eHarmony Agrees to Pay up to $2.2 Million to End Auto-Renewal Suit

Last week, eHarmony agreed to pay up to $2.2 million to resolve allegations brought by four California counties and the city of Santa Monica over the company’s billing practices. That includes a payment of $1.2 million in penalties and up to $1 million in restitution to customers whose subscriptions were automatically renewed, but were denied refunds.

eHarmony also agreed to make various changes to its automatic renewal practices. Specifically, the company agreed to:

  • Clearly and conspicuously disclose the renewal terms to consumers upfront;
  • Get consumers’ consent through “a separate check-box, signature, or other substantially similar mechanism” that relates solely to the automatic renewal terms and no other part of the transaction;
  • Send an e-mail confirmation of the transaction immediately after the contract is made; and
  • Provide a toll-free number, e-mail address, or other easy cancelation mechanism.

While California law already imposes some of these requirements in connection with automatic renewal or continuous service offers, the injunction is more prescriptive in certain respects, such as by expressly requiring a standalone check-box and an e-mail confirmation immediately after the transaction.

The settlement also resolves allegations related to California’s Dating Services Contract Law, which requires specific language informing a consumer of his or her right to cancel within three business days of the contract, and the Uniform Electronic Transactions Act, which requires contracts formed by electronic signature to allow for electronic cancellation.  The settlement further prohibits eHarmony from attempting to collect past due membership fees from customers incurred prior to the effective date of the settlement.

In a press release announcing the settlement, a Santa Monica Chief Deputy City Attorney said that “automatic renewal is one of the critical areas in consumer protection today.” Indeed, in the past few weeks, we’ve noted that California was set to tighten its restrictions on automatic renewals and that the FTC had announced a $1.3 million settlement in a case involving similar issues.

Companies that sell products or services through subscription models need to keep in mind that various federal and state laws could impact how these models are structured and advertised. Failure to comply with these laws could result in significant penalties, especially as states, the FTC, and class action attorneys increase their scrutiny.​

FTC Announces Settlement Involving Connected Toys

Earlier this week, the FTC announced its first settlement involving internet-connected toys. The FTC alleged that the Kid Connect app used with some of VTech’s toys collected personal information from hundreds of thousands of children, and that the company failed to provide direct notice of its privacy practices to parents, or to obtain verifiable consent from them, as required by the Children’s Online Privacy Protection Act (or “COPPA”). The FTC also alleged that VTech failed to use reasonable data security measures to protect the personal information it collected.

According to the FTC’s complaint, VTech collected personal information from parents on its Learning Lodge Navigator online Vconnect Deviceplatform, where the Kid Connect app was available for download, and through a (no longer available) web-based gaming and chat platform called Planet VTech. Before using Kid Connect or Planet VTech, parents were required to register and provide personal information about themselves and their children. VTech also collected personal information from children when they used the Kid Connect app.

As of November 2015, about 2.25 million parents had registered and created accounts with Learning Lodge for nearly 3 million children, including about 638,000 Kid Connect accounts for children. In addition, about 134,000 parents in the US had created Planet VTech accounts for 130,000 children.

The FTC generally alleged that:

  • VTech failed to provide direct notice of its information collection and use practices to parents and did not link to its privacy policy in each area where personal information was collected from children.
  • VTech did not take reasonable steps to protect the information it collected through Kid Connect. (In November 2015, the company was informed by a journalist that a hacker accessed its computer network and personal information about Kid Connect app users.)
  • VTech violated the FTC Act by falsely stating in its privacy policy that most personal information submitted by users through the Learning Lodge and Planet VTech would be encrypted.

As part of the settlement, VTech agreed to pay $650,000. In addition, VTech is permanently prohibited from violating COPPA in the future and from misrepresenting its security and privacy practices as part of the proposed settlement. It also is required to implement a comprehensive data security program, which will be subject to independent audits for 20 years.

In the FTC’s press release, acting FTC Chairman Maureen K. Ohlhausen noted that “as connected toys become increasingly popular, it’s more important than ever that companies let parents know how their kids’ data is collected and used and that they take reasonable steps to secure that data.” This case demonstrates that the consequences of not taking those steps up-front can be significant.

2017 Recap

Most Popular Ad Law Access Posts of 2017

As reported in our Ad Law News and Views newsletter, Kelley Drye’s Advertising Law practice posted 106 updates on consumer protection trends, issues, and developments to this blog in 2017. Here are some of the most popular:

Ad Law News and Views is produced every two weeks to help you stay current on advertising law and privacy matters. You can subscribe to it and other Kelley Drye Publications here and the Ad Law Access blog by email or RSS feed.

2018 Advertising and Privacy Law Webinar Series 

Please join Kelley Drye in 2018 as we continue our well attended Advertising and Privacy Law Webinar Series. Like our in-person events, this series gives key updates and provides practical tips to address issues faced by counsel as well as CLE credit. This webinar series will start again in February 2018. Please revisit the 2017 webinars here.

FTC Releases Business Guidance on Multi-Level Marketing, Memorializing Principles from Prior Settlements on Hot Button Issues

The FTC released today Business Guidance Concerning Multi-Level Marketing, which offers answers to frequently asked questions to assist multi-level marketers in evaluating their business practices for compliance with the FTC Act.  The Guidance begins by restating the general standard for pyramid schemes set forth in the FTC’s 1975 Koscot decision and then goes on to address more contentious issues, such as internal consumption, retail sales validation, the importance of refund and buyback policies, and income and business opportunity claims.

The Guidance memorializes and expands on several principles embodied in recent FTC settlements with multi-level marketing companies and makes clear that FTC Staff will look to these principles in assessing whether a company has committed unfair and deceptive acts or practices in violation of the FTC Act.  Key points include the following:

  • Internal consumption (i.e., purchases from participants in the business opportunity) may in some cases be permissibly counted as genuine retail sales, but this will be a fact-specific inquiry.  The Guidance cites the Herbalife settlement as an example of a marketing plan that appropriately permits payment of compensation based on internal consumption, but “subject to specific limitations and verification requirements.”  While emphasizing that the validity of internal consumption will depend on a “comprehensive analysis of a variety of factors,” the Guidance highlights two of the foremost factors FTC Staff will consider: (1) whether the compensation plan incentivizes participants to purchase unrelated to demand (e.g., to qualify for bonuses, advance in the marketing plan or obtain a greater discount); and (2) fact-specific information about a purchase bearing on whether it seems demand-driven (e.g., whether the purchases are within typical consumption habits).
  • Multi-level marketers are not expressly required to retain and validate receipts, but should ensure sufficient documentation to ensure that actual sales are made to real customers.  Again, the Commission here emphasizes that there is no single correct way to validate retail sales, and that one approach – or a combination of approaches – may work for one company and not work for another.  The Guidance does, however, explain that staff will be most interested in “direct methods” used to verify that retail sales are made to real customers, and that “indirect methods – such as policies requiring participants to attest they have sold a certain amount of product to qualify to receive reward payments – are less likely to be persuasive, with unsupported assertions being even less persuasive.”
  • Buyback provisions are helpful but not dispositive in preventing inventory loading and unlawful conduct.  The Guidance affirms that allowing participants to return unsold products can help reduce potential consumer harm by decreasing the risk of losing money for those participants who take advantage of the buyback policy.  However, the Guidance cautions that “money-back guarantees and refunds are not defenses for violations of the FTC Act” and that unfair and deceptive acts may still occur notwithstanding the existence of those policies.  The section appears intended to address pending congressional legislation, H.R. 3409, which would include a controversial carve-out for multi-level marketing companies with inventory repurchase programs.
  • Claims that convey lifestyles or earnings that are only attained by a small subset of participants are likely to be misleading.  The Guidance explains that all business opportunity and earnings claims must be supported by a reasonable basis, and that claims that present atypical earnings as typical will likely be misleading.  For example, the Guidance explains that images of expensive houses, luxury automobiles and exotic vacations attained through the multi-level marketing program are likely to be deceptive if those results are not generally achieved by others and properly qualified.  Similarly, representations about full-time income and the capacity to “fire your boss” or “become stay-at home parents” are likely to present compliance issues.  Even hypothetical scenarios (e.g., you can make $1,000 if you recruit 30 people and sell X products) may pose compliance risks if those hypotheticals make assumptions that are untrue for the typical participant.
  • Developing and implementing a compliance program is important.  Finally, the Guidance makes clear that it’s not enough to nominally adopt these policies or even ensure that the company itself complies with the policies.  Rather, MLMs should develop and maintain a successful compliance program that includes monitoring of participants to ensure they are also complying with applicable policies and procedures, particularly those related to claims, sales validation, and other consumer protection-oriented policies.

While the principles set forth in the Guidance will not come as a surprise to most MLMs, they serve as an important reminder that MLM compliance inquiries are multi-faceted and full of gray areas.  Companies would be well-served to evaluate their business practices and compliance programs in light of the Commission’s new guidance and prior related settlements.

On the Eve of the FCC’s Reclassification of Broadband Services, the FCC and FTC Release Memorandum of Understanding for Oversight of Broadband

On December 11, 2017, the Federal Communications Commission (FCC) and Federal Trade Commission (FTC) released a draft Memorandum of Understanding (MOU) which will allocate oversight and enforcement authority related to broadband Internet access service (BIAS) between the two agencies.  The new MOU was announced three days before the FCC’s scheduled vote to reclassify BIAS as an “information service,” and is expected to be finalized simultaneously with that vote.  The MOU is part of an ongoing effort to address concerns that reversing the current “net neutrality” rules will adversely affect consumers, and provides a guide for Internet service providers (ISPs) and other stakeholders to understand which agency will be taking the lead on oversight and enforcement going forward.  However, the extent to which the MOU takes effect will depend upon, among other things, the pending case interpreting section 5 of the FTC Act that is before the Ninth Circuit Court of Appeals.

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California to Tighten Rules for Automatic Renewals

Seven years ago, we posted about a new law in California governing automatic renewals. The law generally requires that companies: (1) clearly disclose the material offer terms before a consumers subscribes; (2) obtain affirmative consent to the terms before the consumer is charged; (3) provide a confirmation to the consumer that includes the terms, a description of the cancellation policy, information on how to cancel, and, if the offer includes a free trial, that the consumer may cancel before being charged; and (4) provide an easy-to-use method for canceling. Since then, we’ve seen several lawsuits under the law, including this one.

The state recently enacted a new law that adds additional requirements to the ones already on the books. Under the new law, companies will also be required to:

  • Provide a clear and conspicuous explanation of the price that will be charged after the trial ends;
  • Obtain consent before charging a consumer for an automatic renewal or continuous service that is made at a promotional or discounted price for a limited period of time;
  • Disclose how to cancel automatic renewal prior to payment for the continuing service after a free trial; and
  • Allow consumers to cancel online if they signed up online.

The new law isn’t effective until July 1, 2018, so companies have time to make change their processes. But these changes can require a lot of planning and technological changes on the back end, so it makes sense to start thinking about them now. This is an area that gets a lot of attention from regulators and class action attorneys, so the consequnces of getting things wrong can be significant.

Is It Time to Rethink Establishment Claims?

The decision in Kwan v. Sanmedica International, 854 F.3d 1088 (9th Cir. 2017) in April, has occasioned a lot of discussion about the apparent demise of the establishment claim “standard” in California.  What the Kwan decision should have done, but did not, is provoke some hard thinking about what this “standard” is and how we use it.  From the Kwan decision, it is apparent that the Ninth Circuit does not understand where the establishment claim principle came from and what it means.  But its error is understandable, because attorneys and judges have been careless with the principle and arguably have made much more of it than it should be.                                                                                                                                             

Kwan has been accepted as standing for two propositions.  The first, which should be non-controversial and unsurprising, is that in private suits brought under California’s Unfair Competition Law (UCL) and Consumer Legal Remedies Act (CLRA), a plaintiff must allege and ultimately prove that the offending advertising claim is false, not merely unsubstantiated.  There has been no serious dispute about this since the California Court of Appeal (Second District) decision in National Council Against Health Fraud, Inc. v. King Bio Pharmaceuticals, Inc., 107 Cal. App. 4th 1336, 133 Cal. Rptr. 2d 207 (2003).  What made Kwan news was that the court also rejected plaintiff’s allegations that defendant’s dietary supplements were “clinically tested to boost [human growth hormone] by a mean of 682%,” is provably false, and in so doing refused to “incorporate Lanham Act provisions into California’s unfair competition and consumer protection law by distinguishing between ‘establishment’ and ‘non-establishment’ claims.”  854 F.3d at 1097.    Continue Reading

Chairman Pai Set to Release Draft Net Neutrality Item

On November 21, 2017, FCC Chairman Ajit Pai issued a statement announcing that he had circulated his draft Restoring Internet Freedom Order to his fellow commissioners. The draft Order will largely undo the 2015 Open Internet Order and limit FCC jurisdiction over broadband Internet access services, although it appears that the order will retain a transparency requirement for broadband providers.  Fellow Republican FCC Commissioners Brendan Carr and Michael O’Rielly cheered the anticipated release, while Democratic Commissioners Mignon Clyburn and Jessica Rosenworcel opposed it.  Commissioners of the FTC—which could be the largest jurisdictional beneficiary of the Order, subject to a pending en banc proceeding in the Ninth Circuit—were similarly split down party lines in their reaction to the news.  Acting FTC Chairman Maureen Ohlhausen issued a statement expressing gratification that the FCC appeared to take the FTC Staff’s and Acting FTC Chairman’s public comments into consideration in formulating the draft Order.  The FCC will release the draft item on November 22nd, and is set to vote on the item on December 14th.  We will update you on the scope and implications of the draft Order when Chairman Pai releases it.

Will Your TV Watch You? FCC Green Lights Targeted Advertising in Next Gen TV Broadcasting Standard

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Last week, the Federal Communications Commission (FCC), in a 3-2 vote, approved an order allowing “television broadcasters to use the ‘Next Generation’ broadcast television (Next Gen TV) transmission standard, also called ‘ATSC 3.0.’”  Described in the Order “as the world’s first Internet Protocol (IP)-based broadcast transmission platform,” the Next Gen TV standard is expected to allow broadcasters to provide more targeted advertisements to individual viewers.  Some had expressed concerns over the collection of the demographic and consumer data necessary for Next Gen TV targeted advertising, and applicable privacy safeguards for the new standard.  At this stage though, the FCC majority took a wait and see approach to privacy concerns.

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FTC Announces $1.3 Million Settlement in Negative Option Case

Last week, the FTC announced that an online lingerie company had agreed to return more than $1.3 million to customers who enrolled in a negative-option membership program offering discounts and other benefits.

Under Adore Me’s VIP program, a member would be charged $39.95 per month, unless the member either purchased apparel or pressed a “skip” button during the first five days of that month. The company advertised: “If you do not make a purchase or skip the month by the 5th, you’ll be charged a $39.95 store credit that can be used anytime to buy anything on Adore Me.”

Despite promises that credits could be used “anytime”, for at least a year, a disclosure buried in the company’s terms stated that unused credits could be forfeited for a number of reasons. According to the FTC, the company “took unused credit amounts away from consumers who cancelled their memberships or initiated chargebacks with financial institutions to dispute their transactions with the company.”

In addition to alleging that Adore Me misrepresented its credit policy, the FTC also alleged that the company violated the Restore Online Shoppers Confidence Act by making it difficult for customers to cancel memberships, including by limiting how customers could submit cancellation requests, under-staffing its customer service department, and putting customers through drawn-out cancellation request processes.

Under the settlement, Adore Me generally agreed: (a) not make misrepresentations about its membership program; (b) provide an easy way to cancel memberships; (c) make specific disclosures about the negative option program, both up-front and in a confirmation notice; and (d) not to use billing information without customers’ express informed consent. In addition, the order imposes a $1,378,654 judgment that will be used to pay refunds to customers.

Companies that sell products or services through subscription models need to keep in mind that various federal and state laws could impact how these models are structured and advertised. Failure to comply with these laws could result in significant penalties, especially as the FTC, states, and class action attorneys increase their scrutiny.

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