United States: State AGs In The News - June 4th, 2015


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

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

Consumer Financial Protection Bureau

CFPB and Florida Attorney General Secure Judgment Against Foreclosure Relief Company

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

Consumer Protection

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

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

Data Privacy

FCC Advises Broadband Providers to Protect Consumer Privacy

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

Connecticut Legislature Seeks to Enhance Data Breach Protections

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

False Claims Act

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

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

Court of Appeals Denies FCA Liability for Changes in Grant Execution

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


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

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

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