American Bar Association Consumer Protection Update March 2007

1. American Bar AssociationConsumer Protection UpdateMarch 2007 Barry Reingold Judith Gitterman Matthew C. Staples

2. Presentation Outline • Federal Trade Commission • Notable Cases • FTC Reports & Workshops • State Law Update • Enforcement Actions • Legislation • NAD Update • CARU Update • Private Actions Update

3. FTC: Notable Cases • FTC v. Information Search, Inc. & David J. Kacala • Defendant settled charges that it obtained confidential phone records and sold them to third parties without consent (pretexting) • Settlement bars defendant from obtaining, causing others to obtain, marketing, or selling customer phone records except where allowed by law, regulation, or court order. • Imposes judgment of $40,075, all but $3,000 of which is suspended

4. FTC: Notable Cases • In the Matter of Kmart Corporation, et al. • Defendant agreed to settle FTC charges that it had engaged in deceptive practices in advertising and selling gift cards. • FTC alleged that Kmart had failed to adequately disclose applicable terms and conditions related to "dormancy fees." • Kmart cards stated: "After 24 months of non-use, a $2.10 per month service fee will be deducted from your balance in arrears until the card is used or depleted." • What that meant: in addition to deductions for future months of inactivity, the $2.10/month fee was applied retroactively to previous 24-month period, resulting in immediate $50.40 reduction from card's value.

5. FTC: Notable Cases • The FTC claimed Kmart's disclosure of the fee was inadequate because: • the fee was disclosed on the back of the card in small print (approximately five point font), embedded in a paragraph of "Terms and Conditions" • the card was affixed to cardstock that completely obscured the disclosure on the back of the card; • Kmart failed to use "understandable language and syntax to describe the dormancy fee"; • Kmart sold gift cards on the Kmart.com website without disclosing the fee to consumers at the time of purchase; • the Kmart.com website stated that Kmart Gift Cards "never expire," despite the large dormancy fee that, after two years of inactivity, would reduce many card balances to zero and thereby effectively cause such cards to expire.

6. FTC: Notable Cases • In requiring Kmart to disclose expiration dates and fees "clearly and prominently," the FTC's consent order requires that Kmart: • Provide disclosures "at the point of sale, prior to purchase" • in audiovisual advertisements, provide disclosures in both audio and video formats "simultaneously," with audio "delivered in a volume and cadence sufficient for an ordinary consumer to hear and comprehend it" and video being "of a size and shade, and … appear[ing] on the screen for a duration, sufficient for an ordinary consumer to read and comprehend it" • in interactive media, provide disclosures that are "unavoidable" and "presented prior to the consumer incurring any financial obligation" • in print advertisements or other materials, and on a product label or the gift card itself, provide disclosures in "a type size and location sufficiently noticeable for an ordinary consumer to read and comprehend it, in print that contrasts with the background against which it appears" • in multi-page documents, include the disclosure "on each page where a gift card is advertised, promoted, mentioned, or depicted" • make the disclosure in an "understandable language and syntax"

7. FTC: Notable Cases • FTC v. Capital Acquisitions & Management Corp., et al. • Defendant, a company that buys delinquent debt, settled FTC charges that it threatened and harassed consumers to get them to pay old, unenforceable debts or debts they did not owe. • FTC had alleged violations of FTC Act and FDCPA • Other defendants had already settled for $1,000,000 • Settlement bars defendant from collecting upon debts and, furthermore, from making false or misleading statements or representations in connection with debt collection; imposes $15,000,000 fine if defendant misrepresented financial condition

8. FTC: Notable Cases • FTC v. Myfreemedicine.com • Complaint alleged that defendants targeted low income consumers who spent more than $100 a month for medications and might qualify to receive free prescription medicine through one or more patient assistance programs (PAPs) operated by pharmaceutical companies. • PAPs impose varying eligibility requirements and not all drugs are available. Those that are may only be available for limited times, or in certain doses. • The company charged consumers $199.95 for a six-month enrollment. In exchange, it provided consumers with the PAP forms.

9. FTC: Notable Cases • FTC v. Myfreemedicine.com (cont.) • Settlement imposes $500,000 suspended judgment; prohibits deceptive claims about any medical services program, including claims about PAP eligibility, availability of specific medications, assistance the defendants provide, and their refund policy. • It also bars defendants from accepting payment without first providing a clear and conspicuous written notice that discloses the terms and conditions of their services and informs consumers that they can access PAPs directly, defendants only provide assistance in applying for PAP benefits, PAPs set their own eligibility requirements, and payment to the defendants does not guarantee receipt of medication from a PAP. • The settlement also requires that defendants disclose their refund policy in writing.

10. FTC: Notable Cases • FTC v. International Product Design, Inc., et al. • FTC initiated contempt proceedings against defendants who operated fraudulent invention promotion business in violation of court order • Court order issued in 1998 prohibited two of the defendants from falsely promising to evaluate invention ideas and falsely claiming that consumers would profit financially if they bought the defendant's invention promotion services • FTC also alleged that defendants never sent consumers the “Affirmative Disclosure” form required by the order; the form should have disclosed the defendants' non-existent track record in bringing inventions to market • FTC alleged that defendants, in roles as managers and salesmen for the business, knew about and were subject to court order • Bankruptcy receiver's report indicates that the business has received over $60,000,000 from more than 17,000 customers since 2000 but couldn't identify a single consumer who had utilized its services successfully

11. FTC: Notable Cases • FTC v. 120194 Canada, Ltd. d/b/a Veritech Communications, et al. • FTC alleged that individuals and their companies falsely claimed that high-credit risk consumers would receive low-interest, high-credit limit, no-annual fee credit cards if they paid fees ranging from $159 to $236 • Defendants instead shipped package of coupons and discounts • Settlement and default order: • Bars defendants permanently from telemarketing in the U.S., selling credit-related products or services in the U.S., and making or assisting anyone else in making misrepresentations material to a customer’s decision to buy any good or service, concerning the performance, efficacy, or nature of a product or service, or the material terms, conditions, or limitations of any transaction regarding a product or service • Continues the freeze in place on the defendants’ assets, except for funds required to pay $8.1 million default judgment to the FTC, prohibits them from disclosing information about their customers, and contains monitoring and record keeping terms to ensure their compliance.

12. FTC: Notable Cases • FTC v. 1522838 Ontario, Inc. d/b/a International Industrial Trade Directory • "Bogus billers" settled FTC charges that defendants billed and accepted payment for unauthorized listings and advertisements in nonexistent business and travel directories and undelivered, unauthorized consulting services and office supplies • FTC alleged that defendants targeted businesses and cities in the U.S., and resorts and hotels in more than 25 countries with fake cut out legitimate advertisements and directory listings and pasted them to their invoices to lend credibility • Settlement imposes $4,000,000 suspended judgment and prohibits defendants from making, or assisting in making, any express or implied representation or omission of material fact that is false or misleading

13. FTC: Notable Cases • FTC v. Mystery Shop Link • Complaint filed against mystery shopping operation, its telemarketing firm, and the individuals responsible • Mystery shopping operation allegedly misrepresented that: • the operation itself was hiring mystery shoppers, or hiring mystery shoppers on behalf of others; • there were a specific number of mystery shopping jobs available in the consumers’ area; • a large percentage of mystery shopping jobs go unfilled due to a lack of mystery shoppers; and • consumers who paid the defendants’ fee were likely to earn a substantial income. • Complaint also charges mystery shopping defendants with contempt – one of the individuals previously pitched false availability of government jobs and ability to obtain refund, and others were aware of order entered against that individual

14. FTC: Notable Cases • FTC v. Debt Set, Inc., et al. • Debt Set advertises and provides "debt reduction services," including "debt consolidation" and "debt settlement" programs • Complaint alleges that defendants promise to stop collections calls, and to consolidate debts, negotiate better interest rates such as "between 0 and 9 percent," or lump settlements such as "50 cents on the dollar" or "50 to 60 percent" of the debt • In actuality, the complaint alleges, defendants require consumers to pay 8% of the debt in monthly payments before they contact creditors, and sometimes do not contact them at all • Many consumers accrue additional debt from interest, late fees and finance charges • Judge issued TRO that freezes assets and appoints temporary receiver

15. FTC: Reports & Workshops • Debt Collection Workshop – October 10-11, 2007 • 30th anniversary of FDCPA • The workshop is intended to allow the FTC to learn about changes in the debt collection industry and to examine how those changes have affected consumers and businesses.

16. State Law Update -- Enforcement Actions • Sunrise Herbal Remedies (Connecticut) • Law suit alleges that telemarketing and internet vendor of herbal products defrauded customers who made one-time purchases by sending them (and billing them for) repeated shipments. • Disclosure that vendor was an “auto ship company” and that customers were required to buy at least two bottles was tucked away at the bottom of the webpage. • State seeks restitution for consumers –average loss $200 per consumer.

17. State Law Update -- Enforcement Actions • Mortgage “Foreclosure Rescue” Service (Washington) • State AG settles with investor group that defrauded homeowners and other property owners facing tax foreclosure. • Defendants got names of property holders whose taxes were in arrears from public records. Contacted them with offer to provide them money with which to pay off delinquent taxes (sometimes in amounts as little as $200) in exchange for transfer of title or an interest in the property. • Redress funds will be divided among 100 or more defrauded consumers.

18. State Law Update -- Enforcement Actions • Advance America Case Advance Centers, Inc. (West Virginia) • State AG settles with largest “payday lender” in the Untied States. “Payday loan” is a short-term loans or cash advances that is secured with a post-dated check for the full loan amount plus interest and fees. Interest is often in the triple digits. Collection practices are often coercive; threats to initiate criminal prosecution, unauthorized calls to third parties and personal visits to consumer’s homes. • “Pay day” loans are illegal in West Virginia and other states. • Relief includes injunctive relief and consumer redress.

19. State Law Update -- Enforcement Actions • Oklahoma Republican Political Consultant fined for “Robo-Calling” violations of federal Telephone Consumer Protection Act (Oklahoma) • In lawsuit by State AG, federal judge orders $4,500 fine from consultant Tim Pope for making pre-recorded calls on behalf of local candidates without disclosing the name and telephone number of person responsible for the call. • Defendant intends to appeal on grounds that political calls do not violate TCPA.

20. State Law Update -- Legislation • South Dakota Spam Statute (H.B. 1285) • Prohibits sending unsolicited commercial e-mail advertisements to a "South Dakota electronic e-mail address," defined as any e-mail address "ordinarily accessed" from a computer in South Dakota, owned by or "furnished to" a South Dakota resident, or "furnished by an electronic mail service provider that sends bills for furnishing and maintaining that e-mail address to a mailing address" in South Dakota. • Defines "unsolicited commercial e-mail advertisements" as commercial e-mails sent without a pre-existing business relationship, and without the recipient's prior, direct consent. • Authorizes civil suits by individuals and the state attorney general. Actual damages or liquidated damages of up to $1,000 per unlawful e-mail, or $1 million per incident, are available. • Likely to be challenged on preemption grounds -- CAN-SPAM "supersedes any statute, regulation, or rule of a State or political subdivision of a State that expressly regulates the use of electronic email to send commercial messages, except to the extent that any such statute, regulation, or rule prohibits falsity or deception in any portion of a commercial electronic mail message or information attached thereto"

21. National Advertising Division -- Decisions • Bayer Healthcare LLC (Diabetic Monitoring Systems) • Abbott Labs challenged competitor Bayer’s claims about Abbot’s diabetic blood glucose monitoring systems, specifically, claims about the relative inaccuracy of Abbott’s FREESTYLE system. For example: • For FREESTYLE, “90% of the errors fell in the range of +30% to 59% (Code 7), and -10% to -30% (Code 41)”.

22. National Advertising Division -- Decisions • “The median difference in results from a miscoded FREESTYLE meter when compared to a correctly coded meter was +43.3% and -16.1%”. • When improperly coded, the ONE TOUCH ULTRA and FREESTYLE meters yielded blood glucose results that differed from the correct results by a rage of “-31.3% to +45.9%”. • For FREESTYLE, “90% of the errors fell in the range of +30% to +59% (Code 8), and -5% to -30% (Code 41)”. • “The median difference in results from a miscoded FREESTYLE meter when compared to a correctly coded meter was +45.9% and -15.2%”. • NAD concluded Bayer had overstated these claims. Bayer is requesting referral to a panel of the National Advertising Review Board.

23. National Advertising Division -- Decisions • IOGEAR, Inc. (“Germ Free Laser Mouse”) • Advertiser claims titanium dioxide and silver nano-partical compound coating mouse is 99% germ free and “Safety Approved.” • NAD finds reasonable scientific basis about germ resistant features of coating, but no basis for broad claim that technology is “Safety Approved” where there is no evidence any safety authority approved its use for this specific purpose. • Nutrisystem Inc. (Nutrisystem “Nourish”) • “Results not typical” disclaimer in ad showing consumer who lost 30 pounds not sufficiently “clear and conspicuous” when presented in faint green type vertically (rather than horizontally) on the page.

24. National Advertising Division -- Decisions • Schering-Plough Healthcare Products Inc. (“Dr. Scholl’s Dual Action Freeze Away Wart Remover”) • NAD staff examined whether broadcast ad stating that “Dual Action Freeze Away is twice as effective as freezing alone on large warts” implied that the product was superior to visiting a doctor for treatment of larger warts. • Noting that this ad was part of a trend in which health care product advertisers are claiming that using their products is as good as or better than visiting a doctor, NAD found both the explicit and implied claims substantiated.

25. National Advertising Division -- Decisions • X-Calibur Plant Health Company (“Plantacote Controlled Release Fertilizer”) • Challenge by competing fertilizer maker about efficacy claims in brochure X-Calibur distributed at only trade shows. • NAD found that the advertising constituted “national advertising” within NAD’s jurisdiction because exhibitors and attendees from throughout the United States were invite to and did attend the trade shows.

26. Children’s Advertising Review Unit --Decisions • Conair Corporation (“Quick Gems”) • Television ads asking children to “call right away” for a “special offer” for hair care products was substantiated where the ad ran for less than six months during a twelve month period, and thus was “special”.

27. Children’s Advertising Review Unit --Decisions • Sony Picture Entertainment Inc. (“Stomp the Yard” movie) • Sony found to have violated CARU Self-Regulatory Guidelines by included banner ads for adult shows on the kids section of www.bamzu.com, a portal designed to promote Turner Broadcasting products and events. • The Upper Deck Company, LLC (“Upper Deck Kids Website”) • Website operator found to have collected PII from children without verifiable parental consent in violation of the Children’s Online Privacy Protection Act.

28. Private Litigation Update -- Decisions • Proctor & Gamble Co. v. Hagen, et al. 2007 WL 805603 (D. Utah, February 6, 2007) • Amway independent distributors sent false voicemails through Amway voicemail system claiming profits from Proctor & Gamble support a satanic church. The District Court: • granted P & G's partial motion for summary judgment under Lanham Act sec. 43(a) false advertising claim, holding: • The voicemails were commercial speech, as 10th Circuit had held on appeal prior to remand • The messages were sent by defendant and were false • A question of fact remained whether messages were sufficiently disseminated to general public to constitute commercial advertising under section 43(a) • The court also held that Utah's common interest publication privilege to slander and libel could not defeat the Lanham Act claim

29. Private Litigation Update -- Decisions • Muzikowski v. Paramount Pictures Corp., 477 F.3d 899 (7th Cir. 2007) • Seventh Circuit upheld summary judgment in favor of studio sued by baseball coach who claimed "Hardball" was based on his story, portrayed him in a false light, and constituted false advertising • Court held that coach waived false advertising claim because he did not contest that there was no false statement movie was inspired by "a true story" • Even if he had not waived claim, summary judgment was proper because 18 affidavits of individuals who stated they believed the character in the movie was the coach, were "far short" of a substantial segment of film viewers, where film had grossed over $40 million

30. Private Litigation Update -- Decisions • Love v. The Mailon Sunday, 2007 WL 458050 (C.D. Cal. Feb. 8, 2007) • Mike Love, former Beach Boy sued The Mail on Sunday and other British entities, under 15 U.S.C. section 1125(a) –false designation and false advertising for distributing a "Good Vibrations" covermount CD with old Beach Boy songs and Brian Wilson solo material, for using Beach Boys photos and the use of the term "The Beach Boys" on the CD and in advertisements • The District Court applied the 3 Timberline factors used in the 9th Circuit for extraterritorial application of antitrust laws: (1) there must be some effect of violations on American foreign commerce; (2) the effect must be sufficiently great to present a cognizable injury to plaintiffs; (3) interests and links to American foreign commerce must be sufficiently strong in relation to those of other nations to justify assertion of extraterritorial authority • The court held the U.S. did not have a strong enough interest to justify extraterritorial application of the Lanham Act because the CDs were only distributed in the UK, and the alleged violations did not create an effect on American commerce

31. Private Litigation Update -- Decisions • San Francisco Oven LLC v. Fransmart, Inc., 2007 WL 737399 (4th Cir. March 9, 2007) • Fourth Circuit upheld District Court's award of attorney's fees to defendant whose motion to dismiss 15 U.S.C. section 1125(a)(1)(B) was granted. • Court held that Lanham Act permits award of reasonable attorney's fees to prevailing party in exceptional cases, which may be based on "a showing of less than bad faith" • Relevant considerations: economic coercion, groundless arguments and failure to cite controlling law • Court concluded record supported district court's findings that plaintiff brought Lanham Act claim solely to avoid dismissal for lack of subject matter jurisdiction, without any factual or legal support

32. Private Litigation Update -- Class Action Certified • Wong v. PartyGaming, Ltd., (N.D. Ohio March 19, 2007) • District Court granted an unopposed motion for class certification in part • Plaintiffs alleged PartyGaming's "PartyPoker" falsely represented that it had an effective "collusion prevention system" • Court held that representatives could not represent nationwide class action for violation of state consumer protection laws because they did not provide a fifty-state review establishing differences among state law were minor enough to be ignored • Court certified a class limited to Ohio customers

33. Questions? Questions are welcome (and encouraged) during the presentation. If you have questions after the presentation, please feel free to contact: • Barry Reingold (Washington, D.C.) • breingold@perkinscoie.com • (202) 434-1613 • Judith Gitterman (Los Angeles) • jgitterman@perkinscoie.com • (310) 788-3252 • Matthew C. Staples (Seattle) • mstaples@perkinscoie.com • (206) 359-8381