Progress in the world of biometrics should cause us all to shudder. Cameras in public locations can now employ facial recognition to direct advertising to us based upon an assessment of our age, sex, and other characteristics. Cameras can determine our reaction to and engagement in video games and movies. It sounds a bit like a world composed of two-way mirrors. But instead of shuddering, we sometimes knowingly, sometimes carelessly, support the technology – and other data collection practices – through our online and commercial activities.
How many of us constantly update and tag our Facebook pages with pictures of us and our loved ones and where we’ve been? How many take advantage of product/service discounts by scanning our smart phones and “liking” products on Facebook? How many of us are now buying into dating apps and social apps that are based on facial recognition technology? The fact is that much of our data can be, and is being, collected and we consumers (especially in the United States) seem to have no problem with it, even volunteering for it.
Perhaps fortunately, some regulators are stepping in and keeping a watchful eye on these developments and looking for ways to curb the potentially nefarious use of consumer data. The FTC and its Division of Privacy and Identity Protection recently published its list of best practices for companies who use facial recognition technologies. The publication, “Facing Facts: Best Practices for Common Uses of Facial Recognition Technologies,” underlines important concerns about being able to identify anonymous individuals in public and about attendant security breaches such as hacking. The FTC’s proposed best practices include the following:
• Companies should maintain reasonable data security protections to prevent unauthorized information “scraping” of consumer images and biometric data.
• Companies should maintain appropriate retention and disposal practices.
• Companies should consider the sensitivity of information when developing facial recognition products and services, e.g., they should avoid placing signs in sensitive areas, such as bathrooms, locker rooms, health care facilities, or places where children congregate.
• Companies using digital signs capable of demographic detection should provide clear notice to consumers that the technologies are in use, before consumers come into contact with the signs.
• Social networks should provide consumers with (1) an easy-to-find, meaningful choice not to have their biometric data collected and used for facial recognition; and (2) the ability to turn off the feature at any time and delete any biometric data previously collected.
• Companies should obtain a consumer’s affirmative express consent before using a consumer’s image or any biometric data in a materially different manner than they represented when they collected the data.
• Companies should not use facial recognition to identify anonymous images of a consumer to someone who could not otherwise identify him or her, without obtaining the consumer’s affirmative express consent.
The guidelines come only a few months after the FTC’s March 2012 Privacy Report (“Protecting Consumer Privacy in an Era of Rapid Change: Recommendations For Businesses and Policymakers”) and are a logical follow-on to the report. They incorporate the Privacy Report’s core principles: privacy by design, simplified consumer choice, and transparency. These principles and guidelines are a step in the direction of responsible data collection and responsible technological advancements.
We should point out that neither the Privacy Report nor the Best Practices in Facial Recognition are binding or enforceable as they do not fall under FTC’s legal authority. And the FTC prominently makes this disclaimer, noting that the guidelines are merely recommendations without the force of law. It is clear, however, that the FTC is appropriately preparing to assume enforcement authority, should Congress pursue privacy legislation (something the FTC recommends in the Privacy Report). That is obvious from the mere fact that the agency has established a Privacy and Identity Protection Division.
Companies that are developing or seeking to employ biometrics – or that employ other data collection practices – would be well advised to pay attention to the FTC’s recommendations. The guidelines provide insight into how an enforcement authority is likely to approach biometrics and other data collection practices. The guidelines also provide a framework for responsible use of consumer data. And even though consumers currently seem passive or dismissive about biometrics and data collection, it would take just one scandal or highly publicized incident for public opinion to change. Companies will benefit in the long run by building good will among consumers.
The Commodity Futures Trading Commission (CFTC) is apparently going to appeal a U.S. district judge’s ruling that had overturned its decision to impose limits on the number of contracts that commodity traders can hold.
The CFTC had found that under the recently passed Dodd-Frank law, which amended the Commodity Exchange Act of 1936, it now need not make a finding of “necessity” before it puts forth a rule to impose these position limits. It had ruled, in fact, that it was mandated by Congress to set limits and that it had no discretion to choose not to impose such limits.
The swaps and derivatives industries, however, challenged the CFTC’s interpretation in U.S. District Court for the District of Columbia. The industries contended that even under the Dodd-Frank amendments, the agency must find that it is “necessary and appropriate” to set position limits. In other words, for each given commodity, it would need to show that there was a risk of dangerous speculation.
On September 28, U.S. District Judge Robert Wilkins rejected the CFTC’s position. He sent the rule back to the CFTC for further consideration, just two weeks before the limits were set to take effect. He said that Dodd-Frank did not give the agency a “clear and unambiguous mandate” to set position limits without showing they were necessary in each instance.
The law, wrote Judge Wilkins, requires “that the Court remand the rule to the agency so that it can fill in the gaps and resolve the ambiguities.”
One would think that the agency would accept this direction from the judge and come up with an interpretation of the Dodd-Frank law that would indeed fill in gaps and resolve ambiguities. That is what an agency is supposed to do.
Now, however, according to Reuters and other reports in early November, there appears to be a CFTC majority – three of the five commissioners — in favor of appealing Judge Wilkins’ decision to the U.S. Court of Appeals for the D.C. Circuit.
It seems odd to us, at the very least, that the agency is insisting on an interpretation of the Dodd-Frank law that strips it of all discretion and requires it to set position limits for dozens of commodities without a finding that the limits are going to be helpful to police the markets and limit excessive speculation. Especially now that a judge has ruled that Congress didn’t unambiguously decide to tie the agency’s hands, why pursue this appeal?
A recent decision by a federal judge in California has brought ICANN’s broad authority over the domain name system once again into question. Manwin Licensing International – perhaps the most lucrative provider of online adult-oriented content – brought an antitrust action against ICANN arising from the establishment of the .xxx top-level domain and the award of the registry contract for .xxx to ICM Registry. Manwin claimed, among other things, that because ICANN’s registry contract with ICM contains no restrictions on the price ICM may charge for its services (while providing for an enhanced fee to be paid by ICM to ICANN) and ICM is insulated from competition on renewal, the award of the contract violated the Sherman Antitrust Act.
In any antitrust case, the plaintiff must establish a “relevant market” that it can show is adversely affected by the anticompetitive actions. Here, Manwin sought to establish that the relevant markets affected by ICANN and ICM were the markets for affirmative registrations (i.e., the lack of an adequate economic substitute for .xxx domain names) and for defensive registrations (i.e., the need for trademark holders to protect their marks by registering .xxx names, for instance, playboy.xxx). The court made short work of Manwin’s claim with respect to the affirmative registration market, pointing out that domain names in other generic TLDs (gTLDs) are an adequate economic substitute for .xxx registrations. Indeed, the court pointed out that one of Manwin’s own websites – youporn.com – is the most popular free adult video website on the internet. Thus, the .com gTLD, among others, provides a perfectly adequate (if not superior) substitute to a .xxx registration.
However, the court was not so forgiving as to the defensive registration market. It held that Manwin adequately identified an adversely affected market in defensive registration because Manwin asserted that trademark owners and registrants of domain names in other gTLDs were compelled to register domain names in the .xxx TLD for defensive or blocking purposes, to protect their marks or other domain names from a loss of goodwill, prevent consumer confusion, or prevent association with adult entertainment. The court found no economic substitute for this market, as, it found the “only way to block a name in the .xxx TLD is to register a name in the .xxx TLD.” Therefore, the antitrust case will proceed with respect to the defensive registration market.
This decision has enormous potential consequences to the domain name registration market, particularly with the coming roll-out of new gTLDs. By way of example, one of the applied-for new gTLDs is .hotel. While Marriott has a very popular website located at marriott.com (as do Hyatt at hyatt.com, Hilton at hilton.com, etc.), these hoteliers may feel compelled to register their corresponding names and trademarks in the .hotel TLD, to protect against cybersquatters.
Compounding the problem, particularly for those with famous marks, is the issue of “typosquatters” who may register common misspellings of the mark in the new gTLD (such as marriot.hotel). Thus, the defensive registration market identified by Manwin has implications that extend far beyond the .xxx TLD — although .xxx has its own unique challenges not found with more mundane gTLDs, as the .xxx TLD’s association with adult content and pornography has the very real potential to tarnish otherwise unrelated marks. Imagine, for instance, pepsi.xxx (probably bad) versus pepsi.hotel (probably innocuous). Whether the existence of this case will cause a delay in the launch of the new gTLDs remains to be seen. It would seem that ICANN would proceed cautiously, as an adverse ruling might lead to a requirement that the registry contracts for gTLDs found to violate antitrust laws be unwound. Time will of course tell.
However, in the end, while Manwin seems to have hit upon a soft spot in ICANN’s shield, its claims ultimately seem overblown and contrary to the rights enjoyed by trademark owners and domain name registrants with respect to .xxx registrations. Setting aside blocking/sunrise rights that were afforded to trademark owners in advance of the public rollout of the .xxx TLD, trademark owners have extraordinary rights with respect to infringing domain names registered in .xxx. A trademark owner has available to it three means of challenging an infringing domain name registered in the .xxx TLD. These are the Rapid Evaluation Service (RES), the Charter Eligibility Dispute Resolution Policy (CEDRP), and the Uniform Dispute Resolution Policy (UDRP).
The RES provides a quick take-down process for infringing registered word marks or personal names of individuals. If an RES claimant shows that the domain name is identical or confusingly similar to a registered word mark that the claimant owns and uses, that the registrant has no rights or legitimate interests in the disputed domain name, and that the domain name was registered and is either being used in bad faith or cannot possibly be used in good faith, the domain name is directed to a page which states that the domain name has been deactivated. Temporary take-downs pending a final decision may be effected within two business days.
Trademark owners may also initiate a CEDRP proceeding, which will be handled by NAF, to challenge .xxx domain names that are being used in violation of the Adult Entertainment Industry eligibility requirements for the .xxx TLD (for instance, the example of pepsi.xxx, above). If the trademark owner is successful in a CEDRP proceeding, the offending domain name registration will be cancelled.
In addition, a trademark owner may initiate a UDRP proceeding with respect to a .xxx domain name registration, just as it might for an infringing domain name in any other TLD. Such a proceeding might result in the cancellation or transfer of the offending domain name – though if the registrant is not engaged in the adult entertainment industry, the domain name will not resolve.
In the meantime, since the Court’s ruling allowing Manwin’s case to proceed, ICM Registry has filed a counterclaim against Manwin, asserting antitrust and trade libel claims, amongst others. In the end, this battle promises to have consequences that extend far beyond the .xxx world in which it is clothed.
Companies that run websites must comply with laws and rules requiring the maintenance of personal privacy. While federal requirements such as those applicable to financial privacy and children’s privacy gain significant attention, website and app developers also should pay careful attention to state privacy requirements. State regulators are monitoring websites and apps for compliance with their privacy mandates.
Given the open nature of the Internet, companies and Web developers, as a practical matter, need to comply with the strictest state privacy requirements — since they can assume that their sites will be accessed from all the states.
So the recent letters sent by California Attorney General Kamala Harris to 100 companies and mobile app developers (including Delta, United Continental and Open Table), asking them to bring their privacy policies in line with California state law, are highly relevant to anyone whose Web site is going to be accessed in California.
In these letters, Harris gave companies and developers 30 days to come up with a plan to comply with the California privacy law, or tell her why it does not apply to a particular app. After the 30 days are up, Harris will apparently sue the firms or developers that aren’t complying, with a potential fine of up to $2,500 each time the app is downloaded.
“Protecting the privacy of online consumers is a serious law enforcement matter,” Harris said in a statement. “We have worked hard to ensure that app developers are aware of their legal obligations to respect the privacy of Californians, but it is critical that we take all necessary steps to enforce California’s privacy laws.”
We must emphasize that anyone who makes apps and websites available to consumers must comply with state as well as federal requirements. The California actions will only be the beginning.
Each October, the World Intellectual Property Organization (WIPO), a United Nations agency, hosts at its Geneva, Switzerland, headquarters about 50 participants from around the world for a two-day conclave to discuss recent developments and issues surrounding domain name trademark disputes. This conference brings together, in one place (as an added bonus, scenically overlooking Lake Geneva and the French Alps) representatives of domain name registrars and registries, and lawyers from every corner of the globe to discuss the Uniform Dispute Resolution Policy (UDRP), which governs disputes between domain name registrants and trademark owners in most generic top-level domains (gTLDs).
With ICANN’s roll-out of new gTLDs imminent, the UDRP is likely about to experience increased use and importance, as cybersquatters will doubtless target brand owners whenever and wherever possible in the new gTLDs.
The UDRP is not without its faults — but, in general, it provides brand owners with a fast, relatively inexpensive and effective means to shut down domain names that are registered to take advantage of the goodwill attached to their trademarks. At this year’s conference, as with those in years past, the most hotly contested issues involve domain names that resolve to “criticism” websites. It is with these issues that legal and cultural differences on the borderless Internet intersect and conflict. Many (but certainly not all) representatives from the United States see these issues through the lens of freedom of speech, while participants from elsewhere have no such point of reference. These cases come in two basic flavors.
First, there are the “trademark sucks” sorts of cases (the ubiquitous “suck sites”), and second, there is the more harmful “trademark.com” cases, which then resolve to a site critical of the trademark owner.
Suck site cases are less harmful because there is less risk of initial interest confusion – the likelihood that an Internet user would type the name into his or her browser thinking that the site belonged to the trademark owner. But in this era of the Internet in which search engines drive a great deal of traffic, such sites can cause great harm. However, a small consensus seems to lean toward finding that such domain names are not infringing.
The more hotly contested issue continues to be the trademark.com (including typos, hyphenations and other close variants of the trademark) cases. First Amendment considerations make it very difficult for a trademark owner to retrieve these domain names, when used for noncommercial purposes, in U.S. courts; in other parts of the world, this is not the case. But one UDRP panelist from the United States pointed out that the UDRP process is not a governmental act, and therefore he believes (correctly, I think) that the UDRP should pay no heed to these considerations. At bottom, U.S. trademark owners facing such situations should consider pursuing UDRP cases, understanding that even if they prevail, if the case ultimately lands in court, the likelihood of a successful outcome is diminished.
Other topics discussed included the new proposals for Rights Protection Mechanisms (RPMs) associated with the new gTLDs. While many of these RPMs remain in the discussion stages, they promise to bring to the fore new opportunities for trademark owners to protect their trademarks against cybersquatters who begin infringing in the new gTLD space. A good summary of all of the RPMs can be found here. The most interesting among these is the proposed Uniform Rapid Suspension System, which may bring about a means to temporarily suspend a name (that is, redirect the domain name to a web page revealing the suspension) in an expedited fashion. The devil will be in the details, as the costs and specifics of the proposed program are still up in the air. ICANN, WIPO and the other stakeholders are working on the details, and if implemented, this has the potential to provide trademark owners with another tool to combat those who damage their brands.
WIPO’s conferences are always first class and informative, and the opportunity to hear from and confer with talented, knowledgeable (and opinionated) domain name lawyers from around the world is always a pleasure and a privilege. I was able to meet and work with people from all over the world –from a representative of the Tanzanian registry, to brand managers from Sweden, to IP lawyers from China and Taiwan. And from it, we all are better able to serve our clients who do business on the Internet, which knows no national boundaries.
On October 18, 2012, the Federal Trade Commission hosted a robocall summit to address the current state of the law and to reinforce the FTC’s commitment to enforcing those laws. Additionally, FTC Bureau of Consumer Protection Director David Vladeck announced a formal challenge to end illegal robocalling in the United States by offering a $50,000 prize to whoever can design a program to screen out illegal robocalls by January 17, 2013.
“Robocalls” are automated phone calls made to consumers that use a computerized autodialer to place the call and a computer to deliver a prerecorded message. If the recording is a sales message (not a call from the consumer’s healthcare provider or a charity), and the consumer has not given written permission to get calls from the calling company, the call is illegal. If the recording is purely informational and does not deliver a sales message, and is made to a landline telephone, the robocall is likely legal under federal law. Examples of permissible robocalls include those delivering messages about school closings, weather alerts, and emergency notifications.
Private organizations and companies are permitted to place robocalls under federal law as long as they do not contain a sales message — for example, automatic calls reminding consumers of upcoming appointments are generally permissible, as are political calls. Robocalls made to cell phone numbers without the consumer’s consent are always prohibited, because the consumer may have to pay to receive the call. Additionally, states may implement more restrictive practices than federal law permits. The FTC has prepared a business alert that explains what is legal and what is illegal in this area.
As technology has developed, illegal robocallers have kept pace by developing new ways to thwart the system. Increasingly, robocallers have employed caller ID spoofing to make it appear that the number is coming from a different source, either by using a phony number or name. This can mislead customers as to the source of the call, and it also makes it more difficult to trace the call to its source in order to pursue enforcement action against the caller.
Recognizing that the most effective tool against illegal computerized robocalling is more advanced technology, Vladeck announced a $50,000 award to anyone (with some restrictions) who can develop a solution to reduce the number of illegal robocalls by automatically blocking illegal calls, while letting permissible robocalls through to consumers. Vladeck said at the summit, “We think this will be an effective approach in the case of robocalls because the winner of our challenge will become a national hero.”
We applaud the FTC’s effort to fix this problem and its emphasis on a solution that would still permit the many legal robocalls placed by legitimate businesses for permissible purposes. Those businesses should be sure to protect themselves from unnecessary enforcement action by carefully following the FTC guidelines on robocalling. This will serve both to protect the business from unnecessary legal trouble, and to prevent negative customer experiences.
Earlier this month, the Federal Trade Commission released its revised Green Guidelines, providing parameters for advertising and marketing claims of supposedly eco-friendly products. The publication completes a two-year revision process that the FTC undertook, involving the updating of guidelines last visited in 1998. The Commission touted the new guidelines as helping marketers “avoid making misleading environmental claims” and leveling the playing field for “honest business people.”
The revised guidelines address 14 categories of claims, including general environmental claims, carbon offsets, certifications and seals of approval, and claims of recyclability and renewability. Under the guidelines, marketers and advertisers are cautioned to avoid general claims that products are green or eco-friendly: “Marketers should qualify general claims with specific environmental benefits. Qualifications for any claim should be clear, prominent, and specific.”
Marketers are further cautioned to disclose material connections to any certifying organization. And when it comes to claims of compostability, degradability, recyclability and other claims about product and packaging content, the FTC advises that marketers be able to substantiate such claims and avoid deceiving consumers by replacing one environmental red flag with another. For instance, the guidelines note that “[i]t would be deceptive to claim that a product is “free-of” a substance if it is free of one substance but includes another that poses a similar environmental risk.”
The FTC’s revisions appear to take on a holistic approach to environmental claims. A company cannot willy-nilly claim that its product or packaging is recyclable if it is only recyclable in limited locations, and it cannot claim it is “green” and made with recycled content “if the environmental costs of using recycled content outweigh the environmental benefits of using it.” The guidelines require the marketer to limit and qualify green claims based on a thorough review of the production, distribution, and disposal stream for the product and its packaging.
In many ways, this new guidance seems fair – it should help ferret out the unscrupulous marketer who wants to charge a premium, or carve a market niche, based on dubious environmental claims.
But how much benefit will the new guidelines bring? The guidelines, in and of themselves, do not truly bring more enforcement power to the FTC. With or without Green Guidelines, old or new, the FTC can bring enforcement actions against marketers for false and deceptive claims – like several enforcement actions from 2009 forward that the FTC highlights on its website. With or without the guidelines, the truly unscrupulous marketer remains subject to FTC oversight and liability.
Our concern is that the guidelines may discourage some well-intentioned market entrants. An entrepreneur may have a good green idea but opt not to pursue it because of heightened advertising and labeling standards. For instance, the FTC guidelines caution companies about the need to provide “competent and reliable scientific evidence” for several categories of environmental claims. That could necessitate big R&D bucks to the exclusion of Mom & Pop.
More importantly, the guidelines could provide more ammunition for big companies to pursue claims against small competitors and effectively shut out upstarts. NAD, the advertising industry’s self-regulatory body, apparently plans on using the guidelines. There have been a host of cases by companies like Clorox and Procter & Gamble taking to task smaller companies marketing eco-friendly alternatives. In the end, while the revised Green Guidelines may be a good faith effort by the FTC to level the playing field and may have some positive impact, it will be important to monitor its unintended consequences.
POM Wonderful LLC recently received a setback in its longstanding dispute with the Federal Trade Commission. On Sept. 30, 2012, U.S. District Judge Richard Roberts in the District of Columbia dismissed the juice maker’s declaratory judgment action against the FTC. The judge’s ruling, though, does not put an end to the POM-FTC battle, which is still on appeal in a related administrative proceeding.
POM filed suit in federal district court in September 2010, in anticipation of an impending FTC administrative action. The company challenged what it perceived as agency overreaching, in violation of its First and Fifth Amendment rights, and in violation of the Administrative Procedure Act. The basis of POM’s complaint was the FTC’s use of consent orders with two other companies (Nestle U.S.A. and Iovate Health Systems, Inc.) to establish new and more stringent advertising standards for medical and health claims.
When the FTC waved these consent orders in front of POM (in an apparent attempt to pressure the company into agreeing to tougher standards like Nestle and Iovate), POM responded by thumbing its nose and filing suit in federal court. POM contended that the FTC failed to adhere to the requirements of administrative law that, in order to modify advertising standards, the agency must go through a notice-and-rulemaking process. The FTC subsequently filed its administrative action against the company for alleged failures to adhere to the more stringent standards.
In large part because of the significant overlap of issues between POM’s action in U.S. district court and the FTC’s administrative action, Judge Roberts dismissed the district court case. The judge noted that judicial efficiency militated towards having the dispute play out in the administrative case only: “While the administrative proceeding is not identical to POM’s current action, that forum is ‘perfectly capable’ of determining whether the proposed order exceeds the bounds of the FTC Act, violates the First and Fifth Amendments, and seeks to abrogate the FDA’s power,” he wrote. Other factors in the judge’s holding were (1) that granting declaratory relief would have required the resolution of an anticipatory defense and (2) that POM’s district court action appeared to be filed in part to secure tactical leverage.
As we wrote earlier this year, the administrative law judge already ruled on the parties’ dispute in May. POM touted that ruling largely as a victory because the judge rejected the enhanced advertising standards at issue. However, the FTC and POM appealed the decision before the full commission (POM appealed because the judge still found POM liable under separate standards). Oral arguments in the appeal were held in August, and the outcome of the appeal is still pending.
We find it interesting – and somewhat encouraging for advertisers who are concerned about agency overreaching – that neither the district court action nor the administrative proceeding have rejected on the merits POM’s challenge to the FTC’s use of settlement agreements to effect enhanced standards. Any company that has come under the regulatory microscope can appreciate the tremendous pressure companies face to cooperate with an agency just to get out of hot water – at almost any cost. POM’s bold stance may eventually have the result of reminding regulators to follow the rules set forth for them by the principles of administrative law.
The Federal Trade Commission recently announced a settlement with Jason Pharmaceuticals regarding its use of consumer testimonials and health benefits claims. Any company that relies on testimonials in its advertising, even a company that like Jason Pharmaceuticals, sells products that often have beneficial health results, must become aware of this settlement.
Jason Pharmaceuticals sells Medifast brand low-calorie meal substitutes. In 1992, the FTC settled a case with Jason for allegedly deceptive weight-loss claims. The settlement order barred Jason from making unsupported claims to consumers about losing weight or keeping weight off. According to the FTC, since at least November 2009, Jason ran ads that featured weight loss claims about low-calorie meal substitutes.
The ads run by Jason Pharmaceuticals prominently featured the use of consumer testimonials. One advertisement stated that:
“When you lose up to 2 to 5 lbs a week with Medifast, you’ll feel terrific. And so will your doctor.
THE PROGRAM THE DOCTORS RECOMMEND.
Jeff & Maureen lost a combined 169 lbs.!”
According to the FTC, the only disclaimer displayed in most Medifast advertisements containing consumer endorsements was a small, inconspicuous “Results will vary.” The FTC alleged that this disclaimer violated the 1992 order because was insufficient to change consumers’ net impressions that users of these products could expect to achieve the results represented in the advertisements.
As part of the settlement, Jason Pharmaceuticals will have to pay a civil penalty of $3.7 million to settle charges that it violated the previous order by making unsupported claims about its weight loss products.
Under the settlement, Jason is prohibited from misrepresenting that consumers who use any low-calorie meal replacement program can expect to achieve the same results that an endorser does or can lose a particular amount of weight or maintain that weight loss.
In addition, representations in the company’s ads cannot mislead consumers and must be backed up with competent and reliable scientific evidence that includes at least one clinical study. The company is also barred from making any other representations about the health benefits, safety, or side effects of any meal replacement program, unless it’s backed up by scientific research.
The settlement also has a compliance and recordkeeping requirement that for 20 years after the entry of judgment, Jason Pharmaceuticals needs to keep extensive records relating to any marketing or substantiation of any advertising claim.
The FTC continues to push the limits in pursuing enforcement actions. This, for example, is a very aggressive prosecution. People do lose weight using products such as Medifast, and in some instances people have lost significant weight. These ads may have been in violation of the prior settlement, but the FTC decision to pursue this action shows just how far they are willing to go in pursuing enforcement actions.
Because of the FTC’s aggressiveness in cases such as this one, companies that invoke claims of health benefits to consumers need to be sure that these claims are backed by reliable scientific evidence. Companies should also be aware that merely making a flat statement that “results may vary” will likely not help them avoid liability.
As part of the Federal Trade Commission’s ongoing efforts to shut down scams that target financially vulnerable consumers, a U.S. district judge has issued a $478 million judgment at the request of the FTC against the marketers of three get-rich-quick systems that the agency says are used for deceiving consumers. The order is the largest litigated judgment ever obtained by the FTC.
The judgment was awarded against companies and individuals who marketed the schemes, titled “John Beck’s Free & Clear Real Estate System,” “John Alexander’s Real Estate Riches in 14 Days,” and “Jeff Paul’s Shortcuts to Internet Millions.”
Nearly a million consumers paid $39.95 for one of these “get-rich-quick” systems, and some consumers purchased personal coaching services, which cost up to $14,995. According to the FTC complaint filed in June 2009, one system was marketed to consumers with the promise that consumers could “quickly and easily earn substantial amounts of money by purchasing homes at tax sales in their area ‘free and clear’ for just ‘pennies on the dollar’ and then turning around and selling these homes for full market value or renting them out for profit.”
The FTC said that nearly all the consumers that bought the systems lost money.
The FTC’s suit alleged violations of the Federal Trade Commission Act, based on the defendants’ representations in connection with the advertising, marketing, promoting and sale of the systems. The FTC also alleged that the defendants’ violated the Telemarketing Sales Rule through their marketing to consumers.
Two of the individual defendants, Douglas Gravnik and Gary Hewitt, were held jointly and severally liable for the monetary part of the judgment. The judge also imposed a lifetime ban from infomercial products and telemarketing against Gravnik and Hewitt. Gravnik and Hewitt indicated that they are likely to appeal the order to the extent it imposes a lifetime ban. A third individual, John Beck, is responsible for $113.5 million of the judgment.
In its case, the FTC filed 30 consumer declarations detailing consumers’ experiences with the defendants’ products. The defendants objected to many of these declarations on various grounds, including hearsay, relevance, and the best evidence rule among other objections, but these objections were all overruled.
The defendants also objected to the use of a survey by the FTC that showed that less than 0.2 percent of consumers who purchased the defendants’ system made any profits and only 1.9 percent of consumers who purchased coaching material made any revenue. The defendants moved to exclude all evidence relating to the survey on the ground that the pre-notification letter “poisoned the well in such a way as to invalidate whatever survey finding the FTC obtained” and argued that the manner in which the survey was conducted rendered the results unreliable. The court found that the survey was performed under accepted principles used by experts in the field and was admissible.
The court granted summary judgment for the FTC , finding that the defendants made material misrepresentations that were either false or unsubstantiated. The court pointed out that the materials provided by the defendants to consumers taught consumers how to purchase tax liens and certificates, but these purchasers do not obtain title to the property and thus were not “purchasing” the homes as the advertising materials stated.
The court also granted summary judgment on the Telemarketing Sales Rule allegations. The basis of the defendants’ argument was that the violations were isolated and should not be the basis for liability. The court found that there was no dispute that the defendants’ telemarketers repeatedly initiated calls to consumers who asked the defendants not to contact them. The FTC also produced “overwhelming” evidence that the defendants lacked a meaningful compliance program or any written procedures in place to comply with the regulations.
Jeffrey Klurfeld, director of the FTC’s Western Region, stated in a press release that “This huge judgment serves notice to anyone thinking of using phony get-rich-quick schemes to defraud consumers. The FTC will come after you if you violate the law.”
In this case, the FTC had already completed its surveys when it went to court. Trial judges will often be very impressed with FTC surveys and will grant judgment to the agency in nearly every case. Therefore, it is critical that a company that is being targeted by the FTC obtain counsel at the earliest possible stage, before the agency files anything in court. Counsel should be ready to vigorously defend the client’s marketing practices with techniques such as the use of countersurveys and customer testimonials and expert testimony, before the FTC files in court.