United States: State AGs In The News - November 19th, 2015

Consumer Protection

Federal Agencies Bulk-Up Investigation Into Dietary Supplements

  • The U.S. Department of Justice (DOJ), as lead agency in a multi-agency federal enforcement action, has filed criminal charges against USPlabs LLC, and commenced civil lawsuits against more than 100 other makers or marketers of dietary supplements. As we indicated in prior posts, it was only a matter of time before the investigation into dietary supplements spread from State AGs to federal regulators.
  • In the criminal indictment, the DOJ charges USPlabs with using false certificates of analysis and false labeling to sell products, including Jack3d and OxyElite Pro, that contained potentially harmful synthetic stimulants. USPlabs represented to consumers that the products were made from naturally occurring plant extracts. The indictment also alleges that the defendants committed wire fraud by transmitting false documents by means of wire and radio communications, obstructed a Food and Drug Administration (FDA) investigation by selling products verbally to avoid creating a paper trail, and conspired to commit money laundering.
  • In addition, the DOJ teamed with the U.S. Postal Inspection Service and the FDA to bring multiple civil cases against supplement companies for selling or marketing unapproved or misbranded drugs in violation of the Food, Drug, and Cosmetic Act. In these cases, the government used the claims made on the defendants' labels and relevant websites to argue that defendants intended the products to be used for the diagnosis, cure, mitigation, treatment, or prevention of disease, and thus alleged the products were "drugs" under the Act. For example, the DOJ sued Lehan Enterprises for insinuating that its DMSO Cream could treat or cure, among other things, arthritis, herpes, gallstones, and toenail fungus.
  • The Federal Trade Commission (FTC) also joined the enforcement effort, filing civil cases alleging that supplement makers violated Section 5 of the FTC Act by engaging in false and misleading advertising and marketing practices. For example, the FTC filed a complaint against Sunrise Nutraceuticals, LLC, claiming that the supplement maker made false or unsubstantiated efficacy claims through marketing that indicated its supplement Elimidrol would help users complete opiate withdrawal successfully and overcome opiate addiction.

New York AG Takes Daily Fantasy Sports Fight Into Round Three

  • New York AG Eric Schneiderman filed an enforcement action seeking to enjoin daily fantasy sports websites DraftKings, Inc. and FanDuel, Inc. from accepting wagers and operating in New York for alleged violations of the State Constitution and Penal Code.
  • As we outlined in a prior post, AG Schneiderman issued cease-and-desist letters to the websites last week for what the AG believes are violations of New York's gambling laws. The websites responded by filing separate lawsuits in New York Supreme Court, asking the court to rule that the AG's letters were unconstitutional and an abuse of discretion, and to grant a temporary restraining order. The websites argued that their business model is legal under an exception for fantasy sports contained in the 2006 Unlawful Internet Gambling Enforcement Act. The court denied those requests.
  • On Monday, the AG filed complaints against DraftKings and FanDuel, highlighting other states that have banned daily fantasy sports wagering, and providing detailed arguments as to how the websites' business operations are "knowingly advancing or profiting from unlawful gambling activity" as well as "engaging in bookmaking."

FTC Amends Telemarketing Sales Rule

  • The FTC published final amendments to the Telemarketing Sales Rule to prohibit certain types of payment methods frequently used by scammers. Most of the amendments will become effective 60 days after publication.
  • The amendments will prohibit remotely-created checks or payment orders, as those mechanisms allow for direct debit from a consumer's checking account, making it difficult to effectuate a reversal. They will also prohibit the use of "cash-to-cash" money transfers, which are often anonymous and difficult to trace after the fact. Finally the amendments will prevent payment through "cash reload" mechanisms, where a consumer loads money onto the caller's prepaid card.
  • The amendments also alter aspects of the Do Not Call Registry, including requirements that a telemarketer: demonstrate an existing business relationship in order to call a person on the Registry; acquire the information needed to place the consumer on the entity-specific do-not-call list or be disqualified from the safe harbor for isolated or accidental violations; and not share the cost with other sellers for accessing the Registry.

Data Privacy

FTC Loses Data Security Suit in Its Own Court

  • Chief Administrative Law Judge Michael Chappell dismissed the FTC's complaint, originally filed in 2009, alleging that LabMD, Inc. violated the FTC Act by failing "to employ reasonable and appropriate measures to prevent unauthorized access to consumers' "personal data."
  • The dispute also highlighted the role played by private security firms in detecting data breaches. In this case, a private firm named Tiversa contacted LabMD to discuss consumer information that it had found while searching public networks. Tiversa allegedly used that information in an attempt to sell data protection services to LabMD. When LabMD did not buy the services, Tiversa provided the information to the FTC. The FTC found that Tiversa had "a financial interest in intentionally exposing and capturing sensitive files on computer networks, and a business model of offering its services to help organizations protect against similar infiltrations." In October, 2014, Tiversa filed a defamation case against LabMD, which is still pending in Pennsylvania trial court.
  • The FTC alleged that LabMD committed an unfair practice in violation of Section 5 of the FTC Act, when it stored the names, dates of birth, Social Security numbers, and personal health insurance information for over 9,000 consumers on publicly accessible, peer-to-peer networks. The FTC argued that "injury" was likely for any consumer whose information was disclosed, as they would be subject to increased risk of identity theft. This is a key element under Section 5(n), which requires the FTC to demonstrate that the indicated practice "causes or is likely to cause substantial injury to consumers."
  • Ultimately, Judge Chappell did not accept the FTC's theory of injury, finding that "Complaint Counsel has failed to meet its burden of proving that Respondent's alleged unreasonable data security caused substantial consumer injury." Whether the logic of this decision—i.e., the FTC must show more than just an increased risk of identity theft in order to meet consumer injury element—will be isolated to the complicated factual background, or whether it marks a shift in assessing data breach enforcement by the FTC overall will be a development to watch for in future cases, including the Wyndham case currently pending in federal court in New Jersey.

Financial Industry

NY DFS Plans to Issue Detailed Cybersecurity Rules

  • The New York Department of Financial Services (DFS) recently sent a letter to a group of federal and state regulators, outlining the DFS's plans to create a new cybersecurity regulation for entities in the financial industry, and calling for coordination and collaboration among regulators.
  • The letter indicates the financial industry's use of third-party service providers remains one of the main concerns regarding cybersecurity for banks and insurers, and suggests that covered entities be required to create and disclose third-party management procedures. The DFS issued a report in April describing concerns with third-party service providers in greater detail.
  • The letter also enumerates a number of additional policies and procedures the DFS expects cybersecurity regulations to require regulated entities to implement, including: to maintain written cybersecurity policies and procedures (identifying twelve specific areas to be addressed); to utilize multifactor authentication, to employ a chief information security officer; to establish annual audit procedures to test vulnerabilities; and to provide notice of cybersecurity incidents to the DFS.
  • A cybersecurity regulation of this detailed scope would be a first for a state-level regulator. Although State AGs have been increasingly active in data breach investigations, they have usually done so under broader laws to prevent unfair and deceptive practices. Moreover, as we have seen with trends in data breach notification requirements, what starts in one state often spreads to others.

For-Profit Colleges

DOJ and 39 AGs Settle With For-Profit College Consortium

  • The U.S. DOJ and AGs from 39 states and the District of Columbia reached agreements with Education Management Corp. (EDMC) to resolve multiple qui tam lawsuits alleging that the consortium of over 100 online and bricks-and-mortar, for-profit colleges violated federal and state false claims acts when it participated in federal student aid programs.
  • The cases centered on the claim that EDMC based administrative compensation on the number of students recruited by each admissions employee—an allegation, that if true would violate the Incentive Compensation Ban contained in Title IV of the Higher Education Act of 1965 (HEA). When EDMC certified that it was in compliance with the HEA and similar state laws in order to receive funding through student aid programs, it allegedly violated the False Claims Act.
  • Although EDMC indicated that the claims were without merit, it cooperated with the investigation and agreed to pay $95.5 million to the DOJ, and to provide $102.8 million in loan forgiveness to more than 80,000 former students in response to the suit. It agreed to make certain disclosures during the recruiting process, including potential student debt upon graduation, the graduation rate, and numbers of students who get jobs. Finally, EDMC agreed to limit enrollment in unaccredited programs and to implement an extended period during which new students can withdraw with no financial obligation.

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