Next month, the Supreme Court starts its new term, one that has particular significance for practitioners litigating before and against the FTC. In In our first ever video blog, partner John Villafranco discusses the two consolidated cases that will be heard this term, Federal Trade Commission v. Credit Bureau Center, LLC and AMG Capital Management, LLC v. Federal Trade Commission, and how the Court is set to decide whether Section 13(b) of the FTC Act authorizes the Agency to seek monetary relief. John notes that, absent a legislative fix, which is not currently on the Congressional agenda, the FTC may very well be poised to lose a valuable tool in its arsenal.
We’ve written about automatic renewals before, but the $10 million price tag in the FTC’s settlement with the operators of ABCmouse should grab your attention.
The FTC alleged that over a three-year period, the company advertised membership programs without clearly disclosing that the programs would automatically renew at the end of the term. The automatic renewal was not disclosed during the checkout flow. Instead, it was “buried” in small print amidst other dense text that consumers would only see if they clicked on a link to read Terms & Conditions.
Even though ABCmouse prominently advertised “Easy Cancellation,” the FTC alleged that cancellation was very difficult. Consumers who tried to cancel were required to navigate a lengthy and confusing process that often prevented many of them from completing their cancellations. In fact, evidence suggests that hundreds of thousands of consumers started the cancellation process, but remained enrolled.
Among other things, the proposed settlement order generally requires ABCmouse to:
- Clearly disclose certain information about the offer up-front, such that consumers will see it without having to click to read separate terms;
- Obtain express informed consent before enrolling consumers in any automatic billing programs;
- Send a confirmation message that includes key program terms; and
- Provide a simple mechanism for consumers to cancel.
If you offer services that automatically renew, you should look at the details of the settlement to see what the FTC expects. Even if you don’t, it’s worth noting that the company had received tens of thousands of complaints about its auto-renewal and cancellation policies. If you’re not paying close attention to consumers complaints, you should start doing so. That can help you detect patterns and address problems before a regulator forces you to do so, and with a much lower price tag.
Turns out the best defense may not be a good offense, at least when litigating against the FTC. The Northern District of Illinois yesterday rejected an attempt by multi-level marketer Neora, LLC (formerly Nerium) to obtain a declaratory judgment that the company did not operate as a pyramid scheme and that the FTC was not authorized to seek restitution or disgorgement under Section 13(b) of the FTC Act.
The court granted the FTC’s motion to dismiss, finding that the “the claims presented are not ripe for judicial resolution and Plaintiffs can defend themselves in the enforcement action” that remains ongoing in the Northern District of Texas.” As we discussed back in November 2019 when the suit was first filed, Neora sought a number of declaratory judgments, including that: (1) the FTC was overstepping its authority under the FTC Act in attempting to regulate multi-level marketing companies by guidance and declining to count certain internal consumption as genuine demand when conducting a pyramid scheme analysis; and (2) the FTC lacks authority under Section 13(b) to seek monetary relief.
The latter issue will be considered by the Supreme Court in the coming term in two consolidated cases, F.T.C. v. Credit Bureau Center and AMG Capital Management, LLC v. F.T.C. Just last week, as discussed here, the Northern District of California granted a stay in the FTC’s pending enforcement action against Lending Club on the grounds that the Supreme Court’s decision on the FTC’s powers under Section 13(b) would “greatly simplif[y]” the case, “as no monetary relief will be at issue.”
For Neora, the battle remains ongoing. The court emphasized that “Plaintiffs undoubtedly have an adequate remedy in the [pending] enforcement action” because they “can raise the same arguments they assert here as defenses in that action.” That case was recently transferred from the District of New Jersey to the Northern District of Texas, where it remains pending.
When we posted about a $9.3 million FTC settlement involving the Mail Order Rule, many people commented that they had never heard of that Rule, and wondered what else they might be missing.
In fact, the FTC has more than 50 Rules and Guides. Don’t let that number scare you – many of these rules are very narrow and wouldn’t apply to most of our readers. For example, you probably don’t have to worry about the rule that regulates power output claims for amplifiers used in home entertainment products or the rule that requires certain disclosures when selling funeral goods or services. But odds are that there are a number of Rules and Guides that do apply to you.
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On August 20, a Northern District of California court stayed the trial of an action the FTC brought against Lending Club in 2018 pending a Supreme Court ruling on the FTC’s authority to seek monetary restitution under Section 13(b) of the FTC Act. The issue of whether the FTC has authority to seek monetary relief under Section 13(b) was placed squarely before the Supreme Court in two petitions for certiorari that were consolidated and accepted for review by the High Court in July. Those cases, F.T.C. v. Credit Bureau Center and AMG Capital Management, LLC v. F.T.C., will be argued in October.
In its LendingClub complaint, the FTC had sought substantial monetary relief from LendingClub pursuant to its authority under Section 13(b), in the form of “rescission or reformation of contracts, restitution, the refund of monies paid, and the disgorgement of ill-gotten monies.” The trial in LendingClub had been scheduled for October. In finding a stay of that trial warranted, the LendingClub court emphasized that the FTC’s authority to seek monetary relief under Section 13(b) (or lack thereof) is “an issue of enormous consequence to this case.” The court explained, “[g]oing forward with trial would needlessly burden LendingClub to put on a trial defense only to possibly have the entire enterprise mooted by the FTC’s inability to seek any monetary relief under Section 13(b).”
The FTC had argued that the hardship of presenting a meritorious defense while the Supreme Court’s 13(b) decision was pending did not merit a stay. The LendingClub court soundly rejected the FTC’s argument, finding that the issue was not simply about hardship, but about “the viability of the remedy motivating the case.” Given that the remedy itself has the potential to be extinguished in the coming months, the court concluded that holding a trial before the Supreme Court’s decision issues “is fundamentally inequitable.” The LendingClub court noted a Supreme Court ruling limiting the FTC’s powers under Section 13(b) would “greatly simplif[y]” the case, “as no monetary relief will be at issue.” The court predicted that “the elimination of monetary relief will likely facilitate a negotiated resolution.”
Last week the FTC filed suits against a few online merchandisers regarding their alleged failures to promptly deliver personal protective equipment (PPE) to consumers. The lawsuits allege that three online sellers violated the FTC’s Mail Order Rule, which mandates that companies notify consumers of shipping delays in a timely manner and give them the option to cancel orders and receive prompt refunds.
In its complaint against Zaappaaz, Inc, the FTC alleges that wrist-band.com “guaranteed” same day shipping of COVID-related products, but took weeks to ship orders and failed to inform consumers of delays. The complaint also cites multiple instances of incorrect or defective products received by consumers for which the company denied refeeds, as well as un-kept promises of refunds to consumers who never received their purchased products.
The FTC also alleges that American Screening, LLC, Ron Kilgarlin Jr., and Shawn Kilgarlin violated the Mail Order Rule by stating that PPE products would be shipped “within 24-48 hours,” when many items were not shipped until weeks or months later.
All sellers offering products via website or catalog should take note and review existing compliance practices. Our breakdown of the Mail Order Rule can help companies navigate the requirements. Our recent article, Top FTC Rules and Guides You Should Keep in Mind, may also be useful.
As the pandemic continues to turn consumers to online shopping, shoppers report increasing dissatisfaction with websites that advertise “Fast Shipping,” “2-Day Shipping,” or make similar representations about speedy shipping and then fail to deliver. In the last few months the FTC has received record numbers of complaints related to online shopping, and most of them relate to items that were ordered but never delivered. Many of those unshipped items were personal protective equipment (“PPE”). So it should not be a surprise that the FTC just filed a complaint in federal court against SuperGoodDeals.com and its owner, alleging that SuperGoodDeals violated the Mail Order Rule by representing “Pay Today, Ships Tomorrow,” then taking weeks to ship the PPE products.
As described under the FTC’s Mail Order Rule, a seller needs a “reasonable basis” for shipping within a certain time, and, if there are delays, it must notify purchasers and in certain circumstances cancel and refund orders. In this recent lawsuit, the FTC also alleges violation of the FTC Act by falsely advertising to ship items within one business day and by selling items that were not “authentic, certified, or specifically branded.” As discussed in our previous post, failure to comply can have significant consequences. For example, a few months ago Fashion Nova agreed to pay a $9.3 million civil penalty and to implement certain procedures, including allowing customers to easily request refunds for their delayed orders instead of being issued gift cards for unshipped items.
The claim is pending in federal court in New York, but companies should not wait for a decision or settlement to consider the following key takeaways: (1) although COVID-19 continues to disrupt distribution chains, have a reasonable basis for shipping representations; (2) if (or maybe “when”) an unexpected delay occurs, follow the Mail Order Rule’s specific requirements for notice and handling of open orders; and (3) monitor customer feedback to identify shipping issues and address them quickly.
Summer associate Leticia Salazar contributed to this post. Ms. Salazar is not a practicing attorney and is practicing under the supervision of principals of the firm who are members of the D.C. Bar.
Join us for:
Trade Association Antitrust 101
Please join us on July 14 for a webinar geared toward association legal counsel, executives, marketers, staff and members, participants in association activities or attendees to association meetings.
Antitrust issues are a constant concern for trade associations and their members. Competition regulators will have associations and their members under even greater scrutiny as groups work together to address the ongoing challenges presented by COVID-19. Please join us for a webinar covering the basics of antitrust compliance for association legal and compliance counsel, executives, staff and outside advisers. This webinar is designed to help association professionals and those who attend association functions identify potential antitrust issues and provide practical guidance for effective compliance programs and mitigating risk. Finally, we will talk about how to respond to enforcement actions in the event your organization is involved in an investigation.
Discussion topics include:
- Antitrust law basics
- Best practices for associations and its membership
- Effective compliance and training programs
- Strategies for responding to warning letters or other enforcement actions
Further to ongoing efforts to evaluate and regulate how companies advertise and label that their products are “Made in the USA,” last week the FTC issued a staff report and a proposed rule that would include the possibility of civil penalties up to $43,280 per violation.
FTC Chairman Joseph Simons joined Commissioners Rohit Chopra and Rebecca Slaughter in support of the proposed rule, which would prohibit marketers from including unqualified Made in USA claims on product labels unless they can show that:
- final assembly or processing of the product occurs in the United States;
- all significant processing that goes into the product occurs in the United States; and
- all or virtually all ingredients or components of the product are made and sourced in the United States.
Commissioner Noah Phillips, who voted against the rule, and Commissioner Christine Wilson, who voted to proceed with the notice and comment rulemaking process, each wrote separate dissenting opinions criticizing the broad scope of the proposed rule.
The proposed rule explicitly covers unqualified Made in USA claims appearing in seals, marks, tags, or stamps in mail order catalogs or mail order promotional materials, defined in the proposed rule as “any materials, used in the direct sale or direct offering for sale of any product or service, that are disseminated in print or by electronic means, and that solicit the purchase of such product or service by mail, telephone, electronic mail, or some other method without examining the actual product purchased.”
Commissioner Phillips wrote in his dissent that this scope is broader than the FTC’s statutory authority to issue a Made in USA labeling rule, which refers only to “labels on products.” Commissioner Wilson similarly warned that going beyond the statutory text would mean the rule applies to online advertising or even hashtags, which she warned could be outside the FTC’s jurisdiction. “Expansive interpretations of our rulemaking authority will not engender confidence among members of Congress who have already expressed qualms about the FTC’s history of frolics and detours,” Wilson wrote.
The Staff Report reflects findings from its workshop reviewing Made in USA labeling policy and enforcement. In particular, Staff cited a 2013 consumer perception study that indicates that Americans “agree that ‘Made in America’ means that all parts of a product, including any natural resources it contains, originated in the United States.” Another study from the University of Chicago cited in the report found that consumers were willing to pay as much as 28 percent more for U.S.-made products. Panelists reported that consumers prefer American made goods due to the “qualify of goods, promotion of U.S. jobs, social responsibility, and, to a lesser extent, general patriotism.”
Although the FTC gained rulemaking authority over Made in USA labeling in the early 1990s, the FTC has relied solely on its Section 5 authority to bring enforcement actions for violations of the law. For example, the FTC has announced several settlements and, in the last two years, the Staff has issued over 40 closing letters regarding Made in USA claims. The FTC’s new rulemaking effort reflects renewed interest among the commissioners to add deterrence through the threat of penalties for even first time offenses. As Commissioner Chopra added, “the rule eliminates the perceived litigation risks associated with Section 13(b),” the FTC’s basis for obtaining consumer redress which has been scrutinized as covered extensively on this blog.
Companies making claims about the U.S. origin of their products and services should closely watch these developments. At a minimum, that should involve a review of existing claims, and some companies may choose to file comments in response to the proposed rule.
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The FTC’s most recent COPPA enforcement action, announced on June 4 with app developer HyperBeard, provides evidence of an ongoing debate within the Commission about privacy harm and the role of monetary relief in the agency’s privacy enforcement program. Specifically, Commissioner Noah Phillips voted against the settlement with app developer HyperBeard and two corporate officers, and argues in a dissent that the $4 million civil penalty (to be suspended after payment of $150,000) imposed on HyperBeard is too great for the consumer harm caused by the company’s alleged COPPA violation. In a separate statement, Chairman Simons defended the fine and rejected Commissioner Phillips’s argument that consumer harm should guide the FTC’s civil penalty calculations.
The action against HyperBeard also underscores that developers of child-directed services must not allow third-party interest-based advertising unless they meet COPPA’s parental notice and consent requirements, and that COPPA enforcement remains an FTC priority while the COPPA Rule is under review.
HyperBeard’s Alleged COPPA Violation
The central allegation in the FTC’s complaint is that HyperBeard allowed third-party ad networks to serve interest-based advertising in several child-directed apps without providing notice to parents or obtaining verifiable parental consent. To support its conclusion that HyperBeard’s apps were child-directed, the complaint cites the apps’ content (e.g., cartoon characters and kid-friendly prizes) as well as a cross-promotion with children’s books that were categorized as such and declared as intended for child audiences on Amazon.
The complaint cites specific alleged failures in how HyperBeard handled third-party advertisers. According to the complaint, HyperBeard did not “inform [the] third-party advertising networks that any of the [company’s apps were] directed to children and did not instruct or contractually require the advertising networks to refrain from behavioral advertising.”
Commissioner Phillips Dissents; Chairman Simons Responds
Although Chairman Simons and Commissioner Phillips apparently agreed on the merits of charging HyperBeard with a COPPA violation, they differed sharply on the magnitude and justification for the fine. Chairman Simons argues that “deterrence should come first” when it comes to calculating civil penalties. Specifically, penalties should “make compliance more attractive than violation.” The correct starting place for such a measure in this case was HyperBeard’s gain from allowing interest-based advertising in its apps. Consumer harm, in Chairman Simons’s view, is “inapposite” to the objective of deterrence.
Commissioner Phillips, however, argues that consumer harm should be “a more central consideration in the calculation of privacy penalties.” He also raises concerns that the FTC has been “relentless, without clear direction other than to maximize the amount in every case” and invites Congress to “pay attention to how the FTC is approaching monetary relief, including civil penalties, especially in privacy cases.” In Commissioner Phillips’s view, the only harm that HyperBeard caused was to collect data that allowed “users presumed to be children” to be served with interest-based ads without the parental notice and consent that COPPA requires. Such data collection is “endemic to the economy” and does not warrant a penalty that approaches the $5.7 million fine recently issued against Musical.ly – a case that involved a range of more serious alleged harms.
We do not expect a resolution of the questions about privacy harm and civil penalty calculations anytime soon. In the meantime, developers should take note of the FTC’s continuing attention to COPPA enforcement and closely examine how they manage any data that flows from child-directed apps to third parties.
Earlier this week, federal regulators continued their efforts to combat the spread of products featuring allegedly false and misleading claims that products can diagnose, treat, cure, or prevent COVID-19. In warning letters issued to CBD Gaze, Alternavita, Musthavemom.com, and Careful Cents LLC, the agencies identify the respective recipients as participants in the Amazon Affiliate program. Amazon Affiliates are marketers who earn commissions by promoting products sold on Amazon. The letters state that the products at issue, which include essential oils, grapefruit seed extracts, cod liver oil, and others, feature false treatment and prevention claims such as the following:
- CBD Gaze: “Find the best CBD Oil to help fight Coronavirus.”
- Alternavita: “4 Proven Ways To Protect Yourself Against Coronavirus,” you represent that “Everyone is concerned about Coronavirus and looking for ways to protect themselves,” and then state the following:
“Grapefruit Seed Extract If you want a little extra daily protection GSE is a safe antibiotic . . . [Amazon associate link].”
- Musthavemom.com: “NATURAL REMEDIES FOR CORONAVIRUS. . .There are plenty of things you can do to boost your immune system and fight off any virus including coronavirus. Here are a few!” … “2. Vitamin D . . . This important vitamin plays a crucial role in immune health. Being deficient in Vitamin D can increase your risk of infection. I recommend this brand of Vitamin D [Amazon associates link] and starting at a minimum dose of 5,000 IU.” [from your website https://musthavemom.com/coronavirus-prevention-treatment-plan/]
- Careful Cents LLC: “How to Boost Your Immune System Naturally With Essential Oils to Fight Coronavirus” you state: “Can you use essential oils to boost your immune system and fight coronavirus? Yes! Essential oils are one of the best tools to strengthen your immune system naturally . . .”
The letters state that the products are unapproved new drugs and misbranded pursuant to the Food Drug and Cosmetic Act. Causing the introduction or delivery for introduction of these products into interstate commerce is prohibited under sections 301(a) and (d) of the FD&C Act, 21 U.S.C. § 331(a) and (d). The letters also state that “it is unlawful under the FTC Act, 15 U.S.C. 41 et seq., to advertise that a product can prevent, treat, or cure human disease unless you possess competent and reliable scientific evidence, including, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made. For COVID-19, no such study is currently known to exist for the product identified above. Thus, any coronavirus-related prevention or treatment claims regarding such product are not supported by competent and reliable scientific evidence.”
What’s the lesson? The difference between these letters and the warning letters that FDA and the FTC issued earlier this year is that these are targeted not to the company making the product or even the retail platform on which they are sold. They were sent to the middleman marketer, who likely does not produce or possess the product, but who is promoting and profiting from its sale. This is consistent with the FTC’s letters to product influencers in other marketing contexts but is a departure from FDA’s typical enforcement approach. Although we have seen FDA pursue retailers (particularly online ones), FDA has not made pursuit of marketing affiliates a priority. Clearly, regulators want affiliate marketers (Amazon or otherwise) to understand that they are not immune from enforcement if they are making aggressive or unsubstantiated health claims.