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Decisions Affecting the Powers and Duties of Attorneys General

Multistate—Attorney General Parens Patriae, Civil Penalties Authority Affirmed.

Texas v. Penguin Group (USA) Inc., No. 12 Civ. 3394 (S.D.N.Y. April 15, 2014).

State of Texas v. Penguin Group (USA) Inc., 12 Civ. 3394 (S.D.N.Y., June 5, 2014).

The U.S. Department of Justice and 33 states sued Apple, Inc. and e-book publishers, alleging violations of the Sherman Act. The publishers settled, and after a trial, the district court found that Apple had violated the antitrust laws. A separate trial for damages was scheduled. Apple filed a motion to dismiss the states’ claims, asserting that the states lack standing to pursue Apple for damages that will be awarded to their citizens or, in the alternative, that the states should be required to seek class certification under F.R.C.P. 23. Apple also opposed the states’ claims for civil penalties as part of the relief sought. The court denied Apple’s motion to dismiss and held that the states’ civil penalty claims were valid and civil penalties would be determined as part of the damages trial.

Addressing Apple’s motion to dismiss, the court first examined Article III standing, “which enforces the Constitution’s case-or-controversy requirement.” The test for Article III standing is that the “plaintiff must have suffered or be imminently threatened with a concrete and particularized ‘injury in fact’ that is fairly traceable to the challenged action of the defendant and likely to be redressed by a favorable judicial decision.” Case law holds that a statute specifically authorizing a challenge to a particular practice can form the basis for standing, and in this case, 15 U.S.C. 15c authorizes parens patriae actions by state attorneys general on behalf of the citizens of their states. The treble damages sought by the states on behalf of injured consumers are designed to “deter further economic harm and to obtain relief for the injury inflicted on their economies and their citizens.”

The district court held “The States have both articulated and shown: 1) an injury in fact to their economies, 2) a causal connection between the injury and the conduct complained of, and 3) that it is likely that the injury will be redressed by a favorable decision.” With respect to injury in fact, the court found that the states had shown during the trial that e-book prices rose precipitously as the result of the price fixing conspiracy. “Courts have long found that harm to States’ economies caused by restraints of trade in violation of the antitrust laws constitute injuries that are cognizable in federal court.” Turning to the “causation” prong, the court held that the state demonstrated causation between Apple’s conduct and the injury to their economies by showing that the “price fixing conspiracy would not have succeeded without the active facilitation and encouragement of Apple.” Finally, the court held that the states have fulfilled the “redressability” prong by achieving injunctive relief and by seeking treble damages, which “will send a clear message that violation of the antitrust laws carries consequences.”

The court also noted that Apple’s distinction between the states’ ability to seek injunctive relief in federal court and their ability to seek treble damages is not supported, because “The States have as concrete an interest in deterring future harmful antitrust violations by pursuing treble damages as they did in suing to stop such violations.” The court cited the states’ “long-recognized interest in protecting the health of their economies from antitrust injuries” in holding that they have Article III standing.

The district court next addressed “prudential standing,” a judicially-created doctrine that includes three principles: “the general prohibition on a litigant's raising another person’s legal rights, the rule barring adjudication of generalized grievances more appropriately addressed in the representative branches, and the requirement that a plaintiff's complaint fall within the zone of interests protected by the law invoked.” The court held that the states have prudential standing as well: “Through the passage of Section 15c, Congress has authorized the States to bring this antitrust action in parens patriae. As a result, so long as they have shown they have standing under Article III, the standing inquiry is at an end.” The court noted that Apple did not cite any decision rejecting a state’s lawsuit brought under section 15c.

Finally, the court addressed Apple’s argument that the states should be required to seek class certification under F.R.C.P. 23. The court cited the U.S. Supreme Court’s recent decision in Mississippi ex rel. Hood v. AU Optronics for the proposition that parens patriae actions are not class actions. The court also noted that section 15c was enacted expressly to permit the states to enforce federal antitrust laws without having to fulfill the class action requirements of Rule 23. Nor are the injured parties the real parties in interest. The court stated that the states “are suing not merely to vindicate the rights of their injured citizens, but also for relief from the injury to their quasi-sovereign interests in the welfare of their economies.” Although Apple argued that the lack of Rule 23 requirements raised due process concerns, the court noted that “none of the Supreme Court or Second Circuit cases which have commented on Section 15c’s lack of Rule 23 protections has raised any constitutional concerns.”

Turning to Apple’s opposition to state civil penalties claims, the court noted that the state civil penalties claims were congruent with the federal claims brought by the states and the U.S. Department of Justice under the Sherman Act. At the liability trial, the court found that Apple was liable and held that “[t]o the extent that the state statutes set forth in Appendix A are congruent with the aforementioned elements for a violation of Section 1 of the Sherman Act, Plaintiff States have established liability under these laws.” Among other arguments, Apple contended that it is impermissible to award state civil penalties in addition to Clayton Act treble damages and that the civil penalties are disproportionate and serve no punitive purpose, and therefore violate the Eighth and Fourteenth Amendments.

The court first held that the Clayton Act does not contemplate that the civil penalties sought by the states to be taken out of a damages award. The court noted that “a motivating purpose of the conferral of discretion to allocate a portion of Clayton Act damages as civil penalties was to prevent the antitrust violator from reaping a windfall from unclaimed consumer damages.” The court may not deem civil penalties to be a portion of Clayton Act treble damages because some of the state civil penalty statutes are mandatory in nature, and a court cannot substitute its judgment for that of the legislature. The court also rejected Apple’s argument that both the Clayton Act damages and state civil penalties are punitive in nature, so that the states would reap a duplicate recovery. The court held, “Through its participation in an illegal conspiracy to fix the prices of e-books Apple violated both the Sherman Act and state civil statutes. It is within the power of both sovereigns to enforce their own laws.” The court also held that treble damages are primarily remedial in nature, while civil penalties are punitive. Thus, the “imposition of both civil penalties and Clayton Act treble damages is not only proper but commonplace.”

Apple argued finally that state civil penalties violate both the Eighth Amendment’s ban on excessive fines and Apple’s due process right under the Fourteenth Amendment to fair notice of the severity of the penalty that a state may impose. The court held that a key factor in finding that a fine is excessive is whether it is proportional. In judging whether a fine is disproportionate, the court should examine the reprehensibility of the conduct. In this case, the court held, “Apple’s lawyers and its highest executives orchestrated a price fixing scheme with blatant disregard for the requirements of the law. Apple has expressed no recognition that its conduct was wrongful, ‘suggesting a lack of remorse and supporting further measures to deter future wrongdoing of a like type.’” In addition, the relationship between the penalties sought and the harm allegedly caused to consumers is also proportional, because the states seek a total of $9 million in civil penalties, while the alleged amount of damages is at least $155 million to consumers, in addition to the damage to the states’ general economies. Finally, these penalties would be applied to any party that violated the state antitrust statutes at issue. Apple is not being singled out.

Multistate—State Consumer Protection Actions Remanded to State Court.

In re: Standard & Poor’s Rating Agency Litigation, No. 13-MD-2446 (S.D.N.Y, June 3, 2014).

Seventeen states sued credit rating agencies, including Standard & Poor’s (S&P), for making public statements about the integrity, independence and objectivity of their credit ratings that violated state consumer protection laws. In these state court actions, the states sought injunctive relief, civil penalties and disgorgement. A federal statute, the Credit Rating Agency Reform Act of 2006 (CRARA), regulates the conflicts of interest that arise when credit issuers pay the rating agencies to rate their issues. The CRARA explicitly provides that “[n]othing in this subsection prohibits the securities commission (or any agency or office performing like functions) of any State from investigating and bringing an enforcement action with respect to fraud or deceit against any [credit reporting agency].” S&P removed all of the cases to federal court, alleging federal question jurisdiction, rather than the Class Action Fairness Act (CAFA). The states sought remand.

The court noted that “in certain cases federal-question jurisdiction will lie over state-law claims that implicate significant federal issues.” To determine whether federal question jurisdiction is appropriate, the federal issue must be: “(1) necessarily raised, (2) actually disputed, (3) substantial, and (4) capable of resolution in federal court without disrupting the federal-state balance approved by Congress.” The court first held that the states’ claims did not require interpretation of CRARA or other federal law. Although CRARA requires S&P to have a code of conduct, “the existence of S&P’s code (and of course its truth or falsity)” is all that is necessary for the allegations of false representations and fraud under state law. Even if S&P could use some portion of CRARA as a defense, that would not be sufficient for federal question jurisdiction. The court held, “in order to prove their cases, the States will have to show only that S&P made certain statements and that those statements were deceptive. They do not have to, and indeed may very well have forgone the opportunity to, prove that S&P issued its Code of Conduct in a way that violated CRARA or any other federal law. Having made that choice, the States cannot now be forced to litigate in a forum they did not choose.”

The court next addressed S&P’s removal of Mississippi’s case. S&P removed pursuant to CAFA’s “mass action” provision and also pursuant to the general diversity statute. The court found that CAFA removal was improper after the U.S. Supreme Court’s decision in Hood v. AU Optronics. However, the court considered S&P’s claim that there was complete diversity in this matter because S&P is a New York company and the real parties in interest in Mississippi’s case were individual Mississippi citizens. The court described the two ways to analyze this type of case: the claim-by-claim analysis, which analyzes each type of relief, and the whole complaint analysis, which determines what interest the state has in the lawsuit as a whole. The court adopted the whole complaint approach, which it characterized as the majority position. Using that approach, Mississippi is the real party in interest because the case is “brought by the state attorney general under his exclusive authority, derived from both statute and the common law” and because Mississippi has a quasi-sovereign interest in harms to “banks, insurance companies, government regulators, mutual funds, pension funds and consumers throughout Mississippi-indeed, on the Mississippi economy as a whole.” The fact that Mississippi was seeking injunctive relief and civil penalties also supports its quasi-sovereign interest. Therefore, the Mississippi case, as well as all the other state cases, was remanded by the court to their respective state courts.

New Hampshire—Attorney General May Not Remove County Attorneys.

Reams v. Attorney General, 2014 N.H. Super. LEXIS 5 (N.H. Super. Ct. April 20, 2014).

The county attorney for Rockingham County, N.H., was the subject of a criminal investigation. The attorney general suspended the county attorney and the county attorney challenged the suspension on the grounds that he was a constitutional officer and elected official who was entitled to notice and hearing prior to any suspension. He further argued that because he had not been charged with a crime, he can only be suspended if there is a “clear and convincing showing of his failure to fulfill his official responsibilities.” The superior court, sitting en banc, upheld his suspension, because there was a pending criminal investigation into his conduct.

The attorney general subsequently filed a complaint seeking removal of the county attorney for official misconduct. The attorney general told the court that the criminal investigation was over and that no criminal charges would be brought. The parties also agreed that the removal complaint would not be tried until the county attorney left office. The court stated “The principal issue in this case is the Attorney General’s authority to suspend an elected county attorney.” Although the attorney general argued that he had such authority, the court disagreed and ordered reinstatement of the county attorney.

The court held that although “[t]he New Hampshire Attorney General is the chief law enforcement officer of the State and retains all of his common law powers” and has statutory “power to control, direct and supervise criminal law enforcement by the county attorneys in cases where he deems it in the public interest," he does not have authority to remove a county attorney. In this case, because the trial would not occur until after the county attorney left office, his continued suspension would in effect remove him. The court held that the attorney general could not seek removal simply by filing a complaint with the court, based on allegations of civil misconduct, without any evidentiary hearing or testimony by the county attorney. It further held that if the attorney general believed that the return to office of the county attorney would cause irreparable harm, he could have sought an injunction, rather than filing the removal complaint.

South Carolina—Attorney General Has Authority to Investigate Ethics Complaint.

Ex parte Harrell v. Attorney General, No. 2014-0001058 (S.C. July 9, 2014).

The South Carolina attorney general received a complaint about violations of the state Ethics Act by the state Speaker of the House. After an investigation, the attorney general referred the matter to a grand jury. The Speaker filed a motion to disqualify the attorney general, and the court, although declining to disqualify the attorney general, held that it had no subject matter jurisdiction because the complaint was civil in nature, so the grand jury did not have jurisdiction to investigate. The court held that the attorney general did not have authority to investigate without a referral from the House Ethics Committee: “Ethics investigations concerning members and staff of the Legislature are solely within the Legislature’s purview to the exclusion of the Courts,” and, as such, any alleged criminal violations which arise out of the Ethics Act must be referred from the legislative investigative body to the Attorney General.” The attorney general appealed.

The state Supreme Court agreed with the attorney general that the trial court’s decision was clearly erroneous in requiring a referral to the attorney general from the legislative ethics committee. In an earlier case, the South Carolina Supreme Court held that the jurisdiction of the legislative ethics committees was civil in nature, and held “the absence of a complaint to the Ethics Commission will never operate as a limitation upon the State’s independent right to initiate a criminal prosecution.” The court noted that the Ethics Act criminalized violations of the Act, and it is in the attorney general’s exclusive discretion to prosecute those violations. The court compared the House’s authority to regulate its own members to that of the state board of medical examiners. With respect to doctors, the board may impose disciplinary action, but that would not interfere with a simultaneous criminal investigation. The court held, “The House Ethics Committee’s concurrent civil regulatory authority does not affect the Attorney General’s authority to initiate a criminal investigation in any way, whether or not there is a referral, or even a pending House investigation.”

Texas—Notice to Attorney General of Constitutional Challenge--Separation of Powers.

In re State of Texas, 2014 Tex App. LEXIS 5653 (Tex. Ct. Apps. 4th Dist. May 28, 2014).

Ex parte Lo, 424 S.W.3d 10 (Tex. Crim. App. 2014).

In two recent decisions, the Texas courts were asked to decide on the validity of a statute that requires the court to notify the attorney general if the constitutionality of a state statute is challenged in a proceeding.

In the first case, a criminal matter, the state appealed a decision by a district court holding a provision of the Texas Penal Code facially unconstitutional, because the district court erred in finding the statute unconstitutional without first providing notice to the attorney general, as required by statute. The Texas statute requires the court to “serve notice of the constitutional question and a copy of the . . . pleading that raises the challenge on the attorney general.” The court may not enter a final judgment holding the statute unconstitutional until 45 days after giving notice to the attorney general. The Texas Court of Criminal Appeals held that the notice provisions violate the separation of powers doctrine in the Texas Constitution.

The Texas Constitution contains an express separation of power provision, which may be violated “when one branch unduly interferes with another branch so that the other branch cannot effectively exercise its constitutionally assigned powers.” In this case, “Entering a final judgment is a core judicial power; it falls within that realm of judicial proceedings “so vital to the efficient functioning of a court as to be beyond legislative power.” [citation omitted] Thus, the 45-day time frame provided for . . . is a constitutionally intolerable imposition on a court’s power to enter a final judgment and a violation of separation of powers.” The court also held that the notice provision itself, even without the 45-day delay, was unconstitutional.

The subsection (a) directive to notify the attorney general of every constitutional challenge to a state statute made by a party imposes a duty that is wholly unrelated to the Court’s judicial powers and functions. Pursuant to this unusual provision, the legislature would have this Court exercise a function that is not only non-judicial but would operate solely for the apparent benefit of the attorney general. And to what extent the attorney general would benefit from receiving such a notice is elusive, given that the attorney general has no authority to appear in criminal cases before this Court.

The court concluded that the sections at issue “burden this Court with undertaking a useless and non-judicial act by providing notice which would not further or relate to any of this Court’s judicial functions or powers” they unduly interfere with the court’s constitutionally-assigned powers.

The second case was a civil matter. A same sex couple married out of state moved to Texas and one spouse eventually sought a divorce. The other party argued that Texas law prohibiting same sex marriages precludes the trial court’s ability to hear this divorce action. The party seeking divorce argued that the Texas statute was unconstitutional. The court held that the statute was unconstitutional as applied and denied the motion to dismiss the divorce proceeding. The court sent a copy of its decision to the attorney general, who sought a writ of mandamus from the court of appeals on the grounds that the trial court abused its discretion by invalidating a state statute without providing prior notice to the attorney general.

Interpreting the same statute that was at issue in Ex parte Lo, the court of appeals held “the trial court’s determination of the constitutional challenges without prior notice to the attorney general deprives the State of an important right and constitutes an abuse of discretion for which mandamus relief is available.” Although the state did not have an interest in the underlying divorce proceeding, the court concluded that its mandamus petition was seeking “to protect its right to notice as required by statute.” The court acknowledged that the Court of Criminal Appeals had concluded that the notice statute was unconstitutional, but held that its holding is not binding in a civil proceeding. The mandamus relief was granted and the trial court’s decision was vacated.

Washington—State’s Antitrust Suit May Proceed Against Foreign Defendant.

State v. AU Optronics, No. 69318-2-1 (Wash. Ct. App. May 5, 2014).

The state of Washington filed suit against LG Display, Inc., alleging that it conspired with other manufacturers of liquid crystal display (LCD) panels to fix the prices at which the panels were sold. The trial court dismissed the state’s case on the grounds that LG, a foreign manufacturer, did not have sufficient contacts with the state to allow it to exercise personal jurisdiction over LG. LG is not licensed to do business in Washington and does not have any place of business there. The appellate court reversed.

The court applied the three-part test articulated by the Supreme Court: “(1) that purposeful “minimum contacts” exist between the defendant and the forum state; (2) that the plaintiff’s injuries “arise out of or relate to” those minimum contacts; and (3) that the exercise of jurisdiction be reasonable, that is, that jurisdiction be consistent with notions of “fair play and substantial justice.” The court found that there were sufficient purposeful “minimum contacts” between LG and Washington, based on the large volume of sales by LG Display in Washington state. The court stated, “LG understood the third parties would sell products containing its LCD panels throughout the United States, including large numbers of those products in Washington.” The court also agreed with the state that even though Washington consumers did not purchase LCD panels directly from LG, “Washington consumers and state agencies have been injured by paying supracompetitive prices for LCD products as a result of [LG Display’s] price-fixing conduct. . . LG Display’s admitted price manipulation allegedly inflated the price paid for those purchases.” Finally, the court determined that the exercise of jurisdiction was fair to LG. LG had signed master purchase agreements with equipment manufacturers stating that its products complied with all applicable regulations. This indicated that LG was familiar with the laws of the state. In addition, the inability of indirect purchasers to file antitrust suits in federal court means that Washington consumers would have no forum for redress if the suit could not be brought in Washington courts. Finally, “Finding no jurisdiction could also encourage manufacturers to structure their businesses to avoid direct activity in Washington to avoid liability.”

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