Archives for 2013

Dan Epstein on WINA The Schilling Show 9/30/13

Executive Director Dan Epstein discussing our report on GreenTech Automotive.

LabMD Files Motion for Protective Order to Quash FTC’s Burdensome and Oppressive Subpoenas


CONTACT: Kevin Schmidt, 202-499-2414


LabMD Files Motion for Protective Order to Quash FTC’s Burdensome and Oppressive Subpoenas

Already overstepping its enforcement authority, FTC issues 35 subpoenas for 23 simultaneous depositions

WASHINGTON – Cause of Action (CoA), a government accountability organization, filed a Motion for Protective Order before an Administrative Law Judge on behalf of LabMD seeking to quash 35 subpoenas served by the Federal Trade Commission (FTC) in a single day. The subpoenas are burdensome, oppressive and are consistent with the Commission’s plain goal of forcing LabMD into submission by exhausting the small Atlanta-based cancer diagnosis company’s resources.

CoA is defending LabMD against a complaint brought by the FTC based, in part, on allegations that a third party was able to obtain data from LabMD’s computers through the peer-to-peer (P2P) file sharing program LimeWire. The FTC has attacked LabMD without publishing any data-security regulations or standards and with the knowledge that LabMD’s data security practices are regulated by the Department of Health and Human Services (HHS).  HHS has never suggested that LabMD has violated any patient information data-security regulations or requirements.

In September, CoA filed pleadings challenging the FTC’s statutory authority to regulate patient information data-security practices as “unfair acts or practices” under Section 5 of the FTC Act and denying the Commission’s claim that  LabMD supposedly failed to provide reasonable and appropriate security for personal information on its computer networks.

“From the outset of the FTC’s investigation, the Commission has exerted authority it does not have to punish a business that has done nothing wrong,” said CoA Executive Director Dan Epstein.  “CoA has taken up this fight because the Commission is abusing its power and destroying a small business, and it must be held accountable for demonstrations such as these burdensome subpoenas.”

“No court has ever said that Section 5 authorizes the FTC to regulate patient information data-security practices, or any other data-security practices, for that matter,” explained CoA Senior VP of Litigation Reed Rubinstein.  “Despite the Commission’s repeated requests, Congress has refused to confer upon the FTC jurisdiction over such data-security cases.  Therefore, in an end-run around both the courts and the Congress, the Commission illegally abuses and burdens individual businesses like LabMD.”

CoA asserts in LabMD’s Motion for Protective Order that essentially, the FTC is flexing its “muscles” in retaliation for LabMD’s [public criticism]. No other reason explains why the FTC would issue 35 subpoenas to obtain information it already has. Instead of venerably standing on the strength (or lack thereof) of its Complaint, the FTC, is utilizing the vast resources at its disposal to harass LabMD and its clients. It is demanding irrelevant, costly, unnecessary, and duplicative information in an attempt to crush LabMD and its viability as a business.

The FTC’s bullying tactics include:

  • Conducting a multi-year “civil investigation” requiring LabMD to produce thousands of documents and its principals to submit to multiple examinations by government lawyers all unsupported by any concrete allegation of wrongdoing.  Complying with the FTC’s demands has cost LabMD hundreds of thousands of dollars as well as thousands of hours of management and employee time.
  • Forcing LabMD into an administrative hearing in which the Commission itself makes the “law,” prosecutes the “violations” and then determines the “verdict.”
  • Using abusive tactics that would not be tolerated by any federal court.  For example, the FTC served 35 subpoenas on third parties around the country demanding at least 23 depositions to take place simultaneously.  For LabMD to comply with the FTC’s oppressive subpoenas, LabMD would have to hire more than 23 attorneys and pay for their transportation to appear at depositions in California, Georgia, Pennsylvania and Florida, etc.

Given the FTC’s lack of jurisdiction to even bring such a data-security action against LabMD, it makes it abusive practices all the more egregious:

  • Notwithstanding the FTC’s repeated requests that Congress confer upon it the authority to regulate data-security, Congress has refused to do so.
  • In a 2000 report to Congress, Privacy Online: Fair Information Practices in the Electronic Marketplace: A Report to Congress, for example, the FTC admitted that it “lacks the authority to require firms to adopt information practice policies” and requested that Congress enact legislation providing a federal agency with the authority to regulate data security.  Notwithstanding the FTC’s pleas, Congress has not seen fit to expand the FTC’s jurisdiction.
  • The FTC cannot rely on any statutory precedent for the proposition that the FTC has authority to regulate data-security practices under Section 5 of the FTC Act.
  • Federal District Judge William Duffy recently noted, “There is significant merit to [LabMD’s] argument that Section 5 [of the Federal Trade Commission Act] does not justify an [FTC] investigation into data security practices and consumer privacy issues….”
  • Even assuming, arguendo, that the FTC did have jurisdiction over its asserted claims against LabMD because the Commission has not promulgated any rules, regulations, or other binding guidelines establishing the data-security practices with which it expects compliance, this enforcement action against LabMD violates due process requirements guaranteed and protected by the Fifth Amendment to the U.S. Constitution.

The FTC complaint can be found here, CoA’s answer on behalf of LabMD can be found here, and the Motion for Protective Order can be found here.

About Cause of Action:

Cause of Action is a non-profit, nonpartisan government accountability organization that fights to protect economic opportunity when federal regulations, spending and cronyism threaten it. For more information, visit

About LabMD:

LabMD is a cancer detection facility that specializes in analysis and diagnosis of blood, urine, and tissue specimens for cancers, micro-organisms and tumor markers. You can find out more about their battle with the FTC here.

To schedule an interview with Cause of Action’s Executive Director Dan Epstein, contact Mary Beth Hutchins,  202-400-2721 or Kevin Schmidt,



Related Documents: XP Vehicles v. Department of Energy

Cause of Action is representing XP Vehicles, a San Francisco-based electric car company  in a lawsuit against the federal government concerning the U.S. Department of Energy’s denial of XP’s loan guarantee application under the Advanced Technology Vehicles Manufacturing (AVTM) loan program.

United States Court of Federal Claims

Opposition to Motion to Dismiss (February 18, 2014)

Complaint (January 10, 2013)

United States District Court for the District of Columbia

Opposition to Defendant’s Motion to Dismiss the Official Capacity Claims (October 17, 2013)

Opposition to the Individual Capacity Defendants’ Motion to Dismiss (October 17, 2013)

Memorandum in Opposition to Defendants Motion to Dismiss Official Capacity Counts 2, 3 and 4 (July 30, 2013)

Motion to Amend Complaint (July 30, 2013)

Opposition to Individual Capacity Defendants Motion to Dismiss (July 29, 2013)

Complaint (January 10, 2013)

New York Times: In Regulators’ Sights

In Regulators’ Sights


Published: October 31, 2013

Over the last three weeks, more than 2,200 people have placed orders for $10-to-$40 sets of magnetic stacking balls, rising to the call of a saucy and irreverent social media campaign against a government regulatory agency.

The money from the sales of the so-called Liberty Balls goes to a legal-defense fund. At the crux of the battle is an arcane legal tussle that has caught the attention of a number of mainstream business organizations and free-market legal groups.

It involves an effort by the federal Consumer Product Safety Commission to recall Buckyballs, sets of tiny, powerfully magnetic stacking balls that the magazines Rolling Stone and People once ranked on their hot products lists.

Last year, the commission declared the balls a swallowing hazard to young children and filed an administrative action against the company that made the product, demanding it recall all Buckyballs, and a related product called Buckycubes, and refund consumers their money. The company, Maxfield & Oberton Holdings, challenged the action, saying labels on the packaging clearly warned that the product was unsafe for children.

But the fuss now has less to do with safety. After Maxfield & Oberton went out of business last December, citing the financial toll of the recall battle, lawyers for the product safety agency took the highly unusual step of adding the chief executive of the dissolved firm, Craig Zucker, as a respondent in the recall action, arguing that he controlled the company’s activities. Mr. Zucker and his lawyers say the move could ultimately make him personally responsible for the estimated recall costs of $57 million.

While the “responsible corporate officer” doctrine (also known as the Park doctrine) has been used frequently in criminal cases, allowing for prosecutions of individual company officers in cases asserting corporate wrongdoing, experts say its use is virtually unheard-of in an administrative action where no violations of law or regulations are claimed.

A spokesman for the product safety commission said the group had never used it in a recall action. He declined to say why it was used in this case.

“I think this case presents some important and troubling legal issues that really break new ground legally for the C.P.S.C.,” said Nancy A. Nord, who was the only commissioner to vote against filing the administrative action. Ms. Nord retired from the commission last weekend.

Three well-known business organizations — the National Association of Manufacturers, the National Retail Federation and the Retail Industry Leaders Association — banded together this summer to file a brief urging the administrative law judge reviewing the recall case to drop Mr. Zucker as a respondent.

The groups argue that holding an individual responsible for a widespread, expensive recall sets a disturbing example and runs counter to the business desire for limited liability. They contend that such risk would have a detrimental effect on entrepreneurism and openness in dealing with regulatory bodies.

“It really has a chilling effect on the kinds of things all of us were trying to do, which is involve corporate officers in these kinds of decisions — to decide if something should be reported and if there should be a recall,” said Lee Bishop, a lawyer for the manufacturers association, who helped draft the brief.

Conservative legal groups like Cause of Action, a nonprofit that targets what it considers governmental overreach, have been watching the proceedings with interest and weighing taking some action.

“This really punishes entrepreneurship and establishes a bad precedent for businesses working to create products for consumers,” said Daniel Z. Epstein, the group’s executive director. “It undermines the business community’s ability to rely upon the corporate form.”

Mr. Epstein once worked for a foundation run by Charles G. Koch, who, with his brother David, has funded numerous conservative and antigovernment or antiregulatory causes. He would not disclose the donors behind Cause of Action. The Washington Legal Foundation, which promotes pro-business and free-market positions, has weighed in with a background paper titled “C.P.S.C.’s Misuse of R.C.O. Doctrine Bodes Ill for C.E.O.’s and Consumers.”

The administrative law judge on the case has refused to drop Mr. Zucker’s name from the case. Last month, Mr. Zucker, 34, began the so-called “United We Ball” campaign on Facebook, Twitter and other outlets to raise money for his legal defense fund. The products for sale, called Liberty Balls, are bigger versions of Buckyballs — too big, he says, to be a swallowing risk. So far, he says, the campaign has raised more than $100,000.

“The Consumer Product Safety Act in the Congress is very clear that recalls cannot be conducted by individuals, so entrepreneurs can innovate and create products and don’t have to be in fear of personal bankruptcy and personal financial ruin in the case of a product defect,” Mr. Zucker said in an interview. He added: “But Buckyballs weren’t defective. The commission changed its mind. It said the product was lawful and changed its mind.”

The case is now in the hands of the administrative law judge. If he rules that the product does present a hazard and a recall is warranted, Mr. Zucker may appeal to the commissioners, who will then vote on what action to take.

Buckyballs were created by Mr. Zucker and Jake Bronstein, two friends who said they were down to their last $1,000 each when they invested it in the company. There was something strangely addictive about stacking the powerful little magnets into endless shapes, and the product took off. By 2011, sales reached $18 million. Mr. Bronstein has not been named in the case.

The company had a history of collaborating with the commission, including during a voluntary recall of the product in 2010 to change its warning labels. The original labels said the product was unsafe for people under 13, but after Congress passed a law changing the definition of a child to anyone under 14, the company worked with the commission to recall the product and replace the labels.

The product safety agency says it has reports of about 1,700 emergency room visits involving children who had ingested Buckyballs. The power of the magnet in some cases caused ripped intestines.

“The core issue for Consumer Product Safety Commission is we did not see progress on safety to children,” said Scott Wolfson, a spokesman for the agency. “The labels were not effective,” he said, explaining that many people did not keep the balls in the packaging so the labels were going unnoticed. “Children were getting access to this product,” he said.

After the company protested the recall, the commission approached retailers directly. At least six — including Barnes & Noble, Brookstone and Bed Bath & Beyond — initiated a voluntary recall and agreed to stop selling the product.

Buckyballs were also popular in Europe and elsewhere, including Canada and Australia, which have both initiated similar regulatory actions. The product had distributors in approximately 15 foreign countries, accounting for about 15 percent of sales, according to a spokeswoman for Mr. Zucker. When Maxfield & Oberton went out of business, sales to those distributors stopped as well.

Last week, the commission moved ahead with plans to outlaw these types of small powerful magnets from the marketplace, separate from the recall action. Five doctors testified about safety hazards in a hearing aimed at drafting a federal rule limiting the force and size of magnets for sale to the public.

Statement: Cause of Action on Deputy IG Charles Edwards stonewalling Congress

Cause of Action, a government accountability group which has investigated Department of Homeland Security Deputy Inspector General (IG) Charles Edwards, issued the following response to the letter sent by Chairman McCaskill and Ranking Member Johnson to IG Edwards regarding his delay in providing information related to the Senate’s investigation.

Executive Director Dan Epstein:

“The lack of transparency by and failure of IG Edwards to provide documents to Cause of Action pertaining to allegations of misconduct and abuse drove us to sue DHS for records. But now DHS has taken a new and alarming stance in their affront to transparency: denying both the public’s access to documents as well as stonewalling Congress. Edwards’ failure has now extended beyond a refusal to provide documents; six members of his staff are refusing to conduct interviews with congressional investigators. IG Edwards must be held accountable for his alleged misconduct and his deliberate and continued objection to the public’s right to know about it.”


Cause of Action files opposing briefs in Department of Energy cronyism lawsuit

As we’ve seen over the past month the DOE is reviving its loan program, this time under new management.

Yet Cause of Action (CoA), a government accountability group, hasn’t forgotten how the DOE handled applications for the Loan Guarantee Program in the first go-round.

Today CoA took a step in a lawsuit we filed against the DOE for corrupting its lending programs to favor political insiders, and arbitrarily denying applications by failing to review applications with ‘established merit criteria’ as required by law.

CoA has been investigating the DOE’s loan guarantee program for  more than a year and has uncovered that the agency failed to give XP Vehicles and Limnia, Inc., two qualified applicants under the DOE’s loan guarantee program fair treatment and the honest opportunity to compete for Government loan funds to build advanced technology vehicles and components.

Click here to see the Opposition to Defendant’s Motion to Dismiss the Official Capacity Claims

Click here to see the Opposition to the Individual Capacity Defendants’ Motion to Dismiss

POLITICO: Bobby Jindal, Haley Barbour boosted visa firm

Bobby Jindal, Haley Barbour boosted visa firm

A company closely tied to former Democratic Party Chairman Terry McAuliffe, and currently under scrutiny for allegedly trying to win political favors from the Department of Homeland Security, earned high-powered support only a few years ago from Republican Gov. Bobby Jindal of Louisiana and then-Mississippi Gov. Haley Barbour, according to documents obtained by a nonpartisan watchdog group.

Both Jindal and Barbour wrote letters to DHS in 2008 seeking federal approval for the firm Gulf Coast Funds Management to become a regional EB-5 center – a hub that helps channel foreign investment into American projects and opens a path to green-card status for foreign businessmen.

GCFM, which is now headed by former Secretary of State Hillary Clinton’s brother, Anthony Rodham, has recently been drawn into an internal government investigation into whether a DHS official inappropriately aided the firm.

Republicans have sharply criticized McAuliffe and his former car company, GreenTech Automotive, for collaborating with GCFM and allegedly trying to use political influence to win government approval for EB-5 investments in Virginia. McAuliffe’s relationship with GreenTech started in 2009, well after the Jindal and Barbour letters were sent.

Jindal chairs the Republican Governors Association, which has attacked McAuliffe in TV ads for his ties to GCFM (one August ad cited this POLITICO headline: “Report: DHS probes firm with ties to Terry McAuliffe.”) The Louisiana governor has said that McAuliffe “disqualified” himself from high office through his questionable business dealings.

In documents obtained by the group Cause of Action – and shared exclusively with POLITICO – Jindal and Barbour endorsed GCFM’s bid to become a regional visa center servicing Mississippi and Louisiana. They jointly wrote to Homeland Security Secretary Michael Chertoff on June 19, 2009, to seek support for a company that they said would help the region bounce back from natural disasters.

“We believe that the situation in Mississippi and Louisiana is uniquely affected by the storms of 2005, and GCFM should be granted an exception to invest at the $500,000 level in both states,” the two governors wrote. “These areas are ‘targeted employment areas’ because only capital investment that creates new jobs can bring full recovery and allow all of our people to come home. Given these issues, we request your support for the GCFM regional center in a manner that allows it to fulfill the objectives of the EB-5 program and put funds to work to create needed jobs in Louisiana and Mississippi.”

Earlier in the year – on Feb. 27, 2008 – Jindal wrote separately to Chertoff to lobby for “a regional [EB-5] center that serves all of the state of Louisiana” and mentioned GCFM by name.

“The EB-5 program is an efficient way to direct private equity into all of the regions in Louisiana that need investment capital,” Jindal wrote. “I further understand that Gulf Coast Funds Regional Center has an application pending at this time for a regional center that serves both Louisiana and Mississippi. I ask you to evaluate this application, and all regional center applications from this area as quickly as possible so that investor dollars can be put to use immediately.”

Both Barbour and a spokesman for Jindal told POLITICO that at the time the two governors expressed support for GCFM, neither Terry McAuliffe nor GreenTech Automotive were involved in the project. Rodham only appears to have come on board at GCFM several years later, and McAuliffe didn’t become chairman of GreenTech until after his losing 2009 bid for governor of Virginia.

Barbour said that the point man at the time for GCFM had been a New Orleans-based investor, David Voelker, who died in May of this year. The DHS approval letter for GCFM’s regional center application, dated Aug. 18, 2008, is addressed to Voelker and another investor, George E. Brower II.

“At the time the letter was written, it was different people who were going to have the EB-5 center [and] we were dealing with a different automobile company,” said Barbour, himself a former RGA chairman.

He said a pair of foreign businessmen, Benjamin Yeung and Charles Wang, were involved in the initial EB-5 center application; only Wang ultimately went on to become deeply engaged with GreenTech and its investments in Mississippi.

“There was, as far as I know, no relationship with Hillary Clinton’s brother [in 2008],” Barbour said, emphasizing: “These are different people at a different time.”

Jindal spokesman Kyle Plotkin said in an emailed statement that it was not surprising that the two governors teamed up to advocate for economic development in their two states, and noting that McAuliffe’s involvement with GCFM came later.

“Louisiana and Mississippi have often cooperated since Hurricane Katrina to cut federal red tape and encourage private sector job creation,” Plotkin said. “It’s unfortunate that well after these letters were sent Terry McAuliffe tried to abuse this federal program and take advantage of a town in North Mississippi. Federal authorities should hold him accountable for any violations that might have occurred.”

An email to a GCFM inquiries address seeking comment was not immediately returned.

Cause of Action executive director Dan Epstein said that regardless of the timeline of GCFM’s activities and its relationship with prominent Democrats, that Jindal and Barbour had “very clearly lobbied for GCFM to get approval as a regional center.”

“Political connections should never be the grounds on which a company gets support from the government. We want a transparent and competitive system,” said Epstein, whose group has been highly critical of McAuliffe and his various business connections during the current gubernatorial race.

He noted dryly that Jindal is now “rather critical of Terry McAuliffe and actually cites Mr. McAuliffe’s bad businesses with GreenTech Automotive, which is of course financed by Gulf Coast Funds Management.”

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