fore·shad·ow (verb). Be a warning or indication of (a future event): FCC Commissioner O’Rielly Speech Suggests What’s in Store for the TCPA

On May 16, 2019, FCC Commissioner Michael O’Rielly gave a speech at the ACA International Washington Insights Conference in Washington, DC, which gave a potential preview of how the Commission may shape the TCPA landscape in the near future. Commissioner O’Rielly’s full speech is available here. He gave his thoughts on a number of subjects and some of the highlights are below.

As to the TCPA’s definition of “automatic telephone dialing system” (ATDS or more commonly known as “autodialer”) litigation post-ACA Int’l v. FCC, 885 F.3d 687 (D.C. Cir. 2018), the Commissioner correctly noted that the “‘fog of uncertainty’ . . . remains thicker than ever,” with numerous courts struggling to interpret the TCPA and issuing conflicting decisions. He characterized some decisions as “illogically [finding] the FCC’s 2003 and 2008 orders defining an ATDS to be controlling post-ACA.” And, he went on to remark that:

[T]hat just pales in comparison to the medley of courts that have chosen to ignore the DC Circuit [in ACA Int’l] and instead follow the 9th Circuit’s extremely misguided and breathtakingly expansive definition of ATDS [in Marks v. Crunch San Diego, LLC, 904 F.3d 1041 (9th Cir. 2018)] as a device that stores numbers to be called, irrespective of whether they have been generated by a random or sequential number generator.

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Gagging Gag Clauses under the Consumer Review Fairness Act

For the first time since the Consumer Review Fairness Act (CRFA) went into effect in March of 2017, the FTC has brought three separate actions enforcing the CRFA to halt the use of “gag clauses” – i.e., contract provisions that prohibit consumers from writing or posting negative reviews. The CRFA bans these types of non-disparagement clauses in consumer form contracts when the clauses are imposed on individuals without giving them a meaningful opportunity to negotiate. According to the FTC, an HVAC provider, a flooring company, and a horseback riding operation all violated this requirement. For example, the flooring company included language in its form contract that stated “By signing this purchase order you are agreeing under penalty of civil suit…not to publicly disparage or defame [the company] in any way or through any medium.” All three businesses have entered into settlement orders with the FTC, under which they are banned from using gag clauses in form contracts, and they must notify consumers who already signed their form contracts that the gag clauses are void and that the consumers have a right to publish their honest reviews, even if negative.

There are two other interesting facts to note regarding these cases. One is that the FTC did not allege in its complaints that the businesses knowingly violated the CRFA. In other words, the existence of the gag clause alone was enough for the FTC to take action, without having to establish a knowledge element. And second, in all three cases, the contracts specified that violation of the gag clause would have resulted in a civil lawsuit and/or damages. For instance, the horseback riding company’s form contract stated that its customers would be charged a minimum of $5,000 in damages if any disparaging statements were made. While these penalties may have increased the risk of regulatory scrutiny, it’s worth pointing out that they’re not necessary for the FTC to bring suit under the CRFA; the use of a non-disparagement clause that simply bars or restricts someone from writing or posting a review, even without the threat of a penalty, is enough to violate the Act. So if you’re entering into form contracts with consumers, don’t hamper their ability to review your products, services or conduct – and if you’re unhappy about this, well, you could always write a negative review about the CRFA.

FTC Warns Ukraine Company: You Can’t Let Kids Use Your Dating Apps

With more and more children becoming technologically savvy, parents are having to rely more heavily on laws such as the Children’s Online Privacy Protection Act (“COPPA”) to shield their children’s information. The FTC recently issued a warning letter to a Ukraine-based company, Wildec LLC (“Wildec”), for allowing children under the age of thirteen to access its dating apps—alleging a potential violation of COPPA and the FTC Act.

A little background on COPPA: the FTC’s COPPA Rule prohibits companies from collecting, using, or sharing personal information from a child, which is defined as an individual under the age of thirteen, without the parent’s verifiable consent. In addition, companies must also provide a notice on its website stating what information is collected as well as any disclosure practices for such information.

Wildec’s dating apps collected an array of information from its users, such as email addresses, photographs, dates of birth, as well as a user’s real-time location data. Although the app’s privacy policy prohibited users under the age of thirteen, the FTC staff found that users who indicated they were under thirteen were not prevented from accessing and using the apps, and staff were able to locate individuals that indicated they were as young as twelve. In addition, the FTC noted in its warning letter that “facilitating other users’—including adults’—ability to identify and communicate with children—even those 13 or over—poses a significant risk to children’s health and safety.” Following the allegations, the apps were swiftly removed from Google Play and Apple’s App Store.

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California Advertised-Discount Law Safe—For Now

The advertised-discount provision of California’s False Advertising Law, California Business and Professions Code § 17501, lives to fight another day. A coalition of national department stores, having found themselves brought together by the regulatory lasso of the Los Angeles City Attorney, recently took a big swing at the validity of that statute by objecting to its constitutionality on vagueness and free-speech grounds. The stores’ argument connected with the district court, but was ultimately thrown out by the California Court of Appeals.

The statute at issue is undoubtedly wonky:

For the purpose of this article the worth or value of any thing advertised is the prevailing market price, wholesale if the offer is at wholesale, retail if the offer is at retail, at the time of publication of such advertisement in the locality wherein the advertisement is published.

No price shall be advertised as a former price of any advertised thing, unless the alleged former price was the prevailing market price as above defined within three months next immediately preceding the publication of the advertisement or unless the date when the alleged former price did prevail is clearly, exactly and conspicuously stated in the advertisement.

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Online Lender Settles with FTC on UDAP, TSR, and EFTA Claims

The Federal Trade Commission’s settlement with an online consumer lending platform, Avant LLC, highlights the importance of legal and regulatory compliance in the fintech space, including—perhaps most importantly—what happens after a loan is made.

According to the Commission’s complaint, Avant offered personal consumer loans through its website. The complaint notes that although the loans were formally issued through a bank partner, Avant handled all stages of the process, and all consumer interactions, including advertising, application processing, and all aspects of loan servicing and collection of payments.

The Commission’s allegations stem primarily from Avant’s collection activities, and Avant’s representations about the payment process, under the Federal Trade Commission Act, the Telemarking Sales Rule (TSR); and the Electronic Fund Transfer Act (EFTA) and Regulation E. The allegations include that Avant:

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Updates in FTC and California’s Continuing Enforcement of Continuity Programs

Thought that the FTC and California planned to cool off on enforcing trial and subscription programs? Think again. The FTC and California continue to bring these actions with alarming regularity.

For those of you who haven’t been tracking these issues, last year California’s Automatic Renewal Law was amended to tighten the restrictions on continuity programs. The amendments increased restrictions on companies providing trial or discounted introductory programs, and required companies to provide an “exclusively online” cancellation mechanism for consumers who originally accepted the service agreement online.

In addition, both the FTC and the California Autorenewal Task Force (a team of district attorneys who enforce the statute) have brought multiple challenges against companies offering continuity programs. We wrote a few weeks ago about the FTC’s settlement with Urthbox, which included charges challenging how that company’s free trial and subscription offerings were disclosed.

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Wait – So There Is No “Viagra for the Brain?” FTC Yet Again Bars Dietary Supplement Sellers from Making Unsupported Cognitive Claims

Consumers over 50 are on an endless quest for things that make us feel, look, or perform like younger versions of ourselves. Marketers aware of how aging demographics are tuned into this quest. The FTC has been especially vigilant in policing claims that dietary supplements, especially in the cognitive and memory space, can turn back the clock (for additional reading on the FTC’s history with unsubstantiated cognitive claims, check out our previous blog posts on Prevagen, 5-Hour ENERGY®, Brain Training, Lumosity, Word Smart, and Your Baby Can Read). Last week, the FTC reached a $25 million settlement with four individuals and their companies that sold supplements touted as “Viagra for the Brain” and promising to increase users’ cognitive abilities (see the settlement orders here and here). The case provides a guide of what not to do in selling dietary supplements.

In its complaint, the FTC argued that the defendants falsely claimed that their supplements Geniux, Xcel, EVO, and Ion-Z could enhance users’ focus by as much as 300 percent; concentration, memory recall, and IQ by as much as 100 percent; and brainpower by as much as 89.2 percent. The advertisements claimed that scientists were declaring the defendants’ “Smart Pill” to be “Viagra for the Brain,” and that the supplements should be “taken as directed for extreme IQ effects.” The supplements were sold for between $47 and $57 per bottle.

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To Be an Ad or Not to Be an Ad: That is the Question

You want to start taking supplements, so you turn to a guide containing consumer reviews. Is the guide just a collection of advertisements? Last month, the Southern District of California again confronted this question, and also took into consideration whether the reviews should be afforded First Amendment protection. The court reiterated its prior finding that the Lanham Act does not apply to a nutritional supplement guide that faced a false advertising challenge.

In the fifth edition of the NutriSearch Comparative Guide to Nutritional Supplements (the “Guide”), NutriSearch recognized four companies—but not Ariix—with the Gold Medal of Achievement, even though NutriSearch allegedly acknowledged Ariix met the standards for the distinction. For its part, NutriSearch explained that it was reworking its awards recognition program for the sixth edition of the Guide, and that the fifth edition Gold Medal winners were merely prior winners who were grandfathered in. Ariix filed suit against NutriSearch and the Guide’s author, Lyle MacWilliam, claiming that the failure to award the Gold Medal amounted to a false representation that Ariix or its products are not as good as its main competitor, Usana, or Usana’s products. Ariix also alleged that the Guide claims to be objective and neutral, but is actually a shill for Usana, because of a previously undisclosed business relationship between MacWilliam and Usana.

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FTC’s Snack Service Settlement Reminds DTC Companies Not to Incentivize Reviews

Positive online reviews have become essential for any business marketing goods or services over the internet, especially for trendy services like food delivery and custom health product sales. But the FTC’s newly-announced settlement with startup healthy snack service UrthBox reminds marketers that online praise must be freely given, not bought—even if the compensation offered isn’t monetary.

UrthBox, Inc., a San Francisco company offering direct-to-consumer snack deliveries on a subscription model, drew the FTC’s ire by maintaining an incentive program that offered free snack boxes to consumers who posted positive reviews on the BBB’s website. According to the FTC’s complaint, the plan was simple: when a consumer reached out to UrthBox, customer service representatives would offer to send free products to the consumer in exchange for a screenshot of a positive review. The program began with the customer service department at UrthBox, where representatives were paid bonuses based on the number of consumer complaints they were able to turn into positive online reviews. The impact was significant: where UrthBox’s BBB profile had only nine reviews (all negative) in 2016, by the end of the next year, the company boasted 695 reviews, 88% of them positive.

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Fraudsters and Facilitators, Privacy and Penalties, Shire and Selection: The FTC’s Plans for Consumer Protection

Winding down the 67th Antitrust Law Spring Meeting last week, Andrew Smith, the Director of the FTC’s Bureau of Consumer Protection (the “Bureau”), provided an overview of the FTC’s consumer protection priorities. Director Smith reiterated that Chairman Simons’ focus on law enforcement applies across the Bureau’s five major areas: marketing, finance, advertising, privacy, and enforcement. In deciding who to sue, the FTC plans to look beyond just alleged “fraudsters and scammers,” and will also focus enforcement on the individuals who promote frauds. Director Smith gave as an example how the FTC recently went after an individual who created a robocall software that scammers used, even when that software was also being used for legitimate robocalls. He also noted the FTC went after a Belizean bank that was involved with the Sanctuary Belize scam. In short, Director Smith made it clear that the FTC will go after those the FTC believes are perpetrating fraud and those who facilitate it. Not surprisingly, Smith did not address that the FTC lacks aiding and abetting authority except under the Telemarketing Sales Rule.

Director Smith also addressed recent hearings on data security and consumer protection. He expressed his view that there exists a market failure regarding companies’ investments in data security due to a lack of incentive to invest. According to Smith, giving the FTC the authority to impose civil penalties may provide the incentive companies need to rectify this failure. Director Smith also noted that if the FTC had the authority to promulgate new regulations requiring companies to disclose more on their data use and security, consumers would be able to comparison shop based on those factors.

Next, Director Smith addressed the Shire case. Director Smith and Director Hoffman—of the Bureau of Competition—explained that the outcome in Shire is inconsistent with other courts’ interpretations of the FTC Act. Although the Shire case will not affect the types of cases the FTC brings, they acknowledged it will cause the FTC to bring these cases more quickly to avoid the issue of likelihood of reoccurrence when the conduct happened years prior. According to Smith, the Shire decision may also affect forum selection, and cause the FTC to bring more cases administratively when the conduct has ceased.

Whether the FTC gets the enhanced authority it plans to seek from Congress and how the Shire case and its progeny play out in the courts remains to be seen.

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