LegalZoom and Rocket Lawyer Case over Misleading Advertising Heads to Trial – When is “Free” Really “Free”?
Last week, a federal judge in California declined to grant a summary judgment motion to LegalZoom.com, Inc., in its lawsuit accusing rival Rocket Lawyer, Inc. over claims of trademark infringement, unfair competition, and false and misleading advertising that focus on the use of the word “free” in advertisements by Rocket Lawyer.
LegalZoom and Rocket Lawyer are the two biggest names in the online legal services industry. Both companies provide users online legal services, including incorporation documents, and documents establishing divorces, trusts, and wills, for a small fraction of the price that it would likely cost if a lawyer handled these matters. LegalZoom began offering products in 2001 and has used the model of charging for legal forms. Rocket Lawyer came along in 2008 and has made forms free and charged for legal and advisory services to help people complete the forms.
On Rocket Lawyer, users are able to sign up for a free seven day trial that allows them free access to all services on the site. If the subscription is not cancelled within the seven day window, then it is converted to a paid subscription. In the complaint, LegalZoom alleges that ads run by Rocket Lawyer used the term “free” which it said violated federal law because users still had to pay state filing fees to finalize their incorporations, divorces and other filings, or sign up for a subscription to access the service.
Not long after the complaint was filed in this case, Charley Moore, the Founder and Executive Chairman of Rocket Lawyer, authored an insightful blog about why Rocket Lawyer is fighting LegalZoom in the case. Moore emphasized that many small businesses and individuals cannot afford the cost of traditional legal services and “free access to the basic tools of the legal system can both shield us and provide greater chances for success in the modern economy.”
In its decision last week, the district court held that genuine issues of material facts remain and denied LegalZoom’s summary judgment motion. The court was unwilling at this point in the litigation to rule that the advertisements by Rocket Lawyer regarding its “free” services were false as a matter of law because “a jury could reasonably conclude that the advertisements, when considered in context, are not literally false within the meaning [of the statute].” The court also held that at this point LegalZoom failed to carry its burden of proving that Rocket Lawyer’s advertisements actually deceive consumers.
The denial of summary judgment means that the case will proceed towards trial. This lawsuit could have potential implications for other businesses that use the term “free” in their advertisements as well as offering consumers a negative option enrollment plan. We will continue to follow the case here.
Google recently announced that it would be taking action to demote websites that profit from the use of mugshot photos. These mugshot sites compile booking photographs taken after people’s arrests and publish them along with the arrestees’ names and information concerning the charges against them. Individuals who want their mugshot and arrest record deleted from the site usually must pay a fee ranging anywhere from $10 to $400. Until recently, when a Google user searched the Internet for the name of a recent arrestee, the search hits would include, and often prioritize, mugshot sites. Owners of those sites were content with that outcome; many others were not.
New York Times writer David Segal was one of the latter. In a recent article, Segal took Google to task for not penalizing mugshot sites, which many believe traffic in exploitation. Segal argued that Google should take corrective action because it had prioritized the sites in contravention of its own stated corporate goal that favors original web content. Mugshots do not offer original content; instead, they gather and use images and text from third-party sources.
Before his article ran, Segal contacted Google to discuss the issue. Google responded that it had been working to address the problem in a consistent way. Days later, a Google spokesperson confirmed that mugshot sites do not comply with one of the search giant’s guidelines. To address the problem, Google amended its algorithm, presumably to disfavor sites without original content.
Consequently, mugshot sites are now pushed off the front page of Google search results. People digging for dirt now have to look a little bit harder.
Others who object to mugshot sites have taken the fight to regulators and legislators. On October 7, the Maryland Consumer Protection Division settled its case against the owner of Joomsef.net for false and deceptive advertising. Joomsef’s owner, Stanislav Komsky, published information on the site about traffic offenses, but added statements falsely suggesting there had been an arrest. Persons identified on the site had to pay $40 to $90 to have the information removed. As part of the settlement, Komsky must take down the site, return all payments to consumers, and pay a penalty of $7,500.
Other states are addressing the problem through legislation. Segal points out that Oregon and Georgia have passed laws this year giving site owners 30 days to take down an image, free of charge, if an individual proves that he or she was exonerated or that the individual’s record has been expunged. Utah attacked the problem another way. There, sheriffs are prohibited from giving out headshots to websites that charge for deleting them. Lawmakers in other states, like Florida Representative Carl Zimmerman, have introduced legislation targeting the sites, but many of those bills died from lack of support.
These acts of government are constrained, as they should be, in view of free-speech guarantees under the First Amendment. By contrast, the private sector is not so limited and, therefore, may end up striking the decisive blow against mugshot sites. Things are heading in that direction. MasterCard, Discover, American Express, and PayPal recently pledged to sever all ties with mugshot sites, and Visa has asked merchant banks to investigate the practices of the sites.
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.
It’s quite clear that the Federal Trade Commission and the Federal Communications Commission view existing federal consumer protection and communications statutes as fully applicable to new modes of communication such as texting. One excellent recent example is the FTC’s stipulated settlement, including a payment of $1 million, with a debt collection agency that had sent out text messages in order to collect debts.
The FTC had filed suit under the Fair Debt Collection Practices Act (FDCPA) against National Attorney Collection Services, Inc., National Attorney Services LLC, and Archie Donovan (as an individual). This appears to be the first FTC complaint alleging the illegal use of text messaging to collect consumer debts. In addition, the defendants were also alleged to have violated the FDCPA in more traditional ways by publicly revealing consumer debts to family members and co-workers, sending mailings that had a picture on the envelope of an outstretched arm shaking out an upside-down consumer to empty the money in their pockets, and falsely portraying themselves as law firms or attorneys in phone calls and mailings, as well as in text messages. Of course, the “older” methods of violations were troublesome in and of themselves, but there were two specific points that we see as trend-setting in FTC enforcement.
The first point is the FTC’s emphasis that the medium of text messages does not change disclosure obligations under the FDCPA. The FTC has continued to crack down on illegal behavior that may be carried out by non-traditional means. As Jessica Rich, director of the FTC’s Bureau of Consumer Protection, has said, “No matter how debt collectors communicate with consumers — by mail, by phone, by text or some other way — they have to follow the law.”
The consumer protections in the FDCPA that require the disclosure in initial communications that the company is a debt collector and that any communications may be used to collect a debt apply equally to text messages, even though there may be significant space and size limitations. Likewise, any follow-up text message must state that the communication comes from a debt collector.
The second noteworthy point was the level of consent required by the stipulated order. The stipulated order provides that “express consent” shall mean that prior to sending a text message to a consumer’s mobile telephone: “(i) the Defendants . . . shall have clearly and prominently disclosed that the debtor may receive collection text messages on mobile phone numbers . . . in connection with the transaction that is the subject of the text message; and (ii) the individual has taken an additional affirmative step, including a signature or electronic signature, that indicates their agreement to receive such contacts.”
The FTC appears to have adopted a more stringent definition of consent (similar to the FCC) and is using the stipulated order as a means of notifying companies and consumers of the higher standard. Of course, it is possible to argue that the FTC is only requiring these particular defendants to meet the higher standard because of their alleged prior bad acts. However, we believe it more likely that the FTC is attempting to enforce a standard of express consent similar to that which the FCC has recently promulgated. Consequently, all companies are well advised to meet this higher standard of consent.
The FTC has now put the industry on alert to ensure that their text messages comply with any applicable law. The idiosyncrasies of modern methods of communication do not limit the compliance obligation. Ignorance is not a defense, even though Donovan’s attorney said that “the companies are now in compliance,” and that “nobody was intending to violate the law.”
The U.S. Court of Appeals for the Fourth Circuit recently ruled that the Telephone Consumer Protection Act (TCPA) does not violate the First Amendment by requiring robocallers to identify themselves when making calls.
Three months before the Maryland gubernatorial election in 2010, political consultant Julius Henson and his company Universal Elections, Inc., were hired to assist with efforts for the Republican candidate. On Election Day, Universal Elections made 112,000 robocalls to voters that did not identify the campaign as the source of the message, nor did the calls include the campaign’s phone number. The State of Maryland filed a civil suit against Henson and Universal Elections for violating the TCPA. The state alleged that the defendants violated the TCPA by failing to identify the campaign as the sponsor of the message as required under the statute.
The TCPA and its implementing regulations require that automated and prerecorded messages state clearly at the beginning of the message the identity of the business, individual, or other entity that is responsible for initiating the call. If a business or other corporate entity is responsible, the prerecorded voice message must contain that entity’s official business name. In addition, the telephone number of the business must be provided either during or after the prerecorded voice message. This disclosure applies regardless of the content of the message.
Political calls are exempt from some of the TCPA’s requirements, but other requirements do apply — including the disclosure requirement at issue here and the restrictions on autodialed or prerecorded calls or texts to wireless phones, which require prior express consent. Last year the Federal Communications Commission issued an enforcement advisory regarding political robocalls to cellphones and cited two marketing companies for making millions of illegal robocalls.
In its supplemental motion to dismiss, the defendants asserted a First Amendment defense, arguing that the TCPA is a content-based burden on political speech that cannot withstand a high strict-scrutiny standard of review. The United States intervened to defend the constitutionality of the TCPA. The district court ruled in favor of Maryland, holding that the TCPA withstands First Amendment challenges, and granted a $1 million judgment in favor of the state.
The Fourth Circuit affirmed the district court. The appeals court had previously issued the opinion in July, but as an unpublished opinion. The court issued an order amending its previous opinion to change it to a published opinion after a request from the government that it be published.
The Fourth Circuit held that the TCPA provisions requiring all automated and prerecorded telephone messages to disclose the source of the message are content-neutral and thus subject to an intermediate scrutiny level of review. Content-neutral laws that regulate speech are valid if they further a substantial governmental interest. The Fourth Circuit noted that at least three important governmental interests are advanced by the TCPA’s identity disclosure provision, including protecting residential privacy, promoting disclosure to avoid misleading recipients of recorded calls, and promoting effective law enforcement. Since the TCPA advances important governmental interests and the appellants did not raise an argument to the contrary, the Fourth Circuit affirmed that the TCPA’s identity disclosure provisions are constitutional.
TCPA litigation continues to increase, and potential liability can be significant. All businesses should review their TCPA compliance policies carefully to ensure that their procedures and scripts comply with all requirements. In addition to the identification requirements that have been in effect for many years, companies should make sure that they are prepared for the upcoming TCPA rule changes. These changes will require a called party’s prior express written consent for autodialed or prerecorded calls to wireless phone numbers and for prerecorded telemarketing calls to residential lines, among other requirements.
While Google is already subject to commitments it made to the FTC regarding the requirement to afford advertisers non-discriminatory access to its search engine, the FTC’s latest guidance makes clear that Google and other search engines must also maintain clear disclosures to the public about sponsored content in search results.
On June 24, 2013, in a series of letters to general search engines such as Google, Yahoo, and Ask.com, as well as to specialized search engines, the FTC issued updated guidance concerning disclosures regarding paid advertisements in search results.
This latest FTC action follows on the heels of the Commission’s recent updates to the Dot Com Disclosures and the updated Endorsements and Testimonials Guides. The FTC’s letters came in response to industry and consumer organizations’ requests to the Commission to update its policies on search engine results, last released in 2002. The FTC also noted that it has observed a decline in search engines’ compliance since 2002.
The FTC’s central concern, first articulated in 2002, remains the problem that consumers may be deceived in violation of Section 5 of the FTC Act unless search engines clearly and prominently distinguish advertising from natural search results.
Consumers assume that search results reflect the most relevant results. When results appear because the advertiser has paid a search engine for, say, prominent placement, that placement could be deceptive to consumers if they are unaware of the commercial relationship between the advertiser and the search engine.
The growth of mobile commerce in particular has spurred the FTC to issue new guidelines. Search results on a mobile phone screens are, by their nature, small, and consumers could be easily confused by paid search results if the “paid” nature of those results is not clear.
In the new guidance, the FTC states that if search engines continue to distinguish advertising results by giving a different background color or shading combined with a text label (such as “sponsored” or “ad”), the search engines should consider multiple factors to ensure that any labels and visual cues are sufficiently “noticeable and understandable” to consumers. The agency clarified that there is no “one size fits all” and that search engines may use various methods, provided the disclosures are noticeable and understandable.
Proper disclosures, according to the FTC, include the following:
• Visual Cues – Search engines must select hues of sufficient luminosity to account for varying monitor types, technology settings, and lighting conditions. The FTC notes that search engines should consider using web pages of different luminosities for mobile devices and desktop computers. Further, the FTC recommends that search engines should use:
o more prominent shading that has a clear outline;
o a prominent border that distinctly sets off advertising from the natural search results; or
o both prominent shading and a border
• Text Labels – The FTC asserts that text labels must be used in addition to the visual cues a search engine may use to distinguish advertising. Text labels must:
o use language that explicitly and unambiguously conveys that a search result is advertising;
o be large and visible enough for consumers to notice it;
o be located near the search results (or group of search results) that it qualifies and where consumers will see it; and
o be placed immediately in front of an advertising result, or in the upper-left hand corner of an ad block, including any grouping of paid specialized results in adequately sized and colored font.
The new guidance also recognizes that technology will continue to evolve, such as voice assistants on mobile devices (e.g., the iPhone’s “Siri”). While technology may change, the new guidance makes clear that the FTC Act’s Section 5 prohibition on deceptive practices remains. Therefore, businesses must make sure that they differentiate advertising from other information. For instance, if a voice interface is used to deliver search results (for example, “find me a Mexican restaurant”) the search engine should disclose audibly any paid advertisements in adequate volume and cadence for ordinary listeners to hear and comprehend.
The FTC continues to be vigilant in monitoring the online marketplace. Search engines and advertisers need to review their practices, keeping in mind that disclosures that may be readily apparent on a desktop may be hidden on a mobile screen. As with the “Dot Com Disclosures,” the agency is providing guidance to businesses; however, FTC enforcement remains vigilant and companies that do not clearly disclose paid advertising in search results could face an FTC investigation.
Recently, the Consumer Financial Protection Bureau, the watchdog agency of the financial industry, has proved that it has considerable bite. Created under the Dodd-Frank act to fill gaps in regulatory coverage, the CFPB’s mandate is to enforce federal regulations that, among other things, restrict “unfair deceptive or abusive acts or practices” in consumer finance. The CFPB in recent months announced two major debt relief crackdowns, the most recent of which permanently shut the doors of a Florida company.
Last month, the CFPB announced that it filed a complaint against a Florida debt-relief company that misled consumers across the country by charging upfront fees for debt-relief services without actually settling most of the consumers’ debts. According to the complaint, the defendants engaged in abusive practices by knowingly enrolling vulnerable consumers who had inadequate incomes to complete debt-relief programs. The complaint charged American Debt Settlement Solutions, Inc. (ADSS) and its owner, Michael DiPanni, with actions that were not just unfair and deceptive, but also abusive. Indeed, this case if the first time that the CFPB in its short history has enforced this prohibition on “abusive” acts or practices.
While “unfair” and “deceptive” are familiar terms to anyone who follows the Federal Trade Commission, the term “abusive” is new to Dodd-Frank and has been the subject of much consternation among Republicans in Congress, who consider it too vague. With this complaint, the CFPB provided what may be its first example of the type of conduct it will consider “abusive.” ADSS allegedly collected about $500,000 in fees from hundreds of consumers in multiple states, charging illegal upfront fees for debt-relief services and “falsely promising them it would begin to settle their debts within three to six months when, in reality, services rarely materialized.
The CFPB said the actions were “abusive” because consumers reasonably relied on the company to “act in their interest by enrolling them in a debt-relief program that they can be reasonably expected to complete, and which will therefore result in the negotiation, settlement, reduction, or alteration of the terms of their debts.” The CFPB simultaneously filed a proposed consent order that would settle the matter by halting the company’s operations and imposing a $15,000 fine.
ADSS and its owner may have walked away relatively unscathed, with only a civil penalty, but others caught in the CFPB’s cross hairs have not been as fortunate. Earlier this year, the CFPB filed suit against two lawyers and two debt relief companies in New York, alleging that they charged thousands of consumers illegal advance fees and left some worse off financially, while illegally profiting themselves. One of the lawyers, Michael Levitis, also faces mail and wire fraud charges brought by the Manhattan U.S. Attorney’s Office – the first-ever criminal charges stemming from a CFPB referral. What’s notable in this complaint is that the acts are described as both deceptive and unfair, but not as abusive.
Although a relatively new agency, the CFPB is proving that it has the chops to take down offenders in the financial industry. Both the Florida and New York cases are signs of future enforcement, and they send a stern warning to offenders – if you prey on vulnerable consumers, be prepared for a fight.
Ignorance of the law is no excuse; nor is (willful) ignorance of a business partner’s illegal activities.
That’s a lesson to be learned from a recent amended complaint filed by the FTC which named a payment processor in its complaint against a telemarketer that allegedly engaged in a scam concerning credit card interest rate reduction. The Commission originally filed suit against the telemarketing company, Innovative Wealth Builders, Inc., and its owners in January for misrepresenting the debt relief service they were selling, charging a fee before providing debt relief services, and billing consumers without their express informed consent. The January action resulted in the temporary shutdown of the company’s operations pending outcome of the suit.
But earlier this month, the Commission filed an amended complaint, adding charges against Independent Resources Network Corp., IWB’s payment processor. The payment processor was accused of assisting and facilitating IWB’s deceptive practices, in violation of the Telemarketing Sales Rule (TSR). 16 C.F.R. § 310.3(b).
The TSR was created by the FTC in 1995 at the direction of Congress, which directed the Commission to proscribe rules to address abusive and deceptive telemarketing acts. The FTC has amended the TSR several times in order to respond to developments in telemarketing schemes. The amendments allow for liability for third parties such as payment processors and lead generators that have provided “substantial assistance or support” to any seller or telemarketer while knowing, or consciously avoiding knowing, that the seller or telemarketer is engaged in activity in violation of the TSR.
In the FTC’s complaint against IRN, the Commission notes that IRN “processed millions of dollars of credit card transactions for IWB, thereby earning considerable fees for itself.” The complaint identifies several indicators that would have, or should have, put IRN on notice of IWB’s practices in violation of the TSR, including the following:
• IWB sent IRN copies of company documents including, but not limited to, telemarketing scripts and samples of the IWB defendants’ “financial plan”
• IRN was aware that IWB had a variety of complaints on consumer websites
• IWB had an “F” rating with Better Business Bureau and IRN accessed the BBB website several times
• IRN received thousands of copies of chargeback disputes initiated by dissatisfied consumers
• IRN received multiple fraud alerts from Discover regarding IWB
Instead of ceasing to process transactions for IWB, IRN responded to these “red flags” by increasing the percentage it withheld from transactions processed for the telemarketer and holding such sums in a reserve account.
Some takeaways from the complaint and other FTC developments: if you are going to invest in basic due diligence to determine the risk level and credibility of a prospective account, you should probably follow through with your findings, following the letter of the law. The FTC recently issued additional proposed rule changes to the TSR to address more payment processing concerns.
“Cramming” – while it sounds like the experience of being in the middle row of a cross-country flight – actually refers to unauthorized charges on phone bills. Residential and business telecommunications customers have experienced cramming on their wireline bills for years, particularly for premium and other pay-per-call services. And the FTC has brought nearly two dozen cases against those companies.
With so many U.S. consumers using mobile phones (and many replacing their wireline phones and relying on wireless service exclusively), cramming has migrated to mobile phone bills. We have previously discussed the FTC’s ongoing review of mobile payments and the agency’s continuing concerns with cramming practices.
Last week, the FTC filed its first legal action to shut down a mobile cramming operation. In federal court in Georgia, the FTC alleges that since 2011, Wise Media, LLC, its CEO Brian Buckley, and its owner Winston Deloney have made millions of dollars by placing unauthorized charges for premium text messages services offering “horoscopes, flirting, love tips and other information” on consumers’ mobile phone bills. The FTC’s complaint also names Concrete Marketing Research, LLC, a company owned by Deloney, as having received funds earned through the allegedly unfair and deceptive practices.
According to the FTC, consumers did not “opt in” to receive these text message services, for which Wise Media charged $9.99 per month. The charges appeared on the bills and were repeated each month. Many consumers did not notice the charges and simply paid them. Some consumers noticed the charges but had great difficulty finding a contact for Wise Media, according to the complaint. Other consumers contacted the company, indicating they had not authorized the charges, but were still charged. Still others allegedly were told they would receive refunds, but Wise Media never issued those refunds. Instead, the underlying mobile phone carriers often ended up refunding money to complaining customers. The FTC noted that mobile phone carriers had experienced a high rate of complaints on Wise Media charges. One unnamed major phone carrier had even terminated Wise Media based on its excessive rates.
The FTC’s complaint charges that Wise Media and the other defendants violated Section 5 of the FTC Act by representing that consumers were obligated to pay for premium text services they never ordered. According to the FTC, these representations were false or misleading statements, constituting deceptive acts or practices under Section 5. Further, the complaint states that the placing of charges on consumers’ mobile phone bills without consumers’ “express informed consent” constituted unfair acts and practices also prohibited by Section 5.
The agency is seeking substantial relief and penalties from Wise Media and the other defendants. The FTC’s requested relief includes a request for a temporary and preliminary injunction to prevent future violations of the FTC Act by defendants, an asset freeze, and the refund of monies paid and “the disgorgement of ill-gotten monies.” In fact, after the filing of the complaint, Wise Media and the other defendants entered into a stipulation with the FTC agreeing to a temporary restraining order, an asset freeze, and other relief. The court also ordered that a receiver be appointed to oversee Wise Media’s assets and is requiring financial disclosures by the defendants.
This action signals that the FTC is continuing to monitor closely the mobile payment marketplace and that it will use its broad Section 5 authority to curb alleged deceptive practices in this medium. In fact, on May 8, the FTC staff will host a roundtable discussion on preventing mobile cramming, which will feature consumer advocates, industry leaders, and government regulators. It will be interesting to see what actions the major mobile carriers may propose, as the carriers have been on the receiving end of many of the consumer complaints (and refunds) resulting from third-party charges.
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.