Federal Court to FTC: Show the Receipts When Seeking Disgorgement

A new decision out of the Middle District of Florida may signal further erosion of the FTC’s authority to seek monetary relief as it sets forth a heightened standard of proof the FTC must satisfy to support its disgorgement calculation. In FTC v. Vylah Tech LLC, the court found Vylah Tech, a small tech company, liable for disseminating false and misleading information regarding its computers. However, the court completely shut down the FTC’s demand for disgorgement of $3,400,000 in Vylah Tech’s purported revenues, awarding the FTC a whopping $0.

In a scathing opinion, the court admonished the FTC’s disgorgement calculation, stating that under the FTC’s current practices, “the disgorgement total is [obviously] a moving target.” First, the court found that the FTC’s calculation—based solely on bank records—was unreasonable. Specifically, the bank records were not specific enough to establish that the requested disgorgement figure “reasonably approximate[d]” the defendant’s unjust gains, as the records did not allow for identification of actual consumer transactions.

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Locksmiths Locked Out of Lawsuit Against Search Engines

These days, Big Tech is Big News. While federal lawmakers have recently turned their attention to tech giants and their market power—and launched a broad antitrust probe to boot—a recent decision out of the D.C. Circuit may offer these companies some respite (for now). In a case that pitted fourteen locksmith companies against three tech giants, the appeals court ruled that the safe harbor protections under Section 230 of the Communications Decency Act (“CDA”) applied to shield the tech giants from suit.

In addition to state law claims, the locksmith company plaintiffs (the “Locksmiths”) brought a false advertising claim under the Lanham Act and two antitrust claims under the Sherman Act against three tech giants (the “Search Engines”). The thrust of the Locksmiths’ complaint is that the Search Engines conspired to inundate search results with listings for fake or scam locksmith companies in an effort to force legitimate locksmith companies to pay additional fees for better search result placement. Specifically, the Locksmiths took issue with the fact that the Search Engines, through the use of algorithms, took data they received from the scam businesses (such as address information) and displayed it pictorially alongside similar data points from legitimate businesses. The Locksmiths also complained that the Search Engines knew these sites were for scam businesses.

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FTC Continues to Clamp Down on Gag Clauses

About a month ago, we blogged about how the FTC brought its first-ever cases under the Consumer Review Fairness Act (CRFA) since the statute went into effect in 2017. Well, it looks like the FTC was just getting started, as it announced this week that it has issued administrative complaints and proposed orders against two more companies for allegedly violating the CRFA.

To briefly recap, the CRFA prohibits businesses from including “gag clauses” in their form contracts that bar consumers from writing or posting negative reviews. According to the FTC’s administrative complaint against Shore to Please Vacations LLC, the respondents did just that by including a disclaimer in its form contract for online vacation house rentals that stated “you agree not to defame or leave negative reviews (…as well as any review less than a ‘5 star’ or ‘absolute best’ rating) about this property and/or business,” and specified that “breaching this clause…will immediately result in minimum liquidated damages of $25,000.” Similarly, the FTC alleged that Staffordshire Property Management, LLC used form contracts that prohibited rental applicants from disparaging Staffordshire or publicizing any opinions or communications related to Staffordshire, the rental application, or the application process. Under the FTC’s proposed consent orders, both companies are prohibited from using non-disparagement clauses in standardized customer contracts, and they must notify affected consumers of their right to post honest reviews. In addition, Shore to Please Vacations is required to dismiss with prejudice a claim that it filed against a renter for violating its non-disparagement clause.

If this past month is any indication, this will not be the last we hear of CRFA-related complaints. If you haven’t already, check all of your form contracts to make sure they don’t contain gag clauses; they’re often baked into boilerplate language, so it’s easy to overlook or forget that they exist. Receiving negative reviews may be bad for business, but getting sued by the FTC is probably worse—so we recommend that you play fair and comply with the Consumer Review Fairness Act.

FTC Reminds Crowdfunders: Deliver on Your Promises or Refund

Crowdfunding plays an important role in democratizing access to capital for small entrepreneurs, but as we’ve written before, entrepreneurs of every ilk need to remember that their representations to consumers need to be truthful, accurate and not misleading. Last month, the FTC filed a complaint against Douglas Monahan and his company iBackPack of Texas, LLC, alleging that Monahan and his company had violated Section 5 of the FTC Act by scamming consumers on crowdfunding sites Indiegogo and Kickstarter with four crowdfunding campaigns that together raised over $800,000, including a campaign to develop a bulletproof backpack that could recharge personal electronic devices and act as a mobile hot spot.

iBackPack ad

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You Can’t Block the Ability of the CFPB to Challenge Conduct Through a Release in a Class Action

On April 22, the Maryland Court of Special Appeal told us that a class action settlement can’t buy you peace from the CFPB. That court ruled that a class settlement that purports to interfere with a state agency’s or the CFPB’s enforcement authority was unenforceable. The underlying dispute stems from two cases. The first is a class action brought by lead poisoning victims with cognitive impairments. And the second is a suit bought by government agencies for mishandling the rewards of the first case.

According to the CFPB’s Amended Complaint, class members in the first case were provided a structured settlement where they had the opportunity to transfer a portion of their future payment streams in exchange for a discounted immediate lump sum. Under Maryland’s Structured Settlement Protection Act (SSPA), structured settlement companies, such as the Access Funding Defendant, have to obtain the court’s approval before purchasing a payment stream. And most importantly, the SSPA requires that class settlement members consult with an independent professional advisor.

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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 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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