State AG Monitor

Investigation Watch

Posted in Climate Change, Data Privacy, Environment, False Claims Act, Securities, States v. Federal Government


States Come Up Short on Petition for Stay

  • The state plaintiffs in Michigan v. EPA were dealt a blow on Wednesday when the U.S. Supreme Court denied their petition for a stay of enforcement of the Mercury and Air Toxics Standards (“MATS”) rule during the period in which the Environmental Protection Agency (“EPA”) conducts a court-ordered cost analysis.
  • As we reported last week, a group of mostly Republican State AGs had asked the Supreme Court to stay the implementation of the rule, arguing that without the required cost analysis, the EPA never acquired the authority under the Clean Air Act to regulate mercury and other toxins emitted from power plants. Although the Supreme Court agreed with the states in June of last year when it found that the MATS rule had been improperly promulgated, on this occasion the Court denied the requested stay.

False Claims Act

Lockheed Agrees to FCA Fine

  • The Department of Justice (“DOJ”) intervened and settled with Lockheed Martin Corporation and related subsidiaries, resolving a whistleblower case in which the plaintiffs alleged that Lockheed violated the U.S. False Claims Act by misrepresenting that it had complied with the Resource Conservation and Recovery Act (“RCRA”) in connection to a contract with the Department of Energy (“DOE”).
  • According to the complaint, Lockheed was responsible for providing uranium enrichment and related hazardous waste management services and failed to identify depleted uranium stored on site in accordance with the RCRA. According to the DOJ, the alleged failure to abide by the requirements of the RCRA in connection to the submission for payment under the DOE contract, amounted to a false claim.
  • As a result of the settlement agreement, Lockheed will pay $4 million to the government to resolve the False Claims Act allegations, and another $1 million in civil penalties for violating the RCRA. The case was originally brought by former employees at the site and the Natural Resources Defense Council, Inc.


Texas Argues Hazy EPA Authority at Fifth Circuit

  • Texas AG Ken Paxton has filed a lawsuit challenging the EPA’s recently promulgated regional haze implementation plan for Texas in the U.S. Court of Appeals for the Fifth Circuit.
  • The Regional Haze Rule is designed to reduce the amount of “regional haze,” for visibility purposes, at 156 federal wilderness areas and national parks. It requires states to submit implementation plans to the EPA, allowing state and federal regulators to collaboratively reduce air pollution that impairs visibility on the indicated federal lands. Texas had submitted its implementation plan in 2009. The EPA’s plan for Texas, which came into effect on February 4 and aims to reduce sulfur dioxide pollution in Big Bend and Guadalupe Mountains National Parks by approximately 60 percent, partially disapproved the plan that Texas had already submitted.
  • In the petition for review, AG Paxton makes the argument that the EPA’s Haze Rule is not a nationally applicable law, but instead a collection of requirements that seek to regulate strictly in-state emission sources. In addition, AG Paxton indicated that the EPA plan would require costly upgrades to electricity producers, and would cause the state’s power grid to become less reliable.


Climate Change Investigation Heats Up for Oil Company

  • The DOJ has referred a request from U.S. Representatives Ted Lieu and Mark DeSaulnier to the Federal Bureau of Investigation’s (“FBI”) criminal division, asking the FBI to investigate ExxonMobil Corporation’s disclosures on the risks posed by climate change in light of research conducted by the oil supermajor in the 1970s and 80s.
  • Reps. Lieu and DeSaulnier have been actively calling for both federal and state regulators to investigate Exxon since last fall. As we previously reported, New York AG Eric Schneiderman issued a subpoena last November, and California AG Kamala Harris, in connection to a letter from Lieu and DeSaulnier, opened her own state investigation. In addition, major investors including New York state pension funds and the Church of England have been requesting that Exxon disclose how its business would be affected by climate change.
  • In a statement, Exxon indicated that it “has included information about the business risk of climate change for many years in … 10-K, corporate citizenship report and in other reports to shareholders,” and argued that environmental activists are cherry-picking from “publicly available materials from the company’s archives to deliberately distort ExxonMobil’s nearly 40-year history of climate research.”

State AGs in the News

Posted in Data Privacy, Environment, False Claims Act, Securities, States v. Federal Government


States Ask SCOTUS to Stay EPA Rule—This Time Without Justice Scalia

  • A group of twenty State AGs filed a petition in an ongoing lawsuit, Michigan v. EPA, asking the Supreme Court to stay the implementation of the Mercury and Air Toxics Standards (“MATS”) rule while the Environmental Protection Agency (“EPA”) makes the required procedural revisions to the rule.
  • The MATS rule seeks to create technology-based emissions standards for mercury and other toxic air pollutants from power plants. One significant effect of its implementation will be to reduce the use of coal to generate electricity. In June, the plaintiff states successfully persuaded the Supreme Court that the MATS rule was promulgated without properly considering the costs of regulating mercury and other toxins from power plants. The EPA had argued that it was only required to consider the costs when determining the appropriate level of mercury and other toxins to permit, but the Court held that the costs of regulation must be considered at the outset.
  • On remand, however, the U.S. Court of Appeals for the D.C. Circuit allowed the rule to remain in effect while the EPA conducts the required assessment of costs. The states now argue that since the Supreme Court ruled that the EPA erred in promulgating the rule in the first place—a 5-4 decision authored by former Justice Scalia—the EPA never fulfilled the necessary precondition to regulate mercury emissions at all. Thus the rule should be stayed until the EPA can properly promulgate it.
  • A similar group of states was successful earlier this month in convincing the Supreme Court to stay the EPA’s Clean Power Plan, a rule that aims to significantly reduce carbon emissions from power plants by 2030. In that case—also a 5-4 decision with Justice Scalia in the majority—the states won on the argument that implementation of the rule prior to a final determination by the D.C. Circuit would cause the states to incur substantial costs without the certainty that the rule would pass scrutiny. The difference between the Court’s decision to stay the Clean Power Plan, and how it treats the petition to stay the MATS rule, may ultimately lie in the absence of Justice Scalia. If the Court takes the petition but comes to a 4-4 split, the D.C. Circuit decision will stand.

Data Privacy

FTC Settles With “Secure” Hardware Provider

  • The Federal Trade Commission (“FTC”) reached an agreement with ASUSTeK Computer, Inc. (“ASUS”), to settle charges that the hardware and device provider violated the FTC Act by offering misleading advertisements, and by using unfair sales practices in connection to network routers and secure home cloud devices.
  • The FTC’s complaint generally focused on ASUS’s representations that its network products were secure when, in fact, there were multiple reported vulnerabilities and risks posed by hackers. The FTC claims that ASUS failed to give its customers proper notice regarding the availability of necessary security updates, and in some cases, told customers that they were using the most current version of router and cloud software when a newer version, containing necessary security updates, was available for download. The FTC also alleged that ASUS set unsecure default settings, and failed to provide instructions so that consumers could properly configure the equipment to provide the desired level of security. ASUS’s actions, as alleged by the FTC, exposed information on customers’ home computer systems to anyone on the Internet who knew their IP address.
  • The consent order requires ASUS to notify consumers about software updates and other steps they can take to protect themselves from potential security flaws. It also requires ASUS to establish a comprehensive program to detect security risks and take appropriate steps to protect the privacy and security of consumers’ information. What it does not require is the payment of fines or monetary damages. Like a growing number of cases where consumers’ data is unknowingly exposed to an increased risk of hacking, the FTC did not quantify the harm stemming from the vulnerability. Any future violations by ASUS, however, will result in a civil penalty of up to $16,000 per violation.

False Claims Act

Importer Agrees to Settle FCA Charges Over Misclassified Electrodes

  • The Department of Justice (“DOJ”) intervened and settled a whistleblower case in which the plaintiffs alleged that Ameri-Source International Inc., Ameri-Source Specialty Products Inc., Ameri-Source Holdings Inc., and SMC Machining LLC (together “Ameri-Source”) violated the U.S. False Claims Act in connection to the importation of graphite electrodes.
  • The relator in the case, Graphite Electrode Sales, Inc. (“GES”), alleged that Ameri-Source knowingly misclassified small-diameter graphite electrodes from China as being of a larger diameter, or from a different origin when completing necessary customs documentation. By importing the electrodes under a different classification and origin, Ameri-Source was able to avoid paying antidumping duties associated with the Chinese small-diameter electrodes.
  • According to the complaint, Ameri-Source used a scheme whereby it would first import the Chinese electrodes to a shell company in India. The Indian company claimed to refine the electrodes, allegedly transforming them to a new product. Finally Ameri-Source would import the electrodes into the U.S. under a different customs classification and with Indian origin. GES conducted its own investigation into the Indian company, finding that it lacked proper facilities to make any significant alterations to the electrodes, and that the company shared ownership with a U.S. affiliate of Ameri-Source.
  • As a result of the settlement agreement, Ameri-Source will be required to pay $3 million to the government, of which GES will receive $480,000 for its role in bringing the lawsuit.


SEC and DOJ Call on Telecom for FCPA Allegations

  • The Securities and Exchange Commission (“SEC”), together with the Department of Justice (“DOJ”) and the Dutch Prosecution Service, reached a settlement with VimpelCom Ltd. to resolve allegations that the world’s sixth largest telecom provider violated the Foreign Corrupt Practices Act (“FCPA”) in efforts to secure business in Uzbekistan.
  • In a complaint filed in the Southern District of New York, the SEC alleged that VimpleCom paid more than $114 million in “old-fashioned bribes, hidden through sham contracts and charitable contributions” to Uzbek officials in order to secure the necessary licenses, frequencies, channels, and number blocks the company needed to enter the Uzbek market. The “sham” elements included fake technical services contracts, ownership stakes sold and later repurchased for 200 percent gain, and the use of third-party companies as intermediaries to obscure the payments made to Uzbek officials.
  • VimpleCom agreed to pay more than $795 million in fines and disgorgements in order to resolve the charges: $167.5 million to the SEC, $230 million to the DOJ, and $397.5 million to the Dutch authorities. VimpleCom also agreed to retain an independent monitor for a period of at least three years, and to implement a compliance program. In a related money laundering action, the DOJ is seeking forfeiture of more than $850 million held in Swiss, Belgian, Luxembourgish, and Irish bank accounts alleged to come from the bribes and other illicit conduct alleged in this case.


Tenth Circuit Decision Paves Way for States to Require Tax Notification for Online Purchases

  • In Direct Marketing Association v. Brohl, the U.S. Court of Appeals for the Tenth Circuit upheld a Colorado law that requires out-of-state retailers to report information to the Colorado Department of Revenue for all sales made to Colorado customers.
  • The law was designed to facilitate the collection of state “use” taxes, which states charge residents instead of sales taxes for all goods purchased from sources outside the state. Colorado argued that because state residents are left to declare their out-of-state or Internet purchases, and to pay the appropriate use tax, states have a difficult time collecting use taxes versus sales taxes. In 2012 alone, Colorado claims to have lost $170 million in potential tax revenue to Internet sales from out-of-state vendors.
  • Direct Marketing Association, a trade group representing online retailers, challenged the law as a improper restraint on interstate commerce under the Dormant Commerce Clause of the U.S. Constitution. It also argued the law was contrary to a 1992 holding in Quill Corp. v. North Dakota, where the Supreme Court ruled that states cannot not impose tax collection obligations on out-of-state vendors. The Tenth Circuit, however, held that the law avoided both Quill and the Dormant Commerce Clause as it only amounted to a reporting requirement, and was no more burdensome than collecting sales tax is for instate vendors.

State AGs in the News

Posted in Antitrust, Consumer Protection, Financial Industry, Securities


West Virginia Senate Looks to Shield Hospital Merger From FTC Review

  • A West Virginia Senate committee has approved a bill that would address a disagreement between West Virginia AG Patrick Morrisey and the Federal Trade Commission (FTC) over whether a pending merger between two West Virginia hospitals would reduce competition. The bill, Senate Bill 597, is currently on its second reading in front of the entire Senate.
  • AG Morrisey cleared the merger last July, subject to conditions on rate setting, employee agreements, and exclusivity. The FTC, however, challenged the merger in November and is awaiting an administrative hearing scheduled for April. Among other things, AG Morrisey and the FTC differ on how to define the market, with the FTC focusing on a three county geographic area, and the AG indicating that more than 60 percent of the patients for the two hospitals come from outside the three counties analyzed.
  • If enacted, the Bill would shield certain actions of hospitals and health care providers operating under the jurisdiction of the state health care agency from scrutiny under federal antitrust laws. Specifically, the Bill would allow the state health care agency to issue a Certificate of Need, permitting mergers of hospitals located within 25 highway miles of each other even if the FTC has determined that the merger would result in reduced competition.
  • A 2013 Supreme Court case is informative on the issue. In FTC v. Phoebe Putney Health System, Inc., a pair of merging Georgia hospitals argued that the state action immunity doctrine prevented the FTC from oversight in local healthcare markets. In that case, the Court ruled that the Georgia law “ha[d] not clearly articulated and affirmatively expressed a policy to allow hospital authorities to make acquisitions that substantially lessen competition.” Thus, the merger was not insulated from FTC review.

Consumer Protection

New York AG Goes After Bad Reviews

  • New York AG Eric Schneiderman announced the settlement of four separate investigations into unrelated companies for allegedly posting, or encouraging the posting of, deceptive online reviews and endorsements in violation of N.Y. General Business Law §§ 349 and 350.
  • The facts underlying the investigations exhibited the many nuanced ways through which deceptive conduct can occur in this area:
    • Machinima, Inc., a video game social network, allegedly paid expert gamers on behalf of a third party to post videos in which they endorse a new gaming system and several new games. The AG argued that this endorsement method gave the appearance that the opinions were independent and unpaid.
    • Premier Retail Group, Inc., allegedly solicited online reviews from the public via Craigslist by offering free samples, free vouchers and other compensation in exchange for positive reviews. Premier did not require that the reviewer visit a Premier location or disclose that they were compensated.
    • ESIOHInternet Marketing allegedly paid individuals to post positive reviews on Google Places and Yelp in support of its small business clients. The AG indicated that ESIOH even offered advice to reviewers to avoid having their review tagged as suspicious by website filters.
  • In addition to modest monetary penalties, ranging from $50,000 to $20,000, the settlements order the companies to cease their involvement in activity that incents the creation of deceptive reviews, as well as to require that endorsers and reviewers prominently disclose any material financial connection with the company being reviewed.

FCC Fines Companies for Cramming and Slamming Spanish-Speaking Consumers

  • The Federal Communications Commission (FCC) announced that it will seek a penalty of $29.6 million from OneLink Communications Inc., and related telephone service resellers, alleging that the group placed unauthorized charges on consumer accounts (“cramming”), or switched consumers to higher-priced service providers without their consent (“slamming”).
  • Notably, the FCC alleged that OneLink contacted consumers under the pretext of a (nonexistent) package waiting for them at their local U.S. Post Office. OneLink would ask the consumers to repeat a confirmation number or otherwise confirm that they would accept delivery of the package. When the consumers responded “yes,” OneLink would allegedly record the consumers’ response, and use it (inappropriately) to satisfy third-party verification requirements to authorize additional charges or a change in long-distance carrier.
  • OneLink continues to dispute the FCC’s allegations, calling the whole process “fundamentally flawed and politically motivated.”  OneLink has indicated it will “vigorously defend against the baseless claims, misrepresented factual circumstances and trumped-up fines.”

Financial Industry

Money Transferor to Send Payment to State AGs

  • Texas AG Ken Paxton, and AGs from 48 states and the District of Columbia have settled their investigation into MoneyGram Payment Systems, Inc., for the money transfer service’s role in connection to various online and telephone scams resulting in fraudulently-induced transfers of money.
  • The multistate investigation did not allege that MoneyGram actively participated in the scams, but rather that it failed to detect recurring scams, or to provide reasonable protections for consumers who were being actively deceived by third parties while at the same time generating revenue through fees based on the number and amounts of transfers made. For its part, MoneyGram did not admit that it violated any law.
  • In the Assurance of Voluntary Compliance, MoneyGram agreed to pay $13 million to the states for consumer redress and for investigative and legal costs. MoneyGram also agreed to implement a number of anti-fraud measures, including:
    • adopting a risk-based approach to verify the identities of senders and receivers;
    • enhancing consumer education efforts, including a conspicuous warning that identifies common fraud schemes directed at consumers;
    • requiring anti-fraud training for all transfer agents;
    • encouraging data sharing between MoneyGram and other money transfer companies regarding fraudulently-induced transfer activity; and
    • maintaining an internal list of individuals who have been previously involved with alleged fraudulently-induced transfer schemes.


Software Maker Runs Into FCPA Issues With Chinese Subs

  • The Securities and Exchange Commission (SEC) accepted an offer of settlement to resolve allegations that PTC Inc., violated the Foreign Corrupt Practices Act (FCPA) through improper payments made to induce business between the Chinese government and the Massachusetts-based software maker.
  • The SEC’s allegations are connected to separate investigations into PTC’s Shanghai and Hong Kong based subsidiaries, both of which admitted to using third-party agents to provide $1.5 million in gifts, nonbusiness related travel, and entertainment to officials at Chinese state-owned entities when the officials came to visit PTC’s U.S. headquarters. The Chinese subs had indicated in their books that these were “commission payments” or “sub-contracting fees.” The subsidiaries entered into non-prosecution agreements with the Department of Justice (DOJ).
  • Although PTC did not provide the payments directly, the SEC determined that, among other things, PTC failed to implement and maintain an adequate internal accounting control and recordkeeping compliance program required by Section 13(b)(2) of the Exchange Act.
  • The order requires PTC to pay $13.6 million in disgorgement and interest, while also acknowledging $14.5 million that PTC will pay to the DOJ under the non-prosecution agreements. The order also indicates that the SEC considered in a positive light, PTC’s voluntary self-disclosure and subsequent remedial efforts, including the implementation of an enhanced compliance program and the termination of responsible employees and business partners.

State AGs in the News

Posted in Consumer Financial Protection Bureau, Consumer Protection, Data Privacy, Intellectual Property

Consumer Financial Protection

CFPB Continues to Limit Dealer Discretion in Indirect Auto Lending

  • The Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) reached an agreement with Toyota Motor Credit Corporation (TMCC) to resolve claims that the indirect auto lender violated the Equal Credit Opportunity Act by allowing dealers to “mark up,” or charge purchasers interest rates higher than what TMCC approved, a practice the CFPB alleges results in discrimination based on race and national origin.
  • Since auto loans do not list the applicant’s race or national origin, the CFBP and DOJ utilized a “proxy” technique for determining whether the differences in dealer markup over the interest rate approved by TMCC corresponded to race or origin. This technique allows the CFPB and DOJ to use public data on surnames and location to determine whether African American, Hispanic, and Asian purchasers are ultimately charged higher interest rates than other applicants of similar creditworthiness.
  • Under the consent order, TMCC must implement one of three compliance options that involve either eliminating dealer discretion to mark up interest rates above what TMCC approves, or limiting the markup to 1.25 percent while also implementing system to monitor dealers to ensure they are not basing decisions on impermissible factors such as race or origin. In addition, TMCC must pay $21.9 million in consumer redress and hire a settlement administrator to distribute funds to affected consumers.

Consumer Protection

FTC Sticks Glue Maker With Lawsuit

  • The Federal Trade Commission (FTC) has filed a lawsuit in the Northern District of Ohio alleging that Chemence, Inc. violated Section 5 of the FTC Act by representing that its products are “Proudly Made in the USA” when they contain significant amounts of imported inputs.
  • The FTC’s complaint alleges that Chemence’s labels and promotional materials are deceptive because they would lead a reasonable consumer to believe that its Kwik Frame, Kwik Fix, and other cyanoacrylate glue products were entirely made in the USA, in spite of the fact that on a cost basis, approximately 55 percent of the chemicals used to make the glues are imported.
  • The FTC long ago issued an enforcement policy statement to provide guidance to companies that want to make “made in the USA” claims in labeling, advertising, and all other forms of marketing, including through digital or electronic means. The policy statement indicates that the FTC will apply an “all or virtually all” standard. Notably, this requires a marketer to be able to substantiate, at the time the claim is made, that all the significant parts and processing are products of U.S. origin.

New York AG Looks to Pull the Plug on Ticket Bots

  • New York AG Eric Schneiderman announced the results of a multiyear investigation into the secondary market for tickets to live entertainment events, and reached settlements with two ticket brokers alleged to be operating without a license. The settlements require MSMSS, LLC to pay $80,000 and Extra Base Tickets, LLC to pay $65,000 in penalties.
  • The AG’s report, titled “Obstructed View: What’s Blocking New Yorkers from Getting Tickets,” concludes that industry middlemen who employ the use of “Bots”—software that automates ticket-buying on primary sales platforms to allow thousands of transactions per second—prevent the public from having access to affordable tickets. The result is that ticket prices are on average 49 percent greater than the face value.
  • AG Schneiderman is calling for legislative action along four themes:
    • mandate the live entertainment industry to provide greater transparency into ticket sales and allocation, while also implementing procedures to detect purchases made by Bots and high-volume resale brokers;
    • end the ban on non-transferrable paperless tickets, and require the initial purchaser to be present when the tickets are redeemed;
    • create criminal liability for brokers who use Bots to acquire tickets in greater numbers than authorized by the issuer; and
    • create a maximum markup that resellers can charge over the face value of the ticket.

Massachusetts AG Finds Drug Prices Hard to Swallow 

  • Massachusetts AG Maura Healey has informed Gilead Sciences Inc. that her office is investigating the biotech giant for potential unfair trade practices stemming from the high price per pill in the United States ($1000) for the company’s Hepatitis C medication.
  • The letter argues that “because Gilead’s drugs offer a cure for a serious and life-threatening infectious disease, pricing the treatment in a manner that effectively allows [Hepitits C] to continue spreading through vulnerable populations, as opposed to eradicating the disease altogether, results in massive public harm.” The letter acknowledges that Gilead provides the drugs in other countries for a greatly reduced price (e.g., $4 per pill in India, $10 per pill in Egypt), and questions whether taxpayers supporting Medicaid programs should disproportionately support Gilead’s research and development efforts.
  • Commentators are calling it an untested theory. A previous lawsuit against Gilead for Hepatitis C drug pricing by the Southeastern Pennsylvania Transportation Authority was dismissed for failure to state a claim in 2015. That lawsuit was based on the plaintiff’s insurance company denying them access to the drugs, and alleged that Gilead’s high prices violated the Civil Rights Act through a disparate impact analysis. If AG Healey moves forward with a lawsuit under Massachusetts Chapter 93A, it would ask a difficult question on the margin of public health and competition policy: whether a pharmaceutical company acts unfairly to the public at large when it sets a price that precludes the eradication of a disease, thus preserving the market for future drug sales.

Data Privacy

EU and U.S. Agree to New Data Pact

  • The European Union and the United States have reportedly reached an agreement to allow companies to transmit data across national borders, replacing the old Safe Harbor framework that was invalidated in October by the European Court of Justice amid privacy concerns in light of Edward Snowden’s revelations.
  • The new agreement, referred to as the “EU-US Privacy Shield” will require companies importing data from Europe to commit to a new set of obligations for how they process and store personal data to ensure individual rights are protected. These commitments will be monitored by the U.S. Department of Commerce and enforced by the FTC. The Privacy Shield will also provide a mechanism through which European citizens can raise concerns regarding a company’s misuse of data, and if left unsatisfied with the company’s response, initiate dispute resolution.
  • Although the U.S. was required to give written assurances that access to data will be subject to “clear limitations, safeguards and oversight mechanisms,” there remain skeptics who do not think the new agreement—which has not yet been reduced to a precise document—will meet the requirements of EU data protection law. In the meantime, companies can continue to look to guidance issued by the European Commission on the use of contractual methods and binding corporate rules to facilitate ad hoc and intracompany transfers of personal data.

Intellectual Property

Virginia AG Forms Squad to Vanquish Trolls

  • Virginia AG Mark Herring has formed a special unit in the AG’s office to combat “patent trolling.” The unit will investigate cases and seek financial penalties and injunctions against nonpracticing entities that assert patent infringement claims in bad faith against Virginia businesses, even if the entities are located outside of Virginia.
  • AG Herring’s efforts build on a 2014 law, which makes the bad faith assertion of patent infringement illegal, and provides a list of indicia of bad faith including:
    • vague demand letters that do not indicate which patent is infringed or which products are implicated;
    • offers to license the patent for unreasonably high fees;
    • deceptive threats of legal action;
    • previous assertions of infringement by the same patent holder which a court found baseless or imposed sanctions for; and
    • asserting an invalid patent.

State AGs in the News

Posted in Campaign Finance, Consumer Protection, False Claims Act, Financial Industry, State AGs in the News, States v. Federal Government

Campaign Finance

Washington AG Continues Pursuit of Trade Group for Alleged Campaign Subterfuge

  • Washington AG Bob Ferguson is seeking summary judgment and an order to lift the protective order over the documents filed in his case against the Grocery Manufacturers Association (GMA) on claims that the group intentionally disguised efforts to fund a campaign against a state initiative to require labels for genetically engineered food.
  • The complaint, filed in 2013 in state Superior Court, alleged that GMA violated Washington campaign finance disclosure laws by placing over $11 million solicited from its members into a separate “Defense of Brands” account, which it then deployed to oppose the labeling initiative—all without registering with the Public Disclosure Commission, or providing information on individual contributors.
  • The issue of mandated donor disclosure for nonprofits engaging in state political activity is growing. The Ninth Circuit recently overturned an injunction preventing the California AG from implementing her policy of requiring nonprofit organizations to provide a list of their individual donors in order to ensure that charities are not engaging in unfair business practices. Yet critics continue to call such policies a back door around the Supreme Court decision in Citizens United, and a burden on First Amendment rights.

Consumer Protection

FTC Files Lawsuit Against For-Profit College

  • The Federal Trade Commission (FTC) has filed a complaint in federal court, alleging that DeVry Education Group, Inc. misled consumers with advertisements disseminated through television, radio, online, print, and other media in violation of the FTC Act.
  • In the complaint, the FTC claims that DeVry lacked a reasonable basis to substantiate the following two claims:
    • “90% of DeVry University graduates from all programs who actively sought employment had careers in their field within six months of graduation.”
    • “One year after graduation, DeVry University grads report earning 15% more than the median earnings reported by all other bachelor’s degree candidates.”
  • The FTC argued that there are multiple deceptive issues inherent in DeVry’s calculations, including DeVry’s inclusion of graduates who remained employed in jobs they held prior to enrolling at DeVry, DeVry’s exclusion of graduates based on a narrow determination of what it means to be “actively” seeking employment, and DeVry’s use of only self-reported salaries from 620 DeVry graduates admittedly not representative of its graduates who did not report salaries.
  • The FTC is seeking an injunction as well as rescission, restitution, refund of monies paid, and the disgorgement of ill-gotten monies. However, this industry is facing an uncertain future, and as indicated in a separate statement by Commissioner Ohlhausen, and in light of the effects of prior enforcement actions against other for-profit colleges, the FTC may need to balance its enforcement efforts in light of the interests of current DeVry students.

NYC Consumer Affairs Points Lens at Hackable Baby Monitors

  • The New York City Department of Consumer Affairs (DCA) appears to be joining the efforts of state and federal regulators to protect consumers’ online privacy, in this case, through the security of baby monitors.
  • In the wake of FTC warnings, recent articles, and online videos demonstrating the ease of hacking baby monitors, the DCA indicated that it had issued subpoenas to several major manufacturers of video monitors claiming their devices to be secure.
  • As the “Internet of Things” spreads to increasing numbers of household items, the role of state, and even local, consumer protection departments in securing consumer online privacy will likely continue to grow.

False Claims Act

New York AG Resolves FCA Lawsuit

  • New York AG Eric Schneiderman reached a settlement with CenterLight Healthcare and CenterLight Health System, under which the health care provider agreed to pay $46.8 million (of which $28 million will go to New York) to resolve the state’s investigation and federal whistleblower lawsuit alleging violations of state and federal false claims acts
  • CenterLight received monthly capitation payments of approximately $3,800 for each member, and in turn provided community-based health care to assist with the activities of daily living, including care management services, skilled nursing services, physical therapy, occupational therapy, speech therapy, and preventive services. However, in order to be eligible for this type of long-term care, Medicaid beneficiaries must meet certain requirements.
  • In the Order of Settlement, CenterLight admitted that 1241 of its members receiving managed long-term care were ineligible either because they had been referred to long-term care by social adult day care centers (SADDCs), or had needs that did not qualify under the criteria for managed care. In addition to the monetary aspect, CenterLight also agreed to reduce its reliance on enrolling members through SADCCs, and to implement a more robust compliance monitoring and certification program.

Financial Industry

DOJ Wraps Up Swiss Bank Program

  • The Department of Justice (DOJ) reached an agreement with Swiss bank HSZH Verwaltungs AG, under which the bank will pay $49 million, disclose accounts held by U.S. taxpayers, and cooperate in any related criminal or civil proceedings in exchange for the DOJ’s vow of non-prosecution.
  • HSZH is the final (out of 80) Category 2 bank to reach a non-prosecution agreement as part of the DOJ’s efforts to combat offshore tax evasion through its Swiss Bank Program. The next step for Swiss banks, and all foreign financial institutions seeking to comply with the U.S. Foreign Account Tax Compliance Act (FATCA), will be to search for indicia indicating that accounts are held or controlled by a U.S. person, and to report those assets to the U.S. Department of the Treasury.
  • At the same time that the DOJ is winding up this phase of its global tax evasion efforts, a group of 97 countries is implementing the newer, and stricter, disclosure standards propagated by the Organization for Economic Cooperation and Development (OECD). The U.S., however, has not yet joined that effort. As commentators indicate, the combined effect of FATCA and the OECD’s efforts on foreign banks may actually be driving foreign money into accounts in such exotic tax havens as Nevada, Wyoming, and South Dakota.

States v. Federal Government

FERC Wins at Supreme Court

  • The U.S. Supreme Court has ruled in favor of the Federal Energy Regulatory Commission (FERC) and EnerNOC, Inc. in a dispute over Order 745, which outlined FERC’s interpretation of its authority under the Federal Power Act (FPA) to regulate wholesale electricity providers. Order 745 purported to allow wholesale electricity suppliers (like EnerNOC) to pay commercial end-users to reduce their electricity consumption during hours of peak usage. The model allows for overall cost savings in the wholesale market as the wholesalers would ultimately purchase electricity at a lower rate to supply the users during off-peak hours.
  • A group of states and power generators had argued that the new “demand response” or “pay-to-abstain” model expressed through Order 745 amounted to FERC’s regulation of retail prices—an authority that has been reserved for state-level utility commissions. The U.S. Court of Appeals for the District of Columbia Circuit agreed with the states and power generators on that point, and ruled that Order 745 exceeded FERC’s authority under the FPA.
  • The Supreme Court reversed the DC Circuit in a 6-2 decision, and held that the FPA authorizes FERC to use a demand response model. The Court noted that FERC does not regulate the retail market simply because its actions in the wholesale market would have effects on retail prices. The Court highlighted the power generators’ own admission, that state-level regulators would not have the authority to implement a demand response policy, to further bolster its holding that the FPA gives such authority to FERC.

State AGs in the News

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

Consumer Protection

State AGs Draft Team Against Daily Fantasy Sports

  • Texas AG Ken Paxton issued an opinion against the legality of Daily Fantasy Sports wagering, indicating that any wager placed “on the performance of a participant in a sporting event and the house takes a cut” constitutes illegal gambling under Texas law. With this opinion, Paxton joins AGs from Illinois and New York in finding daily fantasy sports wagering, in current form, to be illegal.
  • In the nine-page opinion, AG Paxton addressed the distinction between daily fantasy sports wagering, and season-long fantasy leagues where participants contribute to a pool of funds that is claimed by the winner at the end of the season. Although AG Paxton deemed both to be illegal gambling, he indicated that season-long league play—where no person or entity receives an economic benefit other than personal winnings and where the risks of winning or losing are the same for all participants—qualifies for a statutory defense to prosecution.
  • Other AGs continue to mull the issue. Maryland AG Brian Frosh has affirmed that traditional fantasy leagues were authorized by a 2012 law, but sees conflict between statutory language and legislative history of that law, and the State Constitution as it applies to daily fantasy sports. AG Frosh has asked the legislature to clear up the ambiguity in the 2016 session. In contrast, AG Maura Healey and the Massachusetts Gaming Commission are offering consumer protection regulations that would limit daily fantasy sports by requiring, among other things, that participants be 21 years old, and by limiting monthly wagers to $1,000. Even here, the fantasy sports industry is pushing back.

Consumer Financial Protection

CFPB Addresses Auto Dealer’s “Abusive” Practices

  • The Consumer Financial Protection Bureau (CFPB) settled with Y King S Corp., doing business as Herbies Auto Sales, to resolve allegations that the “buy-here pay-here” auto dealer violated the Truth in Lending Act and the Consumer Financial Protection Act through misleading and abusive practices.
  • The CFPB alleged that Herbies misled consumers by concealing certain additional finance charges, including the cost of repair warranties and GPS payment devices that consumers were required to purchase in order to obtain financing. In addition, the CFPB asserted that Herbies hid the true cost of credit by negotiating lower prices with cash customers, while refusing to negotiate on price for credit purchases. The CFPB alleged that Herbies did not even reveal the price to credit customers until after they had agreed on the financing terms.
  • The consent order requires Herbies to pay $700,000 in restitution and a civil penalty of $100,000. The penalty is suspended pending Herbies timely satisfaction of the redress payment. The order also requires Herbies to accurately communicate the interest rates and financing charges applied, as well as to clearly post the price of the vehicles it is selling, if it plans to continue offering pay-here financing.

Data Privacy

Facebook Escapes Privacy Lawsuit on Jurisdiction in Illinois

  • A federal judge for the Northern District of Illinois has ruled against plaintiffs on a motion to dismiss, finding that the court lacked personal jurisdiction over Facebook in a class action that alleged that the social network violated the Illinois Biometric Information Privacy Act (BIPA). Facebook is a Delaware corporation with a principal place of business in California.
  • The plaintiffs had alleged that Facebook, Inc., violated BIPA by suggesting that users tag uploaded photos—even photos of non-Facebook users—with the subjects name, and by applying facial recognition software to all uploaded photos to determine age, gender, race, and location of the subject. In response, Facebook argued that scans of photos, as opposed to scans of facial geometry, were not expressly excluded under BIPA.
  • Facebook had moved the court to dismiss for lack of personal jurisdiction. Plaintiffs argued that jurisdiction was proper under BIPA because Facebook had a sales office in Chicago and had millions of users from Illinois presumably affected by the tagging and facial recognition. In contrast, Judge Jorge Alonso found that Facebook’s general contacts with the state were not specific to the “suit-related conduct,” and that Facebook applied the same tagging and recognition process to all uploaded photos, regardless of state. Referencing a 2014 Seventh Circuit decision, Advanced Tactical Ordnance Sys., LLC v. Real Action Paintball, Inc., Judge Alonso reaffirmed that operating an interactive website available to residents of a state does not, by itself, confer specific jurisdiction over an out-of-state defendant.


California Joins New York in Climate Change Investigation

  • California AG Kamala Harris has opened an investigation into whether Exxon Mobil Corp. misled shareholders regarding the risks and benefits to the petroleum supermajor’s business model presented from climate change.
  • The idea, first employed by New York AG Eric Schneiderman, is that Exxon as a publicly-traded company violated a duty it has to disclose risks to its shareholders, and committed fraud by taking a public position that burning fossil fuels did not contribute to climate change while secretly making business decisions based on future effects of climate change—notably in the Arctic where melting sea ice makes it easier to drill for oil. The issue has surfaced recently along with internal company documents from the 1980s and 1990s that describe company-funded climate research.
  • Yet the California AG may face hurdles in her investigation. AG Schneiderman conducted his investigation under the aegis of the Martin Act, a New York law that gives the AG broad investigative authority into allegations of corporate actions that effect shareholders. California does not have an equally strong analogue. In addition, some industry analysts doubt the efficacy of the strategy, noting that Exxon’s conclusions and public statements do not amount to deliberate actions to mislead investors.

False Claims

California Hospital Resolves FCA Lawsuit

  • The Department of Justice (DOJ) reached an agreement with Tri-City Medical Center to resolve allegations that it maintained improper financial arrangements with physicians in violation of the Stark Law and the False Claims Act.
  • The Stark Law generally prohibits hospitals from submitting bills to Medicare for designated health services if the referring physician has a financial relationship with the hospital—including leasing office space or the use of equipment and facilities. There are exceptions where the physician pays rates that are commercially reasonable or are approximate to fair market value. However, to qualify, the agreements must be in writing.
  • Unlike most FCA investigations that start with a whistleblower, Tri-City contacted the Office of the Inspector General in 2011, alerting it to the fact that it had 92 agreements with referring physicians where the written contract was missing, unsigned, or expired. The investigation also comprised allegations that a small number of financial arrangements with former Tri-City executives were not commercially reasonable. Tri-City agreed to pay $3.28 million to resolve the investigation.

State AGs in the News

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

Consumer Protection

West Virginia AG Sues Drug Distributor

  • West Virginia AG Patrick Morrisey filed a lawsuit alleging that McKesson Corporation violated the state consumer protection and controlled substances acts, and committed unfair and deceptive acts or practices by distributing large quantities of highly profitable prescription pain medication to pharmacies throughout West Virginia, contributing to an epidemic of drug abuse in the state.
  • The eight-count lawsuit relies on a core theory of liability that McKesson, as a distributor, was “uniquely situated to perform due diligence in order to help support the security of controlled substances [it] delivered,” and that McKesson failed to implement a system to identify and stop suspicious numbers of prescribed doses. The complaint specifically argues that McKesson distributed 99.5 million doses of hydrocodone and oxycodone to West Virginia consumers over a five-year period, and that it should have known, based on each pharmacy’s population base, that the resulting oversupply could not have been purely for legitimate medical purposes.
  • In addition to restitution, disgorgement, and civil penalties of $5000 for each violation of the unfair and deceptive practices and consumer protection acts, AG Morrisey also seeks injunctive relief that would require McKesson to create a system for determining suspicious orders, and to submit that system to the state for prior approval.

FTC and Florida AG Add Payment Processor to Debt Relief Lawsuit

  • The Federal Trade Commission (FTC) and Florida AG Pam Bondi added CardReady, LLC, and its executive officers, to a debt relief lawsuit filed last July, alleging that CardReady substantially assisted the debt relief defendants in violating the FTC Act and Telemarketing Sales Rule (TSR).
  • The amended complaint, filed in federal court for the Middle District of Florida, alleges that CardReady facilitated credit card payments for the debt relief companies, helping them to continue to process payments even though they had been identified by credit card networks as not meeting underwriting criteria—either because of a high risk of illegal activity or a high rate of chargebacks. CardReady allegedly laundered those payments by routing them through shell companies it created before submitting them to the financial institution for processing, thus hiding the identity of the merchant for which it was processing payment.
  • In addition to the allegations of credit card laundering and factoring (“factoring” is a separate offense under Florida law), the FTC and AG Bondi charged CardReady with facilitating the deceptive and abusive acts that formed the alleged violation of the TSR by the debt relief defendants.

Data Privacy

States’ Investigation Gestoppt-ed by German Privacy Laws

  • Highlighting an additional challenge faced by State AGs conducting international investigations, Volkswagen has allegedly refused to produce emails and other executives communications occurring in Europe to the State AGs investigating. Volkswagen has claimed that the German Federal Data Protection Act, or Bundesdatenschutzgesetz, and other European laws prevent the company from turning over the communications stored in Germany to investigators outside the E.U.
  • New York AG Eric Schneiderman and Connecticut AG George Jepsen, as lead counsel in the 48-state investigation, voiced frustration with Volkswagen’s efforts, indicating that the company publicly claims to be cooperating with the investigation, but has not fulfilled what would otherwise be standard investigative requests under U.S. law. Yet, German law may require employee consent that comes from a “free decision” before an employer can access and transfer worker emails and other communications—even in connection to an internal investigation.


FCC Settles With Radio Station Over Sponsorship Silence

  • The Federal Communications Commission (FCC) reached an agreement with Cumulus Radio Corporation and its subsidiary Radio License Holding CBC, LLC to resolve the FCC’s investigation into whether the radio station violated sponsorship identification laws.
  • The investigation stemmed from allegations that a New Hampshire radio station owned by Cumulus broadcast a series of announcements supporting a hydroelectric power project without properly identifying the sponsor of the announcements, which was a company financially connected to the project.
  • On entering into the consent decree with the FCC, Cumulus agreed to pay a penalty of $540,000 and to introduce a compliance plan for its 195 stations nationwide.

False Claims

Rehab Provider Settles FCA Suit for $125 Million

  • The Department of Justice (DOJ) reached an agreement with Kindred Healthcare, Inc., and subsidiaries RehabCare Group, Inc. and RehabCare Group East, Inc. (together, “RehabCare”), to resolve allegations that the rehabilitation therapy provider violated the False Claims Act by seeking Medicare reimbursement for unreasonable and unnecessary services.
  • The amended complaint alleged that RehabCare strategically scheduled its therapy services to achieve the highest level of Medicare reimbursements, without regard to patients’ clinical needs, including: shifting minutes of planned therapy between different disciplines to ensure targeted amounts were achieved; planning higher amounts of therapy at the close of a measurement period to reach the threshold for a higher reimbursement level; and placing patients in the highest therapy category as a default, instead of using evaluations to match the patient with a proper level of care.
  • The complaint also alleged that RehabCare continued to schedule therapy even after treating therapists indicated that the patients had completed the necessary amount, and reported therapy services provided during a time when patients were either sleeping or otherwise unable to participate in the therapy.
  • RehabCare agreed to pay $125 million, and four nursing homes using RehabCare’s services agreed to pay an additional $8.225 million, to resolve the lawsuit, which was brought in the District of Massachusetts under the name United States ex rel. Halpin and Fahey v. Kindred Healthcare, Inc. The two whistleblowers will receive a combined $24 million from the settlement.


SEC Makes Its New Year’s Resolutions – ETFs and Liquidity Come Into Focus

  • The Securities and Exchange Commission (SEC) announced the agency’s priorities for 2016, which it presented under the broad categories of protecting retail investors, assessing marketwide risks, and using data analysis to detect violations.
  • In Examination Priorities for 2016, the SEC identified 20 specific topics that the agency would focus on in 2016. The list included topics present in previous years’ priorities, including advisors’ fee arrangements and sales practices, as well as broker dealers’ internal fraud and anti-money laundering controls. New to the agency’s priorities for 2016 are the specific topics of Exchange-Traded Funds (ETFs) and Liquidity Controls. There is also a larger emphasis on cybersecurity.
  • For ETFs, the SEC indicated that it will be investigating whether they are operated in compliance with their “exemptive relief” applications, as well as the process used by each ETF for creating and redeeming shares.
  • On the topic of liquidity, the SEC indicated that it will focus on risk management, pricing, and redemption controls for ETFs and funds that deal in potentially illiquid securities. Some of the SEC’s policy ideas on this topic—which have been criticized by industry groups—can be seen in the proposed rule on liquidity management published last fall.

State AGs in the News

Posted in Consumer Protection, Data Privacy, Environment, State AGs in the News

Consumer Protection

New York AG Demands Fantasy Sports Websites Give Back Money

  • New York AG Eric Schneiderman has amended his lawsuit against prominent daily fantasy sports gaming sites FanDuel, Inc. and DraftKings, Inc., this time asking the court to order them to return all the money collected from New York State consumers, and to pay a fine of up to $5000 per player. With approximately 600,000 New York based daily fantasy sports consumers, paying an estimated $200 million in entry fees in 2015, the monetary implications of the AG’s amended complaint could exceed $3 billion.
  • In the amended complaint, AG Schneiderman expands on the deceptive practices arguments from the initial complaint (as opposed to the illegal gambling arguments), emphasizing allegations that the websites misrepresent the amounts won and the likelihood of winning. The AG also claims that the sites employ “incentive advertising” where a consumer must spend additional money in order to fully gain access to current winnings and bonuses. In contrast, authorities in Illinois and Nevada have recently ruled that daily fantasy sports fall under their state’s definition of gambling (with less emphasis on deceptive practices).
  • The New York AG had been granted a temporary injunction blocking the operation of FanDuel and DraftKings on December 11. But on the same day, a New York appeals court granted a stay of that injunction, allowing the websites to continue operations pending a January hearing.

FTC Slows Fast Cash From Online Tribal Lenders

  • The Federal Trade Commission (FTC) voted 4-0 to approve settlement agreements with Red Cedar Services Inc. and SFS Inc., doing business online as 500 Fast Cash and One Click Cash respectively. The FTC had alleged that the online lenders violated the Truth in Lending Act and the Electronic Funds Transfer Act, and had committed deceptive practices under the FTC Act when enticing consumers to take out short-term loans online.
  • The complaint alleged that Red Cedar and SFS charged undisclosed and inflated fees on the short-term (“payday”) loans offered, and threatened consumers with arrest or prosecution if they failed to pay the additional undisclosed fees. In addition, the FTC alleged that the lenders conditioned the loan on consumers’ consent to preauthorize electronic fund transfers, and assessed multiple finance charges for accessing the consumers’ accounts to make payment.
  • The lawsuit was filed in federal court for the District of Nevada and involved tribal entities from Oklahoma (e.g., Red Cedar) and Nebraska (SFS). The FTC cleared a key procedural hurdle in 2014 when District Judge Gloria Navarro ruled that the FTC has jurisdiction to sue tribal entities in federal court for deceptive practices under Section 5 of the FTC Act. The tribal entities had claimed immunity.
  • The final orders require Red Cedar and SFS to each pay $2.2 million as equitable monetary relief and to extinguish all consumer debts issued prior to December 2012, the latter contributing to an overall estimated value of $353 million. It also requires the lenders to accurately disclose the total amount a consumer will owe when initiating a payday loan, including the interest rates, finance charges, and any prepayment penalties.

FTC Shines Light on Brain Training

  • The FTC settled claims against Lumos Labs, Inc., doing business online as Lumosity, for alleged violations of the FTC Act in connection to marketing “brain training” software. The Commissioners voted 4-0 to approve the final order, with Commissioner Brill offering a concurring statement emphasizing the need for “rigorous, scientific support” for advertising claims related to improving consumers’ health.
  • The complaint alleged that Lumosity “preyed on consumers’ fears about age-related cognitive decline” to sell subscription access to a series of online games that it claimed would improve consumers’ mental performance on everyday tasks; delay cognitive decline; and reduce impairment associated with strokes, PTSD, ADHD, etc. The FTC argued that Lumosity’s claims were deceptive under the FTC Act because they relied on false proofs and misleading testimonials, or were made without proper scientific substantiation.
  • The proposed final order imposes a $50 million judgment on Lumosity, of which all but $2 million is suspended based on the company’s financial statements and ability to pay. It requires the company to send emails to customers who had auto-renew subscriptions, offering a copy of the final order and a link to cancel. It also requires Lumosity to provide the FTC a list of its customers over a five-year period ending on December 31, 2014.

Data Privacy

New York AG and Uber Agree to Limit Access to God

  • New York AG Eric Schneiderman reached a settlement with Uber over allegations that the private car-for-hire company insecurely stored user and driver data and permitted company executives and staff to access rider information—including a map that tracked a rider’s current location—through a portal referred to as “God View.”
  • The investigation into the use of customer geolocation information is rumored to have originated when a reporter indicated that an Uber executive had tracked her without her permission and emailed her “logs” that described her rides in Uber cars.
  • Under the assurance of discontinuance, Uber agreed to encrypt rider geolocation and other sensitive rider information, and to adopt a multifactor authentication protocol for accessing it. Uber also agreed to limit access to the God View portal to designated company executives with a legitimate business objective. In addition, Uber agreed to pay a $20,000 fine for failing to provide notice to the AG regarding a 2014 data breach.

FTC Drills Through Dental Software Provider’s Encryption Claims

  • The FTC reached an agreement with Henry Schein Practice Solutions, Inc. to resolve claims that the provider of dental office management software falsely claimed to offer industry-standard encryption that met regulatory requirements under the Health Insurance Portability and Accountability Act.
  • The administrative complaint alleged that Schein knowingly offered software that used a less complex form of encryption to protect patient personal information when compared to the “Advanced Encryption Standard,” represented by the National Institute of Standards and Technology (NIST) to be the industry standard. In addition, the FTC alleged that Schein continued to market its software as “encrypted” even after NIST published a vulnerability alert specifically identifying the encryption standard used by Schein’s software as “weak.”
  • This resolution marks the first time the FTC has imposed monetary penalties for advertisements specifically related to data security. The consent order—which is subject to public comment for 30 days—requires Schein to pay $250,000 in consumer redress, cease making misleading statements about the strength of its data protection, and notify customers within 60 days if the “encrypted” software currently offered uses a weaker encryption standard than what is recommended by NIST.


DOJ Seeks $48 Billion From Volkswagen

  • The U.S. Department of Justice filed a lawsuit against Volkswagen AG; Audi AG; Volkswagen Group of America, Inc.; Porsche AG; and Porsche Cars North America, Inc. (collectively, VW), alleging that the carmaker violated the U.S. Clean Air Act by installing “defeat devices” to hide the actual amount of nitrogen oxide (NOx) emissions generated by the claimed clean diesel engines.
  • The claims center around four separate types of alleged violations Clean Air Act:
    • VW sold vehicles with false certificates of conformity with U.S. regulations;
    • VW sold vehicles that contained defeat devices;
    • VW tampered with emissions control systems; and
    • VW failed to disclose the presence of devices that could alter the performance of the emissions control system under certain conditions.
  • The complaint seeks civil penalties up to $32,500 for each violation prior to January 2009, and $37,500 for each violation thereafter. When applied to the indicated 600,000 vehicles, the combined penalties sought add up to $48 billion—significantly greater than the previous estimate of $18 billion. The DOJ is also seeking various forms of injunctive relief, including mitigation of current excess NOx emissions and prevention of future defeat devices.

Other Regulatory Issues

New Year, New Dietary Guidelines

  • The U.S. Department of Health and Human Services has put out the 2015–2020 Dietary Guidelines for Americans, offering five “overarching guidelines” and some specific recommendations for healthy eating.
  • The issue is not without controversy, and in this case led to a Congressional hearing in December. On certain topics, like the role of cholesterol (the warning against it was dropped in this edition) and whether red meat is healthy in any amount (the rumored recommendation against eating red meat did not materialize), the Guidelines pit different sectors of the economy against others.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Financial Industry, Intellectual Property, State AGs in the News


State AGs Take CIDs to the Movies

  • A group of State AGs is investigating movie theater management companies, AMC Entertainment Holdings, Inc., Cinemark Holdings, Inc., and Regal Entertainment Group, for alleged violations of state antitrust law.
  • AMC and Cinemark have disclosed in regulatory filings that they have both received civil investigative demands (CID) from Ohio, Texas, Washington, Florida, New York, Kansas, and the District of Columbia, asking for documents and responses to questions “concerning potentially anticompetitive conduct, including film clearances and participation in certain joint ventures.” The State AGs’ investigation comes in addition to a U.S. Department of Justice investigation disclosed in May.
  • The state investigation centers on whether the large theater companies are using their combined market share to influence studios into entering into exclusive agreements that preclude independent movie theaters and nonprofit film centers from carrying first run movies if the smaller theater is too closely located to a larger theater.

Consumer Protection

Daily Fantasy Sports Websites Suffer Déjà Vu in Illinois

  • Illinois AG Lisa Madigan issued an opinion in which she indicated that daily fantasy sports betting is illegal under the Illinois Criminal Code, which generally prohibits a person from “operat[ing] an Internet site” that offers “games of chance or skill” played for “money or other thing of value.” Madigan indicated that daily fantasy sports does not fit under the broad exception to the gambling provision, which allows “the actual contestants in a bona fide sporting contest” to be paid to play a game of skill.
  • In response to the AG’s opinion, DraftKings and FanDuel have filed lawsuits seeking to enjoin AG Madigan from shutting down daily fantasy sports betting in Illinois. DraftKings acknowledges in its complaint the potential for Illinois to cause a ripple effect, stating that “[AG Madigan’s] opinion, if left unchecked, will not only force DraftKings to exit the State, but also have a ripple effect, irreparably banning DraftKings’ operations throughout the nation and causing it to lose customer goodwill that can never be restored.”
  • AG Madigan’s legal analysis strikes a similar chord to those made by New York AG Eric Schneiderman in cease-and-desist letters sent to the two largest daily fantasy sports betting sites, DraftKings and FanDuel, in early November. As we indicated in prior posts, many state laws employ a similar definition of gambling, and defendants will likely continute to base arguments on an exception for fantasy sports in the 2006 Unlawful Internet Gambling Enforcement Act (UIGEA). Both Schneiderman and Madigan drew distinctions between fantasy sports betting pools among friends or colleagues (believed to be allowed by UIGEA) and the type of wagers offered by daily fantasy websites like FanDuel and DraftKings.

FTC Offers Policy Guidance for Native Ads

  • The Federal Trade Commission (FTC) issued an enforcement policy statement on deceptively formatted online advertisements, and a business guide to explain how companies can avoid liability under the FTC Act when engaging in Internet marketing and publishing.
  • The policy statement specifically addresses “native advertising,” where a company advertises through digital content that resembles news stories, articles, testimonials, product reviews, and other material differing in form from traditional advertisements. The FTC’s main concern with native ads is that they can resemble the design, style, and functionality of the media which they accompany. Consumers may not be able to easily determine whether a particular article or post is an advertisement or substantive work.
  • The FTC indicates that the policy is based on the application of traditional consumer protection principles developed under Section 5 of the FTC Act to a rapidly evolving digital marketplace. Thus, it will continue to look to the “net impression” conveyed to consumers by the ads when determining if there is deception. The guide specifically indicates that advertisements will be found deceptive “if they convey to consumers expressly or by implication that they’re independent, impartial, or from a source other than the sponsoring advertiser.”
  • The guide focuses on the need for effective disclosure and offers examples of how a company can provide clear and conspicuous disclosures with various formats of native advertising. The FTC indicated that when assessing the effectiveness of disclosure, it will apply the perspective of a reasonable consumer; when ads target a specific audience, the perspective will be one of a reasonable member of the targeted group. As a general rule, the more an advertisement resembles content on the publisher’s site—both in format and topic—the more likely that the FTC will require disclosure.

Consumer Financial Protection Bureau

CFPB Throws Wrench in the Works of Debt-Collection Mill

  • The Consumer Financial Protection Bureau (CFPB) entered into a consent order with Frederick J. Hanna & Associates, resolving claims that the Georgia law firm, and its three principal partners, violated the Fair Debt Collection Practices Act (FDCPA) and the Consumer Financial Protection Act (CFPA) through the use of deceptive court filings and faulty evidence.
  • In the complaint the CFPB alleged that Hanna & Associates filed lawsuits through an automated process completed predominantly by non-attorney staff, with an attorney signing the complaint. The process allegedly allowed the firm to generate more than 130,000 debt collection lawsuits over a two-year time frame. It further alleged that the firm made unsubstantiated claims in its complaints and used faulty sworn statements to intimidate debtor-defendants, but when challenged, the firm would move to dismiss the lawsuits.
  • The consent order requires the firm and the indicated principal partners to jointly pay $3.1 million as a civil penalty to the CFPB. It enjoins the firm and partners from filing, or threatening to file, debt-enforcement lawsuits unless there are specific documents reviewed by attorneys showing that the debt is accurate and enforceable. It also prohibits the use of affidavits as evidence if they do not specifically and accurately describe the signer’s knowledge of the relevant facts and documents.

Financial Industry

Banking Regulators Team Up on FTC Act Enforcement

  • The Board of Governors of the Federal Reserve System (FRB) and the Federal Deposit Insurance Corporation (FDIC) reached settlements with WEX Bank and its institutionally-affiliated party, Higher One, Inc., for alleged deceptive practices in violation of Section 5 of the FTC Act. Under Section 8 of the FDI Act, banking regulators are given authority to enforce the FTC Act’s prohibition on unfair or deceptive practices over the entities they regulate.
  • The FRB and the FDIC alleged that Higher One and WEX Bank omitted material information about fees and certain features (such as the locations of fee-free ATMs) associated with debit card accounts used by students to receive financial aid disbursements. As a result, the banks were alleged to have collected $31 million in improper fees from students over a two year period. The FRB had previously settled with Cole Taylor Bank regarding its affiliation with Higher One during the period in question, issuing a civil penalty of $3.5 million.
  • The settlements require Higher One to pay civil penalties of $2.23 million to both the Board and to the FDIC (for a total of $4.46 million). In addition, WEX Bank is required to pay a civil penalty of $1.75 million to the FDIC. The banks must also provide approximately $55 million in restitution to an estimated 1.47 million harmed students.

Ohio AG Pursues Piece of London Whale for Pensioners

  • Ohio AG Mike DeWine, representing the Ohio Public Employees Retirement System (OPERS), and together with public pension funds from Oregon and Arkansas as lead plaintiffs, reached a settlement with JPMorgan Chase & Co. to resolve allegations that the investment bank issued false and misleading statements when reporting trades made and positions held by the bank through a trader in its London office nicknamed the “London Whale.”
  • The lawsuit alleged that JPMorgan misled investors during a 38-day period following the announcement of the bank’s large position in certain derivative instruments. Plaintiffs claim that by describing the position as “risk management” or “hedging,” when in fact it comprised illiquid and speculative bets that carried additional risk of loss, JPMorgan convinced investors that there would not be significant losses associated. Once the trading losses from those risky bets materialized, the plaintiffs claim JPMorgan’s stock value plummeted, causing class members to collectively lose more than a billion dollars.
  • The settlement agreement requires JPMorgan to pay $150 million to the harmed investors. The class action was filed in U.S. District Court for the Southern District of New York and includes all investors who bought shares in JPMorgan from April 13, 2012 to May 21, 2012.

Intellectual Property

California AG Offshores Liability to Indian Firm

  • California AG Kamala Harris reached an agreement with Indian company Pratibha Syntex Ltd., to resolve allegations that the textile maker violated California Business Professional Code Section 17200 by using pirated software to gain an unfair advantage over its competitors.
  • In the complaint AG Harris argued that because Pratibha saved money by not paying licensing fees, it was able to hire additional employees and invest greater in research and development, thus giving it an unfair advantage over other firms manufacturing and selling clothing in California.
  • The stipulated final judgment requires Pratibha to pay $100,000 in restitution, and prohibits Pratibha from using unlicensed or pirated software, as well as from making copies of licensed software without the permission of the copyright holder. It also requires Pratibha to perform regular audits of the software on its computers, and to fix violations within 45 days.
  • More interesting than the precise terms of the settlement, this marks the first time that a State AG has obtained a judgment in state court against a foreign company for what was essentially alleged copyright violations occurring wholly abroad.

State AGs in the News

Posted in Antitrust, Consumer Financial Protection Bureau, Consumer Protection, Employment, False Claims Act, Securities, State AGs in the News


Texas Medical Board Suffers Blow to Immunity

  • A federal judge for the Western District of Texas denied the Texas Medical Board’s (TMB) motion to dismiss an antitrust lawsuit filed by Teladoc, Inc. Judge Pitman indicated that because Texas does not maintain “active supervision” over TMB—which comprises mostly private practice physicians—TMB could not rely on sovereign immunity to support its motion to dismiss.
  • In April, after years of litigation in state court on this issue, TMB created a new rule that requires a face-to-face visit with a patient before a physician is allowed to issue a prescription. Since Teledoc offers health care consultations with a physician for non-emergency conditions over the Internet, or secure video, the new rule effectively prevented Teledoc from operating in Texas. Teledoc sued TMB alleging that it was violating federal antitrust laws and limiting interstate commerce.
  • The facts mirror those in N.C. State Bd. of Dental Examiners v F.T.C., a case decided in February by the U.S. Supreme Court, which ruled that a professional oversight board can only claim state-action immunity from antitrust claims if it is actively supervised by the state. The Supreme Court held that professional boards must either contain less than a majority of market participants, or be actively reviewed by a state supervisor with the authority to review and, where necessary, overrule or modify the board’s actions. Following up on the N.C. State Board decision, the Federal Trade Commission recently provided guidance on this issue.

Consumer Protection

West Virginia AG Settles Frontier

  • West Virginia AG Patrick Morrisey reached an agreement with Frontier Communications resolving allegations that the television and Internet provider had violated the West Virginia Consumer Credit and Protection Act by providing access to the Internet at speeds significantly slower than advertised.
  • The AG alleged that Frontier advertised connection speeds of 6 Mbps, but consumers complained that their Internet service was slow or failed entirely. The AG claimed the that consumers frequently achieved no more than 1.5 Mbps.
  • The Assurance of Voluntary Compliance requires Frontier to pay $500,000 for the AG’s investigative costs, and to drop the fee on its Internet services to $9.99 per month until it can provide the advertised speeds. In addition, Frontier agreed to invest $150 million over the next three years to increase broadband speeds in West Virginia. According to AG Morrisey, the agreement with Frontier is the largest independently negotiated consumer protection settlement in the state’s history. Moreover, the settlement may bring additional scrutiny of Frontier, triggering other AG investigations.

Consumer Financial Protection Bureau

CFPB Nabs an EZ Settlement

  • The Consumer Financial Protection Bureau (CFPB) entered into a Consent Order with EZCORP, Inc., including numerous wholly-owned subsidiaries, to resolve claims that the payday and installment lender violated the Consumer Financial Protection Act and the Electronic Fund Transfer Act.
  • The CFPB alleged that EZCORP and its subsidiaries violated the law in the following ways:
    • Making in-person collection visits to consumers’ homes and workplaces, as well as calls to credit references, supervisors, and landlords while ignoring consumers’ requests to stop;
    • Claiming in advertisements that it would not conduct credit checks on loan applicants, while routinely running credit checks;
    • Requiring consumers to repay loans through ACH bank withdrawals, and deceiving consumers that they were not permitted to stop the ACH withdrawals or repay the loans early; and
    • Making multiple simultaneous attempts to withdraw money from a consumer’s bank account, or making withdrawals earlier than promised, resulting in consumers incurring unnecessary bank fees.
  • The Consent Order requires EZCORP to submit to the CFPB a Redress and Remediation Plan outlining how EZCORP will return $7.5 million to the consumers involved. It also calls for a $3 million civil penalty. In addition, EZCORP is precluded from collecting on a portfolio of defaulted loans and must request that relevant credit reporting agencies remove any negative information that pertains to those debts.


Seattle Creates Roadmap for Drivers to Unionize

  • The Seattle City Council has passed an ordinance giving professional drivers—whether they drive for taxi, for-hire, or app-dispatch companies—the ability to unionize. The ordinance outlines a process through which drivers using the same company for generating customers can form a nonprofit organization to bargain on the drivers’ behalf.
  • The ordinance, however, requires the nonprofit organization to be supported by a majority of a company’s drivers before it can be recognized by the city as the bargaining representative. Once the organization is recognized, the city will provide a list of drivers using each driving company. The company is then expected to negotiate with the organization. The ordinance allows the city to issue fines for noncompliance, but not to revoke a company’s business license.
  • Yet, as some commentators have noted, federal antitrust law generally prevents independent contractors from entering into agreements with each other regarding their business relationships with third parties. In addition, there is concern over the cost of implementation. Seattle mayor Ed Murray indicated that he would not sign the ordinance, but under the city’s governance structure, it still goes into effect without his signature.

False Claims Act

Regulators See False Claims Liability in the Dirt

  • New Jersey Acting AG John Hoffman settled his investigation into whether Accutest Laboratories violated the New Jersey and U.S. False Claims Acts, as well as state regulations on scientific testing, when it allegedly failed to follow proper protocols while conducting soil and water tests under contract for the state Department of Environmental Protection (DEP).
  • The complaint was filed by relator, and former Accutest employee, Koroush Vaziri, in federal court for the District of New Jersey. The complaint alleged that technicians in Accutest’s laboratories did not fully comply with the EPA’s Standard Operating Procedures by failing to wait the required amount of time between stages of the extraction process, and by failing to properly implement quality control measures. It also alleged that Accutest did not properly calibrate the gas chromatography and mass spectrometry instruments, and thus knowingly presented or caused to be presented false claims to the State DEP.
  • The New Jersey settlement requires Accutest to pay $2 million to the state, to conduct an internal investigation, and to notify any of its clients that could have been impacted by the alleged failure to use standard protocols. Accutest had previously agreed to pay $3 million to the U.S. Department of Justice in a separate settlement involving the same core facts.


SEC Unearths New Rule for Mining Industry Disclosure

  • The Securities and Exchange Commission (SEC) proposed a new rule that would require companies operating in a mining or extractive industry to provide detailed disclosures regarding payments made to the U.S. and foreign governments in order to secure permission to commercially develop oil, gas, and mineral resources.
  • The Proposed Rule would apply to all U.S. and foreign companies that are required to file annual reports under Section 13 or 15(d) of the Exchange Act—even when the payment is made by a subsidiary or controlled entity. The Rule defines “development” as including exploration, extraction, processing, export, and the acquisition of a license. The term “payment” includes taxes, royalties, fees, production entitlements, and bonuses. The SEC also proposes to include dividends and payments for infrastructure improvements in the definition.
  • This is the SEC’s second attempt to comply with Section 1504 of the Dodd-Frank Act. A variety of plaintiffs challenged the SEC’s first rule in 2012. In 2013, the District Court for the District of Columbia ruled in favor of the plaintiffs, and held that the SEC had misinterpreted the statute by requiring public disclosure, and that the rule was arbitrary and capricious for lacking any exemption for payments made in countries that prohibited disclosure of such payments.
  • Initial comments on the Proposed Rule are due by January 25, 2016, and comments responding to issues raised in the initial comment period must be submitted by February 16, 2016.