Month: June 2023

Consumer Deception

Large companies like to give the impression they put customer satisfaction above all else. They constantly tout their rankings in surveys such as those conducted by J.D. Power.

Yet it also turns out they are frequently sued by groups of customers for deceptive practices. Over the past two decades, major companies have paid out over $25 billion in damages and settlements in class action and multi-district consumer protection lawsuits filed throughout the United States. Some corporations have been involved in multiple cases, and a few have had total payouts of more than $1 billion.

These findings come from a compilation of consumer protection lawsuits prepared for inclusion in Violation Tracker. Using court records, we have documented more than 600 successful legal actions dating back to the beginning of 2000. These are only cases in which a company was accused of cheating its customers by overcharging for goods and services or engaging in false advertising. This list does not include cases involving issues such as product safety or privacy violations, which were previously added to Violation Tracker. It also does not include cases brought by government agencies, which were also already in the database.

One thing jumps out from the new list of cases: banks, insurance companies and other players in the financial services sector account for a far larger portion of the penalties than any other part of the economy: over $14 billion in 249 cases. This is more than 55 percent of the penalty total and 40 percent of the cases.

Half of Big Finance’s penalty total comes from a handful of companies. Bank of America paid out over $3 billion in 29 cases. JPMorgan Chase racked up $2.3 billion in penalties in 26 cases. Wells Fargo’s penalty total is $1.3 billion from 21 cases. State Farm Insurance ranks next with $669 million from six cases.

Here are just a few of the abuses Bank of America has been accused of committing: imposing excessive overdraft fees on checking accounts; charging military customers interest rates above federally mandated limits; enrolling customers in credit protection plans without their consent; applying late fees on credit card customers who actually paid on time; and forcing home mortgage customers to purchase excessive amounts of flood insurance;

Outside the financial sector, the biggest penalty totals belong to Dominion Energy ($2.5 billion), Western Union ($508 million), Apple Inc. ($462 million), BP ($414 million) and General Motors ($389 million). Apple’s alleged transgressions ranged from distributing iPhone software updates that slowed the device’s performance to the renewal of app subscriptions without customer consent.

While most of the cases on the list involve prices, fees and other monetary practices, about 100 relate to the quality of the goods and services being sold. Over $1 billion has been paid out by companies accused of false or deceptive advertising and marketing. The single biggest penalty of this type is linked to Acer America, which paid an estimated $280 million to resolve allegations that it misled customers about the Windows operating system installed on its laptop computers.

Behr and its parent Masco paid over $100 million to settle claims that they falsely advertised their wood sealants as protecting against mildew damage. Many of the smaller settlements involved allegations that producers of food and personal-care products falsely advertised their products as organic or natural.

While many of the corporate defendants in these cases will insist they settled out of expedience, it seems clear that many large companies have a tendency to engage in dubious practices. If they are truly concerned about customer satisfaction, putting an end to these practices is a good way to begin.

3M’s Sticky Legal Situation

For the past decade, Johnson & Johnson has symbolized the deterioration of a well-regarded consumer products corporation into the target of multiple lawsuits over alleged disregard for product safety. Now another familiar company is following the same path.

3M, best known as the producer of Scotch Brand adhesive tape and Post-it sticky notes, has been embroiled in two major lawsuits that will probably result in the payment of billions of dollars in settlements. The litigation does not involve office supplies but rather two of the thousands of other products produced by a company originally known as Minnesota Mining and Manufacturing Company.

In one of the cases, 3M has been sued by some 250,000 military veterans who accuse the company of producing foam earplugs that failed to protect them from service-related hearing loss. This stems from a 2018 False Claims Act case brought by the U.S. Justice Department in which the company paid a penalty of $9.1 million. Last year, in what is called a bellwether case, a jury awarded a single plaintiff $50 million in damages.

In an attempt to limit its wider liability, 3M filed for bankruptcy for the subsidiary, Aearo Technologies, that produced the earplugs. Lawyers for the plaintiffs cried foul, and earlier this month a federal bankruptcy judge dismissed the filing, calling it premature. 3M is appealing the dismissal, but the Wall Street Journal reports that the company is in settlement talks.

3M is also said to be deeply involved in negotiating a settlement of its other major legal woe: lawsuits accusing the company of being responsible for the contamination of water supplies with per- and polyfluoroalkyl (or PFAS) chemicals used in the production of its firefighting foam. These substances, which have been linked to numerous adverse health effects, have become known as forever chemicals because they do not break down in the human body or the environment.

A federal judge in South Carolina, where the PFAS cases have been consolidated, recently halted a bellwether trial after the parties in the wider litigation reported that a settlement seemed imminent. This was just after DuPont and its spinoff companies Chemours and Corteva announced they had agreed to pay more than $1 billion to settle their own PFAS cases.

3M’s record apart from these two cases has not been entirely unblemished. In 2018 the company paid $850 million to the Minnesota Attorney General’s office to settle allegations that its disposal of perflourochemicals, or PFCs, over many years had damaged drinking water and natural resources in the Twin Cities area.

It has also been accused of antitrust violations. In 2006 the company paid over $28 million to settle litigation alleging it monopolized the market for adhesive tape. In 2011 3M paid $3 million to settle an age discrimination case brought by the Equal Employment Opportunity Commission. Violation Tracker contains more than 100 other penalties the company has paid in environmental, workplace safety, and employment cases.

With the earplug and PFAS cases, it appears that the company’s aggregate penalty total will soon reach a much higher level. 3M is going to have to sell a lot more Post-its.

Update: Plaintiffs’ attorneys reported that 3M has agreed to pay over $12 billion to public water systems to resolve the PFAS litigation.

DOJ’s Unweaponized Approach to Corporate Crime

There is a lot of loose talk these days about the supposed weaponization of the Justice Department in regard to a certain former president. Yet no one on any part of the political spectrum can claim that DOJ is being overly aggressive in prosecuting corporate defendants.

Despite promises early in the Biden Administration, DOJ has not carried out a serious crackdown on the most serious business offenders. There have been some major prosecutions, but they tend to focus on foreign-based companies (as I discussed in an April post) and the overall volume of cases has not surpassed the dismal record of the Trump years.

Instead, DOJ has devoted much of its energy to creating incentives for companies to report their own misconduct. This carrot-rather-than-stick approach may work in cases of transgressions by lower-level employees, but it is ineffective when the rot reaches all the way to the top.

Recently, DOJ rolled out its latest initiative. Unfortunately, it seems to focus mostly on image-burnishing. The department has created a webpage titled Corporate Crime summarizing all the ways in which it goes after business miscreants. It is a helpful list, but it does not include anything new in the way of enforcement—though DOJ’s self-reporting efforts are prominently featured.

There is one interesting feature on the page: a link to a new Corporate Crime Case Database. At the moment, it is a very modest resource consisting of links to 13 press releases issued recently by various branches of DOJ. The page states: “While it is still in the process of being populated, it will eventually contain the significant, relevant cases from each component and U.S. Attorney’s Office, resolved since the end of April 2023.”

We don’t know more about plans for the database because DOJ chose to roll it out with no fanfare—not even a press release. A department spokesperson told the Wall Street Journal that the scope might be widened to include cases resolved in the last several years.

Even with that addition, the database would be a less-than-robust response to the long-standing efforts by Ralph Nader and corporate accountability groups to get the federal government to produce a resource on white-collar offenses comparable to the FBI’s Uniform Crime Reporting Program, which has been assembling detailed data on street crime since the 1930s. It also does not appear to satisfy the proposal put forth by Senators Dick Durbin and Richard Blumenthal, along with Rep. Mary Gay Scanlon, in the Corporate Crime Database Act they introduced in Congress last year.

Since DOJ has been so reserved about the project, it is not clear whether the new database is meant to be its complete response to the proposals by Nader, Durbin et al. Those proposals envision something a lot more ambitious. The Corporate Crime Database Act would require the DOJ’s Bureau of Justice Statistics to create a resource that collects comprehensive information from every federal agency that carries out enforcement actions with respect to corporate offenses.

That sounds like something more akin to what my colleagues and I have been doing with Violation Tracker, which also covers state and local enforcement activity and which extends back to 2000. Our aim has been to provide a repository of both civil and criminal actions in which corporations have been fined or reached settlements for a wide range of offenses.

DOJ, with resources much greater than ours, should be able to create something a lot more substantial than a list of links to its recent press releases.

Pharma Fights to Preserve the Gravy Train

Big Pharma has been fleecing its U.S. customers for so long, the industry came to regard it as a right. That arrangement started to come to an end last year, at least as far as one large customer, the federal government, is concerned. The Inflation Reduction Act included a provision empowering Medicare to begin negotiating some drug prices in 2026.

One pharmaceutical giant has decided to fight to preserve the gravy train. Merck just filed a lawsuit challenging the law, claiming that the obligation to negotiate is an infringement of its constitutional rights. The company argues that its Fifth Amendment protection against government seizure of private property would be violated. It also says that having to sign an agreement reached after negotiation would trample its First Amendment free speech rights.

The Fifth Amendment takings argument is a favorite position of conservatives in opposing all manner of government regulation, but the obligation to negotiate prices is not regulation. It is actually a free market correction to the absurd restrictions that have long existed on the ability of Medicare to bring drug prices back down to earth. The First Amendment argument is laughable.

It is not surprising that Merck would try its chances in court once its lobbying efforts against the law failed. The company has a lot at stake. It rakes in several billion dollars of revenue each year from the sale of diabetes and cancer medications through Medicare plans. Even if its lawsuit initially fails, Merck presumably hopes it will receive a more sympathetic hearing if the case reaches the corporate-friendly Supreme Court.

Freedom from having to negotiate with Medicare is not the only way in which Big Pharma has managed to evade competition. As I described in a report on antitrust cases published in April, drug companies have repeatedly been caught engaging in illegal schemes to block the introduction of lower-cost generic alternatives to their brand-name medications. Since 2000 the industry has paid a total of $10 billion in fines and settlements in these pay-to-delay cases.

Merck is one of those firms implicated in this practice. For example, in 2017 it agreed to pay $60 million to settle class action litigation alleging that its subsidiary Schering-Plough had taken improper actions to block the introduction of a generic version of K- Dur, which is used to treat potassium deficiencies.

Along with anti-competitive behavior, the pharmaceutical industry has a record of questionable practices in its dealings with the federal government. Merck alone has paid nearly $800 million in fines and settlements relating to alleged violations of the False Claims Act. For example, in 2008 it agreed to pay $650 million to resolve allegations that it failed to pay proper rebates to Medicaid and other government health care programs and paid illegal remuneration to health care providers to induce them to prescribe the company’s products.

These forms of misconduct, along with the immunity from having to negotiate prices with Medicare, have for too long given the drug companies the upper hand in their dealings with the federal government. The Inflation Reduction Act takes an important first step toward correcting that situation. It would be a shame if the courts turn back the clock.

Note: Corporate Crime Reporter reports that the Justice Department has quietly introduced a search engine covering its actions against business entities and individuals. As of this writing, the Corporate Crime Case Database contains only 11 entries but more is promised.

More Compliance Officers, Less Compliance

It appears these are boom times for corporate compliance officers. According to an article in Law360, a recent survey by the recruiting firm BarkerGilmore found that that “the demand for compliance talent is higher than ever because of an evolving list of new requirements like environmental, social and governance programs; enterprise risk management and new work culture brought on by post-pandemic norms.” Pay is also rising rapidly for these officers.

This is all good news for those who want to make a career of helping corporations deal with government regulations, but what does it mean for compliance itself? Does the inclination of big business to spend more on this function indicate that corporate behavior is improving?

Based on the data collected in Violation Tracker, that does not seem to be the case. Fines and settlements in the U.S. in 2022 climbed to over $69 billion, the highest annual total in seven years. Over the entire span of time covered by the database, which extends back to 2000, the only higher totals occurred in the mid-2010s, when the annual tallies reached as high as $77 billion due to giant settlements by the likes of BP in connection with the Deepwater Horizon disaster and by the major banks in connection with the mortgage and toxic securities crises.

Last year also saw a jump in the average penalty paid per case. That figure was $2.5 million, up from $2 million the year before. Aside from the $2.9 million average in 2020, last year’s amount was the highest since 2015.

Another indicator that 2022 was a banner year for penalties can be seen in the number of individual parent companies which paid a massive amount–$100 million or more–in fines and settlements. Sixty-three parents gained that dubious distinction, the highest number since 2015.

Included in that group were eleven companies with penalties of $1 billion or more: Allianz, Walgreens Boots Alliance, CVS Health, Teva Pharmaceutical Industries, Wells Fargo, Walmart, AbbVie, Danske Bank, Navient, Bayer and Glencore.

What does it say that penalties are accelerating at the same time that corporations are purportedly putting more resources into compliance? One possibility is that the increasing use of compliance officers is merely window dressing, a gesture meant to satisfy investors concerned about social responsibility. These officers may have little power and influence. They can warn managers about regulatory risks but may have little ability to change behavior that is illicit but profitable.

A more charitable interpretation would be that compliance officers are bringing more violations to light by encouraging companies to self-report infractions. This, in turn, could contribute to increases in overall penalty levels.

This would be a hopeful sign if it meant that companies were at the same time cleaning up their behavior. The problem is that recidivism shows no signs of receding. Year after year, most large companies go on breaking the rules and treating penalties as an affordable cost of doing business as usual.

If compliance officers could do something about that, they would truly be earning their rising pay.