Category: Antitrust & Trade Regulation

App Developer Chronicles His Saga With Apple’s ‘Anti-Competitive’ App Store

In January 2018 Apple investors complained publicly about the lack of parental controls on their popular devices. At one point even CEO Tim Cook expressed concern about the addictive nature of social media. Vancouver-based app entrepreneur Justin Payeur saw this as validation for the Boomerang Parental Control app he was developing.

What is really needed, apparently, is an app to move apps through the Apple Store app approval process. Reasons for rejecting and requiring changes to the app were numerous, varied, changing, and frustrating. The whole ordeal can drag out for years. That was Payeur’s experience as he chronicled it in an open letter on the Boomerang blog, complete with the text of email exchanges with the Apple app review team and emails to Tim Cook. The most consistent bone Apple picked with the app was that private consumer data could be shared or compromised. Developers aren’t so sure about that. Apple also didn’t like an app that controlled or shut off Apple’s own apps, like Safari, based on parents’ settings.

In June 2018 Payeur was first told that the app didn’t comply with one or more of the App Review Guidelines. He was informed that more time was needed for review and that the use of Mobile Device Management (MDM) was no longer allowed. After some fixes, he was told via message that the app still installed MDM profiles for unapproved purposes. “Specifically, your app blocks or restricts access to third-party apps using MDM,” Apple said. Payeur appealed and was again rejected because, he was told, installing MDM profiles for parental controls was not appropriate for the App Store: “Apps may only use public APIs and must run on the currently shipping OS.”

Payeur continued to log his ping-pong journey with Apple that continued through 2019. During that time Apple requested more information and more time to review. Apple offered vague new reasons for rejecting versions of the app, e.g. “false information and features.” and also cited improper mention of Android because that violates Apple’s metadata guidelines.

‘The timing was suspect’

“We did not use any private APIs or any framework in unintended uses,” Payeur wrote in his January 2020 open letter. “So our internal conclusion … was simple: Apple wanted us out of the App Store …” He said the timing was suspect; Apple was about to launch iOS 12 with screen time controls.

Abandoning development of the app for child devices, Boomerang focused on the parent mode because many of its customers were parents with iPhones and kids with Androids, or the other way around. Revenues for the app tanked and users didn’t like it.

Then the press lit a fire.

In December 2018 it was a TechCrunch piece about the challenges facing third-party developers of iOS parental control apps. In April 2019 the New York Times wrote about Apple’s anti-competitive approach to these apps, to which Apple responded that several of the rejected apps posed privacy risks. Payeur found other developers experienced the same treatment from Apple.

One of those developers was OurPact, a competitor to Boomerang in the parental control app arena. In an article published on Medium.com in May 2019, OurPact also detailed its interactions with Apple, which were very similar to what Boomerang experienced. OurPact also was met with Apple’s alleged privacy concerns. OurPact was unconvinced. According to the developer, Apple stated that “its own MDM technology, used by millions, poses risks to user privacy and can be abused by hackers. This stands in contradiction to the fact that MDM technology was initially developed by Apple to ensure security of private data on remotely managed devices.”

“Apple alone issues certificates to third parties to communicate with their MDM servers, and Apple themselves are responsible for sending all MDM commands to user devices.” OurPact went on to say, “OurPact does not have access to any of this private information via MDM. It is impossible for us, hackers, or anybody else to obtain it. Apple is the only one who has access to and uses this data.”

In June 2019 Boomerang was invited to re-submit its parental control app and was told there was a new Mobile Device Management Capability form to complete. The updated app was approved with MDM, but before it was released Apple again said the app violated the rules. This time it was because the app contained Google Analytics, which could grab sensitive data, Apple maintained.

“This was false,” Payeur said. He fixed the app, pushed the update, then was told the app was in violation for using Google Firebase, which Apple again said risked disclosure of sensitive information. After more back and forth and more waiting, his appeal was rejected. When he removed any analytics, Boomerang Parental Control was approved in October 2019.

Are you sensing a pattern?

However, Apple changed its policies yet again, saying the app was not permitted to block Safari and the App Store itself. Apple was requiring “supervised mode” used by governments and large organizations, but the app timed out these applications based on parental controls, or when parents wanted the only browser on their kids’ phones to be the SPIN Safe Brower. The Boomerang app no longer has these features.

Today, Payeur says that parents are not aware that iOS includes screen time features because it’s buried in the device settings. Parents still have a mix of devices in their families, of course.

“Apple has shown that they will change their minds if there is negative press about them. These are some of the reasons why we continue to recommend Android devices for your kids first smartphone (and you can still control them from your iPhone!). … Any way you slice it, Apple continues to be anti-competitive,” Payeur wrote.

You might think it would be unwise for the owner of a small business to come out so vehemently against such a dominant player. So many developers count on their Apple relationship and the broad distribution it offers through its monopoly on apps on Apple devices to generate revenue. When it comes to Payeur, he told the MoginRubin Blog that he figures he has little to lose since he has turned his attention to Android and only updates his existing Apple apps.

“They neutered our app through all their guideline changes,” he said. “And people (parents) are unhappy that they can’t access on their iPhones the same or similar features that we offer on Android.”

“There are a lot of app developers and they are not multi-million businesses,” Payeur told us. “We provide these apps to do good. That was the biggest frustration. Apple labeled us as bad players with their user privacy angle. That rubbed me the wrong way. At no point did we create our service to [mine and sell user data]. We used Apple’s own technology, not ours, that’s used across the world. We got creative to create parental controls. They weren’t being up front.”

‘One of the most beloved companies in the world.’

The people at OurPact also addressed the David and Goliath nature of the playing field. They said they respect Apple as “one of the most beloved companies in the world,” but they “made a mistake” and “sometimes truth has to be spoken to power,” OurPact wrote. “Given that there are no privacy issues with properly vetted MDM apps like OurPact being on the App Store, we humbly request that we are reinstated and allowed to continue providing our million users with the service they love and depend on. If Apple truly believes that parents should have tools to manage their children’s device usage, and are committed to providing a competitive, innovative app ecosystem, then they will also provide open APIs for developers to utilize.”

Boomerang and OurPact are part of a group of developers who are calling for a Screen Time API, a cross-platform API that would allow developers to provide apps that monitor and control time spent on devices. “It aims to provide a generic API that can be used for a wide range of use cases, from personal health to remote parental controls to social media monitoring. It also aims to do this in a way that is respectful of the device owners privacy, by not providing more information than is necessary and using the platforms permissions system to access data.” The document they published shows how the API would look for iOS, MacOS and tvOS.

Global concerns.

Apple’s management of its store hasn’t just raised concerns in the U.S.

The European Commission recently began investigating whether Apple is fairly applying its rules. The investigations follow separate complaints by Spotify and by an e-book/audiobook distributor on the impact of the App Store rules on competition in music streaming and e-books/audiobooks. Margrethe Vestager, the EC’s competition policy chief, said, “Apple sets the rules for the distribution of apps to users of iPhones and iPads. It appears that Apple obtained a ‘gatekeeper’ role when it comes to the distribution of apps and content to users of Apple’s popular devices. We need to ensure that Apple’s rules do not distort competition in markets where Apple is competing with other app developers ….”

Even in Russia, not exactly a bastion for ethical behavior, Apple’s conduct came to the attention of the country’s Federal Antimonopoly Service when Russian antivirus software developer Kaspersky complained in March 2019. According to CNET and ZDNet, the Russian regulator last month found Apple abuses its power over iOS apps because iPhone and iPad owners must install them from Apple’s App Story. “Kaspersky alleged that it was forced to remove features like app control and Safari browser blocking from its Safe Kids iOS app to reduce its ability to compete with Apple’s own usage-monitoring Screen Time feature,” CNET reported. The irony of a Russian agency charging anyone with abusing power shouldn’t be lost on anyone.

Back in the USA, The Washington Post published an article last year titled, “How Apple uses its App Store to copy the best ideas.” In it, the paper wrote, “Developers have come to accept that, without warning, Apple can make their work obsolete by announcing a new app or feature that uses or incorporates their ideas. Some apps have simply buckled under the pressure, in some cases shutting down.”

Asked about this article, Payeur told us in an email, “The tough part is that apps are making money. Apple copies them and offers the same or similar functionality for free, built into their platform. It’s tough to compete with ‘good enough.’”

It’s especially tough when you’re developing apps on your own dime and can’t predict the changing rules of the game.

Edited by Tom Hagy for MoginRubin LLP.

© MoginRubin LLP
For more articles on Apple, visit the National Law Review Communications, Media & Internet section.

COVID-19: FTC Acts Fast, Lambasts Missing Masks

Section 5 of the Federal Trade Commission Act (15 U.S.C. Section 45(a)) provides worthwhile remedies for the types of unfair competition that intellectual property practitioners find quite familiar, and practitioners should give them due consideration.  Selling COVID-19 masks you don’t have provides a good example.

In a case filed in early July (FTC press release) the FTC took a Staten Island business to task, along with its owner, for claiming that masks, respirators and other “PPE’s” (personal protection equipment) was “in stock” and “would ship the next day” (Complaint).  The website “supergooddeals.com” continues to lead off with its signature slogan, “Pay Today, Ships Tomorrow” (https://supergooddeals.com/; also accessed by the author on July 31, 2020).

Apparently starting in March 2021, supergooddeals.com began selling PPE.  According to the FTC complaint, the website claimed that the desired masks were “IN STOCK” (complaint paragraphs 19 and 20).  The FTC complaint gives no indication as to whether or not the “in stock” claim was accurate, but instead pleads the examples of several consumers who never received masks, and numerous complaints to which supergooddeals.com never responded.

The FTC complaint also implies that to the extent that some orders may have been shipped, they were shipped on terms that were far less favorable than supergooddeals.com advertised, and when shipments never arrived (or perhaps were never sent) supergooddeals.com failed to give buyers the opportunity to change their mind, or offer a refund or any modification in price terms (e.g. Complaint paragraphs 29-31).

Supergooddeals.com also apparently attempted to conceal their failures (worse verbs could be applied) by producing shipment labels carrying the promised shipping date, but for packages that either would never ship, or shipped much later than the labelled date.  Supergooddeals.com apparently didn’t realize that when a business creates its own USPS shipping labels, “An electronic record is generated on the ship date indicating that your package has been mailed and the Postal Service is expecting to see your package that day.” Click-N-Ship Field Information Kit

(For those of us that may merely be tardy, the same USPS webpage suggests mailing the package on the next business day.  Checking for a friend.)

The FTC also asserted MITOR (“Mail, Internet, or Telephone Order Merchandise,” 16 CFR Part 435) which defines the terms in the name, defines unfair and deceptive practices in context, requires certain activities, and lists some exceptions (including, for reasons known only on K Street, “orders of seeds and growing plants”).

So, the alleged infractions include:

  • Advertising a delivery date that you know you cannot meet,
  • Advertising items that you don’t have in stock
  • Producing a false mailing label in an attempt to prove the shipping date, and
  • Failing to cancel orders when requested or provide prompt refunds

The Federal Trade Commission Act has worthwhile remedies for such activities, and as the Complaint indicates (paragraphs 58 and 59) the FTC plans to seek them against supergooddeals.com.

So, the people get their money back from supergooddeals.com and all’s well that ends well. Right?

Not exactly.  The FTC Act offers no private right of action in these circumstances.  The Fair Debt Collection Practices Act (FDCPA) 15 USC Section 1692(d) which is generally under the Federal Trade Commission, provides private remedies in the consumer debt arena, but a private party otherwise has no right to the remedies sought against supergooddeals.com under the FTC Act.

At this point, however, the intellectual property (“IP”) practitioner may have an extra arrow up his or her sleeve:  Section 43(a) of the Lanham Act (15 USC 1125(a)) if—IF—the parties can be defined as competitors in the section 43(a) sense.

FTC § 5(a)

Lanham Act § 43(a)

Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.

(1)Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which—

Anchor(A)

is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or

Anchor(B)

in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities,

shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.

The Lanham Act applies to false representations (etc.) about goods and services in interstate commerce, but plaintiffs attempting to stretch section 43 (a) too far have been turned down e.g., Radiance Found., Inc. v. NAACP, 786 F.3d 316 (4th Cir., 2015) (The Radiance Foundation, an African American influenced pro-life organization, criticized the NAACP over the NAACP position on abortion.  The NAACP issued a cease and desist letter and the Radiance Foundation filed a declaratory judgment complaint arguing that neither trademark infringement nor dilution had occurred.  The NAACP counterclaimed under (inter alia) section 43(a).  The Fourth Circuit held that for a number of reasons, including the lack of competing goods or services in the section 43(a) sense, the NAACP did not have a trademark remedy in these circumstances.)

Supergooddeals.com certainly dealt (and continues to deal) in “goods” in the sense of section 43(a).  Nevertheless, the “hundreds of” consumers listed in (e.g.) paragraph 26 of the FTC complaint don’t have a section 43(a) remedy against supergooddeals.com because such customers are not “competitors” of supergooddeals.com in the sense required by section 43(a).  Stated more formally, for individual defrauded customers, the answer to, “whether a legislatively conferred cause of action encompasses a particular plaintiff’s claim” is “no.” (Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 132 (2014). (“A consumer who is hoodwinked into purchasing a disappointing product may well have an injury-in-fact cognizable under Article III, but he cannot invoke the protection of the Lanham Act—a conclusion reached by every Circuit to consider the question.”)

Does Pat Peoples have any Silver Lining here?  Well, yes. In addition to a possible contractual remedy, most states have some form of general “unfair competition is illegal” statute as well as consumer protection remedies.

For the time being, however, these defrauded consumers have Uncle Sam on their side, and when “Uncle” sues he usually gets the job done.

 

Copyright 2020 Summa PLLC All Rights Reserved

ARTICLE BY Philip Summa and Summa PLLC.
For more FTC PPE Actions see the National Law Review Coronavirus News section.

Apple, Inc. Probed by European Commission for Possible Antitrust Violations

In late June, the European Commission (EC) opened several formal cases investigating Apple’s mobile payment technology (Apple Pay) and various third-party and user agreements to determine whether the tech giant’s practices and policies infringe on competition rights and abuse market power. Specifically, the Commission will investigate the company’s terms and conditions integrating the payment feature into merchant applications and websites, and the imposition of its proprietary in-app purchase system and accompanying restrictions. The latter prevents third-party developers from informing their users of cheaper alternative purchases available outside the app. The investigations follow complaints made by Spotify, a music streaming service competitor, and an e-book/audiobook distributor competitor, according to the EC’s press release.

In a statement, EC Executive Vice President Margrethe Vestager said that the Commission needs to allay fears that Apple’s “gatekeeper role” in the distribution of apps and content to users does not distort market competition. The impetus, she said, was to ensure that “Apple’s measures do not deny consumers the benefits of new payment technologies, including better choice, quality, innovation and competitive prices.”

Apple is one of the latest tech targets to experience regulatory scrutiny. Facebook, Amazon, and Google are facing antitrust inquiries by EU member states, the European Commission, and the United States’ Department of Justice and Federal Trade Commission.

© MoginRubin LLP

ARTICLE BY the Competition Policy and Advocacy practice at MoginRubin.
For more on mobile payment portals, see the National Law Review Financial Institutions & Banking law section.

The DOJ and SEC Have Updated Their Foundational Foreign Corrupt Practices Act Resource

The U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) recently published an updated guide to the Foreign Corrupt Practices Act (FCPA), a key resource for corporate whistleblowers around the world.

The FCPA is a U.S. law that prohibits the payment of anything of value to foreign government officials in order to obtain a business advantage. The FCPA also requires publicly traded corporations to make and keep books and records that accurately reflect transactions of the corporation to ensure that no bribes were paid.

This singular law is extremely important to global corporate accountability because it ensures that U.S. companies can be held accountable for corrupt actions abroad. Additionally, because this law is a part of the Dodd-Frank Act, whistleblowers from around the world may anonymously and confidentially report such corruption to the SEC and receive an award for successful tips. The U.S. government has successfully prosecuted many foreign corporations under the FCPA and has issued millions of dollars in rewards to both U.S. and non-U.S. whistleblowers.

This new guide adheres to this standard by providing significant, easy to follow information on the scope of the FCPA, potential consequences for FCPA violations, and whistleblower protections. In this new edition, the DOJ and SEC expand their guidance on a number of issues citing new cases and the new DOJ FCPA Corporate Enforcement Policy, which all anticorruption advocates, including potential whistleblowers, and corporate compliance professionals should review and understand.

The complete list of topics on which updated definitions and guidance is provided is as follows:

  • Intermediaries

  • Gifts as bribes

  • Instrumentalities of foreign governments

  • Third party payments

  • The “local law defense”

  • Successor liability for corporations

  • Conspiracy liability

  • Applicable statutes of limitations

  • Criminal liability for accounting violations

  • Factors that the Justice Department considers in determining how to resolve a corporate criminal case

  • DOJ FCPA Corporate Enforcement Policy (a new official DOJ policy), including examples of when the DOJ will decline to prosecute

  • How corporate and individual cooperation is evaluated

  • Components of an effective compliance program

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.

For more on the Foreign Corrupt Practices Act, see the National Law Review Antitrust and Trade Regulation section.

Beware the COVID-19 Cure: The FTC Issues Warnings to Products Making COVID-19 Treatment Claims

With no approved vaccine, the world waits for the next big breakthrough in 2020’s medical emergency. Some companies already claim to have found it – and subsequently received warning letters from the Federal Trade Commission (FTC) for misbranding. The FTC is targeting companies promoting products with supposed COVID-19 cures, treatment or prevention for making illegal, unsubstantiated claims.

One of the FTC’s objectives is eliminating false and misleading information from the marketplace. The FTC Act defines false advertising as misleading in a “material respect,” which includes both affirmative statements and failure to “reveal facts material in the light of [the product’s] representations[.]” See 15 USC 55(a)(1).

The FTC accomplishes its goal by sending warning letters. Under the FTC Act, a product may be misbranded if it is promoted as a prevention, cure or treatment for COVID-19 – when in fact it has not been approved for such use by the Food and Drug Administration. Since March 2020, the FTC has issued more than 200 warning letters to various businesses that advertise wellness products and other services that allegedly address COVID-19.

In some instances, the claims involved a gross exaggeration of the product’s effectiveness. For example, the website “NothingsIncurable.com” advertised products alleged to “literally make you invulnerable.” The FTC concluded those claims constituted misbranding. But even when promotional statements do not include an explicit falsehood, overpromotion still can cross into misbranding. For example, businesses that claimed, “[this product] will target and increase your immunity to help ward off the COVID-19 virus” or that recommended their products as “scientifically proven to support healthy immune function” also were found to be misbranded.

In another example, a company included “Coronavirus” in the website navigation menu that led consumers to therapy kits intended to provide “specific nutrition” to “balance the terrain of the body to make it conducive to” its particular function. Although the product description did not reference COVID-19, the FTC concluded that the website navigation menu was suggestive enough to warrant a warning for misbranding.

Summary

The FTC warning letters advise businesses that “under the FTC Act, 15 U.S.C. § 41 et seq.,” they are prohibited from advertising “that a product or service can prevent, treat, or cure human disease unless you possess competent and reliable scientific evidence, including, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made.” In addition, products that claim or imply the ability to mitigate, prevent, treat, diagnose or cure COVID-19 must be approved drugs under section 505(a) of the Federal Food, Drug and Cosmetic Act. In each case, the FTC required a response from the business within 48 hours, detailing the actions taken to address the FTC’s concerns.

During this unprecedented health crisis, companies that sell consumer products should exercise caution when mentioning COVID-19 in advertising or promotional statements. Mentioning COVID-19 in relation to a product, even if the product is intended to address more routine health issues, could be misleading.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.

For more on COVID-19, see the National Law Review Coronavirus News section.

FTC Attorney Discusses Regulatory Focus on Payment Processing Industry

The Federal Trade Commission consistently seeks to expand the scope of potential liability for deceptive advertising practices.  From substantial assistance liability under the FTC’s Telemarketing Sales Rule to theories of agency or vicarious liability, ad agencies, ad networks, lead buyers and aggregators, lead purchasers, merchants and payment processors are all potentially accountable for facilitating the actions or omissions of those that they do business with.

Consider the latter and the FTC’s recent assault on the payment processing industry.  It amply highlights third party accountability remedial theories and the imposition of reasonable monitoring duties.

In January 2020, the FTC announced that an overseas payment processor and its former CEO settled allegations that they enabled a deceptive “free trial” offer scheme.  According to the complaint, the company, its principals and related entities marketed supposed “free trial” offers for personal care products and dietary supplements online, but instead billed consumers the full price of the products and enrolled them in negative option continuity plans without their consent.

To further the scheme, the defendants allegedly used dozens of shell companies and straw owners in the United States and the United Kingdom to obtain and maintain the merchant accounts needed to accept consumers’ credit and debit card payments, an illegal practice known as “credit card laundering.”

The FTC subsequently filed an amended complaint adding a Latvian financial institution and its former CEO to the case, alleging that they illegally maintained merchant accounts for the other defendants in the name of shell companies and enabled them to evade credit card chargeback monitoring programs.

In a press release, FTC attorney Andrew Smith, Director of the Bureau of Consumer Protection, stated that “[t]he FTC will continue to aggressively pursue payment processors that are complicit in illegal conduct, whether they operate at home or abroad.”

The FTC also recently announced that a payment processor for an alleged business coaching scheme settled charges that it ignored warning signs its client was operating an unlawful business coaching and investment scheme.  Here, according to the FTC’s complaint, the company for years processed payments for a purported scheme that charged consumers hundreds of millions of dollars for allegedly worthless business coaching products, and that the company ignored numerous signs that the business was allegedly fraudulent.

The red flags listed in the complaint include questions about whether the company was a domestic or international company, the nature of its business model, the company’s purported history of excessive chargebacks, and claims the company allegedly made in its marketing materials.

Notably, the complaint also alleged that the company failed to follow its own internal policies and failed to review its clients’ business practices in detail, which, according to the FTC, would have revealed numerous elements that should have eliminated the client under those policies.

According to the FTC, even after the company took on the client, the client’s processing data immediately raised red flags related to the quantity of charges it processed and the number of refunds and chargebacks associated with those charges.  When the client experienced excessive chargeback rates, instead of adequately investigating the causes of the chargebacks, the company responded by requiring the client to work closely with chargeback prevention companies, according to the FTC.  The FTC alleged that the company failed to monitor the products its client was selling and the claims it was making to sell those products.

Again, the Director of the FTC’s BCP conveyed that “[i]gnoring clear signs that your biggest customer is a bogus online business opportunity is no way to operate a payment processing business.”  “And, it’s a sure-fire way to get the attention of the FTC,” Smith stated.

Most recently, the FTC announced that a payment processor that allegedly helped perpetuate multiple scams has been banned under the terms of a settlement with the agency and the State of Ohio.  Here, the FTC alleged that the defendants used remotely created payment orders and remotely created checks to facilitate payments for unscrupulous merchants, allowing them to draw money from consumer victims’ bank accounts.

Reaffirming the FTC’s focus on the payment processing industry, FTC lawyer Andrew Smith stated that “[p]ayment processors who help scammers steal people’s money are a scourge on the financial system.”  “When we find fraud, we are committed to rooting out payment processors and other companies who actively facilitate and support these fraudulent schemes,” Smith stated.

The FTC is aggressively policing payment processors that bury their heads in the sand or go a step further and help cover up their clients’ wrongdoing.  Either course of conduct could land them in legal hot water.

The settlement terms of the matters above include permanent bans, hefty monetary judgments and the surrender of assets.

© 2020 Hinch Newman LLP

Declaring National Emergency, President Trump Orders Restrictions on Electrical Equipment Supplied By “Foreign Adversaries”

In an Executive Order issued on May 1, 2020, President Trump declared that the unrestricted supply of electrical equipment from foreign countries represents an “unusual and extraordinary threat to the national security, foreign policy, and economy of the United States” because foreign adversaries may use such equipment to sabotage the nation’s electric power supply. While the scope of the order will not be clear until rules to carry it out are put in place, the order could prove disruptive to the supply chains for substations, transformers, and other equipment essential to operation of the nation’s electric power system, as well as to a new generation of “smart grid” devices that are transforming the electric grid, especially for devices that are manufactured in China.

The vulnerability of the electric system to malicious software and other threats embedded in equipment or components manufactured in the territory of hostile powers has long been recognized as a potential problem. In fact, the North American Electric Reliability Corporation, the entity responsible for promulgating and enforcing mandatory electric reliability standards, has developed a reliability standard (CIP-013-1) governing “Supply Chain Risk Management,” although the effective date for the standard was recently delayed by the Federal Energy Regulatory Commission due to the COVID-19 crisis.

In contrast to CIP-013-1, which requires each entity subject to the standard to develop its own plan for ensuring that relevant supply chains are free from cybersecurity risks, the new Executive Order contemplates a top-down approach, in which certain “foreign adversaries” would be identified and imports from those “adversaries” would be prohibited, although transactions with certain vendors would be allowed if they are on a “pre-approval” list. Notably, the Executive Order applies “notwithstanding any contract entered into or any license or permit granted prior to the date of this order” and authorizes the Secretary of Energy to act against “pending transactions” that might violate the order. Hence, the Executive Order could be applied retroactively, particularly to transactions that are now in process.

This aspect of the Executive Order is particularly troubling because it is likely to be at least several months before the exact reach of the Order is known. The Order directs the Secretary of Energy, in cooperation with other federal departments, to promulgate rules carrying out the Executive Order within 150 days. It is likely that the list of “foreign adversaries” will include China, which is an important link in the supply chain for many companies, as well as Russia, Iran, and North Korea. But that remains an unknown, as does the list of suppliers that might be included on the pre-approved list. The Executive Order is limited to the “bulk electric system”—high voltage transmission lines, substations, and related equipment – but contains a provision that could expand its reach to electric distribution systems, an area generally left to state regulation, based on recommendations from a security task force to be formed under the Executive Order.

The Executive Order creates new and potentially serious regulatory, contractual, and supply chain management issues for companies engaged in operation of the bulk electric system, in the manufacture of equipment necessary for operating the bulk electric system, and for emerging “smart grid” technologies that promise to improve the operation and efficiency of the bulk electric system.

© 2020 Beveridge & Diamond PC

For more on America’s electric infrastructure, see the National Law Review Environmental, Energy & Resource law section.

COVID-19 Update: Don’t Be a Target: What Business Should Know about State Attorney General Reactions to COVID-19

In any time of crisis, there is heightened risk for fraud and scams. While United States Attorney General Barr has warned of scams and other illegal acts on the federal level,1 it is with the state Attorneys General (“AGs”) where the rubber hits the road in enforcing social distancing orders, investigating companies for alleged price gouging, continuing ongoing investigations, and overseeing lending relief efforts. As the economy begins to reopen on a state-by-state and sector-by-sector basis, companies must be vigilant in protecting themselves from the next wave of scrutiny by state AGs.

During normal times, state AGs rely upon their state’s Consumer Protection Act and Unfair or Deceptive Acts or Practices (UDAP) statutes to fight against perceived fraud. During the COVID-19 crisis, state AGs have taken the additional step of issuing Civil Investigative Demands, mostly focused on the issue of price gouging, or an instance in which a company allegedly inflates prices above a perceived acceptable level based not solely on supply and demand, but also on leveraging, in this case, the COVID-19 pandemic to the detriment of the consumer. Allegations of price gouging often appear during or immediately following natural disasters, an example of which would be heightened prices for essential products such as generators and flashlights in historically hard-hit areas such as Florida or New Orleans during the Atlantic hurricane season. In the current environment, state AGs across the country are each receiving literally hundreds of consumer complaints alleging that companies are similarly raising prices on necessities.2 Online platforms for third-party sellers are particularly vulnerable to state AGs in this environment, with most people sheltering in place and fulfilling the majority of their purchasing needs through online retail. In fact, 33 state AGs sent a letter to Amazon.com, Inc., Facebook, Inc., Craigslist, Inc. and eBay Inc. to request enhanced procedures to protect against price gouging on their respective platforms.3 Ironically, companies such as Facebook, Google, Navient, and others that have been targeted by state AGs, often on extremely flimsy legal grounds, are now being asked by those same regulators to continue their efforts to step up to assist in this pandemic. And those companies, and so many others, are doing just that.

However, there are indeed some bad actors. In one well-publicized example, two Tennessee men hoarded over 17,000 bottles of hand sanitizer with the intent to sell them for up to $70 per bottle and was immediately met by an expedited investigation by Tennessee AG Herbert Slatery.4 Other examples have abounded: Massachusetts AG Maura Healey unilaterally expanded her state’s price gouging regulations, which had previously been limited to gasoline and petroleum products, to include “all goods or services necessary for the health, safety or welfare of the public”;5 New York AG Letitia James sent cease and desist letters to merchants that were allegedly engaging in price gouging related to the sale of hand sanitizer and disinfectant;6 New Jersey AG Gurbir Grewal has sent over 80 cease and desist letters after receiving more than 600 complaints of COVID-19-related price gouging and other related consumer protection violations;7 Florida AG Ashley Moody activated a “Price gouging Hotline” and opened an investigation into third-party sellers accused of price gouging on essential goods through accounts on Amazon;8 and finally, 20 state AGs have implored 3M Company to create a database and accounting of the distribution and pricing of 3M’s N95 respirator masks, including urging 3M to publish its policies prohibiting price gouging.

Businesses that remain open should be mindful of the additional steps taken to ensure compliance with social distancing regulations. For example, Vermont AG T.J. Donovan issued a directive for law enforcement outlining guidance for the enforcement of the state’s COVID-19 Executive Order that, among other things, extended authority to the state Department of Public Safety to inspect the premises and records of any employer to ensure compliance with the Executive Order.9 Other state AGs are enforcing their states’ Executive Orders with similar diligence: New York AG James ordered over 70 medical transportation companies to stop providing group rides;10 Michigan AG Dana Nessel sent a letter to home improvement store Menards in the wake of reports that the retailer had engaged in business practices that would endanger consumers and employees contrary to the Executive Order issued by Michigan Governor Gretchen Whitmer;11 and Delaware law enforcement officials even issued cease and desist orders to a barber shop and a tobacco shop.12

As the economy begins to incrementally ‘reopen’ in the weeks and months to come, companies should document every step taken to protect their customers and employees as well as the rationale underlying those measures. The far-reaching effects of the COVID-19 pandemic are unlikely to subside until a vaccine becomes publicly available. Thus, state AGs are likely to continue to probe companies aggressively about safety measures taken to protect their customers and employees; adherence to government policies and interpretative guidance; their definition of essential employees; and whether the company contributed to the spread of the virus.

State AGs are the top law enforcement officers in their states and will continue to act to protect their citizens during, and long after, the COVID-19 crisis is over. Industry should be on the lookout for measures taken by state AGs to identify and prosecute fraud and perceived price gouging during the COVID-19 pandemic, and should comply with laws and Executive Orders as diligently as possible. What constitutes the requisite compliance with social distancing – both now and as the economy begins to reopen – and what constitutes an essential service are often somewhat subjective and may require the consult of counsel. Cadwalader’s state AG practice is regularly in close communication with state AG offices and is well-positioned to provide guidance to clients that may be in receipt of an inquiry from a state AG, and we stand ready to continue to assist clients as they navigate the implications of the COVID-19 pandemic.

1   https://www.justice.gov/opa/pr/attorney-general-william-p-barr-urges-american-public-report-covid-19-fraud

2 https://www.cadwalader.com/state-attorney-general-insider/index.php?nid=6&eid=34

3  https://www.attorneygeneral.gov/wp-content/uploads/2020/03/03_25_2020_Multistate-letter.pdf

4   On April 21, 2020, Tennessee AG Slatery announced that a settlement had been reached with the two men to resolve allegations of price gouging; all supplies were surrendered to a nonprofit organization in Tennessee and a portion of the supplies were distributed to officials in Kentucky, and the two men were prohibited from selling emergency or medical supplies grossly in excess of the price generally charged during any declared state of abnormal economic disruption related to the COVID-19 pandemic.

5  https://www.mass.gov/news/ag-healey-issues-emergency-regulation-prohibiting-price gouging-of-critical-goods-and-services

6  https://ag.ny.gov/press-release/2020/ag-james-price gouging-will-not-be-tolerated

7  https://www.njconsumeraffairs.gov/News/Pages/03172020.aspx

8   http://www.myfloridalegal.com/newsrel.nsf/newsreleases/A32615BF3942B33E8525854300514289?Open&

9  https://www.attorneygeneral.gov/wp-content/uploads/2020/03/03_25_2020_Multistate-letter.pdf

10  https://ag.ny.gov/press-release/2020/attorney-general-james-orders-78-transport-providers-immediately-stop-endangering

11  https://www.michigan.gov/coronavirus/0,9753,7-406-98158-523976–,00.html

12 https://www.delawarepublic.org/post/delaware-flagging-non-essential-businesses-open-during-shutdown

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

For more on AG’s Enforcement Activities around COVID-19 Fraud see the National Law Review Coronavirus News section.

FCPA Landmines Beneath the Surface of the COVID-19 Crisis

COVID-19 took the world by surprise and continues to spread across the globe in more than 210 countries and counting.  The outbreak in the United States escalated rapidly, with over 585,000 confirmed cases as of April 14, 2020.  The federal government and a number of hard-hit states were caught off guard, and soon learned that their inventories of personal protective equipment (“PPE”) and other life-saving equipment such as test kits and ventilators were insufficient to keep pace with the pandemic.  The demand for equipment to fight COVID-19 skyrocketed and government and commercial entities have shifted into high gear to respond.  Whether motivated by humanitarian concern or commercial enterprise, many state and local governments, companies and individuals are now looking abroad to procure critical supplies on an expedited basis.  At the same time, many foreign industrial manufacturers are positioning themselves for the high demand of exports by adapting their facilities to produce PPE.  For example, Chinese electric car maker BYD announced on March 13, 2020 it is now the largest face mask factory in the world—less than one month after converting its facilities in response to the pandemic.  In the midst of these exigent circumstances, the global supply chain landscape is replete with Foreign Corrupt Practices Act landmines—and well-intentioned companies hoping to partner with foreign PPE manufacturers could become a casualty if they don’t watch their step.

Anticipated FCPA Enforcement in the Wake of the COVID-19 Pandemic

The Foreign Corrupt Practices Act of 1977 (“FCPA”) makes it unlawful for any commercial enterprise, or individual representing one, to offer, promise to pay, or direct or authorize another individual to pay money or anything of value to a foreign government official for the purpose of expanding or maintaining their commercial interests.  15 U.S.C. §§ 78dd-1, et seq.  The FCPA also requires publicly traded companies “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the issuer.”  Id.  The statute has a criminal and civil bite; the DOJ is responsible for all criminal enforcement of the FCPA and civil enforcement of its bribery provisions, and the SEC is responsible for civil enforcement of the FCPA’s “books and records” provisions if securities are involved.  The DOJ and SEC rarely enforced the FCPA in its first three decades of existence.  These agencies, however, have aggressively interpreted and enforced the law since the turn of the century.  From 2000 to 2019, the DOJ brought 235 enforcement actions and the SEC brought 168 enforcement actions, together involving over $11 billion in monetary resolutions.  In 2019, the U.S. Government collected more in a single year through DOJ and SEC actions against companies in FCPA cases than ever before.  There are several FCPA-related considerations for companies to keep in mind as they navigate business during the COVID-19 pandemic.

Indeed, U.S. companies would be wise to assume the government will persist in its aggressive “a bribe is a bribe” approach to the FCPA, even in the midst of a worldwide health crisis.  First, corruption tends to thrive in times of crisis.  Weaknesses in governmental systems become exposed, and those with nefarious intent, or just too much aggressiveness, seize on the opportunity to exploit the panic, fear and suffering that accompanies disasters.  Increased corruption, in turn, often results in increased enforcement.  The financial crisis of 2008, for example, increased FCPA enforcement.  As companies faced pressure to obtain business and even maintain operational status during the crisis, their focus on FCPA compliance decreased.  The global economy came to a halt, and many companies decided to quickly merge and consolidate.  The speed of these consolidations resulted in the discovery by some acquiring companies of questionable payments and accounting practices both pre- and post-merger, resulting in increased FCPA compliance risks.  The DOJ and SEC were alerted and brought more FCPA enforcement actions and imposed higher civil fines from 2008 to 2011 than ever before.

Second, although the current administration has not directly addressed whether and to what extent it will pursue FCPA enforcement actions as a result of the COVID-19 pandemic, the DOJ and SEC have announced their intent to prioritize coronavirus-related fraud schemes.  For example, on March 20, 2020, the DOJ issued a press release announcing that Attorney General William P. Barr “is urging the public to report suspected fraud schemes related to COVID-19” and directing all U.S. Attorneys to prioritize investigating and prosecuting such schemes.  Four days later, the DOJ established the COVID-19 Hoarding and Price Gouging Task Force “to address COVID-19-related market manipulation, hoarding, and price gouging.”  Given the global supply chain pressure points and implications of the COVID-19 crisis, it would not be a stretch for the administration to extend its prioritization of such COVID-19-related fraud cases to include COVID-19-related global anti-corruption and bribery cases.

Third, the federal government is in the process of rolling out over two trillion dollars in aid and recovery funding in response to the coronavirus pandemic, and it likely will be eager to replenish its resources after such an unprecedented relief package.  The FCPA historically has generated significant revenue for the U.S. Government, and all criminal fines, civil penalties and disgorged profits resulting from FCPA violations go directly into the U.S. Treasury.  When the COVID-19 crisis curve drops in the U.S., the DOJ, SEC, and federal prosecutors could turn to the FCPA to assist the U.S. Government in bouncing back from the financial impact of the pandemic.

Finally, the current administration and others have been critical of China’s response to the COVID-19 crisis; Secretary of State Mike Pompeo, for example, remarked in a March 5, 2020 press conference that “there was information [from China] that could have been made available more quickly and data that could have been provided and shared among health professionals across the world.”  Further, on March 12, 2020, Chinese Foreign Ministry spokesman Zhao Lijian suggested, via Twitter, that the U.S. has not been transparent and that the U.S. Army may have brought the epidemic to Wuhan, China.  In the wake of a potential diplomatic fallout between the U.S. and China, the administration may be particularly vigilant of and aggressive toward U.S.-China deals implicating the FCPA.

Potential FCPA Landmines

American companies that import goods or supplies from abroad frequently rely on customs agents and third-party brokers to assist them in maneuvering the often complex customs process.  The use of such agents, however, may expose companies to FCPA compliance risks.  Numerous FCPA enforcement actions brought by the DOJ and the SEC have focused on improper payments made by third-party agents to government officials to secure customs clearance or additional business.

For example, on September 26, 2019, the SEC announced that a Wisconsin-based digital and print marketing provider agreed to pay nearly $10 million to settle charges that it violated the FCPA by engaging in multiple bribery schemes in Peru and China.  The SEC Order found that from 2010 to 2015 the company’s China-based subsidiary used sham sales agents to make and promise improper payments to employees of private and governmental customers to secure business.  Similarly, on February 28, 2020, an American communication technology provider settled FCPA charges with the SEC and DOJ for $8.8 million for using resellers and distributors in China to bribe government officials.

As companies face intense pressure to quickly obtain goods and clear them through the customs process to mitigate the healthcare and economic consequences posed by COVID-19, the risk of FCPA violations runs high.  For example, a customs official could refuse to allow the export of PPE without a bribe, and a company employee may be desperate enough to decide that the payment is worth making to preserve his or her employment at a time when company revenues are declining, non-performing employees are subject to lay-offs and furloughs, and sales expectations and revenues remain high.  Further, a company venturing into uncharted terrain by seeking to purchase high-demand and scarce products abroad to compensate for losses in traditional lines of business might face increased risks of bribery and corruption primarily due to inexperience.  Indeed, the pressure to maintain business or get back to “business as usual” may lead some employees to get dangerously close to or even cross ethical boundaries by committing bribery or other similar misconduct.

Best Practices

Companies seeking to procure goods and supplies abroad during the COVID-19 pandemic should consider the following best practices to avoid falling out of compliance with the FCPA:

  1. Maintain a Strong Compliance Presence

Company management should reinforce and reiterate the company’s commitment to its anti-corruption and anti-fraud compliance programs. Many companies are taking proactive steps to ensure the safety and well-being of their employees, cope with new “Work From Home” policies, and brace for the financial impact of the pandemic.  While a heightened focus on these critical areas right now is understandable, it is important now more than ever for companies and their compliance officers to remind employees, especially those responsible for facilitating the acquisition and importation of goods and supplies from abroad, of the company’s commitment to ethical business practices.

  1. Emphasize Reporting Procedures for Suspected FCPA Violations

Company management should conduct anti-corruption training for employees to ensure they are capable of recognizing unethical and potentially illegal conduct, and their responsibilities for reporting it according to company policies and procedures.  Compliance departments should test their reporting procedures to ensure employees are at ease in reporting any suspected FCPA violations through multiple avenues, and compliance officers should similarly test their ability to respond appropriately to reasonable suspicions of illegal activity.

  1. Increase Screenings and Transaction Review

Finally, company management should consider increasing due diligence efforts and taking a “deeper dive” when it comes to interacting with new suppliers, agents, and distributors. For example, companies should pay particular attention to whether the individual being reviewed is related to any public officials in their country of residence, has a history of employment or business dealings with the government, and whether they previously have been the subject of any corruption complaints, investigations or negative news events.  Further, companies that have instituted quantity, financial, or country of origin thresholds for reviews of transactions, expenses, and other aspects of company business for corruption risk, should consider adjusting such thresholds to include a broader and more conservative review process, at least until the COVID-19 pandemic and related equipment and supply demands substantially decrease.

Like all Blogs, this one is for information purposes only. It is not legal advice and does not form an attorney client relationship. As you are aware, things are changing quickly and there is no clear-cut authority or bright line rules in this area. This Blog does not reflect an unequivocal statement of the law, but instead represents our best interpretation of where things currently stand. This Blog does not address the potential impacts of the numerous other local, state, and federal orders that have been issued in response to the COVID-19 pandemic, including, without limitation, potential liability should an employee become ill, requirements regarding family leave, sick pay, and other issues.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.

For more on COVID-19 & Global Trade, see the National Law Review Coronavirus News section.

Gin Manufacturer Bacardi Avoids Lawsuit for Its Use of “Grains of Paradise”

A federal judge in the Southern District of Florida recently dismissed an action alleging that Bacardi’s use of a botanical called “grains of paradise” in its gin was “harmful and illegal,” holding that the statute on which the lawsuit was based was preempted by federal law. Marrach v. Bacardi U.S.A, 19-cv-23856 (S.D. Fla. Jan. 28, 2020).

The complaint alleged a violation of the Florida Deceptive and Unfair Trade Practices Act. While Plaintiff himself suffered no harm from the drink, he cited a nineteenth-century provision forbidding the adulteration of alcoholic beverages with “grains of paradise” to support his claim that Bacardi’s use of the botanical was illegal. However, Bacardi argued in its motion to dismiss that the complaint was preempted because the Federal Food, Drug and Cosmetic Act (FDCA) permits the use of “grains of paradise.”

In an opinion that did not mince words, Judge Robert N. Scola granted the motion to dismiss, opening with the observation: “Numerous class actions have greatly benefited society such as Brown v. Board of Education, In re Exxon Valdez, and In re Agent Orange Product Liability Litigation. This is not one of those class actions.” He noted that the Food Additives Amendment of 1958 granted the FDA broad authority to monitor and control the introduction of food additives, signaling Congress’s intent to prevent rules unnecessarily prohibiting access to safe food additives. Judge Scola held that the Florida statute, which criminalizes adulterating liquor with grains of paradise, frustrated this purpose and was therefore preempted because it was in conflict with federal law.

Plaintiff attempted to counter this reasoning by arguing that the 21st Amendment gave states the right to regulate liquor, thereby overriding any argument that federal law governed in this matter. Judge Scola disagreed. As an initial matter, “the 21st Amendment does not in any way diminish the reach of the Supremacy Clause,” and therefore has neither the intent nor effect of undermining federal preemption of inconsistent state law. Moreover, Judge Scola noted that other courts have found similar state law prohibitions on food additives to be preempted by the FDCA.

Like previous cases we have covered on this blog, the decision underscores the FDA’s broad regulatory authority over food and beverage products which cannot be circumvented by plaintiffs simply by bringing claims under state law. In doing so, it provides important assurance to manufacturers of such products that their reliance on federal law will not be undercut by arcane state provisions.

© 2020 Proskauer Rose LLP.

For more on food & beverage authority, see the National Law Review Biotech Food & Drug section.