Consumer Protection Update August 2007

1. Consumer Protection UpdateAugust 2007 ABA Antitrust Section Oona Peterson August T Horvath

2. Federal Trade CommissionEnforcement

3. FTC Obtains Temporary Restraining Order Against Stored-Value Card Marketers • FTC v. EdebitPay, LLC, C.D. Cal., No. CV074880ODW(AJWx); FTC File No. 062-3125 • The FTC’s request for a temporary restraining order and asset freeze against a business engaged in marketing stored-value cards has been granted • The defendants debited a $159.95 “application and processing” fee from consumers’ bank accounts, even though several of the consumers had no contact with the defendants or had applied for unrelated short-term loans. • The defendants claimed on their Web sites that the cards carried “No Annual Fees” and had “No Security Deposit,” but failed to clearly disclose the processing fee. • Following the restraining order, the FTC will seek to permanently bar the defendants from further violations and will seek to force a forfeiture of the ill-gotten gains

4. FTC Settles Prepaid Stored Value Card Actions • FTC v. Remote Response Corp., et. al., S.D. Fla., No. 06-20168-CIV; FTC File No. 052-3137 • The FTC has entered into a stipulated final order with defendants, banning them from telemarketing and from selling credit cards, stored value cards, phone cards, and health discount plans, among other items • Defendants had targeted Spanish-speaking consumers through advertisements on Spanish-language television • Defendants marketed various pre-paid cards, which frequently did not work. They also offered free trial periods for a discount health plan, but either did not actually provide the free trial period or failed to respond to consumers’ attempts to cancel the trial period before the payment period began • In addition to being banned from selling such items in the future, defendants agreed to pay $4,164,558 • The FTC has approved a final consent order with respect to Kmart's gift card program. • Kmart must reimburse the dormancy fees for eligible consumers and must publicize the refund program on its website • Consumers may contact Kmart to determine if they are eligible for a refund; to obtain a refund, consumers must provide their gift card number, mailing address, and phone number • If the consumer is found eligible, Kmart will mail consumers a new gift card with a balance equal to the improperly deducted fees

5. Filing of Final Monetary Judgment in Matter of Verity International Authorized • FTC v. Verity International, Ltd., S.D.N.Y., No. 00 Civ. 7422-LAK, FTC File No. 002-3386 • The FTC authorized the filing of a stipulated final monetary judgment for over $1.6 million • Defendants had engaged in deceptive and unfair billing practices by charging the phone bills of consumers after the defendants’ pornography web sites were accessed • At times, the consumers who were charged were not the same consumers who accessed the websites • In all cases, bills reflected charges for phone calls to Madagascar, when, in fact, internet usage was “short stopped” in London • In addition to paying a monetary judgment, defendants were permanently barred from billing or offering such services to U.S. consumers

6. Operators of Boiler Room Scam Banned from Telemarketing • FTC v. The Results Group L.L.C., D.C. Az., No. CV 06-2843-PHX-JAT, FTC File No. 062-3205 • Defendants had engaged in deceptive telemarketing by selling home-based internet business opportunities to consumers • Defendants misrepresented statistics portraying how much money consumers earned with the business and pressured consumers to spend money on advertising in order to increase the profitability of their internet businesses • In addition to the telemarketing ban, defendants have been ordered to return approximately $435,000 to consumers

7. Spam Advertising Bogus Weight-Loss Products Must Cease • FTC v. Sili Neutraceuticals, LLC, N.D. Ill., No. 07 C 4541, FTC File No. 072-3124 • Defendants and the FTC have agreed upon a stipulated preliminary injunction • The FTC alleged that defendants violated the “CAN-SPAM ACT” by illegally sending e-mail messages about weight-loss products and human growth hormone anti-aging products to consumers • As alleged by the FTC, defendants used “Web form hijacking” – a spam tactic in which the spammer sends the spam message from an unrelated, third-party site, which causes the message to appear to come from that third-party • Following this injunction, the FTC will ultimately seek to permanently bar the defendants from further violations, and will also seek forfeiture of ill-gotten gains

8. FTC Cracks Down on Phony Weight-Loss Products • This month, the FTC took action to restore money to consumers who had previously purchased bogus diet and exercise products • FTC Requests the Return of Money to Consumers who Purchased “Ab Force” • In August of 2006, the Fourth Circuit upheld a ruling that marketers violated federal law by intentionally making deceptive claims that an electronic muscle stimulator would lead to weight loss • This August, the FTC filed a complaint seeking money for the consumers who purchased the Abdomen belts from the defendant marketers. Over 700,000 belts and related products were sold, earning about $16 million. • Refunds for Consumers Who Purchased Weight Loss Drug • From August 6 until September 15, 2007, the FTC will be accepting refund requests from consumers who bought Xenadrine EFX between February 1, 2002 and May 22, 2006. This action is being taken pursuant to the FTC’s settlement, with the marketers of Xenadrine EFX, of false advertising charges • Weight-Loss Patch Manufacturers to Pay $180,000 • In order to settle FTC claims that Transdermal Products International Marketing Corporation and William H. Newbauer sold bogus weight-loss patches through false advertising, the defendants will cease selling the patches and will pay $180,000 • Settlement also bars defendants from making claims identified by the FTC as “red flags” for weight-loss products, such as claiming that a product rubbed or worn on the skin leads to weight loss

9. Operators Who Placed Unauthorized Charges on Phone Bills to Pay $1.2 Million in Settlement Fees • FTC v. Websource Media, L.L.C., et. al., S.D. Tx., Civ. No. H-06-1980, FTC File No. 032-3176 • Defendants cold-called small businesses and nonprofits and offered them a free “trial” Web site service • Even when consumers did not agree to participate in the free “trial,” the defendants charged their phone bills, later claiming that they had “verification recordings” of an employee authorizing the charges • Defendants entered into a stipulated final judgment with the FTC to pay $1.2 million to settle the charges brought against them • The FTC settlement will bar the unlawful practices the defendants have been practicing • The defendants were charged under sections 5(a) and 13(b) of the Federal Trade Commission Act

10. FTC and Subprime Mortgage Servicer Agree to Modified Settlement • In 2003, Fairbanks Capital Corp. and Fairbanks Capital Holding Corp. agreed to pay $40 million to settle charges of unfair, deceptive, and illegal practices in servicing subprime mortgage loans. The 2003 settlement with the FTC also limited Fairbanks’s ability to charge fees to consumers and engage in certain practices when servicing mortgage loans. • In 2004 Fairbanks changed its name to Select Portfolio Servicing, Inc. and SPS Holding Corp. • A recent review of SPS’s compliance with the 2003 settlement has resulted in several modifications. Among other changes, SPS must: • Cease marketing non-required products, such as home warranties, for five years • Limit charging attorney’s fees in connection with bankruptcies and foreclosures • Provide monthly mortgage statements for customers • Continue to allow an auditor to oversee compliance with the settlement until 2013 • SPS will now be allowed to hold or reject a customer’s payment if it is more than $25 short of the monthly principal and interest that is due, provided that adequate notice is given to the customer

11. FTC Comments on Louisiana State Bar Association’s Proposed Revisions to Attorney Advertising Rules • FTC recommends that Louisiana refrain from banning forms of advertising that are not inherently or actually misleading • FTC suggests that the Louisiana Bar, rather than leveling a ban on advertising, instead provide guidance on how some advertising may be deceptive and how such potential problems may be cured • The FTC refers to the New York State Unified Court System Rules as an example after which Louisiana could model its rules

12. Upcoming FTC Town Hall on Online Behavioral Advertising and Privacy Issues • FTC will host a discussion on the privacy implications of “behavioral advertising” on November 1-2 in Washington DC • Consumer advocates, industry representatives, technology experts, and academics will discuss the practice of tracking consumers’ online activities to target advertising • Discussion will touch upon: • how online behavioral advertising works • whether the data collected is personally identifiable or anonymous • what security protections are in place to guard the consumer data that companies collect • whether the online data-collection practices of companies are being disclosed to consumers • what standards should govern practices related to online behavioral advertising

13. State Attorney GeneralEnforcement

14. Florida AG Sues Deceptive Florist • Florida AG alleges that a New Jersey corporation, “Florist in Miami,” created 53 false listings of florists that appeared to be in Florida and led customers to believe that flower orders were being filled from Florida, when in fact they were being filled from New Jersey. • Sued for over 150 violations of FloridaUDTPA.

15. Florida AG Sues Intelliflix • Florida AG claims DVDrental companyadvertises movies thatare not actually available and ships more slowly than claimed. • Customers who wanted to cancel membership were told they could only do so at the end of an enrollment year. • Suit calls for company to cease all business operations and be enjoined permanently from online video rental business.

16. Connecticut AG Sues Car Dealership • Connecticut AG alleges that Crabtree Subaru and Crabtree Dodge falsely advertised credit terms to lure customers into showrooms. • False testimonials from nonexistent customers were allegedly used to tout the dealer. • Various discounts and special prices promoted by the dealer also allegedly were not available.

17. New York AG Probes Home Health Care • New York AG: “The evidence we’ve obtained to date suggests endemic, persistent fraud and malfeasance at all levels of the home health care industry.” • Unqualified aides and other personnel • Fraudulent billing and collection practices • Fifty subpoenas have been sent to certified home health agencies in the New York City area. • “The findings from these subpoenas will help us put together a global picture of the extent of the problem and a roadmap for repair.”

18. California AG Settles with Vocational School • California AG alleged that The Corinthian School deceptively overstated the percentage of students who had obtained employment from its vocational courses, inflated the starting salary of its graduates, and created unrealistically high expectations to attract prospective students. • Settlement provides $5.8 million in restitution for tuition paid by students in reliance on the claims, including $1.5 million as debt cancellation, the balance as a refund. • $700,000 payment to AG for civil costs and penalties.

19. Nebraska AG Investigates Gas Price Advertising • Gas station in North Platte at I-80 interchange advertised price on gasoline, but it was only available at some pumps. Other pumps were substantially higher priced. Consumers allegedly were deceived into using higher-priced pumps. • Competitor at same interchange notedtactic and followed suit. • AG commenced investigation, served CID.Much media attention, public outcry. • Signs have now changed to disclose thatthe advertised price is available at only somepumps. • AG and some consumers not satisfied.

20. Allstate Ins. Co. v. Abbott, 2007 WL 2192895 (5th Cir. Aug. 1, 2007). • Texas law restricted the right of automobile insurers to own and operate auto body repair shops and to participate in joint marketing with “tied” repair facility. • Auto insurer, having purchased a chain of 60 repair shops in 14 states, challenged this law as violation of dormant Commerce Clause and First Amendment. • Held: The Texas law is an unconstitutional restriction on commercial speech. Insurer may own repair shops and influence customers to use them, provided it discloses affiliation. Prohibiting this is an impermissibly broad restraint on truthful speech. • Court rejected Texas’s argument that advertisements guiding consumers to insurer-owned shops are inherently misleading and therefore ineligible for protection.

21. PrivateEnforcement

22. Shroyer v. New Cingular Wireless Servs., Inc., 2007 WL 2332068 (9th Cir. Aug. 17, 2007) • Suit by consumer class against cellular telephone provider alleging that the 2004 merger with AT&Tinjured consumers through deterioration inservice quality, claiming violations of stateand common law fraud and false advertisinglaw. • Case removed to federal courtunder CAFA; California judge granted motionto compel arbitration. • Ninth Circuit holds that Cingular’s class arbitration waiver was unconscionable and therefore entire arbitration clause void under California law; claims may proceed.

23. Naftulin v. Sprint Corp., 2007 WL 2429499 (N.Y. Sup. Aug. 27, 2007). • Consumer plaintiff sought national class certification of class of subscribers to Sprint’s 3000-minute $49.99 Add-A-Phone Plan, alleging common law fraud and seeking New York subclass based on GBL Sect. 349, 350 violations. • Plan was intended to be test-marketed only inDetroit and Washington DC, but advertising wasinadvertently distributed nationwide by Staples. Those who signed up elsewhere in nation were given other plans and offered chance to deactivate without fee. • Class certification denied because of individual issues as to inducement to sign up, what contract was actually provided to customers, and how much compensation was already received for injury.

24. Pennsylvania Employees Ben. Trust Fund v. Zeneca Inc., 2007 WL 2376312 (3d Cir. Aug. 17, 2007). • State employee benefit fund brought class action against drug manufacturer alleging deceptive advertising of Nexium heartburn and acid reflux disease drug as superior to Prilosec under Delaware Consumer Fraud Act and other state statues. • Affirming dismissal of action, the Third Circuit held that while outside the DCFA’s explicit exemption for conduct that complies with FTC rules, the action was preempted by highly specific FDA regulations for prescription drug advertising. • FDA has issued extensive regulationsgoverning prescription drug advertisingwhich shows intent to exercise closesupervision. Case for preemption is especially strong when the advertising isbased on FDA-approved labeling.

25. Romond v. Valiant Home Remodelers, 2007 WL 2362853 (N.J. Super. A.D. Aug. 21, 2007). • Consumers sued window contractor alleging that they had relied on a brochure shown to them by its president featuring a large bow window having five lights and narrow mullions. • What they got instead had widemullions and the lights consistentmostly of frosted glass. • HELD: Remodeler is bound byappearance of window shown inbrochure. Under NJ Consumer Fraud Act, it must provide a window similar to that shown in the brochure, where customer had focused on brochure illustration specifically in conversations leading to purchase.

26. Weinstein v. Saturn Corp., 2007 WL 2429397 (N.D. Cal. Aug. 23, 2007) • Consumer sued alleging that Saturn’s advertisements for the OnStar system installed in Saturn cars was deceptively implied that that system performs the task of “navigation of automated phone systems,” when in fact it does not. • Court granted motion to dismiss claim. Plaintiff failed to show that Saturn advertisements and/or brochures contained such a claim expressly, nor could one reasonably infer such a claim. Plaintiff alleged that a Saturn dealer employee made this claim, but failed to allege that Saturn can be held vicariously liable for it. Plaintiff also failed to allege that Saturn had an affirmative duty to allege that the OnStar system lacked the desired capability (i.e. that it was a material omission). • Claims against dealer were allowed to proceed but were remanded to state court.

27. In re Tobacco Cases II, 41 Cal. 4th 1257 (Cal. 2007). • Consumer class action against tobacco companies for alleged scheme to market cigarettes to minors was alleged as violation of California UCL and false advertising law. • California Supreme Court held action preempted by Federal Cigarette Labeling and Advertising Act. • This reverses a prior ruling of the Court, Mangini v. R.J. Reynolds Tobacco Co., 7 Cal. 4th 1057 (Cal. 1994), that the FCLAA does not preempt UCL claims that tobacco companies advertised in a manner that encouraged minors to begin smoking, based on intervening U.S. Supreme Court decision, Lorillard Tobacco Co. v. Reilly, 533 U.S. 525 (2001), holding that the FCLAA preempted state statute banning outdoor cigarette advertisements near schools, parks and playgrounds.

28. Good v. Altria Corp., 2007 WL 2460039 (1st Cir. Aug. 31, 2007). • Class of smokers sued tobacco company alleging that claims that a cigarette was “light” and had “lowered tar and nicotine” were deceptive under the Maine UTPA. • Reversing district court, the First Circuit held these claims not preempted by FCLAA, not implicitly preempted by FTC oversight of tobacco advertising, and not barred by MUTPA exemption for activities permissible under federal law. • Distinguished from Lorillard: Here, State is not trying to outlaw specific advertising activities, but to enforce general “state-law duty not to deceive” which is“broader than a duty based on smokingand health and therefore beyond thereach of FCLAA preemption.”

29. Time Warner Cable v. DirecTV, Inc., 2007 WL 2263932 (2d Cir. Aug. 9, 2007) • Lanham Act claim by cable provider against satellite TV provider alleging that satellite provider falsely advertised superiority of picture signal provided by satellite as compared to cable. • Affirming in part district court grant of prelim-inary injunction, Second Circuit holds claims that it is “impossible to obtain the best picture” from cable or that consumers should not “settle” for the qualityof cable are likely to be proven misleading. • However, internet ads showing exaggerateddemo of poor cable quality are so extremeas to be puffing, not likely believed by consumers.