Advertising Law

FTC Shuts Down Scam Touting Aid for Disabled Individuals

A telemarketer faces a Federal Trade Commission ban on claims that the sales of products would help disabled individuals.

The agency took action against Adli Dasuqui and a pair of his companies, American Handicapped Inc. and Disadvantaged Workers Inc., alleging the defendants paid telemarketers to cold-call consumers to sell light bulbs and trash bags. Callers told consumers that they represented a charitable organization that employed disabled persons or that they themselves were disabled. They claimed that a purchase (at inflated prices, such as $30 for two light bulbs or $100 for 60 trash bags), or a donation, would help disabled individuals.

Such claims were false, the FTC alleged, as the defendants paid "only a small portion to handicapped or disabled employees, the person soliciting [was] usually not handicapped or disabled, and Defendants do not operate a charitable organization." The defendants also shipped merchandise without the consent of consumers and then sought payment for the unordered merchandise, according to the agency, which cited complaints about the defendants' practices from several states including Arizona, Iowa, and Minnesota.

The Michigan federal court complaint asserted violations of Section 5 of the Federal Trade Commission Act, the Telemarketing Sales Rule, and the Unordered Merchandise Statute.

Pursuant to the stipulated final order, the defendants are prohibited from selling anything for the "purported benefit" of disabled persons, mischaracterizing their involvement in charitable endeavors, or from making untrue claims that a consumer has ordered and agreed to pay for products. Future violations of the Telemarketing Sales Rule and the Unordered Merchandise Statute are also prohibited by the order, as are misrepresenting any material fact about any good or service, profiting from customers' personal information, or failing to properly dispose such data.

A $4 million judgment was suspended due to an inability to pay.

To read the complaint and stipulated final order in FTC v. American Handicapped, Inc., click here.

Why it matters: For appealing to consumers' sense of charity by misrepresenting that purchases or donations would help handicapped or disabled individuals, the defendants ran afoul of the FTC Act and the TSR. Adding to their legal problems: they sent unordered merchandise and then charged consumers in violation of the Unordered Merchandise Statute.

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Robocall Defendants Reaped $15.6M, Regulators Charge

The Federal Trade Commission working with the Florida Attorney General's Office, filed suit against a group of related defendants, charging them with "bombarding" consumers with illegal robocalls in an attempt to sell debt relief services and credit card interest rate reductions.

A federal court granted the regulators' request for a temporary restraining order halting the operation, which the FTC and AG said took in more than $15.6 million since January 2013 and made "hundreds of thousands" of robocalls.

Collectively known as Life Management Services of Orange County, LLC, the defendants used generic names like "Bank Card Services" and "Credit Assistance Program" when calling consumers, claiming to be a "licensed enrollment center" for credit card networks such as MasterCard and Visa, the FTC and AG said. The defendants promised to work with credit card companies or banks to "substantially and permanently" lower credit card interest rates and save consumers thousands of dollars by paying off their balances three to five times faster, according to the complaint filed in Florida federal court.

Instead, consumers were charged an upfront fee of between $500 and $5,000 and the defendants made, at best, a rudimentary effort to contact some credit card companies, the regulators alleged.

The defendants further deceived consumers by offering a credit card debt elimination service. By tapping into a government fund, the defendants claimed that they could pay off a consumer's debt in 18 months—for an upfront payment of between $2,500 and $20,000. Since no such fund actually exists, the consumers who paid for the purported service only found themselves deeper in debt, according to the complaint.

How did the agency obtain its evidence against the defendants? In the case against Life Management, the FTC told the court it relied upon a "telephone honeypot," a bank of phone lines designed to attract robocalls. FTC investigators were the parties answering the calls, and had the opportunity to interact with callers to identify them and document their claims.

While the action seeks a permanent stop to the defendants' operations and money for consumer refunds for violations of the Federal Trade Commission Act, the Telemarketing Sales Rule, and Florida's Deceptive and Unfair Trade Practices Act, so far the court has only ordered a temporary halt pending an upcoming hearing.

To read the complaint and the TRO in FTC v. Life Management Services of Orange County, click here.

Why it matters: The case was the 39th action taken since January 2015 as part of a collective enforcement effort with state regulators and other countries to halt robocall operations. Actions with agencies ranging from the United Kingdom's Information Commissioner's Office to the offices of the attorneys general in Colorado, Missouri, and Washington, among others, have all focused on combatting "the nuisance of illegal robocalls," the Commission explained. To further these efforts, the FTC announced that 11 international regulatory organizations signed a new memorandum of understanding "to share information and intelligence in the worldwide fight against unsolicited messages and calls." Signatories, all members of the London Action Plan, include regulatory agencies in Australia, Canada, Korea, Netherlands, New Zealand, South Africa, and the United Kingdom, with the FTC and the Federal Communications Commission signing on for the United States.

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FTC Reports on Fraud in Minority Communities

Fraud in minority communities was the subject of a new report from the Federal Trade Commission issued to Congress.

"Combating Fraud in African American and Latino Communities: The FTC's Comprehensive Strategic Plan" discussed the agency's "extensive efforts to combat fraud in not only African American and Latino communities, but every community with an emphasis on raising public awareness and encouraging more fraud reports," the agency explained.

An estimated 10.8 percent of American adults, or 25.6 million people, were victims of fraud according to the most recent FTC survey, with African American and Latino consumers more likely to become victims than non-Hispanic whites (at a rate of 17.3 and 13.4 percent compared to 9.0 percent). To reduce fraud, the FTC report sets forth a three-pronged approach of prevention, law enforcement, and consumer outreach and education.

"Raising awareness of fraud in African American and Latino communities is the first step in prevention," the agency explained, adding that "Talking about fraud helps people avoid scams" as "silence contributes to financial loss."

Data suggests that minority communities underreport fraud to the FTC even though they experience it at higher rates, the FTC said. To solve this problem, the Commission intends to speak at national and regional conferences of organizations that reach African American and Latino audiences and encourage individuals to talk about and report fraud. It will discuss fraud awareness with African American and Latino media outlets to encourage reporting of scams, and launch a pilot program to visit areas with low rates of fraud related complaints.

The FTC also intends to bring more cases against entities that disproportionately prey on African American and Latino consumers (such as affinity frauds, income-related frauds, and debt-related frauds), broaden investigative resources to ensure marketplaces are not overlooked, and perform additional research to help the Commission identify and target frauds affecting minority communities.

For the final component of its strategy, the agency will build on its existing consumer outreach and education efforts to maximize the availability and accessibility of the FTC's educational materials to African American and Latino communities. To that end, consumer education materials will be made widely available in multiple formats (websites, videos, audio, and print) in both English and Spanish, with an increased use of real-life stories to engage interest in the educational campaigns.

The FTC will also continue its examination of fraud in minority communities by hosting a workshop in December on Changing Consumer Demographics. As the population of the United States grows older and more racially and ethnically diverse, the Commission will bring together researchers, marketers, community groups, and law enforcement to consider the predicted changes.

"Who will be the consumers of the future?" the report asked. "How is advertising and marketing changing? How will fraud likely change and what can the FTC and others do to prepare to combat fraud perpetuated against these new consumers? Studying these questions will help the agency continue to strategize and prepare for the years ahead."

To read the FTC's report, click here.

Why it matters: "The FTC is committed to working to promote a fair marketplace for all," the agency wrote in the report. "Combating fraud in African American and Latino communities is an important part of the FTC's fraud program and the agency looks forward to further implementing this strategic plan." Advertisers and marketers should take note of the Commission's fraud prevention strategy as well as the upcoming workshop on changing consumer demographics.

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Spokeo Backs Class Certification Denial in False Ad Suit

Litigants are already seeing the effects of the Spokeo decision in action, with a California federal court judge granting an advertiser's motion to dismiss a false advertising case in reliance upon the U.S. Supreme Court's recent opinion.

In May, the high court ruled in Spokeo, Inc. v. Robins that a plaintiff must show an injury in fact before pursuing a claim for a violation of the Fair Credit Reporting Act, a federal statute that provides for statutory penalties similar to the Telephone Consumer Protection Act. The 6-2 decision authored by Justice Samuel Alito made headlines, with defense attorneys hoping it would decrease the number of consumer class actions seeking damages for mere technical violations of federal statutes.

A false advertising action out of California may further those hopes. The case involved plaintiffs who filed a putative class action against PharmaCare US, Inc. over its IntenseX dietary supplement, which the company claimed could enhance sexual power and performance.

When the plaintiffs filed a motion for class certification, the defendant relied on Spokeo to argue certification was improper because the plaintiffs failed to establish evidence that all members of the proposed nationwide class suffered an actual injury.

U.S. District Court Judge Marilyn L. Huff—who also found problems with commonality and predominance as well as typicality for the proposed class—agreed that standing issues foreclosed granting the certification motion.

"The Supreme Court recently reemphasized the importance of the Article III standing requirements, particularly the requirement of an injury that is both concrete and particularized," she said. "It wrote: 'Congress' role in identifying and elevating intangible harms does not mean that a plaintiff automatically satisfies the injury-in-fact requirement whenever a statute grants a person a statutory right and purports to authorize that person to sue to vindicate that right. Article III standing requires a concrete injury even in the context of a statutory violation."

While the plaintiffs asserted they had standing because they relied on the label claims, the product did not perform as promised, and they lost money as a result, the defendant countered that some class members lacked standing because they were not dissatisfied, were not harmed, or had no viable claim.

"Defendant points out that the proposed class includes consumers (1) who bought similarly named products not distributed by Defendant, (2) whose claims are time-barred, (3) who bought IntenseX because of the express label claims, received the benefit claimed, and are satisfied, (4) who bought IntenseX for reasons other than its advertising or labeling, (5) who suffered no injury because they would have paid the same for similar products, (6) who received a refund, and (7) who bought the product from Defendant's website and were never exposed to the alleged aphrodisiac/disease claims Plaintiffs rely on," the court said.

Although the Ninth Circuit Court of Appeals has been inconsistent about whether absent class members must have standing, Judge Huff said the plaintiffs still failed to satisfy the necessary standing requirements.

"Whether characterized as problems with overbreadth, commonality, typicality, or Article III standing, however, there is a substantial mismatch between Plaintiffs and the classes they propose to represent," the judge wrote. "The Court concludes that class certification is not proper to the extent that Plaintiffs raise claims and theories they do not have standing to raise, and to the extent that the class includes consumers who have no cognizable injury, including those who obtained full refunds."

To read the order in Sandoval v. PharmaCare, click here.

Why it matters: For companies facing putative class actions filed under consumer protection statutes such as the TCPA and the FCRA, the order denying class certification in reliance upon Spokeo holds promise. The court was clear that the U.S. Supreme Court's decision will operate to limit certification where potential class members have not suffered a cognizable injury.

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News and Views

The Electronic Retailing Association recently spoke with Richard Lawson, a partner in Manatt's consumer protection practice, about a fundamental part of the direct response ecosystem—payment processing services. Lawson shared insights on how payment processors and independent sales organizations can help to protect themselves from actions brought by the FTC or state attorneys general. He said, "A company that can demonstrate that it took reasonable precautions—that its staff was (and continues to be) fully trained and refreshed on procedures and that can provide examples of where these policies and procedures resulted in remedial action—is going to have a great case to make." 

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