State AG Monitor

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

Posted in Consumer Protection, Investigations

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

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

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

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

Supplements and the FDA

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

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

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

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

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

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

The State AG Investigation

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

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

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

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

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

Looking Ahead

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

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




State AGs in the News

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


FTC and State AGs Succeed in Preliminarily Blocking Food Distribution Merger

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

Consumer Financial Protection Bureau

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

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

Consumer Protection

New York AG Settles With App-Based Livery Services Provider

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

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

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

West Virginia Reaches Settlement With Virginia Lender

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


Washington Attorney General Releases Guidelines for Minimum Wage Surcharges

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

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

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

False Claims Act

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

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

For-Profit Colleges

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

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

States v. Federal Government

Congress Contemplates Bill That Would Preempt State GE Labeling Laws

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

State AGs in the News

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

AG Insights

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

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

Consumer Protection

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

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

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

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

State AGs Push for Stronger Regulation of E-Cigarettes

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


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

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

False Claims Act

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

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

States v. Federal Government

Court Sets Hearing for States to Argue Against Federal Fracking Regulations

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

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

Posted in Consumer Protection

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

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

The Act

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

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

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

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

Disclosure is the Goal

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

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

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

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

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

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

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

*     *     *     *     *

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

State AGs in the News

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


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

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

Consumer Financial Protection Bureau

CFPB Decides First Appeal of Administrative Decision

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

CFPB Issues Final Rule to Regulate Nonbank Auto Finance Industry

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

Consumer Protection

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

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

Data Privacy

RadioShack Reaches Agreement to Proceed With Data Sale, Again

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

False Claims Act

Georgia Settles With Hospitals Over Alleged Kickbacks for Undocumented Patient Referrals

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

Intellectual Property

Federal Court Moves Forward With Suit Challenging Vermont Patent Assertion Law

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

State AGs in the News

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


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

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

Consumer Financial Protection Bureau

CFPB and Florida Attorney General Secure Judgment Against Foreclosure Relief Company

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

Consumer Protection

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

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

Data Privacy

FCC Advises Broadband Providers to Protect Consumer Privacy

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

Connecticut Legislature Seeks to Enhance Data Breach Protections

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

False Claims Act

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

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

Court of Appeals Denies FCA Liability for Changes in Grant Execution

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


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

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

State AGs in the News

Posted in Antitrust, Charities, Consumer Protection, Data Privacy, For-Profit Colleges


FTC Approves Reynolds Acquisition of Lorillard, With Divestitures

  • The Federal Trade Commission approved Reynolds American’s (“Reynolds”) acquisition of Lorillard, on the condition that the companies divest four cigarette brands—Winston, Kool, Salem, and Maverick—to Imperial Tobacco Group. Reynolds originally offered to sell these four brands, along with Lorillard’s Blu e-cigarettes, as a condition of its $27.4 billion purchase in July 2014. The FTC’s Complaint (which it issued alongside its proposed Consent Order and redacted Decision and Order), does not mention Blu.
  • According to the FTC “without the divestiture to Imperial, the proposed merger raises significant competitive concerns by eliminating current and emergent, head-to-head competition between Reynolds and Lorillard in the U.S. market for traditional combustible cigarettes. It also increases the likelihood that the merged firm would unilaterally raise prices, and that coordinated interaction would occur between Reynolds and Altria, the remaining two large competitors in an already concentrated industry.”
  • The FTC approved the merger on a 3-2 vote, with Commissioners Brill and Wright voting no.


Minnesota AG Files Suit Against Savers for Alleged Charity Violations

  • Minnesota AG Lori Swanson filed a lawsuit against Savers, the nation’s largest thrift store chain, and its subsidiary Apogee Retail, Inc., alleging that it misled people who donated clothing and household goods about the extent their donations would benefit the intended charities.
  • The lawsuit follows a compliance report AG Swanson issued in November 2014 questioning the relationship between Savers and several Minnesota charities, including Vietnam Veterans of America, the Lupus Foundation of Minnesota, Courage Kenney Foundation, and True Friends.
  • Savers CEO Ken Alterman indicated in a statement that “[Savers was] disappointed by the decision of the Minnesota Attorney General’s office to take this action because [it had] made multiple attempts to work collaboratively on a resolution that benefits everyone involved. The money [Savers pays its] charitable partners furthers medical research and supports veterans and their families across Minnesota.”

Consumer Protection

States Reach Agreement With, Florists’ Transworld Delivery, and

  • A group of 22 AGs reached a settlement with Classmates, Inc.; Florists’ Transworld Delivery, Inc.; and Inc. (the “Defendants”) to resolve allegations that the companies engaged in misleading billing and advertising practices. According to the allegations, third-party marketers offered discount buying clubs and travel rewards programs through negative option sales on Defendants’ websites, and signed consumers up for the services unless they specifically declined. The Defendants also allegedly shared consumers’ personal information, including credit card account numbers, without the consumers’ knowledge so they could be billed for the services if they did not affirmatively cancel.
  • The Defendants agreed to settle with the AGs for $8 million, without any admission of wrongdoing. Classmates also is establishing a $3 million restitution fund to provide refunds to consumers who were enrolled into Classmates’ subscription service without authorization or who experienced difficulty when trying to cancel their Classmates subscriptions.
  • The Defendants also agreed to injunctive relief, including compliance with the FTC’s “Guide Concerning the Use of the Word ‘Free’ and Similar Representations,” as well as a number of terms governing their future contractual relationships with their marketing partners.

Data Privacy

Thirty-Eight States, RadioShack, Reach Agreement to Protect Consumer Privacy

  • A coalition of 38 states, led by Texas Attorney General Ken Paxton, reached an agreement with General Wireless, the proposed purchaser of RadioShack’s ecommerce business, regarding General Wireless’s ability to retain RadioShack customer data. Under the agreement, the overwhelming bulk of RadioShack’s consumer data will be destroyed, and no credit or debit card account numbers, social security numbers, dates of birth, or phone numbers will be transferred.
  • Of the 8.5 million customer email addresses in RadioShack’s files, General Wireless will be allowed to retain only the email addresses of those customers who requested product information in the last two years. General Wireless also agreed not to sell or share any of the customer information it obtains with any other entity.
  • According to a statement by AG Paxton, the “settlement is a victory for consumer privacy nationwide…The fact that 38 states joined together in this case reflects a growing understanding of the importance of safeguarding customer information, and we are pleased that General Wireless will continue to be bound by RadioShack’s existing privacy policy.”

Vermont AG Bill Sorrell Enters Data Breach Settlement Agreements with Embassy Suites and Auburn University

  • Vermont AG Bill Sorrell entered an Assurance of Discontinuance (AOD) with Embassy Suites Management LLC to resolve allegations that Embassy Suites failed to notify Vermont of a data breach in the most expedient time possible. According to the AOD, Embassy Suites San Francisco Airport discovered “keyloggers” on two of its computers in October 2013, but failed to notify the Vermont AG’s office or customers until February 2015, constituting a violation of Vermont’s Security Breach Notice Act (the “Act”), which requires notice to the AG within 14 business days of a data breach. The AOD requires future compliance with the Act and calls for stipulated penalties of $5,000 per violation for future violations of the injunctive relief contained therein.
  • AG Sorrell also recently announced a similar agreement with Auburn University (“Auburn”), alleging that Auburn failed to notify the AG’s office and Vermont consumers of a 2013 data breach until almost four months after the breach was discovered. The agreement with Auburn similarly requires future compliance with the Act, and requires Auburn both to implement policies to ensure compliance with the Act and provide the AG with access to records to monitor Auburn’s compliance. It also calls for stipulated penalties of $10,000 per violation for future violations of the injunctive relief contained therein.

FTC Highlights Importance of Cooperation With Law Enforcement After Data Breach

  • The Federal Trade Commission (FTC) recently published a blog post outlining what a company can expect if the FTC targets it for a data privacy-related investigation.
  • According to the FTC, “a company that has reported a breach to the appropriate law enforcers and cooperated with them has taken an important step to reduce the harm from the breach.” As a result, it is likely that the FTC would view the company more favorably than one that did not sufficiently cooperate with its investigation.
  • The FTC also highlighted the fact that an investigation is not tantamount to a violation, and closes more cases than it brings because it finds that, on the whole, companies’ data security practices are reasonable, despite experiencing a breach.

For-Profit Colleges

FTC Reaches Agreement With For-Profit College

  • The Federal Trade Commission (FTC) settled allegations that Ashworth College (“Ashworth”) misrepresented to students that they would receive training and credentials to get a new job or switch careers, and that credits students earned from online courses would transfer to other schools.
  • According to the FTC’s Complaint, certain degrees and programs offered by Ashworth failed to meet basic requirements established by state licensing boards for certain jobs, including school teachers, real estate appraisers, home inspectors, and massage therapists. The FTC also alleged that Ashworth lacked the data to support its claims that other institutions would accept credits students earned at Ashworth.
  • Pursuant to the Settlement, Ashworth agreed to stop misrepresenting that:
    • Ashworth’s programs qualify students to obtain licenses without any further training or experience;
    • there will be job security or steady employment for consumers who completed its programs; and
    • course credits are generally recognized and accepted by other postsecondary institutions.
  • Ashworth also agreed to an $11 million judgment, which was suspended due to Ashworth’s inability to pay.

State AGs in the News

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


DOJ Investigates Movie Theaters for Collusion

  • The U.S. Department of Justice is investigating claims that Regal Entertainment Group, AMC Entertainment Holdings, and Cinemark Holdings (collectively, the “Dominant Theaters”) have engaged in collusive behavior regarding the allocation of first-run movies.
  • At the root of the investigation is the use of a business practice called “clearances” through which theaters seek exclusive rights from movie studios to show first-run movies within certain geographic areas or zones. Various independent movie theaters have alleged that the Dominant Theaters are using their collective market power to secure clearances for anticompetitive purposes, namely, to block smaller theaters’ ability to show the “premium” first-run movies at the same time as the Dominant Theaters in order to preempt competition, and to discourage future independent theater construction in growing markets.
  • AMC stated that it is only “playing by rules that have been long established,” and indicated that the clearances process is legal, and that fewer than 10 percent of AMC’s 342 locations have used the process to acquire an allocated film zone.


Fifty States, the District of Columbia, and the FTC Charge Cancer Charities With Massive Fraud

  • The Federal Trade Commission (FTC) and AGs from all fifty states and the District of Columbia brought a lawsuit in the U.S. District Court for the District of Arizona alleging that Cancer Fund of America, Inc.; Cancer Support Services, Inc.; Children’s Cancer Fund of America, Inc.; the Breast Cancer Society, Inc.; and related officers and directors (collectively, “Defendants”) violated the FTC Act, the Telemarketing Act, and numerous state laws prohibiting deceptive practices and regulating charitable organizations.
  • According to the allegations in the Complaint, Defendants portrayed themselves as legitimate charities dedicated to supporting cancer patients by providing pain medication, transportation for chemotherapy, and hospice care. In reality, Defendants allegedly spent 88 percent of donations on fund-raising events, compensation, vehicles, college tuition, luxury cruises, and loans to friends and family, among other goods and services for personal use.
  • In addition to traditional methods of seeking donations, such as telemarketing and Internet advertising, Defendants distributed materials through the Combined Federal Campaign, which targets federal employees for donations to nonprofit organizations. Defendants allegedly were able to disguise the funding actually passed on to charitable organizations through abuse of the “Gifts in Kind” accounting rules, a tactic that allowed Defendants to overvalue the products they sent to developing countries, thus boosting the amount they could report as directly contributing to program services.
  • The regulators proposed stipulated judgments against the Children’s Cancer Fund of America and its executive director for $30 million, and the Breast Cancer Society and its director for $65.5 million, as well as ordering the charities to be liquidated. Litigation is ongoing against the Cancer Fund of America and Cancer Support Services.

Consumer Financial Protection Bureau

CFPB Settles With PayPal for “Billing Customers Later”

  • The Consumer Financial Protection Bureau (CFPB) settled with PayPal, Inc., and its wholly owned subsidiary Bill Me Later, Inc., resolving allegations that the online payments company violated the Consumer Financial Protection Act by signing consumers up for its online credit product, PayPal Credit (formerly known as Bill Me Later), without permission.
  • The Complaint alleges that PayPal enrolled consumers in PayPal Credit without proper knowledge or consent, either through inadequate disclosures embedded in online purchasing processes, or automatically when consumers opened a PayPal account. It also alleges that PayPal directed purchases on eBay (PayPal’s parent company) and other online retailers toward PayPal Credit, even though consumers may have indicated a different payment method. Finally, the Complaint alleges that PayPal Credit failed to honor promotions, did not timely process payments yet still charged late fees and interest, and failed to adequately respond to billing disputes.
  • As part of the Stipulated Order, which awaits court approval in the S. District Court for the District of Maryland, PayPal must pay a $10 million civil penalty, and is required to place $15 million into a segregated account for the purpose of providing redress to affected consumers. Within 60 days, PayPal must submit a plan on how it will identify all affected consumers and how it will effectuate payment accordingly. PayPal must also build disclosure into the offering of PayPal Credit, and is prohibited from setting its credit product as a default payment method unless the consumer affirmatively consents.

Consumer Protection

States Reach Agreement With Credit Reporting Agencies

  • Ohio AG Mike DeWine led a group of 31 AGs in resolving a multi-year investigation into the practices of the three national credit reporting agencies: Equifax Information Services LLC, Experian Information Solutions Inc., and TransUnion LLC.
  • The investigation was initiated due to an increasing number of consumers reporting difficulty in correcting errors in their credit reports through the procedures previously offered, as well as to increasingly inaccurate data reporting by credit furnishers with no real oversight by the reporting agencies.
  • Under the Assurance of Voluntary Compliance, the credit reporting agencies will pay $6 million to the participating states. In addition, the credit reporting agencies will adopt a series of new procedures, including:
    • Maintaining information on problematic data furnishers;
    • Limits on marketing credit monitoring products to consumers calling to dispute information on their credit report;
    • Improved process for handling complicated disputes, such as those involving identity theft, fraud, or files with mixed consumers’ information;
    • Enhanced limits on what can be placed on consumers records, including waiting periods for medical debt; and
    • Better consumer education, including information on how to challenge the outcome of a dispute investigation with other agencies.

Michigan Reaches Settlement With Online Lenders Over “Sky-High” Interest Rates

  • Michigan AG Bill Schuette reached a settlement with South Dakota-based Western Sky Financial, LLC, and California-based CashCall, Inc., (Lenders) to resolve claims that the Lenders made unlicensed loans over the internet to Michigan consumers at illegally high interest rates.
  • The Lenders charged interest on Internet-based loans at annual percentage rates that ranged from 89 to 350 percent, exceeding both the 7 percent cap for unlicensed lenders and the 25 percent cap for licensed lenders. They also charged excessive processing fees. A consumer who borrowed $1,000 under these terms would repay over $4,000 during the loan’s two-year term.
  • The settlement requires the Lenders to establish a $2.2 million settlement fund to be distributed pro rata to eligible consumers and to reduce the interest on all loans still under payment to 7 percent annually on the loan’s then-outstanding balance of principal. It also precludes Lenders from selling or assigning loans made to Michigan residents to any unaffiliated third-party and from making negative reports to credit reporting bureaus on any implicated loans.

False Claims Act

New Jersey AG Resolves False Claims Act Allegations With With UPS Over Billing Practices

  • New Jersey AG John Hoffman reached an agreement with United Parcel Service, Inc., (UPS) to resolve allegations that the package delivery company violated the New Jersey False Claims Act by charging the state for Next Day Air service when the packages arrived late.
  • UPS allegedly used an inapplicable “exception code” to register late deliveries that were charged to state accounts, without disclosing to the state that such deliveries were late and without refunding the difference in price between Next Day Air and regular delivery services. The New Jersey investigation began when a UPS employee filed a whistleblower lawsuit in Virginia, providing a detailed account of the practice.
  • Under the Settlement Agreement, UPS admits no fault, but agrees to pay $740,000 to the state to resolve the claims. This marks the largest False Claims Act settlement outside of the Medicaid context by the state since the New Jersey False Claims Act took effect in 2008.

States v. Federal Government

North Carolina Petitions Fourth Circuit to Overturn FCC Order on Municipal Broadband

  • North Carolina has filed an appeal to the Fourth Circuit, asking it to overturn a March 12, 2015, Order by the Federal Communications Commission (FCC), in which the FCC preempted certain state laws that regulate the manner in which municipalities can offer broadband services.
  • North Carolina law prevents publicly owned broadband Internet service providers—in this case, the City of Wilson—from offering services outside of county boundaries. The FCC found the state law to conflict with Section 706 of the Telecommunications Act of 1996, which requires the FCC to encourage the deployment of broadband through “measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.”
  • North Carolina argues that the FCC’s actions disrupt the balance in the U.S. Constitution between state and federal power, are outside the FCC’s authority, and are arbitrary and capricious under the Administrative Procedures Act and related case law.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, For-Profit Colleges, State AGs in the News


Kentucky Attorney General Sues Oil Company for Anticompetitive Pricing

  • Kentucky AG Jack Conway filed a lawsuit alleging that Marathon Petroleum Co. is using anticompetitive practices to charge higher gasoline prices in Kentucky in violation of the Kentucky Consumer Protection Law, the Sherman Act, and the Clayton Act.
  • According to the Complaint, gasoline prices in Louisville and Northern Kentucky, in particular, are significantly higher than comparable markets. The lawsuit alleges that Marathon has a dominant position through ownership of refineries that provide 90 to 95 percent of gasoline to the affected markets.
  • AG Conway alleges that Marathon is abusing its dominant position by engaging in certain practices, including:
    • entering supply agreements which require independent gas retailers to buy all of their fuel from Marathon;
    • demanding other refiners sign “exchange agreements” allegedly designed to keep out competing gasoline products; and
    • using deed restrictions to prohibit independent gasoline retailers from using their property as a gas station for 25 years unless it sold only Marathon gas.
  • Marathon responded that it “disputes the allegations” and “will defend this judicial action vigorously in court.” Marathon also indicated that “the FTC has looked at [the issue] before and reviewed it in a couple of different requests.”

Consumer Financial Protection Bureau

CFPB Files Lawsuit Against Mortgage Payment Company

  • The Consumer Financial Protection Bureau (CFPB) filed a lawsuit alleging that Nationwide Biweekly Administration, Inc., its subsidiary Loan Payment Administration LLC, and its owner and president Daniel Lipsky (Nationwide), violated the Consumer Financial Protection Act and the Telemarketing and Consumer Fraud and Abuse Act in attempts to market mortgage payment services.
  • Nationwide offers a biweekly mortgage payment program called the “Interest Minimizer.” This program purportedly allows customers to make mortgage payments to Nationwide every two weeks, which Nationwide forwards on to the mortgage servicer, resulting in customers making one additional monthly payment per year. However, Nationwide allegedly keeps the first extra biweekly payment (up to $995) as a set-up fee, and charges consumers between $84 and $101 in processing fees each year, without expressly disclosing as much.
  • In the Complaint, the CFPB alleged that the defendants misrepresented the savings consumers would achieve, deceived consumers about the cost of switching to the Interest Minimizer, and falsely claimed to be affiliated with mortgage lenders and servicers.

Consumer Protection

Fifty States and the Federal Government Settle Cramming Charges With Sprint and Verizon

  • Fifty states (led in part by Vermont AG William Sorrell), the District of Columbia, the CFPB, and the FCC settled claims against Sprint Corporation and Cellco Partnership d/b/a Verizon Wireless regarding unauthorized charges for third-party messaging services (“cramming”). The lawsuits alleged cramming to be a violation of the Consumer Financial Protection Act, Section 201 of the Communications Act of 1934, and various state Unfair and Deceptive Practices Acts.
  • According to the Complaint, the cramming charges were typically associated with “premium” text message subscription services—such as horoscopes, trivia, flirting tips, and sports scores—offered by third parties. These services charged a monthly fee through the carrier’s billing statement, typically $9.99 per month, with the carrier receiving a percentage. However, in many cases, there was no evidence that consumers had requested the services, and consumers were often unaware that they were being charged.
  • Under the terms of the consent orders, Sprint will pay $68 million and Verizon will pay $90 million, of which $50 and $70 million respectively will be used to repay affected consumers through programs overseen by the CFPB. Sprint will pay penalties of $12 million to the states and $6 million to the FCC; Verizon will pay $16 million to the states and $4 million to the FCC.
  • In addition, Sprint and Verizon will be required to implement procedures to obtain customers’ express consent prior to charging for third-party services, provide a complete refund when customers are billed for unauthorized charges, inform new customers that they can block third-party charges, and create a special section in customers’ bills where third-party charges are clearly distinguished.

FTC Seeks to Shed Ill-Gotten Monies From Company Alleged to Deceptively Market Weight Loss Products

  • The Federal Trade Commission (FTC) issued a complaint alleging that Lunada Biomedical, Inc., and its officers and owners, violated the FTC Act through the marketing and sale of dietary supplement Amberen.
  • The Complaint alleges that Lunada deceptively labeled, advertised, marketed, and sold Amberen through a combination of unsubstantiated efficacy claims, false proofs, false claims regarding customer satisfaction, false “risk-free” trial offers, and that they failed to disclose material connections with endorsers. Defendants allegedly also hired a marketing company to create and maintain a blog, in which the president of the marketing company described personal experiences with menopause, and endorsed Amberen, without disclosing that Lunada was paying for, and consulting on blog topics.
  • The commissioners voted 5-0 in favor of the complaint, which seeks permanent injunctive relief, along with restitution for injured consumers, refund of monies paid, and disgorgement of ill-gotten monies. The lawsuit is pending in federal court for the Central District of California.

Data Privacy

Hedge Fund Acquires RadioShack Consumer Data, Agrees to Mediate With Attorneys General

  • Standard General LP, a hedge fund that purchased hundreds of RadioShack’s store leases in a prior sale, has won the auction to purchase RadioShack Corp.’s brand name and other intellectual property, as well as a vast cache of customer data, for $26.2 million.
  • Thirty-seven State AGs, led by Texas AG Ken Paxton, have objected to RadioShack’s attempt to sell the data, which is reported to consist of 85 million email addresses and 67 million customer names and physical address files. AG Paxton has called the sale “not only a direct violation of the terms of [RadioShack’s] own privacy policies, but also a clear violation of Texas law.”
  • RadioShack agreed to mediate the issue with the objecting AGs to resolve their concerns, which include what type of information is included and how it will be used. The sale of these assets must ultimately be approved by the U.S. Bankruptcy Court for the District of Delaware, which is overseeing the bankruptcy.

For-Profit Colleges

SEC Charges For-Profit College With Multiple Violations of Securities Laws

  • The Securities and Exchange Commission (SEC) brought charges against ITT Educational Services Inc., along with ITT’s chief executive officer Kevin Modany, and chief financial officer Daniel Fitzpatrick, for allegedly defrauding investors in violation of multiple sections of the Securities Act, the Exchange Act, and multiple SEC Rules.
  • The Complaint identifies numerous situations where ITT allegedly mislead investors, analysts, and auditors, including claims that ITT failed to disclose material facts, filed materially false and misleading reports, and made false certifications regarding ITT’s performance from 2009 to 2012, and the potential impact of increasing defaults in the private student loan programs that ITT guaranteed.
  • The SEC is seeking injunctive relief, disgorgement, and civil penalties from ITT. It is also asking that Modany and Fitzpatrick be ordered to return all bonuses, incentive-based and equity-based compensation, as well as profits realized from the sale of ITT stock.

State AGs in the News

Posted in Charities, Consumer Protection, Data Privacy, Environment, False Claims Act, Intellectual Property

Hot News

James Martin Receives Honor for Legal Writing


California Attorney General Wins at Ninth Circuit in Dispute Over Donor Disclosures

  • The Ninth Circuit issued its decision in Center for Competitive Politics v. Kamala Harris, affirming the District Court’s denial of a preliminary injunction, and finding that a California law which requires nonprofit groups to provide to the California AG a list of donors who have contributed more than $5,000, was not likely to be a violation of CCP’s, or its members’, First Amendment Rights.
  • The California law in question—the Supervision of Trustees and Fundraisers for Charitable Purposes Act—requires organizations that solicit funds from California residents to register with the Registry of Charitable Trusts, which in turn requires the list of donors to be disclosed to the AG.
  • CCP had argued that mandatory donor disclosure infringed on its members’ right to freely and anonymously associate with CCP in violation of the First Amendment, and would have a chilling effect on members’ future participation. AG Harris argued that the information provided would remain confidential, and was necessary to ensure that the putative charity is engaged in a charitable purpose and not engaging in improper business practices.
  • CCP President David Keating indicated that CCP would seek review of the decision, framing the outcome as requiring “an impossible choice” between “disclos[ing] donors to the attorney general or [not] asking Californians to support our work to defend free speech.”

Consumer Protection

FTC Issues Complaint Against Weight-Loss Companies Profiting From “Fraud Trifecta”

  • The Federal Trade Commission (FTC) secured a temporary restraining order enjoining Sales Slash LLC, Purists Choice LLC, Artur Babayan, and Vahe Haroutounian d/b/a Prisma Profits (defendants) from violating the FTC Act and the CAN-SPAM Act in connection with marketing, promoting, and selling various weight loss products online.
  • The complaint alleges three types of illegal behavior:
    1. defendants made multiple unsubstantiated claims regarding the efficacy of the weight-loss products
    2. defendants paid marketers to post banner ads on third-party websites that led consumers to false news reports designed to appear as if coming from an independent consumer, or in some cases, from a celebrity or a doctor who has endorsed the product
    3. defendants hired marketers to send spam emails to the contacts of hacked email accounts, making it appear that the email came from a friend or family member
  • The commissioners voted 5-0 in favor of the complaint, which seeks permanent injunctive relief, as well as restitution for injured consumers. The lawsuit is pending in federal court for the Central District of California.

Data Privacy

Los Angeles Sues Bank Over Alleged Deceptive Practices

  • The City of Los Angeles is suing Wells Fargo Bank, N.A., for unfair business practices and failure to report a data breach. The City alleges that Wells Fargo permitted, and even encouraged, bank employees to engage in unfair, unlawful, and fraudulent conduct resulting in higher customer fees.
  • The City alleges that Wells Fargo employees opened unauthorized customer accounts, refused to close those accounts when the customers demanded it, and, in some instances, moved funds from authorized client accounts to pay the fees associated with the newly opened accounts (a practice known as “gaming”).
  • Wells Fargo responded by stating that it is “focused on the best interests of its customers and creating a supportive, caring and ethical environment for our team members.” The bank further averred that it provides its employees with “training, audits and processes” to ensure that its customers “receiv[e] only the products and services they need and will benefit from.”
  • Under a law that permits larger California municipalities to seek redress for consumers statewide, the City is seeking restitution and injunctive relief, as well as civil penalties of up to $2500 for each violation.

U.S. DOJ Unveils Guidelines for Best Practices in Cybersecurity

  • The U.S. Department of Justice (DOJ) released guidelines for businesses to prevent, address, and mitigate damages from potential cybersecurity threats.
  • The Guidelines provide specific suggestions for companies to implement before a cyberattack or intrusion, including:
    • identify the data, assets or services most important to the company’s existence and create tiered security measures to protect such data, assets, or services;
    • create and test an actionable incident response plan comprised of concrete procedures to follow in the event of a cyberattack;
    • implement network monitoring; and
    • acquaint legal counsel with laws regarding cyber incidents and responses.
  • Finally, the Guidelines provide a list of information that a company should retain after a cyber incident, and instructions for notifying relevant law enforcement bodies.


California Teams With EPA and DOJ to Enforce Clean Water Act

  • California AG Kamala Harris together with the California Water Resources Control Board, the U.S. Department of Justice, and the U.S. Environmental Protection Agency, settled claims against Lehigh Southwest Cement Company and Hanson Permanente Cement, Inc., (Lehigh) for alleged violations of the U.S. Clean Water Act and the California Water Code.
  • The Plaintiffs alleged that, over a five-year period, Lehigh discharged millions of gallons daily of process water from cement manufacturing and other industrial activity, polluted with selenium and other toxic metals, into the local ecosystem.
  • In addition to $2.5 million in civil penalties, the Consent Decree requires Lehigh to spend more than $5 million to construct and operate a system to treat all process storm water so that it does not exceed stipulated maximum levels of pollutants, and to develop and implement procedures to minimize future pollution from storm water surges. Lehigh must also submit semiannual progress reports to the EPA and the Water Resources Control Board.

False Claims

Telecom Carriers Pay $10.9 Million in Penalties to FCC

  • The Federal Communications Commission (FCC) agreed to resolve claims with AT&T and Southern New England Telephone (SNET) alleging that the telecom carriers overbilled the government for services provided to the FCC’s Lifeline program.
  • Through the Lifeline program, the FCC provides financial support to telecom carriers based on the number of qualified low-income subscribers to which the carrier reports that it provided discounted service. AT&T and SNET allegedly failed to remove customers in 2012 and 2013 from their records when those customers did not recertify their qualifying status under the program.
  • AT&T responded in a statement that it “discovered this issue in the course of an internal review, voluntarily reported it, and reimbursed the Universal Service Fund.” AT&T also indicated that it had “implemented process enhancements so this does not happen again.”
  • In addition to reimbursing the government for payments received for allegedly ineligible customers, AT&T and SNET will pay a combined $10.9 million in civil penalties to the U.S. Treasury.

Intellectual Property

House Committee Passes “TROL Act”

  • The U.S House of Representatives Committee on Energy and Commerce approved the Targeting Rogue and Opaque Letters (TROL) Act, legislation designed to address the problem of patent assertion entities misusing overly-broad patents.
  • The TROL Act declares certain forms of patent misuse—for example, sending large numbers of deceptive demand letters that threaten litigation and order businesses to pay license or settlement fees in exchange for the recipient’s use of the alleged patent—to be unfair or deceptive practices under the FTC Act. It also gives authority to the FTC and State AGs to levy fines on entities engaging in patent misuse.
  • The House Judiciary Committee is considering a different bill to address patent misuse, the Innovation Act, which creates more specific pleading standards and directs courts to award attorneys’ fees if the position and conduct of the non-prevailing party was not reasonably justified in law and fact.