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  1. 1. WHAT EVERY BUSINESS SHOULD KNOW ABOUT STATE CONSUMER PROTECTION ENFORCEMENT I. State Consumer Protection Authority A. Background Beginning in the 1960’s, there was a wide spread movement across the country to enact legislation that would enhance the marketplace and ensure a level playing field among competitors. By outlawing conduct that had a capacity to mislead consumers, or which was unfair or unconscionable, state legislators hoped to protect consumers and legitimate businesses from economic injury. Since those early beginnings, every state has enacted some form of consumer protection statute to prohibit false, deceptive, or misleading practices in the course of the sale of goods or services (or more broadly, in the course of trade or commerce). Unfair and Deceptive Acts and Practices statutes (“UDAP statutes”) run the gamut in terms of length, breadth, and scope of the statute.1 Nevertheless, some important generalizations can be made and are the basis for what every business should know about consumer protection enforcement. The first generalization that can be made is that a number of states2 have deliberately modeled their UDAP statutes after the Federal Trade Commission Act, which prohibits false or unfair trade practices. These “Little FTC Acts” generally include a statutory requirement that they be interpreted in a fashion similar to the federal statute. Even those states that do not specifically rely on FTC interpretations still use them as a guide. As a result, changes in the FTC Act by Congress, or new interpretations of the FTC Act by federal courts, can have a significant impact on those states’ consumer protection laws. Recently, Congress considered narrowing the definition for unfairness under the FTC Act. This would have had the immediate effect of also narrowing many state UDAP statutes. Congress ultimately decided to leave the FTC Act unchanged but could revisit the issue at any time. While states with “Little FTC Acts” bear the risk of a potential narrow construction of the FTC Act, they also reap the benefits of any expansion of it. This gives many states the opportunity to address conduct which they otherwise may have been unable to review. A second generalization that can be made about state UDAP statutes involves their scope. Not only do the statutes prohibit conduct that has a capacity to mislead consumers (or in other words, is deceptive) state UDAP statutes also routinely prohibit unfair or unconscionable conduct. This allows the states to address certain practices that are not necessarily deceptive. A practice is unfair or unconscionable if it causes substantial injury to consumers, is not outweighed by countervailing benefits to consumers, and cannot be reasonably avoided by consumers. 1 For example, California’s UDAP statute is 200 pages long and covers numerous topics. 2 For example, Connecticut, Massachusetts, and Washington. C:MY DOCUMENTSART.DOC
  2. 2. For example, high-pressure sales tactics are frequently viewed as unfair trade practices. Acts of intimidation, disparaging comments about the buyer, or efforts to prevent the buyer from leaving before making a decision, are common examples of high-pressure sales tactics. A third helpful generalization about state UDAP statutes is that, almost without exception, they imbue the state Attorney General with very broad authority to investigate and prosecute violations of the Act.3 In addition, most of the states provide a private cause of action under their respective UDAP statute. This private cause of action is necessary because given the states’ limited staff and resources, many questionable practices would go unchallenged without consumers’ ability to bring an action to remedy the conduct and recover attorney’s fees. In addition to the general prohibition against deceptive or unfair practices, many state UDAP statutes also include a list of enumerated practices that are considered per se UDAP violations. In other words, the listed acts are automatically deemed unfair or deceptive in and of themselves. No proof that the conduct has a capacity to mislead or is unfair is necessary. These lists are commonly known as “laundry lists.” Some common laundry list violations include: bait and switch advertising, misrepresenting the origin of goods sold, and misrepresenting goods as being of a particular grade or quality. B. Ancillary Consumer Protection Laws UDAP statutes, by their very nature, are broad in sweep and scope. They cover the widest range of conduct possible. However, states usually have additional statutes that are intended to address certain practices within particular industries. Even though these specialized statutes include remedies of their own, violation of these special statutes will usually constitute an automatic, or per se, violation of the state UDAP statute. As with the UDAP laws, ancillary consumer protection statutes normally fall within the Attorney General’s investigative power and enforcement authority. Ancillary consumer protection statutes often regulate the manner in which certain types of sales promotions may be structured or offered.4 Sweepstakes, contests, free offers, rebates, and coupons are commonly the subjects of specific state laws. In addition, some consumer protection statutes include laws that regulate specific industries such as health spas5 and statutes that regulate travel agencies.6 In the last few years some states have even undertaken the task of regulating telemarketers.7 3 Georgia and Hawaii are two notable exceptions. 4 Home solicitation sales are universally regulated and in general, require a three-day cooling off period. 5 Mo. Rev. Stat. § 407.325. 6 Cal. Bus. & Prof. Code § 17550.1 et seq. 7 Fla. Stat. Ann. § 501.601 et seq. C:MY DOCUMENTSART.DOC
  3. 3. II. State Attorney General Investigative Tools A. The Civil Investigative Demand With only limited variation,8 state UDAP laws authorize the Attorney General to pursue broad investigations whenever the Attorney General has reason to believe that a consumer protection law has been violated or is about to be violated. There are several types of investigative tools available to an Attorney General under UDAP statutes. By far the most commonly used tool is the civil investigative demand (CID). In essence, a CID is a pre-litigation demand requiring the recipient to answer questions, provide documentation, or produce physical evidence. While CIDs frequently provide the groundwork for a state’s lawsuit against a company, it is important to note that a CID can be issued even if no lawsuit is contemplated. States routinely use CIDs (which must be answered truthfully and under oath) to discover customer lists, the amount of revenue generated by a particular promotion, and whether the officers of the company have been in trouble in other states. Understandably, companies are not excited when they receive a CID. Responding to a CID is frequently burdensome, time-consuming, and expensive. From the states’ perspective this is not unintentional, but rather is designed to prompt recipients to change business practices sans litigation. It is important to keep in mind that the scope, breadth, and other aspects of a CID may be somewhat negotiable. Furthermore, responses to a CID are generally confidential and therefore, not subject to disclosure under state Freedom of Information Acts. Nevertheless, some states are permitted to share responses to CIDs with other law enforcement agencies pursuant to a specific statutory grant of authority. B. Other Investigative Tools In addition to their power to issue CIDs, many attorneys general also have broad subpoena authority, which enables them to compel witnesses to appear and give sworn statements or depositions. An attorney general frequently uses this subpoena power to obtain evidence from reluctant third party witnesses such as suppliers, vendors, and banks. Although direct methods of investigation, such as CIDs and subpoenas, are extremely important, attorneys general rely heavily on undercover methods of investigation to build their cases. For example, in the past, the Michigan attorney general has sent undercover shoppers into area grocery stores and discount centers to test the accuracy of checkout scanners. The Iowa attorney general has long used undercover taping of telephone calls in telemarketing investigations. Furthermore, all of the states have, at one time or another, sent investigators to business opportunity seminars and network marketing meetings to gather evidence of deceptive conduct. The information gleaned from these undercover efforts is always very useful in ascertaining the validity or scope of suspected violations. By using well-honed, undercover investigative techniques and consumer interviews, consumer protection regulators often develop 8 Supra, note 3. C:MY DOCUMENTSART.DOC
  4. 4. a substantial body of evidence before notifying a company that it is the subject of an investigation. C. Consumer Complaints and Mediation As an adjunct to their investigative authority, most attorneys general accept and informally “mediate” consumer complaints. In theory, mediation involves a disinterested, objective, third party who meets with the parties to reach a mutually satisfactory resolution. While the consumer complaint procedure is called “mediation,” the Attorneys General are hardly disinterested or objective. After all, they have a statutory duty to represent their states’ interest in the fair conduct of business. Therefore, implicit in the “mediation” process is the threat that the Attorney General may put the company on a “buyer beware list” or open an investigation against the company if it does not quickly and completely resolve the consumer’s complaint. Not surprisingly, the vast majority of consumer complaints are resolved at the mediation level. It is important to note that all of the states track the number of complaints they receive as well as the type of allegation involved. This allows them to identify emerging trends and problems and helps them better allocate their resources. Although technically unnecessary, states usually base their decision to investigate a certain company or practice on the number of particular complaints received. Obviously, a large number of complaints in a short period of time will draw the attention of an Attorney General. As a result, it is imperative that businesses develop efficient and comprehensive customer services policies that include detailed procedures for handling regulatory complaints. III. Enforcement Tools A. Assurances of Voluntary Compliance If a state determines that a violation of the law has occurred it may file a lawsuit or offer the company an opportunity to resolve the matter less formally. One avenue for informal resolution is the Assurance of Voluntary Compliance (“AVC”).9 An attorney general’s authority to propose an AVC may be statutorily created,10 or more likely, based on his traditional common law powers. By entering into an AVC, a business expressly promises to comply with the law at all times in the future. This usually means that the business will have to change the way it currently does business and resolve consumer complaints. However, by signing an AVC the business does not admit to any wrongdoing or liability. For most companies this fact alone is a major benefit. In addition to an agreement to change the way a company does business, an AVC will almost always entail the payment of money to the Attorney General’s office or some other designated source. However, because the matter is settled without the necessity of litigation that amount may be lower than if the Attorney General had been forced to file suit. 9 In some states, the document is called an “Assurance of Discontinuance.” 10 For example, Ariz. Rev. Stat. Ann. § 44-1530. C:MY DOCUMENTSART.DOC
  5. 5. Two final points regarding AVCs are important. In some states the AVC is filed with a 11 court. Others are simply a public document that is maintained in the Attorney General’s records. Finally, in a few states subsequent violations of an AVC are punishable by an enhanced monetary penalty. In other states, violation of an AVC is a per se violation of the state UDAP statute. B. Remedies Obtainable Through Litigation While a large part of what consumer protection regulators do takes place outside the courtroom, states nevertheless, have the right to file suit in order to obtain temporary and permanent injunctions, refunds to consumers, and civil penalties. Costs and attorneys’ fees are also recoverable. In special situations, an Attorney General may petition the court to freeze the defendant’s assets and appoint a trustee to manage the business until the court can hear the parties’ arguments at trial. This is usually done where there is a strong likelihood that the defendant will leave the jurisdiction, deplete the assets or destroy evidence. The civil penalties available to states under UDAP laws vary widely. Penalty provisions can allow as much as $50,000 for each violation with no limit on the number of violations.12 Other states place a cap on the penalty that can be obtained. 13 A few states go so far as to authorize enhanced civil penalties when the conduct is directed against a specific class of people, such as the elderly,”14 or when the violations are willful or systematic. The decision to file suit rather than pursue an AVC with a company may turn on several factors. For example, the Attorney General may determine a lawsuit is necessary in light of the magnitude of the allegations or number of complaints received. A decision to file suit may also be based upon the regulator's lack of confidence that an AVC will adequately address the problem. Lawsuits are sometimes filed to maximize publicity surrounding the issue, thereby educating consumers and serving as a warning to other businesses engaging in similar type conduct. IV. Multistate Consumer Protection Enforcement While a large majority of state Attorney General enforcement actions are aimed at conduct specifically affecting that particular state, in the last ten years a significant portion of consumer protection enforcement has also been conducted in the multistate context. A multistate action simply involves two or more states coordinating their resources to target a specific company, industry or practice. One benefit of multistate enforcement for consumer protection regulators is that it allows smaller states with limited staff and resources to have an impact in the consumer protection arena. Multistate actions also significantly bolster the states’ overall bargaining position. 11 Id. 12 815 ILCS 505/7. 13 Tex. Bus. & Com. Code Ann. 17.47(c). 14 Arkansas, California, and Florida. C:MY DOCUMENTSART.DOC
  6. 6. As one might expect, the size of multistate groups varies. Most multistate working groups have about ten to twenty states involved. However, some recent investigations have been conducted by over 40 states acting together. The unwritten goal in multistate actions is to give the target or industry a clear and overwhelming indication that the states are serious about the issues involved, and are committed to addressing them. As a consequence, the more states involved the greater the likelihood that the matter will be resolved on terms favorable to the states. V. The National Association of Attorneys General While there is a high level of ad hoc cooperation between the States on specific issues, there is also a more formal conduit for cooperation. The National Association of Attorneys General (or “NAAG”) serves as that conduit and performs a number of different important functions. First and foremost, NAAG serves as a facilitator for cooperation between the states. There are roughly twenty standing committees and task forces that have been formed to advance various NAAG goals and policies. These committees include the Consumer Protection Committee, which has within it, subcommittees and working groups on issues such as sweepstakes, privacy and Internet marketing. The various committees and working groups hold regularly scheduled conference calls to discuss cases and current trends. Two of the more notable NAAG committees are the Consumer Protection and Internet Committees. Both are very active in their respective fields. For example, members of both committees participated in rulemaking sessions before the Federal Trade Commission regarding the Children’s Online Protection Act. A large number of states participate in NAAG consumer protection committees and most all of the states actively use NAAGNet, which is a secure bulletin board system on the Internet. States use NAAGNet to share information and coordinate their activities. NAAG also publishes the monthly consumer protection report that is a summary of the latest enforcement actions around the country. In addition to its role as facilitator, NAAG provides education and training. Twice a year, NAAG hosts conferences to discuss emerging consumer protection issues and trends. These conferences are usually extremely well attended because they allow states to network and exchange useful information. In particular, during each conference there is a four to five hour closed-door session called a roundtable. Only Attorney General representatives are allowed to attend. During the roundtable a representative from each state will discuss their latest cases and investigations. In many instances a roundtable participant will ask for information about a particular individual or company. It is not uncommon for other participants to know something about the company or person in question. During the roundtable the participants also receive a briefing book that contains written summaries of even more investigations and cases. These briefing books are important because they often serve as the basis for cases brought by other C:MY DOCUMENTSART.DOC
  7. 7. states. Roundtables and other NAAG mechanisms for communications between the states are often the starting point for multistate cases. In certain situations, NAAG also coordinates lobbying efforts before Congress or federal agencies. NAAG staff members then speak with key congressmen, senators, and staff about the legislation. Several bills currently before Congress are directly based on that working group’s efforts. VI. State, Multistate and FTC Initiatives A. Internet Over the years, the states have pursued efforts to impact the manner in which Internet services are advertised. In an early example, 44 states joined together to resolve issues with the way in which America Online promoted a free trial offer for its services. This settlement came after the FTC had settled with AOL, CompuServe, and Prodigy on similar issues. In litigation involving Internet marketers, some states have been successful in obtaining jurisdiction over web site providers for the purpose of enforcing consumer protection laws. For example, the New York Attorney General succeeded in persuading a court to assume personal jurisdiction in a case where the defendant had conducted business within the state by subscribing to a local Internet service provider and selling products through that provider.15 Gambling, particularly on the Internet, is another focus of state enforcement. The State of Missouri has prosecuted several Internet promoters under its gambling statute. The State of Minnesota was found to have jurisdiction to enforce its false advertising and consumer fraud laws against a Las Vegas company offering gambling services over the Internet.16 Recently, the Attorney General of New Jersey filed suit against three offshore Internet gambling sites. The suits seek to enjoin the defendants, Alohacasino.com, Royalclubcasino.com and 7sultans.com, from operating sites that enable New Jersey residents, including minors, to engage in illegal gambling activity. Other state Attorneys General whose efforts in this area have been somewhat impeded by barriers to foreign enforcement are closely monitoring these cases. Of course, consumer privacy is also a major area of concern in the Internet context. Forty-four states and the FTC objected to ToySmart.com’s plan to sell its customer list as an asset in bankruptcy contrary to the provisions of its own privacy policy. In the wake of the Toysmart action, many other states have warned bankrupt Internet companies not to violate their online privacy policies in settling their bankruptcy proceedings and conducting asset sales. Federal and state legislators have considered bills designed to protect consumers from the sale of their personal information by failing or bankrupt web site operators. 15 People by Vacco v. Lipsitz, 174 Misc. 2d 571, 663 N.Y.S.2d 468 (1997). 16 State of Humphrey v. Granite Gate Resorts, Inc., 568 N.W.2d 715 (Minn. App. 1997) aff’d, State by Humphrey v. Granite Grate Resorts, Inc., 576 N.W.2d 747 (Minn. 1998). C:MY DOCUMENTSART.DOC
  8. 8. Finally, a multistate working group has been established to concentrate on Internet marketing. In addition to gambling, this group is currently focusing on traditional deceptive marketing practices conducted on the Internet as well as consumer privacy and identity theft issues. B. Advertising States and the FTC have become increasingly active in the area of online advertising and marketing. In May 2000, the FTC produced a staff working paper that examines how its own consumer protection rules and guidelines apply to advertising and sales on the Internet. The paper, entitled DotCom Disclosures: Information about Online Advertising, serves as a useful tool in understanding how the FTC Act will apply to this medium. As mentioned above, offers for Internet and related services have been prime targets of enforcement. The FTC has taken aggressive action in the enforcement of its rules and guidelines relating to the use of the word “free” and rebate offers. For example, it has required several companies to make extensive disclosures in advertisements that promote free Internet access in conjunction with computers or other electronic equipment. Many states, including New York and Florida, have taken enforcement action against ISPs, tech companies and retailers. These actions have resulted in settlements requiring the companies to clearly disclose all costs associated with Internet access and to honor rebate offers in a timely fashion. As the result of an agreement with the New York Attorney General, 25 ISPs will provide information to their customers on avoiding costly long-distance charges for Internet access. In addition, the states have taken on Internet advertising of dietary supplements, business opportunities, pharmaceutical sales, credit offers and general consumer products. Several companies have signed AVCs that dictate the manner in which such products are advertised. All advertisers should be cognizant of the enforcement precedents set by these AVCs when developing online advertising or offline advertising for Internet services. C. Sweepstakes Promotions Sweepstakes offers have always been the subject of intense regulatory scrutiny at the state level. Recently, the states have focused on sweepstakes offers that are directed at individuals through mailing pieces or telemarketing efforts. In June 2001, a long-term effort to reform the nation’s direct mail sweepstakes industry was concluded with a settlement between 25 states and Publishers Clearing House (PCH). The settlement requires PCH to change the way it uses sweepstakes promotions as a sales tool. PCH also agreed to pay substantial restitution to consumers as well as a penalty and costs to the states. The AVC mandates that PCH’s mailings must meet specific disclosure standards. Moreover, PCH is prohibited from implying, by any means, anything that it is prohibited from stating directly. Further, PCH can no longer require entrants who chose not to make a purchase to use a separate entry form. PCH had previously entered into an AVC with 18 other states. The PCH settlements as well as those with other direct mail sweepstakes giants, significantly impact the manner in which sweepstakes should be promoted. The AVCs contain C:MY DOCUMENTSART.DOC
  9. 9. affirmative provisions regarding the manner in which the alternative method of entry, odds and other material facts should be disclosed. While these cases involved direct mail offers, it is likely that they will become the standard by which states measure sweepstakes offers in other media. D. Spamming and Identity Theft State initiatives to curb spamming and identity theft were highlighted at NAAG conferences throughout the year. Many states have enacted anti-spamming laws in recent legislative sessions. Typically, these laws prohibit marketers from sending unsolicited commercial e-mail to consumers without prior consent or mandated disclosures. Many state anti-spamming laws require that e-mail marketers must include the designation “ADV” in the e- mail subject line and advise recipients of a means for avoiding future mailings. Remedies for violations vary from state-to-state. Some laws provide a private cause of action for treble damages and attorneys fees. In addition, these laws may provide a cause of action for the ISP who is forced to carry bulk e-mail messages. Finally, most states authorize the state Attorney General to seek injunctive relief, penalties and costs. State anti-spamming laws have been challenged on various grounds, including assertions that they violate the Commerce Clause of the U.S. Constitution. In such a challenge, a Washington court dismissed a case that the Attorney General brought against an email advertiser. However, the Washington Supreme Court recently overturned the lower court’s decision on appeal.17 The Washington high court found that the law merely imposes a requisite of truthfulness on email advertisers and does not burden commerce. In addition to safeguarding consumers against unsolicited email advertising, state Attorneys General and the FTC are very actively involved in educating consumers about identity theft. In addition to public education efforts, several states have drafted legislation aimed at preventing identity theft and prosecuting violators. E. Telemarketing Among the best examples of cooperation in the multistate context are the coordinated state initiatives in the area of telemarketing fraud. Beginning earlier this decade the states adopted a four-pronged approach of litigation, collaboration, education, and legislation to address problematic phone solicitations. Collaborating to address telemarketing problems, they organized and held meetings with industries the states felt were necessary components of telemarketing fraud. For example, several members of the NAAG telemarketing task force met with representatives of the overnight courier industry to convey their concerns and enlist the industry’s assistance in addressing the problem. Consumer education has always been a top priority of the states. However, telemarketing fraud has been the focus of especially large education efforts in the past ten years. NAAG has 17 State v. Heckel, 143 Wn.2d 824; 24 P.3d 404; 2001 Wash. LEXIS 388 (2001). C:MY DOCUMENTSART.DOC
  10. 10. prepared and published several brochures discussing the issue. Furthermore, several public service announcements were developed and produced through the leadership of the Idaho and Texas Attorneys General. In addition to concerns regarding deceptive telemarketing practices, many states have taken action to prevent consumer’s private information from being sold to telemarketers. In December of 2000, the Minnesota Attorney General was joined by a large number of states in a comprehensive effort to prevent banks and credit card companies from selling their customers’ personal information to telemarketers. These efforts have resulted in several settlements that curtail the manner in which financial institutions may share customer information with unaffiliated third parties. VII. Tips for Preventing State Consumer Protection Problems F. Know and Comply With the Laws in All States Obviously, there is no better protection against regulatory scrutiny than strict adherence to the law. This is not always an easy task given the patchwork quilt of state laws and the technical nature of some of those laws. Nonetheless, a careful review of the applicable laws should always be conducted when entering a state with a promotion or consumer-targeted campaign. G. Establish a Dialogue with State Attorneys General Despite best efforts at compliance, it is not uncommon for state Attorneys General to interpret statutes somewhat differently than members of the business community. Businesses that operate in a heavily regulated environment may want to consider meeting with representatives of the Attorney General in the state where they are based and where they conduct a significant amount of business. Such meetings are not a guarantee that problems will not arise but they are helpful to establish rapport and personal contacts. H. Establish A Meticulous Customer Relations Program All businesses that sell or promote consumer products, services or entertainment must have well staffed and trained customer relations departments. State attorneys general, the FTC, BBBs and other consumer groups form strong opinions about companies based on the way that they treat customers who complain. Companies with a high volume of consumer inquiries or complaints should develop carefully crafted customer communications and defined protocols with time frames for responding to customer requests. These protocols should include specific procedures for reviewing, handling, and tracking complaints from regulators. It is very important that complaints from Attorneys General and other agencies be resolved as quickly and completely as possible. It is not necessary to admit wrongdoing or accept blame, but is essential that businesses establish their commitment to customer goodwill and satisfaction. C:MY DOCUMENTSART.DOC
  11. 11. I. Monitor Consumer Complaints By monitoring complaints, companies may be able to identify potential consumer problems and correct them before it is too late. Early detection of customer dissatisfaction or misunderstanding could have prevented years of litigation and costly regulatory fines for many companies. VII. Conclusion In conclusion, state consumer protection statutes are designed to prohibit deceptive and unfair conduct. State attorneys general have many tools available to remedy perceived violations of the law. It is very important to respond to consumer complaints quickly and completely. However, it is important that companies understand the goals and policies of the Attorney General in order to avoid being caught in the cross hairs of a consumer protection enforcement action. C:MY DOCUMENTSART.DOC