FTC Beat
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Apr 22
2017

The FTC’s Role in Privacy

Acting Chairman of the Federal Trade Commission, Maureen Ohlhausen, answered questions about the FTC’s current role in data privacy before a crowded audience at the April 2017 IAPP Global Privacy Summit in D.C.  Below are some take-aways we wanted to share from Commissioner Ohlhausen’s talk:

  • Even if out of ISP oversight, the FTC is actively engaged in data privacy enforcement through its consumer protection role.

Ohlhausen expressed disappointment that FTC had to step out of ISP oversight in 2015, when the FCC reclassified broadband as a common carrier service (the reclassification means the FCC, no longer the FTC, has authority over privacy and data security enforcement of ISPs).[1]  But she said that the FTC is still active through holding companies to their data privacy policies and claims: “We enforce promises. We hold companies to their promises, even in technologically advanced areas.”  She noted that FTC enforcement actions derive not only from consumer complaints, but that the FTC is getting cases from computer researchers and marketplace competitors.

  • FTC to present positive findings from its enforcement actions.

Ohlhausen and her staff are considering changing up what they present publicly on their investigation findings.  Normally, the FTC publishes what it has found companies doing wrong, but Ohlhausen believes the public could benefit from what the FTC has found companies doing right.  The FTC therefore may be bolstering its public messages on enforcement actions with this positive twist.

  • How FCC and FTC oversight of ISPs differs.

Ohlhausen noted that the FCC has ended up with a different approach to data security oversight.  For instances, they have taken a different view on what constitutes sensitive data and on what types of opt-ins and opt-outs are permissible.  She expressed concern that, with the Open Internet Order, which revoked FTC Privacy Rules, no one is really watching the hen house. She hopes either Congress or the FCC will reconsider the FTC’s role: The FCC could rescind its reclassification or Congress could rescind the FCC’s common carrier authority of broadband services.

  • The Privacy Shield and the FTC’s role in working with Europe.

Ohlhausen noted that the current Administration seems committed to the Privacy Shield.  She believes that the Privacy Shield meets Europe’s needs and further that the FTC has an important role to fill in (1) ensuring how information is disseminated and (2) enforcement.  For instance, the FTC can provide guidance on how to inform EU consumers on the parameters of the Privacy Shield.  Moreover, the FTC will enforce Privacy Shield violations—based on deception for failure to comply. She is optimistic that the Shield will withstand court challenges, in contrast to the Safe Harbor, which was negotiated in a different environment.

  • Chinese forays into privacy.

Ohlhausen, who was heading to Beijing the day after her IAPP talk, expressed interest in Chinese developments in privacy regulation: where a communist country’s government controls so much, there still can be a real interest in privacy for the consumer.  She noted that some international companies have concerns over whether they will be disadvantaged by Chinese privacy laws.

  • Privacy and overlap with other areas of law

When asked whether privacy laws, such as anti-discrimination provisions contained in the GDPR, are carrying more water than just privacy, Ohlhausen noted that there is some overlap, such as with the Fair Credit Reporting Act and Civil Rights Act.  She took the discussion as an opportunity to highlight the importance of balancing fear of the unknown against the benefits of innovation: it is good to identify the bad things that can happen.  But we also need to weigh that against the good things. While consumer protection is important, we also want a competitive marketplace, and want to encourage innovation.

 

[1] A side note on the FCC reclassification: a persistent theme in Ohlhausen’s talk was expressing hope that the FTC would get authority back over ISPs.

posted in:
Internet Law
Jan 15
2016

Halting Business And Seizing A Domain Without A Moment’s Notice

LGCES2010                  Photo credit: Wikipedia Commons- Uploaded by NativeForeigner

Every year, the Consumer Electronics Show in Las Vegas proves to be one of the more interesting conventions to attend. 2016 did not disappoint: companies showed off cool innovations in displays, robotics, and integrated smart technology across the consumer products platform.

Adding to the excitement at this year’s CES was the dramatic appearance of uniformed officers. We don’t mean the sultry high-heeled look-alikes you’d more likely expect at a Vegas show. These were U.S. Marshals and they were the real McCoys (although we are unsure of their actual names or heritage). The marshals were there to execute a court order and seize product from one of the convention’s participants, Changzhou First International Trade Company.

The China-based company had a booth at CES to promote its Surfing Electric Scooter, a one-wheeled hoverboard. The scooter might be considered a dream machine for many an adolescent skater. The only problem is that it is remarkably similar to Future Motion Inc.’s patented Onewheel (at only about a third the price).

Future Motion was granted a patent on Onewheel’s self-stabilizing technology only recently (within the last month), but it did not waste any time to defend its rights in U.S. District Court. Future Motion requested the federal court grant it a temporary restraining order to, among other things, seize Changzhou First International’s scooter from CES.

Two of the more interesting aspects of the district court’s actions in this matter are (1) the speed at which the judge granted the requested relief and (2) the extent of the relief that the judge granted. The court issued a TRO on the same day that Future Motion filed the request. The following day, the marshals were in the Vegas convention hall seizing scooters and generating a lot of attention.

But the court didn’t limit its TRO to seizing product locally. It granted Future Motion’s request to halt manufacture and sales. The court also ordered web hosts and domain name registrars to “take any and all action necessary to remove the infringing products from websites having content controlled by Defendant, or alternatively to disable access to the website.” Halting sales and manufacture and seizing the company domain name is a pretty impressive order to execute on an expedited basis, and based exclusively on arguments presented by plaintiffs. It’s further impressive considering that the scooter is Changzhou First International’s only advertised product on its website. Closing down this channel is effectively closing down the company’s operations. Is Future Motion’s patented technology really the heart of Changzhou First International’s scooter? A cursory review might suggest yes, but it’s a complex question that should be decided after a proper hearing. Granting a TRO to make a point at the CES convention is one thing, shuttering a business is another.

It doesn’t appear that the part of the order requiring domain name seizure has been executed yet. As of January 14, 2016, Changzhou First International’s website is still active, full of images of its Surfing Electric Scooter. Moreover, the product appears to continue to be sold on Alibaba. This may be because parties have ten days from notice to comply, which isn’t yet up. It may also be based upon some subsequent stipulation by the parties: it is possible that Future Motion does not want to be on the hook financially should the court ultimately find against it (as the order in the case acknowledges, Future Motion would be responsible for damages, i.e. economic loss, for any wrongful seizure).

We shall see in the coming weeks what’s to become of the Surfing Electric Scooter. The next hearing (for preliminary injunction) is scheduled for mid-February. At that hearing, Changzhou First International will have the opportunity to present its arguments demonstrating why its scooter does not infringe on Future Motion’s patents. Although, who would be surprised if a U.S. district court found that a Chinese product infringed on someone else’s intellectual property?

Nov 03
2015

Highlights And Takeaways from the October 30th FTC Lead Generation Workshop

Leads button pointing high position with two fingers, blue and grey tones, Conceptual image for increasing sales lead.

Exploiting consumers and exploiting consumer data were popular themes in the FTC’s October 30th workshop on lead generation, “Follow the Lead.” The day-long workshop explored the mechanics of lead generation and its role in the online marketplace. With a focus on the lending and education spaces, panelists discussed the many layers of marketing involved in lead generation—and importantly—how those many layers can add confusion to how consumer data gets collected, sold, used … and misused.

Panelists of the five workshop sessions hailed from industry, government, advocacy groups, and research institutions. They offered insights into both the vulnerabilities and opportunities flowing from the extensive “behind the scenes” market of lead generation. But unsurprisingly, the benefits of lead generation were overshadowed largely by attendant concerns: why is so much consumer data collected, what is done with it, and are consumers aware of how their personal information is being traded and used?

The workshop included two “case study” panels on lending and education. For the panel on lead generation in lending, Tim Madsen of PartnerWeekly provided an overview of how the “ping tree” model works. Connecting prospective borrowers with lenders through a reverse auction of borrower leads, the “ping tree” model may be an efficient way of matching borrowers and lenders. However, Pam Dixon, Executive Director of World Privacy Forum, highlighted her concerns that lenders are receiving consumer data that would otherwise be protected under the Equal Credit Opportunity Act and therefore that the online process is circumventing important consumer protection laws. For instance, the online lending process may require certain personal information from borrowers in order filter fraudulent requests. But that personal information (e.g., gender or marital status) otherwise could not be part of the loan application process. Dixon felt the disclosure of protected information was one that needed to be addressed from both a technical and a policy standpoint. And it is an issue she raised on subsequent panels during the conference, indicating a possible pressure point for future regulatory action.

The panel on lead generation in education was highly charged, due to the controversial nature of marketing higher education and due to the negative attention on for-profit education. Despite many people’s assumption that online marketing in education is largely a tool of the for-profit education industry, Amy Sheridan, CEO of Blue Phoenix Media, provided some surprising statistics: state and private institutions represent roughly forty percent of her business in the education vertical. Even renowned schools like Harvard and Yale are employing lead generation to gain students in their programs.

But given the extensive access to federal funds through higher education, consumer advocates highlighted concerns over students being preyed upon by unscrupulous educators. Jeff Appel, Deputy Undersecretary of Education at the Department of Education, attributed the problem in part to the lack of underwriting in federal student loans. [Query: Wouldn’t it make sense to add underwriting to the federal student loan process? Statistically, private student loan repayment fares much better thanks to this preliminary screening.]

In support of responsible advertising for educational programs, Jonathan Gillman, CEO of Omniangle Technologies, identified the need for clear guidance on appropriate marketing tactics, which may better address problems than resorting to law enforcement. He pointed out the adverse consequences of clamping down on educators’ online advertising: educators are now afraid to advertise online and that space is being filled by affiliates who are more apt to cross the line into deceptive advertising.

Appel provided some general guidance for schools working with lead generators. Schools should (1) monitor how lead generators are representing programs and ensure their ads are not deceptive, (2) make sure payment for advertising does not implicate regulations against incentive-based compensation, and (3) be aware that the actions of lead generators may come under the Education Department’s purview if they are providing additional assistance (e.g., processing student applications).

Both Appel and consumer advocates seemed to agree, though, that laws and regulations already in place were sufficient to address consumer protection concerns in the education marketing space. It is only a matter of having the resources to enforce those laws and regulations. Appel also suggested that state regulators could curb issues by better screening schools.

Throughout the day and across the panels, FTC representatives turned to the concept of “remnant information,” i.e. consumer information that is longer being used. FTC attorney Katherine Worthman asked panelists various questions about what ultimately happens to this information. R. Michael Waller, another FTC attorney and panelist, noted his concern that companies have an economic interest in maintaining and possibly selling remnant information, and that such information is increasingly vulnerable to fraudsters. These FTC attorneys thus pressed about policies on consumer data retention. Aaron Rieke of Upturn supported the FTC concerns and noted that nothing in the company privacy policies (that he’s reviewed) prevents the sale of consumer data:  “privacy policies are shockingly permissive when you look at how much information is being provided.”

Another popular issue was whether and to what extent disclosures to consumers are sufficient: are consumers aware of how their information is being traded? The general consensus among panelists was that consumers remained ignorant to the sale and use of the personal information they provide online.

Upshot from the workshop: Lead generators, and the companies using them, should be aware of the growing interest by federal regulators in (1) how consumer data is being collected, retained, and sold and (2) the extent to which people up and down the online marketing supply chain are vetting the buyers and sellers of consumer data. Other takeaways from the conference: Companies should ensure their data collection and retention policies comply with applicable state and federal law. Finally, it is important for companies to ensure their practices comply with both their policies and their disclosures.

 

Oct 15
2015

Jumping To Judgment on For-Profit Education

Flat design vector illustration concept for payed education proces.

If you didn’t know any better, you might have gotten pretty fiery over for-profit education after reading one of the front page stories of Tuesday’s New York Times. The lengthy article titled “For-Profit Colleges Fail Standards, but Get Billions” is all about accusations of greedy institutions bilking taxpayers and taking advantage of students through fraud and other deceptive practices. Why the story ran on page one of the paper is anybody’s guess: the only timely element in the piece appeared toward the end of the article, where the author mentioned the Defense Department’s recent decision to bar the University of Phoenix from its tuition assistance program. By the time you got to that part of the article, you might have cheered the DOD’s decision to cut the educator off, despite the fact that the decision appears premature, based on allegations as opposed to findings (meaning they are meting out punishment before a full investigation or review).

The New York Times piece seems narrowly focused on denigrating an industry that has become the bastard-stepchild of higher education. Ever since U.S. Sen. Tom Harkin decided to take on for-profit education, the industry has been under intense scrutiny from state and federal regulators as well as partisan research and advocacy groups. The article would have readers believe that all the negative attention is the equivalent of substantiated claims that for-profit education is a fraud on federal student loan programs. Thirty-seven state attorneys general, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, the Department of Justice, and the Federal Trade Commission are all investigating for-profit schools.  These schools must be horrible, right? But what the article lacks are legal holdings or findings of fact.

That several agencies are investigating industry participants is not tantamount to guilt: it is more reflective of the fact that regulators take their cues from other regulators. Once an industry becomes unpopular, everyone wants to jump in and get their piece of the pie … or the felled lion. For-profit education is now an obvious target. But, again, that does not make the industry per se bad.

Nor does the fact that many for-profit educators have settled with regulators mean they are guilty: people and companies alike perform a cost-benefit analysis when it comes to whether to fight or stand down. It often makes economic sense to settle out with regulators rather than stay the course through potentially lengthy costly litigation.

What is troubling is the undercurrent – and application – of guilt before innocence, both by the New York Times article and by regulators. What is missing is a comparison of how much for-profit education costs per student versus how much other schools cost, or what dropout rates and post-graduation employment rates look like across schools for single parents and the poor (the types of individuals typically enrolled in for-profit colleges). For instance, studies have shown that community colleges are costing taxpayers billions of dollars for uncomfortably high drop out rates. Other studies identify taxpayer subsidies covering significant amounts of college operating costs.

One of the major reasons why for-profit education has high drop-out rates and poor post-grad employment rates is that they are reaching individuals who otherwise may not have access to degree programs, such as single parents or people in economically depressed areas. These individuals have other complications in their lives that can make completing a degree or finding gainful employment more challenging (e.g., scheduling, transportation). These challenges are not the schools’ fault, but a reflection of external factors. Punishing the schools and taking away educational opportunities does not seem like the most thoughtful decision, but it’s the one that partisan groups, partisan journalists, and regulators seem to be angling for.

Instead of celebrating the Defense Department’s decision to cut off the University of Phoenix from its tuition assistance program, we should be troubled that it is doing so before completing an investigation. In a statement, the University noted that: “It is troubling that DoD has used requests for information from other governmental agencies as grounds for placing the university’s DoD MOU in a probationary status.”

For-profit education does have, and has had, its bad actors… as does every industry. But the all-out slam against the sector, the fight for its demise, is unfair and shortsighted. In the end, the greatest losers will be historically underserved populations who will be denied education opportunities.

 

Jun 01
2015

FAIL: For-Profit Education Sector Dealt Major Blow

iStock_000062376740_Medium

For-profit education was dealt a major blow in a federal court case challenging the Department of Education’s Gainful Employment Rule. U.S. District Court Judge Lewis Kaplan of New York dismissed a lawsuit that was filed last November by the Association of Proprietary Colleges. The lawsuit is one of two filed in federal court shortly after the Department of Education issued its revised version of the Gainful Employment Rule. The second lawsuit, brought by the Association of Private Sector Colleges and Universities, is still pending before a federal judge in D.C.

In his opinion, Judge Kaplan rejected APC’s arguments that the Gainful Employment Rule (1) violates colleges’ constitutional due process rights, (2) violates the plain language of the statute, exceeding statutory authority, and (3) is arbitrary and capricious. Kaplan held there could be no due process issues as for-profit colleges do not have a “vested right” to participate in federal student aid programs. He discounted as ill-conceived or misleading arguments that the rule exceeds statutory authority. And he dismissed APC’s allegations that the rule as drafted is arbitrary and capricious.

Judge Kaplan’s rejection of APC’s lawsuit is hailed as a victory by detractors of the for-profit education industry who are anxious to see the new rule implemented this July. Some project that Kaplan’s opinion will influence the direction of the pending federal case in D.C. But, despite these portents, the legal theories in the two suits are distinct enough that APSCU’s case should not be overshadowed. The APSCU’s suit centers on how and why the Gainful Employment Rule, as drafted, would disparately impact populations, identifying concern that the rule would “impose massive disincentives” on schools from recruiting “low-income, minority, and other traditionally underserved student populations, because, as an historical matter, those demographics are widely recognized as most at risk of failing the Department’s arbitrary test.”

The complaint also identifies concerns regarding the DoE’s rulemaking process, which it alleges was marred by “well-substantiated allegations of bias and misconduct that led several Members of Congress to accuse the Department of bad faith.” Perhaps it will not go without notice, the next opinion around, that the DoE’s proposed rule more than doubled in size at the 11th hour of the rulemaking process, flying in the face of the purpose of the public notice and comment period.

It is surprising to see so many consumer advocate groups cheering a marred process and pushing for standards that will have the effect of discouraging education opportunities for historically underserved low-income and minority students. It can’t be that their intentions are bad. It is more likely that detractors of for-profit education are narrowly focused on examples of bad actors in the field—that have been called out by authorities for predatory lending practices and misrepresenting the quality or results of their programs. Indeed the industry is not shy of regulators scrutinizing and penalizing bad practices. For-profit education has the likes of the SEC, CFPB, FTC, and a bevy of state attorneys general at the ready. You might think that those skeptical of for-profit education could look to the work done by these agencies and be satisfied that problems are being addressed.

While detractors breathlessly anticipate another judicial benediction of the DoE’s rulemaking, hopefully the next round of judicial opining will address not just the extent of the DoE’s statutory authority but also how the DoE can and should carry out its purpose. In the meantime, for-profit educators would do well to continue efforts to disseminate data that shows how they meet important needs that other schools do not and how their costs compare to actual costs of other schools (e.g., including data on taxpayer funding of community colleges). Perhaps many of the well-intentioned skeptics would be less anxious to see the end of the industry.

Sep 15
2014

For-Profit Education Flunking Regulations Overload 101

Woman Holding Man Puppet

The last few years have been tough on the for-profit education industry – it’s not easy being the target of a host of federal and state investigations. For-profit educators have been poked and prodded by, among others, the U.S. Congress, a coalition of state attorneys general, the Consumer Financial Protection Bureau, the Federal Trade Commission, and the Securities and Exchange Commission. Federal and state authorities, who see the industry as predatory, seem determined to squeeze it out of the education industry. A draconian set of regulations, known as the Gainful Employment Rule, that were issued by the Department of Education last year may be just what it takes for these detractors to get their way.

Amidst tougher regulations and incessant government probes, already two large institutions have flat-lined. In June, Corinthian Colleges announced its imminent bankruptcy. At the end of August, Anthem Education said that it would be closing its doors. Declining enrollment numbers, costly investigations and rigorous regulations (with hefty compliance costs) have been too much for these colleges to withstand. And their pleas for assistance from the DoE have fallen on deaf ears – the DoE has agreed only to facilitate orderly dissolution (in the case of Corinthian Colleges) or partial-campus acquisition (in the case of Anthem).

The DoE and regulators may be toasting victory as these colleges fall like dominoes. But the result of their party is thousands of students left with unfinished degrees and fewer education opportunities. Corinthian Colleges enrolled students at over 100 campuses; Anthem at over 40. What are students who have not completed their degrees supposed to do? Credits are not always (or easily) transferrable. Some students may not have other local opportunities to complete their education.

One of the major benefits of for-profit colleges is that they have focused on providing education opportunities to underserved populations and non-traditional students. People like single parents or full time workers who may not have access to a campus or who can only take evening or online classes have found course programs that can accommodate their needs. But regulators haven’t seen these educators as opportunity-makers; rather, they see them as opportunists preying upon the underserved. Because these students generally fund their education through federal student loans, regulators think that for-profit education companies are merely using students as conduits to federal money. They use the fact that drop-out rates can be very high, or that post-graduate employment rates can be low to support their theory that for-profit educators are ruthless predators. But high drop-out rates and low employment rates can be tied to other factors. The very populations these colleges serve are ones that are at higher risk of dropping out: single moms and full-time workers may not be able or willing to maintain consistent enrollment. This is a reality that has explained similar problems at public colleges and universities that have also been plagued with high drop out rates for non-traditional students.

Unfortunately neither regulators nor regulations targeted at for-profit educators take these dynamics into account.  For-profit campuses located outside military bases or in economically depressed areas used to be beacons of hope and opportunity. Now they are turning their lights out in these communities.  No one wants to see poor students burdened with debt; but “protecting” underserved communities and non-traditional students by taking away education opportunities seems skewed. Regulators would do better to establish a reasonable set of metrics and limit the number of agencies swarming for-profit college campuses.

 

Jun 10
2014

Higher Ed False Claims Act Suits – Pass or Fail?

Career Education Corporation, like a host of other for-profit education companies, has found itself spinning on the courthouse revolving door. The latest legal challenge for CEC: a False Claims Act suit filed in federal court in New Jersey on May 16. The lawsuit alleges that CEC defrauded the federal government by (1) falsifying job placement statistics to exaggerate the number of graduates working in their fields of study, (2) misrepresenting accreditation status of some of its programs to remain eligible for federal funding, (3) admitting students who did not have high school diplomas or GEDs, could not speak English, or were mentally handicapped, and (4) paying bonuses to admissions staff based on enrollment numbers. Many of these allegations are familiar to CEC as well as others in the industry. Unfortunately CEC – like many other for-profit education companies – just can’t seem to free itself from the yoke of enforcement agencies and plaintiffs’ attorneys.

Last August, CEC entered a settlement agreement with the New York Attorney General’s office following an investigation into allegations of inflated job placement rates and allegations of inadequate disclosures regarding accreditation status. That agreement cost CEC $10.25 million and imposed significant reporting requirements.

The allegation of inappropriate incentive compensation for college recruiters is a popular basis for lawsuits against the for-profit education industry. In May, the Department of Justice filed a False Claims Act suit against Stevens-Henager College, Inc. for allegedly illegally compensating recruiters. These suits follow similar False Claims Act suits filed against the University of Phoenix (which settled in 2009 for a whopping $67.5 million, plus $11 million in attorneys’ fees) and Oakland City University (which settled in 2007 for $5.3 million) for their incentive compensation structures. There is also a pending False Claims Act case against Education Management Corporation with claims that largely mirror those faced by CEC.

Unfortunately for CEC and its fellow for-profit educators, settling with one entity does not necessarily mean freedom from future suits by other regulators or supposed whistleblowers. The more common scenario follows the camel under the tent: once an investigation is initiated – and publicly announced – follow-on actions ensue. The host of False Claims Act cases against the industry is a perfect example.

Part of the problem is the nature of False Claims Act cases. These suits, which are brought on behalf of the federal government by private plaintiffs (known as “relators”), are intended to help root out fraud against the government. Whistleblower relators are given incentive to file claims as they can receive significant compensation should the lawsuit succeed (or settle). For instance, the whistleblowers in the U. Phoenix settlement received $19 million in compensation; the whistleblower in the Oakland City U. settlement received $1.4 million.

The concept of False Claims Act cases seems laudable – the government cannot possibly keep track of all fraudulent claims it pays out to government contractors and other recipients of federal funds; having private actors with personal knowledge come forward to help address the problem should save the government significant sums. But the host of False Claims Act cases against the for-profit education industry defendants has produced little new or damnable information. When False Claims Act cases are brought after the news of alleged problems breaks, or after an investigation is launched, the benefit to the government is substantially diminished. The lawsuits become more about economic opportunity for enterprising litigators and relators.

posted in:
Fraud
Jan 21
2014

Investigating For-Profit Edu: Are Government Agents Going To Start Tripping Over Each Other?

Things look a bit bleak for the for-profit education industry: it seems like every other day a new federal or state agency is launching an investigation or proposing new regulations. The latest news is that a coalition of 32 state attorneys general, along with the Consumer Financial Protection Bureau, is expanding a probe into lending practices at for-profit colleges. This news follows pronouncements by the Securities and Exchange Commission, the Justice Department, the Federal Trade Commission and the Federal Communications Commission of stepped-up initiatives to combat alleged predatory practices by for-profit colleges. In the midst of this full frontal assault, the industry is facing a major new regulatory scheme under the Department of Education’s impending Gainful Employment rule. What the new regulatory scheme will cover and require remains to be determined, but the released drafts of the rule portend extensive record keeping and reporting requirements.  With mounting investigations and regulatory scrutiny, no wonder shares in for-profit education have been on the decline: how can these companies turn a profit in the midst of all this costly government intervention?

But the CFPB and the 32-state coalition could (unwittingly) be the industry’s knights in shining armor. The enforcement agencies’ expanded probe – along with action by the SEC, DOJ, FTC and the FCC – could provide a good argument for why the Education Department’s impending Gainful Employment rule may be redundant. Since there is so much disagreement over the Gainful Employment rule, not only over the prospective text,but also over the rule’s utility in the first place,it may be time to follow the cues of some in Congress who advocate abandoning the rule when the Higher Education Act is next up for re-authorization (this year).And if Congress could be persuaded to nix the rule, educators could allocate more resources to growth that would otherwise need to be focused on compliance with complex new regulations.

This argument initially may sound like a stretch, but consider some of the following points: (1) congressional infighting about the possible effects of the rule, (2) rule making failures as interested parties cannot come together on regulatory language, and (3) current law and enforcement actions that already address the goals of the prospective rule. There are only so many ways to skin a cat, and you can only have so many cat-skinners (poor analogical cat!).

(1)  Congressional Democrats are split on whether the Gainful Employment rule would protect students or negatively impact students.  Thirty Democratic members of Congress recently wrote a letter to Education Secretary Arne Duncan voicing concerns over the adverse effects a Gainful Employment rule could have on students. At the same time, 31 Democratic members wrote a letter in support of the prospective rule. During the back and forth on the Democratic side, many Republicans are advocating abandoning the rule, concerned that it would ultimately hurt students.With so much uncertainty, why press forward with a rule that has been lingering in limbo for years?

(2)  While Congress members deliberate the rule’s ultimate utility, the Education Department and its panel of negotiators have slogged through several sessions of a statutorily mandated negotiated rule making.  They have been unable to reach any consensus on what types of metrics to incorporate into the rule, let alone what metric ranges to use. After several months, three rounds of negotiations, and three very different drafts of the prospective rule, the Education Department is no closer to final language. The third and final round of negotiations, which occurred mid-December, highlighted the extent to which opposing sides remained polarized.

(3)  The Education Department has stated that its goals for the Gainful Employment rule are to:

  • Define what it means for a program to prepare a student for gainful employment in a recognized occupation and construct an accountability system that distinguishes between programs that prepare students and those that do not;
  • Develop measures to evaluate whether programs meet the requirement and provide the opportunity to improve program performance;
  • Protect students and taxpayers by identifying GE programs with poor student outcomes and end taxpayer support of programs that do not prepare students as required; and
  • Support students in deciding where to pursue education and training by increasing transparency about the costs and outcomes of GE programs.

These goals are already being addressed in current regulations and current enforcement actions. For instance, in November the FTC released marketing guidelines directed toward for-profit colleges, advising colleges against misrepresenting, for instance, their job placement and graduation rates, graduate salaries, credit transferring, etc.  The announcement was accompanied by guidelines for prospective students on choosing a school. The FTC’s guidelines send a message to the for-profit education industry: ensure integrity in your marketing and advertising or face the consequences of regulatory action. A new FCC rule, which took effect last October, restricts how for-profit educators can make recruiting calls to past, current, and prospective students.The SEC and CFPB are investigating student recruitment and private lending at various for-profit colleges for possible violations of, for instance, the Dodd-Frank Act (which prohibits violations of federal consumer financial laws and unfair, deceptive or abusive acts or practices), TILA and Regulation Z. And numerous states attorneys general have been actively investigating the industry under state laws.

The expanded probe that the CFPB and state attorneys general coalition is but a continuation of the panoply of government actions and initiatives directed at the for-profit education sector. But the probe provides an excellent basis for reconsidering the necessity of the Gainful Employment rule. The for-profit industry is not shy of regulatory oversight.  All the new regulation would achieve is more cost to industry and taxpayers in compliance and compliance reviews.

Nov 08
2013

After Being Unfairly Characterized by Regulators, For-Profit Institutions Slowly Rebranding Image

For-profit education needs rebranding. With the recent appointment of Michael Dakduk as key advisor to the Association of Private Sector Colleges and Universities, the sector has made a step in the right direction. The onslaught of negative news against for-profit educators has severely impacted industry growth. Recent reports on drops in enrollment (and thus earnings) at Bridgepoint Education, Inc.,Strayer Education, Inc., Education Management Corp. and Apollo Group Inc. demonstrate just how hard the sector has been hit.

A central problem is for-profit education’s extreme unpopularity among government regulators – thanks, largely, to some bad actors overselling their programs and pressuring prospective students. Regulators both perceive and characterize for-profit educators as unscrupulous opportunists. Unfortunately for the industry, this is a characterization regulators like to broadcast to the public without much qualification. (Query: since when did it become okay for government representatives to lambast whole industries – and imperil jobs in those industries – for the actions of a few?).  Most recently, the FTC has launched a campaign to warn veterans about for-profit education:

  • “Colleges are there to help you, right? Hmm, not so fast. Not every school has got your back. Some for-profit schools may care more about boosting their bottom line with your VA education benefits. Some may even stretch the truth to persuade you to enroll, either by pressuring you to sign up for courses that don’t suit your needs or to take out loans that will be a challenge to pay off.”  (http://www.consumer.ftc.gov/blog/veterans-dont-get-schooled)
  • “[S]ome schools manipulate the data or lie about how well their graduates fare.” (http://www.consumer.ftc.gov/articles/0395-choosing-college)

The FTC’s campaign, published in a news release and articles on the FTC’s consumer page, provides the above warnings about for-profit schools, offers questions to ask when choosing a school, and furnishes a link to filing a complaint with the FTC, should a consumer believe a school hasn’t lived up to its promises. The hyperlink to a consumer complaint page suggests that the FTC is actively seeking cases to pursue against for-profit educators. Any FTC enforcement action would likely involve allegations that a school deceived students about the cost, quality, or outcome of its program offerings – as the FTC is charged with protecting consumers from deception and unfairness in the marketplace.  (Section 5 of the FTC Act broadly prohibits ‘‘unfair or deceptive acts or practices in or affecting commerce.’’)

The FTC’s campaign follows statements made by President Obama this summer that “soldiers and sailors and Marines and Coast Guardsmen, they’ve been preyed upon very badly by some of these for-profit institutions.” The message publicly broadcast over and over decries the supposed predatory practices of for-profit institutions. It is an unfair stereotype with a significant impact on these educators, harming their enrollment numbers and forcing institutions to lay off employees and shutter campus locations.  Yes there have been bad actors; but both state and federal enforcement agencies have been active in investigating and addressing predatory and/or deceptive practices. Blackening the eyes of all for-profit educators, which results from statements such as those of the President or the FTC, is overreach.

Part of the problem for government regulators maybe their difficulty accepting that educators could legitimately make money while students earn a degree. They may have the same reservations expressed by a representative from Student Veterans of America: “I am always professionally skeptical about any institution that must answer to shareholders and investors before students and customers.” But having to answer to shareholders and investors is not necessarily a bad thing. It can serve as a check on institutions to ensure they are running their programs effectively and efficiently; it can motivate institutions to be innovative and find better ways to meet their consumers – i.e. their students – needs and demands.  For-profit educators are responsible for advancements in online education and other innovations that make education more accessible.The result: for-profit educators are to thank for opening education opportunities to many underserved groups, like single mothers.

For-profit educators are in definite need of some effective marketing to promote their benefits and to dispel the negative conceptions presumed by and relayed by government regulators and outspoken detractors. They are making steps in the right direction with APSCU’s recent appointment of Mr.Dakduk. Dakduk is a former Marine and the former executive director of Student Veterans of America.

APSCU President Steve Gunderson said Dakduk’s hiring “builds on our member institutions’ commitment to excellence in post secondary education for military and veteran students.” With Dakduk’s presence, the industry may better overcome the flinching bias of so many regulators. Dakduk has built a reputation for success in his work advocating for veterans’ education. While at SVA, he grew the organization from a small group to one with chapters at over 900 campuses nationwide.

Dakduk’s move to APSCU is even a little ironic: In one of the FTC’s articles that warn veterans about for-profit education, the agency suggests veterans consult the SVA on the credibility of schools they are considering. Dakduk’s replacement at the SVA, D. Wayne Robinson, is a graduate of Trident University, a for-profit school.

For-profit education has had its bad actors, but problems in higher education span the spectrum of colleges and universities, and it is unfair – and ultimately detrimental to students and communities – to single out for-profit institutions. Dakduk understands this and should help for-profit educators improve their image.

Oct 11
2013

FTC Takes Tough Action Against ‘Scareware’ Tactics

A great way to make money is to develop a product or service that responds to a consumer want or demand, and then to stay ahead of prospective competitors by offering better pricing or quality. A not-so-great way to make money is to convince consumers to buy a product or service that they don’t really want or need, at inflated rates. A highly dubious way to make money is to trick consumers into paying for something they didn’t want and didn’t mean to buy.

Businesses operating in this third category, which may include a scareware marketer or two, have to consider risk versus reward. Is the reward of temporary profits worth the risk of legal action; what is the likelihood of legal action; and what is the potential cost of such action?

Someone who operates on tricks over treats, or by pure scareware tactics, may expect business to dry up as consumers learn to avoid their traps. Such an operator must also face the looming threat of consumer legal action, government intervention, or run-ins with credit card companies alarmed by high chargeback rates.

For these types of businesses in the mobile marketing space, the cost of potential government intervention is going up. A recent settlement between the Federal Trade Commission and Jesta Digital LLC points to the severe penalties a business may face for operating on the sidelines of fair play. The consequences include a hefty fine, consumer refunds, restricted billing practices and stringent compliance measures for years to come.

Jesta (which also does business as Jamster) is known mostly for its marketplace of ringtones, photos, videos and apps. Starting in 2011, it ran a scareware campaign, purportedly for anti-virus software, that the FTC asserts crossed the line into deceptive advertising. The ads ran on the free version of the Angry Birds app for Android. Using a graphic that looks like the Android robot logo, the banner ad displayed a warning that viruses had been detected on the device – even though no virus scan was conducted. According to the FTC, when the consumers clicked on the “remove [virus]” button, or similar “warning” buttons, Jesta directed them through a number of pages about virus protection that left to very fine print a monthly service fee for ringtones and other content.

The FTC alleges that consumers were even charged at the instant of pressing a “Protect Your Android Today” button. Through the use of Wireless Access Protocol (WAP) billing, the company was able to charge consumers through their cell phone numbers without needing to obtain express authorization. (It may be that the use of the billing practice actually spurred the FTC into action as wireless carriers initiated their own penalties against Jesta for the large number of consumers demanding refunds.) The FTC also alleges that the anti-virus software often failed at download (apparently at one point, only 372 people out of 100,000 subscribers actually received some sort of anti-virus app download link).

The FTC describes numerous deceptive practices: mimicking the Android logo to confuse consumers into believing the virus warnings were credible, charging consumers without their knowledge or consent, failing to provide services charged for. The company apparently was aware that its scareware tactics crossed the line, as an email correspondence among company executives noted that the chief marketing officer was “anxious to move our business out of being a scam and more into a valued service.”

So now the company must pay the FTC a $1.2 million penalty and offer to refund consumers. The process of identifying and notifying consumers of their refund options and tracking all this to show to the FTC will be a costly undertaking. Another major cost will be the stringent and detailed billing practices that the company – and all participants, including principals and agents – must adhere to, disclosures it must make, and compliance monitoring and recordkeeping requirements it must adhere to, for 20 years. The settlement agreement is far more than a hand slap; its terms keep Jesta (and its principals!) beholden to the FTC for the foreseeable future.

Mobile marketers who may calculate risk versus reward and decide that a get-rich-quick scheme is worth the risk should think again. The FTC is making deceptive marketing tactics, like many scareware campaigns, a priority. We have seen strong action from the agency in the recent past, including hefty penalties for the company Innovative Marketing and its principal Marc D’Souza. Moreover, the newly-appointed head of consumer protection at the FTC, Jessica Rich, has noted that the FTC is expanding digital enforcement, increasing the risk of getting caught in the agency’s cross-hairs.

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About Ifrah Law

FTC Beat is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, health care, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

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