names, addresses, Social Security numbers, and driver’s licenses—by allowing a vendor to store the unencrypted information on unprotected servers. The FCC generally takes the position that a company must provide a reasonable level of protection for personal information, and a company violates that requirement where, as was the case here, the information can be accessed through the internet by anyone with a search engine.
  • The consent decree requires the companies to pay $3.5 million as a civil penalty, and to notify all consumers whose information was vulnerable, providing complimentary credit monitoring and appropriate mitigation measures. In addition, the companies are required to develop internal control measures, including a data breach response plan, a designated senior manager who is a certified privacy professional, and compliance reports to be filed with the FCC.
  • The settlement also resolves the FCC’s claims that YourTel overbilled the federal government in regards to the company’s failure to remove ineligible consumers from the reported subscriber base under a federal program that provides subsidized wired and wireless communication for low-income users.


DOL Issues Guidance for Classifying Workers Under FLSA

  • The U.S. Department of Labor (DOL) Wage and Hour Division issued an Administrator’s Interpretation to guide businesses on how to classify workers, as either employees or independent contractors, under the Fair Labor Standards Act (FLSA).
  • The Interpretation indicates that the FLSA was intended to operate under a “very broad definition of employment,” and stresses that the question of whether a worker is an employee under the FLSA is a legal question that should be determined by the application of the “economic realities” test—not by a company-determined classification. Although this test requires a balancing of multiple factors, the Interpretation warns against a mechanical application, and instead looks to whether the worker is economically dependent on the business (employee), or as a matter of economic fact, in business for himself (independent).
  • The Interpretation comes at a moment when state lawmakers and regulators are questioning some of the practices and legal assumptions of app-based “sharing economy” platforms through which consumers can contract directly with workers.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, False Claims Act, State AGs in the News


State AGs and FTC Approve Dollar Store Merger, Subject to Divestitures

  • Dollar Tree, Inc., and Family Dollar Stores, Inc., have reached an agreement with federal regulators and seventeen State AGs, allowing the discount retail chains to move forward with the $9.2 billion merger proposed last summer.
  • The AGs and the Federal Trade Commission (FTC) separately challenged the merger as anticompetitive in local markets, asserting that the relevant geographic market was as narrow as half a mile in some cases, but included both discount general merchandise retail stores and discounted general merchandise in retail stores (thus including larger retailers).
  • The AGs’ consent order adopts the actions required by the FTC order, including Dollar Tree’s sale of more than 330 stores nationwide to Sycamore Partners, a private equity firm, within 150 days after consummating the merger. The AGs’ order also requires notification with respect to certain transactions or store closures for five years and requires the merging entities to pay $865,181 in attorneys’ fees to the AGs.

DOJ Investigation Into Alleged Airline Coordination Triggers Class Actions

  • The Department of Justice (DOJ) has opened an investigation into whether American Airlines Group Inc., Southwest Airlines Co., United Continental Holdings, Inc., and Delta Airlines, Inc.—together more than 80 percent of the domestic market—violated U.S. antitrust laws by coordinating to limit both the number of seats available for purchase, and the number of flights and routes offered. The DOJ allegedly is asking the airlines for, among other things, documents that reference the “need for, or the desirability of, capacity reductions or growth limitations by the company or any other airline.”
  • Senator Richard Blumenthal, previously the AG for Connecticut, urged the DOJ to investigate what he called “anticompetitive, anti-consumer conduct and misuse of market power in the airline industry.” Senator Blumenthal—referencing a 2013 complaint by the DOJ and a group of State AGs to block the merger between American and U.S. Airways—indicated that the airlines appeared to be using certain terminology (“capacity discipline”) in public statements, and otherwise coordinating a strategy to limit expansion. The airlines and some industry analysts do not necessarily agree, with some pointing to seating capacity growth of five percent in 2014.
  • There is a growing queue of follow-on consumer class action lawsuits, based in large part on the claims from the investigation. These classes have the potential to be quite broad: in one complaint filed in Illinois, the plaintiffs are seeking class status for “all consumers who flew domestically from October 1, 2012 to present,” and alleging that the airlines, “in tandem, raised fares, imposed new and higher fees on travelers and reduced their capacity and service.” The case is Bidgoli v. American Airlines Group Inc., 15-cv-5903, (N.D. Ill). In total, there are at least 15 class actions that have been filed against the airlines, making a future Multidistrict Litigation likely.

Consumer Financial Protection Bureau

CFPB and 47 States Settle With Chase for $216 Million, Mandate Reforms to Debt Collection Practices

  • The Consumer Financial Protection Bureau (CFPB) and AGs from 47 states reached an agreement to resolve claims that Chase Bank USA N.A. and Chase Bankcard Services Inc. (together, “Chase”) violated the Consumer Financial Protection Act (CFPA) by engaging in unlawful debt collection and sale practices.
  • The CFPB and the AGs alleged that Chase violated Section 1036 of the CFPA for unfair, deceptive, or abusive acts or practices by:
    • Submitting consumers to collections for accounts that were not theirs, in amounts that were incorrect or uncollectable;
    • Making inaccurate credit reporting and entering unlawful judgments that may affect consumers’ ability to obtain credit, employment, and housing;
    • Filing lawsuits and obtaining judgments against consumers using false and deceptive affidavits and other documents that were prepared without following required procedures (“robo-signing”); and
    • Selling accounts to debt buyers that were already settled, discharged in bankruptcy, not owed by the consumer, or incorrect in some other fashion, with knowledge that debt buyers would file collection lawsuits based on the invalid information.
  • The consent order requires Chase to pay consumer redress of not less than $50 million, a civil penalty of $30 million to the CFPB, a separate $30 million civil penalty to the Office of the Comptroller of the Currency, and $106 million in payments to the states. It also requires Chase, within 60 days of the effective date, to withdraw, dismiss, or terminate all pre-judgment collections litigation, and all post-judgment enforcement actions pending at any time.
  • In addition, as a result of this joint action, Chase must reform its debt collection and sale practices, including the creation of safeguards to ensure that debt information is accurate, that consumers receive notice and information on the new debt holder when their debt is sold to a third party, and that debt buyers are restricted from reselling Chase’s consumer debts to other purchasers.

Consumer Protection

FTC Continues to Work With Florida AG to Address Deceptive Practices

  • The Federal Trade Commission (FTC) and Florida AG Pam Bondi filed a joint lawsuit against E.M. Systems & Services, LLC, and a network of related companies operating under fictitious names (together, “Defendants”), for allegedly running a fraudulent and deceptive credit card payment reduction scam.
  • The complaint alleges that Defendants called consumers, identifying themselves as “card services,” or “card member services,” or by one of the Defendants’ businesses and claimed to have a business relationship with the consumer’s lender. Defendants offered debt relief through interest rate reductions, but after securing an upfront fee ranging from $500 to $1500, failed to fulfill their claims.
  • AG Bondi and the FTC secured a preliminary injunction and asset freeze, and are seeking a permanent injunction and restitution for consumers. In addition, as this action is the second joint federal-state action in as many weeks in Florida, it serves as a reminder of the increasingly collaborative efforts of federal and state enforcement for consumer protection.

FTC Notches More Settlements Against Payday Lenders

  • The Federal Trade Commission (FTC) settled claims against Frampton Rowland III and Timothy Coppinger, and the network of companies they owned or controlled (together, “Defendants”), alleging violations of the FTC Act, the Truth in Lending Act, and the Electronic Fund Transfer Act.
  • According to the complaint, Defendants operated a series of payday lending operations, through which they would purchase sensitive consumer financial information from lead generators, and then make unauthorized loans, followed by unauthorized withdrawals of “finance charges” from consumers’ bank accounts every two weeks. If consumers contested that the loan was not authorized, Defendants would produce false or misleading documentation; if consumers closed their bank account, Defendants would sell the “loans” to debt buyers who then harassed consumers for payment.
  • The consent orders require that Defendants pay approximately $44 million ($32.1 from Coppinger defendants and $22.9 from Rowland defendants) as equitable money relief, although the orders are suspended upon Defendants’ permanent transfer of bank account assets to a court-appointed Receiver. The Orders also extinguish any related consumer debt obligations, and enjoin Defendants from reporting borrowers to credit reporting bureaus.

Data Privacy

Forty-seven States Ask Congress to Preserve State Authority in Data Security and Privacy

  • Forty-seven State AGs, coordinated under the auspices of the National Association of Attorneys General (NAAG), urged Congress to preserve state authority to enforce state laws that address data security and data breach notification.
  • In a letter addressed to Congressional leadership, the AGs ask Congress not to preempt state law on data security and privacy through passage of federal legislation. The AGs argue that states are quicker to adopt legislation, more willing to try innovative approaches to addressing evolving threats, and better able to respond to identity theft and consumer fraud as it affects their constituents. Some AGs also wrote separate letters on the issue to their individual state senators.
  • The AGs indicate that many state laws provide greater protection to residents than would the current federal bill under consideration. According to some estimates, as many as 38 states would have reduced protections under the federal bill. The AGs also highlight the significant role they play in enforcing data privacy, including a growing number of states where a data-breached company must report to and coordinate with the AG. Moreover, for companies that do business in multiple states, the current structure creates an incentive to comply with the strictest requirements. Most parties involved in the debate recognize the benefit of a uniform national standard, but as the AGs indicate, the best approach might be one where a federal law created a minimum standard with joint state/federal enforcement, and states remained empowered to create greater protections.

False Claims Act

DOJ Settles With Company Claiming Benefits for “Disadvantaged” Owners

  • The U.S. Department of Justice (DOJ) reached an agreement with LB&B Associates Inc. and its principals resolving allegations that the government support services company violated the False Claims Act in order to obtain set aside contracts through a government program designed to support small, disadvantaged businesses.
  • The 8(a) Program, offered by the U.S. Small Business Administration (SBA) provides preferential procurement options for companies that are primarily owned and controlled by a person that is “socially and economically disadvantaged.” The government claimed that in seeking certification under the 8(a) Program, LB&B falsely represented that Lily Brandon—who satisfied the 8(a) requirements—controlled the operations of LB&B, when in fact she did not.
  • The settlement, which requires LB&B to pay the government $7.8 million, arises out of the government’s intervention in a lawsuit filed by former employees of LB&B. Under the whistleblower provision of the False Claims Act, the former employees will receive $1.5 million of the settlement.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, False Claims Act, Securities, State AGs in the News, States v. Federal Government

AG Insights

Are You Getting Too Much State AG Enforcement in Your Dietary Supplement Business?

  • In her latest blog post, Dickstein Shapiro Counsel Doreen Manchester provides background and insight into the different roles of State AGs and federal agencies in regulating dietary supplements.


Second Circuit Upholds Ruling That Apple Violated Antitrust Laws When Setting E-Book Prices

  • In a two to one decision, the Second Circuit Court of Appeals upheld a 2013 trial court decision that Apple Inc. violated the Sherman Act by conspiring with e-book publishers to sustain higher prices. The case was originally filed in the Southern District of New York by the U.S. Department of Justice along with 33 State AGs.
  • On appeal, the three judges debated whether Apple’s effort to coordinate a new pricing model among major e-book publishers was anticompetitive “marketplace vigilantism,” or instead a rational business approach to compete in a market that was already highly concentrated, with, Inc., supplying over 90 percent of e-books to consumers. The dissenting judge indicated that he thought “Apple took steps to compete with a monopolist and open the market to more entrants, generating only minor competitive restraints in the process.”
  • The majority found that there was “some surface appeal” to Apple’s argument that in light of Amazon’s virtually uncontested dominance, a more aggressive strategy was procompetitive in the e-book market. However, as Judge Lohier wrote in his concurring opinion (finding that Apple’s agreement was a per se violation of the Sherman Act), “more corporate bullying is not an appropriate antidote to corporate bullying.”
  • Barring further appeal, Apple will be required to pay $450 million in restitution and penalties, as it negotiated in 2014 with the AGs and lawyers for the consumer class action.

Consumer Financial Protection Bureau

CFPB Consumer Complaint Database, Now With Narratives!

  • The Consumer Financial Protection Bureau (CFPB) announced that it now offers public access to a searchable set of 7,700 consumer complaints with accompanying narratives addressing problems and concerns with various financial products and services.
  • The CFPB has provided access since 2012 to data from over 627,000 individual complaints, but until now consumers did not have access to the consumer-drafted narratives associated with the complaints. The CFPB believes that providing access to these narratives will help other consumers make decisions regarding financial products, and will indirectly improve the quality of the services offered.
  • The new feature allows consumers to search narratives based on date received, company name, product description, issue, state, and zip code. It also allows a search based on company response, however, such response is limited to a few standard formats, including “company chooses not to provide a public response.”

Consumer Protection

FTC and New Jersey AG Settle With App Developer Over Allegedly Deceptive Virtual Currency Mining Function

  • The Federal Trade Commission (FTC) and New Jersey Acting AG John Hoffman settled with smartphone app developer Equiliv Investments, LLC, and principal Ryan Ramminger (together, “Equiliv”), for alleged violations of the FTC Act and the New Jersey Consumer Fraud Act.
  • In the Complaint, the FTC alleged that Equiliv marketed a smartphone application that purported to give consumers various prizes in exchange for the completion of certain tasks, such as playing games with advertisements built in, or taking online surveys. However, the real purpose of the app was allegedly to install malware and use the computing power of each smart phone to “mine” virtual currencies for Equiliv.
  • Virtual currencies provide the opportunity for firms to provide computing resources to solve complex mathematical problems in exchange for payment in the form of future denominations of the currency—a process referred to as “mining.” By allegedly infecting consumers’ smartphones with malware downloaded through the app, Equiliv was able to use the collective computing power of thousands of phones to give itself an advantage in mining the currency. The use of that power caused negative effects to the devices’ battery and used consumers’ monthly data allotments.
  • The Stipulated Order requires Equiliv to destroy all consumer information it collected through the marketing and distribution of the app and enjoins it from creating or distributing malware. It also calls for a $50,000 monetary judgment against the defendants, payable to the state of New Jersey, with $44,800 suspended upon compliance with the conditions of the Order.

False Claims Act

DOJ Settles With For-Profit Colleges Over Allegedly Altered Test Scores and Fake Diplomas

  • The U.S. Department of Justice (DOJ) resolved five separate lawsuits against Education Affiliates (EA), an entity that operates for-profit post-secondary education training programs on 50 different campuses under various trade names, for multiple alleged violations of the False Claims Act.
  • The complaints alleged various types of false claims made by EA in pursuit of federal student aid on behalf of its students. Claims included using altered admissions test results, creating false high school diplomas, referring prospective students to “diploma mills” from invalid online sources, and falsifying students’ federal aid applications.
  • EA agreed to pay $13 million to resolve all claims against it. The underlying lawsuits were brought by whistleblowers who, under the terms of the settlement, will receive payments totaling approximately $1.8 million.


SEC Charges Advisory Firm With Fraudulent Valuation Practices

  • The Securities and Exchange Commission (SEC) brought an administrative action against investment firm AlphaBridge Capital Management, LLC, and its owners, Thomas Kutzen and Micheal Carino, for inflating the valuation of unlisted, thinly-traded assets in order to receive higher management and performance fees in violation of the 1940 Investment Advisors Act.
  • The SEC alleged that AlphaBridge coordinated with certain broker-dealer representatives to create the appearance that the asset valuations had been determined independently and were supported by standard industry auditing processes, when instead the valuations were created internally and secretly disseminated by Carino. The respondents have agreed to resolve the action through the submission of Offers of Settlement.
  • The Order requires AlphaBridge and its owners to pay a combined $5 million to resolve the claims, of which $4,025,000 is designated as disgorgement of profits and $975,000 as civil penalties. In addition, Carino is barred from working in the securities industry, or associating with advisors, brokers, and dealers, for at least three years. AlphaBridge and Kutzen are censured, and the firm will engage an independent monitor to oversee winding down the related funds.

States v. Federal Government

States Seek to Overturn “Waters of the U.S.” Rule

  • A group of State AGs, led by Georgia AG Sam Olens, filed a lawsuit to challenge the “Waters of the United States” rule (“Rule”), contending that the Rule violates the Administrative Procedure Act and the U.S. Constitution, and exceeds the authority created by the Clean Water Act.
  • The Rule, which was published in final form in the Federal Register on June 29, extends the definition of the waters over which the Environmental Protection Agency (EPA) and Army Corps of Engineers (“Army Corps”) have regulatory authority under the Clean Water Act. The Rule addresses the scope of EPA and Army Corps authority over “tributaries” and “adjacent waters,” and outlines the standard to be used to decide case-specific issues where there is a “significant nexus” with jurisdictional waters.
  • The AGs’ Complaint states that the Rule too drastically expands federal authority under the Clean Water Act, and thus usurps the states’ primary responsibility for the management, protection, and care of intrastate waters. The AGs argue that giving the EPA and Army Corps authority over minor creeks, streams, roadside ditches, ponds, wetlands, or any other area where water may flow once every 100 years, would overly-burden small transactions and local business activity with costly, and time-consuming, federal bureaucracy. The AGs request the U.S. District Court for the District of Georgia to declare the Rule illegal and enjoin the EPA and Army Corps from enforcing it.

Are You Getting Too Much State AG Enforcement in Your Dietary Supplement Business?

Posted in Consumer Protection, Investigations

In February, New York AG Eric Schneiderman announced the results of an investigation into store-branded dietary supplements sold at major national retailers. The investigation alleged, after the use of a novel testing technique, that some of the supplements did not contain the active ingredient claimed on the label, and in a few cases, contained potential allergens or other contaminants. For the supplement retailers involved, the AG’s investigation presented two elements of surprise: first for what it allegedly discovered, and second for the implicit assertion of state authority in an area typically thought to be under federal regulation.

Dietary supplement labels sit at the regulatory intersection of two federal agencies: the Food and Drug Administration (FDA) regulates product claims made on the labels, and the Federal Trade Commission (FTC) addresses business practices that are unfair or deceptive, as well as prevents advertising that is misleading. Yet the jurisdictional line between the FDA and the FTC can be rather thin. For example, in POM Wonderful v The Coca Cola Company, the Supreme Court made it clear that even when a product otherwise satisfies FDA labeling requirements, it can still violate other aspects of federal law (i.e., the Lanham Act) if the label is found to be deceptive.

AGs have worked closely with the FTC on deceptive advertising and other issues involving food labels. For example, in 2009 the FTC worked with State AGs to prevent consumer confusion through a voluntary food labeling practice that used the term “Smart Choices” to imply that the labeled food was healthy. In 2010 the FTC worked together with State AGs to look into yogurt products claiming to improve digestive health, and to challenge claims that breakfast cereals increased children’s immunity.

The AG’s investigation into supplements begs the question of whether State AGs can also work effectively with the FDA?

Supplements and the FDA

The FDA has primary jurisdiction over dietary supplement labels. Under the principles of federalism (and 21 U.S.C. Sec. 343-1), states are restricted from taking actions that directly conflict with FDA label requirements. However, states can pass, and vigorously enforce, their own, similar labeling requirements. States can also attack mislabeled products under state laws against deceptive practices.

The Dietary Supplement Heath and Education of Act of 1994 (DSHEA) sets the parameters for defining a dietary supplement. Qualifying “ingredients” include vitamins, minerals, herbs, amino acids, concentrates and extracts, and any “substance for use by man to supplement the diet.” 21 U.S.C. 321 (ff). That final ingredient may seem overly broad, but the FDA has narrowed it by limiting it to products that have previously been part of the human diet. Supplements can come in various ingestible forms (pills, liquid, powder, etc.), but cannot be represented, or intended for use, as a conventional food or drug (i.e., the diagnosis, cure, mitigation, treatment, or prevention of a disease).

The FDA requires only a few actions prior to putting a supplement on the market. First, if the supplement presents a “new dietary ingredient,” the FDA will require the supplement manufacturer to adequately substantiate that the new ingredient is reasonably expected to be safe when used under the conditions recommended by the supplement’s label. An ingredient is “new” if it was not marketed in the U.S. prior to October 1994 (passage of DSHEA) as a dietary supplement, and was not previously present in the food supply in its current form.

Second, the FDA requires manufacturers and retailers to conform to the FDA’s current Good Manufacturing Practices (cGMP Rules) for dietary supplements. The cGMP Rules provide specific instructions for producers regarding the preparation, packaging, and storage of dietary supplements. The cGMP Rules require supplement manufacturers to establish cleaning, testing, quality control, and handling procedures, and to include record-keeping and other transparency provisions. The FDA has published a guidebook to help businesses better comply with the cGMP Rules.

Generally, the FDA presumes that established dietary supplements are safe, and as such, does not require safety and efficacy testing prior to placing an established supplement on the market. If, however, the agency comes to understand that “adulterated” or “misbranded” supplements are being sold on the market, it can institute an enforcement action together with the U.S. Department of Justice, seeking to enjoin the implicated company (see, e.g., enforcement action filed against James G. Cole, Inc.). For these purposes, the FDA defines a supplement as adulterated if it “presents a significant or unreasonable risk of illness or injury” under the recommended or ordinary conditions of use. It considers a supplement misbranded if “its labeling is false or misleading in any particular, including…ingredients.”

Although the FDA can take action against adulterated and misbranded supplements, under current law and a 2006 court of appeals decision (Nutraceutical Corporation v. von Eschenbach), the burden of detecting and proving misbranding is on the agency. And when the FDA indicates that a supplement is adulterated or misbranded, the manufacturer is typically given the opportunity to respond and present proposed adjustments to the FDA prior to a lawsuit by a U.S. Attorney.

The State AG Investigation

The New York AG’s investigation, now joined by 13 other State AGs, was initially framed as a question of whether the supplement companies were deceiving consumers through their labels (State AGs have broad authority to prevent deceptive practices). Now, though, the message has morphed into one of increased scrutiny of the FDA’s system for regulating supplement labels, including a perceived lack of enforcement and reliance on self-testing protocols. For example, in April the group of investigating AGs asked Congress to direct the FDA to develop enhanced, uniform, industry-wide quality assurance and verification regimes to guarantee the source, identity, purity, and potency of herbal and dietary supplements.

In May, the investigating AGs wrote a letter to the Acting Commissioner of the FDA, outlining flaws in and requesting reforms to the current way the FDA regulates dietary supplements. The AGs specifically took issue with cGMPs, arguing that the process:

  • provides too much leeway to manufacturers to set their own label specifications and then create their own tests for confirming label claims;
  • does not apply to ingredient suppliers, many of which are overseas;
  • does not require manufacturers to engage in any confirmatory testing to ensure that supplements are free of common allergens; and
  • does not create universal definitions for key terms—like “natural” or “extract”—allowing manufacturers to use such terms ambiguously.

But how far will AGs be able to push in this area? This investigation is not the first time that State AGs have veered into FDA turf. In the late 1980s, a group of AGs challenged nutritional claims put forward by food product monoliths, like Kraft, Campbell’s, and Nabisco. Those collective AG investigations into consumer product claims, although not always successful, helped nudge Congress to pass the Nutrition Labeling and Education Act of 1990.

In the current political morass, it is unlikely that the State AGs will succeed in pushing Congress or the FDA to enhance significantly dietary supplement testing protocols or to more closely scrutinize other claims made on supplement labels, even though individual members of Congress are showing increased interest in the area. But, it is also unlikely that the AGs will go away. At least one retailer has agreed to adopt testing protocols that go well beyond FDA requirements in order to appease the investigating AG’s demands—adopting a more strenuous type of testing methodology to confirm the authenticity of the stated active ingredients, and employing additional consumer education practices. For the other retailers involved, the investigation continues.

Looking Ahead

Rising consumer demand will continue to challenge the FDA to regulate dietary supplements, and the FTC will certainly continue to take an interest in these products. Since the DSHEA was passed in 1994, the dietary supplements industry has grown substantially. Yet, because these agencies have limited enforcement resources, there is a growing justification for state involvement. Indeed, many states are already finding new ways to respond to consumer requests for greater transparency in food labeling, and State AGs are taking greater numbers of enforcement measures.

For companies that sell or manufacture dietary supplements, it is probably necessary, now more than ever, to track state law issues and AG actions. Regulatory compliance on a 50-state level might not be easy for businesses to swallow, but avoiding State AG investigations is becoming a crucial supplement to a healthy business practice.




State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Employment, False Claims Act, For-Profit Colleges, State AGs in the News, States v. Federal Government


FTC and State AGs Succeed in Preliminarily Blocking Food Distribution Merger

  • The Federal Trade Commission (FTC) secured a temporary injunction to block the proposed merger between Sysco Corporation and U.S. Foods Inc. The injunction prevents the companies from integrating operations and preserves the status quo while the FTC conducts its internal merger review and prepares its case for administrative trial. The Commissioners’ vote to seek the preliminary injunction was 3-2, with Commissioners Ohlhausen and Wright voting against.
  • Several State AGs had joined the FTC in bringing the action in federal court for the District of Columbia, arguing that the proposed merger of the two largest companies in the industry would substantially reduce competition among broadline food distributors, causing higher prices and diminished quality food distribution for restaurants, health care facilities, hotels, schools, and other institutions. The FTC’s legal challenge will continue in a trial scheduled to begin on July 21, 2015.
  • In granting the motion, Judge Mehta found that the FTC and State AGs had demonstrated “a reasonable probability that the proposed merger will substantially impair competition in the national customer and local broadline markets.” Sysco CEO Bill DeLaney stated that his company “will take a few days to closely review the Court’s ruling and assess our legal and contractual obligations, including the merits of terminating the merger agreement.”

Consumer Financial Protection Bureau

CFPB Releases Supervision Report, Notes Continued Violations of Mortgage Servicing Rule

  • The Consumer Financial Protection Bureau (CFPB) issued its latest edition of Supervisory Highlights, which reports on its supervisory efforts during the first four months of 2015. The CFPB has supervision authority over banks and credit unions with more than $10 billion in assets. It also supervises mortgage companies, private student lenders, and payday lenders, as well as other nonbank entities defined through rulemaking as “larger participants.” The report provides a summary of the CFPB’s examiner findings in consumer reporting, debt collection, student loan servicing, mortgage origination, mortgage servicing, and fair lending practices.
  • The CFPB noted persistent violations of the CFPB Mortgage Servicing Rules, including:
    • accuracy problems at one or more of the credit reporting agencies, stemming from issues with information collection or quality control;
    • communication “runaround” and “dual-tracking” problems regarding homeowners’ loss mitigation applications;
    • disregarded or ignored complaints about debt collection; and
    • denied or discouraged mortgage applications based on applicant’s potential use of public assistance income to repay the loan.

Consumer Protection

New York AG Settles With App-Based Livery Services Provider

  • New York AG Eric Schneiderman, and the NY Department of Financial Services (DFS) reached a settlement with Lyft, Inc., a company that provides for-hire livery services through an app format, resolving allegations that the company failed to comply with New York state and municipal laws.
  • The settlement arises out of a lawsuit filed by AG Schneiderman in 2014 that sought to halt Lyft’s operations in Rochester and Buffalo, and to prevent it from establishing operations in New York City. The AG alleged that Lyft violated the law by failing to require its drivers to hold commercial driving licenses, carry adequate insurance, and comply with municipal for-hire licensing rules. The parties had worked out an interim agreement that allowed Lyft to continue to operate with commercial drivers, and under special terms, during the pendency of the lawsuit.
  • In addition to paying $300,000 in penalties, the consent order requires Lyft to obtain auto insurance issued by New York-authorized insurers for its drivers. The insurance must provide coverage for the drivers from the moment they turn on the Lyft app to receive requests (not the moment they pick up a fare), through the end of any rides they provide. Additionally, the consent order requires Lyft to comply with all other state and municipal laws applicable to vehicles-for-hire, and to inform the AG, the DFS, and counsel for any relevant municipal authority, at least three weeks prior to launching services in that area.

FCC Greenlights Call-Blocking Technology and Other Measures to Disarm Robocallers

  • The Federal Communications Commission (FCC) issued a series of declaratory rulings, providing for measures to protect consumers against unwanted robocalls and spam text messages.
  • Primary among the array of measures is the determination that it is legal for wireless and landline service providers to offer robocall-blocking technologies to their customers. Led by Illinois AG Lisa Madigan, 38 State AGs had specifically requested that the FCC provide a formal opinion on this issue.
  • The FCC created exceptions to allow automated calls and texts under certain situations without customer consent, such as to alert consumers of possible fraud on their bank accounts or to remind them to refill medication.

West Virginia Reaches Settlement With Virginia Lender

  • West Virginia AG Patrick Morrisey reached an agreement to resolve allegations of unlawful debt collection practices against Virginia-based Dominion Management Services, Inc., doing business as CashPoint.
  • In spite of the illegal status of title loans in West Virginia, CashPoint allegedly offered such loans to West Virginia residents who crossed into Virginia. When borrowers missed a payment, CashPoint allegedly harassed them by telephone, contacted third parties—including employers, neighbors, and relatives—to inform them of the debt, and employed unlicensed people to seize vehicles in West Virginia.
  • In the Assurance of Discontinuance, CashPoint agreed to forgive $2.36 million in loan debt and release liens on vehicle titles for 435 West Virginians. It also agreed to pay $85,000 to the State for use in the AG’s consumer protection programs.


Washington Attorney General Releases Guidelines for Minimum Wage Surcharges

  • Washington AG Bob Ferguson issued guidelines for businesses that want to increase customer prices by adding “surcharges” in order to cover the additional costs associated with compliance with recently increased minimum wage requirements in Seattle and other local jurisdictions.
  • The guidelines indicate that any surcharge must be conspicuously disclosed, and in a format that is clear and easy to understand. They specifically prohibit a company from mischaracterizing the surcharge as a tax or government mandate, and preclude a company from using the funds from the surcharge for a purpose other than as described.

Colorado Supreme Court Clears Up Haze Over Off-Duty Marijuana Use

  • The Colorado Supreme Court ruled that a business can terminate employees for failure to abide by a zero-tolerance policy involving marijuana use, even when off-duty, and even when used for medical purposes.
  • Colorado AG Cynthia Coffman participated in the case through argument and an amicus brief, supporting the position of employer Dish Network LLC in terminating the plaintiff for testing positive for marijuana use. The plaintiff had sued for employment discrimination under the Colorado Lawful Activities Statute, a law that precludes termination based on an employee’s lawful activities conducted outside of the workplace. The plaintiff argued that marijuana use was lawful under Colorado law.
  • The Colorado Supreme Court held that even though marijuana use was legal under Colorado law, it was still illegal under federal law. Thus, Dish Network did not violate the Colorado Lawful Activities statute when it enforced its policy. In reaching this decision, the Court indicated that the statute did not define the term “lawful,” which then required the court to apply the plain and ordinary meaning of the term, which it found to include both state and federal law.

False Claims Act

Joint Federal-State Effort Uncovers Alleged False Claims and Medical Fraud

  • The U.S. Department of Justice (DOJ) announced the results from a nationwide “Medicare Fraud Takedown” in which federal investigators worked with State AGs to uncover and bring criminal and civil charges against 243 individuals, including doctors, patient recruiters, home health care providers, and pharmacy owners, among others. The DOJ indicated that the actions account for approximately $712 million in false billings, the largest medical fraud action in history.
  • The cases involved false claims of various forms under state and federal law. For example, in Florida, AG Pam Bondi worked with federal investigators to uncover a scheme where a mental health center allegedly paid kickbacks to patient recruiters and assisted living facility owners throughout the Southern District of Florida to refer patients for which it billed Medicaid and Medicare for equipment that wasn’t provided, for care that wasn’t needed, and for services that weren’t rendered.
  • The Takedown also highlighted new tools and resources made available through increased funding for health care fraud prevention and enforcement provided under the Affordable Care Act.

For-Profit Colleges

Federal Judge Upholds “Gainful Employment” Rule for For-Profit Colleges

  • A second federal judge, this time for the District of Columbia, has upheld, the Department of Education’s (DOE) Gainful Employment regulations (“the Rule”), requiring for-profit colleges who wish to access federal aid money to demonstrate that their graduates will be employed in a profession where they can earn sufficient wages to repay their student loans. The court held that the Rule fell within the DOE’s sphere of authority under the longstanding policy of Chevron deference—mirroring the decision last month in a lawsuit filed in the Southern District of New York that also challenged the Rule.
  • The plaintiff, the Association of Private Sector Colleges and Universities, had argued that the Rule is arbitrary and capricious, and creates disincentives for private colleges to provide education to low-income, minority, and other underserved student populations.
  • The Rule, which takes effect July 1, conditions eligibility for federal aid on a number of factors, including whether the for-profit colleges are equipping their students for “gainful employment” as used in the Higher Education Act. The plaintiff insisted that the term “gainful” only required graduates to have secured “any job that pays,” but the Rule defined the term to allow a program to receive aid as long as its typical graduates do not have annual loan repayments that exceed 20 percent of their discretionary income, or 8 percent of their total earnings.

States v. Federal Government

Congress Contemplates Bill That Would Preempt State GE Labeling Laws

  • Vermont Assistant AG Todd Daloz testified before the U.S. House of Representatives’ Subcommittee on Health (part of the Committee on Energy and Commerce) regarding the effects that a proposed bill would have on state efforts to create labeling requirements for genetically modified or engineered (GE) food products. In short, it would preempt conflicting state laws without replacing them with an effective national regime.
  • After two years of consultation with the private sector, passage of implementing regulations, and multiple legal challenges, Vermont’s Genetically Engineered (GE) Labeling law is scheduled to go into effect in 2016. The Vermont law and accompanying regulations require food manufacturers to disclose via the food label when a product contains at least a threshold amount of “organisms in which the genetic material has been changed” through techniques that “overcome natural physiological, reproductive, or recombination barriers.” Other states are considering enacting similar laws.
  • The Vermont AG contends that the proposed federal bill does not advance a uniform national standard for mandatory GE food labeling, but rather “halts any state efforts to label such foods and delays implementation of a voluntary system until administrative regulations pass through the gauntlet of rulemaking.”

State AGs in the News

Posted in Consumer Protection, Employment, False Claims Act, State AGs in the News, States v. Federal Government

AG Insights

Doing Business in California? The AG Wants You to Know Your Supply Chain

  • In a recent blog post, Dickstein Shapiro Counsel Doreen Manchester and Aaron Lancaster provide background on the California Transparency in Supply Chains Act.

Consumer Protection

New Jersey AG Settles Lawsuit Against Purveyor of “Home Warranties”

  • New Jersey Acting Attorney General John Hoffman settled the lawsuit against CHW Group, Inc., d/b/a Choice Home Warranty alleging that CHW violated the New Jersey Consumer Fraud Act and advertising regulations by selling residential service contracts misrepresented to be home warranties.
  • The Complaint alleged that CHW induced consumers to buy limited coverage service contracts by claiming they provided comprehensive coverage for various home systems and appliances, when in fact they only provided limited coverage in the form of buyout payments instead of providing repair or replacement. In addition, the AG claims that CHW made it arduous to the point of impossibility for consumers to realize the benefits of the contracts they received. For example, CHW allegedly denied claims when consumers could not demonstrate that they had performed regular maintenance on the covered items.
  • Under the terms of the Consent Judgment, CHW will pay approximately $780,000, inclusive of consumer restitution. CHW is also required to revise its business practices and retain a compliance monitor for at least one year. In addition, former CHW principals Victor Mandalawi, Victor Hakim, and David Seruya are required to execute Confessions of Judgment, a procedure that allows the AG to seek payment from them in the event CHW fails to make the settlement payment.

New York AG Reaches Settlement With Auto Dealers Allegedly “Jamming” Consumers With After-Sale Service Fees

  • New York Attorney General Eric Schneiderman reached an agreement with three jointly-owned auto dealerships doing business under the names Paragon Honda, Paragon Acura, and White Plains Honda (together, “Paragon”) to resolve allegations that the dealerships used deceptive and high pressure sales tactics to add hidden costs and fees for non-negotiated services to the purchase or lease price of autos.
  • The AG’s investigation of Paragon alleged that it used fraudulent and deceptive methods to “jam” credit repair and identity theft prevention contracts from third party Credit Forget, Inc., (CFI) into auto sales and leases—either by failing to disclose or hiding additional charges in the sales documents, or by misrepresenting that the services would not cost the consumer additional money. It also alleged that Paragon violated the law that prohibits charging upfront fees for credit repair services.
  • The settlement agreement requires Paragon to pay $6 million for consumer restitution and to provide each affected customer with a $500 “settlement card” that can be applied toward the purchase or lease of any new or used vehicle, or toward certain services or accessories. The agreement also prohibits Paragon from marketing or selling credit repair and identity theft services in connection with the sale or lease of a vehicle.
  • The AG reached a separate settlement with CFI and its principals, requiring CFI to instruct all relevant dealerships to stop selling CFI’s services, and to remove all related promotional materials. It also enjoins CFI and its principals from engaging in the “credit services business” in violation of the law, and requires CFI to dissolve.
  • This investigation was part of a larger initiative to stop auto dealerships from “jamming” consumers with fees for additional after-sale services. In addition to this action against Paragon, AG Schneiderman settled with a separate dealership under investigation, and served notice of his intent to sue 11 additional dealerships.

State AGs Push for Stronger Regulation of E-Cigarettes

  • Maine Attorney General Janet Mills and Indiana Attorney General Greg Zoeller, sitting as chair and vice-chair of the NAAG Tobacco Committee, are calling on the Food and Drug Administration (FDA) to act on a 2014 proposal to add e-cigarettes to the Tobacco Control Act, and thus enable the FDA to regulate e-cigarettes in a manner similar to other tobacco products.
  • In the letter to the Director of the FDA Center for Tobacco Products, the AGs specifically request that the FDA subject e-cigarettes to the same advertising and marketing restrictions as traditional cigarettes, include e-cigarettes in the ban on “characterizing flavors,” mandate stronger health warnings that indicate that nicotine from e-cigarettes is harmful and addictive, and require face-to-face sales of tobacco products to prevent Internet sales to minors.
  • Meanwhile, State AGs continue to press state legislatures for stronger protections regarding e-cigarettes. For example, the Rhode Island Senate passed AG Peter Kilmartin’s legislation that would require child resistant packaging and would prohibit use of e-cigarettes on school property; Montana enacted AG Tim Fox’s law to prevent sales to minors; and Massachusetts is considering AG Maura Healey’s proposed regulations to limit sales and marketing to minors.


California Labor Commissioner Rules that Uber Drivers are Employees, Not Independent Contractors

  • The California Labor Commission recently ruled that Barbara Berwick, a driver who performed services through Uber Technologies, Inc., should be considered an employee, not an independent contractor.
  • The Commission indicated that in California, where the services provided are of a personal nature, there is a presumption in favor of employment and the party seeking to avoid liability has the burden to demonstrate that the retained worker is an independent contractor. The Commission focused on the amount of control Uber retains over the provision of services on its platform and found that Berwick was properly classified as an employee. The Commission awarded Berwick $4,152 as reimbursable expenses associated with the driving services she provided, including wages for miles driven on behalf of Uber in between passengers and toll charges.
  • Uber has appealed the Commissioner’s ruling in California Superior Court in San Francisco. Uber issued a statement that the ruling “is non-binding and applies to a single driver.” The Case is Uber Technologies Inc. v. Berwick, No. 15-546378.

False Claims Act

DOJ Settles With Skilled Nursing Facility for Alleged Violations of the Anti-Kickback Statute

  • The U.S. Department of Justice (DOJ) reached a settlement with Hebrew Homes Health Network Inc. resolving allegations that the Florida-based skilled nursing center violated the U.S. False Claims Act by paying doctors to refer Medicare patients to its nursing center.
  • The U.S. alleged that from 2006 to 2013, Hebrew Homes, under the direction of former president William Zubkoff, hired physicians as “medical directors,” pursuant to detailed contracts that paid each several thousand dollars monthly. In reality, the government argued, those were “ghost positions” and the physicians were not hired to perform their contracted duties, but rather to refer patients to the Hebrew Homes facilities.
  • The investigation was initiated based on allegations made in a lawsuit filed by Stephen Beaujon, a former CFO of Hebrew Homes, under whistleblower provisions of the False Claims Act. It was conducted by the U.S. Department of Health and Human Services’ Office of Inspector General (HHS-OIG) working together with the Federal Bureau of Investigation’s Miami Field Office. Beaujon will receive $4.25 million as his share of the settlement.
  • Hebrew Homes agreed to pay $17 million to resolve the case—the largest FCA settlement involving a skilled nursing service provider. As part of the settlement, Mr. Zubkoff agreed to resign as Hebrew Homes’ Executive Director and will no longer be an employee of the company. Hebrew Homes entered into a five-year corporate integrity agreement with HHS-OIG, and agreed to change its policies on the use of medical directors.

States v. Federal Government

Court Sets Hearing for States to Argue Against Federal Fracking Regulations

  • The U.S. District Court for the District of Wyoming will hear oral arguments on June 23 from three states seeking a preliminary injunction to prevent the Bureau of Land Management (BLM) from putting its new Hydraulic Fracturing Rule into effect on June 24, 2015.
  • The Rule would apply to fracking activities on all public land and land belonging to American Indian tribes. According to the BLM, the Rule seeks to mitigate risks to groundwater, air, and wildlife, and protect public health by updating requirements for well-bore integrity and wastewater storage and disposal, and by requiring disclosure to the BLM of the chemicals and fluids used in the fracturing operation.
  • Colorado, North Dakota, and Wyoming are seeking the injunction as part of a claim they filed in April contesting the BLM’s authority to impose regulations on hydraulic fracturing under federal law. The states argue that the Hydraulic Fracturing Rule exceeds the BLM’s statutory jurisdiction, conflicts with the Safe Drinking Water Act, and interferes with state hydraulic fracturing regulations.

Doing Business in California? The AG Wants You to Know Your Supply Chain

Posted in Consumer Protection

If State AGs can agree on one thing, it is that human trafficking and forced labor are reprehensible. Through the National Association of Attorneys General, AGs have formed a unified effort to investigate and promote best practices to directly combat human trafficking and forced labor. Moreover, individual AGs have created task forces, expanded services to victims, and filed briefs in key litigation, all aimed at diminishing the market incentives that support trafficking within their states. But trafficking has proven to be a difficult scourge to slay.

California, often a legal innovator, is looking to employ an alternative method to combat trafficking—through mandatory public disclosure. The California Transparency in Supply Chains Act (CTSCA) went into effect in 2012. Mindful of the fact that trafficking often occurs outside the state’s jurisdiction, CTSCA offers a novel and potentially effective way to address the problem. Although there have been only a few enforcement efforts thus far, CTSCA and similar state efforts might be en vogue for 2015 and beyond. As the U.S. seeks to establish easier trade through international agreements like the Trans Pacific Partnership, states will want to ensure that the products sold within their borders are still made under conditions that do not provide incentives to those who use trafficked and forced labor.

The Act

CTSCA applies to retailers or manufacturers that are doing business in California and have annual worldwide gross receipts that exceed $100 million.

The first step is to figure out if your business is a “retailer” or “manufacturer.” Here, CTSCA looks to a company’s self-classification from state tax filings. In fact, the California Tax Code requires the state Franchise Tax Board to send a list of entities it believes to be “retailers” and “manufacturers” under the Act to the California AG annually.

Next, determine if your company is “doing business” in California. CTSCA will apply if the business satisfies one of the following conditions: is organized or domiciled in California; has sales in California that exceed $500,000 or that constitute at least 25 percent of total sales; owns property in California that exceeds $500,000 in value or 25 percent of its total property; or pays compensation in California that exceeds $50,000 or 25 percent of total compensation.

Finally, you will need to determine if your business meets that gross receipts threshold. CTSCA defines “gross receipts” as “the gross amounts realized … on the sale or exchange of property, the performance of services, or the use of property or capital … in a transaction that produces business income…” Notably, a business cannot reduce this number by subtracting the cost basis of goods or property sold. The final determination is, however, subject to exceptions listed in Section 25120 of the California Tax Code, which include proceeds from stock sales, damages from litigation, and repayment of loan principal, for example.

Disclosure is the Goal

When it applies, CTSCA does not prohibit transactions with foreign suppliers, even if there is a risk that they are connected to human trafficking or forced labor (although, depending on the knowledge level and the business relationship, other state and federal laws may apply). Instead it seeks to address the problem by providing information to consumers.

CTSCA requires covered entities to post a series of notices on their website informing the public as to how the company addresses human trafficking or forced labor throughout its supply chain. Specifically, a covered entity must disclose whether it engages in the following practices:

  • evaluating supply chains for risks of human trafficking and slavery;
  • auditing suppliers to determine compliance with company standards for anti-trafficking;
  • requiring direct suppliers to certify that their inputs comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business;
  • maintaining internal accountability protocols for employees or contractors; and
  • providing training to employees with responsibility for supply chain management.

CTSCA does not require a specific format for these disclosures. Instead it only requires that the covered entity adequately address each of the five requirements, and provide a link to such disclosures in a prominent location on the company’s homepage.

California AG Kamala Harris recently published a Guidebook to help explain how businesses can comply with CTSCA, and the California Department of Justice is sending notices to companies, providing 30 days to demonstrate compliance.

The Guidebook offers advice on how to draft these disclosure statements and indicates the proper scope for various topics. For example, the Guidebook states that “a company must do more than make conclusory statements” that it is in compliance with CTSCA, it must provide information about how it complies. For each of the five areas, the Guidebook provides examples of recommended disclosures, as well as disclosures that likely would be considered inadequate.

At the moment, CTSCA is enforced solely by the AG, and remedies are limited to injunctive relief. If, however, covered entities make false or misleading statements when providing such disclosures, a host of additional laws may come into play, with more severe penalties.

*     *     *     *     *

CTSCA is a bold first step from a state government to address a difficult problem. Given the inclusive nature of the definition of “doing business” in California (e.g., 25 percent of total sales), the Act will likely have a broad application. In addition, as consumers become more aware of CTSCA’s requirements, they will likely place greater weight in the accuracy of disclosures. Businesses that best integrate supply chain disclosures may even benefit through connecting with consumers’ social consciousness. Moreover, where California goes, other states usually follow. The reporting requirements may be painful in the short term, but in light of AG efforts and public interest, now is probably a good time to get to know your supply chain.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, False Claims Act, Intellectual Property, State AGs in the News


Attorneys General Look Into Apple’s Negotiations With Record Companies for Streaming Music Services

  • New York AG Eric Schneiderman and Connecticut AG George Jepsen are investigating Apple Inc. for potential antitrust violations associated with its negotiations with record labels to make way for Apple’s new music streaming service.
  • The investigation centers on whether Apple used its market power as the largest seller of downloaded music to pressure or conspire with music recording companies to withdraw their support for free music streaming services offered by companies like Spotify Ltd. in favor of the subscription streaming service Apple plans to provide.
  • In addition to State AGs, other regulators, including the European Commission and the Federal Trade Commission, have shown interest in determining the extent of the underlying negotiations, and the effects of Apple entering this market. In 2013, a federal judge ruled that Apple violated the antitrust laws when it colluded with publishers to raise the price of e-books. That case is pending appeal in the Second Circuit.

Consumer Financial Protection Bureau

CFPB Decides First Appeal of Administrative Decision

  • The Consumer Financial Protection Bureau (CFPB) issued its first decision on appeal of a CFPB administrative enforcement proceeding since the CFPB was created in 2010. In contrast to appellate review proceedings at the Federal Trade Commission or Securities and Exchange Commission—which are presided over by a group of commissioners—the CFPB’s appeal process is presided over by a single person, the director, Richard Cordray.
  • The question on appeal was whether PHH Corporation violated the Real Estate Settlement Procedures Act (RESPA) when it referred mortgage borrowers to mortgage insurers who agreed to reinsure the mortgages with PHH’s wholly owned reinsurance company, Atrium Reinsurance Corporation. Director Cordray generally upheld the Administrative Law Judge’s (ALJ) decision, finding that PHH engaged in a prohibited fee-splitting arrangement because it predominantly referred borrowers from the mortgages it originated, to insurers that had reinsurance agreements with Atrium. Director Cordray also extended liability by ruling that a violation occurred each time Atrium accepted a reinsurance premium during the period in question (the ALJ’s decision had found violations only for loans that closed during the period in question).
  • Director Cordray’s final order requires PHH and related entities to disgorge $109 million in reinsurance premiums received during the relevant period. It also bans PHH from future violations of RESPA, and, for a period of 15 years, from referring consumers to a provider of real estate settlement services in conjunction with a reciprocal payment or referral of service. According to the CFPB appeals procedure, the respondents can seek review in U.S. Court of Appeals within 30 days of the service of the final order.

CFPB Issues Final Rule to Regulate Nonbank Auto Finance Industry

  • The CFPB published the Final Rule that authorizes it to supervise the largest participants in the nonbank auto finance market. Accordingly, the CFPB also updated the Examination Manual to provide guidance on how it will monitor compliance by nonbank auto finance companies.
  • The Rule will apply to any nonbank auto finance company that makes, acquires, or refinances 10,000 or more auto loans or leases in a year. By CFPB estimates, the Rule will implicate approximately 34 nonbank auto finance companies and their affiliates, which originate around 90 percent of nonbank auto loans and leases, and provide financing to approximately 6.8 million consumers annually.
  • The Rule focuses on four main areas of compliance for nonbank auto lenders: fair and transparent marketing practices, accurate reporting to the credit bureaus, fair treatment of consumers when collecting debts, and equal opportunity in offering of loans and lease terms.

Consumer Protection

New York Attorney General Asks Court to Shut Down Allegedly Deceptive Online Study Program

  • New York AG Eric Schneiderman filed a lawsuit against the College Network, Inc.; American Credit Exchange, Inc.; and Southeast Financial Credit Union for allegedly using deceptive practices to sell an online study program purporting to lead to an associate degree in nursing.
  • In the complaint, AG Schneiderman alleges that College Network misled consumers into believing it was affiliated with Excelsior College, that its study guides were tailored to accredited nursing programs offered by Excelsior, and that consumers could receive degrees in nursing through its study program. The complaint further alleges, among other things, that College Network targeted certain consumers with high pressure home sales calls, induced consumers to finance the purchase of the study guides at 12 percent interest or more, and misled consumers about the entire cost of the program.
  • The lawsuit seeks a temporary restraining order to prevent the College Network (based in Indiana) from selling any of its products in New York, and to prevent Southeast and American Credit Exchange from attempting to collect on the debts stemming from the College Network’s allegedly fraudulent conduct. The AG is also seeking rescission of consumers’ contracts, restitution for consumers already harmed, and penalties and costs.
  • In addition, the AG is seeking to hold Gary Eyler, the College Network’s CEO, personally liable based on his involvement in the allegedly misleading actions even after repeat warnings by Excelsior College’s General Counsel dating back to 2003, and a 2007 investigation by the Arkansas AG.

Data Privacy

RadioShack Reaches Agreement to Proceed With Data Sale, Again

  • RadioShack has received court approval of the agreement it reached with third-party telecom services providers AT&T and Verizon, clearing one of the few remaining hurdles for it to move forward with a planned asset sale involving customer data.
  • The agreement between RadioShack, AT&T, and Verizon—which will become final on June 14, assuming there are no significant objections—prevents RadioShack from transferring or disclosing the confidential information of up to 117 million customers gathered through its third-party wireless service agreements, as well as any proprietary information belonging to AT&T or Verizon. The agreement requires RadioShack to work with the telecom companies to identify and scrub all documents that will be transferred so as to remove credit or debit card information, Social Security numbers, telephone numbers, and dates of birth.
  • This agreement is in addition to the mediation efforts between RadioShack and 38 State AGs over how the personal information and consumer data stemming from RadioShack’s business interactions would be handled, given RadioShack’s stated privacy policy. This two-step process to secure consumer data privacy will likely serve as a template for future bankruptcy proceedings.

False Claims Act

Georgia Settles With Hospitals Over Alleged Kickbacks for Undocumented Patient Referrals

  • Georgia AG Sam Olens settled with Health Management Associates, Inc. and Clearview Regional Medical Center (Defendants) regarding allegations that they violated the federal False Claims Act and the Georgia False Medicaid Claims Act by submitting false claims to the Georgia Medicaid program.
  • AG Olens alleged that the Defendants paid monthly fees to an obstetric clinic that served mostly undocumented Hispanic women in exchange for referring the pregnant women to be admitted to their hospitals for delivery and post-birth recovery. The women were either qualified for Medicaid or Emergency Medical Assistance, a Medicaid program providing coverage to undocumented aliens for childbirth. According to the complaint, the Defendants sought to maximize the number of Medicaid qualified women who were admitted (versus outpatient services) as the hospitals received three to four times greater reimbursement from the government for those patients.
  • The Defendants agreed to pay $991,925 to resolve the allegations, with Georgia retaining $396,770 as its share of the settlement. The case was initiated by a whistleblower, a former financial officer, who will receive $83,322 pursuant to Section 3730(d) of the False Claims Act.

Intellectual Property

Federal Court Moves Forward With Suit Challenging Vermont Patent Assertion Law

  • Vermont AG Bill Sorrell faced a setback in his ongoing battle with patent assertion entity MPHJ Technology Investments LLC, when a federal judge from the District of Vermont denied the AG’s motion to dismiss MPHJ’s lawsuit challenging the constitutionality of the 2013 Vermont Bad Faith Assertion of Patent Infringement law. The AG prevailed on his motion to dismiss MPHJ’s other claims, based on actions taken by the AG, and the federal court abstained regarding the AG’s consumer protection lawsuit currently pending in Vermont state court.
  • In the lawsuit, MPHJ challenges the Vermont law on the basis that it violates the First Amendment by chilling MPHJ’s ability to send demand letters to parties it believes are infringing its patents. The law in question provides a list of factors that a court can consider as evidence of bad faith in asserting patent rights through demand letters, including: whether the demand letter contains proper information regarding the patent or patent holder; whether the demand letter identifies how the alleged infringement is occurring; whether the license fee is disproportionate to the value of the patent; and, inter alia, whether a court has found the same or similar claim of infringement meritless.
  • AG Sorrell sought to dismiss the facial challenge to the law as being unripe because the AG has not yet charged MPHJ with violating the 2013 law. The judge, however, relied on statements made by the AG regarding the applicability of the law to MPHJ’s actions, as well as to a sufficient threat of enforcement, to sustain MPHJ’s challenge to the law.
  • The case is MPHJ Technology Investments LLC v. William Sorrell, Case No. 2:12-cv-00191. State AG Monitor has followed this matter closely, including analysis of the lawsuit in state court by AG Sorrell against MPHJ.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, False Claims Act, Securities


FTC Settles With Pharmaceutical Company Over Alleged Pay-for-Delay Tactics

  • The Federal Trade Commission (FTC) reached a settlement with Cephalon, Inc., resolving allegations that the pharmaceutical company engaged in anticompetitive behavior and violated the FTC Act by entering into a series of agreements with other pharmaceutical manufacturers to block the production and marketing of generic products.
  • The FTC originally sued Cephalon in 2008, alleging that the company sought to unlawfully protect its monopolistic market position on its patented drug Provigil. The complaint claims that Cephalon paid over $300 million to a group of generic drug makers that had challenged the validity of its patent and secured an agreement from them to forgo production of generic versions of Provigil for six years.
  • Although the legality of paying challengers not to produce generic drugs in order to settle patent disputes (“reverse-payment” settlements) was uncertain at the outset of the FTC’s case, the U.S. Supreme Court held in 2013 that such agreements can violate antitrust laws, and instructed parties to be mindful that settlements do not stifle competition.
  • According to the terms of the Proposed Stipulated Order, Cephalon and Teva Pharmaceutical Industries Ltd.—Cephalon’s parent company since 2011—must pay $1.2 billion as equitable monetary relief into a settlement fund to be administered by the FTC. Cephalon and Teva are also precluded from entering into any brand/generic agreements to not research, develop, manufacture, market, or sell a pharmaceutical product unless the agreement receives prior approval by the FTC.
  • The Commissioners voted 5-0 to submit the Order, which now awaits approval in the U.S. District Court for the Eastern District of Pennsylvania.

Consumer Financial Protection Bureau

CFPB and Florida Attorney General Secure Judgment Against Foreclosure Relief Company

  • The Consumer Financial Protection Bureau (CFPB), working with Florida AG Pam Bondi, obtained a default judgment against the Hoffman Law Group and its related corporate affiliates for violations of the Consumer Financial Protection Act, the Mortgage Assistance Relief Services Rule (MARS), and the Florida Deceptive and Unfair Trade Practices Act.
  • The court based its judgment on the allegations in the complaint, holding that the defendants were liable for numerous illegal practices related to offering consumers foreclosure relief through “mass-joinder” mortgage modification actions, including:
    • collecting fees prior to obtaining a loan modification;
    • misrepresenting the amount that consumers would save through defendants’ actions;
    • deceiving consumers into believing that they would receive legal representation; and
    • discouraging consumers from communicating with and making payments to their lenders.
  • The U.S. District Court for the Southern District of Florida held the defendants liable for $11.7 million in equitable monetary relief, along with $10 million in civil penalties for violations of federal law. It also required defendants to pay $6 million in civil penalties stemming from violations of state law. However, because the defendants had assets in receivership of only $655,737, the court suspended the balance of the judgment above that amount as noncollectable.

Consumer Protection

Illinois Attorney General Teams With Nonprofit to Allege Manipulation in Power Auction

  • Illinois AG Lisa Madigan joined consumer advocacy watchdog group Public Citizen in efforts to prevent a drastic increase in electricity rates (up to 800 percent) in Illinois following a recent auction conducted by the Midcontinent Independent System Operator (MISO) used to secure energy for a portion of the state. The auction was allegedly manipulated by the participating power suppliers in violation of the Federal Power Act.
  • AG Madigan and Public Citizen filed separate formal complaints with the Federal Energy Regulatory Commission (FERC) to block the pending utility rate increase. The complaints allege that Dynegy, Inc., and possibly other regional power suppliers, may have intentionally withheld power plants from the auction, or offered bids at uncompetitive prices in order to push up auction prices. Complainants are seeking “fast track” resolution; a temporary suspension of rates along with a determination of new, reasonable rates; changes to future auction procedures; and civil penalties.
  • FERC responded by issuing a notice of the complaints, and provided the opportunity for additional parties to intervene in the proceeding until June 17, 2015.

Data Privacy

FCC Advises Broadband Providers to Protect Consumer Privacy

  • In preparation for June 12, 2015, when the Federal Communications Commission’s (FCC) Open Internet Order providing for net neutrality goes into effect, the FCC has issued a public notice to Internet service providers (ISPs) regarding consumer privacy.
  • In the notice, the FCC asserts that the Open Internet Order applies the core elements of Section 222 of the Communications Act to the provision of broadband Internet services, and thus requires ISPs to take reasonable, good faith steps to protect consumers’ privacy, including their personal and proprietary information.
  • The FCC indicated that the Enforcement Bureau will eventually provide informal and formal guidance to the provision of broadband, and confirmed that ISPs are able to seek advisory opinions to gain insight as to whether certain conduct comports with the Open Internet Order. However, for the near term, the Enforcement Bureau stated that ISPs should “employ effective privacy protections in line with their privacy policies and core tenets of basic privacy protections.”

Connecticut Legislature Seeks to Enhance Data Breach Protections

  • The Connecticut state legislature passed An Act Improving Data Security and Agency Effectiveness (“Act”). The Act creates detailed data security requirements for companies contracting with state agencies, and also amends state law on data breach notification and loss mitigation requirements for all companies doing business in the state. The Act will become effective on July 1, 2015, assuming signature by Governor Malloy.
  • Among other things, the Act requires companies that have suffered a data breach involving confidential consumer information to notify state residents impacted by the breach within 90 days of discovery and to offer at least one year of free identity theft prevention and mitigation services. The Act applies to all information “capable of being associated with a particular individual through one or more identifiers, including, but not limited to, an individual’s name, date of birth, mother’s maiden name, motor vehicle operator’s license number, Social Security number, employee identification number, employer or taxpayer identification number, alien registration number, government passport number, health insurance identification number, demand deposit account number, savings account number, credit card number, debit card number or unique biometric data such as fingerprint, voice print, retina or iris image, or other unique physical representation.”
  • Connecticut AG George Jepsen voiced support of the Act, but also indicated that the provisions in the Act would be used as a baseline, and that depending on the nature of the breach and the sensitivity of the information, the AG’s office would continue to demand stricter mitigation procedures, for example, two years’ of identity protection when a consumer’s Social Security Number has been exposed.

False Claims Act

DoJ Reaches $212.5 Million FCA Settlement With Bank Over FHA Loan Origination Standards

  • The U.S. Department of Justice (DoJ) reached an agreement with First Tennessee Bank, N.A., to resolve allegations that the bank violated the False Claims Act when it originated, underwrote, and endorsed mortgages for Federal Housing Administration (FHA) insurance, knowing that such mortgages did not meet FHA requirements.
  • The DoJ alleged that from January 2006 to October 2008, First Tennessee, through its subsidiary First Horizon Home Loans Corporation, operated as Direct Endorsement Lender (DEL) under the FHA program. As a DEL, First Tennessee had the authority to originate mortgages for FHA insurance without FHA oversight. As such, the bank was required to follow FHA rules regarding underwriting and certifying mortgages, including maintaining a strict quality control program to prevent and correct deficiencies in underwriting practices, and establishing a mechanism to self-report any deficient loans discovered. The DoJ asserted that the FHA suffered losses when it had to insure hundreds of loans that allegedly should not have been eligible for FHA insurance.
  • First Tennessee agreed to pay $212.5 million to resolve the FCA investigation. In addition, in February 2015, MetLife, Inc., agreed to pay $123.5 million to resolve the DoJ investigation into FHA-insured mortgages originated after its subsidiary acquired First Horizon from First Tennessee.

Court of Appeals Denies FCA Liability for Changes in Grant Execution

  • The U.S. Court of Appeals for the Eighth Circuit affirmed the lower court’s decision finding no False Claim Act liability based on Bluebird Media, LLC’s grant application to the National Telecommunications and Information Administration (NTIA) seeking funds to provide broadband access to underserved areas.
  • The plaintiff, a whistleblower and former vice president at Bluebird, alleged that the company violated the False Claims Act by submitting a grant application to NTIA that exaggerated the need for broadband in the geographic area addressed by the grant. The plaintiff also alleged that Bluebird misrepresented its ability to secure matching funds and to create a viable business model.
  • The Eighth Circuit iterated that a plaintiff must show more than just a change in the implementation of the grant from the initial application, noting that although Bluebird made changes as it implemented the grant, there was no evidence that Bluebird’s initial statements were false at the time they were made. The court indicated that a plaintiff in this setting would need to prove that the defendant knew such changes would be necessary, or, at the time the application was filed, did not intend to implement the program as indicated.


SEC Levies $55 Million Penalty on Bank for Allegedly Misstated Financial Reports

  • The Securities and Exchange Commission (SEC) charged Deutsche Bank AG with filing false financial reports during the financial crisis, alleging that the bank failed to account for certain risks that could have materialized into billions of dollars in losses.
  • The SEC investigation determined that the bank overvalued certain assets consisting of “Leveraged Super Senior” derivative products, which gave the bank protection against credit default losses. However, because the derivative products were leveraged, the related collateral was only a fraction (approximately 9 percent) of the purported $98 billion protection, according to the SEC. In the event of default, the bank would only be able to recover $9 billion, yet it was reporting as though the market value of its protection was fully collateralized. Thus, there were significant risks to bank assets that the bank did not report.
  • The SEC ordered Deutsche Bank to pay a $55 million penalty, while also requiring it to cease and desist from committing any current or future violations of SEC reporting laws and regulations. Deutsche Bank did not admit or deny the SEC’s findings.