Consumer Financial Protection Bureau
CFPB Seeks to Enhance Public Disclosure With Consumer Narratives
- The Consumer Financial Protection Bureau (CFPB) has finalized a policy that will allow consumers to publish narratives in addition to filing complaints with the CFPB regarding their experiences with various financial products and services. These narratives, which constitute an additional element to the complaint process where the consumer can more specifically describe her experience, will be available in searchable format in the CFPB’s Consumer Complaint Database.
- Three elements will anchor this new public narrative option: 1) consumers must “opt in” to publish their narratives; 2) personal information surrounding the narratives will be removed to reduce the risk of re-identification; and 3) companies named in a published narrative will have 180 days to issue a response. Consumers can withdraw consent to publish their narrative at any time.
- The CFPB’s final policy statement identifies the dual purposes behind publishing consumer narratives: increasing consumer awareness and improving the efficiencies of related markets through increased transparency. The statement also addresses multiple concerns, including:
- verifying that narratives come from actual consumers;
- avoiding misuse of narratives as a tool to threaten financial companies involved in debt negotiation;
- balancing asymmetries where one company must respond to multiple consumer narratives; and
- minimizing potential second-order effects, such as attempts by financial products and service providers to force consumers to sign nondisclosure agreements.
FTC Creates New Office to Regulate Fairness and Deception Across New Technologies
- The Federal Trade Commission (FTC) announced that it has created the Office of Technology Research and Investigation (OTRI) to develop policies to protect consumers from unfair and deceptive practices involving new technologies.
- The OTRI will replace the Mobile Technology Unit and will be housed in the Bureau of Consumer Protection. The OTRI will focus on protecting consumer privacy and data security, as well as ensuring algorithmic fairness and transparency in new products and services including connected cars, smart homes, emerging payment methods, and the “Internet of Things.”
Florida Attorney General Sues Dating Company for Alleged Deception
- Florida AG Pam Bondi filed a lawsuit against SinglesPlus, its owner Kenneth Pogue, and related entities, alleging violations of the Florida Unfair and Deceptive Trade Practices Act in connection to “matchmaking” services.
- AG Bondi alleges that SinglesPlus falsely claimed to screen prospective members and to match members through analysis by trained psychologists. She also alleges that SinglesPlus exaggerated its success rates, engaged in high-pressure sales techniques, and failed to disclose that consumers’ initial interviews were being recorded.
- The complaint also alleges a violation of an assurance of voluntary compliance entered in 1999 between the Florida AG and Singles Plus Relationship Company, Inc., a defunct company previously operated by Pogue. AG Bondi is seeking a permanent injunction, restitution for consumers, civil penalties, and attorneys’ fees.
Washington Attorney General Looks Into New Data Breach at Regional Health Insurer
- Washington AG Bob Ferguson announced that his office is looking into a data breach at health insurer Premera Blue Cross, Premera Blue Cross Blue Shield of Alaska, and its affiliated companies, Vivacity and Connexion Insurance Solutions, Inc.
- The breach was discovered in January, and after an initial investigation, Premera determined that the breach was the result of a cyberattack in May 2014. AG Ferguson is working with Premera to determine what information was compromised, but has indicated that individuals from Washington, Oregon, and Alaska are potentially affected. The Washington Senate is currently considering a bill, already passed in the House, that would create additional obligations for data-breached entities and would enhance AG enforcement authority.
- Premera is offering two years of credit monitoring, as well as identity theft restoration services and insurance through Experian to all customers.
Massachusetts Attorney General Speaks to Congress on Deficiencies in Data Security Bill
- Massachusetts AG Maura Healey sent a letter to the U.S. House Subcommittee on Commerce, Manufacturing, and Trade, to express concern that a current bill under consideration, the Data Security and Breach Notification Act of 2015, would “drastically undercut” state law efforts to protect consumer data privacy.
- AG Healey highlighted the fact that the bill would broadly preempt and replace strong state law protections, like those of Massachusetts, with weaker and potentially ambiguous federal standards. Although AG Healey supported greater involvement by the FTC in data breach investigations, as called for in the bill, she stressed that State AGs play an important role, and any effective federal law should incorporate a dual federal/state enforcement model that continues to empower rigorous state policy goals.
- Finally, AG Healey argued that penalties may not provide proper deterrence, and that the bill does not create appropriate incentives regarding post-breach notification. She suggested that any federal legislation should reflect clearly defined notification policies like those expressed in Mass Gen Law 93H Sec. 3.
Federal Legislation to Protect Student Data Remains Elusive
- The Student Digital Privacy and Parental Rights Act, a draft bill designed to protect children’s privacy by limiting the use of data generated through educational software, was delayed from its proposed introduction in the U.S. House of Representatives.
- The bill would prohibit education technology companies from knowingly using or disclosing students’ personal information to create customized advertisements or to shape student consumer profiles. It also gives the FTC enforcement and regulatory authority over the burgeoning ed-tech industry.
- However, many privacy groups have criticized the bill as not going far enough to address all of the potential threats inherent in collecting data, including securing the data from hacking, allowing data to be erased over time so as to not let childhood mistakes follow into adulthood, and preventing colleges from using behavioral data to make admissions decisions. In addition, passage of a federal law on this issue would likely preempt many efforts at the state level that might provide greater protection.
New York Attorney General Settles Litigation With Custody Bank Over FX Rates
- New York AG Eric Schneiderman, together with U.S. Attorney Preet Bharara, announced a settlement with the Bank of New York Mellon Corporation (BNY Mellon) resolving multiple lawsuits and investigations that alleged that BNY Mellon deceptively and fraudulently profited by charging its clients higher-than-market foreign exchange rates.
- The various lawsuits and investigations alleged that BNY Mellon—which holds equities and other financial assets as a custodian for institutional investors—manipulated foreign exchange transactions that accompanied share purchases, or dividend payments, so that the bank was able to charge clients the higher intra-day exchange rate while paying a lower rate and keeping the difference.
- Under the settlement, BNY Mellon agreed to pay $714 million, with $167 million going to AG Schneiderman’s office to be used to compensate the victims, $167 million to the U.S. Attorney’s office, $30 million to the Securities and Exchange Commission, $14 million to the Department of Labor, and $335 million to private class action plaintiffs.
- In addition, BNY Mellon admitted the factual details of the alleged fraud, agreed to terminate the employment of certain executives who were centrally involved in the underlying actions, and will waive the deductibility of the settlement under New York State and local taxes.
States v. Federal Government
Tennessee Attorney General Petitions Sixth Circuit to Overturn FCC Order
- Tennessee AG Herbert Slatery filed a petition with the U.S. Court of Appeals for the Sixth Circuit, asking the court to overturn an order issued by the Federal Communications Commission (FCC) preempting certain state laws that regulate the manner in which municipalities can offer broadband services.
- Because Tennessee law prevents publicly owned broadband Internet service providers—in this case, the Electric Power Board, a public utility operating out of Chattanooga—from offering services to customers outside of the municipal boundaries, the FCC found the law to be in conflict with Section 706 of the Telecommunications Act of 1996, which requires the FCC to remove barriers to broadband investment and competition.
- AG Slatery’s petition alleges that the FCC “unlawfully inserted itself between the State of Tennessee and the State’s own political subdivisions,” and claims the Order violates the United States Constitution; exceeds the FCC’s authority; and is arbitrary, capricious, and an abuse of discretion under the Administrative Procedure Act.
Nine States File Amici Brief in Petition to Decide States’ Role Under CERCLA
- Colorado AG Cynthia Coffman along with seven other AGs filed an amici brief in support of Arizona in its petition to appeal the Ninth Circuit en banc decision in Arizona v. Ashton Company Incorporated Contractors and Engineers to the Supreme Court. There is also a separate petition in which Arizona is a respondent.
- At the root of Arizona’s petition is the question of the level of deference to which states are entitled when they enter into consent decrees with defendants to resolve liability under the U.S. Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA). The Ninth Circuit ruled that district courts must closely scrutinize CERCLA settlements proposed by states as opposed to those entered into by the U.S. Environmental Protection Agency (EPA).
- The amici AGs argued that Congress did not create a different standard of review for settlements proposed by states, and intended to put states on equal footing with the EPA when resolving liability under CERCLA through entering consent decrees. The AGs further argued that states play an important role in efficiently implementing CERCLA, and that the Ninth Circuit’s ruling will make defendants less willing to enter into early-stage state-proposed settlement agreements.
FTC Issues Final Order in First Application of FTC Act to Alleged Deceptive Patent Assertion
- The Federal Trade Commission (FTC) approved a final order, following the period for public comments, in a matter in which the FTC accused MPHJ Technology Investments, LLC of violating the FTC Act by deceptively asserting rights under patents in an attempt to generate revenue by coercing small businesses to purchase licenses to the patented technology. This order marks the first time the FTC has addressed the issue of deceptive patent assertion. We have covered actions by State AGs involving MPHJ in prior posts.
- In its administrative complaint, the FTC alleged that MPHJ purchased a group of broad patents related to network computer scanning technology and then sent letters to thousands of businesses claiming they were violating the patents, demanding that they pay for a license to continue, and falsely indicating that numerous other businesses had already purchased a license. The FTC also alleged that when businesses failed to pay, MPHJ’s law firm, Farney Daniels, P.C., sent letters threatening the recipients with patent infringement lawsuits.
- The final order bars MPHJ and Farney Daniels from making deceptive representations when asserting patent rights, including unsubstantiated representations that a patent has been licensed to a significant number of entities or for specific prices. The order also prohibits MPHJ and Farney Daniels from claiming that they will bring a lawsuit if they do not have “competent and reliable evidence sufficient to substantiate that they are prepared to and able to take the action necessary…” at the time such claim is made.
- In addition, the order requires MPHJ to keep records for five years, including copies of all patent assertion letters, subpoenas and other communication with law enforcement personnel, as well as business records demonstrating compliance with the terms of the order.
Massachusetts Attorney General Proposes E-Cigarette Regulations
- Massachusetts AG Maura Healey proposed regulations to limit the sale of e-cigarettes to minors, and to provide protections that will help prevent children from inadvertently ingesting nicotine in liquid or gel form. The AG’s office will accept public comments on the proposed regulations until April 24, after which it expects to finalize the regulations in the spring.
- The proposed regulations would subject manufacturers, importers, distributors, and vendors of electronic smoking devices and nicotine in liquid or gel form to already-existing regulations on regular cigarettes and smokeless tobacco. Those regulations prohibit sales of cigarettes to persons under age 18, require retailers to keep cigarettes in a location accessible only to store employees, prohibit promotional giveaways of cigarettes, and require only face-to-face sales methods, among other requirements.
- In addition, the proposed regulations would make it illegal to sell or distribute nicotine liquid or gel in packaging that is not child-resistant.
Indiana Bill to Bolster Data Privacy and Security Passes Senate With Unanimous Vote
- The Indiana Senate voted unanimously in favor of legislation proposed by AG Greg Zoeller, designed to increase data privacy and security for Indiana residents.
- Similar recent legislative efforts in other states, Indiana Senate Bill 413 seeks to broaden the scope of data privacy obligations to apply to all data users (defined as both data collectors and data owners), and would increase, and more precisely identify, the types of data to be protected.
- SB 413 would require data users to delete data that is not required for a legitimate business, government, or educational purpose, and to avoid selling data in a manner inconsistent with consumer authorization or applicable law. The bill would also require data users to conspicuously disclose relevant privacy policies on their website, and would require data collectors to disclose what data they are collecting and how it will be used. Finally, the bill identifies civil penalties for certain types of knowing violations, establishes data breach notification protocols, and delineates AG enforcement procedures.
False Claims Act
Fifty Attorneys General Settle Kickback Lawsuit With Pharmaceutical Company
- Led by New York AG Eric Schneiderman, 50 AGs and the U.S. Department of Justice settled with Daiichi Sankyo, Inc., resolving claims that the pharmaceutical company violated the False Claims Act by allegedly offering physicians inducements in return for prescribing its drugs.
- The AGs argued that Daiichi provided improper kickbacks in the form of speaker fees and “lavish” meals as part of a “Physician Organization and Discussion” program, from 2005 to 2011. The physicians were allegedly paid even if the speaking event was canceled or given only to the physician’s staff within the confines of her office.
- Under the agreement, Daiichi agreed to pay $39 million to the plaintiffs, with $10 million being divided among state Medicaid programs. The complaint was originally filed under qui tam provisions by a former Daiichi sales representative. who will receive $6.1 million of the federal recovery. The settlement resolves the case filed in the District of Massachusetts in 2010.
Missouri Settles With Medicaid Administrative Services Provider
- Missouri AG Chris Koster settled claims against APS Healthcare, Inc., APS Healthcare Bethesda, Inc., and Innovative Resource Group, LLC d/b/a APS Healthcare Midwest (APS), for alleged violations of the U.S. and Missouri False Claims Acts.
- AG Koster alleged that APS submitted false claims to Medicaid by failing to comply with material contractual terms regarding the reduction of administrative costs associated with coordinating preventative and chronic care for state Medicaid beneficiaries.
- Under the agreement, APS will reimburse Missouri and the federal government a total of $5 million, of which Missouri will receive $2.43 million. In addition, Missouri and the federal government could receive up to an additional $10 million if APS’s Owner, Universal American Corp., sells APS or recovers money in a pending lawsuit regarding the purchase of APS in 2012.
States v. Federal Government
Fifteen Attorneys General File Amici Brief, Ask for Stay of Injunction in Immigration Case
- Washington AG Bob Ferguson and 14 additional AGs submitted an amici brief to the Fifth Circuit Court of Appeals in support of the United States’ motion to stay the preliminary injunction issued against President Obama’s executive action on immigration by the Southern District of Texas last month.
- The amici AGs argue that the Fifth Circuit should lift the injunction because the plaintiff states did not identify a legitimate “irreparable” injury, and the injunction is overbroad as it applies nationwide even though amici and non-plaintiff states do not allege any harm and plaintiff states, with the exception of Texas, did not present any evidence of harm at all. The AGs also argued that the court erroneously considered Texas’ alleged costs of drivers and other licenses even though federal law does not compel a state to incur those costs.
- In the government’s Emergency Motion for Stay Pending Appeal, the U.S. argues, among other things, that the district court “invented a novel theory of Article III standing that purports to confer standing on States without any actual injury,” or allowed the plaintiffs to claim injury from “indirect economic costs that … federal law does not obligate Texas to bear and in disregard of the expected economic benefits” related to the immigration action. Plaintiffs have until March 23 to respond.
Attorneys General Write Letter to Oppose ATF Ban on Certain 5.56mm Ammo
- Led by Montana AG Tim Fox, 23 AGs voiced opposition to the U.S. Bureau of Alcohol Tobacco, Firearms and Explosives’ (ATF) proposed action that would have removed an exemption to a ban on the sale of steel bullets under the 1968 Gun Control Act. ATF has since withdrawn the proposal. Similar bullets made of copper or lead would not have been affected.
- The ATF proposal involved a specific type of 5.56mm round, which is frequently used in popular AR-15 rifles (a civilian version of the M16 or M4 military rifle). Because the round is able to pierce body armor and now increasingly chambered in multi-shot handguns on the market, the ATF argued that the 1986 exemption is no longer proper. However, after much public criticism, ATF withdrew its proposal.
- In a brief letter the AGs applaud ATF’s decision to not lift the exemption, and argue that the justification for the ban on the 5.56mm round would be arbitrary: many other rounds typically only chambered in rifles also penetrate soft body armor, and there are only few models of handgun in 5.56mm format. The letter also highlights the popular use of the round for legitimate purposes, including target practice and varmint control. Members of Congress have responded to ATF’s withdrawal by offering proposed legislation to enact the ban.
Consumer Financial Protection Bureau
CFPB Releases Report to Congress on Arbitration Clauses and Consumer Financial Products
- The Consumer Financial Protection Bureau (CFPB) released a report explaining the findings and conclusions of its multiyear study on the effects of mandatory arbitration clauses in contracts for a range of consumer financial products and services, including credit cards, private student loans, automobile financing, and mobile wireless agreements.
- The study and subsequent report submitted to Congress were mandated by the Dodd-Frank financial reform law as preconditions for the CFPB to exercise regulatory authority over the use of mandatory arbitration clauses in contracts for consumer financial products. The CFPB indicated that it will continue to review the results and accept public input before it begins to propose potential regulations for this issue.
- The report details the CFPB’s findings regarding consumers and arbitration, including: consumers generally lack knowledge and understanding of arbitration clauses, and are hesitant to bring individual claims in any forum; consumer financial disputes are generally over smaller amounts, and thus better served through participation in class action settlements or small claims courts; and the absence of evidence that arbitration clauses lead to consumer savings.
New York Attorney General Secures Reforms From Big Three Credit Reporting Agencies
- New York AG Eric Schneiderman reached a settlement with Experian Information Solutions, Inc., Equifax Information Services, LLC, and TransUnion LLC (credit reporting agencies or CRAs) to make reforms that will change the way that medical debt is reported, and will improve the process for detecting and correcting errors in consumer credit reports.
- Under the settlement agreement, the CRAs will now wait 180 days before unpaid medical bills are added to a credit report. The change will allow consumers adequate time to resolve insurance claims or catch up on payments before suffering credit downgrades.
- In addition, over a three-year period, the CRAs will implement procedural and structural changes. The CRAs will provide consumers the right to challenge inaccurate information in their credit reports through an internal dispute resolution process, including the use of trained employees to respond to consumers’ complaints. These trained intermediaries will have primary responsibility for resolving disputes, once reported, between the lender and the consumer. The CRAs will also coordinate with the AG’s office to identify illegal lenders and suppress from the credit reporting databases any entries from an illegal lender.
- The credit reporting agencies denied any wrongdoing associated with the initial AG investigation, cooperated with the AG’s efforts, and undertook the reforms voluntarily.
Ten Attorneys General and the FTC Combine to Sue Robocalling Cruise Line Posing as a Political Survey
- Ten State AGs and the FTC sued Caribbean Cruise Line, Inc. (CCL), Linked Service Solutions, LLC and Economic Strategy LLC, and a group of five telecom companies and their individual owners in federal court in the Southern District of Florida, alleging the companies illegally sold cruise and vacation packages using mass market robocalls masquerading as political surveys.
- The AGs and FTC brought the claims under the U.S. Telemarketing Act and the FTC Telemarketing Sales Rule that established the National Do Not Call Registry, and various state consumer protection laws, which prohibit this type of calling for sales purposes but not for political surveys. The AGs and FTC alleged that CCL illegally conducted sales robocalls and deceived consumers by first asking a series of automated political survey questions before using an offer for “a free cruise to the Bahamas” to transfer the call to a live telemarketer working on behalf of CCL to market its cruise vacations, along with hotels and other travel packages.
- The AGs and FTC entered into a consent order with CCL that prohibits future deceptive telemarketing practices, including calling consumers on the Do Not Call Registry, failing to transmit accurate caller ID information, and placing illegal robocalls. CCL is also required to monitor its lead generators on an ongoing basis. Finally, CCL must pay a civil penalty of $7.73 million, which will be partially suspended after CCL pays $500,000 due to CCL’s inability to pay. Other defendants were ordered to pay lesser penalties, or have yet to reach a settlement.
Attorneys General Join the Investigation Into Herbal Supplements, Industry Groups Respond
- This week Connecticut, Indiana, and Puerto Rico have announced that they are joining a coalition with New York AG Eric Schneiderman to investigate the business practices of the botanical dietary supplement industry relating to labeling and quality control.
- Also this week, four trade associations representing the dietary supplement industry released a whitepaper refuting the results of AG Schneiderman’s initial investigation of botanical dietary supplements. The whitepaper raises questions regarding the use and interpretation of DNA barcode testing on botanical dietary supplements and called the AG’s use of DNA barcode testing “a misuse of the technologies” that “led to a misinterpretation of test results.”
Missouri Attorney General Closes Down Payday Lenders
- Missouri AG Chris Koster reached a settlement with a group of online payday lenders, organized by Martin “Butch” Webb, and operated from an Indian reservation in South Dakota. The enterprise issued loans under the following names: Payday Financial, Western Sky Financial, Lakota Cash, Great Sky Finance, Red Stone Financial, Big Sky Cash, Lakota Cash, and Financial Solutions.
- AG Koster alleged that the lenders charged exorbitant fees for short-term loans—including origination fees that exceeded the statutory maximum of 10 percent—and required consumers to consent to having their future wages garnished without first securing a court order as required by Missouri law. Like online payday loan actions operated on other Indian reservations, Webb and the lenders attempted to assert tribal sovereign immunity to AG Koster and the state of Missouri.
- The agreement prohibits Webb or any of the lenders he operated from making or collecting on loans in Missouri. It also requires Webb to pay $270,000 in restitution, cancels existing loan balances for Missouri borrowers, and requires Webb to instruct credit reporting agencies to remove all information previously supplied about specific consumers. Webb must pay also pay $30,000 in penalties to the state.
New York Attorney General and the FTC Settle With “As-Seen-on-TV” Marketer
- New York AG Eric Schneiderman and the Federal Trade Commission (FTC) entered into a settlement with Allstar Marketing Group, LLC to resolve claims that it violated Section 5 of the FTC Act, the FTC Telemarketing Sales Rule, and New York law on deceptive practices.
- According to the complaint, Allstar “lured” consumers into buying specialty goods (e.g., The Perfect Brownie Pan, or the Snuggie) through an allegedly deceptive and confusing ordering processes that resulted in consumers paying excessive fees, purchasing more products than intended, and being billed without their express consent. For example, the FTC alleged that Allstar offered a “buy one get one free” promotion, but failed to adequately disclose that consumers were required to pay two separate sets of processing and handling fees on the products, which in some cases, nearly doubled the cost of the offer.
- The settlement requires Allstar to cease marketing products in the manner described in the complaint—including conspicuously disclosing the terms of an offer and the accompanying fees—and to pay $7.5 million in restitution, distributed through the Federal Trade Commission. It also requires Allstar to maintain certain records, report compliance to the FTC for ten years, and pay $500,000 to the New York AG’s Office for penalties, costs, and fees.
Washington Data Breach Notification Legislation Easily Passes House With Bipartisan Vote
- The data breach notification law proposed and supported by Washington AG Bob Ferguson passed the state House of Representatives by a vote of 97 to 0.
- The proposed law contains some noteworthy provisions that if enacted would require increased disclosures by entities suffering data breaches compared to what most states currently have enacted: it eliminates a general exemption for encrypted data; requires consumer notification as immediately as possible and no later than 45 days whenever personal information is likely compromised; requires the Attorney General to be notified within 45 days when a data breach occurs at a business, nonprofit or public agency; and requires businesses, nonprofits and agencies to provide consumers with sufficient information to secure or recover their identities.
Illinois Attorney General Seeks to Intervene in Lawsuit Involving Union Dues
- Illinois AG Lisa Madigan filed an unopposed motion for leave to intervene (and a proposed motion to dismiss) in a lawsuit brought by Governor Bruce Rauner in federal court against various public sector unions. The lawsuit challenges the constitutionality of an Illinois law that requires mandatory union dues to be collected from non-union public sector employees to cover their share of expenses for negotiating and administering collective bargaining agreements.
- Governor Rauner issued Executive Order 15-13 in February to suspend the deduction and remittance to unions of the mandatory dues and simultaneously filed this lawsuit. He also brought in an outside law firm to handle the case pro bono (so that no state funds were used). Governor Rauner’s lawsuit argues that mandatory contributions amount to coerced political speech, and are thus prohibited by the First Amendment.
- In response to EO 15-13, 26 labor unions filed a lawsuit in Illinois state court, alleging that the order violates state law, contradicts numerous collective bargaining agreements, and exceeds the scope of executive authority.
- AG Madigan argues in her memorandum in support of her proposed motion to dismiss that the federal court lacks subject matter jurisdiction as the lawsuit is asking a federal court to rule on the scope of executive power under state law. AG Madigan also argues that the court should otherwise stay the federal lawsuit pending the outcome in the state lawsuit under the doctrine of abstention.
Received a State AG Subpoena? Determine if Your Insurer Must Pay
- In a recent blog post, Dickstein Shapiro partners Maria Colsey Heard and Ann-Marie Luciano offer advice for companies facing AG investigations.
New York Attorney General Teams With FTC to Sue Debt Collectors
- New York AG Eric Schneiderman together with the Federal Trade Commission (FTC) filed lawsuits against two groups of related entities: Vantage Point Services, LLC, and Four Star Resolution, LLC. The lawsuits alleged violations of the U.S. FTC Act and Fair Debt Collection Practices Act, as well as New York State laws against abusive debt-collection, and unfair and deceptive practices. Although located in Buffalo, defendants are alleged to have collected more than $45 million in supposed debts, nationwide.
- In collection calls to consumers, the Vantage Point defendants allegedly held themselves out as government agencies—including the FBI—used abusive language, and threatened consumers with arrest if they did not pay.
- The Four Star defendants allegedly claimed to be attorneys, investigators, process servers, court officials, government agents, and criminal law enforcers during collection calls, and “spoofed” real law enforcement phone numbers, and threatened consumers with criminal action, wage garnishment, and seizure of their property for failure to pay.
- The lawsuits were filed in the Western District of New York. The court granted temporary restraining orders against defendants, enjoining their debt collection practices and freezing their assets.
FTC Settles With Company That Allegedly Paid Customers for Online Endorsements
- The FTC entered into a consent order with Amerifreight, Inc., to resolve claims that the automobile shipment broker committed unfair and deceptive practices under the FTC Act. This administrative complaint marks the first time the FTC has charged a company for failing to disclose that it gave cash discounts to customers to post reviews.
- The FTC alleged that Amerifreight deceived consumers by providing cash discounts and other incentives to customers who agreed to provide good reviews in online forums. The FTC also alleged that Amerifreight did not disclose that it compensated consumers to provide reviews, and represented its favorable reviews as a product of unbiased and unprompted customer reaction.
- The consent order precludes Amerifreight from making future misrepresentations and requires it to disclose any material connection between an endorsing entity and Amerifreight. It also requires, among other things, that the company maintain, for five years, copies of advertisements or promotional materials containing representations covered by the consent order, as well as complaints or inquiries against the company concerning any endorsement of its services. Amerifreight did not admit to the claims made by the FTC, other than those facts necessary to establish jurisdiction.
Connecticut Attorney General Probes Computer-Maker Over Software Vulnerability
- Connecticut AG George Jepsen inquired into Lenovo Group Ltd., and software-maker Superfish, Inc., seeking information related to allegations that Lenovo computers were sold with built-in software that tracked users’ internet browsing and made the computer more vulnerable to “man-in-the-middle” hacking, where a third party intercepts communications sent to and from the affected computer.
- AG Jepsen sent letters to Lenovo and Superfish, requesting information on the companies’ contractual and financial relationship. AG Jepsen also requested information on the number of affected computers sold, testing and quality control measures, and any current or future remedial measures. The AG indicated that such information is necessary to determine whether the companies had violated Connecticut’s laws prohibiting unfair or deceptive trade practices.
- Lenovo has promised to stop shipping products with Superfish installed and issued the following statement: “We have thoroughly investigated this technology, and do not find any evidence to substantiate security concerns.”
President Obama Sparks Discussion With Draft Consumer Privacy Bill of Rights
- President Obama released a “discussion draft” of a proposed bill for the creation of a Consumer Privacy Bill of Rights. The bill is designed to bolster transparency in how companies use consumer data, and to foster greater consumer control.
- The response from interest groups, and the public, however, has been generally negative. In addition to finding the bill to be too lax, objectors note that the bill would preempt state data privacy laws that are already operating and that provide greater levels of protection to consumers.
Exxon Settles With New Jersey, Lawmakers and Interest Groups Object
- Exxon Mobil Corporation has agreed to settle with New Jersey for $225 million (the New York Times had previously reported $250 million) over the company’s liability for alleged environmental damage resulting from oil refining and petrochemical production at two sites dating back to the 1870s.
- The court was rumored to be close to issuing a decision on damages, but Acting AG John Hoffman asked Judge Michael Hogan to defer his decision as the parties had agreed on the general parameters of a settlement. AG Hoffman called it an “important settlement” that “holds the company financially accountable through payment of a historic Natural Resource Damages settlement on top of Exxon’s obligation to clean up the sites.”
- Although the settlement would end an eleven-year litigation, numerous interest groups have criticized the settlement as being too small in relation to the State’s original claims of $8.9 billion, and in light of the fact that Exxon had essentially conceded liability.
- The public will have a chance to comment on the agreement next month and it will be submitted to the court for approval in May. State Senators Steve Sweeney and Raymond Lesniak have indicated that they will challenge the proposed settlement, beginning with filing a motion to oppose the settlement with the court. Lesniak indicated the agreement can be overturned if it is fraudulent, arbitrary or capricious and that this settlement “certainly appears to be arbitrary and capricious, to say the least.”
Attorneys General Testify Before Congress on EPA Proposed Rule
- Arkansas AG Leslie Rutledge and Montana AG Tim Fox appeared before the U.S. House of Representatives Oversight Subcommittee on the Interior to testify regarding the scope and potential effects of three rules proposed by the Environmental Protection Agency (EPA) that are scheduled to go into effect later this year.
- The hearing focused on how certain state interests and small businesses will be affected by the implementation of the Clean Power Plan, the National Ambient Air Quality Standards for Ozone, and the Waters of the United States rule.
- State AGs have been increasingly active, on both sides, of EPA rule-making. Currently, a group of 20 AGs is challenging an EPA rule under the Clean Air Act at the U.S. Supreme Court, (with 17 AGs as co-respondents). AGs have also sued the EPA in other contexts, have joined in multiple amici briefs in support of, and opposition to EPA rules, and have submitted numerous comments to proposed rules.
New York Attorney General Pushes Bill to Protect and Reward Whistleblowers
- New York AG Eric Schneiderman has indicated that he will propose legislation to protect and reward insiders who report information about illegal activity in the financial services industries.
- The Martin Act, a New York securities law that predates the U.S. Securities and Exchange Commission, gives the AG broad powers to investigate suspected fraud in the offer, sale or purchase of securities. However, it does not currently provide direct monetary incentives for industry insiders to come forward and aid in investigations.
- The bill would create incentives for insiders to report fraud: it provides monetary rewards—10 to 30 percent of the final settlement or penalty—to individuals who voluntarily provide original and useful information, not previously known to the AG; keeps the identity of the whistleblower confidential; and it would prohibit employers from discharging, demoting, suspending, or otherwise retaliating against employees who report suspicious or fraudulent activity.
- AG Schneiderman stated, “New York has a unique opportunity to set the gold standard for states seeking to expose and hold individuals accountable for financial crimes. This law will be the strongest, most comprehensive in the nation, and is long overdue for a state with the world’s most important financial markets.”
States vs Federal Government
Supreme Court Holds Tax Injunction Act Does Not Block Challenge of Tax Notification Requirements
- The U.S. Supreme Court ruled unanimously in favor of Petitioner Direct Marketing Association (DMA), holding that the U.S. Tax Injunction Act (TIA)—which purports to restrict federal district courts from restraining the assessment, levy or collection of any tax under State law—does not preclude tax payers from challenging other aspects of state tax laws in federal court.
- At the core of this dispute is a Colorado law that requires online retailers to report information for sales made to Colorado residents to the State Department of Revenue, to aid the state in collecting “use” taxes on those purchases. Petitioner, not wanting to litigate Colorado tax policy in state courts, filed a lawsuit in federal court claiming that the notification requirement burdened out-of-state retailers disproportionately as compared to in-state retailers. The State asserted that the TIA precluded the Petitioner from bringing a lawsuit to challenge the state tax law in federal court. Twenty-five AGs filed an amici brief in support of Colorado’s position.
- Writing for the Court, Justice Thomas indicated that the TIA did not apply to “notice and reporting requirements” that were tangential to the collection of state taxes. Thus, the TIA did not preclude DMA from challenging the law in federal court. However, the Court left it to the Tenth Circuit Court of Appeals to decide whether the doctrine of comity could be applied to achieve a similar result.
- In a separate opinion, Justice Kennedy observed, “[t]here is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently substantial nexus to justify imposing some minor tax-collection duty, even if that business is done through mail or Internet.” Kennedy’s observation may indicate a willingness to break with previous decisions banning states from requiring retailers who lack a physical presence to collect and submit taxes to the state for sales made to residents.
When a subpoena from a State Attorney General hits your desk, it is easy to immediately get swept up in the substance. But before becoming absorbed in the details of a subpoena response (recounted here), consider first who should pay for the associated costs. And for that reason, you must review your insurance policies.
Given the broad scope of AG investigations, different types of policies may be applicable, from Comprehensive General Liability to Directors’ and Officers’ policies or Crime/Fidelity Insurance. Conduct a review of all policies to determine if there are any potential sources of recovery.
Once you receive a subpoena or demand letter from an AG, the best response is to promptly notify your insurer. Even when there is no subpoena or letter, certain policies require notice when you become aware of an occurrence that could trigger liability. Keep a broad view of the investigation and potential litigation in order to preserve any rights you may have to defense and indemnification.
Some insurers may argue that AG subpoenas and demands are too informal to trigger coverage by policies that purport to insure against “claims.” But courts have found that written demands and subpoenas that compel a business to produce documents or other information are “claims” triggering coverage. See, e.g., Polychron v. Crum & Forster Ins. Co., 916 F.2d 461, 463 (8th Cir. 1990); Richardson Elecs., Ltd. v. Fed. Ins. Co., 120 F. Supp. 2d 698, 701 (N.D. Ill. 2000). Moreover, an insurer’s duty to defend the policyholder is usually broader than the duty to indemnify against adverse determinations of liability.
Having the comfort of knowing that your attorneys’ fees and costs will be covered will allow you to concentrate on addressing the substantive issues presented by an AG investigation.
Click here to read Dickstein Shapiro’s top 10 tips for analyzing and navigating the pursuit of coverage for government investigations.
Delaware Amends Unclaimed Property Law
- In a recent post, Dickstein Shapiro partner Maria Colsey Heard and counsel Aaron Lancaster continue their analysis of the legal reforms taking place to state unclaimed property laws.
Judge Rules in Favor of Attorneys General, Finds American Express Violated Antitrust Laws
- Ohio AG Mike DeWine led a group of 17 AGs, working together with the U.S. Department of Justice, to successfully argue that American Express Co. and American Express Travel Related Services Co., Inc. (Amex), violated antitrust laws by prohibiting merchants from “steering” consumers to payment cards with lower costs associated.
- According to the decision, Amex required merchants to agree to terms of service that prevented merchants from expressing a preference for a lower cost credit card, or providing extra benefits and discounts when the customer uses one. The court found that Amex’s terms harmed consumers because they prevented merchants from “steering additional charge volume to their least expensive network,” and thus “short-circuit[ed] the ordinary price-setting mechanism in the network services market by removing the competitive ‘reward’ for networks offering merchants a lower price for acceptance services.”
- Judge Nicholas Garaufis for the Eastern District of New York will determine the remedy in subsequent hearings. Competitors Visa Inc. and MasterCard Inc. reached a settlement in 2013 on similar claims.
- Amex has announced that it will appeal the decision.
Eleven Attorneys General and the FTC Sue to Block Merger of Food Companies
- Illinois AG Lisa Madigan along with ten other AGs and the Federal Trade Commission (FTC), filed a lawsuit in federal court to block Sysco Corporation’s proposed $8.2 billion acquisition of US Foods Inc. The FTC also filed its own administrative complaint against Sysco and US Foods.
- The AGs and FTC contend that the proposed merger would substantially reduce competition among “broadline food distributors” resulting in “higher prices and diminished service for restaurants, health care facilities, hotels, schools, and other institutions that require full-service food distribution services.” Broadline foodservice distributors warehouse and sell a vast array of food and food-related products, serving as a “one-stop-shop” for foodservice operators. It is distinct from other types of food distribution because it requires timely and frequent delivery and a constant availability of a wide array of food products and supplies.
- The FTC determined that the merger of Sysco and US Foods would result in a combined entity having a 75 percent share of the national broadline market, and an even higher market share in a number of local markets. Counsel for Sysco indicated that the merger is “procompetitive,” calling it “good for customers” and “good for the United States.”
California Attorney General Approves Hospital Acquisition, Subject to Conditions
- California AG Kamala Harris conditionally approved the sale of six hospitals currently operated by nonprofit organization Daughters of Charity Health Systems (DCHS) to Prime Healthcare Services, Inc. California law requires the AG to approve purchases of nonprofit hospitals by for-profit enterprises.
- AG Harris’ approval requires that Prime continue to operate four of the six DCHS hospitals for up to ten years, to “ensure continued community access to essential health care services.” In addition, AG Harris required structural improvements to the hospitals that will cost in excess of $350 million.
- In its purchase agreement, Prime offered to maintain services at all hospitals for five years after the acquisition, and agreed to assume about $350 million in pension debt and retire about $400 million in other debts and liabilities. In addition, Prime indicated it would spend $150 million on upgrades to the hospitals.
- Prime responded in a statement that AG Harris’ conditions were “extensive” and “unprecedented.” Prime indicated that it will “need to evaluate the viability and future stability” of the DCHS hospitals under the conditions proposed by AG Harris.
California Attorney General Pushes Legislation to Increase Transparency in Charitable Giving
- AG Harris, together with state Assembly Member Jacqui Irwin, proposed Assembly Bill 556 to “close the loophole” that permits certain types of commercial fundraising to remain undisclosed, and thus increase confidence in charitable giving.
- The bill would require “fundraising counsel,” which solicits funds in the name of a charity for compensation, to disclose the portion of a charitable donation that is paid to them. AG Harris was prompted to propose the bill after her office examined data on charitable solicitation campaigns for 2013, revealing the “alarming extent to which charitable donations are often diverted to for-profit companies.” The AG’s findings are summarized in a detailed report together with other publications on charities.
- AB 556 would also create a ten-year statute of limitations and would expand AG authority to address fraud and other misconduct from for-profit fundraising firms and other third parties.
Consumer Financial Protection Bureau
CFPB Director Speaks to NAAG, Highlights Priorities and Promotes Coordination
- Consumer Financial Protection Bureau (CFPB) Director Richard Cordray presented remarks at the winter meeting of the National Association of Attorneys General (NAAG), and highlighted four areas—the Four “Ds”—on which the CFPB will continue to focus: deceptive marketing, debt traps, dead ends (i.e., areas where consumers cannot effectively protect their interests), and discrimination.
- Director Cordray, a former Ohio Attorney General, also highlighted areas where the CFPB has effectively worked with State AGs, including deceptive advertising, payday lending, debt collection, and rulemaking under the Dodd-Frank Act.
- Director Cordray concluded by encouraging AGs to utilize the CFPB’s resources, specifically noting its searchable database of consumer complaints, available through a secure portal.
FTC Sues Company Alleging to Consolidate Payday Loans
- The Federal Trade Commission (FTC) filed a complaint in federal court against Payday Support Center, LLC, now known as PSC Administrative, LLC, and related entities, for allegedly violating the FTC Act’s prohibition on deceptive practices and the Telemarketing and Consumer Fraud and Abuse Act.
- According to the complaint, the defendants allegedly induced consumers to sign up for a “financial hardship program” to help consumers consolidate and pay off their payday loan balances “free of interest and fees” in exchange for a biweekly payment to the defendants. The complaint alleged, however, that defendants usually failed to take sufficient steps to obtain the promised debt relief for consumers.
- The case is pending in U.S. District Court for the Southern District of Alabama, and seeks both preliminary and permanent injunctions, as well as rescission of payments and contracts, restitution, refunds, disgorgement of “ill-gotten monies,” and costs.
Marijuana Legalization Takes Effect in Alaska and the District of Columbia
- AGs and other government officials in Alaska and the District of Columbia are grappling this week with regulatory gaps and questions of federal liability as voter-initiated marijuana legalization measures go into effect.
- The DC law allows adults to possess up to two ounces of marijuana and to grow six plants, whereas the Alaska law limits possession to just one ounce. However, neither jurisdiction has yet legalized the sale of marijuana, nor put in place a regulatory structure allowing for taxation and commercialization like that found in Colorado.
- In DC, the government faces additional dilemmas related to drafting and enacting robust and comprehensive regulations without violating the Anti-Deficiency Act or drawing Congressional ire.
States vs Federal Government
Massachusetts Attorney General Argues That Website Can Be Held Liable for Third Party Violations of State Law
- Massachusetts AG Maura Healey filed an amicus brief in Doe v. Backpage.com, LLC, pending in federal court, in support of plaintiff’s opposition to Backpage’s motion to dismiss based on statutory immunity under the U.S. Communications Decency Act (CDA). In her brief, AG Healy argues that the CDA does not provide immunity to websites against liability for knowingly and actively allowing violations of state law by third parties.
- Specifically, AG Healey contends that Backpage can be held liable under state law for human trafficking and deceptive practices for “intentionally promot[ing] sex trafficking by fostering the online market for illegal commercial sex and by helping traffickers both to develop effective advertisements and to evade detection and prosecution.”
- As AG Healey argues, sex trafficking is a nationwide problem which NAAG and State AGs are actively engaged in addressing through state law. Moreover, the implications of the court’s immunity ruling could be broad, potentially inhibiting AG enforcement efforts in other areas where state law violations share a nexus with online advertising and publishing.
Virginia Rejects Bill That Would Require Attorney General to Defend All State Laws
- With Lieutenant Governor Ralph Northam casting the tie-breaking vote, the Virginia Senate narrowly rejected a bill that would have required the AG to defend any state law challenged on constitutional grounds or in situations where it conflicts with other federal laws.
States Debate Bills With Effects on Unclaimed Life Insurance Proceeds
- Lawmakers in various states, including Oklahoma and Virginia, are considering bills to require life insurance companies to conduct investigations into the status of policyholders by, among other things, checking the Social Security Administration’s death master file.
- Generally speaking, all states have laws that require holders of unclaimed property to transfer it to a state-controlled fund, often housed within the AG’s or Treasurer’s office. As we have previously reported, these state officials are beginning to focus on potential new types of unclaimed property, including life insurance proceeds and health savings account balances.
- The current bills would apply only to newly-issued policies, leaving questions about holders’ obligations to review older policies for potential beneficiaries. Some commentators worry that passage of these new bills will potentially complicate processes already in existence. For example, some states have agreements with life insurance companies requiring them to consult the master list and transfer proceeds accordingly until beneficiaries can be located and informed.
As we have previously reported, Delaware is in the midst of reforming its unclaimed property audit rules, a move that will inevitably affect the myriad businesses headquartered or incorporated there. Recently, Delaware Governor Jack Markell signed into law Senate Bill 11, “An Act to Amend Title 12 of the Delaware Code Relating to Escheats.” The law aims to increase competition among outside, independent auditing firms and to slow the revolving door between government and the private sector. However, it does not address the entirety of concerns that have been expressed by companies holding unclaimed property. Auditors currently use potentially unconstitutional methods to estimate the amounts owed by holders when records are unavailable. The new law does not address this practice, nor does it limit the time frame for which a company can be audited, which currently extends back to 1981. Thus, until the state can pass future amendments, and pending the promulgation of a detailed procedure manual by the Delaware Secretary of Finance, comprehensive reform in this area remains yet unclaimed.
Hospital Backs Away From Acquisition After New Massachusetts Attorney General Voices Concern
- Partners HealthCare System, Inc. decided not to move forward with its proposed acquisition of South Shore Health and Educational Corporation. The parties filed a stipulation of voluntary dismissal with the Suffolk County Superior Court, where a consent judgment detailing the terms and conditions of the merger was pending approval.
- Partners had reached a preliminary agreement to acquire South Shore with former Massachusetts AG Martha Coakley. After taking office, AG Maura Healey expressed her concerns about the merger and indicated that if the court declined to approve the consent judgment, she would seek to enjoin the merger.
- AG Healey stated that she “appreciate[d] the thoughtful process that Partners engaged in while making this important decision, and believe[d] it is the right choice for Partners and the Commonwealth…” Partners’ planned acquisition of Hallmark Health Corporation remains under consideration.
Judge Grants Preliminary Injunction to Prevent Disclosure of Nonprofit’s Donors
- A federal judge for the Central District of California granted a preliminary injunction preventing California AG Kamala Harris from obtaining a list of donors to the Americans for Prosperity Foundation (AFP), a nonprofit group founded by Charles and David Koch. AFP’s lawsuit against AG Harris will now proceed on the merits, and AG Harris has 21 days to file her response to AFP’s complaint.
- The dispute originated when AG Harris informed AFP that in order to comply with the California Supervision of Trustees for Charitable Purposes Act, AFP was required to submit the names and addresses of all individuals who had donated more than $5,000 to the group for tax years 2011 and 2012. AFP resisted and brought this lawsuit seeking permanent injunctive relief, claiming that such information would “hinder citizens’ ability to freely and anonymously associate with AFP in violation of the First Amendment” and subject donors to potentially harmful actions by individuals opposed to AFP.
- AG Harris asserted that acquiring donor information is necessary to ensure that the charity or nonprofit is not being used to evade taxes, or for other fraudulent purposes. AG Harris also indicated that the information would only be used within the AG’s office and would remain confidential.
Consumer Financial Protection Bureau
CFPB Takes Action Against Mortgage Companies for Allegedly Deceptive Ads
- The Consumer Financial Protection Bureau (CFPB) filed suit against All Financial Services, LLC, and settled with Flagship Financial Group, LLC and American Preferred Lending, Inc., over alleged violations of the 2011 Mortgage Acts and Practices Advertising Rule. The Rule prohibits the use of misleading claims in mortgage advertising, including among other things, creating the implication of government affiliation or endorsement of a mortgage product.
- The CFPB alleged that the mortgage companies mislead consumers through the use of terms like “FHA-insured” or “HUD-approved,” or otherwise misrepresented that they were selling mortgage products affiliated with a government entity in the course of conducting direct mail promotion activities.
- The CFPB’s lawsuit against All Financial is pending in U.S. District Court for the District of Maryland. The CFPB entered into administrative consent orders with the other two lenders, requiring Flagship Financial to pay $225,000 in civil penalties, and American Preferred to pay $85,000. In addition, both settling companies must implement compliance monitoring and reporting programs.
Ohio Sues Debt-Recovery Company Said to be “Spoofing” as Government
- Ohio AG Mike DeWine filed a lawsuit against debt collector Nationwide Recovery Group, LLC and its owner Michael McCarthy (Nationwide) for violating the Ohio Consumer Sales Practices Act and the Fair Debt Collection Practices Act.
- The AG’s complaint alleges that Nationwide impersonated local government and law enforcement—including various court clerks, sheriffs, and investigators—in its attempts to collect debts from Ohio consumers. In some cases, Nationwide is alleged to have “spoofed” consumers’ caller IDs to display a government phone number and threatened consumers with arrest or legal action if they did not repay the alleged debt immediately.
- The lawsuit is pending in the Montgomery County Court of Common Pleas, and seeks restitution as well as civil penalties.
President Obama Issues Executive Order on Private Sector Information Sharing
- President Obama signed an executive order designed to increase information sharing among private companies, nonprofit organizations and government agencies regarding threats, vulnerabilities, and attacks occurring over the internet.
- The Order specifically directs the Department of Homeland Security to foster the creation of Information Sharing and Analysis Organizations (ISAOs). It also seeks to establish mechanisms that maintain and improve the functions of ISAOs and facilitate information dissemination and private sector partnership with the federal government—specifically through the National Cybersecurity and Communications Integration Center.
Indiana Attorney General Proposes Stronger Data Privacy Legislation
- Data privacy legislation proposed by Indiana AG Greg Zoeller passed a key hurdle as it was approved by the Indiana Senate Committee on Homeland Security and Transportation and will now be considered by the entire Senate.
- Indiana Senate Bill 413 would expand data breach notification obligations to breaches involving non-computerized data, and would apply to data collectors and users. The current law applies only to data owners.
- The bill would also require companies to employ reasonable procedures to ensure that no personal information is retained “beyond what is necessary for business purposes or compliance with applicable law.” It would also require online entities that collect personal or financial information from Indiana residents to conspicuously post their privacy policies, identifying the types of personal information collected from site visitors, and to whom the information is shared or sold.
Missouri Collects $43.9 Million for Environmental Remediation in National Settlement
- Missouri AG Chris Koster announced that the state will receive $43.9 million from Anadarko Petroleum Corporation as part of a nationwide $5.15 billion settlement regarding the 2006 acquisition of Kerr-McGee Corporation.
- The environmental claims settled by Anadarko stem from the 2009 bankruptcy of Tronox Ltd. Tronox’s creditors together with the U.S. Department of Justice claimed that Kerr-McGee fraudulently saddled Tronox with most of its environmental liabilities and then divested the company to make Kerr-McGee a more attractive acquisition for Anadarko.
- The majority of Missouri’s portion of the settlement—$38.2 million—will go toward remediating two sites formerly owned by Kerr-McGee, and used for creosote wood treatment. The remaining $5.7 million will be applied to the state’s Natural Resource Damages program to remediate contaminated sites for public use.
States vs Federal Government
Round One Goes to Texas in Lawsuit Challenging President’s Executive Action on Immigration
- Andrew Hanen, a federal judge for the Southern District of Texas, ruled in favor of Texas and 25 other state plaintiffs, enjoining the implementation of certain aspects of President Obama’s executive action on immigration. The U.S. Department of Justice has indicated it will appeal the decision.
- Judge Hanen’s decision turned on his interpretation of the requirements of the Administrative Procedure Act (APA). Judge Hanen found that the proposed executive action, effectuated through changes in Department of Homeland Security operations, created a “substantive change to immigration policy” and thus was properly classified as a rule or regulation that must comply with the APA’s requirement of being first published in the Federal Register for a period of notice and comment.
- Texas AG Ken Paxton, who is lead plaintiff along with 25 other states, called the decision “a victory for the rule of law in America.” In contrast, Washington AG Bob Ferguson, who led a group of AGs from twelve states and the District of Columbia in filing an amici brief in support of the President’s actions, indicated that this ruling was only the beginning.
Eleven Attorneys General Argue Mississippi Has Authority to Investigate Google
- Eleven AGs, led by Kentucky AG Jack Conway, filed an amici brief in federal court in support of Mississippi AG Jim Hood’s attempt to investigate Google, Inc. for alleged violations of the Mississippi Consumer Protection Act through the issuance of an administrative subpoena. Kentucky AG Jack Conway was lead AG on the brief.
- The subpoena demanded that Google produce information related to AG Hood’s allegations that the company does not take appropriate measures to limit illegal activity on the internet, and derives revenue from such activities, including the exchange of pirated materials and the promotion of illegal drugs. Google objected to the subpoena and filed a lawsuit in federal court seeking an injunction to block the subpoena and the investigation.
- Google argued that the 1996 Communications Decency Act shields online companies like Google from liability arising out of materials posted by third parties, essentially providing immunity from the AG’s investigation. In their brief, the eleven amici AGs respond that even if Google is ultimately immune, that would be a defense to a lawsuit, and not to an AG investigation. Moreover, the AGs argue that the proper response when objecting to an administrative subpoena is through the state court system, not a federal lawsuit.
- The case is Google, Inc. v. Hood, 3:14-CV-00981. The parties are scheduled to argue their positions on AG Hood’s Motion to Dismiss on February 20 in front of Judge Henry T. Wingate for the Southern District of Mississippi.
Louisiana Attorney General Sues Drug Maker for Allegedly Delaying Generics
- Louisiana AG Buddy Caldwell filed a lawsuit alleging that GlaxoSmithKline LLC (GSK) violated the Louisiana Monopolies Act and Unfair Trade Practices Act by preventing or delaying Federal Drug Administration (FDA) approval of generic versions of Flonase (fluticasone propionate) to keep them from entering the market.
- The complaint is based on a novel theory of liability, alleging that GSK used a “brand maturation” scheme, described as a combination of the following four actions: influencing the FDA bioequivalence guidance process; filing “baseless” citizen petitions with the FDA; drafting a new set of procedures and acceptance criteria in order to set standards for quality, purity, strength and consistency; and supplementing its original New Drug Application in an attempt to delay the FDA from approving applications from generic producers.
- The case was originally filed in state court, but has been noticed for removal to the Middle District of Louisiana. In its Notice of Removal, GSK asserts that its actions were done in compliance with standard FDA procedures. The AG is seeking restitution for “unlawfully inflated prices” paid by the state and treble damages.
Consumer Financial Protection Bureau
CFPB Secures $2 Million in Civil Penalties From Nonbank Mortgage Lender
- The Consumer Financial Protection Bureau (CFPB) reached an agreement with New Day Financial, LLC, to resolve claims that the non-bank lender engaged in deceptive advertising in violation of the Dodd-Frank Act and paid illegal kickbacks in violation of the Real Estate Settlement Procedures Act.
- New Day’s primary business was to originate refinance mortgage loans guaranteed by the Veterans Benefits Administration. The CFPB alleged that New Day agreed to pay “lead generation” fees to a veterans’ organization and a broker that facilitated the arrangement, in addition to a monthly licensing fee to the broker. In exchange, the veterans’ organization named New Day its exclusive lender and referred veterans to New Day. New Day also allegedly advertised its exclusive endorsement to the members of the veteran’s organization without disclosing the financial relationship between them.
- In accordance with the consent order, without admitting any of the allegations, New Day will implement a compliance plan to ensure its marketing of mortgage products complies with the law and must pay $2 million to the CFPB’s Civil Penalty Fund.
Stealth Solar’s Alleged Violations Detected by Arizona Attorney General
- Arizona AG Mark Brnovich settled with Stealth Solar, LLC, and its owners, resolving a lawsuit alleging that Stealth’s sales force violated the Arizona Consumer Fraud Act by making false and deceptive statements to consumers in order to sell photovoltaic electricity generation (PV) systems.
- The consent judgment outlines a series of allegedly false or deceptive statements made by Stealth, including claims that utility bills will increase 10 to 12 percent per year without a PV system, or that 70 percent of the costs of a PV system are covered by government incentives.
- Pursuant to the terms of the consent judgment, Stealth is enjoined from making unsubstantiated claims and will pay $72,000 in restitution to consumers, as well as additional restitution based on consumer complaints received by the AG until July 1, 2015.
West Virginia Cracks Down on Pool Company Allegedly Violating Mortgage Laws
- West Virginia AG Patrick Morrisey settled with Blue World Pools, Inc., regarding allegations that the company violated the West Virginia Consumer Credit and Protection Act in connection with the sale and financing of swimming pools in West Virginia.
- AG Morrisey alleged that Blue World used deceptive sales practices to secure finance agreements by filing a deed of trust against the consumer’s property in which it was named as trustee, a practice the AG alleged was tantamount to making mortgage loans without a license. In addition, Blue World allegedly failed to make necessary financial disclosures and, in some cases, charged annual percentage rates that exceeded limits allowed in the state.
- Blue World did not admit to the allegations, but agreed to resolve the AG’s claims through an assurance of discontinuance, in which it agreed to pay $1 million to the state with $500,000 designated for consumer restitution. Blue World also agreed to cancel almost $650,000 in consumer debt, and to request that credit reporting agencies delete any adverse information it may have reported.
Attorneys General Take Action in Health Insurer’s Data Breach
- Massachusetts AG Maura Healey formally announced that her office is investigating the data breach at Anthem, Inc., through which hackers were able to gain access to information pertaining to Anthem’s current and former customers and employees, including names, birthdates, social security numbers, addresses, email addresses, and employment and salary information.
- In addition, at least ten other AGs sent a letter demanding that Anthem provide better information as to who might be affected and to reimburse consumers who suffer losses during the delay between the breach and the notification and provision of credit monitoring.
- Anthem has created a website to provide information and guidance on this issue, on which it indicates that it will contact affected consumers directly. In addition, Anthem has posted answers to frequently asked questions and will be offering credit monitoring services for affected consumers.
Illinois Attorney General Asks Congress for Strong Data Breach Law, but Not Preemption
- Illinois AG Lisa Madigan testified before a U.S. Senate subcommittee, urging Congress to enact a strong federal law to address data protection, but to do so without preempting state efforts. AG Madigan stated, “A weak national law that restricts what most state laws have long provided will not meet Americans’ increasing and rightful expectation that they be informed when their information has been stolen.”
- As we have previously reported, data security has become a vibrant issue in state legislatures, and State AGs have been very active in investigating data breaches and pushing for stronger state laws.
False Claims Act
Attorneys General Look to Strengthen State False Claims Acts
- Maryland AG Brian Frosh urged the Maryland General Assembly to adopt a broader version of the state’s False Claims Act, calling it his “top priority for the 2015 legislative session.” Currently, the Maryland law only applies to Medicaid and health-related fraud.
- Under the bill submitted to the Senate and House of Delegates, which would apply to both state and local government, individuals would be able to report fraud committed by state contractors to the AG or local State’s Attorney, who would review and pursue those claims with the most merit. If a case is successful, the state may receive triple damages, while the whistleblower would collect a reward and also receive protection against on-the-job retaliation.
- Other AGs are also pushing for more potent legislation to address false claims. In addition, states that enact federally compliant laws are able to keep a larger percentage of the money recovered from national lawsuits and settlements based in part on the federal False Claims Act.
Iowa Settles With Home Medicaid Services Provider
- Iowa AG Tom Miller, together with the U.S. Department of Justice (DOJ), settled with ResCare Iowa, Inc., resolving claims that, from 2009 to 2014, the medical services provider violated the False Claims Act by submitting false home healthcare billings to Medicare and Medicaid programs.
- AG Miller and the DOJ accused ResCare of failing to provide proper documentation demonstrating that an independent physician performed a face-to-face assessment of each patient and that the physician certified that home care was medically necessary.
- ResCare agreed to pay $5.63 million to resolve both state and federal claims, with $2.32 million going to Iowa.
Attorney General Counsels Council That It Lacks Authorization to Enact Marijuana Law
- The District of Columbia Council canceled a hearing to debate Bill 21-23, the “Marijuana Legalization and Regulation Act of 2015” (Bill) after being advised by District AG Karl Racine that to do so would be unlawful.
- In a letter to various Council members, AG Racine advised that the Federal Appropriations Act for 2015 expressly prohibited the D.C. government from using 2015 funds to “enact any law, rule, or regulation to legalize or otherwise reduce penalties” for the use of marijuana for recreational purposes. AG Racine iterated this would apply to even a preliminary hearing, and thus Council members and District employees could be liable under the Anti-Deficiency Act, which prohibits the expenditure of funds that have not been appropriated. Among other things, AG Racine also highlighted that the Bill in current form goes beyond simply decriminalizing small amounts of marijuana, and thus expands the measure approved by voters in last year’s Ballot Initiative 71.
States v. Federal Government
Oklahoma Attorney General Voices Concerns to Congress Over EPA Rule, Threatens Legal Battle
- Oklahoma AG Scott Pruitt testified at a Senate-House committee hearing, and continued to voice objections shared by other AGs to a proposed rule that would expand Environmental Protection Agency (EPA) jurisdiction under the U.S. Clean Water Act.
- The EPA’s proposed rule seeks to broaden and clarify the definition of water that falls under the regulatory powers of the EPA to include seasonal and rain-dependent streams, as well as wetlands that are close to rivers.
- The AGs arguing against the rule highlighted the potential to disrupt small businesses ranging from farmers to home builders by requiring them to obtain EPA approval for any action that might affect surface water. However, other AGs and federal lawmakers indicated that the AGs’ concerns were not supported by the text and purpose of the rule. The EPA plans to make the rule final this spring, but according to EPA head Gina McCarthy, the final wording of the rule will “provide more clarity on the basis of the comments that we received.”
Nevada and Washington Attorneys General Approve Grocery Store Merger With Divestitures
- Nevada AG Adam Laxalt and Washington AG Bob Ferguson entered into consent decrees resolving separate lawsuits that challenged a proposed $9.2 billion merger between rival grocery chains AB Acquisition LLC (Albertsons) and Safeway Inc.
- The Nevada and Washington consent decrees expressly adopt the terms and conditions of a Federal Trade Commission (FTC) proposed consent order, giving the State AGs the power to enforce the terms and conditions in the FTC order.
- The FTC’s analysis found that the merger as initially proposed would lead to anticompetitive results in 130 local markets across western states. In some markets there would be only one remaining grocer. Thus, the FTC conditioned merger approval upon the divestiture of 168 stores from the merged entity to smaller regional grocery chains. As part of this divestiture, the largest ever requested by the FTC in the grocery sector, 146 stores will be acquired by Haggen Holdings, LLC, a grocer that operated only 18 stores in Washington and Oregon prior to the merger.
Consumer Financial Protection Bureau
CFPB Secures Debt Forgiveness for Students as For-Profit Colleges Are Acquired by Nonprofit
- The Consumer Financial Protection Bureau (CFPB) reached an agreement with ECMC Group, Inc., and newly created nonprofit Zenith Education Group, Inc., (together ECMC) in connection with ECMC’s purchase of more than 50 Everest and WyoTech campuses from Corinthian Colleges, Inc.
- Under the agreement, ECMC will provide $480 million in debt forgiveness to former Everest and WyoTech students in exchange for the CFPB releasing ECMC from any liability for prior violations of the Consumer Financial Protection Act or the Fair Credit Reporting Act during the period the colleges were owned by Corinthian.
- In addition to debt forgiveness, ECMC agreed not to engage in improper debt collection practices and will instruct credit reporting agencies to delete any related negative information on former students’ credit reports. ECMC will also provide additional information on post-graduation employment, offer flexible withdrawal policies, and refrain from offering its own private loans to students for seven years, among other measures to improve accountability and transparency.
CFPB Prepares Rule to Regulate Payday Lending
- According to news sources, the CFPB is preparing federal rules to regulate payday lending, a practice it defines as “a short-term loan, generally for $500 or less, that is typically due on your next payday.”
- The CFPB has authority to promulgate rules to regulate payday lending under the 2010 Dodd-Frank Act. However, unlike state laws that address the issue (if at all) through maximum allowable interest rates, Dodd-Frank does not authorize rate caps. Instead, the CFPB will address the issue by declaring certain industry practices to be unfair, deceptive, or abusive to consumers. Because State AGs have authority to enforce CFPB regulations under Section 1042 of Dodd Frank, this and any other rule promulgated by the CFPB can also be enforced by State AGs.
New Jersey Brings Lawsuit to Shut Down Auto Warranty Seller
- Acting New Jersey AG John Hoffman settled with Direct Buy Associates, Inc., d/b/a Direct Buy Auto Warranty, for allegedly selling “comprehensive,” or “bumper-to-bumper” auto warranties that limited coverage for repairs above the Manufacturer’s Suggested Retail Price for parts or for labor that exceeded the current national flat rate.
- The lawsuit alleged multiple violations of the New Jersey Consumer Fraud Act, the Plain Language Act, the Business Corporations Act, and regulations governing advertising.
- The final consent judgment requires Direct Buy to pay $199,560 in restitution to consumers who purchased the policies in question and submitted complaints to the AG’s Consumer Division, in addition to a $500,000 civil penalty, of which $400,000 will be suspended subject to Direct Buy’s compliance with the agreement. Direct Buy must also pay $111,009 to reimburse the state for attorneys’ fees and investigative costs.
New York Attorney General Uncovers Herbal Supplements Allegedly Lacking Advertised Ingredients
- New York AG Eric Schneiderman announced this week that his office has issued cease and desist letters to four major retailers—GNC Holdings, Inc.; Target Corporation; Walgreen Co.; and Wal-Mart Stores, Inc.— for allegedly selling store brand herbal supplements that did not contain the claimed ingredients as determined by the AG office’s testing methodologies, and/or were found to contain ingredients not listed on the labels.
- The investigation focused on supplements claiming to contain echinacea, garlic, gingko biloba, ginseng, St. John’s wort, saw palmetto, or valerian root. Through the use of a process called “DNA barcoding,” the AG’s investigation concluded that 79 percent of the supplements did not contain any amount of the herb claimed. In addition, 35 percent of the supplements tested allegedly contained ingredients not listed on the label, including allergens like gluten or nuts.
- In response to the allegations, Steve Mister, president and CEO of the Council for Responsible Nutrition, stated that “[p]rocessing during manufacturing of botanical supplements can remove or damage DNA,” and that DNA barcoding “has been roundly criticized by botanical scientists who question whether [it] is an appropriate or validated test for determining the presence of herbal ingredients in finished botanical products.”
Vermont Attorney Settles With Marketing Company Over Use of Personal Information
- Vermont AG William Sorrell reached a settlement with Main Street Power Mail, Inc., resolving allegations that it violated the Vermont Consumer Protection Act through attempts to generate leads for third-party insurance agents by soliciting consumers’ personal information through the mail without disclosing that the information would be used to make sales calls.
- The assurance of discontinuance requires Main Street, jointly and severally with owner Kyle Malott, to pay $90,000 to the state. In addition, it requires Main Street to refrain from contacting any Vermont consumer in order to generate business leads without properly disclosing that the consumer may be solicited to purchase a product or service.
New York Attorney General Obtains Judgment Against Pizza Franchisee
- New York AG Eric Schneiderman, with cooperation from the U.S. Department of Labor, obtained a judgment for $789,507 against Emstar Pizza, Inc. and its owner, Emmanuel Onuaguluchi, operating Papa John’s franchises, for violations of New York labor laws.
- AG Schneiderman’s lawsuit asserted that Emstar Pizza, over the course of six years, unlawfully reduced workers’ pay by under-reporting and rounding down hours worked to the nearest whole hour and failed to pay overtime.
- In addition, the judgment permanently enjoins Emstar from selling its assets unless the proceeds from such sale are held in escrow, which AG Schneiderman can use to distribute as restitution to underpaid employees.
False Claims Act
Massachusetts Settles With Neighborhood Pharmacy Over Auto Refill Practices
- Massachusetts AG Maura Healey settled with Neighborhood Diabetes, Inc., d/b/a Neighborhood Pharmacy, resolving claims that the pharmacy automatically refilled prescriptions in violation of MassHealth (Massachusetts’ Medicaid program) regulations that prohibit automated refilling and billing the state for prescriptions that were not explicitly requested by a MassHealth patient or caregiver.
- Under the settlement, Neighborhood Pharmacy will pay $1.5 million to the Commonwealth, and will cease providing automatic refills and/or dispensing drugs to MassHealth patients without the required authorizations and copayments.
Standard & Poor’s Settles With States and Federal Government for $1.37 Billion
- Standard & Poor’s Financial Services, LLC, (S&P) agreed to settle multiple lawsuits brought by 20 AGs and the U.S. Department of Justice alleging securities fraud and violations of state unfair and deceptive practices acts.
- According to Connecticut AG George Jepsen, the states’ lawsuits were based on conduct from 2001 to 2007, whereby S&P allegedly made repeated statements that its ratings were objective, independent, and uninfluenced by any conflicts of interest, but in reality S&P was influenced by its desire to earn lucrative fees from its investment bank clients and “assigned inflated credit ratings to toxic assets packaged and sold by Wall Street investment banks.”
- Pursuant to the settlement agreement, S&P will pay a total of $1.375 billion, of which $687.5 million will go to the states collectively, with individual states receiving from $22 million to $210 million. Although S&P did not admit that it violated any laws, it signed a statement of facts acknowledging that the company did not downgrade underperforming assets and delayed implementing new ratings models because it was worried that doing so would hurt the company’s profitability.
- Last month, S&P settled with New York, Massachusetts, and the U.S. Securities and Exchange Commission for $80 million, resolving similar claims based on S&P’s post-financial crisis ratings methodology.
States vs Federal Goverment
Dueling Amici Frame Arguments in Affordable Care Act Case
- Oklahoma AG Scott Pruitt, leading a group of six states, submitted an amici brief in support of petitioners in King v. Burwell, pending in the U.S. Supreme Court. Virginia AG Mark Herring, leading a group of 22 states and the District of Columbia, submitted an amici brief in support of respondents.
- The issue is whether the Internal Revenue Service is justified in drafting regulations that provide premium-assistance tax credits for individuals in states that did not establish their own exchanges under the Affordable Care Act (ACA), but instead participate in the federally-facilitated health insurance exchange. Oral argument in the case is scheduled for March 4,2015.
- AG Pruitt’s brief focuses on a textual interpretation of the ACA, arguing that the law conditioned the availability of tax credits on states’ participation in establishing exchanges. Moreover, it argues that states made their decisions to not establish exchanges, and thus to avoid certain mandates under the law, based on a reading of the plain text of the ACA.
- In contrast, AG Herring’s brief argues from a functional perspective, that without interpreting the law as providing tax credits regardless of whether the exchange was federally-established, the ACA becomes unworkable and would disrupt state insurance markets. It also argues that the principle of constitutional doubt instructs that when selecting between two plausible interpretations of the ACA, the Court should adopt the interpretation that is constitutional.