With the incoming Trump Administration, regulatory and enforcement priorities for federal agencies are expected to change, and in response state Attorneys General will surely step into perceived gaps. Over the past eight years, state AGs have joined in significant joint federal-state enforcement often following the lead of the U.S. Department of Justice, the Federal Trade Commission or the Consumer Financial Protection Bureau. But if federal agencies scale back their efforts in key consumer protection areas, AGs will pick up the slack on their own.
The primary source of enforcement authority for Attorneys General is their state unfair and deceptive acts and practices statutes, or UDAP laws. Every state has some form of UDAP statute that allows AGs to pursue companies for allegations such as false advertising or deceptive billing. These statutes require no demonstration of actual harm but only likelihood to mislead a consumer. Three points about UDAP litigation to bear in mind:
First, while AGs can litigate on behalf of their states such as a false claim to a state-run Medicaid program, they can also pursue claims on behalf of their citizens under a parens patriae theory. Here state AGs can seek recovery on behalf of an entire class of consumers.
Second, AGs have wide-ranging investigative tools, often broader than their federal counterparts, including civil investigative demands. These CIDs are grounded in statutory, rather than judicial, authority and allow AGs to demand information if when a company is not (yet) the target of a particular violation of the law.
Third, the vast majority of state AGs are elected officials – they respond to the concerns of their citizens and weigh the public policy and political effects of the actions they take. In determining how aggressive to be toward, for instance, the pharmaceutical industry, for-profit colleges, or consumer lending, state AGs will consider, and even react against, the posture of the President and his Administration.
Federal Trade Commission (FTC)
State UDAP laws are often referred to as “little FTC Acts” due the similar broad sweep of those consumer laws. While state AGs often conduct joint enforcement actions with the FTC, they are equally able to enforce the federal UDAP law on their own. Using the totality of their consumer protection authority, state AGs are able to influence a wide variety of industries including the newest technologies on matters involving privacy protections, proper disclosures, and billing practices. Similar to the FTC, state AGs educate themselves on new industries from telehealth to payment platforms to the sharing economy – it is worth noting that engaging AGs early in this process is often a benefit before concerns may arise and litigation ensues.
Among joint actions between the FTC and state AGs on industries targeted for enforcement, two recent actions stand out where the federal agency acted on its own, yet state AGs certainly could take the lead on similar future cases.
For years state AGs have forcefully pursued for-profit education including investigations of DeVry University by Massachusetts AG Maura Healy and Illinois AG Lisa Madigan. However last week, the FTC settled its own lawsuit with DeVry for $100 million over misleading marketing to prospective students, on some of the very same claims under scrutiny by the AGs.
In another targeted industry, payday lending, the FTC itself received its largest litigated judgment ever this Fall. In a $1.3 billion order against a Ferrari racecar driver and other corporate defendants operating a payday lender, the FTC lawsuit pursued UDAP violations of undisclosed fees and inflated charges. Certainly the billion dollar figure has the attention of state AGs who can otherwise bring those claims.
One important area where the priorities of a Trump Administration are bound to make an enforcement difference is with antitrust review, both at the FTC and with DoJ. Those agencies have challenged number of significant mergers spanning industries from retail office supplies to energy oil production to health insurance. Using their own state antitrust authority, AGs often conduct parallel, cooperative investigations with the leading agencies, however, state AGs are able to bring their own multi-state challenges to mergers even when their federal counterparts decline to do so.
U.S. Department of Justice (DoJ)
Joint actions between state Attorneys General and DoJ often involve false claims. The health care industry is the target of the vast majority of false claim act pursuits. Every state AG office contains a Medicaid fraud unit, and joint enforcement can focus on overbilling, on so-called “phantom billing” for services not rendered, and on improper rebates and reimbursements. For instance, this past October the Georgia Attorney General led a settlement with DoJ to obtain a $513 million settlement from Tenet Healthcare for an illegal kickback scheme to Clinica de la Mama, a pregnancy clinic that referred patients to its hospitals.
State pension funds can have significant claims due to alleged fraud, and AGs are highly motivated to secure those recoveries for their states and citizens. Following the mortgage crisis, DoJ received a $160 million penalty from Barclays in respect to interest rate manipulation. And years later this past August, 44 Attorneys General achieved a follow up settlement of a $93 million settlement with Barclays for pension funds harmed by the same activity.
An additional area where AGs are expected to expand enforcement is with the environment. While groups of state AGs have filed a number of environmental and energy-related challenges to the Obama Administration’s rules, litigation will likely shift to enforcement actions. For example, last month, DoJ along with Illinois, Indiana and Michigan settled with U.S. Steel to reduce air pollution in Midwest plants and required the company to fund specific environmental projects. This kind of settlement can be used by state AGs to directly achieve desired policy-oriented goals rather than to purely obtain a monetary penalty.
Consumer Financial Protection Bureau (CFPB)
With the recent D.C. Circuit Court decision holding the Constitution requires the CFPB Director to be removable at will by the President, the Trump Administration may seek to throttle this aggressive agency. And while a new CFPB Director would likely scale back on the agency’s panache for “rulemaking through enforcement,” state AGs may continue to rely on authority under the Dodd-Frank Act that extends beyond what their own state laws provide.
First, state AGs have power to enforce Dodd-Frank’s federal unfair, deceptive and abusive acts and practices (UDAAP) statute with penalties up to $1 million for intentional violations. In a lawsuit filed last month, the CFPB and New York AG Eric Schneiderman alleged a debt collector inflated owed amounts by hundreds of dollars and even impersonated law enforcement in collecting those debts. Even in future cases where the CFPB may be an unwilling partner, it will be increasingly attractive to some AGs to rely on their state authority for investigations, and then on the federal statute with its broad scope of violations and higher penalties for enforcement.
Second, the Dodd-Frank Act gives AGs the power to independently enforce any CFPB rule. State AGs have historically enforced certain federal consumer statutes, such as the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), and the Fair Credit Reporting Act (FCRA). Dodd-Frank broadens AG authority on CFPB rules in any consumer financial area. The CFPB recently released its forward-looking rulemaking agenda even though several key items may not even be finalized prior to or under a Trump Administration.
For instance, the proposed rule prohibiting mandatory arbitration in consumer contracts is controversial among the business community, yet state AGs have a history of opposing arbitration clauses. The same is true for the proposed rule on payday loans and other “high cost” loans as AGs have enforced against those lenders. And the CFPB’s contemplated debt collection rulemaking may not get off the ground – an industry aggressively targeted by state AGs.
If these CFPB rules are stalled in the next Administration, some state AGs will look to advance the agenda through other means, such as alleging UDAP violations surrounding the above practices. Enforcement actions, particularly in a multi-state context, can apply tremendous pressure even on legitimate business practices, and unfortunately at times, that pressure results in a settlement in spite of available defenses. This outcome, criticized as “regulation by litigation,” can eventually cause an industry to abandon practices solely for bearing too much enforcement risk.
Last week, 20 State Attorneys General sued a half-dozen pharmaceutical companies for violating federal antitrust law due to price increases for specific generic drugs. Without a federal agency joining, the bipartisan AGs claim authority in a “quasi-sovereign” capacity to protect the economic interests of their states. If this is any example of what is to come, there is little doubt that state AGs will certainly fill a consumer protection void.