AD-ttorneys@law – May 2021 #1

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SCOTUS: No Equitable Monetary Relief for FTC Under § 13(b)

Well, the buck stops here (for now).

In AMG Capital Management, LLC v. Federal Trade Commission, the Supreme Court unanimously ruled that Section 13(b) of the Federal Trade Commission (FTC) Act does not authorize the FTC to obtain equitable monetary relief such as restitution or disgorgement. This highly anticipated landmark decision reverses decades of precedent and strips the FTC of one of its key enforcement tools for obtaining consumer redress. The decision will likely represent a sea change in FTC enforcement practices. Read more here.

First FTC Complaint Filed Under New COVID-19 Consumer Protection Act

Supplement doctor gets spanked as FTC utilizes civil penalty authority

Acting Out

Much attention has been focused of late on the Supreme Court’s decision to take away the Federal Trade Commission’s (FTC or Commission) authority to seek monetary relief under Section 13(b). However, the FTC remains far from a toothless tiger and can still seek monetary penalties for rule violations and violations of certain congressional statutes. With a sense of impeccable timing, Congress passed the COVID-19 Consumer Protection Act as part of the 2021 Consolidated Appropriations Act in late December of last year. Four months later, the FTC is taking its first whack at a complaint targeting violations of the act, including seeking civil penalties.

First, what is it? The C19CPA (it’s on page 2,094 of the appropriation in case you tried reading from the beginning) basically sics the Federal Trade Commission Act on false COVID-19 claims. It makes it “unlawful for any person, partnership, or corporation to engage in a deceptive act or practice in or affecting commerce in violation of section 5(a) of the Federal Trade Commission Act,” regarding “the treatment, cure, prevention, mitigation, or diagnosis of COVID-19; or (2) a government benefit related to COVID-19.”

Given all the attention paid to COVID-19, the FTC used the occasion to take a victory lap. So, here’s the skinny.

The Takeaway

Eric Anthony Nepute and his company Quickwork LLC were sued by the Commission in the Eastern District of Missouri about halfway through April. According to the complaint, Dr. Nepute—a chiropractor—began hawking his Wellness Warrior supplements in late spring 2020. Wellness Warrior supplements are basically megadoses of vitamin D and zinc.

The FTC alleges that Nepute claimed Wellness Warrior was “scientifically proven to treat or prevent COVID-19.”

The FTC claims that Nepute advanced these claims through videos on his Facebook account—videos that were consumed millions of times by consumers freaked out by the virus. A choice line from one of Nepute’s videos: “One of my best friends just got labeled as a domestic terrorist because he was talking about the benefits of vitamin D3.”

Woo boy.

More to come, folks. However, expect the FTC to look for more and more opportunities to allege violations that carry with them civil penalty authority.

Swag Wag Tagged for Made-in-USA Brag

Young entrepreneur settles with the FTC over foreign-made tchotchkes

Obi Wan

AK Kurji is a wise old soul, and like many entrepreneurs, he likes to share entrepreneurish tips—wisdom to share with the young ’uns.

Here he is in an interview on the Young Entrepreneur Council’s website:

“I pretty much started with nothing, and now I’m able to provide resources so [entrepreneurs] don’t make the same mistakes and waste time like I did. Something that took me a year to learn, I could teach it to them in a day,” he said.

And with his recent settlement with the FTC complete, Kurji can add another “lesson” to his curriculum: the pitfalls of made-in-the-USA claims.

Take notes.

Swagamerica!

Kurji’s company, Gennex Media, does business under several monikers, including Brandnex, BrandStrong, PMGOA and Promotional Manufacturing Group of America. The company produces “customizable promotional products to consumers, including, but not limited to, wristbands, lanyards, temporary tattoos and buttons.” You know—the sort of giveaways your suitcase was swamped with after that three-day vendor conference at the Mahwah Sheraton on Route 17? So far so good.

But trouble reared up when Kurji allegedly advertised that these customized products were made in the United States. “Support USA Jobs. We do!” one tag read. Another claimed that the products were “Manufactured right here in America!”

According to the FTC’s complaint, Kurji’s “customizable promotional products are wholly imported from China.” In fact, “[i]n some cases, Respondents’ products ship directly from Chinese manufacturers to consumers, without even passing through a U.S. facility controlled by Respondents.”

Some Clarity

The FTC hit Kurji with a false representation claim regarding the advertising. The settlement, which includes a $146,249.24 monetary judgment, also provides a succinct primer on whether one is allowed to make made-in-the-USA claims and how to make them:

Under the terms of the proposed order, Gennex and Kurji are prohibited from making unqualified U.S.-origin claims for any product, unless they can show that the product’s final assembly or processing—and all significant processing—takes place in the United States and that all or virtually all ingredients or components of the product are made and sourced in the United States. Under the order, any qualified Made in USA claims must include a clear and conspicuous disclosure about the extent to which the product contains foreign parts, ingredients or components, or processing. Finally, to claim that a product is assembled in the United States, Gennex and Kurji must ensure that it is last substantially transformed in the United States, its principal assembly takes place in the United States, and its U.S. assembly operations are substantial. [FTC’s emphasis]

The Takeaway

When interviewed about the judgment by the Advertising Specialty Institute, Kurji had a clear explanation for his mishandling of the claims: He was young once.

The Texas-based entrepreneur said that he believed he was legally able to present the products as American-made. There were a variety of reasons for that. One partial reason is that he was sourcing some products from U.S.-based companies. Another was that his input expenses to produce a product—like labor, screen printing, etc.—on items like wristbands comprised the vast majority of the items’ cost, he explained.

“I was young. I didn’t know better. I was maybe moving too fast and didn’t have the right advice, and in my head, I thought what we were doing was fine,” Kurji says. “I wasn’t trying to deceive anyone. I didn’t think we were doing anything wrong.”

Last we looked, being young is not a defense to an FTC violation. Perhaps young entrepreneurs should focus on reading the FTC site to learn what they need to know before making claims about their products.

The FTC doesn’t apologize as much, and its advice is probably a lot cheaper in the long run.

NAD Filters Coronavirus Claims for Pure Air Peeps

Explicit brags and suspect maps mar OxyPure commercial spot

Catcher in the Sky

Even though the FTC has been nothing but clear about the dangers of making COVID-19 claims, companies continue to skirt the line of implied coronavirus messaging. The National Advertising Division (NAD) has been active in this space as well. Consider the case of NuWave, the manufacturer of the OxyPure Air Purifier. According to NAD, NuWave claimed that the OxyPure removed “airborne coronavirus by 99.999%*,” while referencing a disclaimer stating, “*The University of Minnesota tested the OxyPure’s removal of the porcine respiratory coronavirus, a surrogate for SARS-CoV-2, the coronavirus that causes COVID-19.”

This was not good enough for NAD, which “was concerned that consumers who viewed the advertiser’s website would reasonably take away the message that OxyPure Air Purifier is effective in killing 99.999% of COVID-19 without seeing the disclosure that testing of the product was on a coronavirus surrogate.”

Here Be Viruses

A further claim targeted by NAD bears mention. According to the watchdog group, NuWave released a video stating that “[a]sthma and allergies are at an all-time high. Sleeping problems are epidemic and carry their own health risks. Airborne pathogens, viruses, bacteria and mold are not far behind.”

There’s no mention of COVID-19 here, right?

Unfortunately, the video “simultaneously [showed] a map of the world with the words ‘AIRBORNE VIRUSES’ and lines originating from China to various cities around the world showing the spread of ‘airborne viruses.’”

NAD held “that the visual of the world map conveys the implied claim that the product is effective against COVID-19” and recommended both ads be changed.

The Takeaway

NuWave agreed to modify the advertisements. In the first case, it replaced the original tag with “OxyPure is Calculated to Remove 99.999% of Coronavirus Surrogate from the Air in Areas up to 1,200 Square Feet in 6 Hours!*,” a claim that was qualified by a presumably “clear and conspicuous disclosure” that reads, “SARS-COV-2 was not used in the study conducted by the University of Minnesota for the efficacy of NuWave OxyPure.”

The company also agreed to remove the map from the video, which is even better news. NAD believed this correction would stop people from assuming that the OxyPure was effective against COVID-19, of course.

But in our opinion, removing the image of threatening red lines emanating from China and infecting the rest of the world is good for another reason—there’s enough irrational sentiment in the air right now, and such imagery only reinforces it.

Another set of good calls from NAD.

Expedia Settles With Hotels Over Glitchy Messaging

Plaintiffs alleged the travel website falsely claimed it had no rooms to rent

Prêt à Louer?

A five-year slog between travel website Expedia and several hotels came to an end with a settlement in April—a dispute that is interesting not for innovative legal argument, but for a technology argument deployed by the defendant.

Here’s a brief outline: Buckeye Tree Lodge and Sequoia Village Inn, a California nature-centric hotel complex, and The Mansion on O Street, a truly strange (in the best sense of the word) Washington, D.C., hotel and residence, sued Expedia in the Northern District of California for alleged violations of the Lanham Act and California state law.

According to the complaint, Expedia allegedly created fictitious search results for hotels that it did not have a booking relationship with. Even though Expedia could not sell rooms for these hotels, it allegedly returned false or misleading “unavailability messages,” including something as direct as “We are sold out” and other, more ambiguous messages such as “Rooms are unavailable for your trip dates on Expedia. Try new dates to check availability.” The plaintiffs claimed that these actions hurt their business.

Human Error

Expedia argued in a 2020 motion for summary judgment that a combination of technical glitches and mistakes made by the hotels represented by some of the plaintiffs caused the false or misleading “unavailability messages” to appear—specifically, the hotels’ reliance on third parties to communicate the numbers of empty beds to Expedia. Even after a booking relationship between the parties had ceased to exist, the hotels continued to be listed on the site by the third parties.

Expedia also alleged that another hotel was accidentally registered with Expedia during negotiations between the travel site and the hotel’s previous owner, even though the booking deal was never signed.

Expedia argued that these mistakes had been corrected and therefore there was no need to continue with the case. The court disagreed, finding that the messages—including the implied message in the ambiguous tags that Expedia could book rooms in unlisted hotels—created real questions of fact for a jury to chew on.

The Takeaway

The case bounced back and forth for years, finally settling for a little more than $2 million in attorneys’ fees and a raft of injunctive restrictions and requirements—“best efforts,” according to the agreement, to exclude from search results “properties with which Expedia does not have a contract and that have no relationship with a third party provider.”

“Recognizing that technology is evolving,” the court order states, “best efforts may include steps … contractually requiring third party providers to notify Expedia when a hotel terminates its relationship with that third party and using technological controls to prevent hotels from appearing in search results when third parties notify Expedia that a hotel has terminated its relationship with that third party.”

The company also agreed “to ensure that search engine marketing, search engine optimization, and social media advertisements for the Websites do not identify by name class member properties that are not in and of themselves attractions.”

All of which leads us to a rather self-evident yet nonetheless important takeaway: Any company that’s engaged in data-enabled or data-enhanced advertising needs to maintain clear, continually audited links between its back-end systems and its front-end messaging.

We don’t know how a jury might have reacted to this dispute in court, and the settlement seems to be a relatively inexpensive end to the case for Expedia.

But by the company’s own admission, the whole thing might have been avoided if Expedia’s back-end systems were bolstered in the first place by the commonsense controls it is now required to implement.

And certain attorneys wouldn’t be $2.1 million richer.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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