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Sep 19

Broken Promises: A Glimpse at the Dark Side of Crowdfunding

Vector crowdfunding concept in flat style

The fact is that social media has connected us to each other in ways which seemed unimaginable only a few decades ago.  Take for example the progression of social activism through online fundraising.  Over the course of two short months the ALS Ice Bucket Challenge (“IBC”) went viral with millions of videos being posted by people drenching themselves in ice water in order to spread awareness and raise money for the research and treatment of ALS.  To date, the total amount of donations made to the ALS Association through the IBC is an unprecedented $114 million.  The Association’s FAQs webpage regarding the IBC indicates that this amount is almost five times its annual overall budget.

The ALS Ice Bucket Challenge is also a good example of the online phenomenon of crowdfunding, where numerous individuals and groups pitch in to fund a project, cause or idea.  Simply put, crowdfunding is fundraising through social media.  There are several popular crowdfunding websites, however one of the most well-known sites is Kickstarter.com, which was launched in 2009, and boasts the facilitation of $1 billion in contributions by seven million backers who have so far funded 69,000 “creative projects” through the site.  However, as is common when dealing with new technology, there are often unanticipated legal aspects of such innovation which can be problematic.

Earlier this year, the first crowdfunding consumer protection lawsuit was filed in the state of Washington (State of Washington v. Altius Management, LLC; Edward J. Polchlopek III (No. 14-2-12425-SEA)).  In late 2012, defendant Ed Nash, as he is known, and his company Altius Management, were successfully funded through a Kickstarter campaign to produce a limited-edition playing card game called Asylum.  According to the campaign page, backers exceeded Nash’s goal of raising $15,000, giving more than $25,000 in total for the promise of the card game to be made.  In addition, many of those who funded Nash’s campaign expected certain perks for contributing, referred to by Kickstarter as “rewards,” as was detailed in his campaign’s backer pledge amounts, which included multiple card decks and custom artwork according to varying contribution levels.  However, two years later the card game has not been produced, backers have received no rewards or refunds and there has been no communication from Nash regarding the status of the Asylum project since July 2013.

Each project “creator” who signs up their campaign on Kickstarter is required to agree to the site’s Terms of Use, which includes language stating that the creator must fulfill all rewards promised to backers or issue refunds.  If the creator fails to deliver on both of these fronts, Kickstarter advises them that they may be open to litigation by backers.  Now, the Washington State Attorney General’s Office wants Nash to pay for breaking his promise to these backers under the state’s Consumer Protection Act (“CPA”) [RCW Chapter 19.86].  The filed lawsuit seeks up to $2,000 per violation of the CPA in civil penalties for restitution to the backers, and also includes all state costs and attorneys fees.

With this being the first case of its kind, there is no precedent to see exactly how these proceedings will develop or how this case will affect Kickstarter and other crowdfunding websites.  We suspect it will proceed like many of the other cases we write about in the internet space.  One thing is certain, whether they are made online or in person, people don’t like broken promises.

Apr 23

A Q&A With Jeff Ifrah on the FTC’s Latest Draconian Tactics

Some lawyers who deal regularly with the Federal Trade Commission in investigations of allegedly false and deceptive online advertising have noticed that the agency is beginning to take steps in these investigations that are unprecedented and draconian – and that judges seem to be going along. Below is a set of questions and answers with Jeff Ifrah, founding partner of Ifrah Law, on these new enforcement methods.

1. What is the first thing that a lawyer representing a company being probed by the FTC on false-advertising charges can expect to see?

IFRAH: Agency lawyers will go to a federal district judge with a copy of a temporary restraining order (TRO) for the judge to sign on an ex parte basis (without the defendant or its lawyers being present). Judges are allowed to do this as long as a hearing is set in a few days for a preliminary injunction, at which the defendant is represented. Meanwhile, the company is essentially barred from doing business by the terms of the TRO.

2. What is the FTC’s usual next step?

IFRAH: The agency will then go before the same judge with a draft of a preliminary injunction that is pretty much identical to the temporary restraining order. These injunctions basically require the business to continue to remain at a standstill until a trial is held and a settlement is reached. In addition, they require the company to disclose on all its web sites that it is being investigated for false and deceptive practices and to disclose online all of its sensitive financial information and that of its owners. Very often, the defendant will not contest this injunction request by the FTC. It is remarkable how many lawyers simply capitulate and agree to these draconian orders and set their clients up to fail.

3. What’s wrong with that? Isn’t the injunction lifted when the defendant agrees to settle the case?

IFRAH: Yes, but by that time, it may be too late, and the company may have gone out of business as a result of the restrictions that were imposed on it by the injunction and as a result of the disclosures that it had to make.

4. Are there other problems with these preliminary injunctions?

IFRAH: Yes. The FTC usually asks for a preliminary injunction with many standard features, and the judge usually grants it. But no two cases or defendants are the same. The courts are not taking into account the fact that different situations require different results. Instead, the injunctions are overbroad and reach behavior that is beyond what is alleged in the complaint.

Some of these restraining orders and injunctions restrict how much money a defendant can spend in a month or what type of online advertising it can use while the case is pending. Other injunctions require affirmative behavior, such as a requirement that the defendant report to the FTC every time it creates or operates any type of business. In either case, the defendant is forced to open its entire existence to the FTC, and everything it does is subject to scrutiny.

Another problem with standard, overbroad injunctions is that a defendant may become uncertain as to what it must do to prevent being held in contempt of court for non-compliance. The language in the injunction is often so vague and undefined that the FTC can act in its discretion to find a defendant in contempt.

5. And is that the end of the story?

IFRAH: No, unfortunately, plaintiffs lawyers often look to copycat an FTC action, and as a result companies may then have yet another headache to deal with, if they haven’t already been irreparably damaged by the FTC’s actions.

Apr 08

A Cautionary Tale: EU Probing Google for Possible Privacy Violations

The increasing difficulties faced by internet providers and data gatherers in the international realm have yet again come to the fore. Privacy regulators in France, Germany, Spain, the Netherlands, the United Kingdom and Italy have banded together to investigate whether to fine Google for what they perceive to be violations of European Union privacy laws.

The background is that in March 2012, Google replaced its disparate privacy policies applicable to its various products (such as Gmail and YouTube) with a single policy that applied to all of its services.

However, as part of a report  issued in October 2012, the EU’s Article 29 Data Protection Working Party then declared that Google’s unified policy did not comply with EU data protection laws. The EU’s primary, but not only, quibble with Google’s new policy involved the sharing of personal data across multiple Google services and platforms. At that time, the president of the French regulatory body, the CNIL, indicated that litigation would be initiated if Google did not implement the Working Party’s recommendations within three to four months.

Google – whose privacy policies appear to comply with U.S. law – did not bow to the EU regulators’ demands. As a result, on April 2, 2013, CNIL announced that it will lead efforts by the various EU states’ data protection authorities to coordinate “repressive action” against Google for not implementing the changes to its privacy policy that were demanded in the October Working Group Paper. Google has defended its privacy policy and contends that its new single policy complies with EU data protection laws.

As a result, Google now faces the time and costs of substantial regulatory oversight and investigation, as well as potential fines, from multiple national privacy protection watchdogs. In fairness, the EU privacy regulators have tended to be rather inclusive in their interpretation of what is and is not required by law. This is unfair to Google and to other companies that comply with what they believe to be the letter and spirit of the law, only to have regulators reinterpret the law to move the goal posts. But this is typical in the EU regulatory realm.

Google’s predicament sends a stern warning to all internet providers that gather personal data. Any provider’s natural inclination is to focus on complying with the applicable privacy rules applicable in the country where the provider is located. But the internet is borderless, subjecting providers to multiple laws in multiple jurisdictions. This creates the need for each provider to carefully analyze privacy policies to ensure as best as possible that it complies with the rules applicable across the globe. EU regulators and others are no longer content to allow the United States to set the guidelines for privacy and other rights, creating new challenges for privacy compliance in the United States and abroad.

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Nov 08

Why Is CFTC Planning to Appeal Judge’s Ruling in Dodd-Frank Case?

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?

Dec 06

Ifrah Law Blog Wrap-Up for November 2011

In November 2011, we at Ifrah Law expressed our views on a number of current issues in our blogs, Crime in the Suites and FTC Beat. This post summarizes and wraps up our thoughts from the month.

ACLU Wins FOIA Appeal on Prosecutors’ Use of Cell Phone Location Data

The Justice Department must turn over the names and docket numbers of numerous cases in which the government accessed cell phone location data without probable cause or a warrant.

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

Options for Suing the Federal Government Under Bivens Unlikely to Expand

U.S. Supreme Court argument indicates that the Justices are unlikely to extend Bivens to cover cases against private employees.

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

Judge Imposes 15-Year Sentence in FCPA Case; Appeal to Follow

This case will test the Justice Department’s expansive definition of “foreign official” under the statute.

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

High Court Hears Argument in GPS Fourth Amendment Case

The Justices grapple with issues of search and seizure in an online, wired world.

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

In Appeal of Construction Fraud Case, DOJ Seeks Tougher Sentences

This case, arising from Boston’s “Big Dig” project, will test the limits of a trial judge’s sentencing discretion.

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

Self-Regulation Reigns, for Now, on Consumer Data Privacy Issues

The online advertising industry is inching its way to more comprehensive policies regarding the collection of consumer data.

Read the full post here on the FTC Beat blog.

Google, Microsoft Assume Roles of Judge, Jury and Executioner on the Web

The Internet giants cancel the Web connections of companies that are accused by the government of mortgage fraud but have not been convicted.

Read the full post here on the FTC Beat blog.

New House Hearing Shows Strength of Hill Support for Legal Online Gaming

Many members of Congress remain serious that legal and technical obstacles can be overcome and that legislation can be passed in this area.

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

Convicted of Fraud but Changed Their Lives; Appeals Court Takes Note

A couple committed mortgage fraud back in the late ‘90s. The 7th Circuit gives them sentencing credit for self-rehabilitation.

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

More Big Pharma Companies Cough Up Big Dollars in DOJ Settlements

How high will these settlements go? The government has the power to strong-arm drug companies into settlements. How much will it demand?

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

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Aug 29

Google Agrees to Forfeit $500 Million: What Does This Mean for Affiliate Marketers?

In an unusual and little-noticed recent settlement, Google Inc. has agreed to pay a forfeiture of $500 million because it permitted Canadian pharmacies to advertise to United States consumers on its site using Google AdWords, resulting in the illegal sale of prescription drugs through online channels into the United States between 2003 and 2009.

The U.S. Department of Justice announced this agreement on August 24, 2011, in conjunction with the Food and Drug Administration’s Office of Criminal Investigations and the Attorney General of Rhode Island.

The government said that this forfeiture represents the gross revenue received by Google as a result of Canadian pharmacies advertising through Google’s AdWords program, plus the gross revenue made by Canadian pharmacies from their sales to U.S. consumers.

Although Canada has its own system of regulation of pharmaceuticals, Canadian pharmacies that ship drugs outside that nation are not subject to that system, and the U.S. Food and Drug Administration regards those shipments into the United States as generally illegal since they don’t comply with its regulations regarding labeling, distribution, and the use of a valid prescription.

What is most unusual here is that Google agreed to pay the forfeiture – even though its role was simply to accept advertising by Canadian pharmacies and to turn a blind eye to the legal problems. According to the government, Google did so from 2003 through 2009, when it learned of the investigation and took a number of steps to prevent the unlawful sale of prescription drugs by online pharmacies, including Canadian pharmacies, to U.S. consumers.

Last March, we asked the question, “Does Google Need to Police Its Ads for Fraud?” when Consumer Watchdog asked whether Google should be held legally responsible for deceptive advertisements placed on its site by mortgage rescue companies. This forfeiture agreement puts Google – and others in its position – on notice that they may need to account for their actions in connection with potentially illegal advertising.

It may go even further. A blog that covers the affiliate marketing community has noted: “For affiliate marketers, the Google and Justice Department settlement has serious consequences. There are many opportunities to partner with products or services online that may or may not be entirely legal.”

In fact, this settlement may have significant effects on the affiliate marketing community. Does each affiliate marketer that places an ad on a website, or simply permits an ad to go on a website, need to check the accuracy and truthfulness of the ad, or risk a major fine? This is at the very least a question that affiliate marketers need to concern themselves with.

Jul 11

Should FTC Sue Law Schools For Misrepresentation?

On May 25, 2011, a class action was filed against the Thomas Jefferson School of Law (TJSL) in San Diego for intentionally misrepresenting employment data of recent alumni. The complaint states that in order to continue attracting students despite exorbitant law student debt and a depleted legal job market, TJSL has “adopted a practice of misrepresenting its post-graduation employment statistics.”

These facts aren’t unique. According to a non-profit devoted to this issue, until very recently almost all 198 American Bar Association-accredited law schools deceptively touted churning out graduates with at least a 90 percent employment rate within nine months of graduation.

The Above the Law blog very recently referred to UCLA Law’s claim that 97.9 percent of its class of 2010 was employed within nine months of graduation at a median starting salary of $145,000 as “frankly unbelievable.”

According to Paul Campos in The New Republic, only about 60 percent of law graduates nationwide obtain permanent, full-time legal employment nine months after graduation.

Some observers say the Federal Trade Commission should step in to have turned to investigate whether the law schools have engaged in false advertising. However, we doubt that this would be a good idea, for several reasons.

Is there jurisdiction? The FTC’s jurisdiction is limited to entities such as for-profit corporations and partnerships and nonprofits that provide a pecuniary benefit to members. This may not include law schools, which are nonprofit institutions of higher education that provide scholastic rather than economic benefits. For the FTC to assert jurisdiction in this instance would be tantamount to an effort to regulate the advertising and marketing of all institutions of higher education, which would be far from the original purpose of the FTC to regulate the trade practices of businesses.

Are law schools completely at fault? Employment statistics are gathered according to the industry standard — a compilation of voluntary student responses to questionnaires provided by the ABA. However, many schools are not receiving anything near full participation from their students, resulting in skewed statistics. Schools tend to indicate this by inserting a disclaimer of the true percentage of student participation, making it clear that the statistic is not fully reliable. However, U.S. News & World Report publishes these statistics without the disclaimer. USNWR remains the most popular resource for potential law students in researching which law schools to attend, and its readers will find no disclaimer.

Is there a violation? Even if the FTC could regulate law schools, in order for there to be a false advertising violation, the misrepresentation must be material. There are numerous factors that go into a perspective student’s decision: location, student body, student/faculty ratio, tuition, and the average GPA/LSAT scores of admitted students. Further, the misrepresentation must also have been reasonably relied upon. Nearly all perspective students who view these statistics already have or nearly have obtained an undergraduate degree. It may not be reasonable to assume that these highly educated consumers have actually relied on claims of a 90 percent-plus employment rate in today’s economy, where unemployment is known to be historically high. The FTC normally protects the most vulnerable consumers against marketing practices that target the gullible, the poor, and the less educated. A lawsuit on behalf of law school applicants hardly seems consistent with the agency’s priorities.

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Jun 22

Ifrah Law’s Blog Wrap-Up, June 1-20

This is the sixth of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s blogs.

1. Perjury, Obstruction and Barry Bonds’ Conviction

Read why we regard the Barry Bonds obstruction of justice verdict as troubling: It sets a bad precedent for the grand jury system and allows prosecutors to unfairly pin an obstruction of justice charge on a witness.

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

2. FTC Says These ‘Free’ Offers Were Anything But Free

In yet another salvo aimed at online marketers, the FTC goes after a Canadian company in the latest federal action targeting companies involved in what is known as the upsell industry. Our post looks at how the FTC wants ads to be worded.

Read the full post here on the FTC Beat blog.

3. Disqualification of AUSA in Scruggs Case Is Message to Prosecutors

In this case, the government may have imprisoned an innocent defendant for 14 months. The only remedy that took effect was the removal of a particular prosecutor. We wonder: Was that really enough?

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

4. FTC Tries to Stay One Step Ahead of Internet Fraud

In this interesting case of “location fraud,” the FTC calls out an Internet seller who allegedly misled British purchasers by claiming to be based in the U.K. and therefore supposedly subject to stringent U.K. consumer protection rules.

Read the full post here on the FTC Beat blog.

5. Online Poker Finds New Supporter on the Hill

An outspoken GOP conservative House member is also a poker player – and he has pledged to support legalization and to move it through a House committee.

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

6. Good-Faith Rule Applies to Document Destruction

A court rejects charges that in a civil case, DuPont was guilty of “spoliation,” or the intentional destruction of evidence. The court says the proper test for document destruction is one of reasonableness and good faith in the circumstances, and DuPont didn’t act in bad faith.

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

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May 18

Ifrah Law’s Blog Wrap-Up, May 1-13

This is the fifth of a regular series of posts that summarize and wrap up our latest thoughts that have appeared recently on Ifrah Law’s blogs.

1. Bank Hit With FCA Complaint Over Mortgage Lending

The Justice Department uses a Civil-War era statute in a very unusual context – to try to recover more than $1 billion in a civil case from Deutsche Bank for statements it made to a federal agency about the quality of mortgages that it wrote.

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

2. What’s Next for Online Poker Players?

In the wake of the April 15 indictments in the online poker industry, we discuss the options available to people who still want to play poker but don’t have access to the websites they normally use.

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

3. Barney Frank’s Advice to Poker Players After ‘Black Friday’

The influential congressman gives a legal and political interpretation of the poker indictments and urges players to exert pressure on members of Congress.

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

4. Since When Did the FTC Start Regulating Cyber Security?

In a consent order with Twitter, the FTC resolves claims that the site deceived consumers regarding privacy protection. But is the agency trying to use the order as a wedge to regulate the entire online industry, arguably without a legal basis?

Read the full post here on the FTC Beat blog.

5. Supreme Court May Examine GPS Surveillance Issue

Do prosecutors need a warrant from a judge before they place a GPS device on a suspect’s vehicle? Federal appeals courts disagree on this issue, and the government has asked the Supreme Court to review it.

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

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About Ifrah Law

FTC Beat is authored by the Ifrah Law Firm, a Washington DC-based law firm specializing in the defense of government investigations and litigation. Our client base spans many regulated industries, particularly e-business, e-commerce, government contracts, gaming and healthcare.

Ifrah Law focuses on federal criminal defense, government contract defense and procurement, health care, and financial services litigation and fraud defense. Further, the firm's E-Commerce attorneys and internet marketing attorneys are leaders in internet advertising, data privacy, online fraud and abuse law, iGaming law.

The commentary and cases included in this blog are contributed by founding partner Jeff Ifrah, partners Michelle Cohen and George Calhoun, counsels Jeff Hamlin and Drew Barnholtz, and associates Rachel Hirsch, Nicole Kardell, Steven Eichorn, David Yellin, and Jessica Feil. These posts are edited by Jeff Ifrah. We look forward to hearing your thoughts and comments!

Visit the Ifrah Law Firm website

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