Julie Brill, assistant AG, Vermont: The primary focus in the states has been in the financial markets. Also telemarketing, payola, internet issues, privacy, pharmaceuticals, and tobacco. She won’t talk about cases that brought by private attorneys on behalf of the states, though there is interesting lead paint litigation in Ohio and Rhode Island.
In 2004, Spitzer charged Marsh & McLennan, the nation’s largest insurance brokerage firm, with deception. Allegations: Marsh steered clients to insurers who’d paid Marsh to do so, despite Marsh’s claims to be neutral. There were also antitrust issues – allegations of deceptive solicitation of rigged bids when in fact the prices had been fixed. Marsh agreed to pay $850 million in restitution, reform practices, and establish compliance procedures. 8 Marsh executives were charged criminally; many trials are still pending.
AIG also settled with NY, DOJ, and SEC, agreeing to pay $1.6 billion, change procedures, and apologize. Other brokers were also investigated. States involved included NY, CT and IL. Aon, the second largest insurance broker, agreed to $190 million in restitution. Willis, the third largest, paid $50, and Gallagher $27 million. Recently, the 3 state AGs filed another suit. Likewise, several other states got involved against insurers, charging everything from bid rigging to improper accounting. Total payments by insurers to date: over $402 million.
Now: sources of income, including contingent commissions, have to be disclosed to clients. There’s now a prohibition on paying contingent commissions where the insurance lines represent more than 65% of the market. In Nov. 2006, the AGs announced that 65% rule has been reached in several lines, which has caused a hullaballoo in the insurance industry.
Student loans: undisclosed financial arrangements between colleges and banks that loan to students. Watch for more investigations! Colleges list lenders as preferred, but fail to disclose that this is because the lenders pay – sometimes up to 1.5% of the loan amount, and sometimes they pay loan officers, not just the college. The implicit representation is that this is the best deal, but it’s not. Also, 90% of students take out loans with the college’s preferred lender, so it’s a significant label and a potentially significant source of income for the college.
NY is asking colleges to sever ties with lenders when this has the potential to mislead students and compromise the college’s ability to help students find the best rate. Minnesota has taken the position that disclosure is the remedy when the preferred lender pays the college. State AGs are also issuing student loan guides to inform students. This is an $85 billion/year industry, so it’s a big deal.
NY filed suit against Education Finance Partners in March – it has revenue sharing arrangements with over 60 major colleges and universities, failing to disclose that the colleges got paid. EFP used the school’s logos, mascots, etc. in various promotional materials. Seven universities have settled, promising to return $3.27 million to students. Citibank and Sallie Mae have agreed to pay $4 million to educate college-bound students about loan issues. A new code of conduct will ban gifts to university personnel, require disclosures, and ban staffing of university call centers – some of the lenders would actually answer the phone “X University.”
Unsuitable annuities/living trusts marketed to the elderly: 20 companies have been sued by 6 states, alleging defendants use phone calls and mail deceptively to sell financial products promising returns of more than double or triple available with CDs with no risk. “Qualified” customers are passed on to agents who come to the consumer’s home and sell various products including equity-indexed annuities with large surrender charges – many times this is a person’s retirement nest egg, and causes huge hardship. All 10 lawsuits are still pending, so they’re being fought vigorously.
Subprime lending: In Jan. 2006, 49 states and DC settled with Ameriquest over alleged deceptive practices, such as pressuring appraisers to inflate values to increase loans; misrepresenting key terms to borrowers like interest rates, prepayment penalties, fees and costs, etc.; and discouraging consumers from asking questions. Ameriquest agreed to pay $295 million to 240,000 consumers nationwide, about 1/3 of their customer base, a minimum of $600 each. Various injunctive provisions: ending incentives to salespeople to include prepayment penalties in contracts, overhauling disclosures, etc. Ameriquest also paid $30 million in penalties to the states.
Other state activities include: suing phony mortgage rescue operations; shutting down subprime lenders in financial collapse; restitution to minorities improperly steered into subprime markets – this is an important case settled by NY recently against Countrywide Home Loans. A number of state AGs are seeking legislative corrections – front and back end fixes to avoid deception in initial subprime loans and then to help consumers out if they get in trouble with the loan.
Rent to own: Rent-A-Center, largest rent to own business, entered into a consent judgment with California over misrepresentation of the true costs of ownership. There were also a lot of alleged misrepresentations about “Club” membership. Result: restitution and penalty.
Preemption is a big deal: The feds have tried to preempt state regulation of financial markets, as in Watters v. Wachovia. The states filed an amicus arguing they could oversee non-banking subsidiaries of national banks. The Supreme Court sided with the OCC and the banks, holding that the National Bank Act preempted state authority. She expects congressional fallout, though not necessarily in the direction of increasing state regulatory authority; perhaps there will be a move to increase federal authority over consumer protection.
Telemarketing: 16 states sued over phony “free trial” membership programs in Trilegiant; Chase Bank was also a defendant. There was a settlement with millions in restitution and civil penalties, as well as changed practices.
Likewise, states are focused on those who assist telemarketers, such as check processors. In Nov. 2005, 5 states settled with check processor Amerinet, which processed debits and unsigned demand drafts on behalf of telemarketers. There was at least an 80% chargeback rate, so consumers clearly felt deceived; regulators argued that Amerinet should have known that this was illegitimate. Amerinet agreed not to process unsigned demand drafts and high-risk products.
Payola: What’s old is new. The payments were more cleverly disguised this time, as the record companies paid for operational expensive, hired “independent” promoters, and did other things to increase airtime. Sony, Warner, and Universal settled, making payments to nonprofit entities that will distribute the money to consumers. One of the nation’s leading radio chains continues to litigate.
DRM: Sony’s rootkit problem. The problems: the DRM was cloaked, created security vulnerabilities, and risked damage to computers if removed. Even in some cases when the consumers declined the EULA, the program was still loaded. 15 states and the FTC investigated. CA, TX and FTC obtained consent judgments, and 13 other states obtained assurances of discontinuance. Payments of $5.75 million were made to the states. Remedies: disclosure in the future.
Washington and NY have taken the lead on litigation on deceptive internet schemes, including adware, spyware, and malware. Washington has a specific spyware law, unlike most states, and has filed 5 lawsuits. Allegations include: phony operating systems warnings; sending a program that monkeys around with internet browsers, then advertising that the senders can fix the problem; installing aggressive popups that demand payment for internet services. One settlement so far.
NY has also settled with 3 major online advertisers, Priceline, Travelocity, and Cingular Wireless, who installed adware through Direct Revenue. The settlements required them to monitor their business partners to avoid the problems in the future.
Paypal: 28 states investigated Paypal for improper disclosures and collection practices. First, Paypal froze consumer accounts when there was a dispute with Paypal. Paypal also charged bank accounts when consumers thought they were using credit cards. Paypal also claimed to provide additional protection through using Paypal, even though the protections were the same as for using a credit card. Settlement: better disclosures, plus $1.7 million to the states for costs.
Pretexting: California obtained a $14.5 million civil settlement over false pretenses used to access phone records. $13.5 million will be used to create a privacy law enforcement fund. Also lots of corporate governance reforms for HP. There’s a lot of other pretexting litigation going on. 5 states have sued in 10 different proceedings against companies offering to sell individual phone records obtained by pretexting. The litigation is still pending. There are also AG calls for new legislation. The FCC is implementing new regulations to require password protection and opt-in for consumers.
Pharmaceuticals: 30 states got a consent judgment in January with Bayer over its marketing of Baycol, a cholesterol-lowering drug. Baycol carried a greater risk of certain serious muscular diseases than other statins. Bayer learned of this risk through postmarketing adverse events; Bayer properly filed reports with the FDA, but didn’t notify doctors or consumers. The settlement requires various reforms, including registering clinical studies, not making false/misleading claims, and paying the states $8 million. Baycol was withdrawn 3 years after it was introduced.
Tobacco: Vermont v. RJR over Eclipse, a “potentially reduced exposure product.” She expects a lot of discussion over PREPs as part of the debate over giving the FDA more authority over tobacco. Eclipse heats, but doesn’t burn, tobacco – it can heat it up to 800 degrees. Ads claimed reduced harm – the next best choice for smokers who worry about their health other than quitting. “May present less risk of cancer, chronic bronchitis, and possibly emphysyma.” No claim to decreased risk of cardiovascular disease or decreased risk from use during pregnancy. The current litigation concerns consumer perception, substantiation, and unfairness (does it discourage people from quitting?). What level of substantiation is required? Do you need human exposure or evidence of reduction in disease outcomes? 9 states are assisting Vt. in the litigation, which is scheduled for trial in late 2007. What Congress & the FDA will do is anyone’s guess.
Christie Grimes, Kelley Drye, presenting for August Horvath: Private sector highlights. Grimes noted instances in which Lanham Act claims were difficult because of a lack of competition between plaintiff and defendant, such as GTFM v. Universal Studios (the clothing brand Fubu sued over the fake brand Bufu in the movie How High) and Bradley v. Google (disgruntled AdWords customer), or issues of materiality, such as Clauson v. Eslinger (do consumers care about the identity of a movie producer?).
State UDAP litigation: Gerber Graduates for Toddlers. It is a “fruit juice snack.” The principal display panel had pictures of various fruits (or fruit-like products), “naturally flavored,” made with “real fruit juice and other all-natural ingredients.” In fact, they’re made of corn syrup, sugar, and white grape juice from concentrate. A federal court in C.D. Cal. determined that this wasn’t deceptive under California state law. “Fruit juice snacks” is true, and there’s no specific representation of fruitiness – though the plaintiffs pointed out that the package doesn’t depict even one white grape among the other fruits. The crux of the court’s decision: the consumer can determine the ingredients from the side panel. A reasonable consumer wouldn’t be deceived. (Then why do they make those claims on the box?)
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