Bernard Nash & Divonne Smoyer, State Attorney General Practice Group, Dickstein Shapiro LLP

Over the past two decades, State Attorneys General (AGs) have increased significantly the number of investigations and litigations they have brought targeting business and industry. This increase is due to, among other things, a perceived lack of federal law enforcement requiring AGs to “fill the void,” as well as the increasing tendency of states to join together to coordinate activity through “multi-state” actions. AGs have used state antitrust, securities, environmental, consumer protection, and predatory lending laws to bring high-profile cases against both small local companies and large national corporations. There is little reason to believe that there will be a slowdown any time soon, and, in fact, there is every indication that AG activity will expand.

Several high-profile cases, which have generated hundreds of billions of dollars of settlement payments from the targeted industries, illustrate the breadth of AG enforcement efforts, including the 1998 $368 billion tobacco Master Settlement Agreement with major cigarette companies, $1.6 billion in settlements with mutual fund companies to resolve claims alleging fraud against investors, and the $779 million predatory lending settlements with Household Finance and Ameriquest. Recent AG activity has focused on areas such as pharmaceutical pricing, the subprime mortgage crisis, student lending, and corporate data breaches.

As a result, many businesses have come to recognize that dealing with AGs requires different strategies than those employed in commercial or federal government investigations or litigations. Those that have been most successful in dealing with AGs have taken proactive steps to incorporate AG relationship-building into their government relations and legal agendas. Working proactively with AGs can help a company (or an industry) avoid becoming a target of an AG or a group of AGs, can help respond to AG concerns before negative headlines or litigation, and can facilitate solutions before, during, and after litigation.
The following are the top ten things you should know about State Attorneys General activities: 

1.    Attorneys General Have Significant and Growing Authority

AGs are the chief legal officer of their states and traditionally have defended the state and its agencies in legal proceedings, as well as provided advice and legal opinions to state legislatures and agencies. However, AGs increasingly have pressed to expand both the boundaries of their authority and the legal bases for their claims. Although their powers vary from state to state, AGs derive their authority both from the state constitution, common law and from statutes such as those in the areas of consumer protection, predatory lending, state securities, and state Medicare fraud laws. AGs also increasingly are deriving their powers from federal laws, including the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (which, among other things, allows states to sue companies, on behalf of their citizens, for treble damages for federal antitrust violations). This trend is accelerating as federal legislation continues to grant AGs specific enforcement powers. For instance, the pending federal Consumer Product Safety Commission (CPSC) Reform Act would grant AGs enforcement powers in consumer safety matters similar to those of the CPSC.

2.    Federal Preemption May Not Be a Defense

Although certain federal laws do preempt state action, it is not uncommon for AGs to initiate investigations and litigation in areas generally considered the province of federal agencies. AGs aggressively have pursued targets in areas that are typically regulated by the Securities and Exchange Commission (SEC), Environmental Protection Agency, Food and Drug Administration, and U.S. Department of Justice (DOJ), among others. Therefore, even if a corporation is regulated by a federal agency, it also may be subject to an investigation or litigation brought by an AG.

For example, because of the SEC’s alleged slowness to act to protect investors, both the former New York AG Eliot Spitzer and current New York AG Andrew Cuomo have taken action against a number of publicly-held corporations under the Martin Act, New York’s securities law, which empowers the AG to investigate any corporation doing business in the state under suspicion of fraudulent, deceptive, or misleading activities. Most recently, a number of AGs have moved forward with investigations of subprime lenders and investment banks involved in the mortgage-backed securities market even though many of those companies are federally-regulated entities.

3.    Attorneys General Have Long Reaches

A considerable number of AGs have asserted jurisdiction over organizations outside of their own states. These AGs have used minimal contacts with their states to justify initiating investigations or litigation. For example, AG Cuomo subpoenaed universities in a number of states regarding those schools’ student lending practices, claiming jurisdiction because students from New York attended those universities. Additionally, eight AGs intervened in the EPA’s suit against American Electric Power (AEP) over its operation of sixteen power plants in the eastern United States, even though none of AEP’s plants are located in those states. In October 2007, AEP settled after eight years of litigation, agreeing to spend $4.6 billion to upgrade its plants and to pay $75 million in penalties and fines. AG Cuomo also has used the Martin Act to subpoena a number of energy companies, citing the fact that the state retirement fund is a stockholder, on the grounds that they have underreported the effect that carbon emission restrictions will have on their profits and, hence, stock value.

4.    Multi-State Coordination Is On The Rise

AGs often pool their resources, forming ad hoc groups of states to investigate individual businesses or even entire industries – multi-state investigations. The most well known multi-state investigation began in the 1990s against the tobacco industry. AGs have since reached settlements with pharmaceutical companies, subprime lenders, and investment banks for hundreds of millions of dollars as a result of multi-state actions. As a result of such coordinated activity, even if an information request comes from one state, it is possible that the information obtained may be shared with other states. Consequently, companies need to be aware that their disclosures to one state may end up in many different jurisdictions.

Not all multi-state groups are formed to litigate in the first instance, however. AGs may unite to educate themselves by working cooperatively with businesses to create solutions to problems affecting people across the country. Most recently, the Iowa AG created a task force comprised of eleven AGs, as well as bank regulators, to address the impact of subprime loans on homeowners. The task force invited more than a dozen of the largest subprime mortgage servicing companies to a summit where the participants discussed modifying loans instead of foreclosing, and it is publishing reports of its findings. The task force also has been actively lobbying Congress not to pass federal laws that would preempt state authority to establish future lending standards.

5.    Remedies Vary Widely

As in other lawsuits, AGs often ask for monetary damages on behalf of their states’ citizens, as well as for fines, penalties, legal fees, and injunctive relief. However, AGs regularly reach settlements after investigations have commenced, but before litigation is initiated, that involve agreements to abide by a code of conduct or otherwise reform corporate practices. New York AG Cuomo recently reached this type of settlement with universities and lenders in his continuing student lending probe. Similarly, AG Cuomo has initiated high profile investigations of a number of health insurers warning them against their practice of doctor ranking. AG Cuomo reached settlements with seven such insurers to date in which the companies agreed to abide by the AG’s Doctor Ranking Model Code, which, among other things, requires insurers to make their ranking practices more transparent.

6.    Contingency Counsel Now Prosecuting Claims

As a result of the significant settlements of the tobacco lawsuits, the plaintiffs’ bar has been actively soliciting AGs to permit them to bring cases on behalf of states in exchange for a percentage of any recovery. A growing number of AGs of both political parties have acquiesced, and have teamed with contingency fee counsel to bring suits (involving, among other things, pharmaceutical pricing, securities, lead paint, and pollution) based on various legal theories to maximize potential damage recoveries. Despite the increasing popularity of these alliances, retaining private counsel by AGs on a contingency fee basis to exercise a state’s sovereign prosecutorial police power creates conflicts of interest, raises substantial due process concerns, and frustrates the fundamental functions of government. This practice is increasingly controversial, and is being litigated in courts throughout the country, with mixed results.

7.    Attorney Generals Activities Often Are More Political

Because AGs are elected officials, some frequently use investigations or litigation to promote policy or political objectives. In addition, AGs are independent of executive officials and the state legislature and, consequently can, and do, advance their own agendas. Accordingly, unlike with investigations by the DOJ, which generally is apolitical, companies subject to AG investigations must have a heightened awareness of political and policy issues that are priorities for such AGs (as well as other AGs who may be interested, as a result of information sharing). Also unlike the DOJ, which has rules governing what its attorneys may say publicly, AGs increasingly are using the media to publicize their efforts. Companies that have been the most successful in dealing with AGs have incorporated building relationships with AGs into their government relations, media relations, and legal strategies.

8.    Proactivity Can Be Productive

The key to dealing with AGs is to be proactive, and including AG relationship building into your company’s government relations and legal program is important. Establishing relationships with AGs can help facilitate solutions before, during, and after litigation. Successfully working with AGs requires creative thinking. Because AGs have broad enforcement discretion, there often are opportunities to craft creative solutions before the commencement of a formal investigation or litigation. Actively engaging AGs with a message about your company’s positive impact on the AG’s state and the economy, your commitment to maintaining high standards of conduct, and your willingness to compromise and modify practices, as appropriate, can help resolve matters before they become costly and time consuming.

9.    Attorneys General Organized Activities Present Useful Opportunities

There are a number of AG-related organizations that are intended to help facilitate interactions among AGs and, also, in some instances to advance AGs’ legal and policy agendas. The four principal AG organizations are the bipartisan National Association of Attorneys General, the bipartisan Conference of Western Attorneys General, the Republican Attorneys General Association, and the Democratic Attorneys General Association. Each of these organizations has meetings throughout the year, and attendance at such meetings, as well as periodic briefings on areas of interest to AGs, can enhance greatly a company’s profile. Becoming a resource on issues of AG concern with respect to your industry can gain your company credibility and set the stage for future positive interactions.

10.    Federal Oriented Responses Aren’t Sufficient

As mentioned above, unlike investigations by federal regulators, there are political and policy aspects to some AG investigations of which companies should be aware. If your company has received an inquiry, sensitivity to those issue as well as open and direct communication and quick and accurate responses to AG concerns can resolve an investigation before it progresses to litigation. Moreover, a successful AG strategy should involve awareness of political and policy concerns of both the inquiring AG as well as the AGs of other states that may have an interest in the issue. Cooperating with AGs and being responsive, receptive, and straightforward will build trust and respect that can serve a company well in the long term.