BLA Volume VI

1Fall 2015 | USC Business Law Advisor

Volume VIUnderstand How Changes in Tax Law May Affect Offshore Account-Holders and Additional Current Issues in Business Law


USC Business Law AdvisorFall 2015 Editorial Staff

Crystal VineEditor-in-Chief

Andrés CanteroManaging Editor

Anne VazExecutive Articles Editor

Eric Pelletier Senior Executive Editor

Monica BralEditor

Prof. Donald ScottenFaculty Advisor

Tiara Tahmizian Senior Executive Editor

Bryan H. OkEditor

Anne Waddell Senior Executive Editor

Nicholas GarciaEditor


December 21, 2015 Dear Reader,

Welcome to Volume Six of the USC Business Law Advisor. The Advisor is a student-driven publication that features student-written articles on current topics at the intersection of business and law. Members are not required to possess any pre-existing business knowledge before joining the Advisor, and our staff comes from a variety of academic and professional backgrounds. The Advisor brings students together for the common goals of building an expertise in a specific content area, refining practitioner-oriented writing skills, and preparing for life as lawyers and thoughtful citizens.

As the Advisor enters its fourth year of existence, our publication continues to strive for creative and ambitious explorations of novel and niche topics in a practical manner. In this issue, we proudly present five articles written during the Fall 2015 semester by students at the University of Southern California, Gould School of Law. These articles range from traditional business topics, like changes in tax law, to contemporary tech issues, like the legal landscape surrounding 3D printing.

Please keep in mind that these articles do not purport to offer legal advice of any kind. Should you have any questions related to the information or opinions presented in these articles, please consult a licensed attorney.

If you have any questions about the Advisor or would like to write an article for our next issue, please email [email protected]. Thank you for your readership.

Fight On!

Crystal VineEditor-in-Chief


Table of Contents

BRITTANY KITCHENDon’t Fake It Until You Make It or You Will Pay: #Fines Aren’t Fun……….……….………. pg 5

BRIAN ADESMANHow Businesses Can Pay Less and Help More:Negotiating with State Attorneys General…………………………………………………… pg 12

JASMIN ELLIS-LOGANFailing Regulation: Lessons for Dietary Supplement Retailers…………………………….. pg 19

MICHAEL MAHBOBIANOffshore Omnipotence: Recent Tax Revisions Could Punish or Pardon the Offshore Account-Holder………………………………………………………… pg 30

SHIQI BORJIGINLegal Pitfalls to Consider Before 3D Printing a Movie Figurine…………………………... pg 38


By Brittany Kitchen

I. INTRODUCTION As consumers become less receptive to traditional advertisements, many brands are ex-

perimenting with social media to transform their advertisements into something more impact-

ful. This shift has ushered in a new era of false advertising where transparency is lacking and

undercover advertising is rampant. While many companies may not want to involve lawyers in

the marketing and advertising creative process, it is becoming increasingly important they do

so because the Federal Trade Commission (the “FTC”) and State Attorneys General1 are actively

combating deceptive social media practices by launching investigations and bringing enforce-

ment actions against businesses. This recent crackdown means lawyers must recognize unlaw-

ful practices and work with companies to create adequate social media policies, particularly

because deception in the social media context is not always obvious and a robust social media

policy can save a company from hefty fines.

II. THE FEDERAL TRADE COMMISSION ACT & GUIDELINES Consider the following hypothetical: suppose a skincare company, SkinCo, wants to

launch a social media marketing campaign to generate buzz for its new line of products. To

get things started, the marketing team sends out a company-wide e-mail urging employees to

tweet about the new line using the hashtag #SkinMagic. SkinCo also creates a Pinterest board

and pins images of its customers who have achieved the best results using its products. SkinCo

then launches an Instagram contest in which customers have a chance to win a weekend get-

away if they post a picture of themselves with SkinCo products using the hashtag #SkinMagic.

SkinCo also hires a branding and advertising company that helps campaigns go viral by paying

social media users to like, comment, and share social media content.

This hypothetical marketing campaign employs practices used everyday by real

1 This paper focuses on the Federal Trade Commission Act. Each state has its own laws and enforcement guidelines. USC

Bus

ines

s Law

Adv

isor

Don’t Fake It Until You Make It or You Will Pay:

#Fines Aren’t Fun

© Brittany Kitchen 2015


businesses. Although common, the FTC has expressly

deemed these acts as deceptive under Section 5 of the Fed-

eral Trade Commission Act (FTCA), and businesses have

faced enforcement actions or investigations for engaging in

similar behavior.2 Section 5 prohibits “unfair or deceptive

acts or practices in or affecting commerce.”3 Deception is

broadly defined as conduct “likely to mislead reasonable

consumers and affect their behavior or decision about the

product or service.”4

The FTC has authority under the FTCA to enact

rules and create guidelines to define what specific practices

violate Section 5,5 and although not ‘law,’ these guidelines

represent the FTC’s interpretation of Section 5. As a result,

businesses must comply with the FTC’s guidelines or risk

possible corrective action.6 Pursuant to this authority, the

FTC released guidelines to help businesses ensure their

advertising practices are in compliance with Section 5,

including The Guides Concerning the Use of Endorsements and

Testimonials in Advertising,7 .com Disclosures, and The FTC’s

Endorsement Guides: What People are Asking8 (collectively,

“The Guides”). As social media evolves, the FTC continues

to expand the definition of “endorsements” and “advertis-

ing messages” so that it has the authority to regulate a

2 See Deutsch LA, Inc., 2014 WL 6806841 (Fed. Trade Comm’n Nov. 25, 2014); see also, Letter from Mary K. Engle, Assoc. Dir. of Div. of Adver. Practices of Fed. Trade Comm’n to Kenneth A. Plevan (Apr. 20, 2010); see also, Letter from Mary K. Engle, Assoc. Dir. of Div. of Adver. Practices of Fed. Trade Comm’n to Christie Grymes Thompson (Mar. 20, 2014).3 15 U.S.C. 45(a)(1).4 Letter from Fed. Trade Comm’n to Senators Wendell H. Ford & John C. Danforth (Dec. 17, 1980).5 15 U.S.C. 46(g).6 16 C.F.R. Ch. I, Subch. B, Pt. 17.7 16 C.F.R. § 255.0.8 Shannon Bryne, The Age of the Human Billboard: Endorsement Disclosures in New Millennia Media Marketing, 10 J. Bus. & Tech. L. 392, 401-404 (2015).

broad range of online conduct by companies and their

compensated endorsers.

A. Endorsements

An endorsement is any advertising message that

consumers are likely to believe reflects the opinions, beliefs

or experience of the endorser.9 An advertising message is

broadly defined and includes not only verbal or written

communication but also any action conveying an endors-

er’s approval of a certain product, service or business.10 The

Guides make it clear that actions, such as liking a Facebook

post or Instagram picture, pinning a photo on Pinterest, or

retweeting content on Twitter, qualify as endorsements.11

To avoid deception, endorsements must be the honest

beliefs or experiences of the endorser, and any “material

connections” between the advertiser and endorser must

be disclosed.12 A material connection is one that “is not

reasonably expected by the audience” and “might affect

the weight or credibility of the endorsement.”13 Thus, when

someone likes, posts, or shares content on social media

as part of a sponsored campaign, or when the endorser is

being compensated for the act, disclosure is required if the

relationship is not reasonably clear.14

III. APPLYING THE STANDARDS

The audience’s understanding of the advertiser/

9 16 C.F.R. § 255.0(b).10 See Id. 11 FTC’s Endorsement Guides What People are Asking, Fed. Trade comm’n 7- 9 (2013), https://www.ftc.gov/system/files/documents/plain-language/pdf-0205-endorsement-guides-faqs_0.pdf.12 16 C.F.R. § 255.1(a); 16 C.F.R. § 255.5(a).13 16 C.F.R. § 255.5(a).14 Id.

Brittney Kitchen Don’t Fake It Until You Make It or You Will Pay


endorser relationship is key to whether an advertising

message requires disclosure of the relationship. When busi-

nesses target specific groups, particularly the youth, the

reasonable expectation of the audience will be judged from

that group’s perspective.15 Companies are not only required

to ensure their advertising messages have adequate dis-

closures, but must also reasonably monitor endorsements

made by any endorser acting on their behalf such as em-

ployees, bloggers, advertising agencies and public relations

firms.16 Given the constant evolution of technology, it is not

always clear when and how to make adequate disclosures

of material connections between companies and endorsers

on online platforms.

Though some conduct may clearly be deceptive

from a common-sense perspective, these practices are still

widely used. Other conduct might not seem deceptive on

its face, but a detailed reading of The Guides reveals that

the FTC deems these messages to be deceptive because a

disclosure that has been made is not conspicuous enough

or, absent a disclosure, a material connection is not reason-

ably clear. The FTC’s stance on which incentives create a

“material connection” is very broad; even a small gift or

a gift with no financial value could require disclosure.17

When an endorser receives any kind of incentive, the safest

strategy is to require the endorser to disclose the relation-

ship and reasonably monitor that endorser’s disclosure.

15 Shannon Bryne, The Age of the Human Billboard: Endorsement Disclo-sures in New Millennia Media Marketing, 10 J. Bus. & Tech. L. 392, 399 Fn. 65 (2015).16 See 16 C.F.R. §§ 255.1-255.5.17 FTC’s Endorsement Guides What People are Asking, Fed. Trade comm’n 7- 9 (2013), https://www.f tc.gov/system/files/documents/plain-language/pdf-0205-endorsement-guides-faqs_0.pdf.

Not only is this important to prevent liability, but also to

avoid tarnishing a brand’s reputation and causing consum-

er backlash and mistrust.

A. Clearly Deceptive Practices

Conduct that is clearly deceptive warrants substan-

tial penalties. For example, brands that engage in “astro-

turfing,” an advertising tactic in which fake grassroots

support for a product is obtained by secretly compensating

consumers, are being prosecuted and fined by both the FTC

and State Attorneys General.18 Learning Legacy was fined

$250,000 and required to submit monthly reports to the

FTC for the next 20 years for failing to reasonably monitor

its affiliate marketers, who, while posing as independent

reviewers, endorsed Learning Legacy’s guitar-lesson DVDs

in articles, blogs and product review forums without dis-

closing their sales commissions.19 Even though the agree-

ment with the affiliates required them to comply with The

Guides, Learning Legacy did not monitor compliance with

these terms and, as a result, was held liable for the market-

ers’ deceptive practices.20 Additionally, states are cracking

down on astroturfing. In 2009, the New York Attorney

General brought the first astroturfing case in the country

against Lifestyle Lift, a cosmetic surgery company, when its

employees posted anonymous positive reviews on internet

message boards.21 Lifestyle Lift paid $300,000 in penalties.22

18 James B. Astrachan, Social Media Marketing: Testimonials and Endorsements the New Transparency and Attorneys’ Ethics, 45-DEC Md. Bar J. 12, 16 (2012).19 Lisa McGrath, The Role of Legal Counsel in Social Media Strategy, 55 advo-caTe 31 (2012). 20 Id. 21 James B. Astrachan, Social Media Marketing: Testimonials and Endorse-ments the New Transparency and Attorneys’ Ethics, 45-DEC Md. Bar J. 12, 17 (2012).22 Id.



B. Unclear Deceptive Practices

Because some conduct is not obviously deceptive,

the FTC often issues warning letters or cease and desist

orders for first-time violators, instead of penalties.23 For ex-

ample, when an investigation revealed that an advertising

agency had sent a company-wide e-mail urging its employ-

ees to kick off a new ad campaign on Twitter for its client,

Sony, by using the hashtag #GAMECHANGER, the FTC

only issued a cease and desist order.24 Although the hashtag

was part of the campaign, this disclosure did not adequate-

ly reveal the material connection between the agency’s

employees and its client and any future inadequate disclo-

sures would result in fines of $16,000 for each violation.25

Similarly, in a matter of first impression, Cole Haan was

merely warned that its Pinterest contest was in violation of

Section 5.26 Cole Haan instructed its contestants to create a

Pinterest board entitled “Wandering Sole” and pin images

of Cole Haan shoes with the hashtag #WanderingSole for

a chance to win a $1,000 shopping spree.27 Unfortunately,

since the hastag did not properly convey that the contes-

tants were creating these boards as part of a sponsored

campaign, these instructions were found to be inadequate

and Cole Haan was responsible for the purportedly

23 See Letter from Mary K. Engle, Assoc. Dir. of Div. of Adver. Practices of Fed. Trade Comm’n to Christie Grymes Thompson (Mar. 20, 2014). 24 Deutsch LA, Inc., 2014 WL 6806841 (Fed. Trade Comm’n Nov. 25, 2014).25 Id.26 Letter from Mary K. Engle, Assoc. Dir. of Div. of Adver. Practices of Fed. Trade Comm’n to Christie Grymes Thompson (Mar. 20, 2014).; See also, Matthew E. Liebson, Daniel F. McInnis, Thomas F. Zych & Darcy M. Brosky, When Does Social Media Use Create a Product Endorsement? LexoLogy.com (JuLy 15, 2014), http://www.lexology.com/library/detail.aspx?g=af99e026-55ba-4cf5-8aa1-0b6ca6116b4d.27 Id.

deceptive Pinterest boards created by its contestants.28

IV. PROVIDING PROPER DISCLOSURE Clearly, what constitutes proper disclosures on

social media platforms is still a gray area. Much of the

disclosure guidelines in The Guides merely offer business-

es factors to consider because the FTC understands that it

must give advertisers “the flexibility to be creative in de-

signing their ads.”29 While The Guides do provide specific

examples of adequate disclosures in certain circumstances,

the FTC cannot address every situation that might arise.

The FTC has specifically addressed the conduct in

the hypothetical marketing campaign of SkinCo and found

that this conduct fails to adequately disclose the material

connection between the company and its endorsers. Ac-

cording to The Guides, SkinCo’s Instagram contest would

not be deceptive if SkinCo had instructed contestants to use

the hashtag #contest.30 The tweets by its employees would

still be deceptive if the employees disclosed their relation-

ship on their respective profile pages because the relation-

ship must be disclosed in the message.31 It gets tricky when

posting endorsements relating to the results achieved by

one or more consumers because consumers are likely to

interpret these endorsements as representative of what all

28 Id.29 .com disclosures: How to Make Effective Disclosures in Digital Advertising, Fed. Trade comm’n 7 (2013), https://www.ftc.gov/sites/default/files/attach-ments/press-releases/ftc-staff-revises-online-advertising-disclosure-guidelin-es/130312dotcomdisclosures.pdf. 30 FTC’s Endorsement Guides What People are Asking, Fed. Trade comm’n 7- 9 (2013), https://www.ftc.gov/system/files/documents/plain-language/pdf-0205-endorsement-guides-faqs_0.pdf.31 Id. at 20.



consumers will generally achieve.32 In its Pinterest pictures

of customers’ results, it would not be adequate for SkinCo

to merely disclose that “results are not typical” or “individ-

ual results may vary.”33 SkinCo would have to disclose the

generally expected results achieved by consumers.34

When SkinCo hires a branding and advertising

company to pay users to help its content go viral, it must

ensure that the affiliate requires users to disclose that they

are being compensated, because SkinCo will ultimately be

held liable for the company’s deceptive actions.35 Using

the hashtag #PaidAd or #PaidtoPost would be sufficient

for the users who commented or shared content so long as

the disclosure is conspicuous.36 On the other hand, paying

users to “like” a photo on Facebook or Instagram could not

avoid being deemed a deceptive act since the “like” func-

tion does not allow for adequate disclosures.37 The FTC has

made it clear that the purchaser and seller of fake “likes”

could face enforcement actions because the conduct is

clearly deceptive.38 However, merely offering incentives to

actual customers who “like” Facebook conduct is different

from buying fake likes. The FTC has not yet taken a stance

on whether nondisclosures in these situations would be de-

ceptive because it does not know “how much stock social

network users put into “likes”

32 16 C.F.R. § 255.2(b).33 FTC’s Endorsement Guides What People are Asking, Fed. Trade comm’n 7- 9 (2013), https://www.ftc.gov/system/files/documents/plain-language/pdf-0205-endorsement-guides-faqs_0.pdf.34 Id.35 Id. at 9.36 Id. at 11-12. 37 Id. at 938 Id.

when deciding to patronize a business.”39

V. RECOMMENDATIONS Since adequate disclosures are not always clear and

The Guides cannot address every situation, it is important

that businesses involve legal counsel in specifically tailor-

ing social media policies to their products or services and

the online platforms they use to connect with consumers.

Having a proper social media policy in effect, and ensuring

said policy is being followed, can be the difference between

merely receiving a warning or paying significant fines,

either of which could lead to an embarrassing investigation

and loss of consumer trust.40

Hyundai was not fined when its marketing agency

provided gift certificates to bloggers who posted content

related to Hyundai’s Super Bowl advertisements without

disclosures because this conduct violated its express social

media policies and Hyundai acted quickly to handle the

problem.41 Similarly, Ann Taylor was not fined when it

provided gift bags to fashion bloggers who wrote about its

new collection.42 Although Ann Taylor did not have a writ-

ten policy on product endorsements, it had posted a sign

advising bloggers to disclose their gifts and some followed

the advice. 43 Additionally, during the investigation it

39 Id. 40 Lucille M. Ponte, Mad Men Posing as Ordinary Consumers: The Essential Role of Self-Regulation and Industry Ethics on Decreasing Deceptive Online Consumer Ratings and Reviews, 12 J. marshaLL rev. InTeLL. ProP. L. 462, 488-489 (2013).41 Id. at 489.42 Id. at 488-489.43 Id.



created a written policy that included monitoring its blog-

gers to ensure they complied with the disclosure policy.44

In addition to tailoring social media policies to the

specific issues it faces, a company must also consider the

risk of harm, both physical and financial, that deceptive

practices can cause to consumers.45 A company that sells

health products will need a more comprehensive policy

than a company that sells clothing since a deceived con-

sumer may suffer substantial harm.46

There are, however, four essential elements for

any company’s social media policy.47 At a minimum, the

policies should: (1) explain disclosure responsibilities; (2)

include a list of what can and cannot be said about the

brand’s products or services – all claims must be substanti-

ated; (3) require reasonable monitoring of what endorsers

are saying; and (4) include procedures on responding to

questionable conduct.48 Furthermore, it is imperative that

all people who may speak on behalf of the company be

thoroughly trained on their responsibilities under the poli-

cy and the law.49

As a practical matter, the policy should also include

broad cautionary provisions that address the two main

considerations for disclosures: (1) proximity to the relevant

message or claim; and (2) language that adequately con-

veys a material connection between the advertiser and

44 Id. 45 FTC’s Endorsement Guides What People are Asking, Fed. Trade comm’n 7- 9 (2013), https://www.ftc.gov/system/files/documents/plain-language/pdf-0205-endorsement-guides-faqs_0.pdf.46 Id.47 Id.48 Id.49 Id.

endorser.50 Finally, to avoid the possibility of an

investigation by the FTC, the policy should:

1) Require customers to disclose when they receive

an incentive from a company, including product

samples, entry into a contest or sweepstakes and

even just the chance to be featured on the compa-

ny’s website or social media page. Examples of

disclosures on social media platforms include

#ad, #sponsored, #contest or #freesamples, how-

ever, online platforms such as blogs or websites

should include a brief statement explaining the

nature of the relationship rather than a mere

hashtag;

2) Ensure employees know that they must disclose

they work for the company when they post

as part of a sponsored campaign or receive an

incentive for posting on social media. It is not

enough that their employment is listed on their

profile page. The disclosure, such as #Iwork-

4SkinCo or #SkinCoEmployee, must be clearly

displayed within the message;

3) Ask to review the social media policies of adver-

tising agencies, public relations firms and any

other affiliate that will be disseminating adver-

tising messages on the company’s behalf before

employing them;

50 Id.



4) Specifically prohibit deceptive practices such as

astroturfing and undercover marketing without

adequate disclosures; and

5) Provide examples and illustrations of conspicu-

ous disclosures and explain that the disclosures

must be close to the endorsement, clear and easy

to read and in the same font as the surrounding

text.

VI. CONCLUSION With the FTC and states taking active measures

to crackdown on deceptive social media practices, every

company should create a social media policy, regardless

of whether or not the company is active on social media.

It is also important for businesses to take preventative

measures, such as training and reasonably monitoring any

agents disseminating advertising messages on behalf of the

brand; otherwise companies may be held liable for their

conduct. Robust social media policies can act as insurance

against penalties imposed by the FTC, since the existence

and enforcement of these policies is one of the factors the

FTC considers in deciding whether a fine or warning is

most appropriate. Above all, brands should avoid any

conduct that is even potentially deceptive. Even if the FTC

only issues a warning, the investigation itself can tarnish a

company’s reputation and cost the company a lot of money

defending an enforcement action. Since social media is

continuously evolving, the gray area of the law will con-

tinue to expand and it will be harder to know what is and

is not deceptive. Lawyers must play an active role in the

marketing and advertising initiatives to ensure its clients or

employers are protecting their brand.



By Brian Adesman

I. INTRODUCTIONCorporations face many unique challenges when negotiating settlement agreements

with state attorneys general (“state AGs”). While the Federal Department of Justice is one soli-

tary unit, state AGs come in various (political) shapes and (personality) sizes. The variability in

styles amongst state AGs often inhibits corporate parties from adopting a cooperative strategy

when negotiating settlements with state AGs. This effect is further exacerbated by the massive

increase in multistate AG investigations, creating an ever-changing cartel of various state AGs

for corporations to deal with in multistate disputes.

Far too often, corporate parties interpret state AG investigations as litigious fights,

resulting in expensive penalties, rather than using such investigations as opportunities to make

both parties and the general public better off. This article will shed light on the concerns and

considerations factoring into state AG decision-making while proposing creative provisions to

include in multistate settlement agreements to generate mutually beneficial outcomes for both

parties.

II. POLITICAL CONSIDERATIONS AMONG STATE ATTORNEYS GENERAL State AGs are elected as follows: popularly elected in forty-three states as well as in

the District of Columbia and Guam; appointed by the governor in Alaska, Hawaii, New Hamp-

shire, New Jersey and Wyoming; elected by the legislator in Maine and the Tennessee Supreme

Court in Tennessee.1 Research indicates elected AGs are twice as likely as appointed AGs to later

run for higher office.2 Thus, political aspirations can affect state AGs’ decision-making. For

instance, elected AGs are more likely to use high profile litigation to enhance their future politi-

cal prospects.3 Additionally, elected AGs are more willing to frustrate governors’ programs and

1 About NAAG, NAAG, http://www.naag.org/naag/about_naag.php (last visited Jan. 24, 2013).2 Colin Provost, When is AG Short for Aspiring Governor? Ambition and Policy Making Dynamics in the Office of State Attorney General, 40 PuBLIus 597, 612 (2010).3 Id. U

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rHow Businesses Can Pay Less and Help More:Negotiating with State Attorneys General

© Brian Adesman 2015


represent “the public as they see it” instead of acting as an

extension to the Governor’s office.4

Whether elected or appointed, state AGs often

use their position as a stepping-stone to run for higher

governmental positions. This trend is so common that the

acronym “AG” is sometimes referred to as “Aspiring Gov-

ernor.”5 As such, state AGs will often consider their public

image when deciding which cases they pursue and which

terms to include in settlement agreements with corporate

parties.6 Dr. Colin Provost, a researcher focused on the

policy decisions of state AGs found, “AGs will attempt to

shape policy in ways that are more likely to translate into

electoral rewards later on. Moreover, AGs have a great deal

of latitude in pursuing their policy objectives, as they have

the authority to act as they see fit, in the public interest.”7

Thus, corporate parties subject to state AG investigations

should use an AG’s inherent motivation for policy change

as a way to negotiate for mutually beneficial non-monetary

restitution provisions.

III. NON-MONETARY RESTITUTION IN SETTLE-MENT AGREEMENTS

During negotiations, state AGs and corporate

defendants are often hyper-focused on monetary damages,

causing them to overlook valuable opportunities to draft

4 James Brent, The Judiciary and the Dual Executive in the American States 60-63 (2005) (unpublished Ph.D. dissertation, Ohio State University)(on file with authors).5 Supra note 2, at 604 (reporting about fifty-four percent of attorneys general who began their service between 1988 and 2003 eventually ran for higher office).6 See Supra note 2, at 597 (stating “AGs who are active in multistate litiga-tion are also likely to run for higher office”). 7 Supra note 2, at 604.

creative non-monetary provisions tailored to remedy each

specific dispute. Additionally, when corporations pay large

fines to state AGs, the funds from these fines are often di-

verted away from helping citizens in need and more often

used to help politicians.8

Provisions for non-monetary restitution can turn

settlement negotiations into mutually beneficial opportuni-

ties for the corporate parties, the state AGs, and the affected

citizens of each state. Below are some notable examples.

A. Funding Consumer Education Programs and In-

ternal Corporate Policy Reform

The settlement agreement between New York AG

Eric T. Schneiderman and the credit reporting agencies

(“CRAs”) Equifax, Experian, and Transunion is a great ex-

ample of an agreement successfully implementing import-

ant, wide-reaching corporate change rather than merely im-

posing punitive fines. In March of 2015, Mr. Schneiderman

and the country’s three leading CRAs finalized a settle-

ment, which contained no monetary penalties but included

many interesting and creative provisions for non-monetary

restitution. For example, the agreement outlined a three-

year consumer education campaign in which the agencies

were required to “conduct a credit reporting-themed

8 Edward Krudy, Bank Settlements Create Windfall For US, and Wrangling Over How it Is Spent, reuTers (JuLy 24, 2014), available at http://www.reuters.com/article/2014/07/24/usa-banks-settlements-idUSL2N0PX-2EN20140724 (“Often money from settlements has been used for general budget purposes even though it may have been targeted more specifically. For years, U.S. states have found ways to divert some of the $200 billion tobacco companies agreed in 1998 to pay over 25 years away from smoking and other health programs. Similarly, some of the money from a national foreclosure settlement stemming from the 2008 financial crisis was used by the states to balance budgets and other projects rather than to help people hit by foreclosures.”).

Brian Adesman How Businesses Can Pay Less and Help More


educational campaign through which they shall create,

distribute, and present messages designed to educate con-

sumers on specific topics relating to credit reporting and

distribute the educational content through unpaid place-

ments of public service announcements, internet chats and

other online content, and paid placements in print, radio

and television media.”9 Consumer education programs like

this ensure consumers are better informed, corporations are

held accountable, and future problems are avoided.

As evidenced by the Schneiderman settlement,

these programs can create positive publicity for both the

corporation and the state AG. The AG’s press release head-

line read: “A.G. Schneiderman Announces Groundbreaking

Consumer Protection Settlement With The Three National

Credit Reporting Agencies”10 while the CRAs’ press release

read, “Equifax, Experian and TransUnion Launch Nation-

al Consumer Assistance Plan to Enhance Credit Report

Accuracy, Consumer Experience.”11 This agreement was

used as a template for a subsequent 31-state settlement in-

volving the same three companies. The 31-state settlement

was almost identical but included a relatively small penalty

totaling $6 million to be paid to the states involved.12

9 Settlement Agreement, aTTorney generaL new york 26 (march, 2015), http://www.ag.ny.gov/pdfs/CRA%20Agreement%20Fully%20Executed%203.8.15.pdf (internal defined terms omitted). 10 A.G. Schneiderman Announces Groundbreaking Consumer Protection Settle-ment With The Three National Credit Reporting Agencies, aTTorney generaL new york, http://www.ag.ny.gov/press-release/ag-schneiderman-announc-es-groundbreaking-consumer-protection-settlement-three-national. 11 Equifax, Experian and TransUnion Launch National Consumer Assistance Plan to Enhance Credit Report Accuracy, Consumer Experience, Pr newswIre (march 9, 2015), http://www.prnewswire.com/news-releases/equifax-ex-perian-and-transunion-launch-national-consumer-assistance-plan-to-en-hance-credit-report-accuracy-consumer-experience-300047158.html. 12 Assurance of Voluntary Compliance / Assurance of Voluntary Discontinuance, Iowa aTTorney generaL (may 2015), https://www.iowaattorneygeneral.gov/media/cms/Equifax_Experian_TransUnion_Iowa_Ag_B96FE1387B199.pdf.

B. Customer Service Provisions

Some settlement agreements include mandated

changes to the defendant’s business model to ensure

greater customer satisfaction. For example, an agreement

between AGs from Ohio and Washington and the company

Form Giant LLC contained a provision requiring defen-

dants to “maintain a toll-free number that is answered

by a live operator without putting the customer on hold

for more than 60 seconds.”13 These provisions provide an

immediately recognizable benefit to affected citizens by

providing them with better customer service. Additionally,

these provisions benefit the business involved by helping

the company re-build its reputation through actions rather

than fines.

C. Debt Relief

As a result of a multistate investigation by the

North Carolina and Virginia AGs, the states accused Free-

dom Stores, Inc. (“Freedom Stores”) of engaging in illegal

debt collection practices largely aimed at members of the

military. Freedom Stores negotiated a settlement with the

AGs that would credit or refund more than $2.5 million to

consumers while only paying a penalty of $100,000 to the

AGs’ offices.14

When practicable, debt forgiveness can be a more

expedient and targeted remedy for affected consumers.

Instead of forcing businesses to pay punitive fines, then

13 Agreed Consent Judgment Entry and Order, ohIo aTTorney generaL sec. order ¶7(F) (may 9, 2014) http://www.ohioattorneygeneral.gov/Files/Briefing-Room/News-Releases/Consumer-Protection/2014-05-12-Con-sent-Judgment.aspx. 14 Stipulated Final Judgment and Order, consumer FInance.gov ¶ 22, ¶ 30 (dec. 18, 2014), http://files.consumerfinance.gov/f/201412_cfpb_pro-posed-order_freedom-stores_va-nc.pdf.



organizing the money into a relief fund in which consum-

ers can apply for restitution, state AGs can force businesses

to forgive consumer debt, reducing transaction costs for all

parties involved. This method saves the AG administration

costs by avoiding the distribution and allocation of a relief

fund. As a result, more value from the settlement goes di-

rectly to the consumer. Additionally, debt relief can benefit

the businesses involved from a public relations standpoint.

For instance, in a later statement, Freedom Stores claimed

that it “voluntarily agreed to forgive more than two million

dollars in loans.”15 By characterizing the restitution as “vol-

untary debt forgiveness,” Freedom Stores dictated public

perception, casting the company in a more positive light.

Freedom Stores also used the settlement as an opportuni-

ty to garner more positive press by funding a consumer

education program.16 A spokesperson for Freedom Stores

stated, “we are redoubling our efforts to educate customers

on money management fundamentals through our on-

line MoneySKILL course. More than 1,000 customers have

already completed the course, receiving a $100 Freedom

Store gift card. In 2015, we have set the goal of 5,000.”17

By providing gift cards to those who completed the con-

sumer education course, Freedom Stores not only created

goodwill with the general public by providing consumer

education, but also gained future business by providing

gift cards.

15 Barbara S. Mishkin, CFPB settles with military base retailer and related companies for alleged unlawful debt collection practices, cFPB monITor (dec. 19, 2014), https://www.cfpbmonitor.com/2014/12/19/cfpb-settles-with-mil-itary-base-retailer-and-related-companies-for-alleged-unlawful-debt-collec-tion-practices/.16 Id.17 Id.

D. “Not A Fine Or Penalty” Provision

Some settlements specify any money paid to the

state AGs “does not constitute a fine or penalty” which

allows the business party to potentially treat this money as

a tax write-off. For example, the 31-state Settlement

Agreement with the CRAs Equifax, Experian, TransUnion

included a provision stating, “[t]he States and the CRAs ac-

knowledge that the payment described herein is not a fine,

civil penalty, or forfeiture.”18 Businesses should negotiate

for these provisions to offset some of the monetary resti-

tution paid. However, some settlements expressly forbid

businesses from labeling the payment as anything but a

fine to prevent the business from escaping tax liability.19

E. “Payment Suspended Upon Compliance”

Provision

After the Federal Trade Commission (“FTC”) and

ten state AGs investigated the business practices of Carib-

bean Cruise Line Inc. (“CCL”), the company was charged

with making “billions” of illegal robocalls. CCL agreed to

settle the matter by paying $7.7 million in civil penalties

to the affected states.20 However, this payment would be

suspended after CCL paid $500,000, essentially leaving

18 Assurance of Voluntary Compliance / Assurance of Voluntary Discontinuance, Iowa aTTorney generaL 36 § x, (may, 2015), https://www.iowaattor-neygeneral.gov/media/cms/Equifax_Experian_TransUnion_Iowa_Ag_B96FE1387B199.pdf ; See also Settlement Agreements with Florists’ Transworld Delivery, Inc. and Classmates, Inc., N.J. gov, http://nj.gov/oag/newsreleases15/FTD_Final-Consent-Jdmt.pdf. 19 See Settlement with Freedom Stores, Inc., consumer FInance. gov ¶34(a), http://files.consumerfinance.gov/f/201412_cfpb_proposed-order_free-dom-stores_va-nc.pdf (“deFendanT may noT cLaIm, asserT or aPPLy For a Tax deducTIon”). 20 Stipulated Order For Permanent Injunction and Civil Penalty Judgment Against Carribbean [sic] Cruise Line, Inc., FTc. gov §3(a) (mar. 3, 2015), https://www.ftc.gov/system/files/documents/cases/150303caribbeancruise-linesstip.pdf.



the remaining $7.2 million a legal fiction.21 This agree-

ment included comparable suspended penalties for CCL’s

co-defendants.

In a similar agreement, the FTC and AGs of Illi-

nois, Kentucky, and North Carolina accused operators of

Hi-Tech Marketing, a Kentucky-based company, with op-

erating an illegal pyramid scheme and deceiving consum-

ers.22 The resulting settlement order imposed a judgment

of more than $169 million, which would be suspended

when the defendants surrendered assets with an estimated

value of at least $7.75 million.23

Lastly, a consent judgment between Level 10

Marketing, Inc. and seven state AGs waived the entire

civil penalty owed to the states on the condition that the

company remained in compliance with the Consent Judg-

ment.24

These provisions allow business parties to pay

reasonable fines while also providing them with increased

incentive to comply with the settlement terms. Additional-

ly, these provisions allow state AGs to boast large settle-

ment numbers while ensuring that the involved business-

es are able to pay the requested restitution without filing

for bankruptcy.

21 Id. at §3(B). 22 Stipulated Order for Permanent Injunction and Monetary Judgment, FTc.gov §3 ( may 9, 2014), https://www.ftc.gov/system/files/documents/cases/140513fortunehitechstip.pdf.23 Id.24 Consent Judgment, ncdoJ.gov §3(c) (nov. 28, 2012), http://www.ncdoj.gov/getattachment/f86e6c62-855b-4ac6-b1f6-6188e415c5fb/Level_10_Consent_Judgment.aspx.

IV. POTENTIAL FUTURE THREAT TO NON-MON-ETARY PROVISIONS

The provisions discussed above are only in the best

interest of all the negotiating parties when state AGs are

actually handling the case. However, state AGs are increas-

ingly hiring private law firms on a contingency basis to

litigate cases.25 As such, the private law firms, acting on

behalf of the AG, have an interest in maximizing the dollar

amount of the settlement, rather than implementing provi-

sions to create lasting change. Some state legislators combat

this trend by requiring AGs to make a specific “finding of

need for outside counsel” or limiting attorneys’ fees.26 Cor-

porate parties should look up the laws in each state and be

cognizant of the change in incentive when negotiating with

a privately hired law firm.

V. CONCLUSION When negotiating with state AGs, corporate parties

should consider developing creative non-monetary rem-

edies to produce more mutually beneficial outcomes for

all parties involved. While this article proposes a few, the

possibilities are endless and the waters remain uncharted.

25 Eric Lipton, Lawyers Create Big Paydays by Coaxing Attorneys General to Sue, ny TImes (dec. 18, 2015), http://www.nytimes.com/2014/12/19/us/poli-tics/lawyers-create-big-paydays-by-coaxing-attorneys-general-to-sue-.html. 26 Id.



By Jasmin Ellis-Logan

I. INTRODUCTIONMany consumers assume vitamin supplements are safe.1 This may be because some

supplement labels encourage adult consumers to take vitamins daily to promote everything

from a healthy metabolism, hair, and bone development. Other vitamin products appear

non-threatening because of their marketing toward children—the products look fun, colorful,

and even come in dinosaur shapes. Yet contrary to popular belief, the vitamin industry lacks

heightened regulation.2 The U.S. Food and Drug Administration (“FDA”) does not oversee

a supplement’s efficacy or ingredients prior to it being marketed.3 Therefore, little consumer

transparency exists between the time a supplement is manufactured and the time it is put

on retail shelves. This lack of transparency has led to an increase in the potential harm to

consumers’ health and subsequent lawsuits.4

The lack of stringent supplement regulations creates a unique opportunity for retailers

and manufacturers to adopt their own standards for testing the quality of products. For instance,

GNC Holdings, Inc., one of the largest vitamin retailer chains in the United States, will enforce

its own higher testing standards for its store-branded products in 2016.5 GNC’s step towards

implementing more exacting testing criteria should influence other supplement retailers, such as

Target, Walgreens, Rite-Aid, and Wal-Mart, to strengthen their own standards. There are benefits

to tougher testing standards, like assuring consumers of a product’s efficacy, quality, and safety,

and reducing a company’s litigation costs associated with mislabeled or adulterated products.

1 FAQ’s on Dietary Supplements, consumer rePorT, http://www.consumerreports.org/cro/2012/04/what-s-behind-our-dietary-supplements-coverage/index.htm (last visited Nov. 5, 2015). 2 Id.3 Are Dietary Supplements Approved by the FDA?, u.s. Food and drug admIn., http://www.fda.gov/AboutFDA/Transparency/Basics/ucm194344.htm (last visited Nov. 5, 2015).4 See Jonathan Rundles, Wal-Mart, Target, Walgreen Sued Over Herbal Supplements, Law 360 (Feb. 5, 2015, 5:14 PM), http://www.law360.com/articles/618601/wal-mart-target-walgreen-sued-over-herbal-supplements; Ed Adamczyk, Justice Department targets dietary supplement makers, uPI.com (Nov. 18, 2015), http://www.upi.com/Top_News/US/2015/11/18/Justice-Department-targets-dietary-supplement-makers/1041447856449/. 5 Letter from Eric T. Schneiderman, New York Attorney General, to Michael G. Archbold, Chief Executive Officer of GNC Holdings, Inc. (Mar. 27, 2015), available at https://www.ag.ny.gov/pdfs/NYAG-GNC%20AGREEMENT.%20FINAL%20AGREEMENT.%203.28.2015..pdf.

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Moreover, since it appears that the government is going to

implement stricter regulations for industry requirements in

the near future, vitamin retailers should be proactive and

create stricter testing methods now. Although there may be

costs associated with retailers taking these steps, these costs

are outweighed by the benefits of self-regulation.

II. THE REGULATORY SCHEME OF THE DIETARY

SUPPLEMENT INDUSTRY

The FDA only regulates a dietary supplement after

it has been placed in the market. Hence, ex ante, there is

minimal oversight over the creation and manufacturing

aspects of a supplement. Supplement manufacturers are

required to follow the regulatory scheme of Current Good

Manufacturing Practices (“CGMP”), rules set forth by the

FDA to ensure that supplements are produced with quality,

do not contain impure ingredients, and that all claims on

the label are “truthful and not misleading.”6 Even so, the

FDA does not approve the products’ claims of truthfulness,

ingredients, or CGMP’s compliance prior to the product’s

presence in the market place.7 Thus, many multivitamins,

herbal supplements, and diet pills are sold without proof of

their effectiveness or approval from the FDA.8

Yet, the FDA can issue a “Warning Letter” to

6 21 C.F.R. § 111 (2015). (Requiring anyone who manufactures, labels or holds a dietary supplement to comply with Good Manufacturing Practices); FDA Issues Dietary Supplements Final Rule, u.s. Food and drug admIn. (June 22, 2007), http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/2007/ucm108938.htm.7 FDA Basics: Are Dietary Supplements Approved by the FDA?, u.s. Food and drug admIn., http://www.fda.gov/AboutFDA/Transparency/Basics/ucm194344.htm (last visited Nov. 5, 2015). 8 Dietary Supplements: What You Need To Know, naTIonaL InsTITuTe oF heaLTh, https://ods.od.nih.gov/HealthInformation/DS_WhatYouNeedToKnow.aspx (last visited Nov. 5, 2015).

manufacturers who are found to “significantly” violate

the CGMP standards.9 The purpose of a Warning Letter

is to notify a manufacturer of a violation and to give that

manufacturer a timeframe to correct all violations.10 A

manufacturer or retailer can receive a Warning Letter if

the FDA suspects that a product has been mislabeled,

“misbranded,” meaning it contains inaccurate ingredients

based on the label, or “adulterated,” which occurs

when a vitamin has not been prepared under the CGMP

standards or contains an ingredient that would cause “an

unreasonable risk of injury.”11

With little enforcement in the supplement

industry, it is no surprise that government officials want

to increase regulation by urging manufacturers to follow

the CGMP.12 For example, New York Attorney General

Eric Schneiderman issued cease and desist letters to Wal-

Mart Stores, Inc., Walgreens Co., Target Corp., and GNC

Holdings, Inc., notifying each company that their store-

branded supplements were suspected of being mislabeled

and misbranded.13 Interestingly, GNC was the only

9 What is a Warning Letter?, u.s. Food and drug admIn., http://www.fda.gov/AboutFDA/Transparency/Basics/ucm194986.htm (last visited Nov. 5, 2015).10 Id.11 21 U.S.C. § 343(q)(5)(F) (2010); Labeling Requirements-Misbranding, u.s. Food and drug admIn., http://www.fda.gov/MedicalDevices/DeviceRegulationandGuidance/Overview/DeviceLabeling/GeneralDeviceLabelingRequirements/ucm052190.htm (last visited Nov. 18, 2015); The Science Behind Supplements, councIL For resPonsIBLe nuTrITIon (June 2013), http://www.crnusa.org/pdfs/DS-RegsLabel-061510.pdf; 21 U.S.C §§342(f)-(g), gPo.gov, http://www.gpo.gov/fdsys/pkg/USCODE-2011-title21/pdf/USCODE-2011-title21-chap9-subchapIV-sec342.pdf.12 Letter from State Attorney Generals to Jerry Moran, Joe Pitts, Richard Blumenthal and Gene Green (Apr. 2, 2015), available at http://www.ag.ny.gov/pdfs/Final%20Letter%20Re%20Herbal%20Supplements.pdf. 13 Sarah Kaplan, GNC, Target, Wal-Mart, Walgreens accused of selling adulterated ‘herbals’, The washIngTon PosT (Feb. 3, 2015), http://www.washingtonpost.com/news/morning-mix/wp/2015/02/03/gnc-target-wal-mart-walgreens-accused-of-selling-fake-herbals/.

Jasmin Ellis-Logan Failing Regulation


participating retailer that agreed to improve its testing

standards and to make those results public.14 As part of

the agreement with the Attorney General, GNC’s testing

standards would include testing the actual plant, or herb

that is used in a vitamin, to ensure its safety.15 GNC’s new

policy is set to become effective in late 2016.16 By taking

the initiative to adopt a heightened standard for its dietary

supplements, GNC may have raised the bar for retailer

responsibility in the vitamin industry.

III.THE DIETARY SUPPLEMENT CONSUMER:

CHARACTERISTICS AND CONCERNSStudies show that dietary supplement consumers

take vitamins to improve and maintain their health.17

The National Health and Nutrition Examination Survey

(NHANES) report of 2007-2010 states that people who use

dietary supplements have healthier characteristics: they are

more physically active, less likely to smoke, and have lower

body mass indexes. In addition, 45 percent of participants

in the study said they took vitamins to “improve overall

health,” and another 33 percent said they use vitamins to

“maintain” health.18

Even though the FDA does not require supplement

retailers to prove a vitamin’s safety prior to its appearance

14 Letter from Eric T. Schneiderman, New York Attorney General, to Michael G. Archbold, Chief Executive Officer of GNC Holdings, Inc. (Mar. 27, 2015) available at https://www.ag.ny.gov/pdfs/NYAG-GNC%20AGREEMENT.%20FINAL%20AGREEMENT.%203.28.2015..pdf.15 Id.16 Id.17 Reagan Bailey, Paul Thomas, Paige Miller, & Johanna Dwyer, Why US Adults Use Dietary Supplements, Jama InTernaL med. (Mar. 11, 2013), http://archinte.jamanetwork.com/article.aspx?articleid=1568520.18 Id.

on store shelves, retailers should have higher testing

standards to increase consumers’ confidence in their

vitamin products. One reason for this is because a dietary

supplement’s purpose is to add nutritional value to a

diet,19 and studies show that individuals who adopt

healthier lifestyles and habits often look to include

dietary supplements in their diets.20 Considering the

characteristics of consumers who use dietary supplements,

some organizations, including the U.S. Pharmacopeial

Convention (“USP”), NSF International, and ConsumerLab.

com, independently test vitamin products so that

consumers are aware of their safety and quality.21 For

example, the USP, a scientific not-for-profit organization

that promotes the quality and purity of dietary

supplements,22 notes that “a majority of consumers are

likely to buy a supplement bearing the USP Verified Mark”

and that its programs can help manufacturers “validate the

integrity of [their] products, and increase consumer

19 What is a Dietary Supplement?, u.s. Food and drug admIn., http://www.fda.gov/AboutFDA/Transparency/Basics/ucm195635.htm (last visited?).20 Annette Dickinson & Douglas McKay, Health Habits and Other Characteristics of Dietary Supplement Users: a review, nuTrITIonaL J., (2014) available at http://www.nutritionj.com/content/pdf/1475-2891-13-14.pdf.; Multivitamin/Mineral Supplements, naTIonaL InsTITuTe oF heaLTh, https://ods.od.nih.gov/factsheets/MVMS-HealthProfessional/ (last visited Oct. 14, 2015).21 Anahad O’Connor, Knowing What’s in Your Supplements, The n.y TImes (Feb. 12, 2015, 5:26 AM), http://well.blogs.nytimes.com/2015/02/12/107141/?_r=1. (illustrating the positive association between safety and the USP Verified Mark encourages consumers to look for the USP Verified Mark on product and cautions that some manufacturers print the letters “USP” on a product, which does not mean that the product has been USP Verified). 22 About USP, u.s. PharmacoPeIaL convenTIon, http://www.usp.org/about-usp (last visited Nov. 5, 2015).



confidence, brand loyalty, and product sales.”23

Presuming that these characteristics and USP’s

research are correct, it appears that individuals who use

supplements do so to improve their health and are likely to

base their vitamin-shopping habits on businesses that sell

quality products, like those that contain the “USP Verified

Mark.” Accordingly, GNC may benefit by increasing

its testing standards for its store-branded vitamin

supplements since supplement users will likely view

GNC’s steps as a commitment to ensuring quality products.

By understanding a consumer’s needs, retailers should

increase their testing standards to maintain their credibility

in the industry and establish consumer trust.

IV. POTENTIAL DECREASE IN GOVERNMENT

INVESTIGATIONS AND CONSUMER LAWSUITS

Strict testing standards within the dietary

supplement industry may reduce consumer lawsuits

and government investigations regarding allegations

that a supplement has been misbranded or adulterated.

For example, a Minnesota woman sued Target Corp.,

accusing the company of mislabeling and adulterating its

supplements.24 This suit followed the New York Attorney

General’s Warning Letter to Target Corp. over its

23 Join the USP Verified Program for Dietary Supplements, u.s PharmacoPeIaL convenTIon, http://www.usp.org/usp-verification-services/usp-verified-dietary-supplements/join-programapplication-form, (last visited Nov. 5, 2015); USP Verified Dietary Supplements, u.s PharmacoPeIaL convenTIon, http://www.usp.org/usp-verification-services/usp-verified-dietary-supplements (last visited Nov. 5, 2015).24 Stephen Montemayor, Federal Suit Filed Against Target Mislabeled, Adulterated Supplements, TwIncITIes BusIness (Feb. 26, 2015), http://tcbmag.com/News/Recent-News/2015/February/Federal-Suit-Filed-Against-Target-For-Mislabeled-A.

store-branded products.25 In addition, Wal-Mart Stores, Inc.

and Walgreen Co., who were also given cease-and-desist

letters from the Attorney General and ordered to take

their products off the market, currently have class action

lawsuits pending where adulteration and misbranding

supplements are the central allegations of the Plaintiffs’

complaints.26 Moreover, the Attorney General of Oregon

recently filed a lawsuit against GNC for selling products

containing illegal ingredients.27 Due to this lawsuit, GNC’s

stock plummeted as much as 21% following the broadcast

of this lawsuit.28

If the industry were more transparent with its

supplement manufacturing process, consumers and the

government would be less likely to challenge dietary

supplements manufacturers because products could more

easily be evaluated. As mentioned above, there is not

much oversight during the manufacturing process since

manufacturers are presumed to have followed CGMP

when making a supplement because the government does

not verify this before the supplement enters the market.

Therefore, having tighter standards could reduce the amount

of litigation caused by the industry’s lack of transparency.

25 Id.26 Johnathan Randles, Wal-Mart, Target, Walgreen Sued Over Herbal Supplements, Law360 (Feb. 5, 2015, 5:14 PM), http://www.law360.com/articles/618601/wal-mart-target-walgreen-sued-over-herbal-supplements.27 Peter Blumberg, GNC Plunges After Oregon Says Unapproved Drugs in Supplement, BLoomBergBusIness (Oct. 22, 2015, 12:16 PM), http://www.bloomberg.com/news/articles/2015-10-22/gnc-plunges-after-oregon-sues-over-supplement-ingredients. 28 Id.



V. FUTURE GOVERNMENT INTERVENTION

WILL LIKELY IMPOSE STRICTER REGULATION

OF DIETARY SUPPLEMENTS Even if supplement retailers do not impose higher

testing standards for their products, the government

may force them to do so soon. With the government’s

latest inquiries into dietary supplement ingredients and

its issuance of Warning Letters, the industry is receiving

increasily intense scrutiny from the government.29 Between

2004-2012 dietary supplements accounted for a staggering

50% of all FDA recalls.30 This year, the FDA has issued

permanent injunctions against supplement manufacturers

in Wisconsin and Florida for misbranded and adulterated

products.31 After the FDA’s inspection of three companies

revealed violations of Good Manufacturing Practices,

including selling misbranded and mislabeled supplements,

the federal court prohibited the companies from selling

or manufacturing any dietary supplements.32 Moreover,

the Department of Justice intends to file criminal and civil

charges against supplement manufacturers and retailers

making health claims that are unsupported by

29 David DiSalvo, Massive Drug Recalls are a Wake-Up Call for Vitamin and Supplement Industry, ForBes (Apr. 18, 2013, 5:34 PM), http://www.forbes.com/sites/daviddisalvo/2013/04/18/massive-drug-recalls-are-a-wake-up-call-for-vitamin-and-supplement-industry/; Douglas F. Gansler, Brian P. Kelly, & Leslie L. Meredith, Congress Could Be Coming For Dietary Supplements Soon, Law360 (May 20, 2015), http://www.law360.com/articles/657653/congress-could-be-coming-for-dietary-supplements-soon.30 Id.31 Federal judge enters permanent injunction against Wisconsin dietary supplement manufacturers, u.s. Food and drug admIn. (Aug. 4, 2015), http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm457293.htm; Federal judge enters permanent injunction against Florida dietary supplements maker, Sunset Natural Products Inc., u.s. Food and drug admIn. (Sep. 28, 2015), http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm464565.htm.32 Id.

sufficient evidence or selling products containing unlisted

ingredients.33 So far, the government has filed actions

against 117 supplement companies and officials.34 These

increasing government actions suggest ongoing trends

toward higher scrutiny from the government.

If the government gets involved in the enforcement

of the dietary supplement industry, the costs to comply

with the new requirements could be great to vitamin

businesses. Thus, retailers and manufacturers should

become more transparent regarding the ingredients and

effectiveness of the supplements. If the government sees

that manufacturers and retailers are using sufficient and

reasonable efforts to ensure the quality and safety of

dietary supplements, then the government may be less

likely to interfere with the industry.

The actions of the government suggest that the

dietary supplement industry is likely to be regulated in

the near future with greater scrutiny. As such, retailers and

manufactures should consider strengthening their testing

standards.

VI. CONCLUSION Increased litigation and government investigations

regarding the integrity of the dietary supplement industry

act as evidence that the government’s current methods for

regulating the quality and safety of supplements are

33 Laura Wagner, Justice Department Offers Criminal Charges Against Dietary Supplement Firms. nPr.org (Nov. 18, 2015), http://www.npr.org/sections/thetwo-way/2015/11/17/456396714/justice-department-announces-criminal-charges-against-dietary-supplement-firms.34 Petter Lattman & Anahad O’Connor, Makers of Nutritional Supplements Charged in Federal Sweep, The n.y. TImes (Nov. 17, 2015), http://well.blogs.nytimes.com/2015/11/17/federal-officials-target-dietary-supplement-makers/?_r=0.




insufficient. Accordingly, retailers and manufacturers

should follow GNC’s lead and adopt higher testing stan-

dards for their supplements to increase consumer trust in

their products and the industry as a whole. Moreover, the

dietary supplement industry may benefit by using more ro-

bust standards for testing productions, which should likely

decrease the costs associated with consumer litigation and

government investigations.


By Michael Mahbobian

I. INTRODUCTION The phrase “offshore account” is one that tends to ring in infamy. While offshore bank-

ing is often associated with controversial purposes, such as money laundering and criminal

transactions, its notoriety also stems from the Internal Revenue Service’s (“IRS”) primary target:

the American tax evader. Despite the legitimate reasons for offshore banking,1 its propensity for

misuse has been acknowledged by the IRS’s discussion of Abusive Offshore Tax Avoidance

Schemes.2

In order to encourage foreign asset reporting, the U.S. has implemented policies that

give offenders an ultimatum: seek amnesty or risk penalty. According to a 2008 Senate report,

offshore tax evasion schemes cost the U.S. Department of Treasury an estimated $100 billion in

annual tax revenues.3 In response, what once amounted to an “honor system” of foreign asset

reporting4 has evolved into a rather stringent policy of disclosure. This has been achieved largely

in part by three key laws: the Foreign Account Tax Compliance Act (“FATCA”), the Stream-

lined Filing Compliance Procedures (“SFCP”), and the Offshore Voluntary Disclosure Program

(“OVDP”). While FATCA requires foreign banks to turn over U.S. accounts under certain dead-

lines, the SFCP and OVDP incentivize individual compliance by offering amnesty.

However, tax evaders are not the only ones at risk: those facing prosecution for a botched

tax-shelter scheme may be quick to point the finger at the clever firms that advised them.

1 See Offshore Income and Filing Information for Taxpayers with Offshore Accounts, Irs (Jun. 2014), https://www.irs.gov/uac/Newsroom/Offshore-Income-and-Filing-Information-for-Taxpayers-with-Offshore-Accounts (LasT vIsITed ocT. 13, 2015) (“There are many legitimate reasons for holding offshore accounts, including convenience, investing and to facilitate international transactions”).2 See Abusive Offshore Tax Avoidance Schemes – Talking Points, IRS, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Abusive-Offshore-Tax-Avoidance-Schemes-Talking-Points (last visited Oct. 13, 2015) (listing several types of common abusive tax avoidance schemes).3 Offshore Compliance Initiative, DOJ, http://www.justice.gov/tax/offshore-compliance-initiative (last visited Oct. 13, 2015).4 Richard Rubin, Offshore Tax Crackdown Opens with 30% Penalties for Banks, BLoomBerg news (June 30, 2014) http://www.bloomberg.com/news/articles/2014-06-30/offshore-tax-crackdown-opens-with-30-penalties-for-banks (According to Denise Hintzke, the global tax leader for Deloitte Tax LLP’s FATCA practice, “If you had an account outside of the U.S., you were pretty much on your honor to disclose that information”).

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The IRS is also taking a closer look at the role that advisors

play in preparing amnesty applications. Thus, attorneys

must stay current and be mindful of potential exposure.

The government’s implementation of amnesty

policies, deadlines, and legal revisions has three key im-

plications: (1) there is room for offshore account-holders to

strategically come clean to the IRS; (2) it is in a firm’s best

interest to advise its clients in accordance with changes in

tax law; and (3) offenders may be facing their last window

of opportunity to avoid IRS detection. Ultimately,the gov-

ernment’s crackdown on illegal offshore schemes appears

to be a product of a two-pronged strategy to pressure

foreign jurisdictions into turning over U.S. account-holders,

and to pressure domestic incompliant account-holders into

coming clean on their own.

II. FOREIGN PRESSURE: FATCA Perhaps the government’s most pervasive means

of achieving foreign compliance is FATCA, which requires

foreign financial institutions (“FFIs”) to reveal their U.S.-

sourced accounts to the IRS.5 FFIs that fail to do so may

face a 30% withholding tax on U.S.-sourced payments,6 and

may be frozen out of U.S. markets.7 Jurisdictions that com-

ply with FATCA sign one of two agreements: (1) a Model

1 Intergovernmental Agreement (“IGA”), in which the

jurisdiction itself is responsible for reporting U.S accounts,

5 Foreign Account Tax Compliance Act, IRS, https://www.irs.gov/Businesses/Corporations/Foreign-Account-Tax-Compliance-Act-FATCA (last visited Oct. 13, 2015).6 Id. 7 Robert W. Wood, IRS Delays FATCA to Help Banks, But Offshore Account Disclosures Continue, ForBes (sePT. 21, 2015) avaILaBLe aT http://www.forbes.com/sites/robertwood/2015/09/21/irs-delays-fatca-to-help-banks-but-off-shore-account-disclosures-continue/#49edd61641b0.

or (2) a Model 2 IGA, in which the FFIs of that jurisdiction

report directly to the IRS.8 While FATCA has been criticized

as being draconian and even unconstitutional,9 it has been

effective: over 77,000 institutions have agreed to pass along

such information as of 2014,10 and the possibility of detec-

tion has significantly increased.11

Though FATCA became law in 2010, several

indicators suggest that there is still wiggle room for FFIs

and individuals to become tax compliant. First, the law’s

effective dates are staggered.12 The IRS refers to this as a

“phased implementation” of FATCA’s requirements, which

began on January 1, 2014 and continues through 2017.13

For example, FFIs are required to report six items of U.S.

account-holder information with respect to the 2014 year,

including name, address, and account balance.14 However,

with respect to the 2015 year, FFIs must disclose a seventh

item called “income paid,” and with respect to the 2016

year, an eighth item called “gross proceeds paid to custodi-

al accounts.”15 Thus, FATCA’s delayed potency could give

8 FATCA Information for Governments, IRS, https://www.irs.gov/Businesses/Corporations/FATCA-Governments (last visited Oct. 13, 2015).9 Rand Paul Sues Obama Over Foreign Banking Law, The washIngTon TImes (JuLy 14, 2015), http://www.washingtontimes.com/news/2015/jul/14/rand-paul-sues-obama-over-foreign-banking-law/?page=all.10 FATCA’s Flaws, The economIsT (June 28, 2014), http://www.econ-omist.com/news/leaders/21605907-americas-new-law-tax-compli-ance-heavy-handed-inequitable-and-hypocritical-fatcas-flaws.11 The U.S. Government’s Crackdown on Offshore Tax Evasion, and Options for Non-Compliant Taxpayers, BLank rome LLP (may-June 2013), http://www.blankrome.com/index.cfm?contentID=37&itemID=3069.12 Robert W. Wood, IRS Starts Offshore Account Data Swaps Under FATCA, ForBes (ocT. 5, 2015) http://www.forbes.com/sites/robert-wood/2015/10/05/irs-starts-offshore-account-data-swaps-under-fatca/.13 Notice 2015-66, IRS, https://www.irs.gov/pub/irs-drop/n-15-66.pdf (last visited Oct. 13, 2015).14 Summary of FATCA Timelines, IRS, https://www.irs.gov/Businesses/Corpo-rations/Summary-of-FATCA-Timelines (last visited Nov. 5, 2015).15 Id.

Michael Mahbobian Offshore Omnipotence


offenders a chance to report assets now before additional

items of information must be disclosed.

Second, the government has demonstrated a will-

ingness to extend reporting deadlines, given that foreign

jurisdictions are continuing to implement systems, proce-

dures, and legislation to ease compliance with FATCA’s

reporting requirements.16 For example, the U.S. Treasury

Department recently announced that the September 30,

2015 deadline for Model 1 IGA’s to report U.S. account in-

formation for 2014 was pushed back an entire year.17 Thus,

the six items of information that banks were required to

disclose to the IRS—including an account-holder’s name,

address, and account balance—would not be reported until

2016. This extension is significant for two reasons. First, the

extension indicates that the IRS is granting foreign banks

some leeway before imposing FATCA’s steep withholding

penalties. Second, the extension re-opens a time window

for Americans holding money in Model 1 IGA jurisdictions

to come clean. Therefore, hidden assets may no longer be

safe in popular tax havens, such as the Bahamas or Cayman

Islands, as ninety-three jurisdictions now appear on the

Model 1 IGA list.18

16 Notice 2015-66, IRS, https://www.irs.gov/pub/irs-drop/n-15-66.pdf (last visited Oct. 13, 2015) (Page 18 states: “Treasury and the IRS understand that partner jurisdictions are continuing to develop and implement the systems needed for automatic information exchange and may not have those systems in place by September 30, 2015. In addition, several partner jurisdictions in are in the process of enacting legislation to implement their IGAs, without which they are not able to exchange information with the United States”).17 Matthew D. Lee, FATCA Update: Treasury Relaxes September 30 Deadline for Model 1 IGA Jurisdictions to Exchange Tax Information, BLank rome LLP (sePT. 18, 2015), http://taxcontroversywatch.com/2015/09/18/fatca-up-date-treasury-relaxes-september-30-deadline-for-model-1-iga-jurisdic-tions-to-exchange-tax-information/.18 See FATCA – Archive, u.s. deParTmenT oF Treasury, http://www.treasury.gov/resource-center/tax-policy/treaties/Pages/FATCA-Archive.aspx (last visited Oct.13, 2015) (providing a list of Model 1 IGAs).

Acknowledging FATCA’s staggered nature and last-minute

extensions are especially because such volatility provides

a window of opportunity. According to Matthew D. Lee

of Blank Rome LLP, a tax specialist with extensive experi-

ence in FATCA compliance,19 “Once a foreign jurisdiction

turns over account information to the U.S., non-compli-

ant taxpayers generally cannot take advantage of the IRS

disclosure programs and will be subject to audit or, worse,

a criminal investigation.”20 In sum, offenders may experi-

ence better outcomes by opting for IRS amnesty rather than

waiting until their own banks turn them over.

III. DOMESTIC PRESSURE: SFCP & OVDP The second prong of the government’s offshore

crackdown is to encourage individuals to voluntarily

disclose their foreign assets. Domestic incompliant ac-

count-holders generally face three options: (1) seek amnes-

ty through the SFCP; (2) seek amnesty through the OVDP;

or (3) assume the risk of IRS detection. Selecting the ap-

propriate route requires an understanding of each option’s

characteristics and an acknowledgement of recent changes.

A. Option 1: Amnesty through the SFCP

In 2012, the SFCP was enacted to provide taxpayers

with a procedure for filing amended or delinquent re-

turns and for resolving penalties.21 However, up until June

of 2014, the program was not available to non-resident,

19 Professionals, BLank rome LLP, https://www.blankrome.com/index.cfm?-contentID=10&bioID=2165.20 Lee, supra note 17, at 2.21 Streamlined Filing Compliance Procedures, IRS, https://www.irs.gov/Individu-als/International-Taxpayers/Streamlined-Filing-Compliance-Procedures (last visited Oct. 13, 2015).



non-filer U.S. taxpayers.22 Thus, two sets of procedures

were announced: the Streamlined Foreign Offshore Pro-

cedures and Streamlined Domestic Offshore Procedures.23

According to IRS Commissioner John Koskinen, these

procedures create “a new pathway for people with offshore

assets to come into tax compliance.”24 Further, since 2014

taxes are due by April 15th, 2015—or October 15th with

an extension—many participants may have only recently

realized its financial consequences.

The 2014 expansion refines the program’s require-

ments and penalties. For example, taxpayers must now

certify that any previous failures to comply were due to

non-willful conduct.25 Eligible taxpayers residing in the

U.S. will incur a penalty equal to 5% of the foreign financial

assets at issue.26 However, if the IRS has already initiated a

civil or criminal examination, the taxpayer will not be eligi-

ble.27 In sum, the SFCP provides an opportunity to calcu-

late the cost of resolving offshore tax issues with reasonable

certainty.28

B. Option 2: Amnesty through the OVDP

Similarly, the OVDP encourages taxpayers to

22 IRS Clarifies Requirements for Establishing Non-Willful Conduct in Offshore Disclosure Cases, mcdermoTT wILL & emery (FeB. 2, 2015) http://www.mwe.com/IRS-Clarifies-Requirements-for-Establishing-Non-Willful-Con-duct-in-Offshore-Disclosure-Cases-02-02-2015/.23 Id. 24 IRS Makes Changes to Offshore Programs; Revisions Ease Burden and Help More Taxpayers Come into Compliance, IRS (June 18, 2014), https://www.irs.gov/uac/Newsroom/IRS-Makes-Changes-to-Offshore-Programs%3B-Revi-sions-Ease-Burden-and-Help-More-Taxpayers-Come-into-Compliance.25 Id. 26 Id.27 IRS, supra note 21.28 Voluntary Disclosure: Questions and Answers, IRS, https://www.irs.gov/uac/Voluntary-Disclosure:-Questions-and-Answers (last visited Oct. 13, 2015) (This statement is provided in the answers to Q3 and Q50).

disclose accounts now rather than risk detection by the

IRS later on.29 The IRS recommends that taxpayers who

are concerned that their incompliance was due to willful

conduct should consider this option to ensure insulation

from criminal liability and/or substantial civil penalties.30

A taxpayer must: (1) file all tax returns for the past eight

years; (2) pay tax, interest, and a 20% penalty on unre-

ported amounts; and (3) pay a penalty equal to 27.5% (or

50% on certain accounts) of the highest aggregate value of

offshore holdings related to non-compliance.31 For willful

evaders, the OVDP amounts to a get-out-of-jail [not for]

free card.

1. SFCP & OVDP Compared

Major differences between the SFCP and OVDP

may make one option more favorable than the other,

depending on a taxpayer’s scenario. First, the penalty

bases differ. Under the SFCP, the 5% penalty is based on all

foreign accounts that were either unreported or were not

tax compliant.32 However, the OVDP penalty is based only

on non-compliant accounts.33 Second, the SFCP penalty is

calculated on year-end balances, whereas the OVDP bases

the penalty on the highest value of the account during the

29 Offshore Voluntary Disclosure Program, IRS, http://www.irs.gov/uac/2012-Offshore-Voluntary-Disclosure-Program (last visited Oct. 13, 2015).30 Streamlined Filing Compliance Procedures, IRS, https://www.irs.gov/Individu-als/International-Taxpayers/Streamlined-Filing-Compliance-Procedures (last visited Oct. 13, 2015).31 IRS Clarifies Requirements for Establishing Non-Willful Conduct in Offshore Disclosure Cases, mcdermoTT wILL & emery (FeB. 2, 2015) hTTP://www.mwe.com/Irs-cLarIFIes-requIremenTs-For-esTaBLIshIng-non-wILLFuL-con-ducT-In-oFFshore-dIscLosure-cases-02-02-2015/.32 Robert M. Wood, Offshore Accounts? Choose OVDP or Streamlined Despite FATCA, ForBes (June 30, 2015), hTTP://www.ForBes.com/sITes/roBerT-wood/2015/06/30/oFFshore-accounTs-choose-ovdP-or-sTreamLIned-desPITe-FaTca/.33 Id.



year. 34 Thus, someone who funneled his or her money out of an account before the fiscal year ends will still have expo-

sure under the OVDP. Third, the OVDP is the only option that offers protection from criminal prosecution.35 Further, once

a taxpayer makes a submission under the SFCP, the OVDP is no longer an option.36 Similarly, a taxpayer that elected the

OVDP on or after July 1, 2014 is ineligible for the SFCP.37

SFCP OVDPAccounts Subject to Penalty

Unreported & non-compliant accounts Non-compliant accounts only

*Typically, there is no penalty on unreported ac-counts that turn out to be tax-compliant.

Penalty Base Based on year-end balances Based on highest amount during yearInsulation from Crim-inal Penalty?

No Yes

Protection from “will-ful” incompliance?

No Yes

C. Option 3: Do Nothing & Risk Detection

Another option for offshore offenders—though not recommended by this author—is to pray that the IRS never

detects the hidden assets. IRS detection can come with steep penalties and may result in prison time. For example, those

with foreign accounts exceeding $10,000 are required to file a Report of Foreign Bank and Financial Accounts (“FBAR”).38

The penalty for failing to file an FBAR is the aggregate value of all foreign accounts exceeding $10,000 at any time.39 The

penalty for willfully failing to file an FBAR is the greater of $100,0000 or 50% of the balance.40 Offenders may also face se-

vere criminal charges for failing to file an FBAR, as well as for tax evasion (26 U.S.C.§ 7201), filing a false return (26 U.S.C.

§ 7206(1)), and failure to file an income tax return (26 U.S.C. § 7203)—each of which may result in prison time.41

With laws such as FATCA looming over the shoulders of hundreds of foreign jurisdictions, amnesty may be the

best insurance policy. If an offshore offender finds amnesty attractive, he or she should weigh the pros and cons of the

34 Id. 35 Id. 36 Streamlined Filing Compliance Procedures, IRS, https://www.irs.gov/Individuals/International-Taxpayers/Streamlined-Filing-Compliance-Procedures (last visited Oct. 13, 2015).37 Id. 38 4.26.16 Report of Foreign Bank and Financial Accounts, IRS, https://www.irs.gov/irm/part4/irm_04-026-016.html#d0e10 (last visited Oct. 13, 2015).39 Id. 40 Id. 41 IRS, supra note 28, at 5 (“Q15: What are some of the criminal charges I might face if I don’t come in under voluntary disclosure and the IRS finds me?”).



SFCP and ODVP and a consult a tax professional. However,

it is imperative that the consultation addresses a key topic:

willfulness.

IV. DECIPHERING “WILLFULNESS” Although the SFCP and OVDP vary in terms of

timing and penalties, electing the appropriate program

boils down to one main issue: whether the incompliance

was “willful.” The IRS mentions non-willful and willful

conduct in its descriptions of the SFCP and OVDP, but fails

to provide helpful definitions. With respect to eligibility for

the SFCP, the IRS defines non-willful conduct as that due

to “negligence, inadvertence, or mistake, or conduct that is

the result of a good faith misunderstanding of the require-

ments of the law.”42 However, the definition is unavailing

and unsatisfactory in isolation. Instead, several questions

are left unanswered.

A. Question 1: Upon what information will the

IRS base its “willfulness” determination?

The IRS has recently provided a partial answer to

this question. In January 2015, IRS Forms 14654 and 14653

were updated to clarify the requirements for establishing

non-willful conduct.43 The forms now require: (1) a de-

tailed “narrative” explaining that any failure to file taxes or

appropriate forms, such as FBARs, were not due to willful

conduct; and (2) that taxpayers provide explanations for

42 U.S. Taxpayers Residing in the U.S., IRS, https://www.irs.gov/Individuals/International-Taxpayers/U-S-Taxpayers-Residing-in-the-United-States (last visited Oct. 13, 2015).43 Patricia Weisgerber, IRS Clarification on Non-Willful Conduct Certification for Streamlined Offshore Compliance Procedures: Revisions to IRS Forms 14654 and 14653, Jd suPra BusIness advIsor (FeBruary 27, 2015), hTTP://www.JdsuPra.com/LegaLnews/Irs-cLarIFIcaTIon-on-non-wILLFuL-con-ducT-30959/.

their conduct.44 Moreover, any application that does not

include a narrative statement is disqualified from the SF-

CP.45 While this revision could merely suggest that the IRS

is trying to increase transparency in the application process,

it could have other less obvious implications.

One possible implication in requiring a narrative

is that the IRS is demonstrating its hesitance to make per se

determinations of willful misconduct. Rather, the require-

ment sounds familiar to the “in light of the circumstances”

approach, with the IRS sitting as its own fact-finder. Per-

haps the IRS is acknowledging a grey area between willful

and non-willful incompliance, which could be good news

for participants and litigators. Further, this requirement

could make amnesty more attractive to offenders, as it

allows for an opportunity to be meaningfully heard.

Another consequence of requiring a narrative is that

it could encourage offenders to strategically fashion their

stories to sidestep a “willfulness” finding. Thus, a partici-

pant might wish to enlist the aid of an experienced attorney

to help craft the narrative. However, the IRS may have antic-

ipated this possibility of facing legal friction. Following the

requirement that a taxpayer provide reasons for incompli-

ance, the form states that “[i]f you relied on a professional

advisor, provide the name, address, and telephone number

of the advisor and a summary of the advice.”46 Perhaps the

IRS is implementing a safeguard against dishonest narra-

tives by making sure that attorneys understand that they too

44 Id. 45 Matthew D. Lee, IRS Updates Streamlined Certification Forms; Narra-tive Explanation is Mandatory, BLank rome LLP (Jan. 15, 2015), hTTP://TaxconTroversywaTch.com/2015/01/15/Irs-uPdaTes-sTreamLIned-cerTIFIca-TIon-Forms-narraTIve-exPLanaTIon-Is-mandaTory/.46 Id.



might be on the hook for a questionable submission.

B. Question 2: What level of conduct will the IRS

apply in fine-line cases?

Unfortunately, the IRS has indicated its unwill-

ingness to answer this question. According to a National

Taxpayer Advocate’s Report, the IRS has made a deliber-

ate decision not to define and distinguish “willful” from

“non-willful” conduct.47 For this reason, the SFCP has been

criticized as being ineffectively administered.48

C. Question 3: What other sources can clue us in

on the “willfulness” inquiry?

Related IRS provisions may provide the best clues

as to the requisite level of conduct for a finding of willful-

ness. For example, the IRS discusses the levels of conduct in

assessing penalties for the failure to file FBARs.49 Since the

SFCP “narrative” must include reasons for incompliance,

including failing to submit FBARs, this may be a helpful

starting point.

One could reasonably interpret the FBAR provi-

sions as prescribing four possible levels of conduct. For

example, the IRS notes that there are civil penalties for neg-

ligence, patterns of negligence, and non-willful and willful

violations.50 This may suggest that the IRS views “will-

fulness” and “non-willfulness” as two opposite ends of a

spectrum, rather than as mutually exclusive alternatives.

47 Richard A. Josepher, It’s Time For the IRS to Make Major Changes to its Current Offshore Tax Compliance Options, FLorIda Tax, hTTP://FLorIdaTax.com/wP-conTenT/uPLoads/2015/06/15raJoFFshorFInaL0527ar15.PdF (on Page 17, JosePher quoTes a sTaTemenT made In a naTIonaL TaxPayer advocaTe rePorT).48 Id. 49 4.26.16 Report of Foreign Bank and Financial Accounts, IRS, https://www.irs.gov/irm/part4/irm_04-026-016.html#d0e10 (last visited Oct. 13, 2015).50 Id.

Moreover, a related provision provides: “[t]he examiner

has discretion in determining the amount of the penalty, if

any.”51 Should this discretionary analysis be applied with

equal force to amnesty programs? Or would prescribing

four levels of conduct defeat the purpose of offering two

distinct policies aimed at two different types of conduct?

Regardless, the IRS has considerable latitude in finding

“willfulness” in FBAR inquiries and amnesty alike.

Other FBAR provisions may also clarify the IRS’s

criteria for “willfulness.” The FBAR Willfulness Penalty

Provision states, “The test for willfulness is whether there

was a voluntary, intentional violation of a known legal

duty.”52 It goes on further to state, “In the FBAR situation,

the only thing that a person need know is that he has a

reporting requirement,”53 and that willfulness may be at-

tributed to conscious efforts to avoid learning about FBAR

requirements.54 However, this raises additional questions:

does this test only apply to the FBAR situation? Would the

standard be different for amnesty applicants? Is uncon-

scious ignorance ever an excuse?

Lastly, the FBAR provisions list hypothetical situa-

tions in which willfulness may or may not be present. For

example, willfulness might be found if a person receives

a warning letter for failing to file a FBAR and then still

fails to file without a reasonable explanation.55 However,

a willfulness finding might not be proper where a person

51 Id. 52 Id. 53 Id. 54 Id. 55 Id.



omits one of three foreign bank accounts in a FBAR due to

unintentional oversight.56 Given the overlap in disclosing

offshore accounts and filing FBARs, such examples may

help offenders put their own scenarios into perspective.

Overall, the determination of willfulness is ulti-

mately in the IRS’s discretion. Although the IRS fails to

articulate a standard that is unique to amnesty policies,

related provisions may nonetheless provide participants

with valuable insight.

V. ATTORNEY’S ROLE: ADVISORY LIABILITY Masterminding a tax shelter scheme is often the

product of a creative accountant or attorney rather than the

client acting alone. Thus, it should be of little surprise that

both clients and IRS agents might look to advisors when a

tax scheme turns out to be more fraudulent than strategic.

Attorneys, accountants, and consultants should be wary of

the types of exposure they may face.

First, facilitating an illegal or ineffective tax shelter

can expose attorneys to malpractice liability. Malpractice

expert Johannes Kingma of Carlock Copeland & Stair LLP

points to the growing complexity of the tax code and busi-

ness decisions to lower tax burdens as two key drivers of

tax shelter suits against lawyers.57 Perhaps the enactment of

FATCA, the SFCP, and the OVDP fueled this fire: not only

do these laws add a layer of complexity that did not exist

during the “honor system” era of asset reporting, but the

likelihood of detection has also since increased, resulting in

56 Id. 57 Andrew Strickler, How Tax Shelter Suits are Taking a Bite Out of Big Law, Law 360 (JuLy 23, 2015), hTTP://www.Law360.com/arTIcLes/682372/how-Tax-sheLTer-suITs-are-TakIng-a-BITe-ouT-oF-BIgLaw.

more blame-shifting and more litigation.

Second, advisors may be hit with tortious or crimi-

nal allegations. Earlier this year, attorneys at Morgan Lewis

& Bockius LLP were accused of aiding and abetting illegal

tax schemes that landed accounting executives in prison.58

In addition, Proskauer Rose LLP was blamed for a failed

tax avoidance scheme that resulted in a $40 million loss.59

Interestingly, while the court dropped the legal malprac-

tice claim in April, the fraud and punitive damages claims

survived.60

Lastly, offshore advisors must stay mindful of the

IRS. The updated SFCP amnesty forms, which now require

that applicants provide information about their “profes-

sional advisors,” could be a cryptic warning to attorneys,

accountants, and financial consultants alike.

VI. CONCLUSION The government’s offshore onslaught has been

executed through a two-pronged strategy. While laws such

as FATCA pressure foreign banks to turn over American ac-

counts from the back-end, amnesty programs like the SFCP

and OVDP incentivize evaders to come clean at the front-

end. Given the steep penalties for tax evasion, and FATCA’s

staggered potency, incompliant individuals should consid-

er amnesty before another window of opportunity closes.

Further, electing the appropriate route requires a close

look at both amnesty programs and, most importantly, an

honest assessment of the arguably opaque concept called

“willfulness.”

58 Id. 59 Id. 60 Id.




Therefore, offenders are best advised to consult tax profes-

sionals, and professionals are best advised to tread lightly, as

they too are not immune from the all-seeing eye of the IRS.


By Shiqi Borjigin

I. INTRODUCTION With the emergence of online marketplaces for 3D-printed products motivated by the

rapid development of 3D printing technology, Hollywood now faces intellectual property rights

issues as more movie characters are turned into three-dimensional objects and sold online.1

Individuals and certain websites involved in the 3D printing of movie figurines may infringe on

movie studios’ exclusive rights for producing derivative works of the underlying movies and

movie characters. To protect the movie industry, and also to steer clear of copyright lawsuits,

individuals and 3D printing websites need to be aware of potential infringement and ways to

avoid it.

II. COPYRIGHT INFRINGEMENT BY DERIVATIVE WORKS Copyright protection provides the owner of copyright with exclusive rights to recast,

transform, or adapt pre-existing copyrighted work into a derivative work.2 The original owner

of the copyrighted work must consent to the creation of a derivative work by a third party, and

any unauthorized creation of the derivative work constitutes a copyright infringement of the

pre-existing work.3 On the other hand, a derivative work may command copyright protection

if it contains distinguishable variations with sufficient originality from the pre-existing work.4

Nevertheless, the mere act of converting copyrighted two-dimensional works to

1 David Dunham, Is 3D Printing the Next Frontier for Copyright Infringement?, http://www.taylordunham.com/Articles/Is-3D-printing-the-next-frontier-for-copyright-infringement.shtml (last visited Nov. 11, 2015, 3:34 AM) (“While 3D printing remains unfeasible for many items, easily replicated objects are beginning to find a niche market, including toys of copy-righted cartoons and movie figures. … This may pose some problems in the future for the film industry, which relies on toys and games as a supplement to income generated from movies, especially for movies which underperform at the box office.”).2 17 U.S.C. § 106(2) (2012) (granting copyright owners the exclusive right “to prepare derivative works based upon the copyrighted work”).3 17 U.S.C. § 106 (2012); Brownstein v. Lindsay, 742 F.3d 55, 68 (3d Cir. 2014). 4 meLvILLe B. nImmer & davId nImmer, 1-3 nImmer on coPyrIghT § 3.01.

USC

Bus

ines

s Law

Adv

isor

Legal Pitfalls to Consider Before 3D Printing a Movie Figurine

© Shiqi Borjigin 2015


Shiqi Borjigin Legal Pitfalls to Consider Before 3D Printing a Movie Figurine

three-dimensional works without permission constitutes

copyright infringement because it lacks sufficient originality.5

III. COPYRIGHT INFRINGEMENT BY 3D-PRINTED MOVIE FIGURINES With the advancement of 3D printing technology,

creating movie figurines has gained popularity among

fans and hobbyists, while also raising potential copyright

infringement issues in the movie industry.6 Besides the

use of a 3D printer, the production of a movie figurine by

3D printing technology mainly utilizes a computer-aided

design software (“CAD”), which creates an electronic blue-

print that dictates the appearance of the figurines.7 Then,

based on the blueprint, users can print out the figurines

with a 3D printer.8 Creators of the CAD files and websites

that provide ready-to-use CAD files may be liable for

copyright infringement for unauthorized manufacturing of

movie figurines.

Copyright infringement can be categorized as

5 See Durham Indus., Inc. v. Tomy Corp., 630 F.2d 905, 909–11 (2d Cir. 1980) (no originality in converting Walt Disney characters into plastic, wind-up dolls); meLvILLe B. nImmer & davId nImmer, 1-2 nImmer on coPyrIghT § 2.08 (stating that “the mere act of converting two dimensions to three dimen-sions … may not represent a contribution of independent effort because no one can claim to have independently evolved the idea and technique with working in three dimensions.”).6 Eric Schwartzel, Hollywood’s Other Piracy Problem: 3-D Printers, The waLL sTreeT JournaL (JuLy 20, 2015, 3:33 Pm), http://www.wsj.com/articles/holly-woods-other-piracy-problem-3-d-printers-1437420799.7 Mark Cotteleer, Jonathan Holdowsky & Monika Mahto, The 3D Opportu-nity Primer: The Basics of Additive Manufacturing, deLoITTe unIversITy Press 3 (2013), http://d27n205l7rookf.cloudfront.net/wp-content/uploads/2014/03/DUP_718-Additive-Manufacturing-Overview_MASTER1.pdf, (last visited Nov. 10, 2015, 4:47 AM).8 Id.

direct or indirect infringement.9 Current copyright law

defines direct copyright infringement as the violation of a

copyright holder’s exclusive rights, such as the unautho-

rized reproduction, creation, distribution, or public display

of a derivative work of the copyrighted work.10 In addition,

courts have recognized indirect copyright infringement, in-

cluding contributory infringement and vicarious liability, as

a secondary liability in copyright law.11 Contributory copy-

right infringement holds a party liable when that party,

“with knowledge of the infringing activity, induces, causes

or materially contributes to the copyright infringement by

another party.”12 Vicarious liability, based on the respon-

deat superior doctrine, holds a party liable for another’s

copyright infringement when the party has “the right and

ability to supervise or control the infringing activity” and

enjoys “a direct financial benefit from the activity.”13

A. Copyright Liability of 3D Printing Websites

Websites, such as Shapeways and Sculpteo, allow

creators of CAD files to showcase the electronic blueprints

for sale and also provide 3D-printed products directly to

consumers.14 Such sites contain CAD files for the “Enter-

prise” from Star Trek, Mickey Mouse figurines, the “Min-

ion” from Despicable Me, and busts of well-known Star

9 Aaron Wright, Copyright and Trademark in 3D, BenJamIn n. cardozo schooL oF Law 5 http://www.cardozo.yu.edu/sites/default/files/Wright.CopyrightAndTrademarkIn3D.pdf (LasT vIsITed nov. 10, 2015, 5:43 am).10 See 17 U.S.C. § 106.11 Intentional Inducement of Copyright Infringements Act of 2004: Hearing Before the Comm. on the Judiciary, coPyrIghT. gov ¶3 (JuL. 22, 2004), http://copyright.gov/docs/regstat072204.html. 12 Id. at ¶ 5.13 Id. at ¶ 4; Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir. 1971) (citing Shapiro, Bernstein & Co. v. H. L. Green Co., 316 F.2d 304 (2 Cir. 1963)).14 See Wright, supra note 8, at 2.



Wars characters, like Yoda.15 When a user orders a 3D-print-

ed object from a seller on the website, the website will print

the object using its own industrial 3D printers and send the

object to the user.16 The website then divides the proceeds

of the sale with the seller.17 By providing manufacturing

and shipping services for 3D- printed movie figurines,

these websites could be held liable for direct copyright

infringement.18

However, a website is not directly liable for copy-

right infringement if it simply hosts and delivers content

uploaded by users, as it acts as a mere conduit for the

sellers of CAD files and does not promote the files them-

selves.19

Nevertheless, apart from direct infringement,

such sites can also face potential liability under vicarious

copyright infringement or contributory copyright infringe-

ment.20 One threshold for vicarious copyright infringement

is “profiting from direct infringement while declining to

exercise a right to stop or limit it.”21 Because these websites

usually share the proceeds of sales with the sellers, they

15 Id. at 3.16 See Wright, supra note 8, at 2.17 Id. at 2.18 Id. at 5.19 See Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F.3d 121, 131–32 (2d Cir. 2008) (the court was hesitant to hold a website directly liable for copyright infringement because it “resembles a store proprietor who charges customers to use a photocopier on his premises, and … his ma-chines are actually operated by his customers hosts and delivers content uploaded by users.”).20 See Wright, supra note 8, at 5–6.21 Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930 (2005).

meet this direct financial interest requirement.22 Likewise,

as they provide and operate the platform for sellers to

upload the CAD files, these websites should also have the

right and ability to supervise the infringing activities, and

be able to discontinue the sellers from uploading these

CAD files.23 The inquiry for contributory infringement by

the 3D printing websites focuses on whether the websites

know or have reason to know of the direct infringement.24

Since the CAD files are based on popular movie figurines,

the websites should easily detect the direct infringement.

The Digital Millennium Copyright Act (“DMCA”)

helps 3D printing websites avoid liability, but the pro-

tection is limited under certain requirements. Under the

DMCA, websites can benefit from the Safe Harbor defense

and avoid liability by posting policy indicating that they

will take down infringing material upon the copyright

holder’s request.25 Nevertheless, the DMCA is only avail-

able for 3D printing websites that merely provide storage

22 Arista Records LLC v. Usenet.com, Inc., 633 F. Supp. 2d 124, 157 (S.D.N.Y. 2009) (“the law is clear that to constitute a direct financial benefit, the [‘]draw[’] of infringement need not be the primary, or even a significant, draw—rather, it need only be [‘] a [’] draw.”).23 Id. (“Defendants have, in the past, exercised this right and ability to control their subscribers’ actions by terminating or limiting access of subscribers who posted “spam,”… Defendants likewise have the right and ability to block access to articles stored on their own servers that contain infringing content”).24 Contributory Infringement, corneLL unIversITy Law schooL, https://www.law.cornell.edu/wex/contributory_infringement (last visited Nov. 11, 2015, 4:03 AM) (“One who knowingly induces, causes or materially contributes to copyright infringement, by another but who has not committed or participated in the infringing acts him or herself, may be held liable as a contributory infringer if he or she had knowledge, or reason to know, of the infringement.” (citing Metro-Goldwyn-Mayer Studios Inc., 545 U.S. 913; Sony Corp. v. Universal City Studios, Inc., 464 U.S. 417 (1984))).25 Erin Carson, 3D Printing: Overcoming the Legal and Intellectual Property Issues ¶ 11 (Aug. 1, 2014, 14:41 GMT), http://www.zdnet.com/arti-cle/3d-printing-overcoming-the-legal-and-intellectual-property-issues/.



of CAD files at the direction of users.26 The Safe Harbor

defense does not apply to websites that also promote CAD

files and provide 3D printing services for the movie figu-

rines.27 Also, the Safe Harbor provision does not require

the websites to search for infringing materials, it requires

the copyright holders to “police their own rights.”28 Thus,

one challenge the movie industry faces in protecting its

copyright by adopting the DMCA is that it is increasingly

difficult for movie studios to monitor the marketplaces to

find all the infringers and to send out takedown notice.

For such websites to avoid copyright liability, they

should fully utilize the Safe Harbor defense under the

DMCA. First, the websites must designate an agent and file

this designation with the Copyright Office to receive noti-

fications of claimed infringement.29 In addition, they must

make the agent’s information publicly available on the

websites.30 Upon receiving proper notification of claimed

infringement from the copyright holder, the websites must

expeditiously take down or block access to the CAD files.31

26 17 U.S.C. § 512(c)(1) (“A service provider shall not be liable for … in-fringement of copyright by reason of the storage at the direction of a user of material that resides on a system or network controlled or operated by or for the service provider.”).27 See Gardner v. CafePress, Inc., WL 794216, *5–6 (S.D. Cal. Feb. 26, 2014), (the court declined to grant a website DMCA protection on summa-ry judgment, because the site did more than store content for users, it allowed users to upload images and print them on consumer products.).28 See Melissa Barnett, The Next Big Fight: 3D Printing and Intellectual Prop-erty, Tech. Law source (Jan. 31, 2014), http://www.technologylawsource.com/2014/01/articles/intellectual-property-1/the-next-big-fight-3d-print-ing-and-intellectual-property/. 29 17 U.S.C. § 512(c)(2).30 Id.31 Wright, supra note 8, at 11 (“A 3D file site must adopt a policy that provides for the termination of access for repeat copyright infringers, in-form users of the service policy, and implement the policy in a reasonable manner”).

B. Copyright Liability of CAD File Creators

Creators of the CAD files may commit direct copy-

right infringement when they generate the electronic blue-

prints based on specific movie characters.32 The blueprint

can be generated either by a 3D scanner or designed by

the creator. A 3D-scanned CAD file is a transformation of a

pre-existing work, and thus can be a derivative work that

infringes on the pre-existing work.33 Self-designed CAD

files based on pre-existing movie characters may even be

more transformative if they add new design elements to the

original characters and may also be infringing on the movie

studios’ exclusive rights to produce derivative works.34 For

the creators of CAD files to avoid copyright liability, first,

they must independently design the files themselves and

they must not create the files using a 3D scanner.35 The file

must demonstrate “some substantial variation” and not

merely be a “translation to a different medium.”36 The file

must be produced from the creator’s independent efforts

such that he “contributed something more than a

32 See Michael Weinberg, 3D Printing Expands How You Should Think About Copyright: The Super 8 Cube Edition, PuBLIc knowLedge (June 28, 2011), https://www.publicknowledge.org/news-blog/blogs/3d-printing-expands-how-you-should-think-abou.33 See Nathan Reitinger, CAD’s Parallel to Technical Drawings: Copyright in the Fabricated World, 97 J. PaT.& Trademark oFF. soc’y 111, 142 (2015).34 See Jacqueline D. Lipton & John Tehranian, Derivative Works 2.0: Reconsid-ering Transformative Use in the Age of Crowdsourced Creation, 109 nw. u. L. rev 383, 386 (2015) (“the law of copyright … secures the ability of rights holders to control entire derivative franchises … it is … the derivative rights doctrine that allows Harry Potter’s author, the exclusive ability to control …”).35 Feist Publ’ns, Inc. v. Rural Tel. Serv. Co., 499 U.S. 340, 345 (1991) (“Orig-inal, as the term is used in copyright, means only that the work was independently created by the author (as opposed to copied from other works), and that it possesses at least some minimal degree of creativity [citation omitted]”). 36 Dam Things From Denmark v. Russ Berrie & Co., Inc., 290 F.3d 548, 563 (3d Cir. 2002).



‘merely trivial’ variation, something recognizably ‘his

own.’”37

IV. CONCLUSION As 3D printing technology continues to develop

rapidly and become more accessible to the public, there

will be more home-based mini factories and an increased

reproduction of toys and movie figurines. It is thus im-

portant for the movie industry to protect its intellectual

property rights. CAD file creators and 3D printing websites

should also take preventive procedures to avoid copyright

infringement while still enjoying the advantages of the new

technology.

37 Alfred Bell & Co. v. Catalda Fine Arts, Inc., 191 F.2d 99, 102–103 (2d Cir. 1951).

Documents

BLA Volume VI