A Q&A With Jeff Ifrah on the FTC’s Latest Draconian Tactics

Some lawyers who deal regularly with the Federal Trade Commission in investigations of allegedly false and deceptive online advertising have noticed that the agency is beginning to take steps in these investigations that are unprecedented and draconian – and that judges seem to be going along. Below is a set of questions and answers with Jeff Ifrah, founding partner of Ifrah Law, on these new enforcement methods.

1. What is the first thing that a lawyer representing a company being probed by the FTC on false-advertising charges can expect to see?

IFRAH: Agency lawyers will go to a federal district judge with a copy of a temporary restraining order (TRO) for the judge to sign on an ex parte basis (without the defendant or its lawyers being present). Judges are allowed to do this as long as a hearing is set in a few days for a preliminary injunction, at which the defendant is represented. Meanwhile, the company is essentially barred from doing business by the terms of the TRO.

2. What is the FTC’s usual next step?

IFRAH: The agency will then go before the same judge with a draft of a preliminary injunction that is pretty much identical to the temporary restraining order. These injunctions basically require the business to continue to remain at a standstill until a trial is held and a settlement is reached. In addition, they require the company to disclose on all its web sites that it is being investigated for false and deceptive practices and to disclose online all of its sensitive financial information and that of its owners. Very often, the defendant will not contest this injunction request by the FTC. It is remarkable how many lawyers simply capitulate and agree to these draconian orders and set their clients up to fail.

3. What’s wrong with that? Isn’t the injunction lifted when the defendant agrees to settle the case?

IFRAH: Yes, but by that time, it may be too late, and the company may have gone out of business as a result of the restrictions that were imposed on it by the injunction and as a result of the disclosures that it had to make.

4. Are there other problems with these preliminary injunctions?

IFRAH: Yes. The FTC usually asks for a preliminary injunction with many standard features, and the judge usually grants it. But no two cases or defendants are the same. The courts are not taking into account the fact that different situations require different results. Instead, the injunctions are overbroad and reach behavior that is beyond what is alleged in the complaint.

Some of these restraining orders and injunctions restrict how much money a defendant can spend in a month or what type of online advertising it can use while the case is pending. Other injunctions require affirmative behavior, such as a requirement that the defendant report to the FTC every time it creates or operates any type of business. In either case, the defendant is forced to open its entire existence to the FTC, and everything it does is subject to scrutiny.

Another problem with standard, overbroad injunctions is that a defendant may become uncertain as to what it must do to prevent being held in contempt of court for non-compliance. The language in the injunction is often so vague and undefined that the FTC can act in its discretion to find a defendant in contempt.

5. And is that the end of the story?

IFRAH: No, unfortunately, plaintiffs lawyers often look to copycat an FTC action, and as a result companies may then have yet another headache to deal with, if they haven’t already been irreparably damaged by the FTC’s actions.

FTC Revises Online Advertising Disclosure Guidelines: Say It and Say It Clearly

This week, the FTC released updated guidance to its 2000 “Dot Com Disclosures,” a guide covering disclosures in online advertising. The online world has certainly changed in 13 years, and the new guidelines, available here, cover advances in online advertising, including mobile advertising.

One central theme still prevails: existing consumer protection laws and rules apply no matter where you offer products and services: newspapers, magazines, TV and radio commercials, websites, direct marketing, and mobile marketing. Thus, the basic principle applies that companies must ensure that their advertisements are truthful and accurate, including providing disclosures necessary to ensure that an advertisement is not misleading. Further, the disclosures should be clear and conspicuous – irrespective of the medium of the message.

In determining whether a disclosure is “clear and conspicuous” as the FTC requires, advertisers should consider the disclosure’s placement in the ad. Importantly, the 2000 guidelines defined proximity of disclosures to ads as “near, and when possible, on the same screen.” The new guidelines state that disclosures should be “as close as possible” to the relevant claim. The closer the disclosure is to the claim, the better it is for FTC compliance purposes.

Advertisers should also consider: the prominence of the disclosure; whether it is unavoidable (e.g., consumers must scroll past the disclosure before they can make a purchase); whether other parts of the ad distract attention from the disclosure; whether the disclosure should be repeated at different places on the website; whether audio message disclosures are of sufficient volume and cadence (e.g., too fast); whether visual disclosures appear long enough; and, whether the language of the disclosure is appropriate for the intended audience. The FTC suggests avoiding “legalese” or technical jargon.

Mobile marketers should take note that the FTC provided some additional guidance regarding disclosure issues particular to mobile marketing. In particular, the FTC stated that the various devices and platforms upon which an advertisement appears or a claim is made should be considered. For example, if the advertiser cannot make necessary disclosures because of the limit of the space (e.g., in a mobile app), then the claim should not be made on the platform.

The FTC does permit hyperlinks for disclosures in certain circumstances. However, hyperlinks must:
- be obvious
- be labeled appropriately to convey the importance, nature and relevance of the information they lead to (such as “Service plan required. Get service plan prices here”)
- be used consistently
- be placed as close as possible to the relevant information the hyperlink qualifies and made noticeable
- take consumers directly to the disclosure after clicking

Companies should assess the effectiveness of the hyperlink by monitoring click-through rates and make changes accordingly. The agency also suggests that advertisers design ads so that scrolling is not necessary to find a disclosure. The FTC discourages hyperlinks for disclosures involving product costs or certain health and safety issues (similar to its 2000 guidelines).

The FTC suggests that companies display disclosures before a consumer chooses to buy a product or service – in other words, the disclosure should appear before a consumer adds a purchase to his or her “shopping cart” or before the consumer clicks “buy now.” The FTC also cautions that necessary disclosures should not be relegated to general “terms of use” and similar contractual terms on a website. Further, because so many consumers have set their computers to prevent “pop ups,” the FTC discourages companies from placing disclosures in “pop ups.”

Probably the most helpful part of the new guidelines are the 22 different examples of proper/improper disclosures the FTC provides at the end of the guidelines. As companies move forward in promoting products and services online, particularly on mobile platforms, reviewing these examples along with the general principles of truthful and complete statements in advertising may save a company from an FTC enforcement action.

Organizations are increasingly marketing their products and services on mobile platforms. Advertisers should take note that special considerations apply in the mobile marketplace, especially the space and text size limitations. If a disclosure is necessary to prevent an advertisement from being deceptive, unfair, or otherwise violative of an FTC rule, it must be clear and placed next to the offer. If that can’t be done, the safest course would be to move the offer to another platform, such as a traditional website. The FTC and the states have demonstrated that they take a keen interest in mobile marketing and they will be watching claims and disclosures in the smartphone/tablet universe.

FTC Remains Tough on ‘Robocalls’ with New Enforcement Case

Once again, the FTC has completed a major enforcement action against the illegal use of robocalls, a form of prerecorded, computerized telemarketing calls. This time, the action resulted in a $1.1 million civil penalty against Roy M. Cox, an individual whom the FTC considered to be the architect of an illegal robocall operation. The FTC alleged that Cox and several companies he controlled were using robocalls to market credit card interest-rate reduction programs, extended automobile warranties, and home security systems. Due to Cox’s inability to pay, the dollar penalty has been waived and Cox has been permanently banned from participating in any telemarketing activities.

According to the December 2011 complaint, Cox and his co-defendants were not only making prerecorded sales calls to consumers without their consent, in violation of the Telemarketing Sales Rule, but they were also illegally disguising their identity on customers’ caller ID displays. Instead of displaying the companies’ actual name and contact information, generic names such as “CARD SERVICES,” “CREDIT SERVICES,” or “PRIVATE OFFICE” would appear on a recipient’s caller ID. This tactic, known as “caller ID Spoofing,” is also prohibited by law.

As we reported in October, the FTC has been struggling to keep pace with these technological advancements, so it called on the public to come up with a solution. The commission offered a $50,000 prize to whoever could design a program to screen out illegal robocalls. The challenge was open to the public for three months and garnered nearly 800 submissions. The agency expects to announce a winner in early April.

The case against Cox and many of the FTC’s previous enforcement actions indicate that the FTC may be most concerned with robocalls that use patently deceptive advertising to lure in vulnerable, unsuspecting customers. Companies offering fraudulent credit card services, auto-warranty protection, and medical plans have made themselves an easy mark for the FTC, because of the likelihood that they will be reported by recipients or advocacy groups. However, companies interested in using computerized telemarketing must remember that even innocuous content can violate the Telemarketing Sales Rule (and the Telephone Consumer Protection Act) if recipients have not given prior written consent to receive such calls. Also, any company engaging in telemarketing should be subscribing to the federal “do not call” list and scrubbing its calling lists against the federal list. Some states still maintain their own lists as well. In addition to FTC or FCC enforcement, illegal robocalling can result in costly civil litigation, including class actions.

FTC Report Faults App Developers on Data Collection From Kids

The Federal Trade Commission released a report on December 10, 2012, that concluded that mobile apps targeted at children were collecting large amounts of data from children and sharing their information with advertisers without disclosing their practices.

The FTC report examined 400 leading apps designed for kids that were sold in the mobile stores run by Apple and Google. The agency said it is launching an investigation to determine if certain mobile apps developers have violated the Children’s Online Privacy Protection Act (COPPA) or engaged in unfair or deceptive trade practices.

The FTC’s authority over children’s mobile apps comes from laws that prohibit unfair and deceptive acts of commerce, as well as from COPPA, which requires operators of online services for children under 13 to get consent from parents before collecting and sharing personal information, among other requirements.

The report itself does not call for regulatory changes. However, the FTC is reviewing COPPA to determine if it needs to be updated, and is expected to announce updates soon COPPA was enacted in 1998, and FTC officials say the law needs to be changed to reflect the growing prominence of mobile apps and social networking sites used by children. The regulations under COPPA have not been substantially revised since its introduction. COPPA sets forth specific requirements for websites aimed at children, but its guidance on mobile technology is far less clear.

The FTC proposed updating COPPA, but it has been met with pushback thus far from technology companies. The proposed changes could significantly increase the need for children’s sites and apps to obtain parental permission to collect certain types of data, including device IDs, photos, and voice recordings. FTC officials have also emphasized that they consider the exact location of a mobile device to be personal information that would require parental permission to collect.

The FTC report noted that it was particularly concerned with the collection of a user’s device ID, which is a string of letters or numbers that identifies each mobile device. Nearly 60 percent of the mobile apps that the FTC reviewed transmitted the device ID. Some of those apps then shared that ID with an advertising network or other third party, including some apps that disclosed the phone number and location of the device. Additionally, more than half the apps also contained interactive features such as advertising or in-app purchases that were largely undisclosed to parents.

Only 20 percent of the apps reviewed in the report disclosed any information about the app’s privacy practices. FTC Chairman Jon Leibowitz said, “Our study shows that kids’ apps siphon an alarming amount of information from mobile devices without disclosing this fact to parents.”

This week’s report serves as further notice to all mobile app developers that the FTC is monitoring the mobile app market.  App developers, particularly developers that are targeting children, need to review their compliance with FTC guidelines, as well as their overall truth-in-advertising and data privacy policies, to make sure their apps are complying. The FTC has made clear that it will take enforcement actions against industry participants and will continue to aggressively pursue action in the future.

CFPB, FTC Announce Crackdown on Deceptive Mortgage Advertising

On November 19, 2012, the Federal Trade Commission and the Consumer Financial Protection Bureau announced that they have launched a new coordinated effort to protect consumers, focusing on mortgage advertisements that they say are deceptive.

The CFPB and the FTC worked together to review roughly 800 mortgage ads. These ads were produced by entities involved in different aspects of the mortgage process, including mortgage brokers and lenders, lead generators, real estate agents, home builders, and others. The ads were featured on a wide range of media including newspaper, direct mail, email and social media.

The agencies stated that some of these ads had specifically targeted the elderly and veterans.

The letters warned the recipients that they may be in violation of the Mortgage Acts and Practices Advertising Rule (MAP Rule) that took effect in August 2011, which prohibits misleading claims concerning government affiliation, fees, costs, interest rates, payment associated with the loan, and the amount of cash or credit that is available to the consumer. The MAP Rule does not apply to traditional banks, meaning today’s actions affect only non-banks.

The FTC and the CFPB both have enforcement authority over non-bank mortgage ads under the MAP Rule. The agencies stressed that as part of the initiative they are working together to assure that consistent standards are applied across agencies. The agencies will conduct separate investigations focused on different targets to better utilize their resources and avoid double-teaming businesses.

“Working together and applying consistent standards to all types of clients in all types of ads is a very important means of making sure that mortgage advertisers are on notice that they have to comply with the law,” said Thomas Pahl, the assistant director of the FTC’s Division of Financial Practices.

The FTC and the CFPB issued more than 30 warning letters to mortgage advertisers, warning them that their advertisements may be deceptive. Both agencies stated that they have also opened formal investigations into other advertisers that may have committed more serious violations of the law. Violators of the MAP Rule can be subject to civil fines.

“Misrepresentation in mortgage products can deprive consumers of important information while making one of the biggest financial decisions of the lives,” CFPB Director Richard Cordray stated. “Baiting consumers with false ads to buy into mortgage products would be illegal.”

The review of the advertisements revealed several different types of claims that regulators could possibly find misleading, including ads that suggested that a company was affiliated with a government agency, ads that guaranteed approval and offered low monthly payments without discussing the conditions of the offers, and ads offering a low fixed mortgage rate without discussing significant loan terms.

The announcement shows that the FTC and the CFPB are taking an aggressive and proactive look at companies that offer products in the financial services sector. Companies that offer mortgage and other consumer lending products should know that the FTC and the CFPB are paying special attention to them and that their advertisements need to comply with federal regulations.

It’s Not Easy Being Green: FTC’s Revised Green Guidelines May Adversely Affect the Little Guy

Earlier this month, the Federal Trade Commission released its revised Green Guidelines, providing parameters for advertising and marketing claims of supposedly eco-friendly products. The publication completes a two-year revision process that the FTC undertook, involving the updating of guidelines last visited in 1998. The Commission touted the new guidelines as helping marketers “avoid making misleading environmental claims” and leveling the playing field for “honest business people.”

The revised guidelines address 14 categories of claims, including general environmental claims, carbon offsets, certifications and seals of approval, and claims of recyclability and renewability. Under the guidelines, marketers and advertisers are cautioned to avoid general claims that products are green or eco-friendly: “Marketers should qualify general claims with specific environmental benefits. Qualifications for any claim should be clear, prominent, and specific.”

Marketers are further cautioned to disclose material connections to any certifying organization. And when it comes to claims of compostability, degradability, recyclability and other claims about product and packaging content, the FTC advises that marketers be able to substantiate such claims and avoid deceiving consumers by replacing one environmental red flag with another. For instance, the guidelines note that “[i]t would be deceptive to claim that a product is “free-of” a substance if it is free of one substance but includes another that poses a similar environmental risk.”

The FTC’s revisions appear to take on a holistic approach to environmental claims. A company cannot willy-nilly claim that its product or packaging is recyclable if it is only recyclable in limited locations, and it cannot claim it is “green” and made with recycled content “if the environmental costs of using recycled content outweigh the environmental benefits of using it.” The guidelines require the marketer to limit and qualify green claims based on a thorough review of the production, distribution, and disposal stream for the product and its packaging.

In many ways, this new guidance seems fair – it should help ferret out the unscrupulous marketer who wants to charge a premium, or carve a market niche, based on dubious environmental claims.

But how much benefit will the new guidelines bring? The guidelines, in and of themselves, do not truly bring more enforcement power to the FTC. With or without Green Guidelines, old or new, the FTC can bring enforcement actions against marketers for false and deceptive claims – like several enforcement actions from 2009 forward that the FTC highlights on its website. With or without the guidelines, the truly unscrupulous marketer remains subject to FTC oversight and liability.

Our concern is that the guidelines may discourage some well-intentioned market entrants. An entrepreneur may have a good green idea but opt not to pursue it because of heightened advertising and labeling standards. For instance, the FTC guidelines caution companies about the need to provide “competent and reliable scientific evidence” for several categories of environmental claims. That could necessitate big R&D bucks to the exclusion of Mom & Pop.

More importantly, the guidelines could provide more ammunition for big companies to pursue claims against small competitors and effectively shut out upstarts. NAD, the advertising industry’s self-regulatory body, apparently plans on using the guidelines. There have been a host of cases by companies like Clorox and Procter & Gamble taking to task smaller companies marketing eco-friendly alternatives. In the end, while the revised Green Guidelines may be a good faith effort by the FTC to level the playing field and may have some positive impact, it will be important to monitor its unintended consequences.

POM Loses a Round in Its Advertising Dispute With FTC, But Battle Continues

POM Wonderful LLC recently received a setback in its longstanding dispute with the Federal Trade Commission. On Sept. 30, 2012, U.S. District Judge Richard Roberts in the District of Columbia dismissed the juice maker’s declaratory judgment action against the FTC. The judge’s ruling, though, does not put an end to the POM-FTC battle, which is still on appeal in a related administrative proceeding.

POM filed suit in federal district court in September 2010, in anticipation of an impending FTC administrative action. The company challenged what it perceived as agency overreaching, in violation of its First and Fifth Amendment rights, and in violation of the Administrative Procedure Act. The basis of POM’s complaint was the FTC’s use of consent orders with two other companies (Nestle U.S.A. and Iovate Health Systems, Inc.) to establish new and more stringent advertising standards for medical and health claims.

When the FTC waved these consent orders in front of POM (in an apparent attempt to pressure the company into agreeing to tougher standards like Nestle and Iovate), POM responded by thumbing its nose and filing suit in federal court. POM contended that the FTC failed to adhere to the requirements of administrative law that, in order to modify advertising standards, the agency must go through a notice-and-rulemaking process. The FTC subsequently filed its administrative action against the company for alleged failures to adhere to the more stringent standards.

In large part because of the significant overlap of issues between POM’s action in U.S. district court and the FTC’s administrative action, Judge Roberts dismissed the district court case. The judge noted that judicial efficiency militated towards having the dispute play out in the administrative case only: “While the administrative proceeding is not identical to POM’s current action, that forum is ‘perfectly capable’ of determining whether the proposed order exceeds the bounds of the FTC Act, violates the First and Fifth Amendments, and seeks to abrogate the FDA’s power,” he wrote. Other factors in the judge’s holding were (1) that granting declaratory relief would have required the resolution of an anticipatory defense and (2) that POM’s district court action appeared to be filed in part to secure tactical leverage.

As we wrote earlier this year, the administrative law judge already ruled on the parties’ dispute in May. POM touted that ruling largely as a victory because the judge rejected the enhanced advertising standards at issue. However, the FTC and POM appealed the decision before the full commission (POM appealed because the judge still found POM liable under separate standards). Oral arguments in the appeal were held in August, and the outcome of the appeal is still pending.

We find it interesting – and somewhat encouraging for advertisers who are concerned about agency overreaching – that neither the district court action nor the administrative proceeding have rejected on the merits POM’s challenge to the FTC’s use of settlement agreements to effect enhanced standards. Any company that has come under the regulatory microscope can appreciate the tremendous pressure companies face to cooperate with an agency just to get out of hot water – at almost any cost. POM’s bold stance may eventually have the result of reminding regulators to follow the rules set forth for them by the principles of administrative law.

‘Results Will Vary,’ But FTC’s Cases Against Weight-Loss Companies Remain the Same

The Federal Trade Commission recently announced a settlement with Jason Pharmaceuticals regarding its use of consumer testimonials and health benefits claims. Any company that relies on testimonials in its advertising, even a company that like Jason Pharmaceuticals, sells products that often have beneficial health results, must become aware of this settlement.

Jason Pharmaceuticals sells Medifast brand low-calorie meal substitutes. In 1992, the FTC settled a case with Jason for allegedly deceptive weight-loss claims. The settlement order barred Jason from making unsupported claims to consumers about losing weight or keeping weight off. According to the FTC, since at least November 2009, Jason ran ads that featured weight loss claims about low-calorie meal substitutes.

The ads run by Jason Pharmaceuticals prominently featured the use of consumer testimonials. One advertisement stated that:

“When you lose up to 2 to 5 lbs a week with Medifast, you’ll feel terrific. And so will your doctor.

TRUST MEDIFAST.

THE PROGRAM THE DOCTORS RECOMMEND.

Jeff & Maureen lost a combined 169 lbs.!”

According to the FTC, the only disclaimer displayed in most Medifast advertisements containing consumer endorsements was a small, inconspicuous “Results will vary.” The FTC alleged that this disclaimer violated the 1992 order because was insufficient to change consumers’ net impressions that users of these products could expect to achieve the results represented in the advertisements.

As part of the settlement, Jason Pharmaceuticals will have to pay a civil penalty of $3.7 million to settle charges that it violated the previous order by making unsupported claims about its weight loss products.

Under the settlement, Jason is prohibited from misrepresenting that consumers who use any low-calorie meal replacement program can expect to achieve the same results that an endorser does or can lose a particular amount of weight or maintain that weight loss.

In addition, representations in the company’s ads cannot mislead consumers and must be backed up with competent and reliable scientific evidence that includes at least one clinical study. The company is also barred from making any other representations about the health benefits, safety, or side effects of any meal replacement program, unless it’s backed up by scientific research.

The settlement also has a compliance and recordkeeping requirement that for 20 years after the entry of judgment, Jason Pharmaceuticals needs to keep extensive records relating to any marketing or substantiation of any advertising claim.

The FTC continues to push the limits in pursuing enforcement actions. This, for example, is a very aggressive prosecution. People do lose weight using products such as Medifast, and in some instances people have lost significant weight. These ads may have been in violation of the prior settlement, but the FTC decision to pursue this action shows just how far they are willing to go in pursuing enforcement actions.

Because of the FTC’s aggressiveness in cases such as this one, companies that invoke claims of health benefits to consumers need to be sure that these claims are backed by reliable scientific evidence. Companies should also be aware that merely making a flat statement that “results may vary” will likely not help them avoid liability.

‘Get-Rich-Quick’ Systems Penalized by FTC to Tune of $478 Million

As part of the Federal Trade Commission’s ongoing efforts to shut down scams that target financially vulnerable consumers, a U.S. district judge has issued a $478 million judgment at the request of the FTC against the marketers of three get-rich-quick systems that the agency says are used for deceiving consumers. The order is the largest litigated judgment ever obtained by the FTC.

The judgment was awarded against companies and individuals who marketed the schemes, titled “John Beck’s Free & Clear Real Estate System,” “John Alexander’s Real Estate Riches in 14 Days,” and “Jeff Paul’s Shortcuts to Internet Millions.”

Nearly a million consumers paid $39.95 for one of these “get-rich-quick” systems, and some consumers purchased personal coaching services, which cost up to $14,995. According to the FTC complaint filed in June 2009, one system was marketed to consumers with the promise that consumers could “quickly and easily earn substantial amounts of money by purchasing homes at tax sales in their area ‘free and clear’ for just ‘pennies on the dollar’ and then turning around and selling these homes for full market value or renting them out for profit.”

The FTC said that nearly all the consumers that bought the systems lost money.

The FTC’s suit alleged violations of the Federal Trade Commission Act, based on the defendants’ representations in connection with the advertising, marketing, promoting and sale of the systems. The FTC also alleged that the defendants’ violated the Telemarketing Sales Rule through their marketing to consumers.

Two of the individual defendants, Douglas Gravnik and Gary Hewitt, were held jointly and severally liable for the monetary part of the judgment. The judge also imposed a lifetime ban from infomercial products and telemarketing against Gravnik and Hewitt. Gravnik and Hewitt indicated that they are likely to appeal the order to the extent it imposes a lifetime ban. A third individual, John Beck, is responsible for $113.5 million of the judgment.

In its case, the FTC filed 30 consumer declarations detailing consumers’ experiences with the defendants’ products. The defendants objected to many of these declarations on various grounds, including hearsay, relevance, and the best evidence rule among other objections, but these objections were all overruled.

The defendants also objected to the use of a survey by the FTC that showed that less than 0.2 percent of consumers who purchased the defendants’ system made any profits and only 1.9 percent of consumers who purchased coaching material made any revenue. The defendants moved to exclude all evidence relating to the survey on the ground that the pre-notification letter “poisoned the well in such a way as to invalidate whatever survey finding the FTC obtained” and argued that the manner in which the survey was conducted rendered the results unreliable. The court found that the survey was performed under accepted principles used by experts in the field and was admissible.

The court granted summary judgment for the FTC , finding that the defendants made material misrepresentations that were either false or unsubstantiated. The court pointed out that the materials provided by the defendants to consumers taught consumers how to purchase tax liens and certificates, but these purchasers do not obtain title to the property and thus were not “purchasing” the homes as the advertising materials stated.

The court also granted summary judgment on the Telemarketing Sales Rule allegations. The basis of the defendants’ argument was that the violations were isolated and should not be the basis for liability. The court found that there was no dispute that the defendants’ telemarketers repeatedly initiated calls to consumers who asked the defendants not to contact them. The FTC also produced “overwhelming” evidence that the defendants lacked a meaningful compliance program or any written procedures in place to comply with the regulations.

Jeffrey Klurfeld, director of the FTC’s Western Region, stated in a press release that “This huge judgment serves notice to anyone thinking of using phony get-rich-quick schemes to defraud consumers. The FTC will come after you if you violate the law.”

In this case, the FTC had already completed its surveys when it went to court. Trial judges will often be very impressed with FTC surveys and will grant judgment to the agency in nearly every case. Therefore, it is critical that a company that is being targeted by the FTC obtain counsel at the earliest possible stage, before the agency files anything in court. Counsel should be ready to vigorously defend the client’s marketing practices with techniques such as the use of countersurveys and customer testimonials and expert testimony, before the FTC files in court.

Court Strikes Most of ‘Gainful Employment’ Rule, But For-Profit Colleges Must Still Beware

For-profit education institutions may have breathed a sigh of relief on June 30, 2012, when a federal judge struck down most of the Department of Education’s Gainful Employment rule. The decision came none too soon, as the U.S. District Court for the District of Columbia issued the ruling literally on the eve of the day the regulations were slated to take effect. But these colleges and universities should not rest on their laurels. While the court sided with the private sector in this instance, the judge’s opinion keeps the door open for more and similar regulation.

To address concern over the seeming disconnect between debt burden and employment prospects of graduates of for-profit colleges and universities, the DOE last year published its Gainful Employment rule. The rule was instituted to test schools’ compliance with the Higher Education Act’s requirement that certain institutions must “prepare students for gainful employment in a recognized occupation” in order to qualify for federal funds. To accomplish this, the rule set forth three tests, one or more of which a school would need to meet, to qualify for federal funds. The tests required that:

1. At least 35 percent of graduates must be repaying their loans,
2. The median graduate’s estimated annual loan payments must not exceed 12 percent of earnings, or
3. The median graduate’s estimated annual loan payments must not exceed 30 percent of discretionary income.
The rule further required that subject schools make certain disclosures to prospective students and obtain DOE approval for new programs.

The Gainful Employment rule stirred up consternation in the for-profit world, as concerns mounted over the costs of compliance. The Association of Private Sector Colleges and Universities, the main association representing the for-profit education industry (with over 1800 members), challenged the rule in court.

The APSCU argued that the Gainful Employment rule exceeded statutory authority by stretching the meaning of the term “gainful employment.” The court squarely sided with the DOE on its authority, noting that “gainful employment” is not an unambiguous term and that the DOE has the authority to assess whether educational programs prepare students for gainful employment. The only question, according to the court, was whether the DOE had reasonably promulgated rules to test programs’ ability to prepare students.

Working through an analysis of the rules, the court ultimately determined that the debt repayment standard (No. 1 above) “was not based upon any facts at all. No expert study or industry standard suggested that the rate selected by the Department would appropriately measure whether a particular program adequately prepared its students, the court wrote. The reason: The rule was solely based upon statistics that at the 35 percent rate, roughly 25 percent of schools subject to the rule would fail, i.e. the rate was set because it would knock out the bottom quarter of schools.

The judge rightly ruled that this basis — merely picking a compromise figure — “is not reasoned decisionmaking.” Since the other standards were so intertwined with the debt repayment test, the judge struck them down as well, leaving remaining only the disclosure provisions of the rule.

The APSCU and the for-profit industry have hailed the judge’s decision as a victory. But the industry needs to understand that it may be just the first of a series of regulatory battles. The court’s opinion read largely like an opinion favoring the DOE. Notably, the judge stated that “the Department has gone looking for rats in ratholes — as the statute empowers it to do.” And the court squarely upheld the DOE’s regulatory authority to go about enforcing something just like the Gainful Employment rule, so long as the basis is grounded in sufficiently reasoned standards.

It is not clear yet how the DOE will proceed, and whether it will go about another round of rulemaking. But the court’s opinion provides ample incentive for the administration to take another turn at Gainful Employment.