Consumer Financial Protection Bureau
CFPB Settles With Military Payroll Processor Over Camouflaged Fees
- The Consumer Financial Protection Bureau (CFPB) settled with Fort Knox National Company and its subsidiary, Military Assistance Company, LLC, for charging hidden fees when processing military allotments in violation of the Consumer Financial Protection Act (CFPA). The military allotment system allows service members to transfer a portion of their pay into a pooled bank account out of which a processor makes payments to service members’ creditors.
- The CFPB alleged that the companies failed to send statements to clients and did not disclose certain fees charged in connection with their processing services, including a $5 fee to send a letter to the service member or to their current or past creditors, as well as a recurring monthly fee of $12 to $20 if an account sat idle with a positive balance for more than six months.
- The consent order requires the respondents to pay $3.1 million in monetary relief to be administered by the CFPB as redress for injured consumers. It also requires respondents to cease all actions alleged to be in violation of the CFPA, to assist the CFPB in locating injured consumers, and to create and maintain records that demonstrate compliance with the order for five years.
Vermont Attorney General Adopts Regulations to Clarify State’s “GE” Labeling Requirements
- Vermont AG Bill Sorrell formally adopted regulations to implement Act 120, Vermont’s law requiring that food products made with genetically engineered ingredients provide certain disclosures on the label.
- The new regulations, Consumer Protection Rule 121 (Rule), set forth the requirements for labeling unpackaged and packaged food produced or partially produced with genetic engineering, provide the format for sworn statements certifying that foods were not produced with genetic engineering (when applicable), and outline a safe harbor period whereby the AG will provide 30 days’ notice prior to issuing a civil investigative demand or initiating an enforcement action against any retailer alleged to be in violation of Act 120.
- The Rule indicates that violators can be liable for civil penalties up to $1,000 per day, per “uniquely named, designated and marketed product” in violation of the Rule. Act 120 and the Rule take effect on July 1, 2016.
FTC and CFPB Bring Lawsuit Against Mortgage Servicer
- The Federal Trade Commission (FTC) joined with the Consumer Financial Protection Bureau (CFPB) to bring a lawsuit in federal court in Minnesota alleging that Green Tree Servicing, LLC, violated the FTC Act, the Consumer Financial Protection Act, Fair Credit Reporting Act, Fair Debt Collections Practices Act, and the Real Estate Settlement Procedures Act in connection with its residential mortgage loan servicing and debt collection practices.
- The complaint alleges that Green Tree failed to honor loan modification agreements in connection with mortgages it acquired from prior servicers; delayed recognition of the in-process modification status of other borrowers; demanded payment from struggling borrowers without providing loss mitigation options such as loan modifications, deferrals, extensions or forbearances; and employed aggressive and threatening debt collection practices.
- The proposed stipulated order, which must be approved by the court, requires Green Tree to pay $48 million in consumer redress and $15 million in civil penalties. The order also requires Green Tree to implement programs that enhance consumer loss mitigation options, ensure the accuracy of consumer loan information before servicing the loans, and substantiate collection amounts when consumers are in the process of loan modifications or when there is reason to believe that Green Tree has flawed loan information.
Delaware Attorney General Announces Quartet of Online Privacy Bills
- Delaware AG Matt Denn and state lawmakers announced an array of proposed legislation to increase consumer privacy on the internet and through social media. AG Denn indicated that the proposals are designed to be consistent with laws already on the books in other states such as California and Georgia. The proposals include the following, which will be introduced in the upcoming legislative session:
- The Delaware Online Privacy and Protection Act, which would restrict marketing of certain products to children and require commercial internet services that collect personally identifiable information to provide users with an explanation as to how the service uses that information.
- The Employer Use of Social Media Act, which would prohibit employers from requiring employees and applicants to provide the employer with access to personal social media accounts.
- The Victim Online Privacy Act, which would make it unlawful to post or solicit information online related to a participant in the Department of Justice’s Address Confidentiality Program for the purpose of inciting violence or harm to that person.
- The Student Data Privacy Protection Act, designed to create guidelines for school districts, schools, teachers, and staff regarding permissible methods of collecting and using student data for appropriate educational purposes. It would also create procedures to protect the privacy and data security of students and their parents/guardians.
New York Attorney General Presses Legislation to Ban Microbeads
- New York AG Eric Schneiderman announced that the Microbead-Free Waters Act—legislation designed to address the increased presence of plastic microbeads from personal care products in waters across the state—passed the State Assembly and now awaits consideration by the Senate.
- Microbeads are used as abrasives in consumer products like toothpaste and body scrubs in lieu of natural materials like ground almonds or pumice. According to the AG, because microbeads are made of plastic, they absorb a variety of chemicals they come into contact with, and over time they become “toxic-sponges.” If released from a controlled system, such as municipal wastewater treatment, they can become a hazard for aquatic ecosystems.
- The Act seeks to ban the sale of any cosmetic product in which microbeads are intentionally added; it defines microbeads as sub-five-millimeter plastic components of personal cosmetic products. The recent legislative efforts to ban microbeads stem from a study conducted by AG Schneiderman, which identified a large number of wastewater treatment facilities from which microbeads are being discharged.
States v. Federal Government
Supreme Court Holds State Antitrust Laws Not Preempted by U.S. Natural Gas Act
- The U.S. Supreme Court issued a 7-2 decision in favor of the respondents in ONEOK, Inc. v. Learjet, Inc., holding that the U.S. Natural Gas Act does not preempt state antitrust laws that seek to prevent price-fixing in retail gas markets.
- The dispute consolidated multiple lawsuits, originally brought in state courts, into one multi-district litigation in the District of Nevada. The original plaintiffs (respondents at the Supreme Court) included an array of retail gas purchasers, from manufacturers to school districts and universities. The original defendants (petitioners at the Supreme Court) were a group of interstate pipelines and gas providers.
- The decision was in line with arguments made by a group of 21 AGs, led by Kansas AG Derek Schmidt, through an amici brief. The AGs had emphasized the distinction between the federal law’s intent to occupy the field when regulating interstate wholesale markets, and the state interest to protect consumers and small businesses purchasing through in-state retail markets. The petitioners, backed by an amicus brief from the federal government, had argued that the state laws were preempted because the challenged industry practices, although applied at the retail level, affected the interstate wholesale market.
Texas Attorney General Settles With Alleged Anticompetitive Dental Supplier
- Texas AG Ken Paxton filed a lawsuit against Benco Dental Supply Company (Benco) alleging that it engaged in anticompetitive conduct to prevent lower-cost dental suppliers from entering the market and simultaneously entered into a consent order with Benco settling the claims.
- The petition, which followed a year-long investigation, alleges that Benco shared information with established participants in the dental supply market and colluded with distributors and manufacturers to discourage them from forming working relationships with new market entrants. The new market entrants sought to bypass traditional distributors like Benco, and sell products without sales representatives through an online platform developed by the Texas Dental Association.
- In the consent order, Benco denied the AG’s allegations and did not admit liability; however, it agreed to pay $300,000 to the State for investigative costs and attorney’s fees. In addition, the consent order prohibits Benco from participating in agreements, or coercing other suppliers, to limit supply of dental supplies to any third party. It also precludes Benco from soliciting information from dental supply manufacturers and distributors related to their sales to third parties. Benco also agreed to provide the State with records of all communications between Benco officers and third parties regarding sales for a period of three years.
Consumer Financial Protection Bureau
CFPB Settles With Lender Over Use of Government Logos
- The Consumer Financial Protection Bureau (CFPB) settled with RMK Financial Corporation, resolving allegations that the mortgage lender engaged in deceptive mortgage advertising practices in violation of the Consumer Financial Protection Act, the Mortgage Acts and Practices Rules, and the Truth in Lending Act (TILA).
- The CFPB alleged that RMK used the names and logos of the Department of Veterans Affairs (VA) and the Federal Housing Administration (FHA) in print advertisements sent to more than 100,000 consumers—including thousands of U.S. military service members and veterans—across several states. The CFPB claimed that RMK used the logos to falsely and deceptively imply that the RMK and its mortgage products were sent, endorsed, or sponsored by the VA or FHA. In addition, the advertisements failed to adequately disclose certain information required under TILA, such as the type of mortgage product offered and whether the interest rates were variable.
- The consent order requires RMK to pay $250,000 in civil penalties and precludes RMK from seeking tax deductions in accordance therewith. It also requires RMK to develop and submit a compliance plan to the CFPB Enforcement Director demonstrating how RMK will implement the order and ensure that all future advertisements comply with federal law, and to keep detailed records on RMK’s advertising practices for five years.
CFPB Joins With Navajo Nation to Stop Alleged Predatory Lender
- The CFPB, together with the Navajo Nation, brought a lawsuit against S/W Tax Loans, Inc.; J Thomas Development of NM, Inc.; owner Jeffrey Scott Thomas; and the president of S/W, Dennis Gonzales, (defendants), for alleged violations of the Truth in Lending Act and the Consumer Financial Protection Act.
- The complaint alleged that defendants operated an illegal tax refund scheme through which employees of Thomas’ tax advisory practices were given bonuses to direct low-income Navajo customers seeking tax advice to “short-term, triple-digit-APR loans secured by the consumer’s anticipated tax refund” offered by S/W Tax Loans, when significantly lower interest rates were available at other businesses. The complaint alleges that Thomas and his employees also made deceptive statements regarding the loans offered, and failed to disclose that Thomas had a financial interest in S/W.
- The proposed consent order, which must be approved by a court, requires defendants to pay $254,267 in consumer redress in addition to $183,733 already paid in remediation, and $438,000 in civil penalties. It also enjoins defendants from providing tax refund anticipation loans, as well as assisting or receiving compensation from any person engaged in similar loans. Finally, the order precludes defendants from disclosing or using consumer information and mandates recordkeeping and reporting.
Massachusetts Attorney General Settles Claim Against Solar Power Developer
- Massachusetts AG Maura Healey settled with Soltas Energy Corporation over allegations that the solar power developer violated the state False Claims and Consumer Protection Acts by improperly allocating certain electricity credits related to the generation of solar power multiple times.
- Soltas had entered into power purchase agreements (PPAs) with two Central Massachusetts towns and two nonprofit organizations which required Soltas to allocate “net metering credits” for solar energy generated at a nearby location to the towns and nonprofits in return for fixed price electricity. Soltas, however, allegedly allocated the same credits to other customers through a public bidding process, negating the benefit to the parties to the PPAs.
- Pursuant to the terms of the assurance of discontinuance, Soltas has agreed to pay $330,000 in damages and restitution: $175,000 to Athol Memorial Hospital, $40,000 to the town of Petersham, $38,000 to the Athol YMCA, $22,000 to the town of Warwick, and $55,000 to the Commonwealth.
FTC Issues Final Order Barring App That Claims to Detect Melanomas
- In a 4 to 1 decision, the Federal Trade Commission (FTC) voted to approve a final consent order barring Health Discovery Corporation (HDC) from making claims that its smartphone app “MelApp” can detect or diagnose melanomas without HDC having proper scientific evidence to substantiate its claims.
- In the consent order, the FTC indicated that scientific testing must be accomplished in order to make claims of health efficacy for a product like MelApp. The FTC also identified the type of documentation that will be required, including those describing the testing methods and results, the recruitment and identification of participants, any statistical analysis of participants, and the sponsorship of such tests. HDC admits no fault, but agreed to pay $17,693 to the FTC.
State Attorneys General Go Back to Court to Prevent RadioShack Data Sale
- RadioShack has asked a bankruptcy court for approval to sell data on as many as 117 million customers as part of a second asset auction that includes various intellectual property, including the rights to the name RadioShack.
- Texas AG Ken Paxton, leading the group of AGs objecting to the sale of any consumer data that contains personally identifiable information (PII), asked the court to require RadioShack to specify whether the data being offered is limited to contact information, such as name, address, phone number, and email address, or whether it also includes other information such as credit card numbers or account history.
New York Attorney General Investigates “On-Call” Staffing Practices
- New York AG Eric Schneiderman has opened an investigation to determine whether certain retailers’ “on-call” scheduling practices violate New York labor laws. On April 10, the AG sent letters to 13 major retailers inquiring about their scheduling practices, giving them until May 4 to respond.
- According to AG Schneiderman, the practice in question involves requiring employees to check in by telephone, text message, or email before a scheduled shift to see if their services are still needed, allowing retailers to adjust staffing levels to meet customer traffic. AG Schneiderman claims, however, that New York law requires employers to pay employees who report for a scheduled shift at least four hours’ wages, even if they are sent home.
Attorneys General Back Students in Pursuit of Loan Forgiveness
- Nine State AGs, led by Massachusetts AG Maura Healey, have asked the U.S. Department of Education (DoE) to relieve student borrowers of the obligation to repay federal student loan debt that was originated to enroll in classes at Corinthian Colleges, Inc., in connection to Corinthian’s alleged violations of state law.
- In a letter to Secretary of Education Arne Duncan, the AGs argue that the Higher Education Act and DoE Regulations permit students to assert legal claims against schools as a defense to loan payment obligations.
- The AGs also urge the DoE to outline the formal process through which students can assert claims to have their loans discharged, including guidance on how students can request relief from loan servicers. Finally, the AGs suggest that the DoE accept findings from State AG investigations as sufficient evidence upon which students can assert their rights under the law.
- Corinthian objected to the “mischaracterization of our job placement efforts and the suggestion that we misrepresented these efforts” and drew a distinction between AG investigations and violations of law, stating that “[i]t is important to note the difference between findings and allegations—a number of state AGs have made allegations but as these cases are still in progress, it would be inappropriate to presume guilt without due process.”
Washington Legislature Passes Attorney General’s Bill to Prevent Patent Misuse
- The Washington House of Representatives passed AG Bob Ferguson’s Patent Troll Prevention Act (PTPA), designed to protect “small businesses from predatory and bad faith patent infringement claims and demands.” The bill overwhelmingly passed House and Senate votes, and is expected to be signed by the Governor.
- The PTPA prohibits alleged patent owners from asserting patent rights in bad faith, including: sending demand letters that contain false or deceptive information, threatening litigation if the demanded fee is not paid, and failing to identify the alleged infringement and/or the individual asserting ownership of the patent. It also precludes letters sent by parties who do not have the legal right to enforce the indicated patent.
- The PTPA provides the AG with enforcement authority under the Washington Consumer Protection Act to bring an action in the name of the state, or as parens patriae on behalf of persons residing in the state, and allows the AG to recover damages and attorneys’ fees, as well as to seek injunctive relief.
Massachusetts Attorney General Seeks Bill to Enhance Health Policy Commission Reports
- Massachusetts AG Maura Healey, together with House Majority Leader Ron Mariano, submitted a bill to the legislature intended to strengthen the State Health Policy Commission (HPC) and the AG’s ability to control rising consumer health care costs associated with mergers and acquisitions in the healthcare industry.
- The bill would provide that HPC’s Cost and Market Impact Review Reports create a presumption that a proposed merger or acquisition in the healthcare market is a violation of the Massachusetts Consumer Protection Act. HPC reports are referred to the AG if the HPC determines that a transaction will result in a provider gaining a dominant market share resulting in higher prices. The bill would also allow HPC reports to justify temporarily enjoining a proposed merger between healthcare organizations.
- Under the current law, HPC reports do not establish prima facie that the entities involved have engaged in unfair methods of competition in violation of the Massachusetts Consumer Protection Act. Instead, HPC reports “may be evidence” in any action brought by the AG.
Consumer Financial Protection Bureau
CFPB Sues Robo-Call Phantom Debt Collection Operation
- The Consumer Financial Protection Bureau (CFPB) filed a lawsuit charging Marcus Brown and Mohan Bagga, along with a group of debt-collection companies owned by them (Defendants) with orchestrating an illegal “robo-call phantom debt collection operation” in violation of the Consumer Financial Protection Act (CFPA) and the Fair Debt Collection Practices Act. The CFPB also brought claims under the CFPA against telemarketing firm Global Connect LLC and a group of payment processing companies for their roles in the underlying operation.
- The CFPB’s complaint alleged that Defendants purchased consumers’ old or expired debt and personal information from debt brokers and payday loan lead generators, and made robo-calls through Global Connect that threatened consumers with various legal actions. Defendants allegedly used the acquired consumer personal information (including Social Security Numbers and bank account information) to appear legitimate, and threatened that if the callers did not immediately pay the debts to defendants, they would be arrested for fraud or sued.
- The CFPB filed the lawsuit in federal court in the Northern District of Georgia and is seeking injunctive relief along with restitution, damages, disgorgement, civil penalties, and costs.
Florida Attorney General Settles With Home Security Providers
- Florida AG Pam Bondi settled with Security Networks, LLC and Vision Security, LLC for allegedly making false and misleading statements in violation of the Florida Deceptive and Unfair Trade Practices Act (DUTPA).
- The security providers allegedly deceived consumers in door-to-door sales by falsely representing that they were affiliated with their current security providers and that consumers’ current security systems were outdated and in need of upgrading. Once upgraded, consumers were allegedly charged for two security systems—their original system and the “upgraded” system.
- The Assurance of Voluntary Compliance for Security Networks, among other things, prohibits the company from making false statements to induce consumers to utilize their services, and requires Security Networks to cancel service contracts when a consumer has a legitimate basis and to pay more than $80,000 in restitution and $70,000 in attorneys’ and investigative fees to the Department of Legal Affairs.
- The Assurance of Voluntary Compliance for Vision Security, among other things, requires the company to suspend all business activities within Florida for two years, operate in compliance with Florida’s DUTPA after the two-year period, pay restitution to consumers, and pay attorneys’ and investigative fees of $18,134 to the Department of Legal Affairs.
New York Attorney General Teams With State Lawmakers to Push Payroll Card Legislation
- New York AG Eric Schneiderman announced that State Assembly Majority Leader Joseph Morelle and Senator Patrick Gallivan will sponsor the AG’s draft legislation to regulate the use of payroll cards. Payroll cards are prepaid debit cards through which an employee can access wages that are deposited electronically into an account at a bank selected by the employer or by the payroll card vendor.
- AG Schneiderman proposed the bill, the Payroll Card Act, in response to an investigative study undertaken by his office in 2013. Although payroll cards can serve as an efficient method to provide payment services to the unbanked, the AG’s study suggested that there were a growing number of cases where the use of payroll cards may hurt low-wage workers because they were often charged fees to gain access to their wages (through ATMs, point-of-sale purchases, electronic funds transfers, etc.).
- The Payroll Card Act seeks to regulate the use of payroll cards by, among other things, limiting fees and requiring adequate disclosure of the terms and conditions.
Ohio Attorney General Sues to Keep U.S. Army From Dumping Dirt in Lake Erie
- Ohio AG Mike DeWine, at the request of the Ohio State Department of Natural Resources and Environmental Protection Agency, filed a lawsuit against the U.S. Army Corps of Engineers (ACE) to prevent it from dumping sediment dredged from Cleveland Harbor and the Cuyahoga River into Lake Erie.
- The U.S. Water Resources Development Act of 2007 requires ACE to use available funds to maintain the navigability of the Great Lakes and connecting channels through dredging and other methods. ACE has proposed dumping the sediment from dredging in Lake Erie because it is the most cost-effective way to dispose of it. The AG asked ACE to deposit the sediment in a confined disposal facility, but ACE indicated that it will only comply with the AG’s request if a non-federal partner agrees to pay the extra costs.
- In the complaint, filed in the Northern District of Ohio, AG DeWine alleges, based on Ohio EPA studies, that the sediment collected from the prescribed dredging contains high levels of carcinogenic toxins, and dumping it in Lake Erie would violate a number of federal laws, including the National Environmental Policy Act and the Clean Water Act. AG DeWine seeks a range of declaratory and injunctive relief, specifically asking the court to order ACE to dispose of the sediment in a confined area without requiring reimbursement from a non-federal partner.
False Claims Act
Maryland Legislature Passes Enhanced False Claims Act
- A bill expanding the Maryland False Claims Act and strongly supported by AG Brian Frosh, passed the General Assembly and will be presented to Governor Larry Hogan for signature.
- The bill expands Maryland’s false claims law, bringing it into harmony with other states and the federal law. Whereas the previous law only applied to cases of Medicaid and healthcare-related fraud, the new law will open up potential claims in all areas of fraud committed against state and local governments. It will also provide incentives and protection to whistleblowers, including a share in the proceeds if the government recoups money as a result of the information they provide. AG Frosh anticipates the False Claims Act expansion will recoup millions for the state budget.
Texas Attorney General Settles With Generics Maker
- Texas AG Ken Paxton settled an enforcement action against pharmaceuticals manufacturer Glenmark Generics Inc. (the U.S. subsidiary of Glenmark Pharmaceuticals Ltd.), resolving allegations that Glenmark violated the Texas Medicaid Fraud Prevention Act by inflating the prices it reported to the Medicaid program.
- Glenmark admitted no fault in the settlement, and indicated that the settlement will not materially impact the organization’s operations, stating that it remains committed to “continuing our mission of providing… the finest generic pharmaceutical products in the US and complying with all applicable state and federal pricing requirements.”
- Pursuant to the settlement, Glenmark agreed to pay $25 million in 16 quarterly payments of $1.56 million. Of that amount, $11.25 million will go to the state’s general revenue fund, $11.25 million to the federal government, and $2.5 million to the Texas AG’s office for attorneys’ fees and costs.
States v. Federal Government
Attorneys General Submit Dueling Amici Briefs at DC Circuit
- Changes to the Department of Labor’s (DoL) Home Care Rule are at the center of a recent AG amici face-off in Home Health Care Association of America v. Weil, currently on appeal at the Court of Appeals for the DC Circuit. The new rule applies wage and hour requirements inherent in the Fair Labor Standards Act to home-care workers that were exempted under a domestic service exception in prior DoL regulations.
- Kansas AG Derek Schmidt together with eight other AGs submitted an amici brief in support of Appellees, various companies providing home care services. In their brief, the Schmidt-led AGs argue that the DoL does not have the legal authority to issue the regulations that require overtime compensation for home healthcare workers and place limits on the services that they can provide because Congress intended to exclude from overtime limitation “any employee” providing domestic service. The AGs also argue that the new rule changes the balance struck between states and the federal government under the Medicaid program.
- New York AG Eric Schneiderman, as lead AG for a group of eight submitted an amici brief in support of Respondents, DoL, et al, arguing that it was lawful and proper to extend wage and hour laws to home-care workers, as the industry has grown since the DoL first promulgated the prior regulations.
Consumer Financial Protection Bureau
The CFPB Takes First Steps to Reform Payday and Title Loan Practices
- The Consumer Financial Protection Bureau (CFPB) announced that it is considering proposed rules to regulate the market for short-term and long-term payday loans, as well as vehicle title, high-cost installment, and open-end credit loans, and deposit advance products. As the first step in the rulemaking process, the CFPB is convening a Small Business Review Panel to gather feedback from lenders.
- The proposed rules seek to eliminate concerns associated with certain kinds of loans marketed to vulnerable consumers through both prevention and protection measures. Under the prevention measures, lenders would be required to determine at the outset whether the consumer will be able to repay the loan on time. Alternatively, lenders could choose to satisfy certain protection measures, which include limiting the number of consecutive loans to a single borrower over the course of a 12-month period.
- In addition, the proposed rules seek to reduce the perceived harm caused by lenders who collect directly from consumers’ checking accounts. The proposed rules would require lenders to provide three business days’ notice before submitting a payment request to the consumer’s account and would limit the number of unsuccessful attempts to collect from a consumer’s account.
FTC Reveals New Actions Against Auto Industry in “Operation Ruse Control”
- The Federal Trade Commission (FTC) announced “Operation Ruse Control,” a series of actions and proposed consent orders resulting from a nationwide enforcement effort targeting alleged deceptive marketing practices in the auto sales and financing. The FTC worked with multiple federal and state law enforcement agencies in this effort and marks the first significant foray into this area under the enhanced authority to regulate auto dealers provided by the Dodd-Frank Act. The FTC states that these six new cases include more than $2.6 million in monetary judgments.
- One area specifically addressed by the enforcement actions was “add-ons,” which is the practice of a dealer adding charges for other products or services to the vehicle sales, lease, or finance agreement. Add-ons can take the form of extended warranties, special payment programs, guaranteed automobile protection (commonly called GAP or GAP insurance), credit life insurance, road service, theft protection, and undercoating. Auto lenders and car dealerships were also targeted for alleged deceptive advertising, loan application fraud, odometer fraud, and deceptive marketing of car title loans.
New York Attorney General Settles With Herbal Supplement Retailer
- New York AG Eric Schneiderman reached a settlement agreement with GNC Holdings, Inc., arising out of his investigation of herbal supplements. Under the terms of the settlement agreement, GNC will implement source material traceability standards that utilize DNA barcoding to confirm the authenticity of ingredients prior to any extraction processes, and will display signage at its retail locations regarding whole herbs and extracts.
- The Assurance of Discontinuance provides that the AG’s office found no evidence that GNC deviated from the FDA Current Good Manufacturing Processes rules or standard industry practice in the production of the supplements at issue.
- The Council for Responsible Nutrition (CRN), a trade association representing dietary supplement and functional food manufacturers, issued a statement on the GNC settlement, calling it “a real disservice to consumers because it wrongly perpetuates the misdirected notion that DNA barcode testing is appropriate for herbal supplements, when it is not.” CRN further explained that “federal law already requires dietary supplement manufacturers to adhere to good manufacturing practices… and to perform ‘at least one appropriate test’ for the identification of raw materials. FDA, the federal agency charged with enforcing these requirements, does not require DNA barcode testing for plant identification of dietary supplements, nor does it use DNA sequencing by itself for identification of herbal extracts.”
Five States File Lawsuits to Stop Allegedly Fraudulent Magazine Subscription Seller
- AGs from Minnesota, Missouri, New York, Oregon, and Texas collaborated to bring separate state lawsuits against Liberty Publishers Services, Inc., Orbital Publishing Group, and a “labyrinth of corporate entities” that were allegedly created to disguise a nationwide scheme to deceive consumers into renewing magazine subscriptions at exorbitant rates.
- The AGs allege that the various defendants represented that they were offering magazine and newspaper subscription renewals designed to look like they came directly from various well-known publishers, and offering “one of the lowest available rates,” while in fact they were operating without the publishers’ permission and charging, in some cases, more than double the publication price and pocketing the difference.
- The AGs’ lawsuits allege violations of state deceptive business practices and false advertising laws, and seek injunctive relief, restitution, and civil penalties as authorized by state law. In addition, the Oregon complaint also alleges that a group of defendants operated as a criminal enterprise, and thus seeks civil penalties for racketeering, as well as forfeiture of any real and personal property used in the course of the alleged activity.
Attorneys General Succeed in Blocking the Sale of Consumer Data in Bankruptcy
- Texas AG Ken Paxton, leading a group of 30 AGs, filed an objection in RadioShack’s bankruptcy proceedings to the potential sale of personally identifiable information of 117 million consumers collected by RadioShack.
- Although RadioShack has agreed to move forward without a data sale in order to hasten the sale of assets to a buyer that will keep the electronics retailer’s business intact, the electronics retailer did not completely rule out such sale in the future. AG Paxton is still wary and is urging RadioShack to vow to keep the customer data private.
Attorneys General File Amici Brief in Support of Colorado and Federalism
- Washington AG Bob Ferguson and Oregon AG Ellen Rosenblum filed an amici brief in the U.S. Supreme Court in support of Colorado in an action commenced by Nebraska and Oklahoma. Nebraska and Oklahoma are seeking leave to file a complaint challenging the legality of Colorado’s marijuana legalization and regulatory regime under federal law.
- The AGs argue in their brief that the Supreme Court should not accept this dispute under its original jurisdiction because it does not involve competing state sovereign interests—i.e., a state’s power to adopt its own laws—but rather addresses whether federal controlled substance laws preempt the state law at issue. The AGs also argue that the Court should be sensitive to federalism, which “invites the States to explore new legal policies and address changes in society,” including experimenting with different marijuana policies.
- The AGs also argue that Nebraska and Oklahoma lack standing, in that the remedy sought (a declaration that Colorado’s marijuana laws are preempted) would not redress the alleged harm (increased quantities of marijuana crossing state lines). Under the anti-commandeering doctrine, the AGs contend, a federal court cannot require state law enforcement to enforce federal law.
Mortgages and Foreclosures
Massachusetts Attorney General Secures $1.9 Million Judgment Against Pinnacle for Mortgage Modification Scam
- Massachusetts AG Maura Healey prevailed in her office’s lawsuit against Pinnacle Financial Consulting, LLC, and owner Robert Burton, establishing that the defendants harmed struggling homeowners by engaging in unfair or deceptive practices and the unauthorized practice of law in connection with providing foreclosure-related services.
- AG Healey alleged that the defendants deceived consumers by stating they could provide loan modification and bankruptcy petition preparation services while also exaggerating the benefits thereunder. AG Healey also alleged that the defendants violated state law by charging advance fees for foreclosure assistance, practicing law without a license, and failing to provide the promised services after receiving payment and refusing to give refunds.
- The judgment orders the defendants to pay restitution to affected consumers totaling $1.2 million and civil penalties of $665,000. It also orders the defendants to pay approximately $55,000 in attorneys’ fees and costs to the Commonwealth. The AG’s office had previously secured an order of contempt when defendants violated a preliminary injunction, resulting in the court ordering approximately $170,000 in penalties, $30,400 in restitution, and $39,800 in fees and costs.
States v. Federal Government
North Dakota Joins Wyoming Lawsuit to Challenge New Federal Fracking Rules
- North Dakota AG Wayne Stenehjem announced that his state will join a lawsuit filed by Wyoming on March 26, 2015, to challenge a Bureau of Land Management (BLM) final rule that regulates underground injections used in the fracking industry.
- The BLM Final Rule applies to drilling on federal land and, among other things, requires the operator of a well “to submit detailed information about the proposed operation, including wellbore geology, the location of faults and fractures, the depths of all usable water, estimated volume of fluid to be used, and estimated direction and length of fractures” prior to drilling. It also requires the operator to disclose the chemicals used in the fracking process to the BLM and the public.
- Wyoming and North Dakota argue that the BLM does not have statutory jurisdiction to regulate underground injections, for which the U.S. Safe Drinking Water Act gives exclusive authority to the Environmental Protection Agency. The lawsuit is Wyoming v. U.S. Dept. of Interior Secretary, No. 15-cv-00043, and is pending in federal court in the District of Wyoming.
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.