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Uncharted territory

As state attorneys general expand into new areas, in-house counsel must prepare

On March 19, 2014, Illinois Attorney General Lisa Madigan filed suit against All Credit Lenders, a Chicago-area short-term lender, claiming that the lender evaded Illinois’ 36 percent interest-rate cap. It's not unusual to see state attorneys general go after a rogue lender of this manner, but Madigan's suit was different than previous AG forays—it invoked the federal Consumer Financial Protection Act, using Dodd-Frank to file a civil suit for unfair, deceptive or abusive acts or practices. At the time, it was the first state suit separate from the Consumer Financial Protection Bureau.

As this case shows, many state attorneys general are beginning to expand their views into completely new territories. Some of these areas reflect inquiries made by federal agencies, while others represent a direct response to local concerns.

No breach in the law

One area where state attorneys general are beginning to see more action is with state data breach statutes. Breaches suffered by Target and Neiman Marcus show that citizen concern for sub-par data security standards are at an all-time high and AGs are responding to consumer requests to keep private information safe.

The state of Vermont has enacted strict reporting requirements for potential breaches. Companies must notify Vermont AG Bill Sorrell's office within 14 days and potentially affected consumers within 45 days. Sorrell says that this quick reporting time proves to companies that privacy cannot be taken lightly.

“What the Vermont law is trying to do is say that in today's day and age, our identity and our access to credit is one of our most valuable assets for average people,” Sorrell says. “We want to protect those, and if you’re going to gather this information, and you’re not going to be as diligent as you should to protect that information, then that's going to be a problem.”

Not every state has passed a data breach notification law, and navigating the waters of different statutes can be time-consuming for in-house counsel. Sorrell says he would support a national law, but with two caveats: protection remains for Vermont consumers, and state AGs still have a hand in enforcement.

“Companies with less than 100 employees, the Feds just aren't going to bother with that,” Sorrell says. “They’re going to look at the bigger instances affecting millions of peoples’ records. We certainly want to make sure that states are in a position to enforce that federal standard.”

Bernie Nash, a partner with Dickstein Shapiro, says that no matter what happens with a national cybersecurity standard, in-house counsel should still expect to have state AGs involved in some form.

“The first step will be, what are the standards?” Nash says. “After that it will be, what role do the AGs have in enforcing the standards? The price for abdicating sovereignty and the price for achieving a national federal standard will be a say in enforcement.”

Patents, not labels

Patent litigation is another key area where state AG awareness has already started to rise, and it will likely continue to do so in the next several years.

“In no small part because of my having raised the issue of patent trolling in various meetings of attorneys general, a number of AGs have gotten involved in this area,” Sorrell says. “I think a dozen or more states have passed their own Vermont-style statutes against bad faith assertions of patent infringement. ... It's much higher on our agenda than it was a year ago today.”

The key to the rise in state AG litigation in this area, says Nash, is that federal agencies simply cannot prosecute everything.

“AGs got involved because of the complaints from your average consumers,” Nash says. “The Wal-Marts, when they get preyed upon by the same trolls, don't have to go to the AGs and say, ‘I don't know what this means. Help me.’ They can defend themselves. That's what got the AGs involved, because it was the ma and pa stores being targeted.”

One area of legal activity in which state AGs have not seen an increase, though, is in the food and beverage labeling arena. While many federal agencies and private attorneys have seen an increase in this type of litigation, Mark H. Lynch, a partner with Covington & Burling, says that state AGs are not yet fully immersed in this type of litigation—perhaps surprisingly.

“There is an enormous amount of litigation, but interestingly, not much activity by the state attorneys general,” Lynch says. “There's a tidal wave of cases in California brought against food, beverage and supplement manufacturers that say they misrepresented the true nature of the products. ... But the states have not shown much interest in that. so far”

Because of Vermont's proactive laws in the consumer protection space, Sorrell often finds himself defending labeling statutes rather than prosecuting companies concerning them. The state has recently enacted statutes concerning labeling of products featuring bovine growth hormone, mercury and genetically modified organisms, which have been attacked with various degrees of success by trade groups.

Working with the AG

Michael D. Ricciuti, a partner with K&L Gates who has worked with many state AG offices, says that thorough and specialized preparation should be every in-house lawyer's first task.

“Before you engage with the state AG, you better make sure you’ve reviewed the law in that state,” Ricciuti says.

By understanding a regulator's goals, Ricciuti says, in-house counsel can instantly gain credibility and respect, which goes a long way.

“In enforcement matters, moreso than civil litigation, the parties talk a lot, and they expect that representations made by counsel are reliable,” Ricciuti says. “Knowing what their interests are and having a deep understanding of the law allows you to have a conversation with the AG that demonstrates you can be trusted to provide meaningful facts that actually match up with the statutes in a way that is reliable.”

Nash says that being proactive with an investigation leads to an amicable conclusion for all parties, which will also help with future litigation.

“You’re ahead of the curve before hostility builds in, before misunderstandings embed in concrete, before animosity sets in,” Nash says. “The state has a better appreciation about why you did what you did and what you think is right, and the civility of the discourse as at a higher level.”

And another benefit for actively engaging state AGs? Lynch points out that some AG offices have begun the controversial practice of contracting outside counsel to try certain cases, which often makes reaching a mutually beneficial conclusion tougher.

“Once they farm the case out, then state personnel aren't putting as much time into the case; it's not costing them any money,” Lynch said. “It becomes the contingency case where the lawyer they give the case to is the primary stakeholder.”

Assistant Editor

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Zach Warren

Zach Warren is Assistant Editor of InsideCounsel magazine, where he oversees online content submissions and administers InsideCounsel's enewsletters. Zach specializes in new media and multimedia...

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