FTC Says: “Show Me the Money”

Troutman Pepper
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Troutman Pepper

[co-author: Matt Fay]

On June 7, the Federal Trade Commission (FTC) announced a proposed settlement with MoviePass. And in an interesting twist, the FTC used the proposed settlement to announce a novel means of obtaining monetary relief.

As you’ll remember from our prior commentary, the Supreme Court recently held in AMG Capital Management that Section 13(b) of the FTC Act does not authorize the FTC to obtain monetary remedies. That decision threatened to upend the FTC’s fraud program, which for more than 40 years had invoked Section 13(b) as the basis for obtaining monetary relief in consumer fraud cases. Not to be undone, the FTC’s proposed settlement with MoviePass aggressively expands the agency’s interpretation of the Restore Online Shopper’s Confidence Act (ROSCA), 15 U.S.C. § 8403, and thus paves a new path for the FTC to obtain monetary relief in many consumer fraud cases.

The FTC proposed settlement resolves allegations that MoviePass aggressively interfered with its customers’ ability to use the movie-ticketing subscription service as advertised, along with allegations that MoviePass failed to adequately protect its users’ personal data.

MoviePass advertised that its users could use the service to view one movie per day at their local movie theaters, and that they could view any movie, in any theater, at any time.

The FTC alleges, however, that MoviePass erected barriers to prevent heavy users of the service from using the service as advertised. For example, MoviePass would lock users out of their accounts, falsely claiming to have “detected suspicious activity or potential fraud,” and then require users to reset their passwords — a process that MoviePass made extraordinarily difficult by purposely rejecting users’ email addresses, failing to send password-reset emails, and linking its password reset icon to a nonworking webpage. These barriers were often coupled with an intentionally cumbersome ticket verification process. The FTC’s complaint alleges that MoviePass’s practices rendered its “one movie per day” promise false or misleading in violation of Section 5 of the FTC Act.

And in a novel move, the FTC’s complaint also alleges MoviePass’s practices violated ROSCA, because MoviePass failed to obtain consumers’ express informed consent before charging their credit or debit cards, as consumers didn’t know that the promise of “one movie per day” was illusory and thus could not give express informed consent.

By invoking ROSCA, the FTC signaled that it could have demanded that MoviePass pay equitable monetary relief as well as penalties under Section 19 of the FTC Act, which authorizes those remedies when a defendant has violated “any rule” that the FTC has authority to enforce.

As Commissioner Phillips explained in a dissenting statement:

The novelty here is that, for the first time, the Commission is treating a deception about the characteristics of the underlying product — not the negative option feature — as a violation of ROSCA. To data, all the complaints filed by the Commission that allege ROSCA violations in the negative option context with a first party seller have involved defendants hiding a negative option feature, not obtaining express informed consent before charging the consumer, or failing to provide a simple mechanism for cancelling the recurring charge. Instead of examining whether consumers understood the negative option feature, had given consent to that, or were able to cancel in a simple way, this complaint instead looks to the characteristics of the product that MoviePass sold … . The Commission is thus announcing that it may seek civil penalties against all businesses that use online negative option features where the Commission determines that there has been any material deception, whether relating to the negative option feature or a characteristic of the underlying product.

Commissioner Phillips went on criticize the FTC’s novel interpretation of ROSCA. “The Commission’s decision dramatically to re-interpret ROSCA and expand liability comes just weeks after the Supreme Court’s decision in AMG Capital Management, LLC v. FTC, which held that equitable monetary relief is not available under Section 13(b) of the FTC Act,” he said. “I believe Congress should amend the statute. But I do not agree that our loss of authority under one statute someone creates authority elsewhere.”

Our take. The FTC’s proposed settlement with MoviePass is a warning to the market. Indeed, in a concurring statement, Commissioner Wilson made that exact point: “Given the inaugural use of ROSCA for this purpose, it is appropriate that the Commission is foregoing civil penalties. Businesses need predictability about the manner in which laws will be enforced and should be afforded the ability to contest new uses of authority. This case will serve as notice to the market, and future violations of this type may well warrant civil penalties.”

Heed the warning. If you’re using on online negative option feature, the FTC will aggressively interpret ROSCA in order to obtain monetary relief for any false or misleading advertising representation. And because the FTC’s ability to obtain monetary relief in consumer fraud cases that do not involve online negative option features has been limited by the Supreme Court’s decision in AMG Capital, the FTC’s staff attorneys are likely to focus their attention on companies offering online negative option features.

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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