United States: State AGs In The News - September 3rd, 2015

AG Insights

States Seek Strengthened Data Breach Laws

  • In a recent post, Dickstein Shapiro Counsel Aaron Lancaster explains how state legislatures are shaping law and policy to better protect consumers against the growing threat of data breaches.

Antitrust

California DMV Asked to Prevent "Bird-Dogging"

  • California auto dealers have asked the California DMV to stop Tesla Motors Inc. from offering current Tesla owners a $1000 credit when they successfully refer a new purchaser, with the purchaser also receiving a $1000 discount.
  • The dealers argue that the practice, known in the industry as "bird-dogging," violates state law because it provides a financial incentive to a person who is not licensed to sell vehicles. The letter from the California New Car Dealers Association argues that "other licensed dealers would like to offer similar referral fees" but "California law flatly prohibits the practice."
  • Tesla has faced challenges to its direct-to-consumer sales model under various state competition laws, including a prior challenge to the referral program under Virginia law. In response to an inquiry by the Virginia Motor Vehicle Board, Tesla altered the program by offering the whole $2,000 incentive to the buyer.

Consumer Protection

FTC Gets to the Bottom of Wellness Drink Marketing Plan

  • The Federal Trade Commission (FTC) has filed a lawsuit against Vemma Nutrition Company and Chief Executive Officer Benson K. Boreyko for violating Section 5 of the FTC Act by operating an illegal pyramid scheme in connection with marketing health and wellness drinks through a network of independent affiliates.
  • The complaint alleges that Vemma and Boreyko deceived consumers into buying in to the Vemma Affiliate program by falsely representing the level of income they could earn from selling products, or referring other affiliates. The FTC, working with AGs from Arizona, South Carolina, and Michigan, secured a preliminary injunction and asset freeze. Boreyko is already subject to a 1999 order involving multilevel marketing and unsubstantiated claims for certain nutritional items.
  • The FTC highlighted that Vemma stressed recruitment over product sales, and that the company overall offered no guidance regarding a marketing strategy. As the FTC has indicated in its guidelines, network, or multilevel marketing operations can be legitimate, but only when the business model is based on making sales of products to the public (as opposed to recruiting paying members).

FTC Seeks Greater Disclosure From Online Endorsements

  • The FTC entered into a settlement with Machinima, Inc. to resolve allegations that the online network for video game enthusiasts engaged in a deceptive advertising campaign by paying well-known, influential gamers ("influencers") to post videos on YouTube that promoted Microsoft's new Xbox One video gaming system.
  • The administrative complaint explained that Machinima was hired to provide a marketing campaign that built interest around the launch of Microsoft's new gaming system, Xbox One. As part of this campaign, Machinima allegedly paid influencers to post videos on YouTube that depicted the Xbox One products in a favorable light, giving the impression that the videos were independently produced and reflective of the influencer's impartial personal views.
  • The consent order prohibits Machinima from misrepresenting, expressly, or by implication, that an influencer endorsing a product is an independent user or ordinary consumer if Machinima has a material connection to that product. The order also requires influencers to prominently disclose any material connection with the product they are endorsing, and prohibits Machinima from compensating any influencer who has not made the required disclosures.

Data Privacy

Facebook Alleged to Violate State Privacy Law by Storing Faces, Again

  • A second consumer class action lawsuit has been filed in federal court in Illinois, alleging that Facebook Inc. violated the Illinois Biometric Information Privacy Act through the social network's "Photo Tag Suggest," a feature that the plaintiffs argue encourages users to identify and label people in the photos they upload to Facebook.
  • Unlike a previously-filed lawsuit that seeks to certify a broad class that includes Facebook users, the recent complaint focuses on a narrower class of non-Facebook users who have been identified and labeled through the photo tag feature. As the Illinois law requires notification and consent before a company can store biometric data, this narrower class might better avoid the inevitable defense based on Facebook's terms of use.
  • The case is Gullen v. Facebook, Inc., No. 1:15-cv-07681 (N.D. Ill 8/31/15). In addition to declaratory and injunctive relief, attorneys' fees, and litigation expenses, plaintiffs are seeking statutory damages under the Illinois law of $5,000 for every intentional and reckless violation, and $1,000 for every negligent violation.

False Claims Act

Small Business Lender Sued for False Claim in Connection With SBA Loan Program

  • The Department of Justice (DOJ) settled with EDF Resources Capital Inc. and Chief Executive Officer Frank Dinsmore resolving allegations that the lender violated the False Claims Act when it failed to maintain the statutorily-required level of reserves, and failed to make required loss-sharing payments to the government under the Small Business Administration's (SBA) 504 loan program.
  • The SBA 504 program uses local lenders, like EDF, to arrange, service, and collect on long-term business loans which are guaranteed, in large part, by the government. In exchange for authority to make loans without SBA approval, EDF was required to maintain a reserve fund to cover its share of any potential losses, and to remit certain payments to the SBA for nonperforming loans. The DOJ alleged that EDF hid some of the troubled loans in a separate entity created by Dinsmore (Redemption Reliance LLC) so as to avoid having to reimburse the SBA for its share of the risk associated with those loans.
  • The settlement requires EDF and Dinsmore to make payments and turn over certain assets worth approximately $6 million. In an earlier action, the SBA permanently revoked EDF's authority to participate in the 504 program.

Securities

Delaware Court Finds CEO Unlawfully Drove Down Stock Price

  • Investors in Dole Food Co. secured a favorable decision in their appraisal lawsuit, alleging that Chief Executive Officer David Murdock and chief counsel Michael Carter engaged in fraud and other misconduct to drive down the company's share price to allow Murdock to acquire control at a lower price.
  • In a memorandum opinion, the Delaware Court of Chancery found that Murdock and Carter had driven down the value of the company's shares by convincing the directors that the company was overvalued, understating how much Dole could earn by spinning off a couple of its businesses, and by canceling the company's stock buy-back program. The court also noted that Murdock did not disclose to the board that he had been in discussions with an investment bank for more than a year prior to the sale.
  • The court found that Murdock and Carter engaged in fraud and violated duties to shareholders by "orchestrating an unfair, self-interested transaction." The court ordered the pair to pay $148.1 million to reimburse shareholders for the loss in value.

States v. Federal Government

AGs Push for State Sanctions on Iran

  • Oklahoma AG Scott Pruitt and Michigan AG Bill Schuette sent a letter to all 50 state governors arguing that states have legal authority to ignore President Obama's pending action on the Iranian nuclear program and asking that they maintain and implement state-level sanctions against Iran.
  • The letter argues that the President's executive agreement does not have the force of a treaty, and thus cannot bind the states. It argues that state entities that are stewards of public monies—like pension funds—have moral, reputational, and prudential reasons to maintain and enforce state sanctions.
  • Twenty-five states currently maintain some form of state-level sanctions against Iran, however, given the Constitutional allotment of foreign policy powers (and the Commerce Clause), the scope of states' authority to sanction a foreign country are limited. Oklahoma currently does not have a sanctions package in place, but AG Pruitt has indicated he will work to implement one. Michigan prohibits Iranian companies or entities from submitting bids for state work or contracts, and AG Schuette has stated that he will continue to enforce that provision.

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