The FTC recently filed suit against ten operations with websites that market acai berry weight loss products. The FTC alleged that the companies’ websites – which look like news websites – deceived consumers who thought the sites were credible journalistic outlets as opposed to elaborate marketing schemes.
According to the FTC, the sites contained titles such as “News 6 News Alerts,” “Health News Health Alerts,” or “Health 5 Beat Health News” and would include the names and logos of actual major media outlets such as ABC, Fox News, CBS, CNN, USA Today and Consumer Reports. The sites published news-type headlines, articles with content that appeared to be objective investigative reporting, and supposed independent user comments at the end of the articles.
These websites, however, were made up entirely of marketing content to prompt consumers to click on hyperlinked acai berry weight loss product sites (which is how the website operators made money — when consumers clicked through to linked product sites and made purchases, the marketing site would receive a commission). This nature and purpose of the sites was not made clear to consumers – another failing alleged in the FTC’s suits.
The FTC’s action should come as no surprise to the defendant companies. Looking at a sample defendant company site (see, for example, the exhibit provided on the FTC’s Bureau of Consumer Protection blog) it seems pretty obvious that the marketing schemes of these companies attempted to entice consumers into believing their website content was objective news reporting. Such schemes seem textbook “deceptive” advertising as outlawed under the Federal Trade Commission Act.
Moreover, the FTC has been making noise over the last couple of years that should have put the companies on notice. Last August, the Commission succeeded in halting a similar deceptive scheme by Central Coast Nutraceuticals, Inc. regarding marketing of the very same product. And back in 2009, the FTC published guidelines on use of Testimonials and Endorsements in advertising, outlining how relationships with producers should be disclosed.
It is possible that the defendant companies knew of, but merely ignored, the fact that their marketing schemes could result in FTC action. They may have opted for temporary profit over long-run regulatory risk. But when the regulatory risk could mean frozen assets and disgorgement of profits, marketers should think twice before selling “by any means necessary.”
A new Illinois law purporting to preserve and create jobs in the state may soon be putting Illinois affiliates out of business. Governor Pat Quinn recently signed a law requiring online retailers to collect sales tax on purchases made in Illinois, on the premise that the companies have a presence in the state due to in-state affiliates. This follows the Supreme Court ruling in Quill v. North Dakota, 504 U.S. 298 (1992), which stated that vendors are only required to track and collect sales tax on transactions for states in which they have a physical presence.
Illinois lawmakers claim that the bill will level the playing field for small businesses to compete with online merchants, and will generate $150 million in tax revenues annually. However, the plan could backfire on the state. Amazon.com, the online retailer at which the law is largely aimed, has responded by promising to terminate all of its Illinois affiliates in order to avoid charging the state sales tax. Other major online merchants such as Overstock.com are vowing to follow suit.
Illinois has cause to believe that Amazon will follow through with its threat. It has responded to similar laws in Colorado, North Carolina, and Rhode Island by terminating its contracts with affiliates in those states. In fact, officials at the Rhode Island Department of Revenue “do not believe that there has been any sales tax collected as a result of the Amazon legislation” according to Paul Dion, the head of the department’s revenue analysis-office.
Rather than support small businesses, this law will put Illinois affiliates out of business. We believe that this law unfairly targets internet affiliates, costing them their jobs and costing the state income tax revenue. Since the state will not generate additional sales tax if online retailers terminate their in-state affiliates, Illinois will be left in a worse position than it was before. We believe that this law punishes the small businesses which it purports to help, and that it should be repealed.
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.
But recent legislative and regulatory developments could recommend a different course for companies with a significant online presence. Companies may want to prepare to change their practices when it comes to the collection and use of consumer data obtained through tracking consumers’ online activities.
The announcement of the FTC’s settlement with Chitika comes on the heels of preliminary Senate committee hearings on online consumer privacy. The U.S. Senate Committee on Commerce, Science, and Transportation began hearings in March on the state of online consumer privacy and the potential need for protective statutory measures. The initial hearings, held March 16, focused on how online consumer information is collected, maintained and used.
At the March 16 hearings, FTC chairman Jon Leibowitz testified on the Commission’s December 2010 report on consumer online protections, which outlines the FTC’s Do Not Track program. The program – reflected in enhanced consumer controls of online tracking by Microsoft and Mozilla – would allow consumers to choose not to have their Internet browsing tracked by third parties.
Do Not Track is currently being promoted by the FTC, along with other measures, to inform consumers of safeguards against unwanted collection of personal data. With or without additional legislation, the Commission, according to Leibowitz’s testimony and the December 2010 report, is actively engaging in proactive measures to change consumer and business practices online and to undertake enforcement actions against companies whose data collection and dissemination may violate current laws.
Spam seems to be everywhere these days, and it has now invaded your wireless handheld.
Last month, the Federal Trade Commission filed its first lawsuit ever against an alleged perpetrator of “spam texting” – the practice of sending unsolicited commercial text messages to a large number of people.
The FTC is alleging that Phillip Flora of Huntington Beach, Calif., sent some five million unsolicited commercial texts to wireless handhelds to promote his debt relief and loan modification programs. Flora’s mass texting, according to the FTC, violated the Federal Trade Commission Act because his “acts or practices … are unfair.” Although the allegation may sound vague, a closer review of the FTCA and the FTC’s jurisdiction may show that the case against Flora has a substantial basis in law.
The FTC also charged Flora with other violations of the FTCA as well as of the CAN-SPAM Act, including deceiving consumers by representing a government affiliation and sending commercial e-mails without the required return address and opt-out provisions. The “unfairness” allegation, though, raises the most interesting questions under the law.
The statute that gives the FTC authority to prevent “unfair” commercial practices also limits the agency’s jurisdiction to those practices (1) causing substantial injury to consumers, (2) which are not reasonably avoidable, and (3) which are not outweighed by benefits to consumers or competition. In its suit against Flora, the FTC alleged that the mass spamming caused substantial injury since text recipients were often charged under their cell phone plans for text messages received. Recipients could not reasonably avoid the messages because the text spam was “foisted upon consumers,” including those who specifically requested to receive no more messages. As for the third part of the “unfairness” test, the FTC merely asserted that there were no benefits outweighing harm to consumers without elaborating.
The biggest question appears to be whether or not text spam in fact causes substantial injury to consumers. Can a charge of less than a dollar be considered substantial? The Commission itself has previously stated that it “is not concerned with trivial or merely speculative harms.” However, the FTC emphasized the large number of text spam recipients, and it has previously noted that a small harm to a large number of people could be considered substantial. Whether the court will agree is another question, but the FTC does appear to have decent arguments for why it has authority to pursue text spammers.
Consumers themselves have also been going after text spammers. Class actions have been filed recently against, for example, Domino’s Pizza, Burger King, and Simon & Schuster for their text advertising. These lawsuits, which allege violations of the Telephone Consumer Protection Act, have regularly resulted in multimillion-dollar settlements – including up to a $250 reimbursement to each text recipient.
This month, the Federal Trade Commission released its list of the top ten consumer complaints received by the agency in 2010. This list represents a good indication of some of the areas toward which the FTC may direct its resources and increase its scrutiny.
For the 11th year in a row, identity theft was the number one consumer complaint category. Approximately 19% of the complaints received in 2010 (or 250,854 out of the 1,339,265 complaints) were related to identity theft. Debt collection complaints were second among the top complaints received by the agency, and internet services were third.
“Imposter scams” also made the list for the first time, coming in at number 6. “Imposter scams” involve people who pose as friends, family, respected companies, or government agencies to get consumers to send them money. The rise in imposter scams has prompted the FTC to issue a new consumer alert, “Spotting an Imposter,” to help consumers avoid these commonplace scams.
The FTC Report also breaks down complaint data on a state-by-state basis. According to the report, residents of Colorado filed the most fraud complaints per capita, followed by Maryland. Residents of Florida and Arizona filed the most identity theft complaints.
The top 10 consumer complaints for 2010 were:
1. Identity Theft (19% of complaints received)
2. Debt Collection (11% of complaints received)
3. Internet Services (5% of complaints received)
4. Prizes, Sweepstakes and Lotteries (5% of complaints received)
5. Shop-at-home and Catalog Sales (4% of complaints received)
6. Imposter scams (4% of complaints received)
7. Internet Auctions (4% of complaints received)
8. Foreign Money/Counterfeit check Scams (3% of complaints received)
9. Telephone and Mobile Services (3% of complaints received)
10. Credit Cards (2% of complaints received)
The data comes from the Consumer Sentinel Network, a law enforcement database that also includes complaints filed with the Better Business Bureau, the U.S. Postal Inspection Service, and select state agencies. Total complaints for 2010 were slightly lower than those reported in 2009. A full list of the top FTC complaints for 2010 can be found on page 6 of the FTC report.
This is the fourth of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s blogs.
1. Proposed Gaming Bill Could Make Nevada First to Legalize Online Poker
Nevada, long an innovator in the gambling arena, may soon take another major step by becoming the first state to legalize online poker. We discuss the state’s importance in the gaming world, the chances of passage of the bill, and the groups that stand to benefit.
2. Brady Violation Leads to Reversal of Conviction in D.C.
When it comes to Brady violations, sometimes late is no better than never, it seems, as the D.C. Court of Appeals reverses a conviction for assault with intent to commit murder. We explain what information the prosecutors withheld and why it was important.
3. ‘Taking the Fifth’ Before Congress: A New Ethics Twist
It’s unethical for a prosecutor to put a witness on the stand with knowledge that the witness will exercise the privilege against self-incrimination. We look into a new D.C. Bar ethics opinion that gives a novel answer to the question of doing the same thing before a congressional committee.
4. Is FTC Action Needed Against Pricey Apps?
It’s true that children shouldn’t be buying expensive Smurfberries and other online goodies for their apps with real money (on Mom or Dad’s credit card). The FTC has been asked to take action. We discuss whether the agency is the right place to turn, or perhaps Mom and Dad are.
5. Does Google Need to Police Its Ads for Fraud?
There are unscrupulous merchants out there on the Internet. Does Google need to look into every advertiser before accepting its money? A consumer group’s letter to the FTC has awakened interest in this issue.
6. Online Sellers Need to Beware of State Attorneys General
A Philadelphia online electronics store is the target of Pennsylvania’s attorney general for alleged bait-and-switch practices. But it’s not just the state of origin that can target an online seller.
The Pennsylvania Attorney General filed a consumer protection lawsuit last month against Zoommania, LLC, a Philadelphia-based Internet electronics store, for a bait-and-switch scheme the company allegedly employed in online sales and for its creation of new websites to avoid negative customer feedback resulting from the scheme.
The complaint, which seeks restitution for consumers, alleges that the company’s websites would list inventory as being in stock, but when a consumer placed an order, he or she would receive a subsequent call or e-mail that the item requested was not in stock. A company representative would inform the consumer that he or she could receive the item in a timely manner by upgrading to a “kit” – i.e. a more costly bundled purchase of the requested item and other items. Without the upgrade, the company could not promise timely delivery. Not surprisingly, this tactic was not well received by customers who proceeded to fire off complaints on online forums, including on Yahoo and CNET. In response to all the negative feedback, the company merely set up new websites under which to operate, using the same bait-and-switch scheme.
Zoomania is just one of many online merchants under fire by various states’ attorneys general for employing such tactics. For instance, New York-based Starlight Camera & Video Inc. and Broadway Photo both recently entered settlement agreements with the Texas AG, agreeing to pay restitution to Texas customers. One of those companies also agreed to stop doing business in the state.
The Texas settlements show how one state’s laws and its law enforcers can reach businesses in other states. This may be a comfort to consumers who have been burned by online merchants. It also may be an important cost factor for merchants operating on the fringes of consumer protection laws: online merchants should be aware that they may be subject to government action in any state from which a customer made a purchase. Broadway Photo, for instance, signed an earlier settlement agreement with New York in 2009. That settlement did not prevent Texas, or any other state, from initiating an enforcement action. And, judging from the abundance of negative comments on online forums about these companies, other states may also pursue actions against them.
Indeed, online merchants employing envelope-pushing sales and marketing tactics should take a cue from online forums and consumer feedback. If lots of consumers are complaining, the government may not be far behind, as the volume of consumer complaints drives government enforcement action. Given the jurisdictional reach of state attorneys general across states, the threat of action can come from many directions. Instead of changing names, it may be better to start changing practices.
Do Google and other search engines have an obligation to screen their advertisers for those who may be perpetrating consumer fraud?
Google has said in the past that its AdWords Content Policy will reject advertisements for sites that make false claims and that it investigates and removes any ads that violate Google’s internal policies, but a recent letter sent by a public interest group to the Federal Trade Commission may prompt new interest in this issue.
In the letter sent to the FTC on February 8, 2011, the group Consumer Watchdog contended that Google and other search engines have essentially been acting as accomplices in consumer fraud. The letter specifically noted recent FTC probes into alleged mortgage scammers that prey on struggling homeowners seeking to avoid foreclosure. According to the group, Google has turned a blind eye to their doings and has facilitated the alleged frauds. In the past, however, no federal agency has attempted to hold a search engine responsible for frauds committed by its advertisers.
Recently, more than 25 foreclosure rescue marketers have been sued for deceptive advertising by the FTC, which is conducting a major investigation under “Operation Stolen Hope.” Consumer Watchdog claims that Google has been lax in preventing fraudulent advertising and is profiting from the deceptive marketers that pay thousands of dollars for prime advertising space on the search engine. Some of the ads in question can be found by using search terms such as “stop foreclosure” or “loan modification.” A “cost per click” for these search terms can cost upwards of eight dollars, meaning that advertisers pay Google that amount every time someone searches that term and clicks on that ad. This translates into a big payday for Google given the thousands of times per month people search those terms.
The February 8 letter to the FTC proposes five recommendations. The first recommendation is for Google to be more diligent in screening advertising in areas where fraud is known to be a serious problem. If screening ads is not feasible, Google should ban advertising in those areas completely. The second recommendation is for Google to use its advertising techniques to post public service ads countering the deceptive ads in areas where fraud is prevalent but legitimate firms also operate. The third recommendation proposes that Google should initiate and help set industry-wide standards to prevent fraudulent advertising on the Internet. The fourth r proposes that Google donate revenue it has received from questionable financial advertising to nonprofit groups that assist consumers with credit problems. The fifth recommendation asks the FTC to begin using its legal authority under the Lanham Act to seek injunctions against search providers that accept large inventories of advertising from marketing firms that the search engines have reason to believe are engaged in deceptive practices.
Consumer Watchdog says Google is not alone in accepting deceptive advertising. According to the group, other search engines, such as Microsoft’s Bing and Yahoo!, are also guilty of facilitating fraudulent advertising. Despite Google’s announced policy against these ads, Consumer Watchdog says that Google does not typically ban misleading ads from questionable advertisers until after a company is sued by federal regulators.
In the past, the FTC has tended to act only against the actual perpetrators of fraud and has not begun major investigations against search engines like Google. If the FTC does look into the actions that Consumer Watchdog is describing, it would definitely be worth watching.
Nobody ever went broke underestimating the apathy of the American parent.
If a parent drops off a child at a candy store, handing the child a credit card and saying nothing more than he’ll be back in 15 minutes, should that parent be angry with the candy store owner if the child ends up buying lots and lots of candy? Should the candy store owner have some special legal obligation to limit the price or quantity of candy that someone can purchase because his goods are more enticing than those sold at the neighboring hardware store?
This is a somewhat imperfect analogy to an issue recently raised with the FTC by three members of Congress. In early February, Rep. Edward Markey and Sens. Amy Klobuchar and Mark Pryor wrote to FTC Chairman Jon Leibowitz expressing concern over the ease with which children can rack up real dollars playing games on the Apple iPhone and iPad. The letters were sent after The Washington Post published an article on Apple’s in-app purchase system, which offers many apps for free download that subsequently charge for actions within the application. The big charging culprits are children’s games, such as Smurf’s Village and Tap Zoo. The article provided some fairly egregious examples of children charging hundreds of dollars to their parents’ iTunes accounts to decorate their virtual Smurf gardens and homes with not-so-virtual pricey smurfberries and the like.
Leibowitz responded to the letter by noting the FTC’s shared concern “that consumers, particularly children, are unlikely to understand the ramifications of these types of purchases.” He promised that the FTC would look into industry practices for the marketing and delivery of such applications. Leibowitz’s response also referenced the FTC settlement in the Reverb case .But this reference was not apropos: the case, which involved nondisclosures in product endorsements, had little to do with the issue at hand.
Admittedly, it does raise eyebrows that an app like Smurf’s Village, which clearly caters to young children, would charge exorbitant prices for in-game content. It may seem even more suspicious when the app itself is free to download.
But these red flags don’t mean that FTC action is necessary. Parents are first and foremost responsible for their children’s purchases. If parents dismissively hand their iPhones over to their children, without setting restrictions with the children or on the device, that’s primarily the parents’ problem.
The one major caveat is whether or not parents are aware that games like Smurf’s Village include real dollar purchase options. This is why the kid in the candy store with dad’s charge card is an imperfect analogy. A parent should know that there are monetary consequences to leaving a child with limitless purchasing power alone in a candy store. The same parent may not know that he’s giving that same purchasing power to his child when allowing his child to play a game on his iPhone.