Un-Belize-Able! FTC Setting New Standards in Sanctuary Belize

On November 8, 2018, the Federal Trade Commission (“FTC”) held a press conference to announce a lawsuit against what it claims is the largest real estate scam the FTC has ever encountered. According to the FTC Complaint, through false claims in its marketing materials and sales pitches, the Sanctuary Belize Enterprise (“SBE”) took in more than $100 million through its sale of lots in what was meant to become a luxury development equipped with amenities similar to American luxury resorts. On October 31, the FTC filed its complaint against Andris Pukke, the creator of the scam, and numerous other defendants. The Complaint raises several interesting issues and provides useful insight into the worldview of the new slate of FTC Commissioners, which could give us clues as to where enforcement action is heading in a number of contexts.

First, the FTC sued a foreign bank for the first time. The FTC does not have jurisdiction over domestic banks. In this case, the FTC sued Atlantic International Bank (“Atlantic International”), a foreign bank with no branches in the United States and not regulated by any American financial authority. The FTC alleges Atlantic International provided Belizean banking facilities for SBE and the consumers targeted by SBE, knowing its clients were based in the US, in addition to other forms of aid. Atlantic International also accepted wires from American correspondent banks. As more payment processors do business offshore, this may be the first step in an effort by the FTC to hold foreign banks responsible in situations where the FTC cannot sue domestic banks.

Second, the FTC’s pursuit of Pukke indicates how seriously it takes order compliance and asset disclosure. The FTC alleges Pukke perpetuated the SBE scam with a piece of parcel he should have turned over to the FTC in a 2006 order in FTC v. AmeriDebt Inc. In 2010, Pukke refused to turn over assets and was held in contempt of court, leading to an eighteen-month incarceration. Through a series of workaround transactions, Pukke allegedly was able to maintain control of the Sanctuary parcel despite his incarceration and court order. The FTC has filed three contempt actions against Pukke and other defendants. Through these actions, the FTC sends a clear signal that when the FTC tells you to hand something over, they want you to hand it over.

Third, the FTC actively pursued the defendants here using some novel tools. The FTC created a fake exercise and fitness company in an attempt to fit the profile of a typical SBE target. The FTC went so far as to create a website for their fake business to lure SBE in. Some believe that in the consumer protection realm, the Chairman Simons led FTC may bring fewer cases, but the investigations brought will be more robust and the remedies sought more severe. This case would seem to fit that paradigm. How common this type of “sting” operation becomes remains to be seen.

After twelve years the story of Sanctuary Belize is far from over. Stay tuned.

The FTC is Searching for the Value in Loot

The Commissioners of the FTC agreed, during an oversight hearing on November 27, 2018, to investigate the use of “loot boxes” in video games. Senator Hassan (D-NH), following up on questions she asked the newly appointed Commissioners during their confirmation hearings, specifically requested the FTC investigate loot boxes citing addiction concerns, (especially as it relates to children) and the resemblance of loot boxes in video games to gambling.

A loot box is a digital container of virtual goods that a user can purchase in-game using real-world currency. A user does not know what is in the loot box before purchasing. The loot box may contain digital goods (such as character skins, tools, weapons, etc.) that the user can use in the game. Importantly, the user cannot choose the contents of the loot box. The box could contain an extremely rare/sought-after item or the contents could be a collection of items already owned by the user (or somewhere in between).

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Senators Seek FTC Scrutiny of Children’s Apps

A few years ago, tech companies were confronted with a common complaint from parents: their children were inadvertently spending lots of money on in-app purchases while using children’s apps. Although this led to the implementation of expanded parental control settings, children’s app developers stayed the course. Last month, however, three senators asked the FTC to investigate the use of potentially manipulative marketing practices in apps designed for children. In a joint letter to the Commissioners, Senators Edward J. Markey (D-Mass.), Tom Udall (D-N.M.), and Richard Blumenthal (D-Conn.) cited a recent study published in the Journal of Developmental & Behavioral Pediatrics (the “Study”) that describes various advertising techniques children’s apps use that the Senators believe constitute unfair and deceptive practices under Section 5 of the FTC Act.

The heart of the Senators’ concerns is that children are too young to assess and identify marketing when it appears under the guise of gameplay. The Senators describe four general categories of apps with which they take issue: (1) apps marketed as “free” when they actually require additional spending in order to play; (2) apps that guide users’ attention to various ads throughout gameplay; (3) apps whose characters overtly encourage users to make in-app purchases; and (4) apps labeled as educational, but that are nonetheless inundated with advertisements, detracting from any educational value the app may have. According to the Study, over 95% of the 135 apps the authors analyzed included advertising in some form. The Senators hope an FTC investigation can help protect children and families from these purported deceptive and unfair marketing techniques.

What does this mean for app developers and brands with children’s apps? With the potential for increased FTC scrutiny, developers and brands alike would do well to clarify the line between an app and advertising material within the app. Furthermore, ensure that the app is appropriately labelled and categorized wherever it is sold, and include helpful additional language in the app’s description. Lastly, ensure the app complies and is compatible with parental settings, so that parents can better monitor their children’s app usage and make more informed decisions about whether to allow continued use of an app. Although the FTC has yet to respond to the Senators’ letter, we’ll be sure to track any developments in this space. Stay tuned.

Cell Cultured Food—FDA and USDA Reach Agreement on Splitting Up Oversight

Previously on the blog, we noted that federal government agencies don’t always play well together. So, when these agencies synchronize their efforts, the industry would do well to take notice. One such coordination effort is well underway. The FDA and the USDA just announced that they will jointly oversee cell‑cultured food production derived from livestock and poultry.

The FDA and the USDA’s announcement follows the agencies’ October 2018 public meeting, where they met with consumers and members of the agricultural industry to discuss safety considerations, possible hazard controls, and labeling concerns related to cell‑cultured foods. Cell‑cultured food production is a burgeoning industry. It continues to raise questions about what will be regulated, what the regulatory process will look like, and which agencies will manage the regulatory process.

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The FTC, Contact Lenses, and the Future of Retail?

On November 14, the FTC Commissioners, in an opinion authored by Chairman Simons, issued an opinion in an antitrust case involving the online advertising industry that has important implications for online advertisers. Last November, we discussed the initial decision by FTC ALJ Chappell that 1-800 Contacts had violated Section 5 of the FTC Act by coming to agreements with its competitors limiting their abilities—as well as 1-800 Contacts’ ability—to bid on each other’s trademarks and URLs in auctions for placement in search results. In his decision, termed an “Initial Decision” in FTC parlance, Judge Chappell found that those agreements directly harmed competition and consumers in the market for contact lenses sold over the internet, and he rejected the efficiency justifications proposed by 1-800 Contacts.

The full Commission went even further, affirming the ALJ’s decision, albeit on different grounds, and also holding that the agreements also violated the antitrust laws by harming competition in the bidding market for search engine keywords, reducing the prices that search engines like Google received for presenting ads in search results, and reducing the quality of the results delivered to consumers. As a result of the Commission’s decision, 1-800 Contacts is barred from either enforcing the agreements it already has with other online contact lens marketers, or from entering into similar agreements in the future.

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“The Number on the Matchbook is Old and Faded”: Federal Court Issues First-of-Its-Kind Ruling on Reassigned Number Liability Under the TCPA

We love us some Jim Croce here at Venable and his 1972 ballad, Operator (That’s Not the Way It Feels), is resonating with us right now. In Operator, Croce sings about a man confessing to an operator about his love for an ex-girlfriend. He needs the operator’s help to find a telephone number for his ex, as she’s moved on and she is no longer at the number he has for her. Ironically, if the heartbroken man were to leave a message for his lost love at her old telephone number, well, the Telephone Consumer Protection Act (“TCPA”) plaintiffs’ bar might be all over it and allege a violation of the Act for leaving a prerecorded message without the consent of the new owner of that number. Silly? Yes. Possible? Also yes. However, a recent decision out of the U.S. District Court for District of Minnesota – the first of its kind as far as we are aware – gives a bit of security to industry. There, the court applied a “reasonable reliance” test to determine whether a caller could be liable for leaving a prerecorded message for the wrong person when the previous owner of the telephone number had provided his prior express consent to receive calls at that number.

In Stewart L. Roark v. Credit One Bank, N.A., No. 16-173, 2018 WL 5921652 (D. Minn. Nov. 13, 2018), defendant Credit One Bank placed 140 collection calls to the plaintiff’s cell phone over a three-month period; in four of those calls, the bank left a prerecorded message in the plaintiff’s voicemail box. Credit One, however, was seeking to reach the account holder, rather than the plaintiff. Unbeknownst to Credit One, the account holder, for whom the bank had appropriate TCPA consent, had changed telephone numbers, with his former number being reassigned to the plaintiff. The bank had no relationship with the plaintiff. When the plaintiff finally informed Credit One that he was not the individual whom the bank was trying to reach, the bank immediately added the number to its internal do-not-call list and placed no more calls to him. Nonetheless, the plaintiff alleged that Credit One violated the TCPA.

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No Math Allowed – The Saga of New York Surcharge Law Continues

Whether merchants can charge consumers who pay with a credit card more and how that increase in price is described has been the subject of extensive litigation. According to a divided New York Court of Appeals, New York’s anti-surcharge law, which banned merchants from imposing a surcharge on credit customers, does not actually prohibit a merchant from charging more or characterizing the difference in price for cash versus credit as a “surcharge” as long as the total price for credit purchases is posted. As a result, retailers are free to call the higher price for credit whatever they want as long as consumers do not have to do math to figure out what that price is. The decision sets the stage for the law to be upheld against claims that it restricts commercial speech in violation of the U.S. Constitution.

In 2013, a group of retailers sued the New York Attorney General in the case Expressions Hair Design v. Schneiderman, alleging that New York General Business Law § 518 violates the First Amendment by permitting higher prices for credit card users while restricting the manner in which retailers may describe those prices. Specifically, the plaintiffs would like to use a “single-sticker” pricing scheme under which they would post a single price for cash or credit with an additional amount or percentage for credit purchases, for example, “$10 for a haircut, plus 3% if paying by credit card.”

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New Faces, Same FTC

Recently, we wrote about new faces at the FTC, which, for the first time in its history, has five new Commissioners in a calendar year. This unprecedented change has cast some uncertainty on how the FTC will approach consumer protection enforcement. Recent actions by the Commission, however, indicate that despite new leadership, the Commission’s focus will be largely unchanged. Unsubstantiated health claims and unauthorized billing appear to remain high on the FTC’s list of priorities.

Last week, the FTC won a preliminary injunction from the Central District of California regarding the sale of oral dissolvable film strips promising smoking-cessation, weight loss, and enhanced sexual performance—all past favorites of the FTC. The advertisements for all three products made objective claims concerning performance such as the “88% Success Rate” of the smoking-cessation product or the promise that you can “lose 10, 20, even 100 pounds without giving up your favorite foods or adding any exercise.” The FTC alleged these claims were false, misleading, or unsubstantiated. The FTC also challenged alleged phony testimonials and threw in a false “Made In The USA” claim.

In addition to the product claims, the Commission also alleged that the defendants allegedly charged consumers without their knowledge or consent through an automatic renewal plan violating the FTC Act, ROSCA, and EFTA. Automatic renewal or negative option plans have frequently been the subject of enforcement by the FTC as well as several states in recent years. It does not appear that the new Commission will be changing course.

Finally, the FTC also alleged that the defendants violated the Telemarketing Sales Rule by sending prerecorded outbound calls to induce the sale of their products. So, while there might be new faces at the top of the FTC, it appears that for many marketers, it’s business as usual.

FTC Stems Doc’s Stem Cell Claims

The Federal Trade Commission (“FTC”) recently settled a case against a physician and his two clinics over allegedly deceptive and unsubstantiated claims relating to their “amniotic stem cell therapy.” The physician, Dr. Bryn Jarald Henderson, frequently appeared in his companies’ advertisements and claimed that this therapy, which purported to use stem cells derived from amniotic fluid, could treat diseases such as Parkinson’s disease, autism, macular degeneration, cerebral palsy, and multiple sclerosis. The proposed settlement order imposed a $3.31 million judgment, which will be partially suspended after the defendants pay $525,000 to the FTC for refunds to harmed consumers, and a broad injunctive order. The order prohibits unsubstantiated claims relating not only to amniotic stem cell therapies, but also to several other therapies not included in the complaint, such as therapies using stem cells derived from adipose tissue, bone marrow, umbilical cord blood, and peripheral blood. In addition, unsubstantiated claims relating to food, dietary supplements, drugs, and medical devices are covered.

According to the FTC’s complaint, “[t]here are no human clinical studies in the scientific literature showing that amniotic stem cell therapy cures, treats, or mitigates diseases or health conditions in humans, and the medical community considers amniotic stem cell therapy to be an experimental and unproven treatment.” Despite this, Dr. Henderson’s clinics charged patients between $9,500 and $15,000 for initial stem cell injections and $5,000 to $8,000 for follow-up “booster” procedures. The clinics’ marketing materials included claims such as: “Lives are being saved, the blind see, the crippled walk . . . with a single therapy that lasts for years and impacts their lives NOW”; “[w]e can reverse autism symptoms”; “[t]hese macular degeneration stem cell treatments have been shown to improve sight in patients with macular degeneration”; and “[y]es, we can treat Parkinson’s.” The FTC alleged that Dr. Henderson could not substantiate these claims.

This isn’t the FTC’s first settlement in the medical space this year. Just last month, the FTC settled its complaint against iV Bars, alleging that the company lacked substantiation for its claims regarding the efficacy of its intravenously injected therapy products (“iV Cocktails”) in treating cancer, multiple sclerosis, and congestive heart failure. Earlier this year, the FTC settled its complaint against CellMark, alleging that the company deceptively advertised its products as effective treatments for cancer patients’ malnutrition and treatment-related cognitive dysfunction. The FTC appears to remain focused on health claims of all types and also to be following the marketing of new or innovative treatment modalities. Folks involved in advertising health care services would be wise to remember that an ounce of prevention is worth a pound of cure. In other words, talk to a lawyer before making aggressive health claims.

Influencer Marketing – Three Golden Rules

My kids watch a lot of YouTube videos, ranging in topics from taking an alligator to the vet to the world’s longest walk on Legos. They have their favorites – YouTubers under the names LoserFruit and Dude Perfect come to mind. I have caught my daughter practicing for her own channel about making slime.

Those aspirations had me thinking about the career path of being an “influencer.” Indeed, trickshot stars and video game aficionados have been hired as brand ambassadors for everything from sports equipment and toys to automobiles and insurance. By some accounts, YouTubers are making five-to-seven figures as brand partners.

While brand ambassadors can influence the purchasing choices of their audience, there are rules in the U.S. about influencer marketing that influencers must follow and brand marketers must monitor. This post outlines the basics in three golden rules.

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