Ifrah Law’s Semi-monthly Blog Wrap-up, February 1-18

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.

Read the full post here on the Crime in the Suites blog.

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.

Read the full post here on the Crime in the Suites blog.

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.

Read the full post here on the Crime in the Suites blog.

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.

Read the full post here on the Crime in the Suites blog.

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.

Read the full post here on the Crime in the Suites blog.

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.

Read the full post here on the FTC Beat blog.

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.

Read the full post here on the FTC Beat blog.

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.

Read the full post here on the FTC Beat blog.

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.

Read the full post here on the FTC Beat blog.

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.

Read the full post here on the FTC Beat blog.

Chargebacks Can Be a Major Problem for Small Businesses

The Wall Street Journal has acknowledged the serious problem that chargebacks pose to businesses in an article posted on its website. Merchants pay a heavy price for these reverse credit card transactions, which cost them a lost sale, the lost product, and a fine imposed by the credit card company. What’s more, courts have equated chargebacks to merchant fraud, using merchants’ chargeback rates against them in lawsuits regardless of the reason for the reverse transaction.

Long considered evidence of consumer injury, chargeback rates are not a reliable indicator of merchant wrongdoing. When courts cite a merchant’s chargeback rate in litigation, they do not analyze the reasons for the chargebacks, but only the percentage of the merchant’s total sales that were charged back to credit cards. As the article discusses, chargebacks do not always indicate that a customer has been fraudulently charged. Rather, chargebacks can be triggered for any number of reasons, including when a card issuer finds an authorization or processing error, such as an invalid account number or an expired card.

Recent years have also seen the dramatic rise of “friendly fraud,” or fraud carried out by customers to get items free of charge. According to the Better Business Bureau, the most common types of friendly fraud involve cases in which a customer falsely claims that he or she never received an item ordered online, received the wrong item, or had a credit card stolen and was charged for items that weren’t ordered. The customer then either demands a refund from the business or issues a chargeback on his or her credit card. In some cases, the customer receives a “double refund” after receiving a refund from the company and a chargeback on the credit card. The Wall Street Journal has previously reported that many major online companies, such as Expedia, have seen a 50% increase in friendly fraud since October 2008.

Credit card companies have liberalized chargeback procedures, providing an inducement for consumers to purchase and use products and then demand a chargeback, without ever contacting the merchant’s customer service department with complaints about the product or the manner in which it had been sold. Whereas consumers once had to go into the bank to request a chargeback, they can now view their statement online and merely click “dispute charge” in order for the charge to be reversed.

It is refreshing for the Journal to acknowledge the price that business owners pay for this customer convenience, which some customers unfortunately abuse. We hope that as this issue gains greater exposure, customers will realize how their actions harm merchants, many of whom are small businesses that cannot afford these losses. We hope customers will begin to think twice before contacting their credit card company for a chargeback, and instead first contact the merchant regarding a return or disputed charge.

Wu Appointment May Mean More Regulation to Come

On February 8, the Federal Trade Commission announced that Columbia Law Professor Tim Wu would be joining the Commission’s Office of Policy Planning. The law professor known for coining the phrase “net neutrality” reportedly will advise the Commission on long-range competition and consumer protection policy initiatives.

Professor Wu’s appointment is considered by many in the business community as a harbinger of more market-stifling regulation to come. In a recent Forbes article, D.C. business consultant Scott Cleland was quoted as saying, “It’s nothing but trouble for business … He’s about as interventionist and hyper-regulatory a thinker as you will find.”

There is sound basis for the concern that Professor Wu will help the federal agency identify new – and possibly costly and unnecessary – regulatory interventions. He has been a long-standing advocate of government regulation of Internet access, professing fears of “private power as much as public power.” He has been instrumental in aiding the Federal Communications Commission to devise net neutrality rules and policies.

Just as the FCC, armed at least in part by Wu policy proposals, vies for more regulatory control over the Internet, the FTC has invited the same pro-regulation thinker to help it build its justifications for a power grab.

But the FTC already has its place in Internet commerce, is very active on this front, and should not seek regulatory control beyond this role. For instance, the agency recently settled a sizeable “scareware” case against several individuals and companies for their deceptive Internet advertising schemes. The case looks pretty egregious: the defendants apparently incorporated automatic downloads in their Internet ads, involuntarily redirected consumers to their websites, falsely claimed to scan and detect malware on the consumers’ computers, and prompted consumers to purchase software to remove the nonexistent files.

The scareware case seems to fit squarely within the FTC’s jurisdiction: Rogue companies bilked consumers of significant sums (roughly $40 per software download) under false pretenses through deceptive advertising. Investigating and bringing charges against such companies is within the parameters of the FTC’s purpose to protect consumers and within the agency’s statutory powers to prevent “unfair methods of competition in or affecting commerce and unfair or deceptive acts or practices in or affecting commerce.”

The FTC seems to have acted appropriately in the scareware case. But pursuing a systematic course of looking for new regulatory mechanisms, which is what is anticipated from the Wu appointment, is another thing. Just as free marketers, entrepreneurs, and businesses have been chiming, “if it isn’t broken, don’t fix it” vis-à-vis the FCC’s endeavors to assume more regulatory control over the Internet, the same should be said vis-à-vis the FTC.

FTC Cracks Down on Bogus Virus-Removal Software

It’s a gut-wrenching feeling when a computer owner realizes that his or her computer may be infected with a virus. Immediately, one’s thoughts turn to the data that could be permanently lost — documents and pictures that may be difficult or impossible to replace. Next comes the realization that if the documents can be recovered (if the computer can even be saved) it will be a costly and time-consuming process to obtain and install effective virus-removal software.

Companies and individuals who took advantage of these fears recently settled with the FTC in the amount of $8.2 million. Defendant Marc D’Souza and others who did business under several names, including Innovative Marketing and ByteHosting Internet Services, used online advertisements that falsely claimed that viewers’ computers were infected with viruses. The advertisements made it appear that the computer was running a scan that detected viruses, spyware, and illegal pornography on consumers’ computers. The “scan” then recommended that in order to remove the malware, the consumer buy the defendant’s bogus security software, which cost $39.95 or more.

According to the FTC, the defendants used an “elaborate ruse” to get Internet advertising networks and popular websites to carry their advertisements. They falsely claimed they were placing the ads on behalf of legitimate companies and then inserted hidden programming code which delivered the fake scan instead.

As part of the settlement, D’Souza is barred from making deceptive claims in connection with computer security software, using domain names registered with false information, and misrepresenting that he is authorized to act on behalf of third parties. He is required to turn over $8.2 million in ill-gotten gains, which will be used to reimburse the estimated one million victims of the scam.

This case serves as a reminder that the FTC is likely to target sellers who blatantly cloak their advertisements in deceptive fear tactics to get sales. The more distressing the interaction is for a consumer, especially for a highly successful and lucrative campaign, the more likely the FTC is to take notice and step in.

FTC Looks at Football Helmet Safety Claims

Helmet safety has caught the attention of the Federal Trade Commission, which is looking into marketing claims that some football helmets can help reduce concussions. Recent months have seen widespread publicity about concussions and other traumatic head and neck injuries suffered by football players, prompting the National Football League to step up enforcement of rules against illegal hits. Pressure on the FTC to investigate possibly deceptive and misleading safety claims increased last month when Sen. Tom Udall (D-N.M.) sent a letter to the FTC chairman claiming that advertisements by two prominent helmet manufacturers could violate the FTC Act.

In his letter to the FTC, Udall specifically cited Riddell, a leading helmet manufacturer that supplies the official helmet to the NFL, for the prominent claim on its website that its popular Revolution models decrease concussion risk by 31 percent. This figure has long been criticized because new Revolution helmets had been compared with used helmets of unknown age and condition. Udall claims that “there is actually very little scientific evidence” to support the claim that “research shows a 31 percent reduction in the risk of concussion in players wearing a Riddell Revolution football helmet when compared to traditional helmets.” According to Udall, the voluntary industry standard for football helmets does not specifically address concussion prevention or reduction.

Last fall, Udall asked the Consumer Product Safety Commission to investigate helmet safety. Now, Udall has raised his concerns with the FTC, which is looking into possible actions regarding safety claims against helmet manufacturers. Riddell called the allegations “unfounded and unfair.” The company also claimed that, while its research on reducing concussions was encouraging, “we can’t stress enough that no helmet will prevent all concussions.”

A spokesperson for the FTC has stated that the commission could decide to launch an investigation but would not confirm or deny one until it either closed the investigation without bringing charges or announced it would bring charges of deceptive advertising against the helmet companies. If an investigation is launched, the FTC will likely examine whether the helmet safety claims comply with the FTC’s policy statement on advertising substantiation, which states: “The Commission intends to continue vigorous enforcement of this existing legal requirement that advertisers substantiate express and implied claims, however conveyed, that make objective asserts about the item or service advertised.” In other words, the FTC warns manufacturers and advertisers against making claims about a product that would require proof that the manufacturer or advertiser does not have.

There is a lot at stake if the government intervenes in the helmet business. In addition to the personal safety concerns for young football players — which the letter to the FTC lists as a paramount concern — football helmet sales represent big business. Helmets can range from $150 to $400. With a reported 4.4 million players under the age of 18 alone, this can mean big bucks for the helmet companies. It is unlikely that sales of helmets will be significantly affected by an FTC investigation, but helmet companies may be faced with the added costs of research and development necessary to substantiate claims of helmet safety.

Middlemen Run Afoul of FTC Suspicions

Brokers, middlemen, and intermediaries serve an economic purpose: to put people who want a product or service in touch with a product maker or service provider. Real estate brokers help us buy and sell homes; mortgage brokers help us find lenders for our home purchases; manufacturing reps help get new products on our grocery shelves, and so on. These middlemen help match buyers and sellers and provide information in the marketplace.

The Federal Trade Commission, however, has become highly suspicious of intermediaries and brokers in some marketplace areas. Last week, for example, the FTC settled a case against three companies and their owner for marketing debt relief services on behalf of debt settlement service providers.

The defendant companies, Hermosa Group LLC, Media Innovations LLC and Financial Future Network LLC, and their owner Jonathan Greenberg, were charged in the FTC’s four-count complaint with (1) misrepresenting to consumers that they themselves provided debt settlement services and (2) misrepresenting to consumers that they could provide debt relief benefits without being able to substantiate such claims. The settlement bans the defendants from future involvement in the debt relief services industry and requires a payout of some $8.5 million (which will be suspended in part if the defendants pay $500,000 within ten days of the judge’s order).

The defendants advertised debt relief services on radio and television, claiming that consumers could reduce, eliminate or settle their debt by calling the advertised toll-free telephone number. Consumers who called the number provided information and were ultimately put in touch with debt relief service providers.

But what did the defendants do wrong? They provided an unpopular service to a group of consumers considered vulnerable. They apparently were not explicit enough in saying that they themselves would not be providing the services and that there were no guarantees that customers would find debt relief.

Brokers like the defendants, often referred to as lead generators, are being scrutinized with increased vigor by the FTC, especially in areas where consumers are most vulnerable. Lead generators – companies that collect and sell consumer data to service providers – in the mortgage and debt services industries have been subject of recent FTC investigations and new FTC rules.

The FTC’s stated reason for its increased oversight is to reduce abusive practices against desperate and cash-strapped consumers. We can all appreciate why it’s important to root out fraudsters who take vulnerable consumers’ last pennies in return for nothing. But the government already regulates that. The FTC’s recent enforcement activity against middlemen and new rules may effectively squeeze out all intermediaries in these industries. For instance, the new Telemarketing Sales Rule will prohibit any entity – including lead generators – from receiving payment until debt relief services have been fully performed. Lead generators, such as the defendants in the recent FTC action, are generally paid up front for each lead provided, regardless of the ultimate outcome. The new rule could effectively eliminate lead generators’ profits and destroy all incentive to enter the industry.

Will consumers benefit in the end? In the name of fraud prevention, consumers will see less promotion of services that may be valuable to them.

FTC Advertising Crackdown Provides Food for Thought

The Federal Trade Commission has been clamping down on several major food companies regarding health claims in their advertising.  Iovate Health Sciences USA and Nestle S.A. subsidiary, Nestle Healthcare Nutrition, Inc., were the first to come under FTC fire, both entering into settlement agreements last summer.  Dannon Company, Inc. and POM Wonderful LLC were next.  Dannon settled in December, while POM opted to fight the government for imposing what it sees as unreasonably burdensome new standards.

The FTC argued that the companies have not been able to sufficiently substantiate health claims regarding their products, such as reduction in likelihood of cold and flu, digestive improvement, and weight loss.  The FTC argued the companies’ ads therefore were deceptive in violation of the Federal Trade Commission Act. 

The three companies that settled with the FTC are now subject to new stringent advertising standards that significantly raise the bar on what companies must be able to prove before making health claims.  There is some debate whether the settlement agreements are binding on the whole industry. In a lawsuit filed against the FTC last September, POM argues that they are and that this is unreasonable.  In fact, a later FTC complaint and proposed consent order against POM support POM’s contentions as the FTC indeed suggests that the same standards should apply to POM. 

The three new standards in the agreements between the FTC and Nestle, Iovate and Dannon are problematic in many ways. 

First, each of the agreements provides that the companies must obtain approval from the Food and Drug Administration before making certain claims in advertising.  This additional hurdle is something that the FTC acknowledges is not required of advertisers under the act governing FTC powers.

Second, each of the agreements provides that the companies have two clinical studies to back certain other health claims.  As developed by the FTC, such studies must be adequate and well-controlled human clinical studies conforming to acceptable designs and protocols with results sufficient to substantiate that the representation is true.

Third, for all remaining or new health claims made by the companies, the companies must be able to back those claims by nonspecific competent and reliable evidence, i.e. evidence that is sufficient in quality and quantity based on standards generally accepted in the relevant scientific fields, when considered in light of the entire body of relevant and reliable scientific evidence, to substantiate that the representation is true.

These standards are both difficult to comply with and unclear.  For a given product, there are different standards for different prospective health claims.  For instance, if Dannon wants to claim that its Activia product helps reduce the risk of cold and flu, it must seek FDA approval first.  If Dannon wants to claim that Activia improves intestinal tract functions, it needs to pass the two clinical studies requirement.  Any other claims for Activia must pass the wordy “nonspecific competent and reliable evidence” requirement.  The existence of multiple standards for various claims (and on various products) makes it very difficult for a company to establish a clear FTC compliance policy.

The FTC has done little to clarify these matters.  So companies looking to avoid FTC action are left wondering: How can they anticipate what claims they can make?  How can they determine what standards to use?  How can they establish an efficient and effective compliance policy?

Some companies have expressed legitimate concerns that concerns that excessively stringent standards will limit their commercial speech rights.  In POM’s September 2010 suit, in which it requests the court declare that the FTC acted outside its authority in establishing new standards, POM alleges the standards breach First and Fifth Amendment principles of free speech and impose significant new burdens and risks on advertisers. 

The more hoops a company has to jump through before it can make a claim, the less likely the company will be to provide information. Ultimately, we run a significant risk that consumers will end up learning less rather than more about the health benefits of a product.

Ifrah Law’s Semi-monthly Blog Wrap-up, January 15-31

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.

Read the full post here on the CrimeInTheSuites blog.

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.

Read the full post here on the FTCBeat blog.

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.

Read the full post here on the FTCBeat blog.

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.

Read the full post here on the CrimeInTheSuites.

FTC Gets Serious About ‘Fake’ Reviews, Endorsements

In a cybermarket full of every product and service imaginable, advertisers go to great lengths to make their products stand out by grabbing consumers’ attention and interest. In recent years blogs have become a popular forum for sharing tips and information, and advertisers have used blogs to promote their products.

While advertisers are perfectly entitled to tout their products’ positive attributes, they must do so honestly and transparently. An advertiser that poses as an ordinary consumer reviewer risks paying the price through FTC enforcement.

The FTC brought its first case focusing solely on “fake” product reviews against Reverb Communications, a public relations firm that was hired to promote a video game developer’s iPhone apps on iTunes. The FTC alleged that Reverb engaged in deceptive advertising by having employees pose as ordinary, independent consumers in posting reviews of the apps. The reviews did not disclose the relationship between the PR company and its client, nor did they disclose that Reverb received a portion of the sales for every game it sold iTunes. In its settlement with the FTC, Reverb agreed to remove all endorsements that misrepresented the reviewer as an independent consumer, and agreed not to post any similar items without proper disclosures in the future.

The case against Reverb demonstrates the FTC’s intention to enforce its endorsement guidelines, the policy under which people who post reviews online are required to disclose any relationship with the seller, especially a financial connection. The FTC used the Reverb case to stress that that online marketers must abide by long-held truth-in-advertising principles and must make clear any affiliation with the seller.

Advertisers must diligently monitor the FTC’s ever-expanding collection of guidelines to ensure that their advertising practices strike the proper balance between effectively promoting their products and avoiding FTC action.

How to Sell E-cigarettes and Avoid an FTC Investigation

Customers are flocking to electronic cigarettes — battery-operated nicotine delivery devices that are meant to replicate the flavor and sensation of smoking a tobacco cigarette. While merchants and advertisers are understandably eager to participate in this growing industry, we predict that the FTC will be watching ads carefully in anticipation of enforcing its advertising rules.

The FTC can regulate advertisements for any product, but it is especially likely to focus on products such as e-cigarettes because of their potential health implications. The FTC will likely be looking for any express or implied health representations in online ads. The agency generally presumes that advertisers don’t have the funds or expertise to fund reliable scientific studies, so we predict that it will investigate and require substantiation for advertising claims that imply that e-cigarettes provide health benefits or advantages over traditional cigarettes.

Health implications aside, the FTC is likely to pursue e-cigarette advertising because of the success the products have had in the marketplace. Because internet advertisements have a national audience, the FTC can presume that many people are being affected by any unfair or deceptive acts or practices used in the sale of the product. Advertisements that make general, subjective claims that can be analyzed by the consumers themselves (such as “Tastes great!”) have historically attracted less FTC attention than those claims that consumers would have difficulty evaluating for themselves, such as “e-cigarettes contain none of the harmful ingredients of tobacco cigarettes.”

While the FTC has yet to file any litigation on e-cigarette matters, the Food and Drug Administration (FDA) tried and was rebuffed by the U.S. Court of Appeals for the D.C. Circuit, which ruled that “tobacco” products are governed by the Family Smoking Prevention and Tobacco Control Act of 2009.

Whether or not the courts ultimately decide that e-cigarettes are drugs, devices or tobacco, the FTC has jurisdiction to regulate advertising for this product. Section 5(a) of the FTC Act provides that “unfair or deceptive acts or practices in or affecting commerce” are unlawful, giving the FTC broad power to regulate advertising. Section 12(a) of the FTC Act specifically prohibits the dissemination of any false advertisement that is likely to induce the purchase of drugs or devices.

And when it comes to e-cigarettes, we feel certain that the FTC will be paying attention.