Definitely not “Winning”: Scammers Pay Millions to FTC and Missouri Attorney General for Running Deceptive Prize Scheme

In February 2018, the FTC teamed up with the Missouri Attorney General’s office in filing a complaint against a prize promotions company and others that allegedly operated a large-scale deceptive prize scam targeting the elderly. A little more than a year later, the FTC and the Missouri AG’s office announced that they reached a settlement to the tune of $30 million. The settlement is comprised of $21 million in cash, and the remainder will be made up by liquidating assets owned by the individual defendants, such as luxury vacation homes, a yacht, a Bentley automobile, and other personal property. The full judgment, which will become due immediately if the defendants are found to have misrepresented their financial condition, amounts to $114.7 million.

According to the complaint, the defendants allegedly sent tens of millions of deceptive personalized mailers to consumers around the world. One category of mailer falsely told recipients they had won a substantial cash prize, and a subset of this group were merely a means of disguising newsletter subscription solicitations. Another type of mailer claimed the recipient could win a substantial cash prize by answering simple arithmetic questions and paying a registration fee. These mailers failed to disclose, though, that they were the first in a series of multiple rounds in a larger “game of skill”—in other words, a contest—and that the recipient would have to pay additional fees to advance to the next round. The contest culminated in a final, complex mathematical puzzle that few people, if any, can solve. Consumers allegedly lost more than $110 million to the defendants’ scheme.

In light of the Justice Department’s recently announced “largest coordinated sweep of elder fraud cases in history,” we expect the FTC to take a closer look at consumer complaints from the elderly. As a particularly vulnerable group of consumers, it is especially important that advertising aimed at the elderly contain clear and conspicuous language disclosing all material terms, particularly any required purchases. Moreover, while some potential prize promotion sponsors view games of skill as less heavily regulated than the more common sweepstakes or games of chance, this case shows that this is not the case. It’s important to understand that many federal and state laws make no distinction between the two when it comes to the material disclosures that are required in advertising and the rules, and moreover, there are specific laws that regulate particular kinds of skill promotions. For example, California has a law dictating specific disclosures when conducting multi-level puzzle promotions, and the federal Deceptive Mail Prevention and Enforcement Act requires the publication of the full rules in any mailer for a skill or chance promotion that includes an entry form (among other requirements). Should you have any questions about best practices for running your promotions, the Venable team is here to help.

Guest Blog: Amazon’s New “Project Zero” – A Way for Brand Owners to Curb Counterfeits

Amazon has just announced Project Zero to potentially assist brand owners in combatting counterfeit goods by removing products likely to be fake from the online retailer’s platform. Project Zero would allow brand owners to designate product listings for removal, instead of undergoing Amazon’s prior reporting and removal process, which required brand owners to report counterfeit products to an internal Amazon team for investigation prior to removal. So far, Amazon has tested the Project Zero pilot program with several brands over the past few months, but will now open up Project Zero to additional companies through an invitation process. Amazon hopes that eventually all brand owners will be able to join the program.

Using Project Zero, brands provide trademarks, logos, etc., and Amazon scans listings daily, looking for suspected counterfeits. Brands can log into an online portal to search for keywords or images of their products on Amazon, and click listings they believe to be infringing. Amazon then removes either the item at issue, or the seller automatically. The ability to remove counterfeit listings is free, but brand owners can also utilize a Project Zero tool that generates a unique serialized barcode for each product unit, which the brand owner can print onto its product packaging or attach to products via a sticker. Brand owners and Amazon can then use those codes to ensure product authenticity when they enter an Amazon warehouse. The product codes cost between roughly 1 and 5 cents each, depending upon the volume at issue. While participation in Project Zero is currently by invitation only, Amazon has a waitlist for participation. In order to participate, brand owners have to have registered trademarks and be enrolled in Amazon’s brand registry.

Accordingly, if you are a brand owner, or represent a brand owner, now would be a good time to shore up your company’s registered trademark protection. Likewise, if your brand is fortunate enough to participate in the Project Zero program, the brand should not abuse its discretion in removing suspect product listings, as brand owners must “maintain a high bar for accuracy in order to maintain their Project Zero privileges.” Amazon Project Zero training is also required for users participating in the anti-counterfeiting program.

For more information, please contact Justin Pierce or Marci Ballard.

Best to Leave Cherry Picking to Cherry Farms: Regulators Revive Lawsuit Challenging Data Used to Support Memory Improvement Claims

Three things to remember when making claims: always ensure that you have the appropriate substantiation—I forget the other two. Last week, the Second Circuit issued an order vacating the Southern District of New York’s dismissal of an FTC complaint alleging that Quincy Bioscience falsely advertised a memory supplement, known as Prevagen.

A little background: Quincy represented that Prevagen improved memory—and that studies proved as much. Advertising through multiple mediums, Quincy claimed Prevagen “improves memory” and “has been clinically shown to improve memory,” and that “a landmark double-blind and placebo controlled trial demonstrated Prevagen improved short-term memory, learning, and delayed recall over 90 days.” Quincy also represented that apoaequorin, a protein derived from jellyfish and an ingredient in Prevagen, “enters the human brain to supplement endogenous proteins that are lost during the natural process of aging.”

On January 9, 2017, the FTC and the New York Attorney General brought suit alleging that Quincy did not have the proper substantiation to make the claim that apoaequorin improves memory or that it enters the brain. Attached to the complaint was the study on which Quincy relied. Quincy moved to dismiss the complaint, arguing that the complaint failed to allege facts demonstrating that the representations at issue were false or unsubstantiated, and relying on the study to defend against the FTC’s claims.

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FTC Sets Its Sights on Fake Customer Reviews

Since updating its Endorsement Guides in 2015 to keep pace with the meteoric rise of social media and influencers in marketing, the FTC has placed a significant emphasis on the need to disclose material connections between advertisers and endorsers. Through its Guides, informal business guidance, blog posts, warning letters, and multiple enforcement actions, the FTC has deployed virtually all of the tools in its proverbial tool box to combat what it views as deceptive omissions by influencers who promote goods and services that they are compensated in some shape or form to promote. We’ve blogged many times about the nuances of what constitutes a material connection and how to adequately disclose such connection on social media.

This week, the FTC went back to basics. It announced a settlement with a marketer of weight loss capsules for, among other things, hiring a third-party review site to create and post fake reviews of its product on Amazon to boost its ratings, and thus sales. This is the first such enforcement action by the FTC, although the New York AG has brought several such cases challenging similar conduct.

Customer reviews are critical to distinguishing your product and brand in today’s crowded online marketplace. It’s a good practice to monitor reviews to proactively identify strengths and weaknesses with your products and customer service. When you cross the line to controlling the content by manipulating or fabricating customer reviews, however, it is deceptive. If you’re unsure what you can and cannot do with customer reviews, consult with skilled counsel.

Ninth Circuit Affirms FDA Preemption in Tossing Vitamin E Supplement Case

There is no denying that, at times, the express claims made on dietary supplement labels may seem to convey a broader implied claim to the consumer regarding the supplement’s performance benefits. While that may be true, last month the Ninth Circuit confirmed that plaintiffs cannot successfully allege that a lawful “structure/function” claim misleadingly implies that a dietary supplement will treat, cure, or prevent a disease under state law. In so deciding, the court found that Section 403(r)(6) of the Federal Food, Drug, and Cosmetic Act (“FDCA”) expressly permits dietary supplements to make claims that describe the role of a nutrient or dietary ingredient intended to affect the structure or function of the body (i.e., structure/function); and that Section 403A(a)(5) of the FDCA expressly preempts any California law that would differ from the FDCA’s allowance for structure/function claims.

While perhaps not surprising that the court reached this conclusion, a recent Ninth Circuit opinion is worth noting because it is the first time that the court has issued an opinion expressly confirming that lawful structure/function claims will have coverage against California’s strong consumer protection laws. We caution, however, that dietary supplement manufacturers may still face liability under state law if they fail to disclose material information about their products, including its safety profile.

The plaintiff alleged that the defendant’s Vitamin E supplement claims to “support cardiovascular health” and “promote[ ] immune function” were false and misleading in violation of California law because the Vitamin E supplements (1) did not prevent “cardiovascular disease” and (2) might increase the risk of all-cause mortality. The Ninth Circuit disagreed and affirmed the district court’s grant of summary judgment in favor of the defendant.

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Stop the Presses: Third Circuit Limits FTC’s Access to Federal Court for Past Conduct

The Federal Trade Commission suffered a significant blow yesterday. In a decision that many saw coming—bloggers here included—the Third Circuit curtailed authority the FTC has been using for decades to confront allegedly unlawful past conduct. The decision has a direct impact on the ability of the FTC to obtain injunctions against defendants for alleged past misdeeds. In its ruling, the Third Circuit held that the FTC can only go directly into federal court where it can allege a defendant is violating or about to violate the law.

Let us first review the legal landscape. In broad terms, the FTC Act provides the FTC several avenues to address consumer harm. The FTC could bring an administrative action to obtain a cease and desist order against a defendant. In addition, after all judicial review of the order is complete, the Commission may file an action for consumer redress under Section 19 of the FTC Act (15 U.S.C. § 57b) if the FTC can allege that the conduct in question was such that “a reasonable man would have known under the circumstances was dishonest or fraudulent.” Claims for redress under Section 19, however, are subject to a three-year statute of limitations. As one can imagine, that administrative process and the subsequent court proceeding are time consuming. To avoid the statute of limitations and the cumbersome two-step process, the FTC has, in recent decades, overwhelmingly chosen a different option. It has used its authority expansively under Section 13(b) of the FTC Act (15 U.S.C. § 53(b)) to go straight into federal court and seek both injunctive and equitable monetary relief.

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Who Made the Call? Applying the Fundamentals of Pleadings to TCPA Actions

Twombly and Iqbal—two names that invoke fond memories of the first year of law school for the (much) younger attorneys—have defined the bar that each plaintiff must meet to survive a Rule 12(b)(6) motion to dismiss. Walk into any first-year civil procedure class and you’ll hear the students muttering the following like a nursery rhyme or a page from a Dr. Seuss book, “Twombly said ‘enough facts to state a claim to relief that is plausible on its face’ and Iqbal followed ‘[a] pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do.'” The lesson the students are supposed to take away is that a complaint must connect the dots between a defendant and the claim.

In a recent ruling issued by the Southern District of California, Ewing v. Encor Solar, LLC, No. 18-2247, 2019 WL 277386 (S.D. Cal. Jan. 22, 2019), the court confirmed that this fundamental requirement applies, unsurprisingly, to Telephone Consumer Protection Act (“TCPA”) claims against multiple defendants. In particular, the court dismissed the TCPA claim because the plaintiff failed to identify who actually called him.

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FCC Public Notice Requests Stakeholders to Sound Off on Soundboard Technology

Last week, the Federal Communications Commission (“FCC”) issued a Public Notice seeking comment on a petition for an expedited declaratory ruling relating to how the Telephone Consumer Protection Act (“TCPA”) applies to the use of soundboard or avatar technology. Specifically, the FCC requests comment on whether “calls using recorded audio clips specifically selected and presented by a human operator in real-time, a tool generally referred to as ‘soundboard technology,’ do not deliver a ‘prerecorded message’ under the [TCPA].” Comments are due on March 15, 2019; the reply comment deadline is March 29, 2019.

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FTC Opts Out of Canning the CAN-SPAM Rule

In June 2017, the FTC initiated a regulatory rule review of the Controlling the Assault of Non-Solicited Pornography and Marketing Rule (“CAN-SPAM Rule” or “Rule”), seeking information about the Rule’s costs and benefits as well as its economic and regulatory impact. The FTC received 92 responses to its request for public comment. Last week, the FTC announced it had completed its review of the Rule and public comments it received, and decided to keep the Rule exactly as it is.

The CAN-SPAM Act (“Act”) became effective as of January 1, 2004. The Act regulates the transmission of all commercial email messages and authorizes the FTC to issue regulations concerning certain provisions of the Act. Pursuant to this authority, the FTC promulgated the CAN-SPAM Rule, which has evolved in a number of significant ways since 2004. Key provisions of the Rule require that commercial emails: (1) contain accurate header and subject lines; (2) identify themselves as advertisements; (3) include a valid physical address; and (4) offer recipients a way of opting out of future messages.

Beyond a general request for comment recommending modifications to the Rule, the FTC also sought comment in response to three specific issues—whether the FTC should: (1) expand or contract the categories of messages that are treated as “transactional or relationship messages”; (2) shorten the time period for processing opt-out requests; and/or (3) specify additional activities or practices that constitute “aggravated” violations. Based on the comments it reviewed, the FTC concluded that a continuing need exists for the Rule, the Rule benefits consumers, and the Rule does not impose significant costs to businesses. With respect to the three specific issues outlined above that the FTC also sought comment on, the FTC determined no rule modification was warranted.

Although the FTC decided retain the CAN-SPAM Rule without modification, in light of the breadth of concerns raised in the public comments, the FTC plans to review its consumer and business education materials to determine if any revisions are warranted. In the meantime, the FTC has maintained the status quo. Should you have any questions regarding your business’ compliance with the CAN-SPAM Rule, the Venable team is here to provide guidance.

FTC and FDA Issue Warning Letters to Supplements Companies

Earlier this week, the FTC and the FDA announced a joint effort to combat unsubstantiated health claims in the supplement space. In three warning letters—to Gold Crown Natural Products, TEK Naturals, and Pure Nootropics, LLC (collectively, the “Companies”)—the agencies explain that certain efficacy claims may lack competent and reliable scientific evidence for support. Specifically, the Companies’ claims pertain to treating Alzheimer’s and remediating or curing other serious illnesses, including Parkinson’s, heart disease, and cancer. The FDA issued the letters the same week it announced an effort to modernize its oversight over dietary supplement products. Taken together, these two actions reinforce that the agency appears to be trying to differentiate participants in the supplement space.

The letters warned that the companies were making drug claims in violation of Section 201(g)(1)(B) of the FD&C Act and unsubstantiated disease claims under Section 12 of the FTC Act. Under the FTC Act, it is unlawful to make health claims that a product can prevent, treat, or cure human disease without competent and reliable scientific evidence to substantiate such claims. This standard can also entail a need for well-controlled human clinical studies. With respect to its review of the Companies’ websites and social media accounts, the FTC pointed to a number of exemplary claims that likely require substantiation. However, the FTC made clear that the examples are not exhaustive, urging the Companies to thoroughly review all claims and ensure they have adequate substantiation.

The agencies gave the Companies fifteen days to notify the FTC and FDA of the specific actions the companies will take to address the concerns outlined in the warning letters. Absent curative action, enforcement action is likely. Similar actions against other companies may be in the wings. Stay tuned.

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