Advertising Law - May 2016 #3

Manatt, Phelps & Phillips, LLP

In This Issue:

Fake Subscription Notices, Real FTC Lawsuit

Fake subscription notices are the subject of a new lawsuit filed by the Federal Trade Commission in an Oregon federal court.

The defendants, a web of dozens of companies, sent consumers "Notice of Renewal/New Order" mailers for subscriptions to real magazines and newspapers, such as The Denver Post, The New York Times, and The Wall Street Journal. But the notices themselves were often not authorized by the publishers, the agency alleged. A statement appeared in fine print on the back of the notices that the defendants "do not necessarily have a direct relationship with the publishers or publications," although the disclaimer only referenced magazines and not newspapers.

Consumers were also promised that their subscriptions would be automatically renewed at "one of the lowest available rates," but the defendants regularly marked up their prices, in some cases up to 40 percent, the agency added.

Even when the defendants did have authorization to renew a subscription, consumers faced a myriad of problems, the FTC said.

"Many consumers experienced delivery problems or delays or they did not receive the requested newspapers at all," the complaint alleged. "Some consumers paid twice for the same subscription and some complained about what appeared to be substantially inflated renewal rates. Many consumers attempted to cancel payments to Defendants, but were unsuccessful or they received only a partial refund. Some consumers received refunds only after much effort."

"Thousands" of consumers and more than 375 newspapers have complained about the defendants, with some publications sending cease and desist letters to the defendants to halt their practices.

The complaint seeks to stop the defendants' operation and obtain consumer redress.

To read the complaint in FTC v. Adept Management, click here.

Why it matters: The agency alleged that the defendants violated Section 5 of the Federal Trade Commission Act by misrepresenting that the renewal notice mailings were authorized by the publications and that consumers would receive their subscription at a price offered by the publishers. Neither claim was true, the FTC said.

Education Lead Generator Settles With FTC

In its first enforcement action against an education lead generator, the Federal Trade Commission reached a deal with the operators of over charges that the company claimed it was "pre-screening" job applicants for hiring employers but was actually gathering data for other purposes.

Gigats gathered online job announcements posted by various entities (including government agencies, multinational companies, and other employers) seeking workers. It summarized the positions on its website, which created the impression it was accepting applications and which prompted job applicants to call. Many of the positions were not even current, the agency added.

According to the FTC, Gigats intended to collect personal information from consumers and pass it along to third-party schools and programs that paid between $22 and $125 for each lead.

Consumers believed they were moving closer to a possible job, primarily because Gigats, in a series of questions, falsely claimed it was helping employers with the interview process, stating, "We get paid by employers to screen their applicants for them and only send out qualified candidates."

The questions were steered toward education, the FTC said, and consumers who expressed an interest in further training or classes were transferred to "Education Advisors" or "Academic Guides." These individuals, although they claimed to be independent advisors who could help the interviewees find the best option for educational opportunities, were in fact employees of Gigats and only connected consumers with schools or programs that paid for leads. So, instead of connecting consumers with the best fit, the advisors in fact only shared consumer information with schools or programs that paid for leads.

To settle the allegations, Gigats agreed to halt its deceptive conduct and refrain from promoting job openings without a reasonable basis to expect that employers are currently hiring for those jobs to avoid deceiving consumers about the possibility of a job that doesn't exist. Absent clear disclosures that data will be shared with third parties and the relationship with the third party, the defendants— and Ayman A. Difrawi, the self-described "quarterback" of the operation—are prohibited from transferring personal information about consumers. Information already obtained by the defendants may not be shared unless consumers affirmatively opt in.

In addition, the stipulated order in the Florida federal court case imposes a $90.2 million judgment that will be suspended upon payment of $360,000.

To read the complaint and stipulated order in FTC v. Expand, Inc., click here.

Why it matters: The lesson from the agency's first education lead generator action: the need for transparency, and a reminder to lead generators to be upfront with consumers about their activities and refrain from using deceptive practices.

U.S. Supreme Court Passes on FTC v. POM

The U.S. Supreme Court has declined to grant a petition for writ of certiorari filed by POM Wonderful in an action brought by the Federal Trade Commission.

In 2012, an administrative law judge determined that 19 ads for POM Wonderful 100% Pomegranate Juice and POMx supplements were misleading because they claimed that the products could treat, prevent, or reduce the risk of problems such as heart disease and prostate cancer. When the Commission reviewed the decision, it not only affirmed the ALJ's findings but additionally ruled that another 17 advertisements were deceptive.

The FTC issued a cease and desist order instructing the company to support any of its future disease-related claims with two randomized clinical trials (RCTs). Other health benefit claims could be supported by competent and reliable scientific evidence.

POM appealed the order to the D.C. Circuit Court of Appeals. According to POM, the agency's order created a new, heightened standard for food products similar to that of pharmaceuticals. The federal appellate panel agreed, to an extent. While the court found that the company and its principals engaged in deceptive advertising, the court declined to accept the FTC's requirement of two RCTs in support of future claims.

Instead, the D.C. Circuit panel cut the requirement in half to just one trial, holding that while two RCTs would certainly be more reliable than one, the Commission failed to justify that the increased scientific certainty afforded by the requirement outweighed the increased costs and burden to POM.

The advertiser appealed again, filing a writ of certiorari with the U.S. Supreme Court, presenting the question: "Whether a finding by the FTC that a truthful advertisement nonetheless implies a misleading message to a minority of consumers, and therefore receives no First Amendment protection, must be reviewed de novo?" The D.C. Circuit gave too much deference to the FTC's determination, POM argued, and the agency was infringing its free-speech rights.

But the justices elected to pass on the case, leaving the D.C. Circuit opinion in place and ending POM's hopes for a reversal.

To read the D.C. Circuit opinion in POM Wonderful v. FTC, click here.

To read POM Wonderful's cert petition, click here.

Why it matters: The courtroom battle may have come to an end, but both parties continued the skirmish in statements about the Supreme Court's denial of cert. "I am pleased that the POM Wonderful case has been brought to a successful conclusion," FTC Chairwoman Edith Ramirez said in a statement. "The outcome of this case makes clear that companies like POM making serious health claims about food and nutritional supplements must have rigorous scientific evidence to back them up. Consumers deserve no less." In its own statement, POM said the company "is committed to honest, transparent communication with consumers everywhere, and while the FTC questioned only 36 of our nearly 600 ads, we continue to stand behind our efforts to publicly convey valuable information about the health benefits of POM, as well as the $40 million peer-reviewed, scientific research we've conducted regarding the power of this amazing fresh fruit."

Weight-Loss Supplement Marketers Face Ban, Asset Forfeiture

The marketers of weight-loss supplements containing green coffee bean extract agreed to forfeit assets totaling $9.2 million and to a ban on advertising or selling weight-loss supplements using negative option sales plans to settle the Federal Trade Commission's charges of deceptive advertising. They also agreed to cease making unsupported health claims about other products.

According to the agency, Health Formulas LLC, 42 related entities, and two individuals controlling the operation touted their weight-loss supplements with claims such as "Burn fat without diet or exercise" and "Extreme weight loss!" despite lacking support for the claims. The marketing campaign included Internet, print, radio, and television ads as well as telemarketing.

Consumers were deceived into sharing their personal information by the defendants' "free trial" or discount programs that featured undisclosed costs, the FTC alleged, and were then enrolled—often without their consent—in a negative option program. Those who tried to cancel their membership were often unable to stop the automatic charges, the agency said, in part due to the defendants' failure to disclose material facts about the refund and cancellation policies.

"The defendants made misleading claims about their products, locked people into recurring charges, and debited bank accounts without permission," Jessica Rich, Director of the FTC's Bureau of Consumer Protection, said in a statement. "As a result of their outrageous behavior, they're now banned from using continuity programs or selling weight-loss products, and they've surrendered millions of dollars."

For the alleged violations of the Federal Trade Commission Act, the Restore Online Shoppers' Confidence Act, the Telemarketing Sales Rule, and the Electronic Funds Transfer Act, the defendants will surrender more than $9 million in assets (including a Ferrari). The remainder of the $105 million judgment will be suspended.

The final consent order further prohibits the defendants from a host of illegal activity, including a ban on negative options and weight-loss marketing. They are also forbidden from misrepresenting evidence used to support product claims and from committing telemarketing violations. The Health Formulas defendants must clearly disclose all material transaction terms and conditions during any sale, as well as information on cancellation and refund policies. Substantiation is required for any claims made about the health benefits or efficacy of any food, drug, or dietary supplement.

To read the complaint and court order in FTC v. Health Formulas, click here.

Why it matters: Enforcement actions against the marketers of green coffee bean extract weight-loss products continue to keep the agency busy, following prior actions against an entity that relied on fake news sites to promote its product and an advertiser that claimed its supplement would allow consumers to lose 17 pounds and 16 percent of their body fat in 12 weeks without diet or exercise.

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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