United States: State AGs In The News - July 30th, 2015

Antitrust

Federal Appeals Court Focuses on Utah Contact Lens Law

  • Leading national manufacturers of contact lenses are asking the U.S. Tenth Circuit Court of Appeals to reverse a lower court decision not to enjoin enforcement of a new Utah law on vertical price controls in the contact lens industry. On June 16, the Tenth Circuit removed the temporary injunction pending appeal it had issued in May, and allowed the law to go into effect. The court's ruling on the preliminary injunction has been expedited, and both sides have filed their briefs.
  • The law was enacted earlier this year and bans contact lens manufacturers and distributors from "fixing or otherwise controlling the price that a contact lens retailer charges or advertises for contact lenses." The law specifically prohibits a manufacturer from discriminating against a contact lens retailer that sells or advertises contact lenses for a particular price; operates in a particular channel of trade; is a person authorized by law to prescribe contact lenses; or is associated with a person authorized by law to prescribe contact lenses.
  • Utah AG Sean Reyes argued that the new law is a legitimate antitrust measure and would benefit consumers by encouraging greater price competition. In contrast, national contact lens manufacturers argued that the law violates the Commerce Clause of the U.S. Constitution because it effectively seeks to regulate interstate commerce, stating that "it will necessarily result in [a] Utah retailer receiving a competitive advantage over the non-Utah retailers who abide by the [unilateral pricing] policies."

Charities

Citizens United Loses in Federal Court, Must Disclose Donors

  • In Citizens United v. Schneiderman, a federal court in New York ruled that a State AG can require charitable organizations to disclose a list of major donors as part of the organization's annual reporting requirements under state law.
  • The plaintiffs, Citizens United Foundation and Citizens United, two nonprofit corporations, sought to enjoin New York AG Eric Schneiderman from enforcing state Exec. Law §172, requiring charities registered in New York to disclose the names of donors who gave $5,000 or more by providing a copy of each entity's confidential "Schedule B" filings that accompany federal tax returns.
  • The court indicated that this type of disclosure forms an important part of a State AG's investigative authority "because he can compare major donor information against other documents that charities submit, allowing him to uncover possible violations and ultimately take action against unlawful charities." This decision mirrors recent decisions involving a similar state law in California.

Consumer Financial Protection Bureau

CFPB Gives Failing Marks to Student Lender

  • The Consumer Financial Protection Bureau (CFPB) reached an agreement with Student Financial Aid Services, Inc., (SFAS) to resolve claims that the company violated the Consumer Financial Protection Act, the Telemarketing Sales Rule, and the Electronic Funds Act through its paid subscription services.
  • SFAS, which operated the website FAFSA.com, was alleged to have used deceptive tactics to enroll and automatically bill consumers for online or over-the-phone assistance for filling out the federal government's Free Application for Federal Student Aid (FAFSA). SFAS allegedly charged a recurring annual fee, with a negative option for termination, for up to four years.
  • The consent order requires SFAS to pay $5.2 million to the CFPB for redress to consumers who were charged for unauthorized, recurring service fees, and to cease all recurring or automatic charges. The order also requires SFAS to pay a civil penalty of $1—this nominal amount is to ensure that the company's remaining funds are focused on repaying harmed consumers while preserving victims' eligibility for additional relief from the CFPB Civil Penalty Fund in the future. In addition to the order, SFAS agreed to transfer the website FAFSA.com to the U.S. Department of Education, which uses FAFSA.ed.gov.

CFPB Hits the Brakes on the "Equity Accelerator"

  • The Consumer Financial Protection Bureau (CFPB) took action against two companies for allegedly deceiving consumers by marketing a mortgage payment system that promised consumers savings on interest over time through biweekly payments made automatically from consumers' bank accounts.
  • Paymap Inc., a payment processor and wholly-owned subsidiary of Western Union, together with LoanCare LLC, a mortgage servicer, marketed an "Equity Accelerator" product to LoanCare's customers. The companies claimed that through biweekly payments, "the average customer will achieve over $33,000 in interest savings." The CFPB alleged, however, that few customers achieved that level of savings, and that even though Paymap withdrew funds from consumers' accounts every two weeks, it would still only make payments on consumers' mortgages as per their original monthly schedule. As such, any savings came not from more frequent payments, but from the additional principal paid each year.
  • According to the orders, Paymap will return $33.4 million to consumers and pay a $5 million civil penalty to the CFPB. For its part in providing customers, LoanCare LCC will pay a $100,000 civil penalty. Both companies are prohibited from advertising the benefits of mortgage payment programs without credible evidence to support their claims, and must disclose when the projected savings comes only from increased annual payment amounts. In addition, both companies must keep records on their compliance with the CFPB orders, and report regularly to the CFPB for a period of five years.

DC Circuit Clarifies Who Has Standing to Sue the CFPB

  • The Court of Appeals for the DC Circuit overturned a lower court opinion that held that State National Bank of Big Spring did not have standing to challenge the constitutionality of certain aspects of the Consumer Financial Protection Bureau (CFPB) since the Texas bank had not been subject to a CFPB enforcement action.
  • Instead, the DC Circuit indicated that an entity can challenge an agency when it can show that the entity operates in a sector the agency regulates. As stated by the court, "[i]t would make little sense to force a regulated entity to violate a law (and thereby trigger an enforcement action against it) simply so that the regulated entity can challenge the constitutionality of the regulating agency."
  • Since the bank does business in the remittance market, and the CFPB has authority to regulate that sector, the DC Circuit ruled that the bank had standing to challenge the CFPB on at least two constitutional issues. The DC Circuit did not address the substance of the bank's challenge, namely that it was unconstitutional for the CFPB to operate under a single director instead of a commission similar to that of the Federal Trade Commission or the Securities and Exchange Commission, and that the recess appointment of CFPB Director Cordray was unconstitutional.

Consumer Protection

Washington AG Makes Crowdfunder Pay

  • Washington AG Bob Ferguson has successfully sued Altius Management LLC and its President for violations of the state Unfair Business Practices and Consumer Protection Act in connection with a failed crowdfunding project.
  • According to the complaint, Altius created, marketed, and accepted funding for a Kickstarter campaign to create a custom set of playing cards. Altius secured over $25,000 in funding from 810 backers, and thus, as per the terms and conditions of the Kickstarter platform, was legally bound to fulfill backer rewards (i.e., provide each backer with the indicated custom set of playing cards). AG Ferguson brought the law suit when, after more than two years, Altius failed to deliver the product, and had not issued any refunds.
  • The default judgment requires Altius to pay $668 in restitution and $23,183 for attorneys' fees and costs. The court held that each unrewarded or unrefunded contributor formed a separate violation of state law and also issued civil penalties totaling $31,000: Because there were 31 backers in Washington, the court issued 31 separate civil penalties of $1,000 each.

Wireless Provider Disputes "Apparent" Liability

  • AT&T Mobility LLC responded to a decision made last month by the Federal Communications Commission (FCC) to fine the wireless provider $100 million for throttling broadband speeds after users reached a certain data usage threshold for the month, even though such data plans were sold as "unlimited."
  • The FCC issued a Notice of Apparent Liability (NAL) claiming that AT&T violated the Open Internet Transparency Rule when it failed to advise users that their broadband access would be slowed or throttled if they exceeded a monthly limit of data usage. The FCC's investigation claimed that some users had their speeds slowed by more than 80 percent, even though they had paid for unlimited data plans, rendering their Internet access almost useless during the period of throttling. The FCC alleged that heavy users faced, on average, 12 days per month of throttling.
  • In its Response to the NAL, AT&T argued that the FCC's forfeiture penalty of $100 million was seemingly "plucked out of thin air, and the injunctive sanctions it proposes are beyond the Commission's authority." In addition, AT&T argued that it was not given proper notice that its practices would be in violation of the Transparency Rule, and that the FCC has ignored other wireless providers who have used similar practices. Finally, AT&T indicated that the term "unlimited" was not deceptive, and must be viewed in the context of the agreement, which applied to data quantity, not speed. Since the NAL, AT&T has switched to a policy that only reduces heavy users' speeds during periods of peak network congestion.

Securities

Food Company Digests SEC Fine for Alleged Bribes in China

  • The Securities and Exchange Commission (SEC) settled its allegations against Mead Johnson Nutrition Company, resolving claims that Mead violated the Foreign Corrupt Practices Act through the conduct of its Chinese subsidiary and third-party distributors.
  • The SEC alleged that Mead's Chinese subsidiary made over $2 million in improper payments, and provided other incentives to professionals at government-owned hospitals in China from 2008 to 2013, in order to entice the hospitals to use the company's infant food and formula products. Although the payments were made through third-party distributors, the SEC was able to trace them back to Mead because the distributors received discounts to compensate them for their expenses.
  • As indicated in the SEC Order, Mead presented an Offer of Settlement in which it agreed to pay $9 million in disgorgement and prejudgment interest, and $3 million as a penalty. It did not admit wrongdoing. The Department of Justice closed its investigation accordingly.

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