Consumer Financial Protection Bureau
CFPB Releases Report to Congress on Arbitration Clauses and Consumer Financial Products
- The Consumer Financial Protection Bureau (CFPB) released a report explaining the findings and conclusions of its multiyear study on the effects of mandatory arbitration clauses in contracts for a range of consumer financial products and services, including credit cards, private student loans, automobile financing, and mobile wireless agreements.
- The study and subsequent report submitted to Congress were mandated by the Dodd-Frank financial reform law as preconditions for the CFPB to exercise regulatory authority over the use of mandatory arbitration clauses in contracts for consumer financial products. The CFPB indicated that it will continue to review the results and accept public input before it begins to propose potential regulations for this issue.
- The report details the CFPB’s findings regarding consumers and arbitration, including: consumers generally lack knowledge and understanding of arbitration clauses, and are hesitant to bring individual claims in any forum; consumer financial disputes are generally over smaller amounts, and thus better served through participation in class action settlements or small claims courts; and the absence of evidence that arbitration clauses lead to consumer savings.
New York Attorney General Secures Reforms From Big Three Credit Reporting Agencies
- New York AG Eric Schneiderman reached a settlement with Experian Information Solutions, Inc., Equifax Information Services, LLC, and TransUnion LLC (credit reporting agencies or CRAs) to make reforms that will change the way that medical debt is reported, and will improve the process for detecting and correcting errors in consumer credit reports.
- Under the settlement agreement, the CRAs will now wait 180 days before unpaid medical bills are added to a credit report. The change will allow consumers adequate time to resolve insurance claims or catch up on payments before suffering credit downgrades.
- In addition, over a three-year period, the CRAs will implement procedural and structural changes. The CRAs will provide consumers the right to challenge inaccurate information in their credit reports through an internal dispute resolution process, including the use of trained employees to respond to consumers’ complaints. These trained intermediaries will have primary responsibility for resolving disputes, once reported, between the lender and the consumer. The CRAs will also coordinate with the AG’s office to identify illegal lenders and suppress from the credit reporting databases any entries from an illegal lender.
- The credit reporting agencies denied any wrongdoing associated with the initial AG investigation, cooperated with the AG’s efforts, and undertook the reforms voluntarily.
Ten Attorneys General and the FTC Combine to Sue Robocalling Cruise Line Posing as a Political Survey
- Ten State AGs and the FTC sued Caribbean Cruise Line, Inc. (CCL), Linked Service Solutions, LLC and Economic Strategy LLC, and a group of five telecom companies and their individual owners in federal court in the Southern District of Florida, alleging the companies illegally sold cruise and vacation packages using mass market robocalls masquerading as political surveys.
- The AGs and FTC brought the claims under the U.S. Telemarketing Act and the FTC Telemarketing Sales Rule that established the National Do Not Call Registry, and various state consumer protection laws, which prohibit this type of calling for sales purposes but not for political surveys. The AGs and FTC alleged that CCL illegally conducted sales robocalls and deceived consumers by first asking a series of automated political survey questions before using an offer for “a free cruise to the Bahamas” to transfer the call to a live telemarketer working on behalf of CCL to market its cruise vacations, along with hotels and other travel packages.
- The AGs and FTC entered into a consent order with CCL that prohibits future deceptive telemarketing practices, including calling consumers on the Do Not Call Registry, failing to transmit accurate caller ID information, and placing illegal robocalls. CCL is also required to monitor its lead generators on an ongoing basis. Finally, CCL must pay a civil penalty of $7.73 million, which will be partially suspended after CCL pays $500,000 due to CCL’s inability to pay. Other defendants were ordered to pay lesser penalties, or have yet to reach a settlement.
Attorneys General Join the Investigation Into Herbal Supplements, Industry Groups Respond
- This week Connecticut, Indiana, and Puerto Rico have announced that they are joining a coalition with New York AG Eric Schneiderman to investigate the business practices of the botanical dietary supplement industry relating to labeling and quality control.
- Also this week, four trade associations representing the dietary supplement industry released a whitepaper refuting the results of AG Schneiderman’s initial investigation of botanical dietary supplements. The whitepaper raises questions regarding the use and interpretation of DNA barcode testing on botanical dietary supplements and called the AG’s use of DNA barcode testing “a misuse of the technologies” that “led to a misinterpretation of test results.”
Missouri Attorney General Closes Down Payday Lenders
- Missouri AG Chris Koster reached a settlement with a group of online payday lenders, organized by Martin “Butch” Webb, and operated from an Indian reservation in South Dakota. The enterprise issued loans under the following names: Payday Financial, Western Sky Financial, Lakota Cash, Great Sky Finance, Red Stone Financial, Big Sky Cash, Lakota Cash, and Financial Solutions.
- AG Koster alleged that the lenders charged exorbitant fees for short-term loans—including origination fees that exceeded the statutory maximum of 10 percent—and required consumers to consent to having their future wages garnished without first securing a court order as required by Missouri law. Like online payday loan actions operated on other Indian reservations, Webb and the lenders attempted to assert tribal sovereign immunity to AG Koster and the state of Missouri.
- The agreement prohibits Webb or any of the lenders he operated from making or collecting on loans in Missouri. It also requires Webb to pay $270,000 in restitution, cancels existing loan balances for Missouri borrowers, and requires Webb to instruct credit reporting agencies to remove all information previously supplied about specific consumers. Webb must pay also pay $30,000 in penalties to the state.
New York Attorney General and the FTC Settle With “As-Seen-on-TV” Marketer
- New York AG Eric Schneiderman and the Federal Trade Commission (FTC) entered into a settlement with Allstar Marketing Group, LLC to resolve claims that it violated Section 5 of the FTC Act, the FTC Telemarketing Sales Rule, and New York law on deceptive practices.
- According to the complaint, Allstar “lured” consumers into buying specialty goods (e.g., The Perfect Brownie Pan, or the Snuggie) through an allegedly deceptive and confusing ordering processes that resulted in consumers paying excessive fees, purchasing more products than intended, and being billed without their express consent. For example, the FTC alleged that Allstar offered a “buy one get one free” promotion, but failed to adequately disclose that consumers were required to pay two separate sets of processing and handling fees on the products, which in some cases, nearly doubled the cost of the offer.
- The settlement requires Allstar to cease marketing products in the manner described in the complaint—including conspicuously disclosing the terms of an offer and the accompanying fees—and to pay $7.5 million in restitution, distributed through the Federal Trade Commission. It also requires Allstar to maintain certain records, report compliance to the FTC for ten years, and pay $500,000 to the New York AG’s Office for penalties, costs, and fees.
Washington Data Breach Notification Legislation Easily Passes House With Bipartisan Vote
- The data breach notification law proposed and supported by Washington AG Bob Ferguson passed the state House of Representatives by a vote of 97 to 0.
- The proposed law contains some noteworthy provisions that if enacted would require increased disclosures by entities suffering data breaches compared to what most states currently have enacted: it eliminates a general exemption for encrypted data; requires consumer notification as immediately as possible and no later than 45 days whenever personal information is likely compromised; requires the Attorney General to be notified within 45 days when a data breach occurs at a business, nonprofit or public agency; and requires businesses, nonprofits and agencies to provide consumers with sufficient information to secure or recover their identities.
Illinois Attorney General Seeks to Intervene in Lawsuit Involving Union Dues
- Illinois AG Lisa Madigan filed an unopposed motion for leave to intervene (and a proposed motion to dismiss) in a lawsuit brought by Governor Bruce Rauner in federal court against various public sector unions. The lawsuit challenges the constitutionality of an Illinois law that requires mandatory union dues to be collected from non-union public sector employees to cover their share of expenses for negotiating and administering collective bargaining agreements.
- Governor Rauner issued Executive Order 15-13 in February to suspend the deduction and remittance to unions of the mandatory dues and simultaneously filed this lawsuit. He also brought in an outside law firm to handle the case pro bono (so that no state funds were used). Governor Rauner’s lawsuit argues that mandatory contributions amount to coerced political speech, and are thus prohibited by the First Amendment.
- In response to EO 15-13, 26 labor unions filed a lawsuit in Illinois state court, alleging that the order violates state law, contradicts numerous collective bargaining agreements, and exceeds the scope of executive authority.
- AG Madigan argues in her memorandum in support of her proposed motion to dismiss that the federal court lacks subject matter jurisdiction as the lawsuit is asking a federal court to rule on the scope of executive power under state law. AG Madigan also argues that the court should otherwise stay the federal lawsuit pending the outcome in the state lawsuit under the doctrine of abstention.
New York Attorney General Teams With FTC to Sue Debt Collectors
- New York AG Eric Schneiderman together with the Federal Trade Commission (FTC) filed lawsuits against two groups of related entities: Vantage Point Services, LLC, and Four Star Resolution, LLC. The lawsuits alleged violations of the U.S. FTC Act and Fair Debt Collection Practices Act, as well as New York State laws against abusive debt-collection, and unfair and deceptive practices. Although located in Buffalo, defendants are alleged to have collected more than $45 million in supposed debts, nationwide.
- In collection calls to consumers, the Vantage Point defendants allegedly held themselves out as government agencies—including the FBI—used abusive language, and threatened consumers with arrest if they did not pay.
- The Four Star defendants allegedly claimed to be attorneys, investigators, process servers, court officials, government agents, and criminal law enforcers during collection calls, and “spoofed” real law enforcement phone numbers, and threatened consumers with criminal action, wage garnishment, and seizure of their property for failure to pay.
- The lawsuits were filed in the Western District of New York. The court granted temporary restraining orders against defendants, enjoining their debt collection practices and freezing their assets.
FTC Settles With Company That Allegedly Paid Customers for Online Endorsements
- The FTC entered into a consent order with Amerifreight, Inc., to resolve claims that the automobile shipment broker committed unfair and deceptive practices under the FTC Act. This administrative complaint marks the first time the FTC has charged a company for failing to disclose that it gave cash discounts to customers to post reviews.
- The FTC alleged that Amerifreight deceived consumers by providing cash discounts and other incentives to customers who agreed to provide good reviews in online forums. The FTC also alleged that Amerifreight did not disclose that it compensated consumers to provide reviews, and represented its favorable reviews as a product of unbiased and unprompted customer reaction.
- The consent order precludes Amerifreight from making future misrepresentations and requires it to disclose any material connection between an endorsing entity and Amerifreight. It also requires, among other things, that the company maintain, for five years, copies of advertisements or promotional materials containing representations covered by the consent order, as well as complaints or inquiries against the company concerning any endorsement of its services. Amerifreight did not admit to the claims made by the FTC, other than those facts necessary to establish jurisdiction.
Connecticut Attorney General Probes Computer-Maker Over Software Vulnerability
- Connecticut AG George Jepsen inquired into Lenovo Group Ltd., and software-maker Superfish, Inc., seeking information related to allegations that Lenovo computers were sold with built-in software that tracked users’ internet browsing and made the computer more vulnerable to “man-in-the-middle” hacking, where a third party intercepts communications sent to and from the affected computer.
- AG Jepsen sent letters to Lenovo and Superfish, requesting information on the companies’ contractual and financial relationship. AG Jepsen also requested information on the number of affected computers sold, testing and quality control measures, and any current or future remedial measures. The AG indicated that such information is necessary to determine whether the companies had violated Connecticut’s laws prohibiting unfair or deceptive trade practices.
- Lenovo has promised to stop shipping products with Superfish installed and issued the following statement: “We have thoroughly investigated this technology, and do not find any evidence to substantiate security concerns.”
President Obama Sparks Discussion With Draft Consumer Privacy Bill of Rights
- President Obama released a “discussion draft” of a proposed bill for the creation of a Consumer Privacy Bill of Rights. The bill is designed to bolster transparency in how companies use consumer data, and to foster greater consumer control.
- The response from interest groups, and the public, however, has been generally negative. In addition to finding the bill to be too lax, objectors note that the bill would preempt state data privacy laws that are already operating and that provide greater levels of protection to consumers.
Exxon Settles With New Jersey, Lawmakers and Interest Groups Object
- Exxon Mobil Corporation has agreed to settle with New Jersey for $225 million (the New York Times had previously reported $250 million) over the company’s liability for alleged environmental damage resulting from oil refining and petrochemical production at two sites dating back to the 1870s.
- The court was rumored to be close to issuing a decision on damages, but Acting AG John Hoffman asked Judge Michael Hogan to defer his decision as the parties had agreed on the general parameters of a settlement. AG Hoffman called it an “important settlement” that “holds the company financially accountable through payment of a historic Natural Resource Damages settlement on top of Exxon’s obligation to clean up the sites.”
- Although the settlement would end an eleven-year litigation, numerous interest groups have criticized the settlement as being too small in relation to the State’s original claims of $8.9 billion, and in light of the fact that Exxon had essentially conceded liability.
- The public will have a chance to comment on the agreement next month and it will be submitted to the court for approval in May. State Senators Steve Sweeney and Raymond Lesniak have indicated that they will challenge the proposed settlement, beginning with filing a motion to oppose the settlement with the court. Lesniak indicated the agreement can be overturned if it is fraudulent, arbitrary or capricious and that this settlement “certainly appears to be arbitrary and capricious, to say the least.”
Attorneys General Testify Before Congress on EPA Proposed Rule
- Arkansas AG Leslie Rutledge and Montana AG Tim Fox appeared before the U.S. House of Representatives Oversight Subcommittee on the Interior to testify regarding the scope and potential effects of three rules proposed by the Environmental Protection Agency (EPA) that are scheduled to go into effect later this year.
- The hearing focused on how certain state interests and small businesses will be affected by the implementation of the Clean Power Plan, the National Ambient Air Quality Standards for Ozone, and the Waters of the United States rule.
- State AGs have been increasingly active, on both sides, of EPA rule-making. Currently, a group of 20 AGs is challenging an EPA rule under the Clean Air Act at the U.S. Supreme Court, (with 17 AGs as co-respondents). AGs have also sued the EPA in other contexts, have joined in multiple amici briefs in support of, and opposition to EPA rules, and have submitted numerous comments to proposed rules.
New York Attorney General Pushes Bill to Protect and Reward Whistleblowers
- New York AG Eric Schneiderman has indicated that he will propose legislation to protect and reward insiders who report information about illegal activity in the financial services industries.
- The Martin Act, a New York securities law that predates the U.S. Securities and Exchange Commission, gives the AG broad powers to investigate suspected fraud in the offer, sale or purchase of securities. However, it does not currently provide direct monetary incentives for industry insiders to come forward and aid in investigations.
- The bill would create incentives for insiders to report fraud: it provides monetary rewards—10 to 30 percent of the final settlement or penalty—to individuals who voluntarily provide original and useful information, not previously known to the AG; keeps the identity of the whistleblower confidential; and it would prohibit employers from discharging, demoting, suspending, or otherwise retaliating against employees who report suspicious or fraudulent activity.
- AG Schneiderman stated, “New York has a unique opportunity to set the gold standard for states seeking to expose and hold individuals accountable for financial crimes. This law will be the strongest, most comprehensive in the nation, and is long overdue for a state with the world’s most important financial markets.”
States vs Federal Government
Supreme Court Holds Tax Injunction Act Does Not Block Challenge of Tax Notification Requirements
- The U.S. Supreme Court ruled unanimously in favor of Petitioner Direct Marketing Association (DMA), holding that the U.S. Tax Injunction Act (TIA)—which purports to restrict federal district courts from restraining the assessment, levy or collection of any tax under State law—does not preclude tax payers from challenging other aspects of state tax laws in federal court.
- At the core of this dispute is a Colorado law that requires online retailers to report information for sales made to Colorado residents to the State Department of Revenue, to aid the state in collecting “use” taxes on those purchases. Petitioner, not wanting to litigate Colorado tax policy in state courts, filed a lawsuit in federal court claiming that the notification requirement burdened out-of-state retailers disproportionately as compared to in-state retailers. The State asserted that the TIA precluded the Petitioner from bringing a lawsuit to challenge the state tax law in federal court. Twenty-five AGs filed an amici brief in support of Colorado’s position.
- Writing for the Court, Justice Thomas indicated that the TIA did not apply to “notice and reporting requirements” that were tangential to the collection of state taxes. Thus, the TIA did not preclude DMA from challenging the law in federal court. However, the Court left it to the Tenth Circuit Court of Appeals to decide whether the doctrine of comity could be applied to achieve a similar result.
- In a separate opinion, Justice Kennedy observed, “[t]here is a powerful case to be made that a retailer doing extensive business within a state has a sufficiently substantial nexus to justify imposing some minor tax-collection duty, even if that business is done through mail or Internet.” Kennedy’s observation may indicate a willingness to break with previous decisions banning states from requiring retailers who lack a physical presence to collect and submit taxes to the state for sales made to residents.
When a subpoena from a State Attorney General hits your desk, it is easy to immediately get swept up in the substance. But before becoming absorbed in the details of a subpoena response (recounted here), consider first who should pay for the associated costs. And for that reason, you must review your insurance policies.
Given the broad scope of AG investigations, different types of policies may be applicable, from Comprehensive General Liability to Directors’ and Officers’ policies or Crime/Fidelity Insurance. Conduct a review of all policies to determine if there are any potential sources of recovery.
Once you receive a subpoena or demand letter from an AG, the best response is to promptly notify your insurer. Even when there is no subpoena or letter, certain policies require notice when you become aware of an occurrence that could trigger liability. Keep a broad view of the investigation and potential litigation in order to preserve any rights you may have to defense and indemnification.
Some insurers may argue that AG subpoenas and demands are too informal to trigger coverage by policies that purport to insure against “claims.” But courts have found that written demands and subpoenas that compel a business to produce documents or other information are “claims” triggering coverage. See, e.g., Polychron v. Crum & Forster Ins. Co., 916 F.2d 461, 463 (8th Cir. 1990); Richardson Elecs., Ltd. v. Fed. Ins. Co., 120 F. Supp. 2d 698, 701 (N.D. Ill. 2000). Moreover, an insurer’s duty to defend the policyholder is usually broader than the duty to indemnify against adverse determinations of liability.
Having the comfort of knowing that your attorneys’ fees and costs will be covered will allow you to concentrate on addressing the substantive issues presented by an AG investigation.
Click here to read Dickstein Shapiro’s top 10 tips for analyzing and navigating the pursuit of coverage for government investigations.
Delaware Amends Unclaimed Property Law
- In a recent post, Dickstein Shapiro partner Maria Colsey Heard and counsel Aaron Lancaster continue their analysis of the legal reforms taking place to state unclaimed property laws.
Judge Rules in Favor of Attorneys General, Finds American Express Violated Antitrust Laws
- Ohio AG Mike DeWine led a group of 17 AGs, working together with the U.S. Department of Justice, to successfully argue that American Express Co. and American Express Travel Related Services Co., Inc. (Amex), violated antitrust laws by prohibiting merchants from “steering” consumers to payment cards with lower costs associated.
- According to the decision, Amex required merchants to agree to terms of service that prevented merchants from expressing a preference for a lower cost credit card, or providing extra benefits and discounts when the customer uses one. The court found that Amex’s terms harmed consumers because they prevented merchants from “steering additional charge volume to their least expensive network,” and thus “short-circuit[ed] the ordinary price-setting mechanism in the network services market by removing the competitive ‘reward’ for networks offering merchants a lower price for acceptance services.”
- Judge Nicholas Garaufis for the Eastern District of New York will determine the remedy in subsequent hearings. Competitors Visa Inc. and MasterCard Inc. reached a settlement in 2013 on similar claims.
- Amex has announced that it will appeal the decision.
Eleven Attorneys General and the FTC Sue to Block Merger of Food Companies
- Illinois AG Lisa Madigan along with ten other AGs and the Federal Trade Commission (FTC), filed a lawsuit in federal court to block Sysco Corporation’s proposed $8.2 billion acquisition of US Foods Inc. The FTC also filed its own administrative complaint against Sysco and US Foods.
- The AGs and FTC contend that the proposed merger would substantially reduce competition among “broadline food distributors” resulting in “higher prices and diminished service for restaurants, health care facilities, hotels, schools, and other institutions that require full-service food distribution services.” Broadline foodservice distributors warehouse and sell a vast array of food and food-related products, serving as a “one-stop-shop” for foodservice operators. It is distinct from other types of food distribution because it requires timely and frequent delivery and a constant availability of a wide array of food products and supplies.
- The FTC determined that the merger of Sysco and US Foods would result in a combined entity having a 75 percent share of the national broadline market, and an even higher market share in a number of local markets. Counsel for Sysco indicated that the merger is “procompetitive,” calling it “good for customers” and “good for the United States.”
California Attorney General Approves Hospital Acquisition, Subject to Conditions
- California AG Kamala Harris conditionally approved the sale of six hospitals currently operated by nonprofit organization Daughters of Charity Health Systems (DCHS) to Prime Healthcare Services, Inc. California law requires the AG to approve purchases of nonprofit hospitals by for-profit enterprises.
- AG Harris’ approval requires that Prime continue to operate four of the six DCHS hospitals for up to ten years, to “ensure continued community access to essential health care services.” In addition, AG Harris required structural improvements to the hospitals that will cost in excess of $350 million.
- In its purchase agreement, Prime offered to maintain services at all hospitals for five years after the acquisition, and agreed to assume about $350 million in pension debt and retire about $400 million in other debts and liabilities. In addition, Prime indicated it would spend $150 million on upgrades to the hospitals.
- Prime responded in a statement that AG Harris’ conditions were “extensive” and “unprecedented.” Prime indicated that it will “need to evaluate the viability and future stability” of the DCHS hospitals under the conditions proposed by AG Harris.
California Attorney General Pushes Legislation to Increase Transparency in Charitable Giving
- AG Harris, together with state Assembly Member Jacqui Irwin, proposed Assembly Bill 556 to “close the loophole” that permits certain types of commercial fundraising to remain undisclosed, and thus increase confidence in charitable giving.
- The bill would require “fundraising counsel,” which solicits funds in the name of a charity for compensation, to disclose the portion of a charitable donation that is paid to them. AG Harris was prompted to propose the bill after her office examined data on charitable solicitation campaigns for 2013, revealing the “alarming extent to which charitable donations are often diverted to for-profit companies.” The AG’s findings are summarized in a detailed report together with other publications on charities.
- AB 556 would also create a ten-year statute of limitations and would expand AG authority to address fraud and other misconduct from for-profit fundraising firms and other third parties.
Consumer Financial Protection Bureau
CFPB Director Speaks to NAAG, Highlights Priorities and Promotes Coordination
- Consumer Financial Protection Bureau (CFPB) Director Richard Cordray presented remarks at the winter meeting of the National Association of Attorneys General (NAAG), and highlighted four areas—the Four “Ds”—on which the CFPB will continue to focus: deceptive marketing, debt traps, dead ends (i.e., areas where consumers cannot effectively protect their interests), and discrimination.
- Director Cordray, a former Ohio Attorney General, also highlighted areas where the CFPB has effectively worked with State AGs, including deceptive advertising, payday lending, debt collection, and rulemaking under the Dodd-Frank Act.
- Director Cordray concluded by encouraging AGs to utilize the CFPB’s resources, specifically noting its searchable database of consumer complaints, available through a secure portal.
FTC Sues Company Alleging to Consolidate Payday Loans
- The Federal Trade Commission (FTC) filed a complaint in federal court against Payday Support Center, LLC, now known as PSC Administrative, LLC, and related entities, for allegedly violating the FTC Act’s prohibition on deceptive practices and the Telemarketing and Consumer Fraud and Abuse Act.
- According to the complaint, the defendants allegedly induced consumers to sign up for a “financial hardship program” to help consumers consolidate and pay off their payday loan balances “free of interest and fees” in exchange for a biweekly payment to the defendants. The complaint alleged, however, that defendants usually failed to take sufficient steps to obtain the promised debt relief for consumers.
- The case is pending in U.S. District Court for the Southern District of Alabama, and seeks both preliminary and permanent injunctions, as well as rescission of payments and contracts, restitution, refunds, disgorgement of “ill-gotten monies,” and costs.
Marijuana Legalization Takes Effect in Alaska and the District of Columbia
- AGs and other government officials in Alaska and the District of Columbia are grappling this week with regulatory gaps and questions of federal liability as voter-initiated marijuana legalization measures go into effect.
- The DC law allows adults to possess up to two ounces of marijuana and to grow six plants, whereas the Alaska law limits possession to just one ounce. However, neither jurisdiction has yet legalized the sale of marijuana, nor put in place a regulatory structure allowing for taxation and commercialization like that found in Colorado.
- In DC, the government faces additional dilemmas related to drafting and enacting robust and comprehensive regulations without violating the Anti-Deficiency Act or drawing Congressional ire.
States vs Federal Government
Massachusetts Attorney General Argues That Website Can Be Held Liable for Third Party Violations of State Law
- Massachusetts AG Maura Healey filed an amicus brief in Doe v. Backpage.com, LLC, pending in federal court, in support of plaintiff’s opposition to Backpage’s motion to dismiss based on statutory immunity under the U.S. Communications Decency Act (CDA). In her brief, AG Healy argues that the CDA does not provide immunity to websites against liability for knowingly and actively allowing violations of state law by third parties.
- Specifically, AG Healey contends that Backpage can be held liable under state law for human trafficking and deceptive practices for “intentionally promot[ing] sex trafficking by fostering the online market for illegal commercial sex and by helping traffickers both to develop effective advertisements and to evade detection and prosecution.”
- As AG Healey argues, sex trafficking is a nationwide problem which NAAG and State AGs are actively engaged in addressing through state law. Moreover, the implications of the court’s immunity ruling could be broad, potentially inhibiting AG enforcement efforts in other areas where state law violations share a nexus with online advertising and publishing.
Virginia Rejects Bill That Would Require Attorney General to Defend All State Laws
- With Lieutenant Governor Ralph Northam casting the tie-breaking vote, the Virginia Senate narrowly rejected a bill that would have required the AG to defend any state law challenged on constitutional grounds or in situations where it conflicts with other federal laws.
States Debate Bills With Effects on Unclaimed Life Insurance Proceeds
- Lawmakers in various states, including Oklahoma and Virginia, are considering bills to require life insurance companies to conduct investigations into the status of policyholders by, among other things, checking the Social Security Administration’s death master file.
- Generally speaking, all states have laws that require holders of unclaimed property to transfer it to a state-controlled fund, often housed within the AG’s or Treasurer’s office. As we have previously reported, these state officials are beginning to focus on potential new types of unclaimed property, including life insurance proceeds and health savings account balances.
- The current bills would apply only to newly-issued policies, leaving questions about holders’ obligations to review older policies for potential beneficiaries. Some commentators worry that passage of these new bills will potentially complicate processes already in existence. For example, some states have agreements with life insurance companies requiring them to consult the master list and transfer proceeds accordingly until beneficiaries can be located and informed.
As we have previously reported, Delaware is in the midst of reforming its unclaimed property audit rules, a move that will inevitably affect the myriad businesses headquartered or incorporated there. Recently, Delaware Governor Jack Markell signed into law Senate Bill 11, “An Act to Amend Title 12 of the Delaware Code Relating to Escheats.” The law aims to increase competition among outside, independent auditing firms and to slow the revolving door between government and the private sector. However, it does not address the entirety of concerns that have been expressed by companies holding unclaimed property. Auditors currently use potentially unconstitutional methods to estimate the amounts owed by holders when records are unavailable. The new law does not address this practice, nor does it limit the time frame for which a company can be audited, which currently extends back to 1981. Thus, until the state can pass future amendments, and pending the promulgation of a detailed procedure manual by the Delaware Secretary of Finance, comprehensive reform in this area remains yet unclaimed.
Hospital Backs Away From Acquisition After New Massachusetts Attorney General Voices Concern
- Partners HealthCare System, Inc. decided not to move forward with its proposed acquisition of South Shore Health and Educational Corporation. The parties filed a stipulation of voluntary dismissal with the Suffolk County Superior Court, where a consent judgment detailing the terms and conditions of the merger was pending approval.
- Partners had reached a preliminary agreement to acquire South Shore with former Massachusetts AG Martha Coakley. After taking office, AG Maura Healey expressed her concerns about the merger and indicated that if the court declined to approve the consent judgment, she would seek to enjoin the merger.
- AG Healey stated that she “appreciate[d] the thoughtful process that Partners engaged in while making this important decision, and believe[d] it is the right choice for Partners and the Commonwealth…” Partners’ planned acquisition of Hallmark Health Corporation remains under consideration.
Judge Grants Preliminary Injunction to Prevent Disclosure of Nonprofit’s Donors
- A federal judge for the Central District of California granted a preliminary injunction preventing California AG Kamala Harris from obtaining a list of donors to the Americans for Prosperity Foundation (AFP), a nonprofit group founded by Charles and David Koch. AFP’s lawsuit against AG Harris will now proceed on the merits, and AG Harris has 21 days to file her response to AFP’s complaint.
- The dispute originated when AG Harris informed AFP that in order to comply with the California Supervision of Trustees for Charitable Purposes Act, AFP was required to submit the names and addresses of all individuals who had donated more than $5,000 to the group for tax years 2011 and 2012. AFP resisted and brought this lawsuit seeking permanent injunctive relief, claiming that such information would “hinder citizens’ ability to freely and anonymously associate with AFP in violation of the First Amendment” and subject donors to potentially harmful actions by individuals opposed to AFP.
- AG Harris asserted that acquiring donor information is necessary to ensure that the charity or nonprofit is not being used to evade taxes, or for other fraudulent purposes. AG Harris also indicated that the information would only be used within the AG’s office and would remain confidential.
Consumer Financial Protection Bureau
CFPB Takes Action Against Mortgage Companies for Allegedly Deceptive Ads
- The Consumer Financial Protection Bureau (CFPB) filed suit against All Financial Services, LLC, and settled with Flagship Financial Group, LLC and American Preferred Lending, Inc., over alleged violations of the 2011 Mortgage Acts and Practices Advertising Rule. The Rule prohibits the use of misleading claims in mortgage advertising, including among other things, creating the implication of government affiliation or endorsement of a mortgage product.
- The CFPB alleged that the mortgage companies mislead consumers through the use of terms like “FHA-insured” or “HUD-approved,” or otherwise misrepresented that they were selling mortgage products affiliated with a government entity in the course of conducting direct mail promotion activities.
- The CFPB’s lawsuit against All Financial is pending in U.S. District Court for the District of Maryland. The CFPB entered into administrative consent orders with the other two lenders, requiring Flagship Financial to pay $225,000 in civil penalties, and American Preferred to pay $85,000. In addition, both settling companies must implement compliance monitoring and reporting programs.
Ohio Sues Debt-Recovery Company Said to be “Spoofing” as Government
- Ohio AG Mike DeWine filed a lawsuit against debt collector Nationwide Recovery Group, LLC and its owner Michael McCarthy (Nationwide) for violating the Ohio Consumer Sales Practices Act and the Fair Debt Collection Practices Act.
- The AG’s complaint alleges that Nationwide impersonated local government and law enforcement—including various court clerks, sheriffs, and investigators—in its attempts to collect debts from Ohio consumers. In some cases, Nationwide is alleged to have “spoofed” consumers’ caller IDs to display a government phone number and threatened consumers with arrest or legal action if they did not repay the alleged debt immediately.
- The lawsuit is pending in the Montgomery County Court of Common Pleas, and seeks restitution as well as civil penalties.
President Obama Issues Executive Order on Private Sector Information Sharing
- President Obama signed an executive order designed to increase information sharing among private companies, nonprofit organizations and government agencies regarding threats, vulnerabilities, and attacks occurring over the internet.
- The Order specifically directs the Department of Homeland Security to foster the creation of Information Sharing and Analysis Organizations (ISAOs). It also seeks to establish mechanisms that maintain and improve the functions of ISAOs and facilitate information dissemination and private sector partnership with the federal government—specifically through the National Cybersecurity and Communications Integration Center.
Indiana Attorney General Proposes Stronger Data Privacy Legislation
- Data privacy legislation proposed by Indiana AG Greg Zoeller passed a key hurdle as it was approved by the Indiana Senate Committee on Homeland Security and Transportation and will now be considered by the entire Senate.
- Indiana Senate Bill 413 would expand data breach notification obligations to breaches involving non-computerized data, and would apply to data collectors and users. The current law applies only to data owners.
- The bill would also require companies to employ reasonable procedures to ensure that no personal information is retained “beyond what is necessary for business purposes or compliance with applicable law.” It would also require online entities that collect personal or financial information from Indiana residents to conspicuously post their privacy policies, identifying the types of personal information collected from site visitors, and to whom the information is shared or sold.
Missouri Collects $43.9 Million for Environmental Remediation in National Settlement
- Missouri AG Chris Koster announced that the state will receive $43.9 million from Anadarko Petroleum Corporation as part of a nationwide $5.15 billion settlement regarding the 2006 acquisition of Kerr-McGee Corporation.
- The environmental claims settled by Anadarko stem from the 2009 bankruptcy of Tronox Ltd. Tronox’s creditors together with the U.S. Department of Justice claimed that Kerr-McGee fraudulently saddled Tronox with most of its environmental liabilities and then divested the company to make Kerr-McGee a more attractive acquisition for Anadarko.
- The majority of Missouri’s portion of the settlement—$38.2 million—will go toward remediating two sites formerly owned by Kerr-McGee, and used for creosote wood treatment. The remaining $5.7 million will be applied to the state’s Natural Resource Damages program to remediate contaminated sites for public use.
States vs Federal Government
Round One Goes to Texas in Lawsuit Challenging President’s Executive Action on Immigration
- Andrew Hanen, a federal judge for the Southern District of Texas, ruled in favor of Texas and 25 other state plaintiffs, enjoining the implementation of certain aspects of President Obama’s executive action on immigration. The U.S. Department of Justice has indicated it will appeal the decision.
- Judge Hanen’s decision turned on his interpretation of the requirements of the Administrative Procedure Act (APA). Judge Hanen found that the proposed executive action, effectuated through changes in Department of Homeland Security operations, created a “substantive change to immigration policy” and thus was properly classified as a rule or regulation that must comply with the APA’s requirement of being first published in the Federal Register for a period of notice and comment.
- Texas AG Ken Paxton, who is lead plaintiff along with 25 other states, called the decision “a victory for the rule of law in America.” In contrast, Washington AG Bob Ferguson, who led a group of AGs from twelve states and the District of Columbia in filing an amici brief in support of the President’s actions, indicated that this ruling was only the beginning.
Eleven Attorneys General Argue Mississippi Has Authority to Investigate Google
- Eleven AGs, led by Kentucky AG Jack Conway, filed an amici brief in federal court in support of Mississippi AG Jim Hood’s attempt to investigate Google, Inc. for alleged violations of the Mississippi Consumer Protection Act through the issuance of an administrative subpoena. Kentucky AG Jack Conway was lead AG on the brief.
- The subpoena demanded that Google produce information related to AG Hood’s allegations that the company does not take appropriate measures to limit illegal activity on the internet, and derives revenue from such activities, including the exchange of pirated materials and the promotion of illegal drugs. Google objected to the subpoena and filed a lawsuit in federal court seeking an injunction to block the subpoena and the investigation.
- Google argued that the 1996 Communications Decency Act shields online companies like Google from liability arising out of materials posted by third parties, essentially providing immunity from the AG’s investigation. In their brief, the eleven amici AGs respond that even if Google is ultimately immune, that would be a defense to a lawsuit, and not to an AG investigation. Moreover, the AGs argue that the proper response when objecting to an administrative subpoena is through the state court system, not a federal lawsuit.
- The case is Google, Inc. v. Hood, 3:14-CV-00981. The parties are scheduled to argue their positions on AG Hood’s Motion to Dismiss on February 20 in front of Judge Henry T. Wingate for the Southern District of Mississippi.
Louisiana Attorney General Sues Drug Maker for Allegedly Delaying Generics
- Louisiana AG Buddy Caldwell filed a lawsuit alleging that GlaxoSmithKline LLC (GSK) violated the Louisiana Monopolies Act and Unfair Trade Practices Act by preventing or delaying Federal Drug Administration (FDA) approval of generic versions of Flonase (fluticasone propionate) to keep them from entering the market.
- The complaint is based on a novel theory of liability, alleging that GSK used a “brand maturation” scheme, described as a combination of the following four actions: influencing the FDA bioequivalence guidance process; filing “baseless” citizen petitions with the FDA; drafting a new set of procedures and acceptance criteria in order to set standards for quality, purity, strength and consistency; and supplementing its original New Drug Application in an attempt to delay the FDA from approving applications from generic producers.
- The case was originally filed in state court, but has been noticed for removal to the Middle District of Louisiana. In its Notice of Removal, GSK asserts that its actions were done in compliance with standard FDA procedures. The AG is seeking restitution for “unlawfully inflated prices” paid by the state and treble damages.
Consumer Financial Protection Bureau
CFPB Secures $2 Million in Civil Penalties From Nonbank Mortgage Lender
- The Consumer Financial Protection Bureau (CFPB) reached an agreement with New Day Financial, LLC, to resolve claims that the non-bank lender engaged in deceptive advertising in violation of the Dodd-Frank Act and paid illegal kickbacks in violation of the Real Estate Settlement Procedures Act.
- New Day’s primary business was to originate refinance mortgage loans guaranteed by the Veterans Benefits Administration. The CFPB alleged that New Day agreed to pay “lead generation” fees to a veterans’ organization and a broker that facilitated the arrangement, in addition to a monthly licensing fee to the broker. In exchange, the veterans’ organization named New Day its exclusive lender and referred veterans to New Day. New Day also allegedly advertised its exclusive endorsement to the members of the veteran’s organization without disclosing the financial relationship between them.
- In accordance with the consent order, without admitting any of the allegations, New Day will implement a compliance plan to ensure its marketing of mortgage products complies with the law and must pay $2 million to the CFPB’s Civil Penalty Fund.
Stealth Solar’s Alleged Violations Detected by Arizona Attorney General
- Arizona AG Mark Brnovich settled with Stealth Solar, LLC, and its owners, resolving a lawsuit alleging that Stealth’s sales force violated the Arizona Consumer Fraud Act by making false and deceptive statements to consumers in order to sell photovoltaic electricity generation (PV) systems.
- The consent judgment outlines a series of allegedly false or deceptive statements made by Stealth, including claims that utility bills will increase 10 to 12 percent per year without a PV system, or that 70 percent of the costs of a PV system are covered by government incentives.
- Pursuant to the terms of the consent judgment, Stealth is enjoined from making unsubstantiated claims and will pay $72,000 in restitution to consumers, as well as additional restitution based on consumer complaints received by the AG until July 1, 2015.
West Virginia Cracks Down on Pool Company Allegedly Violating Mortgage Laws
- West Virginia AG Patrick Morrisey settled with Blue World Pools, Inc., regarding allegations that the company violated the West Virginia Consumer Credit and Protection Act in connection with the sale and financing of swimming pools in West Virginia.
- AG Morrisey alleged that Blue World used deceptive sales practices to secure finance agreements by filing a deed of trust against the consumer’s property in which it was named as trustee, a practice the AG alleged was tantamount to making mortgage loans without a license. In addition, Blue World allegedly failed to make necessary financial disclosures and, in some cases, charged annual percentage rates that exceeded limits allowed in the state.
- Blue World did not admit to the allegations, but agreed to resolve the AG’s claims through an assurance of discontinuance, in which it agreed to pay $1 million to the state with $500,000 designated for consumer restitution. Blue World also agreed to cancel almost $650,000 in consumer debt, and to request that credit reporting agencies delete any adverse information it may have reported.
Attorneys General Take Action in Health Insurer’s Data Breach
- Massachusetts AG Maura Healey formally announced that her office is investigating the data breach at Anthem, Inc., through which hackers were able to gain access to information pertaining to Anthem’s current and former customers and employees, including names, birthdates, social security numbers, addresses, email addresses, and employment and salary information.
- In addition, at least ten other AGs sent a letter demanding that Anthem provide better information as to who might be affected and to reimburse consumers who suffer losses during the delay between the breach and the notification and provision of credit monitoring.
- Anthem has created a website to provide information and guidance on this issue, on which it indicates that it will contact affected consumers directly. In addition, Anthem has posted answers to frequently asked questions and will be offering credit monitoring services for affected consumers.
Illinois Attorney General Asks Congress for Strong Data Breach Law, but Not Preemption
- Illinois AG Lisa Madigan testified before a U.S. Senate subcommittee, urging Congress to enact a strong federal law to address data protection, but to do so without preempting state efforts. AG Madigan stated, “A weak national law that restricts what most state laws have long provided will not meet Americans’ increasing and rightful expectation that they be informed when their information has been stolen.”
- As we have previously reported, data security has become a vibrant issue in state legislatures, and State AGs have been very active in investigating data breaches and pushing for stronger state laws.
False Claims Act
Attorneys General Look to Strengthen State False Claims Acts
- Maryland AG Brian Frosh urged the Maryland General Assembly to adopt a broader version of the state’s False Claims Act, calling it his “top priority for the 2015 legislative session.” Currently, the Maryland law only applies to Medicaid and health-related fraud.
- Under the bill submitted to the Senate and House of Delegates, which would apply to both state and local government, individuals would be able to report fraud committed by state contractors to the AG or local State’s Attorney, who would review and pursue those claims with the most merit. If a case is successful, the state may receive triple damages, while the whistleblower would collect a reward and also receive protection against on-the-job retaliation.
- Other AGs are also pushing for more potent legislation to address false claims. In addition, states that enact federally compliant laws are able to keep a larger percentage of the money recovered from national lawsuits and settlements based in part on the federal False Claims Act.
Iowa Settles With Home Medicaid Services Provider
- Iowa AG Tom Miller, together with the U.S. Department of Justice (DOJ), settled with ResCare Iowa, Inc., resolving claims that, from 2009 to 2014, the medical services provider violated the False Claims Act by submitting false home healthcare billings to Medicare and Medicaid programs.
- AG Miller and the DOJ accused ResCare of failing to provide proper documentation demonstrating that an independent physician performed a face-to-face assessment of each patient and that the physician certified that home care was medically necessary.
- ResCare agreed to pay $5.63 million to resolve both state and federal claims, with $2.32 million going to Iowa.
Attorney General Counsels Council That It Lacks Authorization to Enact Marijuana Law
- The District of Columbia Council canceled a hearing to debate Bill 21-23, the “Marijuana Legalization and Regulation Act of 2015” (Bill) after being advised by District AG Karl Racine that to do so would be unlawful.
- In a letter to various Council members, AG Racine advised that the Federal Appropriations Act for 2015 expressly prohibited the D.C. government from using 2015 funds to “enact any law, rule, or regulation to legalize or otherwise reduce penalties” for the use of marijuana for recreational purposes. AG Racine iterated this would apply to even a preliminary hearing, and thus Council members and District employees could be liable under the Anti-Deficiency Act, which prohibits the expenditure of funds that have not been appropriated. Among other things, AG Racine also highlighted that the Bill in current form goes beyond simply decriminalizing small amounts of marijuana, and thus expands the measure approved by voters in last year’s Ballot Initiative 71.
States v. Federal Government
Oklahoma Attorney General Voices Concerns to Congress Over EPA Rule, Threatens Legal Battle
- Oklahoma AG Scott Pruitt testified at a Senate-House committee hearing, and continued to voice objections shared by other AGs to a proposed rule that would expand Environmental Protection Agency (EPA) jurisdiction under the U.S. Clean Water Act.
- The EPA’s proposed rule seeks to broaden and clarify the definition of water that falls under the regulatory powers of the EPA to include seasonal and rain-dependent streams, as well as wetlands that are close to rivers.
- The AGs arguing against the rule highlighted the potential to disrupt small businesses ranging from farmers to home builders by requiring them to obtain EPA approval for any action that might affect surface water. However, other AGs and federal lawmakers indicated that the AGs’ concerns were not supported by the text and purpose of the rule. The EPA plans to make the rule final this spring, but according to EPA head Gina McCarthy, the final wording of the rule will “provide more clarity on the basis of the comments that we received.”
Nevada and Washington Attorneys General Approve Grocery Store Merger With Divestitures
- Nevada AG Adam Laxalt and Washington AG Bob Ferguson entered into consent decrees resolving separate lawsuits that challenged a proposed $9.2 billion merger between rival grocery chains AB Acquisition LLC (Albertsons) and Safeway Inc.
- The Nevada and Washington consent decrees expressly adopt the terms and conditions of a Federal Trade Commission (FTC) proposed consent order, giving the State AGs the power to enforce the terms and conditions in the FTC order.
- The FTC’s analysis found that the merger as initially proposed would lead to anticompetitive results in 130 local markets across western states. In some markets there would be only one remaining grocer. Thus, the FTC conditioned merger approval upon the divestiture of 168 stores from the merged entity to smaller regional grocery chains. As part of this divestiture, the largest ever requested by the FTC in the grocery sector, 146 stores will be acquired by Haggen Holdings, LLC, a grocer that operated only 18 stores in Washington and Oregon prior to the merger.
Consumer Financial Protection Bureau
CFPB Secures Debt Forgiveness for Students as For-Profit Colleges Are Acquired by Nonprofit
- The Consumer Financial Protection Bureau (CFPB) reached an agreement with ECMC Group, Inc., and newly created nonprofit Zenith Education Group, Inc., (together ECMC) in connection with ECMC’s purchase of more than 50 Everest and WyoTech campuses from Corinthian Colleges, Inc.
- Under the agreement, ECMC will provide $480 million in debt forgiveness to former Everest and WyoTech students in exchange for the CFPB releasing ECMC from any liability for prior violations of the Consumer Financial Protection Act or the Fair Credit Reporting Act during the period the colleges were owned by Corinthian.
- In addition to debt forgiveness, ECMC agreed not to engage in improper debt collection practices and will instruct credit reporting agencies to delete any related negative information on former students’ credit reports. ECMC will also provide additional information on post-graduation employment, offer flexible withdrawal policies, and refrain from offering its own private loans to students for seven years, among other measures to improve accountability and transparency.
CFPB Prepares Rule to Regulate Payday Lending
- According to news sources, the CFPB is preparing federal rules to regulate payday lending, a practice it defines as “a short-term loan, generally for $500 or less, that is typically due on your next payday.”
- The CFPB has authority to promulgate rules to regulate payday lending under the 2010 Dodd-Frank Act. However, unlike state laws that address the issue (if at all) through maximum allowable interest rates, Dodd-Frank does not authorize rate caps. Instead, the CFPB will address the issue by declaring certain industry practices to be unfair, deceptive, or abusive to consumers. Because State AGs have authority to enforce CFPB regulations under Section 1042 of Dodd Frank, this and any other rule promulgated by the CFPB can also be enforced by State AGs.
New Jersey Brings Lawsuit to Shut Down Auto Warranty Seller
- Acting New Jersey AG John Hoffman settled with Direct Buy Associates, Inc., d/b/a Direct Buy Auto Warranty, for allegedly selling “comprehensive,” or “bumper-to-bumper” auto warranties that limited coverage for repairs above the Manufacturer’s Suggested Retail Price for parts or for labor that exceeded the current national flat rate.
- The lawsuit alleged multiple violations of the New Jersey Consumer Fraud Act, the Plain Language Act, the Business Corporations Act, and regulations governing advertising.
- The final consent judgment requires Direct Buy to pay $199,560 in restitution to consumers who purchased the policies in question and submitted complaints to the AG’s Consumer Division, in addition to a $500,000 civil penalty, of which $400,000 will be suspended subject to Direct Buy’s compliance with the agreement. Direct Buy must also pay $111,009 to reimburse the state for attorneys’ fees and investigative costs.
New York Attorney General Uncovers Herbal Supplements Allegedly Lacking Advertised Ingredients
- New York AG Eric Schneiderman announced this week that his office has issued cease and desist letters to four major retailers—GNC Holdings, Inc.; Target Corporation; Walgreen Co.; and Wal-Mart Stores, Inc.— for allegedly selling store brand herbal supplements that did not contain the claimed ingredients as determined by the AG office’s testing methodologies, and/or were found to contain ingredients not listed on the labels.
- The investigation focused on supplements claiming to contain echinacea, garlic, gingko biloba, ginseng, St. John’s wort, saw palmetto, or valerian root. Through the use of a process called “DNA barcoding,” the AG’s investigation concluded that 79 percent of the supplements did not contain any amount of the herb claimed. In addition, 35 percent of the supplements tested allegedly contained ingredients not listed on the label, including allergens like gluten or nuts.
- In response to the allegations, Steve Mister, president and CEO of the Council for Responsible Nutrition, stated that “[p]rocessing during manufacturing of botanical supplements can remove or damage DNA,” and that DNA barcoding “has been roundly criticized by botanical scientists who question whether [it] is an appropriate or validated test for determining the presence of herbal ingredients in finished botanical products.”
Vermont Attorney Settles With Marketing Company Over Use of Personal Information
- Vermont AG William Sorrell reached a settlement with Main Street Power Mail, Inc., resolving allegations that it violated the Vermont Consumer Protection Act through attempts to generate leads for third-party insurance agents by soliciting consumers’ personal information through the mail without disclosing that the information would be used to make sales calls.
- The assurance of discontinuance requires Main Street, jointly and severally with owner Kyle Malott, to pay $90,000 to the state. In addition, it requires Main Street to refrain from contacting any Vermont consumer in order to generate business leads without properly disclosing that the consumer may be solicited to purchase a product or service.
New York Attorney General Obtains Judgment Against Pizza Franchisee
- New York AG Eric Schneiderman, with cooperation from the U.S. Department of Labor, obtained a judgment for $789,507 against Emstar Pizza, Inc. and its owner, Emmanuel Onuaguluchi, operating Papa John’s franchises, for violations of New York labor laws.
- AG Schneiderman’s lawsuit asserted that Emstar Pizza, over the course of six years, unlawfully reduced workers’ pay by under-reporting and rounding down hours worked to the nearest whole hour and failed to pay overtime.
- In addition, the judgment permanently enjoins Emstar from selling its assets unless the proceeds from such sale are held in escrow, which AG Schneiderman can use to distribute as restitution to underpaid employees.
False Claims Act
Massachusetts Settles With Neighborhood Pharmacy Over Auto Refill Practices
- Massachusetts AG Maura Healey settled with Neighborhood Diabetes, Inc., d/b/a Neighborhood Pharmacy, resolving claims that the pharmacy automatically refilled prescriptions in violation of MassHealth (Massachusetts’ Medicaid program) regulations that prohibit automated refilling and billing the state for prescriptions that were not explicitly requested by a MassHealth patient or caregiver.
- Under the settlement, Neighborhood Pharmacy will pay $1.5 million to the Commonwealth, and will cease providing automatic refills and/or dispensing drugs to MassHealth patients without the required authorizations and copayments.
Standard & Poor’s Settles With States and Federal Government for $1.37 Billion
- Standard & Poor’s Financial Services, LLC, (S&P) agreed to settle multiple lawsuits brought by 20 AGs and the U.S. Department of Justice alleging securities fraud and violations of state unfair and deceptive practices acts.
- According to Connecticut AG George Jepsen, the states’ lawsuits were based on conduct from 2001 to 2007, whereby S&P allegedly made repeated statements that its ratings were objective, independent, and uninfluenced by any conflicts of interest, but in reality S&P was influenced by its desire to earn lucrative fees from its investment bank clients and “assigned inflated credit ratings to toxic assets packaged and sold by Wall Street investment banks.”
- Pursuant to the settlement agreement, S&P will pay a total of $1.375 billion, of which $687.5 million will go to the states collectively, with individual states receiving from $22 million to $210 million. Although S&P did not admit that it violated any laws, it signed a statement of facts acknowledging that the company did not downgrade underperforming assets and delayed implementing new ratings models because it was worried that doing so would hurt the company’s profitability.
- Last month, S&P settled with New York, Massachusetts, and the U.S. Securities and Exchange Commission for $80 million, resolving similar claims based on S&P’s post-financial crisis ratings methodology.
States vs Federal Goverment
Dueling Amici Frame Arguments in Affordable Care Act Case
- Oklahoma AG Scott Pruitt, leading a group of six states, submitted an amici brief in support of petitioners in King v. Burwell, pending in the U.S. Supreme Court. Virginia AG Mark Herring, leading a group of 22 states and the District of Columbia, submitted an amici brief in support of respondents.
- The issue is whether the Internal Revenue Service is justified in drafting regulations that provide premium-assistance tax credits for individuals in states that did not establish their own exchanges under the Affordable Care Act (ACA), but instead participate in the federally-facilitated health insurance exchange. Oral argument in the case is scheduled for March 4,2015.
- AG Pruitt’s brief focuses on a textual interpretation of the ACA, arguing that the law conditioned the availability of tax credits on states’ participation in establishing exchanges. Moreover, it argues that states made their decisions to not establish exchanges, and thus to avoid certain mandates under the law, based on a reading of the plain text of the ACA.
- In contrast, AG Herring’s brief argues from a functional perspective, that without interpreting the law as providing tax credits regardless of whether the exchange was federally-established, the ACA becomes unworkable and would disrupt state insurance markets. It also argues that the principle of constitutional doubt instructs that when selecting between two plausible interpretations of the ACA, the Court should adopt the interpretation that is constitutional.
Delaware Senate Passes Reforms to State Unclaimed Property Audit Process
- In a recent blog post, Dickstein Shapiro partner Maria Colsey Heard and counsel Aaron Lancaster explain how the Delaware legislature is seeking to reform the state unclaimed property audit process.
New Massachusetts Attorney General Hints at Possible Action on Hospital Merger
- Massachusetts AG Maura Healey indicated to a Suffolk Superior Court judge that she would vigorously enforce the terms and conditions of a consent judgment reached between her predecessor, Martha Coakley, and two healthcare entities seeking merger approval, Partners HealthCare System, Inc. and South Shore Hospital, if the court decides to approve the consent judgment.
- AG Healey also indicated, however, that she does not wholly endorse the settlement terms, and if the court declined to approve the consent judgment, her office would “exercise its right to void the agreement,” and would likely “litigate to enjoin Partners’ proposed acquisition of South Shore Hospital.”
- In her submission, which was requested by the court and informed by public and industry comments, AG Healey outlined her concerns for the efficacy of the consent judgment, which include: concerns for the market power of the merged entity after the constraints expire, skepticism over the utility of “component contracting,” and the preference that the merged entity demonstrate an ability to contain costs before it is allowed to expand.
Consumer Financial Protection Bureau
CFPB Creates Scorecard for University-Linked Debit and Prepaid Cards
- The Consumer Financial Protection Bureau (CFPB) is seeking public comments on a new “scorecard” it created to help minimize potential harm to students when their university enters into an agreement with a bank to offer university-linked debit and pre-paid card accounts on campus.
- The CFPB proposed the scorecard out of concern that banks and schools were not properly considering students’ interests in the negotiations for these debit cards. Because universities are often provided with a signing bonus and/or a portion of the revenues generated from card fees, and given that these cards are sold on campuses, linked to student accounts, and used to access student loan balances, the CFPB emphasized that it is important they are structured to minimize fees and to promote sound financial practices by students.
- The scorecard—which is a voluntary tool for universities to use—requires that a bank provide a clear description and annual summary of the fees charged to students, an explanation of the bank’s marketing practices, and an estimate of bank earnings from student debit card accounts. The goal is to establish a uniform and transparent format for making disclosures so that the universities can better evaluate and compare the various debit card offers, and select the offer that best protects its students.
False Claims Act
Wisconsin Settles Ten-Year Old Dispute With Drug Maker
- Wisconsin AG Brad Schimel has reached a settlement with Novartis Pharmaceuticals Corporation, resolving claims that Novartis charged artificially inflated prices to the State Medicaid program.
- AG Schimel’s lawsuit, originally filed in 2004, alleges that Novartis reported inflated average wholesale prices for certain drugs provided to the Medicaid program. The dispute was scheduled for trial starting on February 2, with the state claiming $22 million in damages.
- According to news reports, Novartis maintained that the state’s claims were unfounded but settled to avoid any additional costs of litigation. It also highlighted that it “provides millions of dollars every year to the state of Wisconsin, which enables Wisconsin to fairly pay its pharmacies and assure that Wisconsin Medicaid beneficiaries have access to Novartis’ innovative medicines.”
New York Attorney General Looks to Amend “Dark Pools” Complaint, Spotlighting Alleged Wrongdoing With Greater Specificity
- New York AG Eric Schneiderman has moved for leave to file an amended complaint against Barclays Capital Inc. and Barclays PLC, seeking to demonstrate that the alleged illegal conduct was not accidental or minimal, but rather part of “a broad course of conduct involving numerous Barclays employees.”
- The amended complaint—which is based on information gained through discovery of more than 100,000 documents—names specific executive level employees and provides greater detail to the allegations that Barclays misled customers to boost its own profits. The amended complaint identifies specific incidents in which Barclays assured investors they were protected from “toxic” high-frequency traders, while at the same time was inviting high-frequency traders to transact in the “dark pools.”
- Barclays responded that the amended complaint “merely repackages the same flawed arguments that were in the original complaint,” and that it will “continue to seek to cooperate with the New York Attorney General in this matter,” but will also “continue to defend vigorously against these allegations.”
Washington Attorney General Seeks Legislation to Curb “Patent Trolls”
- Washington AG Bob Ferguson is proposing legislation to prohibit the deceptive and fraudulent assertion of alleged patent rights. If passed, Washington would become the 18th state in the last two years to limit the actions of “patent trolls” through legislation.
- The proposed legislation, the “Patent Troll Prevention Act,” prohibits an entity from sending demand letters that contain false or deceptive information, requesting a licensing fee for a patent they do not possess, baselessly threatening litigation if a fee is not paid, and failing to identify the individual asserting the patent and explaining the alleged infringement.
Mortgages and Forclosures
Maryland Attorney General and CFPB Settle With Banks Over Alleged Mortgage Kickback Arrangement
- Maryland AG Brian Frosh, working together with the Consumer Financial Protection Bureau (CFPB), entered into consent judgments with Wells Fargo Bank, N.A. and JPMorgan Chase Bank, N.A. to resolve allegations that the banks violated the Real Estate Settlement Procedures Act and the Maryland Consumer Protection Act through a “kickback” arrangement with now defunct Genuine Title, LLC.
- In the complaint, AG Frosh and the CFPB alleged that from September 2011 to early 2014, Genuine Title provided leads on potential mortgage clients to the banks in exchange for the banks’ referral of mortgage customers to Genuine for closing services.
- Under the terms of the consent judgments, Wells Fargo will provide $10.8 million and Chase will provide $300,000 in restitution to customers who used either a Wells Fargo or Chase loan officer and closed with Genuine Title. In addition, the banks will pay civil penalties totaling $21.5 million to the CFPB and $3.1 million to the Maryland Consumer Protection Division.
States v. Federal Government
Ohio Attorney General Sues Federal Government Over Affordable Care Act “Tax” on State Entities
- Ohio AG Mike DeWine, along with officials from Warren County and various Ohio public universities, filed a lawsuit in the Southern District of Ohio alleging that the application of the Affordable Care Act’s (ACA) Transitional Reinsurance Program requiring state entities to pay “contributions” to the U.S. Treasury for a three-year period beginning in 2014 is unconstitutional.
- At the heart of AG DeWine’s lawsuit is the application of U.S. Department of Health and Human Services (HHS) regulations purporting to require local and municipal governments and public universities that offer self-insured group health plans to their respective employees to make monetary contributions toward the establishment of a national reinsurance pool.
- In the complaint, AG DeWine argues that because local governments and public universities are essentially state entities, they cannot be mandated to make “contributions” under the ACA. DeWine further contends that such contributions amount to a direct revenue generating tax on the state that violates the Tenth Amendment and the doctrines of Intergovernmental Tax Immunity and Anti-Commandeering.
Kentucky Attorney General Secures $54 Million in Rate Reductions and Refunds
- Kentucky AG Jack Conway, together with Kentucky Industrial Utility Customers, Inc., an association of energy-consuming companies, intervened in a utility price dispute before the Kentucky Public Service Commission, ultimately saving ratepayers $54 million in fuel costs.
- The Kentucky Public Service Commission (PSC) found Kentucky Power Co.’s alleged failure to disclose $38.25 million in additional fuel costs stemming from a recent acquisition to be “incomprehensible”—especially in light of its finding that the Power Co. decided to operate two plants simultaneously, generating excess power that it sold on the open market while imposing the extra costs on its customers.
- The PSC directed Kentucky Power Co. to refund $13.2 million to ratepayers for overcharges already collected during the first four months of last year, and barred the company from collecting approximately $41 million in additional fuel costs through May 2015.
Delaware, like most states, requires that certain types of unclaimed property be reported and turned over to the State. Delaware’s unclaimed property administrator, as in other states, has the power to “examine the records” of businesses—either directly, or through the use of private-sector audit firms—to ensure compliance. This audit process has engendered controversy in recent years, and the Delaware Senate has been working on significant reforms. Although geographically small, Delaware is a heavyweight in forming policy in this area for one simple reason: Delaware is the state of incorporation for a large majority of American companies, and when the rightful owner’s address is unknown, unclaimed property must be reported to the state where the company holding it is incorporated.
In July 2014, the Delaware Senate created a task force to assess policy shortfalls and propose new legislative goals for identifying unclaimed and abandoned property. The task force met numerous times throughout 2014 and made its recommendations in a final report issued on December 23, 2014. The report identified both specific actions (e.g., amend the statute of limitations relating to unclaimed property audits so that businesses are not liable for unclaimed property after a reasonable period for record retention has expired) and general guidelines (e.g., maintain a broader base of contracted auditors) to be addressed in future legislation.
Last week, the Senate adopted some of those recommendations in Senate Bill 11. The proposed law would implement two key recommendations from the task force final report: it would limit a single private firm to securing no more than 50 percent of the contracts to audit for unclaimed property, and it would prohibit a firm awarded an auditing contract from employing persons who have served as supervisors in the Delaware Division of Revenue or Department of Finance during the prior two years. SB 11 also calls for the Secretary of Finance to create a detailed procedural manual by December 15, 2015, with further input from stakeholders and interested parties.
Passage of SB 11 likely will not resolve all controversy surrounding states’ use of outside auditors with a financial stake in the process, but it shows a recognition of businesses’ concerns about the fairness of the audit process. Other state unclaimed property offices, and state legislators, are certain to pay attention.