Chris Allen:

Welcome to the second season of State AG Pulse. In this season we will be releasing a new podcast episode every two weeks. In addition to providing a deep dive into those headlines that showcase the enormous power and broad authority of state attorneys general, we’ll be talking with new AGs about their transition into office and their priorities. As we did in the last season, we’ll leverage our decades of experience to provide insight and perspective to help business leaders better understand and successfully work with state AGs. Listen for new voices as co-chairs Bernie Nash and Lori Kalani share the host mic with other members of Cozen O’Connor’s State AG Group. So now let’s jump right into this week’s episode.

Hello everyone and welcome to this, our second episode of our second season of State AG Pulse and our first episode in what we’re calling our Behind the Headline series. So if you joined us two weeks ago, we had a conversation, a riveting conversation, with Virginia Attorney General Jason Miyares, and we’re going to be alternating those with these kinds of segments where we’re going to try and pull the curtain back on what we think are some of the most interesting news stories and trends in the state AG world.

I’m Chris Allen. I am a member in the State Attorney General practice sitting in Washington, DC, and I am joined by two of my colleagues today. And I can tell you guys, even though they’re my partners, I will say you could not have two more experienced people joining us today and providing their perspective on what we have provocatively entitled, “Money, money, money. Where does it go and why? (How much is too much?)” First, Meghan, would you like to introduce yourself?

Meghan Stoppel:

Hi, Chris. Yes, welcome everyone to this episode. Happy to be joining you today, Chris and Milton. I think I’ve got a unique perspective probably on this topic as a former consumer protection chief in Nebraska and staff attorney in the consumer division in the Kansas AG’s office. So happy to be joining this particular conversation to give you that behind the curtain perspective on the AG consumer world.

Chris Allen:

And Milton?

Milton Marquis:

Milton Marquis, also a member of the State Attorneys General Group based in Washington, and I’ve been with this practice group for 15 plus years, and so I look forward to the discussion.

Chris Allen:

What we’re going to do today is cover the basics of AG settlement demands. Where do they get the statutory authority to make these settlement demands? What kind of toolbox do they have in determining what makes up the size and composition of a settlement? What are the hallmarks of an AG monetary settlement? And are there any kind of trends we can discern? We’ll also cover at the end some takeaways for business, because of course the entire purpose of this series is to try and provide insight to decision makers and advocates out there to help you all understand and deal more effectively with state attorneys general.

So first, I think let’s start at the very beginning. Why are we even talking about this? Why are AGs even able to seek monetary penalties in cases? Why do they do it? First of all, I’ll turn it over to Meghan to start. You came from a consumer, two consumer protection offices, Kansas, and then you ran the Nebraska Consumer Protection Division for many years. Can you explain what brings us to this topic? Where are AGs coming from? What’s the background of their ability to act in this area at all?

Meghan Stoppel:

Yeah, thanks Chris. No, I actually love this particular topic for this episode, especially because we’re framing these episodes as behind the headlines. We’re behind the curtains, and oftentimes what we see is what makes the headlines are these big, splashy cases where the state AGs are settling for millions or tens of millions of dollars. And I think Joe Public is often wondering what was it about that case that led to that multimillion dollar settlement or why was it that the AG thought they were either entitled to or needed to demand that amount of money? And then more importantly, where is it going?

But to get to your question, Chris, on what’s the authority here? Or why do the AGs feel compelled in most of these cases to seek fairly significant monetary remedies or even penalties in some cases? You really have to take a step back and pull yourself out of the law, the statutes, even the consumer protection statutes, and you have to look at what the office is, who the attorney general actually is, and you have to consider the fact that the attorney general is a law enforcement officer first and foremost. They’re also a public facing office. They’re government officials. They’re elected. Well, most of them are elected. Not all of them. And because of that, they need to be responsive to their constituents. And so we often see them advocating on behalf of a number of issues, consumer protection and otherwise, that they believe are of importance to their constituents or various constituencies in their states.

Chris Allen:

So one could be forgiven for thinking this is all politically driven. You want a headline because you’re running for office or you want to be the next governor or senator or president, whatever.

Meghan Stoppel:

Absolutely. And I think there’s some truth to that, that they’re looking for these multimillion dollar settlements to grab a headline to advance their political careers. There is a little bit of that in this, but I don’t think that’s where the majority of these headlines are actually coming from because there’s years and years oftentimes of work and investigation that goes into these cases before you ever get to that headline. And it all starts with the staff level attorney, sometimes the investigators in these offices, who see their job and the attorney general’s job as one which is primarily to enforce the law as it’s written, to enforce those consumer protection statutes or those antitrust statutes, to punish the bad actors, or to educate their constituents so that they can protect themselves against bad actors. But then it’s this vicious cycle because then they use the money from these settlements to fund those sorts of functions in their office. That’s what allows them to, in many cases, continue operating.

Maybe I’ll turn it over to Milton and I’ll let him talk about the statutory bases for a lot of these investigations and where the penalty authority comes from because it does vary a little bit from one state to another, but we’ve also seen some really interesting adjustments I’ll say in some of these statutes over the last few years.

Milton Marquis:

Sure. I’d be happy just to jump in for a few moments. So we’re primarily focusing on consumer statutes, but I’ll note that state antitrust statutes, unlike the federal statutes, also have civil penalty provisions. And unlike the Federal Trade Commission Act, where for the most part… now, some of the newer federal statutes do have what I would call first act, first offense civil penalty provisions… but for the most part, the FTC has injunctive relief. Prior to the AMG Supreme Court decision, they could go to federal court and get restitution. That’s now off the table, but for the most part, under federal law, civil penalties come into play when an actor violates an FTC order, either a rule or a consent order. That’s not the case under…

Chris Allen:

[That’s the danger of] inviting an anti-trust lawyer to join a podcast because he’s going to take a consumer protection podcast and find a way to work antitrust into it.

Milton Marquis:

Well, antitrust…

Meghan Stoppel:

I don’t think you said this had to be about consumer, Chris.

Milton Marquis:

…protects consumers as well. Every state has a consumer protection statute and all of those statutes… maybe with some exceptions, but I think all of the statutes have a civil penalty component to it. That is, if an actor violates a consumer protection statute, commits fraud or misleading advertising, et cetera, there is a provision that allows the attorney general in that state to seek penalties. And those penalties are per violation. They could be $1,000, $10,000, $5,000. They vary.

And when these statutes or most of these statutes were passed, I would say the overwhelming majority of cases were one-off cases. So if I get ripped off, I buy something and I’m defrauded, then the attorney general would have the authority to go to court on my behalf, not as a class, but just on my behalf as a member of the public that was a victim of this fraud and ask the court to award penalties for that violation.

But of course, in our current economy, many of these cases involve thousands, hundreds, sometimes millions of transactions and consumers and in most of the statutes, there is a willfulness component so that the defraud or the deceptive conduct has to, to some extent, be willful. And on top of that, every state has the authority to seek restitution on behalf, that is that you’re clawing back the ill-gotten gain from the actor. And some of these statutes also allow for disgorgement where you’re disgorging the profit from the bad actor. You can get to big numbers very, very quickly. So oftentimes a company can be in a situation where the civil penalty that’s being demanded far exceeds the harm or alleged harm to consumers.

Chris Allen:

I’m glad you said that last piece, Milton, because I think, you know, if you’re on the receiving end of a settlement demand where you know as a company perhaps I had a million consumers but you can’t prove Mr. or Ms. Attorney General, that a million consumers were harmed. Or if they were harmed, it was pennies on the dollar or fractions of pennies on the dollar. And yet you see these settlements in the multimillions of dollars. And so, Meghan, you’ve brought these actions. You’ve helped coordinate multi states. What goes into that thinking? What are you trying to accomplish when you formulate these penalty numbers and in terms of the factors that go in there? Are you trying to send a message? What’s the thinking from the side of enforcement?

Meghan Stoppel:

Yeah. No, that’s a great question, Chris. And I think we probably should have taken a step back before we even delved into the civil penalty discussion and set the landscape for the listener about what are the buckets that the money can go into? Because there are several different buckets or labels that we can apply to these payments in these settlements or even that the court could apply if, God forbid, these cases got litigated. So the court or a settlement agreement could label something as a restitution payment or a disgorgement payment. Restitution, typically that’s going to go back into the pockets of consumers. The payments can also be labeled as investigative costs or cost to cover any expenses that the AG incurred in investigating the case, litigating the case. Sometimes these statutes make specific reference to attorneys’ fees. Then there’s the civil penalties that Milton mentioned and I think that you’re alluding to, Chris, that have the potential to send that deterrent message.

But I think when you’re talking about, what does the enforcer think about when calculating these demands? They look at, one, what was the harm to the consumer? In those cases where there’s very clear costs that the consumer have incurred as a result of the violation, I do think most AGs are going to say the priority is going to be putting money back in the consumer’s pocket. So they’re going to try to label any payment as restitution if it’s a case where that’s necessary.

I think the second most important category for most enforcers is going to be recouping those costs to their office, because as I mentioned a minute ago, that money is usually put in some sort of fund or account – and again, this goes back to budgeting and relationships with state legislatures – that the AG then can use to fund their office, to keep those complaint mediation units functioning, to bring other investigations and enforcement actions. So that’s going to be the second priority. It’s being responsive to the constituents, making them whole if necessary, keeping their office running.

And then I actually think that that third category, that civil penalties category, is probably the lowest of the three in terms of priority. While it does have the ability to send a message from a deterrence perspective, oftentimes that’s not what these cases are about. And for a variety of reasons, that’s where – and Chris, you can speak to this probably, and Milton as well – our clients don’t want something labeled as a civil penalty either for a variety of reasons. So there’s often a lot of negotiation about that and that is actually something that enforcers are willing to give up. And the reason for that, unsurprisingly, is that that’s money that just goes into a state general fund. It’s irrelevant from the AG’s perspective what that amount is.

Chris Allen:

Yeah. Milton, that’s an interesting point that Meghan raised last, because you think of penalties, you think of, in the criminal and I guess also in the civil context as you’re talking about deterrence, you’re talking about somebody did something wrong and you don’t want them to do it again because you already have the restitution to take care of the injury to the consumer, but that’s not the only detrimental effect or component of a settlement. You also have these often detailed injunctive provisions that companies and defendants are required to agree to, in order to resolve a matter. What’s the relationship between civil penalties, monetary components, and the injunctive provisions that AGs are often seeking as part of their resolution?

Milton Marquis:

Well, certainly, depending on the matter, the injunctive provisions can cost a company more than the monetary payment. And so from a company standpoint, they tend to look at this as a whole. How much is it going to cost out-of-pocket for the company? What’s the reputational hit for the company? And unpacking a reputational hit. Oftentimes companies are loathe to agree to restitution. One, it’s often very difficult to find the consumers that were supposedly harmed. And from a reputational standpoint, It’s not a good way to interact with your customers when it is part of a settlement. So certainly companies look at it as a whole. I will say that the AGs have been very flexible in terms of how these payments are characterized.

Chris Allen:

That was going to be my next question for both of y’all. You’ve both been on that side of the table. Sitting there from the state’s perspective, how receptive are you when a company says, “Okay, you’re asking me for…” I’m throwing numbers out here. “50 million dollars in penalties, but it’s going to cost me a hundred million dollars to completely change my business.” Does that resonate? Is that something that AAGs and AGs are receptive to? How do you express that most effectively?

Meghan Stoppel:

I think from the enforcer’s perspective, Chris, it is effective, but it all is in the framing. If you say to the enforcer, “We’re willing to do it, and by doing so we think we’re bringing along the industry or we have the potential to bring along the industry for reasons X, Y, and Z,” or it’s something that the law otherwise doesn’t require… If that’s something the business needs to be doing internally to remain in compliance with the law, you’re not going to get a lot of sympathy from the enforcer when you come to them and say, “It’s expensive.”

Now, if you say, “It’s not necessarily required for us to do X, Y, and Z to remain in compliance, but we think it either makes for a better customer experience, again, it moves the industry forward, or something else,” that’s going to resonate, and I think you are going to get “value” out of that, and you can start doing that horse trading with the injunctive provisions vis-à-vis the number that’s on the table.

Milton Marquis:

No, I agree completely with that. And it’s all about building credibility. And regulators or enforcers are not sympathetic to high level, “Oh, it’s going to cost a lot of money.” Okay. So sometimes you have to bring in business people to explain why the remedy that’s being proposed is hard to accomplish, that there are less invasive ways to accomplish the same objective. But there has to be that sort of dialogue and it’s important for companies not to lose patience with enforcers and just react: “Well, they just don’t understand our business.” There has to be a dialogue and there has to be credible dialogue with the enforcers. And so in our experience, AGs are willing to listen. It’s a trust but verify type of approach. Sometimes you have to put your business people on a Zoom call to explain your business and why what may appear on the surface to be an easy fix is not so easy. But you have to provide alternatives. It just can’t be, “No, no, no, no. We can’t do this. It’s too hard.”

And sometimes, the cost of compliance can be part of a discussion on the overall number. If you say, “Well, it’s going to cost us X and it is important for you, AGs, that we change certain marketing or change certain other aspects of our business, we’re willing to do that, but we’d like some consideration.” Because oftentimes a company can make the point that we all have litigation risk and the chances of a judge ordering this kind of far-reaching change in business practices are probably low, but we’re willing to go there because we want to put this matter behind us, but we would ask for some consideration on the civil penalty amount. And of course, most companies don’t like the money being characterized as civil penalties for the reasons that we’ve discussed previously, but it’s all part of a package to get the yes.

Chris Allen:

I noticed both of you… And I do this too. We use these words enforcer and regulator almost interchangeably when we talk about AGs. And I don’t think that’s an accident because state AGs in particular in their consumer protection capacities have such flexibility. They have such concerns. They have so much ability to be creative because what they’re trying to accomplish is not just the enforcement of the statute and compliance, like you pointed out, Meghan, but also there is a regulatory aspect to this, to transforming industries, to setting a baseline standard that may not be in a regulation or a statute, but takes into account something that’s changed in that industry, something that’s been disrupted or a practice that they want to put an end to. And that has a real regulatory effect beyond just the law enforcement, “You did something bad, and I’m going to rap you for it.” And what that does, I think, is it provides a lot of opportunity for people who see AGs more broadly than just enforcers and see them as people with serious political and policy concerns and are able to wrap that into the negotiations, bring that in there, and really understand where, at least from the company’s perspective, the other side is coming from and what they’re trying to accomplish through all of their requests.

Meghan Stoppel:

Yeah, and that’s exactly what we saw happen with the opioid matters, discussions that started years ago as somewhat narrow and then very rapidly expanded to include all sorts of other parties, distributors, retail pharmacies, local municipalities came to the table. And I think you saw that conversation very quickly evolve from, “This is an opportunity to enforce the law,” to, “This is an opportunity to effect change.” The AGs were essentially saying there was a social ill here that needs to be addressed and we’re going to use our law enforcement authority to address it.

Chris Allen:

I will point out, if you do read the headlines, inflation is not just for eggs anymore. You see, I think, a discernible trend in settlement amounts creeping up over time. And then you also see in some states the AGs leading the effort to have their consumer protection statutes amended to increase the amount of penalties they can seek. I know that’s happened in Colorado. I know that happened in Washington state. You see the increase in these penalties per case and also in what the statute allows. That’s being driven, I think in many cases, by AG offices. Why is that the case?

Milton Marquis:

Well, I think that the type of matters have shifted to large scale issues that are national in scope. So Meghan mentioned opioids. Before opioids there was tobacco and certainly many other type of issues in between. And what certainly tobacco and opioids have in common… that there was a perceived failure of other agencies and entities to address a problem. I think it’s just the type of issues that AGs collectively and individually have taken on involve a lot of commerce, involve a lot of alleged harm to the public and the consumers, whether it’s opioid where you’re talking about the health and societal impact of the opioid epidemic. And so that’s what’s driving the increase in the numbers. And state legislators increasing the penalties give AGs an additional tool in their toolboxes to address these issues. Because as I said, these penalties can add up when you’re talking about per violation. And I think the takeaway from our discussion today is engage early, engage often, and try to come up with a resolution that oftentimes can be creative, but that really goes to the heart of the concerns.

And I fall into this trap of using regulator and enforcer interchangeably, but it’s really not. It shouldn’t be. I never thought of myself when I was in the government, whether it’s in the state or as a fed, as a regulator. The FDA is a regulator. The FDA is a regulator because they regulate every aspect of a business. I think AGs correctly see themselves as enforcers of statutes. And some of these resolutions can take undertones of regulation, but I think they see themselves as enforcing a statute. The injunctive relief has to address what AGs perceive as the harm and the offense so that you can have a fix that actually fixes the problem. It’s our job as counsel to companies to understand where the AGs concerns are, minimize the impact of the fix on our client’s business. I think states are not so burdened with a lot of bureaucracy, that they do have more flexibility than the federal government. They have more runway to come up with solutions and these types of problems that the AGs are trying to address sometimes require solutions that are unprecedented.

Meghan Stoppel:

I think one of the other things that it would be a mistake to not mention during this podcast… to be honing in on the other terms, the injunctive terms, and not be giving short shrift to the significance of those terms. Because again, that precedential value in those terms, not just the monetary amount, but the injunction… There is tremendous value in just the educational nature of these settlements for industry. That applies in the privacy and data breach context. That applies in the financial industry context. It applies in the healthcare space. I can’t think of a single industry where that’s not true.

And so it’s also one of the things we talk about with our clients a lot, is just keeping our eye on the ball and making sure we always have our ear to the ground, so to speak, about what’s important to the AGs and what they’re working on, because that informs, one, whether our clients are going to get questions, but it informs the direction they take some of these settlements in terms of, do they put more emphasis on restitution? Do they put more emphasis on the injunctive language? It just depends on what they’re trying to accomplish. Are they really just going after a bad actor or are they trying to send a message to the industry? And understanding the difference there, is really, really critical.

Chris Allen:

Yeah. It’s interesting because so few of these giant cases go to trial, go to judgment, give you an opinion where the judge lays out the law. There are some, but not all of them. And so when you’re talking about AG enforcement actions, you almost have this sub body of law, which are the consent orders and the AVCs that are out there impacting the industry or a particular kind of practice. And really, that’s why, Milton, you correctly called me out for: these are not regulators, but there is that aspect. A business’s conduct has to take into account what AGs have done against others in that business or in that industry who are trying to do what that business is trying to do, because in many cases, that may be the only guidance you have in terms of what the enforcer on the other side of the table considers lawful or not lawful.

Meghan Stoppel:

Exactly. And these statutes are incredibly broad and they’re vague. And that’s one of the comments we get from… I got it when I was sitting on that side of the table as an enforcer, like, “This statute’s vague. We can’t believe you’re trying to enforce it or interpret it this way against my client.” They understand that. They appreciate that. They appreciate the position it puts us in as defense counsel, but it is what it is. Some of them on the thornier issues will issue things like guidance documents. They’ll do public education on their websites or they’ll do events, but oftentimes you don’t see that from AG offices specifically. So yeah, to your point, Chris, the only thing you have to look at are those settlement documents and then the statutes themselves, which, in a lot of cases, are not going to be very helpful.

But the other thing that I think we have to keep in mind in this conversation is that especially when you’re talking about certain industries, like the telemarketing industry, financial service industries, the AGs are increasingly looking at third parties for liability and recovery purposes. So even when you’re not operating an organization or you’re not responsible for an organization that you think would be directly in the cross hairs because, say, you’re a service provider or you’re a distributor to a pharmaceutical company… You may not think you’re going to be in the cross hairs, but what we’re seeing… And this is a trend that we’re seeing across industries, the AGs don’t necessarily care if you have that direct-to-consumer contact. If you have knowing participation in an activity that leads to that consumer harm that we were talking about earlier, you may be caught in those cross hairs. You may be getting those uncomfortable questions about, “What did you know? When did you know it? What did you do?” And if you don’t have good answers for those questions, you’re going to be in an uncomfortable spot. So it’s just one more reason to keep your eye on those settlements, because when you see one that’s relevant to your industry, you really need to pay attention.

Chris Allen:

So in these days where almost everything seems to have a partisan view, I can’t help but conclude our discussion by bringing politics directly into it. I think right now the AGs are pretty evenly split between Democrats and Republicans. Does that impact how offices approach this issue? Republicans, I think, traditionally had a reputation for being business friendly, Democrats less so. I don’t know if that’s fair or not. That’s not for this podcast to decide, but is there a political aspect to this? Can you tell whether somebody is an R or a D? Is that going to impact their approach to what they ask for in settlement negotiations?

Milton Marquis:

Well, in my experience, no. I’ve worked for Republican and Democratic attorneys general and I can honestly say that I could tell no difference. I certainly didn’t do my job differently. While the AGs may differ on certain issues, particularly social issues, there doesn’t seem to be a huge gulf between the positions that Republican and Democratic AGs take on some of these hot button, important consumer protection and antitrust issues. And certainly I’d throw into pot Medicaid fraud for our clients in the healthcare area. Because the staffs work so well together and the staffs are apolitical, the advice and information that the AGs get are not tainted by politics or ideology. It’s the law. It’s the facts that are applied to the law. And at least from my perspective, sitting on the side of companies, if an AG sees there’s a problem, it’s usually not tainted by whether the AG is an R or a D.

Meghan Stoppel:

Yeah, and I would completely agree with Milton on that. I mean, I worked for a Dem AG. I worked for a couple Republicans. The nature, the size of the settlements… very little difference. So sometimes you will get from the top down direction about what the administration wants your priorities to be.

But I will say to Milton’s point, most of the work from a consumer protection and antitrust perspective and Medicaid fraud perspective… Even when you get into those things like environmental law, 90% of the time, if not more, it comes from the bottom up. And the reason for that is because there’s complaints that have been filed by constituents or there’s working groups that states are sharing information amongst or they’re talking to their colleagues in the federal government. And those staffers, the attorneys that are doing that work, the investigators that are doing that work, have probably been there through several administrations. They’ve been doing the same thing day in and day out and they are apolitical, as Milton mentioned. So I’ve not seen it. I’m sure there are people out there that would disagree with us, but I really don’t think at the end of the day, especially when you’re talking about consumer protection matters, it makes a whole heck of a lot of difference.

Chris Allen:

And just to throw my two cents in, I think if you look at complaints that AG offices have filed in multistates against big tech, some of the opioid actions, when you see California and Texas or New York and Florida or Georgia on the same complaint, I think that reinforces both of y’all’s points pretty effectively. AG enforcement actions: the last political common ground between the parties. Maybe we’ll do a podcast on that also.

Well, I got my eye on the clock. Is there anything else that we should make sure we touch upon? I think we’ve covered a lot of ground on this podcast. I think it’s been a really interesting discussion.

Meghan Stoppel:

No. I think we’ve hit a lot.

Milton Marquis:

No. Appreciate the opportunity. Thank you.

Chris Allen:

Well, no, thank y’all so much for giving up your time. Thank you everybody for listening today. We hope you got something out of this and that you’ll join us for our next episode, in two weeks on Tuesday, February 21st, we hope you will join us for that. In the meantime, Meghan, Milton, and all our listeners, I hope y’all have a fantastic week. Bye.

You have been listening to State AG Pulse, brought to you by Cozen O’Connor’s State AG Group. Research for this podcast was provided by our associates, Ryan Bottegal, Hannah Cornett, Gianna Puccinelli, Keturah Taylor and Emily Yu, as well as our policy analyst, Elisabeth Hill Hodish. If you enjoyed this week’s episode, please leave us a five-star rating and review. That will help our visibility and will allow other listeners to learn about the podcast. And of course, please tune in again in two weeks for our next episode.