Behind the Scenes, Health Insurers Use Cash and Gifts to Sway Which Benefits Employers Choose

[Editor's note: today's guest post, by reporters at ProPublica, explores business practices within the health insurance industry. It is reprinted with permission.]

By Marshall Allen, ProPublica

The pitches to the health insurance brokers are tantalizing.

“Set sail for Bermuda,” says insurance giant Cigna, offering top-selling brokers five days at one of the island’s luxury resorts.

Health Net of California’s pitch is not subtle: A smiling woman in a business suit rides a giant $100 bill like it’s a surfboard. “Sell more, enroll more, get paid more!” In some cases, its ad says, a broker can “power up” the bonus to $150,000 per employer group.

Not to be outdone, New York’s EmblemHealth promises top-selling brokers “the chance of a lifetime”: going to bat against the retired legendary New York Yankees pitcher Mariano Rivera. In another offer, the company, which bills itself as the state’s largest nonprofit plan, focuses on cash: “The more subscribers you enroll … the bigger the payout.” Bonuses, it says, top out at $100,000 per group, and “there’s no limit to the number of bonuses you can earn.

Such incentives sound like typical business tactics, until you understand who ends up paying for them: the employers who sign up with the insurers — and, of course, their employees.

Human resource directors often rely on independent health insurance brokers to guide them through the thicket of costly and confusing benefit options offered by insurance companies. But what many don’t fully realize is how the health insurance industry steers the process through lucrative financial incentives and commissions. Those enticements, critics say, don’t reward brokers for finding their clients the most cost-effective options.

Here’s how it typically works: Insurers pay brokers a commission for the employers they sign up. That fee is usually a healthy 3 to 6 percent of the total premium. That could be about $50,000 a year on the premiums of a company with 100 people, payable for as long as the plan is in place. That’s $50,000 a year for a single client. And as the client pays more in premiums, the broker’s commission increases.

Commissions can be even higher, up to 40 or 50 percent of the premium, on supplemental plans that employers can buy to cover employees’ dental costs, cancer care or long-term hospitalization.

Those commissions come from the insurers. But the cost is built into the premiums the employer and employees pay for the benefit plan.

Now, layer on top of that the additional bonuses that brokers can earn from some insurers. The offers, some marked “confidential,” are easy to find on the websites of insurance companies and broker agencies. But many brokers say the bonuses are not disclosed to employers unless they ask. These bonuses, too, are indirectly included in the overall cost of health plans.

These industry payments can’t help but influence which plans brokers highlight for employers, said Eric Campbell, director of research at the University of Colorado Center for Bioethics and Humanities.

“It’s a classic conflict of interest,” Campbell said.

There’s “a large body of virtually irrefutable evidence,” Campbell said, that shows drug company payments to doctors influence the way they prescribe. “Denying this effect is like denying that gravity exists.” And there’s no reason, he said, to think brokers are any different.

Critics say the setup is akin to a single real estate agent representing both the buyer and seller in a home sale. A buyer would not expect the seller’s agent to negotiate the lowest price or highlight all the clauses and fine print that add unnecessary costs.

“If you want to draw a straight conclusion: It has been in the best interest of a broker, from a financial point of view, to keep that premium moving up,” said Jeffrey Hogan, a regional manager in Connecticut for a national insurance brokerage and one of a band of outliers in the industry pushing for changes in the way brokers are paid.

As the average cost of employer-sponsored health insurance premiums has tripled in the past two decades, to almost $20,000 for a family of four, a small, but growing, contingent of brokers are questioning their role in the rise in costs. They’ve started negotiating flat fees paid directly by the employers. The fee may be a similar amount to the commission they could have earned, but since it doesn’t come from the insurer, Hogan said, it “eliminates the conflict of interest” and frees brokers to consider unorthodox plans tailored to individual employers’ needs. Any bonuses could also be paid directly by the employer.

Brokers provide a variety of services to employers. They present them with benefits options, enroll them in plans and help them with claims and payment issues. Insurance industry payments to brokers are not illegal and have been accepted as a cost of doing business for generations. When brokers are paid directly by employers, the results can be mutually beneficial.

In 2017, David Contorno, the broker for Palmer Johnson Power Systems, a heavy-equipment distribution company in Madison, Wisconsin, saved the firm so much money while also improving coverage that Palmer Johnson took all 120 employees on an all-expenses paid trip to Vail, Colorado, where they rode four-wheelers and went whitewater rafting. In 2018, the company saved money again and rewarded each employee with a health care “dividend” of about $700.

Contorno is not being altruistic. He earned a flat fee, plus a bonus based on how much the plan saved, with the total equal to roughly what would have made otherwise.

Craig Parsons, who owns Palmer Johnson, said the new payment arrangement puts pressure on the broker to prevent overspending. His previous broker, he said, didn’t have any real incentive to help him reduce costs. “We didn’t have an advocate,” he said. “We didn’t have someone truly watching out for our best interests.” (The former broker acknowledged there were some issues, but said it had provided a valuable service.)

Working for Employers, Not Insurers

Contorno is part of a group called the Health Rosetta, which certifies brokers who agree to follow certain best practices related to health benefits, including eliminating any hidden agreements that raise the cost of employee benefits. To be certified, brokers (who refer to themselves as “benefits advisers”) must disclose all their direct and indirect sources of income — bonuses, commissions, consulting fees, for example — and who pays them to the employers they advise.

Dave Chase, a Washington businessman, created Rosetta in 2016 after working with tech health startups and launching Microsoft’s services to the health industry. He said he saw an opportunity to transform the health care industry by changing the way employers buy benefits. He said brokers have the most underestimated role in the health care system. “The good ones are worth their weight in gold,” Chase said. “But most of the benefit brokers are pitching themselves as buyer’s agents, but they are paid like a seller’s agent.”

There are only 110 Rosetta certified brokers in an industry of more than 100,000, although others who follow a similar philosophy consider themselves part of the movement.

From the employer’s point of view, one big advantage of working with brokers like those certified by Rosetta, is transparency. Currently, there’s no industry standard for how brokers must disclose their payments from insurance companies, so many employers may have no idea how much brokers are making from their business, said Marcy Buckner, vice president of government affairs for the National Association of Health Underwriters, the trade group for health benefits brokers. And thus, she said, employers have no clear sense of the conflicts of interest that may color their broker’s advice to them.

Buckner’s group encourages brokers to bill employers for their commissions directly to eliminate any conflict of interest, but, she said, it’s challenging to shift the culture. Nevertheless, Buckner said she doesn’t think payments from insurers undermine the work done by brokers, who must act in their clients’ best interests or risk losing them. “They want to have these clients for a really long term,” Buckner said.

Industrywide, transparency is not the standard. ProPublica sent a list of questions to 10 of the largest broker agencies, some worth $1 billion or more, including Marsh & McLennan, Aon and Willis Towers Watson, asking if they took bonuses and commissions from insurance companies, and whether they disclosed them to their clients. Four firms declined to answer; the others never responded despite repeated requests.

Insurers also don’t seem to have a problem with the payments. In 2017, Health Care Service Corporation, which oversees Blue Cross Blue Shield plans serving 15 million members in five states, disclosed in its corporate filings that it spent $816 million on broker bonuses and commissions, about 3 percent of its revenue that year. A company spokeswoman acknowledged in an email that employers are actually the ones who pay those fees; the money is just passed through the insurer. “We do not believe there is a conflict of interest,” she said.

In one email to a broker reviewed by ProPublica, Blue Cross Blue Shield of North Carolina called the bonuses it offered — up to $110,000 for bringing in a group of more than 1,000 — the “cherry on top.” The company told ProPublica that such bonuses are standard and that it always encourages brokers to “match their clients with the best product for them.”

Cathryn Donaldson, spokeswoman for the trade group America’s Health Insurance Plans, said in an email that brokers are incentivized “above all else” to serve their clients. “Guiding employees to a plan that offers quality, affordable care will help establish their business and reputation in the industry,” she said.

Some insurer’s pitches, however, clearly reward brokers’ devotion to them, not necessarily their clients. “To thank you for your loyalty to Humana, we want to extend our thanks with a bonus,” says one brochure pitched to brokers online. Horizon Blue Cross Blue Shield of New Jersey offered brokers a bonus as “a way to express our appreciation for your support.” Empire Blue Cross told brokers it would deliver new bonuses “for bringing in large group business ... and for keeping it with us.”

Delta Dental of California’s pitches appears to go one step further, rewarding brokers as “key members of our Small Business Program team.”

ProPublica reached out to all the insurers named in this story, and many didn’t respond. Cigna said in a statement that it offers affordable, high-quality benefit plans and doesn’t see a problem with providing incentives to brokers. Delta Dental emphasized in an email it follows applicable laws and regulations. And Horizon Blue Cross said its gives employers the option of how to pay brokers and discloses all compensation.

The effect of such financial incentives is troubling, said Michael Thompson, president of the National Alliance of Healthcare Purchaser Coalitions, which represents groups of employers who provide benefits. He said brokers don’t typically undermine their clients in a blatant way, but their own financial interests can create a “cozy relationship” that may make them wary of “stirring the pot.”

Employers should know how their brokers are paid, but health care is complex, so they are often not even aware of what they should ask, Thompson said. Employers rely on brokers to be a “trusted adviser,” he added. “Sometimes that trust is warranted and sometimes it’s not.”

Bad Faith Tactics

When officials in Morris County, New Jersey, sought a new broker to manage the county’s benefits, they specified that applicants could not take insurance company payouts related to their business. Instead, the county would pay the broker directly to ensure an unbiased search for the best benefits. The county hired Frenkel Benefits, a New York City broker, in February 2015.

Now, the county is suing the firm in Superior Court of New Jersey, accusing it of double-dipping. In addition to the fees from the county, the broker is accused of collecting a $235,000 commission in 2016 from the insurance giant Cigna. The broker got an additional $19,206 the next year, the lawsuit claims. To get the commission, one of the agency’s brokers allegedly certified, falsely, that the county would be told about the payment, the suit said. The county claims it was never notified and never approved the commission.

The suit also alleges the broker “purposefully concealed” the costs of switching the county’s health coverage to Cigna, which included administrative fees of $800,000.

In an interview, John Bowens, the county’s attorney, said the county had tried to guard against the broker being swayed by a large commission from an insurer. The brokers at Frenkel did not respond to requests for comment. The firm has not filed a response to the claims in the lawsuit. Steven Weisman, one of attorneys representing Frenkel, declined to comment.

Sometimes employers don’t find out their broker didn’t get them the best deal until they switch to another broker.

Josh Butler, a broker in Amarillo, Texas, who is also certified by Rosetta, recently took on a company of about 200 employees that had been signed up for a plan that had high out-of-pocket costs. The previous broker had enrolled the company in a supplemental plan that paid workers $1,000 if they were admitted to the hospital to help pay for uncovered costs. But Butler said the premiums for this coverage cost about $100,000 a year, and only nine employees had used it. That would make it much cheaper to pay for the benefit without insurance.

Butler suspects the previous broker encouraged the hospital benefits because they came with a sizable commission. He sells the same type of policies for the same insurer, so he knows the plan came with a 40 percent commission in the first year. That means about $40,000 of the employer’s premium went into the broker’s pocket.

Butler and other brokers said the insurance companies offer huge commissions to promote lucrative supplemental plans like dental, vision and disability. The total commissions on a supplemental cancer plan one insurer offered come to 57 percent, Butler said.

These massive year-one commissions lead some unscrupulous brokers to “churn” their supplemental benefits, Butler said, convincing employers to jump between insurers every year for the same type of benefits. The insurers don’t mind, Butler said, because the employers end up paying the tab. Brokers may also “product dump,” Butler said, which means pushing employers to sign employees up for multiple types of voluntary supplemental coverage, which brings them a hefty commission on each product.

Carl Schuessler, a broker in Atlanta who is certified by the Rosetta group, said he likes to help employers find out how much profit insurers are making on their premiums. Some states require insurers to provide the information, so when he took over the account for The Gasparilla Inn, an island resort on the Gulf Coast of Florida, he obtained the report for the company’s recent three years of coverage with UnitedHealthcare. He learned that the insurer had only paid out in claims about 65 percent of what the Inn had paid in premiums.

But in those same years the insurer had increased the Inn’s premiums, said Glenn Price, its chief financial officer. “It’s tough to swallow” increases to our premium when the insurer is making healthy profits, Price said. UnitedHealthcare declined to comment.

Schuessler, who is paid by the Inn, helped it transition to a self-funded plan, meaning the company bears the cost of the health care bills. Price said the Inn went from spending about $1 million a year to about $700,000, with lower costs and better benefits for employees, and no increases in three years.

A Need for Regulation

Despite the important function of brokers as middlemen, there’s been scant examination of their role in the marketplace.

Don Reiman, head of a Boise, Idaho, broker agency and a financial planner, said the federal government should require health benefit brokers to adhere to the same regulation he sees in the finance arena. The Employee Retirement Income Security Act, better known as ERISA, requires retirement plan advisers to disclose to employers all compensation that’s related to their plans, exposing potential conflicts.

The Department of Labor requires certain employers that provide health benefits to file documents every year about their plans, including payments to brokers. The department posts the information on its website.

But the data is notoriously messy. After a 2012 report found 23 percent of the forms contained errors, there was a proposal to revamp the data collection in 2016. It is unclear if that work was done, but ProPublica tried to analyze the data and found it incomplete or inaccurate. The data shortcomings mean employers have no real ability to compare payments to brokers.

About five years ago, Contorno, one of the leaders in the Rosetta movement, was blithely happy with the status quo: He had his favored insurers and could usually find traditional plans that appeared to fit his clients’ needs.

Today, he regrets his role in driving up employers’ health costs. One of his LinkedIn posts compares the industry’s acceptance of control by insurance companies to Stockholm Syndrome, the feelings of trust a hostage would have toward a captor.

Contorno began advising Palmer Johnson in 2016. When he took over, the company had a self-funded plan and its claims were reviewed by an administrator owned by its broker, Iowa-based Cottingham & Butler. Contorno brought in an independent claims administrator who closely scrutinized the claims and provided detailed cost information. The switch led to significant savings, said Parsons, the company owner. “It opened our eyes to what a good claims review process can mean to us,” he said.

Brad Plummer, senior vice president for employee benefits for Cottingham & Butler, acknowledged “things didn’t go swimmingly” with the claims company. But overall his company provided valuable service to Palmer Johnson, he said.

Contorno also provided resources to help Palmer Johnson employees find high-quality, low-cost providers, and the company waived any out-of-pocket expense as an incentive to get employees to see those medical providers. If a patient needed an out-of-network procedure, the price was negotiated up front to avoid massive surprise bills to the plan or the patient. The company also contracted with a vendor for drug coverage that does not use the secret rebates and hidden pricing schemes that are common in the industry. Palmer Johnson’s yearly health care costs per employee dropped by more than 25 percent, from about $11,252 in 2015 to $8,288 in 2018. That’s lower than they’d been in 2011, Contorno said.

“Now that my compensation is fully tied to meeting the clients’ goals, that is my sole objective,” he said. “Your broker works for whoever is cutting them the check.”

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.


New Vermont Law Regulating Data Brokers Drives 120 Businesses From The Shadows

In May of 2018, Vermont was the first (and only) state in the nation to enact a law regulating data brokers. According to the Vermont Secretary of State, a data broker is defined as:

"... a business, or unit or units of a business, separately or together, that knowingly collects and sells or licenses to third parties the brokered personal information of a consumer with whom the business does not have a direct relationship."

The Vermont Secretary of State's website contains links to the new law and more. This new law is important for several reasons. First, many businesses operate as data brokers. Second, consumers historically haven't known who has information about them, nor how to review their profiles for accuracy. Third,  consumers haven't been able to opt out of the data collection. Fourth, if you don't know who the data brokers are, then you can't hold them accountable if they fail with data security. According to Vermont law:

"2447. Data broker duty to protect information; standards; technical requirements (a) Duty to protect personally identifiable information. (1) A data broker shall develop, implement, and maintain a comprehensive information security program that is written in one or more readily accessible parts and contains administrative, technical, and physical safeguards that are appropriate... identification and assessment of reasonably foreseeable internal and external risks to the security, confidentiality, and integrity of any electronic, paper, or other records containing personally identifiable information, and a process for evaluating and improving, where necessary, the effectiveness of the current safeguards for limiting such risks... taking reasonable steps to select and retain third-party service providers that are capable of maintaining appropriate security measures to protect personally identifiable information consistent with applicable law; and (B) requiring third-party service providers by contract to implement and maintain appropriate security measures for personally identifiable information..."

Before this law, there was little to no oversight, no regulation, and no responsibility for data brokers to adequately protect sensitive data about consumers. A federal bill proposed in 2014 went nowhere in the U.S. Senate. You can assume that many data brokers operate in your state, too, since there's plenty of money to be made in the industry.

Portions of the new Vermont law went into effect in May, and the remainder went into effect on January 1, 2019. What has happened since then? Fast Company reported:

"So far, 121 companies have registered, according to data from the Vermont secretary of state’s office... The list of active companies includes divisions of the consumer data giant Experian, online people search engines like Spokeo and Spy Dialer, and a variety of lesser-known organizations that do everything from help landlords research potential tenants to deliver marketing leads to the insurance industry..."

The Fast Company site lists the 120 (so far) registered data brokers in Vermont. Regular readers of this blog will recognize some of the data brokers by name, since prior posts covered Acxiom, Equifax, Experian, LexisNexis, the NCTUE, Oracle, Spokeo, TransUnion, and others. (Yes, both credit reporting agencies and social media firms also operate as data brokers. Some states do it, too.) Reportedly, many privacy advocates support the new law:

"There’s companies that I’ve never heard of before," says Zachary Tomanelli, communications and technology director at the Vermont Public Interest Research Group, which supported the law. "It’s often very cumbersome [for consumers] to know where the places are that you have to go, and how you opt out."

Predictably, the industry has opposed (and continues to oppose) the legislation:

"A coalition of industry groups like the Internet Association, the Association of National Advertisers, and the National Association of Professional Background Screeners, as well as now registered data brokers such as Experian, Acxiom, and IHS Markit, said the law was unnecessary... Requiring companies to disclose breaches of largely public data could be burdensome for businesses and needlessly alarming for consumers, they argue... Other companies, like Axciom, have complained that the law establishes inconsistent boundaries around personal data used by third parties, and the first-party data used by companies like Facebook and Google."

So, no companies want consumers to own and control the data -- property -- that describes them. Real property laws matter. To learn more, read about data brokers at the Privacy Rights Clearinghouse site. Related posts in the Data Brokers section of this blog:

Kudos to Vermont lawmakers for ensuring more disclosures and transparency from the industry. Readers may ask their elected officials why their state has not taken similar action. What are your opinions of the new Vermont law?


Sackler Embraced Plan to Conceal OxyContin’s Strength From Doctors, Sealed Testimony Shows

[Editor's note: today's guest post explores issues within the pharmaceuticals and drug industry. It is reprinted with permission.]

By David Armstrong, ProPublica

In May 1997, the year after Purdue Pharma launched OxyContin, its head of sales and marketing sought input on a key decision from Dr. Richard Sackler, a member of the billionaire family that founded and controls the company. Michael Friedman told Sackler that he didn’t want to correct the false impression among doctors that OxyContin was weaker than morphine, because the myth was boosting prescriptions — and sales.

“It would be extremely dangerous at this early stage in the life of the product,” Friedman wrote to Sackler, “to make physicians think the drug is stronger or equal to morphine….We are well aware of the view held by many physicians that oxycodone [the active ingredient in OxyContin] is weaker than morphine. I do not plan to do anything about that.”

“I agree with you,” Sackler responded. “Is there a general agreement, or are there some holdouts?”

Ten years later, Purdue pleaded guilty in federal court to understating the risk of addiction to OxyContin, including failing to alert doctors that it was a stronger painkiller than morphine, and agreed to pay $600 million in fines and penalties. But Sackler’s support of the decision to conceal OxyContin’s strength from doctors — in email exchanges both with Friedman and another company executive — was not made public.

The email threads were divulged in a sealed court document that ProPublica has obtained: an Aug. 28, 2015, deposition of Richard Sackler. Taken as part of a lawsuit by the state of Kentucky against Purdue, the deposition is believed to be the only time a member of the Sackler family has been questioned under oath about the illegal marketing of OxyContin and what family members knew about it. Purdue has fought a three-year legal battle to keep the deposition and hundreds of other documents secret, in a case brought by STAT, a Boston-based health and medicine news organization; the matter is currently before the Kentucky Supreme Court.

Meanwhile, interest in the deposition’s contents has intensified, as hundreds of cities, counties, states and tribes have sued Purdue and other opioid manufacturers and distributors. A House committee requested the document from Purdue last summer as part of an investigation of drug company marketing practices.

In a statement, Purdue stood behind Sackler’s testimony in the deposition. Sackler, it said, “supports that the company accurately disclosed the potency of OxyContin to healthcare providers.” He “takes great care to explain” that the drug’s label “made clear that OxyContin is twice as potent as morphine,” Purdue said.

Still, Purdue acknowledged, it had made a “determination to avoid emphasizing OxyContin as a powerful cancer pain drug,” out of “a concern that non-cancer patients would be reluctant to take a cancer drug.”

The company, which said it was also speaking on behalf of Sackler, deplored what it called the “intentional leak of the deposition” to ProPublica, calling it “a clear violation of the court’s order” and “regrettable.”

Much of the questioning of Sackler in the 337-page deposition focused on Purdue’s marketing of OxyContin, especially in the first five years after the drug’s 1996 launch. Aggressive marketing of OxyContin is blamed by some analysts for fostering a national crisis that has resulted in 200,000 overdose deaths related to prescription opioids since 1999.

Taken together with a Massachusetts complaint made public last month against Purdue and eight Sacklers, including Richard, the deposition underscores the family’s pivotal role in developing the business strategy for OxyContin and directing the hiring of an expanded sales force to implement a plan to sell the drug at ever-higher doses. Documents show that Richard Sackler was especially involved in the company’s efforts to market the drug, and that he pushed staff to pursue OxyContin’s deregulation in Germany. The son of a Purdue co-founder, he began working at Purdue in 1971 and has been at various times the company’s president and co-chairman of its board.

In a 1996 email introduced during the deposition, Sackler expressed delight at the early success of OxyContin. “Clearly this strategy has outperformed our expectations, market research and fondest dreams,” he wrote. Three years later, he wrote to a Purdue executive, “You won’t believe how committed I am to make OxyContin a huge success. It is almost that I dedicated my life to it. After the initial launch phase, I will have to catch up with my private life again.”

During his deposition, Sackler defended the company’s marketing strategies — including some Purdue had previously acknowledged were improper — and offered benign interpretations of emails that appeared to show Purdue executives or sales representatives minimizing the risks of OxyContin and its euphoric effects. He denied that there was any effort to deceive doctors about the potency of OxyContin and argued that lawyers for Kentucky were misconstruing words such as “stronger” and “weaker” used in email threads.

The term “stronger” in Friedman’s email, Sackler said, “meant more threatening, more frightening. There is no way that this intended or had the effect of causing physicians to overlook the fact that it was twice as potent.”

Emails introduced in the deposition show Sackler’s hidden role in key aspects of the 2007 federal case in which Purdue pleaded guilty. A 19-page statement of facts that Purdue admitted to as part of the plea deal, and which prosecutors said contained the “main violations of law revealed by the government’s criminal investigation,” referred to Friedman’s May 1997 email to Sackler about letting the doctors’ misimpression stand. It did not identify either man by name, attributing the statements to “certain Purdue supervisors and employees.”

Friedman, who by then had risen to chief executive officer, was one of three Purdue executives who pleaded guilty to a misdemeanor of “misbranding” OxyContin. No members of the Sackler family were charged or named as part of the plea agreement. The Massachusetts lawsuit alleges that the Sackler-controlled Purdue board voted that the three executives, but no family members, should plead guilty as individuals. After the case concluded, the Sacklers were concerned about maintaining the allegiance of Friedman and another of the executives, according to the Massachusetts lawsuit. To protect the family, Purdue paid the two executives at least $8 million, that lawsuit alleges.

“The Sacklers spent millions to keep the loyalty of people who knew the truth,” the complaint filed by the Massachusetts attorney general alleges.

The Kentucky deposition’s contents will likely fuel the growing protests against the Sacklers, including pressure to strip the family’s name from cultural and educational institutions to which it has donated. The family has been active in philanthropy for decades, giving away hundreds of millions of dollars. But the source of its wealth received little attention until recent years, in part due to a lack of public information about what the family knew about Purdue’s improper marketing of OxyContin and false claims about the drug’s addictive nature.

Although Purdue has been sued hundreds of times over OxyContin’s marketing, the company has settled many of these cases, and almost never gone to trial. As a condition of settlement, Purdue has often required a confidentiality agreement, shielding millions of records from public view.

That is what happened in Kentucky. In December 2015, the state settled its lawsuit against Purdue, alleging that the company created a “public nuisance” by improperly marketing OxyContin, for $24 million. The settlement required the state attorney general to “completely destroy” documents in its possession from Purdue. But that condition did not apply to records sealed in the circuit court where the case was filed. In March 2016, STAT filed a motion to make those documents public, including Sackler’s deposition. The Kentucky Court of Appeals last year upheld a lower court ruling ordering the deposition and other sealed documents be made public. Purdue asked the state Supreme Court to review the decision, and both sides recently filed briefs. Protesters outside Kentucky’s Capitol last week waved placards urging the court to release the deposition.

Sackler family members have long constituted the majority of Purdue’s board, and company profits flow to trusts that benefit the extended family. During his deposition, which took place over 11 hours in a law office in Louisville, Kentucky, Richard Sackler said “I don’t know” more than 100 times, including when he was asked how much his family had made from OxyContin sales. He acknowledged it was more than $1 billion, but when asked if they had made more than $5 billion, he said, “I don’t know.” Asked if it was more than $10 billion, he replied, “I don’t think so.”

By 2006, OxyContin’s “profit contribution” to Purdue was $4.7 billion, according to a document read at the deposition. From 2007 to 2018, the Sackler family received more than $4 billion in payouts from Purdue, according to the Massachusetts lawsuit.

During the deposition, Sackler was confronted with his email exchanges with company executives about Purdue’s decision not to correct the misperception among many doctors that OxyContin was weaker than morphine. The company viewed this as good news because the softer image of the drug was helping drive sales in the lucrative market for treating conditions like back pain and arthritis, records produced at the deposition show.

Designed to gradually release medicine into the bloodstream, OxyContin allows patients to take fewer pills than they would with other, quicker-acting pain medicines, and its effect lasts longer. But to accomplish these goals, more narcotic is packed into an OxyContin pill than competing products. Abusers quickly figured out how to crush the pills and extract the large amount of narcotic. They would typically snort it or dissolve it into liquid form to inject.

The pending Massachusetts lawsuit against Purdue accuses Sackler and other company executives of determining that “doctors had the crucial misconception that OxyContin was weaker than morphine, which led them to prescribe OxyContin much more often.” It also says that Sackler “directed Purdue staff not to tell doctors the truth,” for fear of reducing sales. But it doesn’t reveal the contents of the email exchange with Friedman, the link between that conversation and the 2007 plea agreement, and the back-and-forth in the deposition.

A few days after the email exchange with Friedman in 1997, Sackler had an email conversation with another company official, Michael Cullen, according to the deposition. “Since oxycodone is perceived as being a weaker opioid than morphine, it has resulted in OxyContin being used much earlier for non-cancer pain,” Cullen wrote to Sackler. “Physicians are positioning this product where Percocet, hydrocodone and Tylenol with codeine have been traditionally used.” Cullen then added, “It is important that we be careful not to change the perception of physicians toward oxycodone when developing promotional pieces, symposia, review articles, studies, et cetera.”

“I think that you have this issue well in hand,” Sackler responded.

Friedman and Cullen could not be reached for comment.

Asked at his deposition about the exchanges with Friedman and Cullen, Sackler didn’t dispute the authenticity of the emails. He said the company was concerned that OxyContin would be stigmatized like morphine, which he said was viewed only as an “end of life” drug that was frightening to people.

“Within this time it appears that people had fallen into a habit of signifying less frightening, less threatening, more patient acceptable as under the rubric of weaker or more frightening, more — less acceptable and less desirable under the rubric or word ‘stronger,’” Sackler said at his deposition. “But we knew that the word ‘weaker’ did not mean less potent. We knew that the word ‘stronger’ did not mean more potent.” He called the use of those words “very unfortunate.”

He said Purdue didn’t want OxyContin “to be polluted by all of the bad associations that patients and healthcare givers had with morphine.”

In his deposition, Sackler also defended sales representatives who, according to the statement of facts in the 2007 plea agreement, falsely told doctors during the 1996-2001 period that OxyContin did not cause euphoria or that it was less likely to do so than other opioids. This euphoric effect experienced by some patients is part of what can make OxyContin addictive. Yet, asked about a 1998 note written by a Purdue salesman, who indicated that he “talked of less euphoria” when promoting OxyContin to a doctor, Sackler argued it wasn’t necessarily improper.

“This was 1998, long before there was an Agreed Statement of Facts,” he said.

The lawyer for the state asked Sackler: “What difference does that make? If it’s improper in 2007, wouldn’t it be improper in 1998?”

“Not necessarily,” Sackler replied.

Shown another sales memo, in which a Purdue representative reported telling a doctor that “there may be less euphoria” with OxyContin, Sackler responded, “We really don’t know what was said.” After further questioning, Sackler said the claim that there may be less euphoria “could be true, and I don’t see the harm.”

The same issue came up regarding a note written by a Purdue sales representative about one doctor: “Got to convince him to counsel patients that they won’t get buzzed as they will with short-acting” opioid painkillers. Sackler defended these comments as well. “Well, what it says here is that they won’t get a buzz. And I don’t think that telling a patient ‘I don’t think you’ll get a buzz’ is harmful,” he said.

Sackler added that the comments from the representative to the doctor “actually could be helpful, because many patients won’t get a buzz, and if he would like to know if they do, he might have had a good medical reason for wanting to know that.”

Sackler said he didn’t believe any of the company sales people working in Kentucky engaged in the improper conduct described in the federal plea deal. “I don’t have any facts to inform me otherwise,” he said.

Purdue said that Sackler’s statements in his deposition “fully acknowledge the wrongful actions taken by some of Purdue’s employees prior to 2002,” as laid out in the 2007 plea agreement. Both the company and Sackler “fully agree” with the facts laid out in that case, Purdue said.

The deposition also reveals that Sackler pushed company officials to find out if German officials could be persuaded to loosen restrictions on the selling of OxyContin. In most countries, narcotic pain relievers are regulated as “controlled” substances because of the potential for abuse. Sackler and other Purdue executives discussed the possibility of persuading German officials to classify OxyContin as an uncontrolled drug, which would likely allow doctors to prescribe the drug more readily — for instance, without seeing a patient. Fewer rules were expected to translate into more sales, according to company documents disclosed at the deposition.

One Purdue official warned Sackler and others that it was a bad idea. Robert Kaiko, who developed OxyContin for Purdue, wrote to Sackler, “If OxyContin is uncontrolled in Germany, it is highly likely that it will eventually be abused there and then controlled.”

Nevertheless, Sackler asked a Purdue executive in Germany for projections of sales with and without controls. He also wondered whether, if one country in the European Union relaxed controls on the drug, others might do the same. When finally informed that German officials had decided the drug would be controlled like other narcotics, Sackler asked in an email if the company could appeal. Told that wasn’t possible, he wrote back to an executive in Germany, “When we are next together we should talk about how this idea was raised and why it failed to be realized. I thought that it was a good idea if it could be done.”

Asked at the deposition about that comment, Sackler responded, “That’s what I said, but I didn’t mean it. I just wanted to be encouraging.” He said he really “was not in favor of” loosening OxyContin regulation and was simply being “polite” and “solicitous” of his own employee.

Near the end of the deposition — after showing Sackler dozens of emails, memos and other records regarding the marketing of OxyContin — a lawyer for Kentucky posed a fundamental question.

“Sitting here today, after all you’ve come to learn as a witness, do you believe Purdue’s conduct in marketing and promoting OxyContin in Kentucky caused any of the prescription drug addiction problems now plaguing the Commonwealth?” he asked.

Sackler replied, “I don’t believe so.”

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Federal Reserve Enforcement Action Against Banking Executives

Last month, the Federal Reserve Board (FRB) announced several notable enforcement actions. A February 5th press release discussed a:

"Consent Notice of Suspension and Prohibition against Fred Daibes, former Chairman of Mariner's Bancorp, Edgewater, New Jersey, for perpetuating a fraudulent loan scheme, according to a federal indictment."

The order against Daibes described the violations:

"... on October 30, 2018, a federal grand jury in the United States District Court for the District of New Jersey charged [Diabes] and an accomplice by indictment with one count conspiracy to misapply bank funds and to make false entries to deceive a financial institution and the FDIC, five counts of misapplying bank funds, six counts of making false entries to decide a financial institution and the FDIC, and one count of causing reliance on a false document to influence the FDIC... During the relevant time period, Mariner’s was subject to federal banking regulations that placed limits on the amount of money that the Bank could lend to a single borrower... the Indictment charges that in about January 2008 to December 2013, Daibes and others orchestrated a nominee loan scheme designed to circumvent the Lending Limits by ensuring that millions of dollars in loans made by the Bank (the “Nominee Loans”) flowed from the nominees to Daibes, while concealing Daibes’ beneficial interests in those loans from both the Bank and the FDIC. Daibes recruited nominees to make materially false and misleading statements and material omissions..."

The FRB and the U.S. Federal Deposit Insurance Corporation (FDIC) are two of several federal agencies which oversee and regulate the banking industry within the United States. The order bars Daibes from working within the banking industry.

Then, a February 7th FRB press release discussed a:

"Consent Prohibition against Alison Keefe, former employee of SunTrust Bank, Atlanta, Georgia, for violating bank overdraft policies for her own benefit."

The order against Keefe described the violations:

"... between September 2017 and May 2018, while employed as the manager of the Bank’s Hilltop Branch in Virginia Beach, Virginia, Keefe repeatedly overdrew her personal checking account at the Bank and instructed Bank staff, without authorization and contrary to Bank policies, to honor the overdrafts... Keefe’s misconduct described above constituted unsafe or unsound banking practices and demonstrated a reckless disregard for the safety and soundness of the Bank..."

Keefe was fired by the bank on July 12, 2018, and has repaid the bank. The order bars Keefe from working within the banking industry.

A February 21st press release discussed the agency's enforcement action against a former manager at J.P. Morgan Chase bank. The FRB:

"... permanently barred from the banking industry Timothy Fletcher, a former managing director at a non-bank subsidiary of J.P. Morgan Chase & Co. Fletcher consented to the prohibition, which includes allegations that he improperly administered a referral hiring program at the firm by offering internships and other employment opportunities to individuals referred by foreign officials, clients, and prospective clients in order to obtain improper business advantages for the firm. The FRB is also requiring Fletcher to cooperate in any pending or prospective enforcement action against other individuals who are or were affiliated with the firm. The firm was previously fined $61.9 million by the Board relating to this program. In addition, the Department of Justice and the Securities and Exchange Commission have also fined the firm."

The $61.9 million fine was levied against J.P. Morgan Chase in November, 2016. Back then, the FRB found that the bank:

"... did not have adequate enterprise-wide controls to ensure that referred candidates were appropriately vetted and hired in accordance with applicable anti-bribery laws and firm policies. The Federal Reserve's order requires J.P. Morgan Chase to enhance the effectiveness of senior management oversight and controls relating to the firm's referral hiring practices and anti-bribery policies. The Federal Reserve is also requiring the firm to cooperate in its investigation of the individuals..."

Last month's order against Fletcher described the violations:

"... from at least 2008 until 2013 [Fletcher] engaged in unsafe and unsound practices, breaches of fiduciary duty, and violations of law related to his involvement in the Firm’s referral hiring program for the Asia-Pacific region investment bank, whereby candidates who were referred, directly or indirectly, by foreign government officials and existing or prospective commercial clients were offered internships, training, and other employment opportunities in order to obtain improper business advantages for the Firm... the Firm’s internal policies prohibited Firm employees from giving anything of value, including the offer of internships or training, to certain individuals, including relatives of public officials and relatives and associates of non-government corporate representatives, in order to obtain improper business advantages for the Firm..."

Kudos to the FRB for its enforcement action. Executives must suffer direct consequences for wrongdoing. After reading this, one wonders why direct consequences are not applied against executives within the social media industry. The behaviors there do just as much damage; and cross borders, too. What are your opinions?


Brave Alerts FTC On Threats From Business Practices With Big Data

The U.S. Federal Trade Commission (FTC) held a "Privacy, Big Data, And Competition" hearing on November 6-8, 2018 as part of its "Competition And Consumer Protection in the 21st Century" series of discussions. During that session, the FTC asked for input on several topics:

  1. "What is “big data”? Is there an important technical or policy distinction to be drawn between data and big data?
  2. How have developments involving data – data resources, analytic tools, technology, and business models – changed the understanding and use of personal or commercial information or sensitive data?
  3. Does the importance of data – or large, complex data sets comprising personal or commercial information – in a firm’s ordinary course operations change how the FTC should analyze mergers or firm conduct? If so, how? Does data differ in importance from other assets in assessing firm or industry conduct?
  4. What structural, behavioral or conduct remedies should the FTC consider when remedying antitrust harm in a market or industry where data or personal or commercial information are a significant product or a key competitive input?
  5. Are there policy recommendations that would facilitate competition in markets involving data or personal or commercial information that the FTC should consider?
  6. Do the presence of personal information or privacy concerns inform or change competition analysis?
  7. How do state, federal, and international privacy laws and regulations, adopted to protect data and consumers, affect competition, innovation, and product offerings in the United States and abroad?"

Brave, the developer of a web browser, submitted comments to the FTC which highlighted two concerns:

"First, big tech companies “cross-use” user data from one part of their business to prop up others. This stifles competition, and hurts innovation and consumer choice. Brave suggests that FTC should investigate. Second, the GDPR is emerging as a de facto international standard. Whether this helps or harms United States firms will be determined by whether the United States enacts and actively enforces robust federal privacy laws."

A letter by Dr. Johnny Ryan, the Chief Policy & Industry Relations Officer at Brave, described in detail the company's concerns:

"The cross-use and offensive leveraging of personal information from one line of business to another is likely to have anti-competitive effects. Indeed anti-competitive practices may be inevitable when companies with Google’s degree of market dominance update their privacy policies to include the cross-use of personal information. The result is that a company can leverage all the personal information accumulated from its users in one line of business to dominate other lines of business too. Rather than competing on the merits, the company can enjoy the unfair advantage of massive network effects... The result is that nascent and potential competitors will be stifled, and consumer choice will be limited... The cross-use of data between different lines of business is analogous to the tying of two products. Indeed, tying and cross-use of data can occur at the same time, as Google Chrome’s latest “auto sign in to everything” controversy illustrates..."

Historically, Google let Chrome web browser users decide whether or not to sign in for cross-device usage. The Chrome 69 update forced auto sign-in, but a Chrome 70 update restored users' choice after numerous complaints and criticism.

Regarding topic #7 by the FTC, Brave's response said:

"A de facto international standard appears to be emerging, based on the European Union’s General Data Protection Regulation (GDPR)... the application of GDPR-like laws for commercial use of consumers’ personal data in the EU, Britain (post EU), Japan, India, Brazil, South Korea, Malaysia, Argentina, and China bring more than half of global GDP under a common standard. Whether this emerging standard helps or harms United States firms will be determined by whether the United States enacts and actively enforces robust federal privacy laws. Unless there is a federal GDPR-like law in the United States, there may be a degree of friction and the potential of isolation for United States companies... there is an opportunity in this trend. The United States can assume the global lead by adopting the emerging GDPR standard, and by investing in world-leading regulation that pursues test cases, and defines practical standards..."

Currently, companies collect, archive, share, and sell consumers' personal information at will -- often without notice nor consent. While all 50 states and territories have breach notification laws, most states have not upgraded their breach notification laws to include biometric and passport data. While the Health Insurance Portability and Accountability Act (HIPAA) is the federal law which governs healthcare data and related breaches, many consumers share health data with social media sites -- robbing themselves of HIPAA protections.

Moreover, it's an unregulated free-for-all of data collection, archiving, and sharing by telecommunications companies after the revoking in 2017 of broadband privacy protections for consumers in the USA. Plus, laws have historically focused upon "declared data" (e.g., the data users upload or submit into websites or apps) while ignoring "inferred data" -- which is arguably just as sensitive and revealing.

Regarding future federal privacy legislation, Brave added:

"... The GDPR is compatible with a United States view of consumer protection and privacy principles. Indeed, the FTC has proposed important privacy protections to legislators in 2009, and again in 2012 and 2014, which ended up being incorporated in the GDPR. The high-level principles of the GDPR are closely aligned, and often identical to, the United States’ privacy principles... The GDPR also incorporates principles endorsed by the U.S. in the 1980 OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data; and the principles endorsed by the United States this year, in Article 19.8 (3) of the new United States-Mexico-Canada Agreement."

"The GDPR differs from established United States privacy principles in its explicit reference to “proportionality” as a precondition of data use, and in its more robust approach to data minimization and to purpose specification. In our view, a federal law should incorporate these elements too. We also recommend that federal law should adopt the GDPR definitions of concepts such as “personal data”, “legal basis” including opt-in “consent”, “processing”, “special category personal data”, ”profiling”, “data controller”, “automated decision making”, “purpose limitation”, and so forth, and tools such as data protection impact assessments, breach notification, and records of processing activities."

"In keeping with the fair information practice principles (FIPPs) of the 1974 US Privacy Act, Brave recommends that a federal law should require that the collection of personal information is subject to purpose specification. This means that personal information shall only be collected for specific and explicit purposes. Personal information should not used beyond those purposes without consent, unless a further purpose is poses no risk of harm and is compatible with the initial purpose, in which case the data subject should have the opportunity to opt-out."

Submissions by Brave and others are available to the public at the FTC website in the "Public Comments" section.


Google To End Forced Arbitration For Employees

This news item caught my attention. Axios reported:

"Google will no longer require current and future employees to take disputes with the company to arbitration, it said on February 21st... After protests last year, the search giant ended mandatory arbitration for individual cases of sexual harassment or assault for employees. Employees have called for the practice to end in other cases of harassment and discrimination. Google appears to be meeting that demand for employees — but the change will not apply in the same blanket way to the many contractors, vendors and temporary employees it uses."

Reportedly, the change will take effect on March 21, 2019.


Study: Privacy Concerns Have Caused Consumers To Change How They Use The Internet

Facebook commissioned a study by the Economist Intelligence Unit (EIU) to understand "internet inclusion" globally, or how people use the Internet, the benefits received, and the obstacles experienced. The latest survey included 5,069 respondents from 100 countries in Asia-Pacific, the Americas, Europe, the Middle East, North Africa and Sub-Saharan Africa.

Overall findings in the report cited:

"... cause for both optimism and concern. We are seeing steady progress in the number and percentage of households connected to the Internet, narrowing the gender gap and improving accessibility for people with disabilities. The Internet also has become a crucial tool for employment and obtaining job-related skills. On the other hand, growth in Internet connections is slowing, especially among the lowest income countries, and efforts to close the digital divide are stalling..."

The EIU describes itself as, "the world leader in global business intelligence, to help companies, governments and banks understand changes in the world is changing, seize opportunities created by those changes, and manage associated risks. So, any provider of social media services globally would greatly value the EIU's services.

The chart below highlights some of the benefits mentioned by survey respondents:

Chart-internet-benefits-eiu-2019

Other benefits respondents said: almost three-quarters (74.4%) said the Internet is more effective than other methods for finding jobs; 70.5% said their job prospects have improved due to the Internet; and more. So, job seekers and employers both benefit.

Key findings regarding online privacy (emphasis added):

"... More than half (52.2%) of [survey] respondents say they are not confident about their online privacy, hardly changed from 51.5% in the 2018 survey... Most respondents are changing the way they use the Internet because they believe some information may not remain private. For example, 55.8% of respondents say they limit how much financial information they share online because of privacy concerns. This is relatively consistent across different age groups and household income levels... 42.6% say they limit how much personal health and medical information they share. Only 7.5% of respondents say privacy concerns have not changed the way they use the Internet."

So, the lack of online privacy affects how people use the internet -- for business and pleasure. The chart below highlights the types of online changes:

Chart-internet-usage-eiu-2019

Findings regarding privacy and online shopping:

"Despite lingering privacy concerns, people are increasingly shopping online. Whether this continues in the future may hinge on attitudes toward online safety and security... A majority of respondents say that making online purchases is safe and secure, but, at 58.8% it was slightly lower than the 62.1% recorded in the 2018 survey."

So, the percentage of respondents who said online purchases as safe and secure went in the wrong direction -- down. Not good. There were regional differences, too, about online privacy:

"In Europe, the share of respondents confident about their online privacy increased by 8 percentage points from the 2018 survey, probably because of the General Data Protection Regulation (GDPR), the EU’s comprehensive data privacy rules that came into force in May 2018. However, the Middle East and North Africa region saw a decline of 9 percentage points compared with the 2018 survey."

So, sensible legislation to protect consumers' online privacy can have positive impacts. There were other regional differences:

"Trust in online sources of information remained relatively stable, except in the West. Political turbulence in the US and UK may have played a role in causing the share of respondents in North America and Europe who say they trust information on government websites and apps to retreat by 10 percentage points and 6 percentage points, respectively, compared with the 2018 survey."

So, stability is important. The report's authors concluded:

"The survey also reflects anxiety about online privacy and a decline in trust in some sources of information. Indeed, trust in government information has fallen since last year in Europe and North America. The growth and importance of the digital economy will mean that alleviating these anxieties should be a priority of companies, governments, regulators and developers."

Addressing those anxieties is critical, if governments in the West are serious about facilitating business growth via consumer confidence and internet usage. Download the Inclusive Internet Index 2019 Executive Summary (Adobe PDF) report.


New Bill In California To Strengthen Its Consumer Privacy Law

Lawmakers in California have proposed legislation to strengthen the state's existing privacy law. California Attorney General Xavier Becerra and and Senator Hannah-Beth Jackson jointly announced Senate Bill 561, to improve the California Consumer Privacy Act (CCPA). According to the announcement:

"SB 561 helps improve the workability of the [CCPA] by clarifying the Attorney General’s advisory role in providing general guidance on the law, ensuring a level playing field for businesses that play by the rules, and giving consumers the ability to enforce their new rights under the CCPA in court... SB 561 removes requirements that the Office of the Attorney General provide, at taxpayers’ expense, businesses and private parties with individual legal counsel on CCPA compliance; removes language that allows companies a free pass to cure CCPA violations before enforcement can occur; and adds a private right of action, allowing consumers the opportunity to seek legal remedies for themselves under the act..."

Senator Jackson introduced the proposed legislation into the sate Senate. Enacted in 2018, the CCPA will go into effect on January 1, 2020. The law prohibits businesses from discriminating against consumers for exercising their rights under the CCPA. The law also includes several key requirements businesses must comply with:

  • "Businesses must disclose data collection and sharing practices to consumers;
  • Consumers have a right to request their data be deleted;
  • Consumers have a right to opt out of the sale or sharing of their personal information; and
  • Businesses are prohibited from selling personal information of consumers under the age of 16 without explicit consent."

State Senator Jackson said in a statement:

"Our constitutional right to privacy continues to face unprecedented assault. Our locations, relationships, and interests are being tracked without our knowledge, bought and sold by corporate interests for their own economic gain and conducted in order to manipulate us... With the passage of the California Consumer Privacy Act last year, California took an important first step in protecting our fundamental right to privacy. SB 561 will ensure that the most significant privacy protections in the nation are effectively and robustly enforced."

Predictably, the pro-business lobby opposes the legislation. The Sacramento Bee reported:

"Punishment may be an incentive to increase compliance, but — especially where a law is new and vague — eliminating a right to cure does not promote compliance," the California Chamber of Commerce released in a statement on February 25. "SB 561 will not only hurt and possibly bankrupt small businesses in the state, it will kill jobs and innovation."

Sounds to me like fearmongering by the Chamber. Senator Jackson has it right. From the same Sacramento Bee article:

"If you don’t violate the law, you won’t get sued... To have very little recourse when these violations occur means that these large companies can continue with their inappropriate, improper behavior without any kind of recourse and sanction. In order to make sure they comply with the law, we need to make sure that people are able to exercise their rights."

Precisely. Two concepts seem to apply:

  • If you can't protect it, don't collect it (e.g.,  consumers' personal information), and
  • If the data collected is so value, compensate consumers for it

Regarding the second item, the National Law Review reported:

"Much has been made of California Governor Gavin Newsom’s recent endorsement of “data dividends”: payments to consumers for the use of their personal data. Common Sense Media, which helped pass the CCPA last year, plans to propose legislation in California to create such a dividend. The proposal has already proven popular with the public..."

Laws like the CCPA seem to be the way forward. Kudos to California for moving to better protect consumers. This proposed update puts teeth into existing law. Hopefully, other states will follow soon.


Facebook Admits More Teens Used Spyware App Than Previously Disclosed

Facebook logo Facebook has changed its story about how many teenagers used its Research app. When news first broke, Facebook said that less than 5 percent of the mobile app users were teenagers. On Thursday, TechCrunch reported that it:

"... has obtained Facebook’s unpublished February 21st response to questions about the Research program in a letter from Senator Mark Warner, who wrote to CEO Mark Zuckerberg that “Facebook’s apparent lack of full transparency with users – particularly in the context of ‘research’ efforts – has been a source of frustration for me.”

In the response from Facebook’s VP of US public policy Kevin Martin, the company admits that (emphasis ours) “At the time we ended the Facebook Research App on Apple’s iOS platform, less than 5 percent of the people sharing data with us through this program were teens. Analysis shows that number is about 18 percent when you look at the complete lifetime of the program, and also add people who had become inactive and uninstalled the app.”

Three U.S. Senators sent a letter to Facebook on February 7th demanding answers. The TechCrunch article outlined other items in Facebook's changing story: i) it originally claimed its Research App didn't violate Apple's policies and we later learned it did; and ii) it claimed to have removed the app, but Apple later forced that removal.

What to make of Facebook's changing story? Again from TechCrunch:

"The contradictions between Facebook’s initial response to reporters and what it told Warner, who has the power to pursue regulation of the the tech giant, shows Facebook willingness to move fast and play loose with the truth... Facebook’s attempt to minimize the issue in the wake of backlash exemplifies the trend of of the social network’s “reactionary” PR strategy that employees described to BuzzFeed’s Ryan Mac. The company often views its scandals as communications errors rather than actual product screwups or as signals of deep-seeded problems with Facebook’s respect for privacy..."

Kudos to TechCrunch on more excellent reporting. And, there's more regarding children. Fortune reported:

"A coalition of 17 privacy and children’s organizations has asked the Federal Trade Commission to investigate Facebook for allowing children to make unauthorized in-app purchases... The coalition filed a complaint with the FTC on Feb. 21 over Facebook doing little to stop children from buying virtual items through games on its service without parental permission and, in some cases, without realizing those items cost money... Internal memos show that between 2010 and 2014, Facebook encouraged children, some as young as five-years old, to make purchases using their parents’ credit card information, the complaint said. The company then refused to refund parents..."

Not good. Facebook's changing story makes it difficult, or impossible, to trust anything its executives say. Perhaps, the entertainer Lady Gaga said it best:

"Social media is the toilet of the internet."

Facebook's data breaches, constant apologizing, and shifting stories seem to confirm that. Now, it is time for government regulators to act -- and not with wimpy fines.


California Seeks To Close Loopholes In Its Data Breach Notification Law

California pursues legislation to close loopholes in its existing data breach notification law. Current state law in California does not require businesses to notify consumers when their passport and biometric data is exposed or stolen during a data breach. The proposed law would close that loophole.

The legislation was prompted by the gigantic data breach at Marriott's Starwood Hotels unit. The sensitive information of more than 327 million guests was accessed by unauthorized persons. The data accessed -- and probably stolen -- included guests' names, addresses, at least 25 million passport numbers, and more. California Attorney General Xavier Becerra announced the proposed legislation:

"Though [Marriott] did notify consumers of the breach, current law does not require companies to report breaches if only consumers’ passport numbers have been improperly accessed... In 2003, California became the first state to pass a data breach notification law requiring companies to disclose breaches of personal information to California consumers whose personal information was, or was reasonably believed to have been, acquired by an unauthorized person... This bill would update that law to include passport numbers as personal information protected under the statute. Passport numbers are unique, government-issued, static identifiers of a person, which makes them valuable to criminals seeking to create or build fake profiles and commit sophisticated identity theft and fraud. AB 1130 would also update the statute to include protection for a person’s unique biometric information, such as a fingerprint, or image of a retina or iris."

Assembly member Marc Levine (D-San Rafael) introduced the proposed legislation to the California House, and said in a statement:

“There is a real danger when our personal information is not protected by those we trust... Businesses must do more to protect personal data, and I am proud to stand with Attorney General Becerra in demanding greater disclosure by a company when a data breach has occurred. AB 1130 will increase our efforts to protect consumers from fraud and affirms our commitment to demand the strongest consumer protections in the nation."

Good. There are too many examples of companies failing to announce data breaches affecting companies. TechCrunch reported that AB 1130:

"... comes less than a year after state lawmakers passed the California Privacy Act into law, greatly expanding privacy rights for consumers — similar to provisions provided to Europeans under the newly instituted General Data Protection Regulation. The state privacy law, passed in June and set to go into effect in 2020, was met with hostility by tech companies headquartered in the state... Several other states, like Alabama, Florida and Oregon, already require data breach notifications in the event of passport number breaches, and also biometric data in the case of Iowa and Nebraska, among others..."

Kudos to California for moving to better protect consumers. Hopefully, other states will also update their breach notification laws.


Large Natural Gas Producer to Pay West Virginia Plaintiffs $53.5 Million to Settle Royalty Dispute

[Editor's note: today's guest post by ProPublica discusses business practices within the energy industry. It is reprinted with permission.]

By Kate Mishkin and Ken Ward Jr., The Charleston Gazette-Mail

The second-largest natural gas producer in West Virginia will pay $53.5 million to settle a lawsuit that alleged the company was cheating thousands of state residents and businesses by shorting them on gas royalty payments, according to terms of the deal unsealed in court this week.

EQT Corporation logo Pittsburgh-based EQT Corp. agreed to pay the money to end a federal class-action lawsuit, brought on behalf of about 9,000 people, which alleged that EQT wrongly deducted a variety of unacceptable charges from peoples’ royalty checks.

The deal is the latest in a series of settlements in cases that accused natural gas companies of engaging in such maneuvers to pocket a larger share of the profits from the boom in natural gas production in West Virginia.

This lawsuit was among the royalty cases highlighted last year in a joint examination by the Charleston Gazette-Mail and ProPublica that showed how West Virginia’s natural gas producers avoid paying royalties promised to thousands of residents and businesses. The plaintiffs said EQT was improperly deducting transporting and processing costs from their royalty payments. EQT said its royalty payment calculations were correct and fair.

A trial was scheduled to begin in November but was canceled after the parties reached the tentative settlement. Details of the settlement were unsealed earlier this month.

Under the settlement agreement, EQT Production Co. will pay the $53.5 million into a settlement fund. The company will also stop deducting those post-production costs from royalty payments.

“This was an opportunity to turn over a new leaf in our relationship with our West Virginia leaseholders and this mutually beneficial agreement demonstrates our renewed commitment to the state of West Virginia,” EQT’s CEO, Robert McNally, said in a prepared statement.

EQT is working to earn the trust of West Virginians and community leaders, he said.

Marvin Masters, the lead lawyer for the plaintiffs, called the settlement “encouraging” after six years of litigation. (Masters is among a group of investors who bought the Charleston Gazette-Mail last year.)

Funds will be distributed to people who leased the rights to natural gas beneath their land in West Virginia to EQT between Dec. 8, 2009, and Dec. 31, 2017. EQT will also pay up to $2 million in administrative fees to distribute the settlement.

Settlement payments will be calculated based on such factors as the amount of gas produced and sold from each well, as well as how much was deducted from royalty payments. The number of people who submit claims could also affect settlement payments. Each member of the class that submits a claim will receive a minimum payment of at least $200. The settlement allows lawyers to collect up to one-third of the settlement, or roughly $18 million, subject to approval from the court.

The settlement is pending before U.S. District Judge John Preston Bailey in the Northern District of West Virginia. The judge gave it preliminary approval on February 11th, which begins a process for public notice of the terms and a fairness hearing July 11 in Wheeling, West Virginia. Payments would not be made until that process is complete.

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UK Parliamentary Committee Issued Its Final Report on Disinformation And Fake News. Facebook And Six4Three Discussed

On February 18th, a United Kingdom (UK) parliamentary committee published its final report on disinformation and "fake news." The 109-page report by the Digital, Culture, Media, And Sport Committee (DCMS) updates its interim report from July, 2018.

The report covers many issues: political advertising (by unnamed entities called "dark adverts"), Brexit and UK elections, data breaches, privacy, and recommendations for UK regulators and government officials. It seems wise to understand the report's findings regarding the business practices of U.S.-based companies mentioned, since these companies' business practices affect consumers globally, including consumers in the United States.

Issues Identified

First, the DCMS' final report built upon issues identified in its:

"... Interim Report: the definition, role and legal liabilities of social media platforms; data misuse and targeting, based around the Facebook, Cambridge Analytica and Aggregate IQ (AIQ) allegations, including evidence from the documents we obtained from Six4Three about Facebook’s knowledge of and participation in data-sharing; political campaigning; Russian influence in political campaigns; SCL influence in foreign elections; and digital literacy..."

The final report includes input from 23 "oral evidence sessions," more than 170 written submissions, interviews of at least 73 witnesses, and more than 4,350 questions asked at hearings. The DCMS Committee sought input from individuals, organizations, industry experts, and other governments. Some of the information sources:

"The Canadian Standing Committee on Access to Information, Privacy and Ethics published its report, “Democracy under threat: risks and solutions in the era of disinformation and data monopoly” in December 2018. The report highlights the Canadian Committee’s study of the breach of personal data involving Cambridge Analytica and Facebook, and broader issues concerning the use of personal data by social media companies and the way in which such companies are responsible for the spreading of misinformation and disinformation... The U.S. Senate Select Committee on Intelligence has an ongoing investigation into the extent of Russian interference in the 2016 U.S. elections. As a result of data sets provided by Facebook, Twitter and Google to the Intelligence Committee -- under its Technical Advisory Group -- two third-party reports were published in December 2018. New Knowledge, an information integrity company, published “The Tactics and Tropes of the Internet Research Agency,” which highlights the Internet Research Agency’s tactics and messages in manipulating and influencing Americans... The Computational Propaganda Research Project and Graphika published the second report, which looks at activities of known Internet Research Agency accounts, using Facebook, Instagram, Twitter and YouTube between 2013 and 2018, to impact US users"

Why Disinformation

Second, definitions matter. According to the DCMS Committee:

"We have even changed the title of our inquiry from “fake news” to “disinformation and ‘fake news’”, as the term ‘fake news’ has developed its own, loaded meaning. As we said in our Interim Report, ‘fake news’ has been used to describe content that a reader might dislike or disagree with... We were pleased that the UK Government accepted our view that the term ‘fake news’ is misleading, and instead sought to address the terms ‘disinformation’ and ‘misinformation'..."

Overall Recommendations

Summary recommendations from the report:

  1. "Compulsory Code of Ethics for tech companies overseen by independent regulator,
  2. Regulator given powers to launch legal action against companies breaching code,
  3. Government to reform current electoral communications laws and rules on overseas involvement in UK elections, and
  4. Social media companies obliged to take down known sources of harmful content, including proven sources of disinformation"

Role And Liability Of Tech Companies

Regarding detailed observations and findings about the role and liability of tech companies, the report stated:

"Social media companies cannot hide behind the claim of being merely a ‘platform’ and maintain that they have no responsibility themselves in regulating the content of their sites. We repeat the recommendation from our Interim Report that a new category of tech company is formulated, which tightens tech companies’ liabilities, and which is not necessarily either a ‘platform’ or a ‘publisher’. This approach would see the tech companies assume legal liability for content identified as harmful after it has been posted by users. We ask the Government to consider this new category of tech company..."

The UK Government and its regulators may adopt some, all, or none of the report's recommendations. More observations and findings in the report:

"... both social media companies and search engines use algorithms, or sequences of instructions, to personalize news and other content for users. The algorithms select content based on factors such as a user’s past online activity, social connections, and their location. The tech companies’ business models rely on revenue coming from the sale of adverts and, because the bottom line is profit, any form of content that increases profit will always be prioritized. Therefore, negative stories will always be prioritized by algorithms, as they are shared more frequently than positive stories... Just as information about the tech companies themselves needs to be more transparent, so does information about their algorithms. These can carry inherent biases, as a result of the way that they are developed by engineers... Monika Bickert, from Facebook, admitted that Facebook was concerned about “any type of bias, whether gender bias, racial bias or other forms of bias that could affect the way that work is done at our company. That includes working on algorithms.” Facebook should be taking a more active and urgent role in tackling such inherent biases..."

Based upon this, the report recommended that the UK's new Centre For Ethics And Innovation (CFEI) should play a key role as an advisor to the UK Government by continually analyzing and anticipating gaps in governance and regulation, suggesting best practices and corporate codes of conduct, and standards for artificial intelligence (AI) and related technologies.

Inferred Data

The report also discussed a critical issue related to algorithms (emphasis added):

"... When Mark Zuckerberg gave evidence to Congress in April 2018, in the wake of the Cambridge Analytica scandal, he made the following claim: “You should have complete control over your data […] If we’re not communicating this clearly, that’s a big thing we should work on”. When asked who owns “the virtual you”, Zuckerberg replied that people themselves own all the “content” they upload, and can delete it at will. However, the advertising profile that Facebook builds up about users cannot be accessed, controlled or deleted by those users... In the UK, the protection of user data is covered by the General Data Protection Regulation (GDPR). However, ‘inferred’ data is not protected; this includes characteristics that may be inferred about a user not based on specific information they have shared, but through analysis of their data profile. This, for example, allows political parties to identify supporters on sites like Facebook, through the data profile matching and the ‘lookalike audience’ advertising targeting tool... Inferred data is therefore regarded by the ICO as personal data, which becomes a problem when users are told that they can own their own data, and that they have power of where that data goes and what it is used for..."

The distinction between uploaded and inferred data cannot be overemphasized. It is critical when evaluating tech companies statements, policies (e.g., privacy, terms of use), and promises about what "data" users have control over. Wise consumers must insist upon clear definitions to avoided getting misled or duped.

What might be an exampled of inferred data? What comes to mind is Facebook's Ad Preferences feature allows users to review and delete the "Interests" -- advertising categories -- Facebook assigns to each user's profile. (The service's algorithms assign Interests based groups/pages/events/advertisements users "Liked" or clicked on, posts submitted, posts commented upon, and more.) These "Interests" are inferred data, since Facebook assigned them, and uers didn't.

In fact, Facebook doesn't notify its users when it assigns new Interests. It just does it. And, Facebook can assign Interests whether you interacted with an item once or many times. How relevant is an Interest assigned after a single interaction, "Like," or click? Most people would say: not relevant. So, does the Interests list assigned to users' profiles accurately describe users? Do Facebook users own the Interests list assigned to their profiles? Any control Facebook users have seems minimal. Why? Facebook users can delete Interests assigned to their profiles, but users cannot stop Facebook from applying new Interests. Users cannot prevent Facebook from re-applying Interests previously deleted. Deleting Interests doesn't reduce the number of ads users see on Facebook.

The only way to know what Interests have been assigned is for Facebook users to visit the Ad Preferences section of their profiles, and browse the list. Depending how frequently a person uses Facebook, it may be necessary to prune an Interests list at least once monthly -- a cumbersome and time consuming task, probably designed that way to discourage reviews and pruning. And, that's one example of inferred data. There are probably plenty more examples, and as the report emphasizes users don't have access to all inferred data with their profiles.

Now, back to the report. To fix problems with inferred data, the DCMS recommended:

"We support the recommendation from the ICO that inferred data should be as protected under the law as personal information. Protections of privacy law should be extended beyond personal information to include models used to make inferences about an individual. We recommend that the Government studies the way in which the protections of privacy law can be expanded to include models that are used to make inferences about individuals, in particular during political campaigning. This will ensure that inferences about individuals are treated as importantly as individuals’ personal information."

Business Practices At Facebook

Next, the DCMS Committee's report said plenty about Facebook, its management style, and executives (emphasis added):

"Despite all the apologies for past mistakes that Facebook has made, it still seems unwilling to be properly scrutinized... Ashkan Soltani, an independent researcher and consultant, and former Chief Technologist to the US Federal Trade Commission (FTC), called into question Facebook’s willingness to be regulated... He discussed the California Consumer Privacy Act, which Facebook supported in public, but lobbied against, behind the scenes... By choosing not to appear before the Committee and by choosing not to respond personally to any of our invitations, Mark Zuckerberg has shown contempt towards both the UK Parliament and the ‘International Grand Committee’, involving members from nine legislatures from around the world. The management structure of Facebook is opaque to those outside the business and this seemed to be designed to conceal knowledge of and responsibility for specific decisions. Facebook used the strategy of sending witnesses who they said were the most appropriate representatives, yet had not been properly briefed on crucial issues, and could not or chose not to answer many of our questions. They then promised to follow up with letters, which -- unsurprisingly -- failed to address all of our questions. We are left in no doubt that this strategy was deliberate."

So, based upon Facebook's actions (or lack thereof), the DCMS concluded that Facebook executives intentionally ducked and dodged issues and questions.

While discussing data use and targeting, the report said more about data breaches and Facebook:

"The scale and importance of the GSR/Cambridge Analytica breach was such that its occurrence should have been referred to Mark Zuckerberg as its CEO immediately. The fact that it was not is evidence that Facebook did not treat the breach with the seriousness it merited. It was a profound failure of governance within Facebook that its CEO did not know what was going on, the company now maintains, until the issue became public to us all in 2018. The incident displays the fundamental weakness of Facebook in managing its responsibilities to the people whose data is used for its own commercial interests..."

So, internal management failed. That's not all. After a detailed review of the GSR/Cambridge Analytica breach and Facebook's 2011 Consent Decree with the U.S. Federal Trade Commission (FTC), the DCMS Committee concluded (emphasis and text link added):

"The Cambridge Analytica scandal was facilitated by Facebook’s policies. If it had fully complied with the FTC settlement, it would not have happened. The FTC Complaint of 2011 ruled against Facebook -- for not protecting users’ data and for letting app developers gain as much access to user data as they liked, without restraint -- and stated that Facebook built their company in a way that made data abuses easy. When asked about Facebook’s failure to act on the FTC’s complaint, Elizabeth Denham, the Information Commissioner, told us: “I am very disappointed that Facebook, being such an innovative company, could not have put more focus, attention and resources into protecting people’s data”. We are equally disappointed."

Wow! Not good. There's more:

"... a current court case at the San Mateo Superior Court in California also concerns Facebook’s data practices. It is alleged that Facebook violated the privacy of US citizens by actively exploiting its privacy policy... The published ‘corrected memorandum of points and authorities to defendants’ special motions to strike’, by the complainant in the case, the U.S.-based app developer Six4Three, describes the allegations against Facebook; that Facebook used its users’ data to persuade app developers to create platforms on its system, by promising access to users’ data, including access to data of users’ friends. The case also alleges that those developers that became successful were targeted and ordered to pay money to Facebook... Six4Three lodged its original case in 2015, after Facebook removed developers’ access to friends’ data, including its own. The DCMS Committee took the unusual, but lawful, step of obtaining these documents, which spanned between 2012 and 2014... Since we published these sealed documents, on 14 January 2019 another court agreed to unseal 135 pages of internal Facebook memos, strategies and employee emails from between 2012 and 2014, connected with Facebook’s inappropriate profiting from business transactions with children. A New York Times investigation published in December 2018 based on internal Facebook documents also revealed that the company had offered preferential access to users data to other major technology companies, including Microsoft, Amazon and Spotify."

"We believed that our publishing the documents was in the public interest and would also be of interest to regulatory bodies... The documents highlight Facebook’s aggressive action against certain apps, including denying them access to data that they were originally promised. They highlight the link between friends’ data and the financial value of the developers’ relationship with Facebook. The main issues concern: ‘white lists’; the value of friends’ data; reciprocity; the sharing of data of users owning Android phones..."

You can read the report's detailed descriptions of those issues. A summary: a) Facebook allegedly used promises of access to users' data to lure developers (often by overriding Facebook users' privacy settings); b) some developers got priority treatment based upon unclear criteria; c) developers who didn't spend enough money with Facebook were denied access to data previously promised; d) Facebook's reciprocity clause demanded that developers also share their users' data with Facebook; e) Facebook's mobile app for Android OS phone users collected far more data about users, allegedly without consent, than users were told; and f) Facebook allegedly targeted certain app developers (emphasis added):

"We received evidence that showed that Facebook not only targeted developers to increase revenue, but also sought to switch off apps where it considered them to be in competition or operating in a lucrative areas of its platform and vulnerable to takeover. Since 1970, the US has possessed high-profile federal legislation, the Racketeer Influenced and Corrupt Organizations Act (RICO); and many individual states have since adopted similar laws. Originally aimed at tackling organized crime syndicates, it has also been used in business cases and has provisions for civil action for damages in RICO-covered offenses... Despite specific requests, Facebook has not provided us with one example of a business excluded from its platform because of serious data breaches. We believe that is because it only ever takes action when breaches become public. We consider that data transfer for value is Facebook’s business model and that Mark Zuckerberg’s statement that “we’ve never sold anyone’s data” is simply untrue.” The evidence that we obtained from the Six4Three court documents indicates that Facebook was willing to override its users’ privacy settings in order to transfer data to some app developers, to charge high prices in advertising to some developers, for the exchange of that data, and to starve some developers—such as Six4Three—of that data, thereby causing them to lose their business. It seems clear that Facebook was, at the very least, in violation of its Federal Trade Commission settlement."

"The Information Commissioner told the Committee that Facebook needs to significantly change its business model and its practices to maintain trust. From the documents we received from Six4Three, it is evident that Facebook intentionally and knowingly violated both data privacy and anti-competition laws. The ICO should carry out a detailed investigation into the practices of the Facebook Platform, its use of users’ and users’ friends’ data, and the use of ‘reciprocity’ of the sharing of data."

The Information Commissioner's Office (ICO) is one of the regulatory agencies within the UK. So, the Committee concluded that Facebook's real business model is, "data transfer for value" -- in other words: have money, get access to data (regardless of Facebook users' privacy settings).

One quickly gets the impression that Facebook acted like a monopoly in its treatment of both users and developers... or worse, like organized crime. The report concluded (emphasis added):

"The Competitions and Market Authority (CMA) should conduct a comprehensive audit of the operation of the advertising market on social media. The Committee made this recommendation its interim report, and we are pleased that it has also been supported in the independent Cairncross Report commissioned by the government and published in February 2019. Given the contents of the Six4Three documents that we have published, it should also investigate whether Facebook specifically has been involved in any anti-competitive practices and conduct a review of Facebook’s business practices towards other developers, to decide whether Facebook is unfairly using its dominant market position in social media to decide which businesses should succeed or fail... Companies like Facebook should not be allowed to behave like ‘digital gangsters’ in the online world, considering themselves to be ahead of and beyond the law."

The DCMS Committee's report also discussed findings from the Cairncross Report. In summary, Damian Collins MP, Chair of the DCMS Committee, said:

“... we cannot delay any longer. Democracy is at risk from the malicious and relentless targeting of citizens with disinformation and personalized ‘dark adverts’ from unidentifiable sources, delivered through the major social media platforms we use everyday. Much of this is directed from agencies working in foreign countries, including Russia... Companies like Facebook exercise massive market power which enables them to make money by bullying the smaller technology companies and developers... We need a radical shift in the balance of power between the platforms and the people. The age of inadequate self regulation must come to an end. The rights of the citizen need to be established in statute, by requiring the tech companies to adhere to a code of conduct..."

So, the report seems extensive, comprehensive, and detailed. Read the DCMS Committee's announcement, and/or download the full DCMS Committee report (Adobe PDF format, 3,5o7 kilobytes).

Once can assume that governments' intelligence and spy agencies will continue to do what they've always done: collect data about targets and adversaries, use disinformation and other tools to attempt to meddle in other governments' activities. It is clear that social media makes these tasks far easier than before. The DCMS Committee's report provided recommendations about what the UK Government's response should be. Other countries' governments face similar decisions about their responses, if any, to the threats.

Given the data in the DCMS report, it will be interesting to see how the FTC and lawmakers in the United States respond. If increased regulation of social media results, tech companies arguably have only themselves to blame. What do you think?