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?
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.
On April 1, 2011, David Deitch started work as a partner at the Ifrah Law Firm. David is an experienced trial lawyer and former Department of Justice counterterrorism prosecutor. Because he will now be a regular contributor to this blog, the editor of FTC Beat conducted this brief interview to introduce David to our readers. Please feel free to ask him your own questions in the comments section and at the end of this post.
Q. Can you tell us a little about your background — where have you worked, and what kinds of cases have you tried?
A. In the 20-plus years since I graduated law school, the largest portion of my career has been spent as a state and federal prosecutor. I worked for the Manhattan District Attorney’s Office in the early 1990s, and later worked as a federal prosecutor, as an Associate Independent Counsel, as an Assistant United States Attorney, and as a trial lawyer for the Department of Justice’s Counterterrorism Section. I have also worked for law firms such as Covington & Burling, Schulte Roth & Zabel, and Janis Schuelke & Wechsler.
Most of my trial work has involved criminal cases. The most prominent cases were the two trials for which I was co-lead counsel while I was with the Counterterrorism Section, in which defendants were charged with providing material support to terrorist organizations.
Q. In addition to counterterrorism cases, what other types of white-collar cases have you worked on?
A. My background in white-collar criminal law comes from two sources. First, my work on counterterrorism cases often included a lot of the same kinds of investigative processes, issues and charges that are usually associated with white-collar crime. For example, in many cases, the focus of investigation and prosecution was on the illegal movement of money, and the charges under consideration involved money laundering. Other cases may have involved other facts and charges that are not as different from traditional white-collar work as you might expect. Second, since I left the government in January 2007, I have been involved with a wide variety of investigations and prosecutions of white-collar criminal cases. These included internal investigations undertaken on behalf of the boards of directors of large corporations, as well as representation of individuals charged with violating federal criminal law. The subjects of these matters included wire fraud, bribery and gratuities violations, violations of the Foreign Corrupt Practices Act, and other federal crimes, as well as forfeiture statutes.
Q. Why did you choose to join Ifrah Law?
A. I joined Ifrah Law for a number of reasons. The firm offers attentive, expert and effective legal representation to its clients, and these are the qualities of service that I have always sought to bring to my clients. Ifrah Law also has a strong client base in a number of different industries. I am looking forward to a long and successful relationship with the firm.
Q. What do you see as some of the major trends in white-collar law and litigation in this decade?
There are a few prominent trends. The Department of Justice has made no secret about its vigorous efforts to seek out and prosecute companies and individuals who violate the Foreign Corrupt Practices Act, and law enforcement agencies at all levels are looking hard at some of the economic activity involving mortgages and investments that are viewed as being related to the downturn in the economy of the last few years.
These vigorous efforts at enforcement have also seen the use of investigative tools in white-collar cases that were once traditionally reserved for investigations into other kinds of crimes. The best example of that is the use of wiretaps in the Rajratnam insider trading case. As readers of the Crime in the Suites blog may know, Jeff Ifrah has been quoted in the media discussing that matter.
Q. Can you mention some steps that companies can take, as a matter of corporate policy, to avoid finding themselves in the cross hairs of prosecutors?
A. There are certainly no guarantees, but companies must train their employees about the rules and regulations that govern their employees’ activities. Then, I suggest that companies institute a vigorous compliance program that reinforces that training and create systems designed to identify employees who violate the law. Finally, if a company receives information that an employee has violated the law, it should move promptly to investigate the allegations so that company counsel can advise the company on the best course of action to protect the company’s interests.
This is the third of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s blogs.
1. Will the Internet Taint a Loughner Verdict?
Is it impossible for accused Tucson shooter Jared Lee Loughner to get a fair trial because jurors will inevitably be looking online for information about the shootings that is inadmissible in court? We think not – and we propose a workable solution to an increasingly common problem.
2. The ‘Delete’ Key Doesn’t Help These Insider-Trading Defendants
These hedge-fund employees evidently thought that hitting the “delete” key and destroying hard drives was all they had to do to conceal their conduct. We explain why that doesn’t work, and we look ahead to the next steps in a major insider-trading probe that has implicated traders at major Wall Street firms.
3. Big Boeing Award, New Rules Won’t End DOD Conflicts of Interest
After a very convoluted process, the Boeing Co. received a $35 billion contract to build refueling tankers for the Air Force. New conflict of interest rules are in place, but we explain why the defense industry and the Pentagon will probably remain cozy.
4. Ifrah Quoted in News Outlets Coast to Coast
The Ifrah Law firm has been quoted lately in news outlets everywhere from New York to Seattle. We give a quick summary of those quotes on issues relating to white-collar crime and marketing fraud.
5. With a Veto, N.J. Governor Stays Out of the Game
To many people’s surprise, the governor of New Jersey vetoed a bill that would have permitted online gaming within his state. We explain why he did that and what the next steps are likely to be in state efforts to legalize e-gaming.
6. Are DOJ, SEC Getting Too Cozy?
Sen. Charles Grassley (R-Iowa) has asked the SEC and the Justice Department to explain why they are sharing information about their investigations with the targets of the probes. We look into the inter-agency cooperation and conflicts and we see matters differently than the senator did.
7. The Recession’s Effect on Federal Prison Sentences
Have the recession, and the cost-cutting measures that it necessitated, led to an increase in good-time credits in the federal system in order to save taxpayer dollars? In an article published in the Los Angeles Daily Journal, we say that may be the case, and we endorse that development.
8. FTC Cracks Down on Merchants’ Empty Promises
On March 2, 2011, the FTC took the unusual step of convening a press conference, in person and online, to describe a multi-agency law enforcement initiative aimed at cracking down on misleading “work from home” and other business opportunity offers. We were among the first observers to listen and, the next day, to be in a position to describe what the FTC is up to.
This is the second of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s two blogs.
1. Is D.C. on the Way to Legalizing Online Poker?
On February 2, we were among the first media outlets to point out that a little-noticed amendment could give D.C. residents the legal right to play online poker through a new system administered by the D.C. Lottery. This would put the District, surprisingly, in the forefront of the movement to legalize Internet poker. It’s an issue that a lot of people will be watching.
2. New DOJ Unit Will Keep Eye on Prosecutors’ Misconduct
The Department of Justice’s new Professional Misconduct Review Unit was created to investigate and punish instances of misconduct by DOJ attorneys. Our post examines this new unit and concludes that the DOJ has a long way to go to restore full public confidence.
3. Those iPad Hackers Were Probably Seeking Publicity, Not Profit
What was the story behind the two iPad hackers who obtained the personal data of approximately 120,000 iPad users by exploiting a security weakness in AT&T’s software? They’re now facing potential jail time, but we concluded that they were probably just trying to show where the weaknesses were in the software, not to profit from the data that they got hold of.
4. Is This Domain Name Seizure a Bad Omen for Internet Freedom?
Recently, a U.S. magistrate seized 10 websites that prosecutors say were streaming live sports events in violation of copyright. We were concerned that prosecutors might soon go too far in these efforts and try to ask for the seizure of any domain or website that they just find objectionable.
5. Facebook Friends and Judicial Ethics
We looked at an Ohio state board’s ruling that a judge may become a Facebook “friend” of an attorney as long as the judge takes care to protect the integrity and impartiality of the judiciary. This decision is one indication that states are looking to impose content-based restrictions regarding Internet use and social media, rather than broad prohibitions on the use of an entire website.
6. Middlemen Run Afoul of FTC Suspicions
We took a look at a recent case that the Federal Trade Commission settled with three companies that had advertised to consumers that they would provide debt relief services, while in fact they simply were middlemen who put people in touch with others who were in the business of debt relief. Our post examines why FTC actions like this one can prevent middlemen from entering a market and can actually be harmful to consumers.
7. FTC Looks at Football Helmet Safety Claims
In view of the growing concern over concussions in the NFL, we took a look at safety claims for football helmets. Sen. Tom Udall (D-N.M.) asked the FTC to look into claims made by helmet manufacturers. We discussed what might be at stake for the companies and for young football players.
8. FTC Cracks Down on Bogus Virus-Removal Software
The FTC recently took action against companies that placed online advertisements falsely stating that users’ computers are infected with viruses – and then sold them bogus security software. We noted that cases like this can serve as a reminder that the FTC is likely to target sellers who blatantly cloak their advertisements in deceptive fear tactics.
9. Wu Appointment May Mean More Regulation to Come
We believe the FTC’s recent appointment of Columbia Law Professor Tim Wu as a member of the FTC’s Office of Policy Planning could be a harbinger of more market-stifling regulation to come, and we urged that the FTC should stick to protecting consumers and not to look to fix things that aren’t broken.
10. Chargebacks Can Be a Major Problem for Small Businesses
In this post, a follow-on to a Wall Street Journal article that identified chargebacks as a major problem for small businesses, we noted that credit card companies often take the side of the purchaser in reversing a charge and that it can often take a long time for a merchant to be re-credited with a sale. We expressed hope that consumers would realize that their actions can harm merchants that often can’t afford these losses and that they would think twice before requesting a chargeback.
This is the first of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s two blogs.
1. Can Police Read a Suspect’s Text Messages Without a Warrant?
What happens when the usual rules of search and seizure collide with the new world of information in which a tiny phone can hold as much data as a computer? On January 19, we looked at a California Supreme Court decision that in a warrantless police search after an arrest, a cell phone in a defendant’s pocket isn’t treated any differently from a pack of cigarettes or a note pad.
2. E-Cigarettes, the Internet, and the FTC
Electronic cigarettes are battery-operated nicotine delivery devices that are meant to replicate the flavor and sensation of smoking a tobacco cigarette. On January 20, we made some predictions about how the FTC will be regarding online advertising strategies for this new product and what online advertisers should do about it.
3. ‘Fake’ Reviews and Endorsements Catch the FTC’s Attention
On January 24, we took a look at the FTC’s first case that focused on “fake” product reviews and explained what this means for other affiliate marketers. The FTC alleged that a PR firm called Reverb Communications had its employees pose as ordinary consumers when they posted online iTunes product reviews and that it didn’t disclose the relationship. We discuss why Reverb’s settlement set important precedent for online advertisers, affiliate marketers and bloggers.
4. An Unfair Sentence for Slaughterhouse Plant Manager?
A few months ago, Sholom Rubashkin, the former plant manager at Agriprocessors, Inc., in Iowa, was sentenced to 27 years in prison for fraud in his operation of the kosher slaughterhouse. The case drew national attention. Recently, three influential legal advocacy groups filed amicus briefs in a federal appeals arguing that the sentence is excessive and urging that Rubashkin be resentenced. On January 25, we examined these amicus briefs and their arguments.
Late last month, we noted a highly unusual decision by U.S. Magistrate Judge Alan Kay in the District of Columbia to order the Federal Trade Commission to respond to interrogatories about a subpoena it had issued to Paul Bisaro, the CEO of Watson Pharmaceuticals, in a generic-drug investigation.
Normally, that sort of inquiry into the motivations behind an FTC subpoena is off limits. The only exception, which is rarely invoked, is that limited discovery can be ordered to ensure that enforcement of the subpoena would not amount to an abuse of process.
Kay’s inquiry seems to have found nothing terribly amiss in the FTC’s motivations for the subpoena, as he has just recommended to U.S. District Judge Colleen Kollar-Kotelly that the subpoena to Bisaro should be enforced. Judge Kollar-Kotelly had referred the dispute to Kay, and his findings can now be appealed to Judge Kollar-Kotelly.
Kay said that the case law requires that the court enforce the subpoena, as long as the FTC could show a proper purpose for it, even though there were allegations that the subpoena also had an improper purpose.
Watson had contended that the FTC was using its investigative powers improperly. The commission says it is looking into whether there was a possibly anti-competitive agreement that could have kept a generic form of a sleep disorder drug off the market for a substantial period of time, thus harming consumers.
Watson and Bisaro had asserted that the FTC was using its investigative tools to try to pressure Watson, a generic-drug company, to enter into a deal with a third party and to relinquish its statutory rights to exclusivity for the drug.
However, Kay wrote in his August 17, 2010, report to Judge Kollar-Kotelly that Bisaro may still have information that would be relevant to a legitimate inquiry by the FTC and that “enforcement of a subpoena is called for as long as a proper purpose does exist.”
Kay did call the FTC’s approach “questionable” but said it is the business of the legislature, not the judiciary, to look into the practices of regulatory agencies.
It appears that a direct challenge to the FTC’s practices has been averted. However, the commission may feel chastened by the fact that a federal magistrate chose to order interrogatories to flesh out the purpose behind a subpoena.
Watson might have done better to try to resolve the issue with the FTC after the first, favorable ruling, rather than letting the matter go back to Magistrate Kay for another ruling, especially after he too knew that a legitimate enforcement purpose existed.
For further thoughts on this matter, see the Washington Legal Foundation’s Legal Pulse commentary on this case.
When a U.S. magistrate judge in the District of Columbia issued his ruling in Federal Trade Commission v. Bisaro on July 13, 2010, permitting limited discovery of certain FTC officials regarding an agency subpoena, it had been more than three decades since the D.C. Circuit had found that “extraordinary circumstances” were present that warranted discovery in a subpoena enforcement action.
Subpoena enforcement proceedings are typically “summary procedures.” However, upon a finding that extraordinary circumstances exist, the court may order limited discovery to ensure that enforcement of the subpoena would not amount to an abuse of process.
In opposing the FTC’s petition to enforce a subpoena requiring him to testify under oath, Paul M. Bisaro, CEO of Watson Pharmaceuticals, moved to compel limited discovery on whether the FTC was acting with an improper purpose in issuing the subpoena. Bisaro argued that the FTC had acted outside the scope of its regulatory and enforcement authority by using the subpoena to pressure Watson to enter a deal with another generic pharmaceutical company.
U.S. Magistrate Judge Alan Kay found the facts in Bisaro “extraordinary enough to grant very limited discovery.”
In a finding that will no doubt be embarrassing to the Commission, Kay found that the FTC may have exceeded its authority by using its investigative power to pressure Watson to enter into a business deal that the FTC considers desirable. Citing the U.S. Supreme Court’s 1964 decision in United States v. Powell, Kay said it is an abuse of process to enforce an agency summons that “had been issued for an improper purpose, such as to harass the [recipient] or to put pressure on him to settle a collateral dispute.” Kay ordered the FTC to answer interrogatories but stopped short of requiring a key agency official, Markus Meier, to sit for a deposition.
The case will likely fuel the debate as to just how far the FTC will go to achieve a ban on so-called reverse-payment patent settlements between generic and branded drug firms. Bisaro argued that Meier, the assistant director of the FTC’s Bureau of Competition’s Health Care Division, expressly warned Watson’s counsel that failure to pursue the FTC’s suggested course would likely cause the FTC “Front Office” to initiate an investigation.
Kay found this credible and noted that the FTC had admitted, “If Watson had just agreed to [do what the FTC wanted] it never would have pursued this investigation.”
Kay rejected the FTC’s argument that “an administrative subpoena must be enforced whenever a valid purpose appears, even if an otherwise improper purpose also appeared.”
Prior to the Bisaro decision, the D.C. Circuit had only found one instance where extraordinary circumstances existed to warrant discovery. See United States v. Fensterwald, 553 F.2d 231, 232 (D.C. Cir. 1977) (finding limited discovery into IRS audit selection procedure appropriate where lawyer who headed a committee investigating the IRS was then selected for special audit).