United States: State AGs In The News - January 22nd, 2016

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.

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