Consumer Protection Update

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					Consumer Protection Update

    Consumer Protection Committee
          October 10, 2006

                       August T. Horvath
                        Anna S. McLean
                      Daniel K. Slaughter

   “Q-Ray” Bracelets
   Post Office Employment
   Fraudulent Telemarketing of Telemarketing
    Fraud Protection
   Online Check Processing
   Hispanic Advertising Awareness Campaign

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Q-Ray Bracelets

       “Ionized” bracelet
        marketed through
        infomercials supposedly
        provided pain relief.
       Court is expected to order
        payment of $22.5 million
        in net profits, plus $87 in
        refunds to consumers.

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         Post Office Employment

                    Success Express, Inc. placed
                     ads in classifieds nationwide,
                     claiming that they were hiring
                     for the post office.
   Then sold consumers study packets for postal
    examinations that did not guarantee
   $8 million suspended judgment against
    company and principals; $540,000 actually to
    be collected.
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         Online Check Processing

   Qchex is an internet-based check creation and
    delivery service.
   FTC alleged Qchex created and sent checks drawn
    on any bank account identified by a customer without
    checking whether the customer has authority to write
    checks on that account.
   Scammers used it as conduit to draw fraudulent
   Conduct enjoined; remedies not specified.

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, a social networking site, was
    challenged for a violation of COPPA.
   Although nominally not allowed to join the site
    if under 13, visitors were allowed to create
    accounts even if they provided birthdate
    indicating they were under 13; 1.7 million
    people did so over past 5 years.
   Penalty of $1 million is the largest ever
    assessed by FTC for a COPPA violation.

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    Hispanic Advertising Awareness
   FTC sent letters to 166 advertisers and 77 media
    outlets warning them that their advertisements
    targeting Hispanics, spotted during one-day (April 19)
    surf of Spanish-language print, broadcast media and
    internet, are potentially deceptive.
   Over half of deceptive ads were health related,
    especially weight-loss. Other key categories were
    credit and business ops.
   FTC worked with 60 “partners” including FDA, Postal
    Inspection Service, state A.G.s, consumer groups,
    and consumer protection agencies of Colombia,
    Costa Rica, Mexico, Nicaragua, Panama.
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              DOJ ACTION:
   U.S. District Court for D.C. issued opinion in DOJ
    case filed in 1999 alleging conspiracy under RICO by
    tobacco companies to deceive the American public
    about health effects of smoking and environmental
    tobacco smoke, addictiveness of nicotine, and health
    benefits of light cigarettes, and by manipulating
    design of cigarettes to sustain nicotine addiction.
   Enjoined defendants from conduct, but denied
    government request for $289 billion in ill-gotten gains
    because RICO disallows disgorgement remedy.

                              8                    Heller Ehrman LLP

   “American Spirit Fraud Prevention Act” H.R.
    3675 would amend FTC Act to authorize FTC
    to seek double civil penalties for unfair or
    deceptive acts that exploit reactions to
    emergencies and major disasters.
   Passed by House last October; reported by
    Senate Commerce, Science and
    Transportation Committee Sept. 27.

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         Econopro
         Les Centres de Santé Minceur
         Procter & Gamble / SK-II

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Canada: Econopro

        Canadian Competition Bureau
         took action against marketers
         of “Econopro”, which it called
         “bogus fuel saving device.”
        Required Injunctive relief,
         publication of correction in
         newspapers, and $15,000 in
         administrative penalties.

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     Les Centres de Santé Minceur
   Centres de Santé Minceur weight loss
    centers marketed a variety of products
    (Cellotherm, Cure de départ, Noctoslim,
    Nopasim) with claims of spectacular results.
   CCB imposed
    injunction and
    $70,000 penalties
    against company
    and principals.

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Procter & Gamble / SK-II
           Hong Kong actress-
            spokesmodel for SK-II
            claimed “"my facial wrinkles
            and lines have been reduced
            by 47 percent after using SK-II
            for 28 days, and I look 12
            years younger."
           Consumer Lu Ping sued,
            based on Guangdong Bureau
            of Inspection and Quarantine
            (GDBIQ) finding that most SK-
            II cosmetics contained
            chromium and neodymium

             13                   Heller Ehrman LLP

   PayPal
   United Egg Producers
   Alltel
   Automakers

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   A.G.s of 28 states settled with PayPal. They had
    charged that PayPal failed to provide adequate
    disclosures regarding dispute resolution and
    chargeback, selection of funding sources, protection
    programs, and other aspects of service.
   Settlement provides for strict disclosure and
    customer service standards to be followed by the
   PayPal agreed to pay $5.2 million ($1.7 million to
    A.G.s, $3.5 million direct to customers).

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          United Egg Producers

                          Egg industry agreed to
                           drop “Animal Care
                           Certified” label that
                           state A.G.s charged
                           implied higher level of
                           hen care.
   Also agreed to pay $100,000 to states for
    attorney fees, consumer education, and other

                           16               Heller Ehrman LLP
   Florida A.G. sued Alltel Wireless October 4,
    alleging that Alltel automatically enrolled
    thousands of consumers for a free trial of a
    roadside assistance program without
    disclosing terms of the program and billing
    customers without their specific consent.

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            Automakers Sued for
              Global Warming
   California A.G. sued General Motors,
    Ford, DaimlerChrysler, Toyota,
    Honda, and Nissan on September 20
    for creating a “public nuisance” by
    producing millions of cars that emit
    carbon dioxide and contribute to global warming.
   Action seeks damages related to beach erosion,
    reduced water supplies and pollution.
   Suit is an effort to pressure manufacturers and federal
    government to implement and enforce stricter
    emissions limits and address global warming.
                             18                   Heller Ehrman LLP

      New York City passes gasoline
       price gouging law.
      Idaho A.G. demands to know
       why Idaho wholesale fuel
       prices are higher than in other
       states, receives answers from
      Utah contemplates whether to
       do away with legislating
       prohibiting low gas prices.

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   McDonald’s obesity litigation
   Supremes take FCRA insurance cases
   Google keywords not trademark violation
   Jurisdiction over spammers
   Broadband internet not regulated by Cable
   AOL sued over Web posting of search info

                          20              Heller Ehrman LLP
    McDonald’s obesity case finally to proceed

    Pelman v. McDonald’s Corp., S.D.N.Y. No. 02 Civ. 7891 (RWS),
     9/16/06) denied defendant’s motion to strike/dismiss claims that
     McDonald’s advertisements falsely implied its food was
     nutritious, that it failed to disclose the use of certain additives,
     and that nutritional information was not readily available at
     certain New York restaurants.
    Case (filed in 2002) had earlier been dismissed by same judge;
     reversed by Second Circuit.
    Court limited case to 40 ads.
    Complaint adequately complied with Second Circuit’s
     requirement that Pls identify specific ads and how they were
     injured by the “scheme”; reliance on specific ads not required.

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Supremes grant review of Ninth Circuit FCRA cases

   In Reynolds v. Harford Financial Services Group, 435 F.3d 1081
    (9th Cir. 2006) and Spano v. Safeco Corp., 140 Fed. Appx. 746
    (9th Cir. 2005), Ninth Circuit held that insurers who failed to
    comply with FCRA’s adverse action notice requirement when
    they charged higher rates based on consumers’ credit reports
    could be liable for statutory and punitive damages under
    FCRA’s “willfulness” standard if they “recklessly disregarded”
    the law.
   Split from Sixth and Eight Circuits; agreed with Third Circuit
   Question is whether actual knowledge of legal violation is

                                   22                        Heller Ehrman LLP
        Google prevails against claim of keyword

   In Rescuecom Corp. v. Google, Inc., N.D.N.Y., No. 5:04-CV-
    1055 (9/28/06), Google prevailed on motion to dismiss against
    claim that its sale of trademark-owner’s name as keyword to
    bring up competitors’ sites was Lanham Act violation.
   Rescuecom, a computer services franchising business, claimed
    that Google violated its trademark by allowing competitors to
    buy its name as a keyword so their sponsored links would
    appear when Internet users searched for Rescuecom’s name.
   Court held that keyword advertising is not “use in commerce”
    because trademark is never displayed in Google’s search
    results; nor did Pl allege that sponsored links displayed its

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       Jurisdiction over spammers

   In EarthLink, Inc., v. Pope, et. al., N.D. Ga. No. 1:03-CV-2559-
    JOF (8/31/06), the U.S.D.C. for the Northern District of Georgia
    found that spammers who concealed their identities by funneling
    spam through EarthLink’s mail servers to make it appear that
    the emails originated with EarthLink were subject to jurisdiction
    in Georgia.
   Court found Defs could be sued in Georgia based both on such
    “electronic contacts” as the “masking” process described above,
    and under the “effects test” of Calder v. Jones, 465 U.S. 783
    (1984), because Defs’ activities had sufficient “effects” in
    Georgia to subject them to jurisdiction there.

                                  24                       Heller Ehrman LLP
Cable Act does not apply to broadband
           Internet service
   In Klimas v. Comcast Cable Communications, Inc., 2006 WL
    2772747 (6th Cir. 9/28/06), the SIxth Circuit held that the Cable
    Communications Policy Act (CCPA), 47 U.S.C. section 521-561,
    does not apply to broadband Internet services.
   Putative class action suit challenged Comcast’s practice of
    temporarily storing IP addresses and websites visited by its
    broadband subscribers under privacy provisions of the CCPA.
   District Court had dismissed on standing grounds.
   Sixth Circuit affirmed, but on different grounds, holding that
    Comcast’s Internet service was not a “cable system” and thus
    was not regulated by the CCPA.

                                  25                       Heller Ehrman LLP
    AOL sued over Web search posting

   On August 8, 2006, AOL announced it had removed a database
    that had been temporarily posted on its website containing
    20,000,000 search records of its members. By that time, other
    sites had downloaded it and reposted it.
   Doe 1 v. AOL LLC., N.D. Cal. No. C-06-5866-SBA (filed Sept.
    22, 2006) alleges that although AOL represented that records
    had been “anonymized,” search queries themselves revealed
    information that could be linked with specific users.
   Suit alleges nationwide class, claims under Electronic
    Communications Privacy Act, 18 U.S.C. section 2702, and
    California law.

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        CALIFORNIA UCL § 17200

   Retroactivity
   Amendment
   Class Certification and
   Definition of “Unfair”

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Proposition 64 - “Retroactivity”

•   Californians for Disability Rights v. Mervyn’s,
    LLC, 39 Cal.4th 223 (2006) and Branick v.
    Downey Savings and Loan Assoc., 39 Cal.4th
    235 (2006)
     - Prop. 64’s new standing rules (requiring that
        plaintiffs have suffered “injury in fact” and “lost
        money or property as a result of [the alleged]
        unfair competition”) apply to cases pending at
        the time of passage of Prop. 64

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Proposition 64 - Amendment

•   Court did not decide the issue raised by Branick - whether a
    plaintiff without standing may amend to add a plaintiff with
    standing. But the Court suggested such amendment would be
    allowed. See Foundation for Taxpayer and Consumer Rights
    v. Nextel Communications, Inc., 2006 WL 2699032 (Sept. 21,
    2006) (amendment liberally allowed, as long as new plaintiff
    has the same claim).
•   Query whether plaintiff without standing can file an action,
    seek discovery to find plaintiff with standing, then amend. See
    Pioneer Electronics (USA) Inc. v. Superior Court, 27
    Cal.Rptr.3d 17 (2005) (intermediate court decision, now on
    review by Cal. S. Ct., considering whether pre-certification
    discovery of customer information allowed without affirmative
    consent of customers).

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           Class Certification and
   Pfizer v. Superior Court, 141 Cal.App.4th 290 (July 11,
    2006), alleged representations re mouthwash as effective
    as floss misleading. Held no cert. because:
    - every member of a class must have suffered injury to
       meet Prop. 64’s requirements
    - likelihood of deception/harm is not enough – there must
        be actual injury to each class member
    - “as a result of” language of Prop. 64 imposes an
        individual (not presumed) reliance/causation
     - petition for review by Cal. S. Ct. on file, and multiple
        requests for depublication made

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    Class Cert. and Reliance (cont.)

   In re Tobacco II Cases, 142 Cal.App.4th 891 (Sept. 5,
    2006) – more traditional approach.
    - Vasquez, 4 Cal.3d 800 (1971), allows for cert. based on
       presumed reliance
    - But not if the alleged misrepresentations “vary too much
       among the class members”
    - Here, general tobacco advertising not sufficient for
       presumed reliance because representations varied,
       different class members saw different representations,
       and suffered harm (began smoking) at different times

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               Definition of “Unfair”

   Camacho v. Auto Club of So. Calif., 48 Cal.Rptr.3d 770 (Sept.
    14, 2006)
     - recognizes split of authorities after Cel-Tech, 20 Cal.4th 163
         (1999), as to whether “old” definitions of unfair still apply to
         consumer cases, and if not, what replaces them
     - old standards (which require fact inquiry precluding pleading
         challenge) now disapproved
     - new standard, based on FTC Act, 15 U.S.C. § 45(n),
        approves dismissal: (1) plaintiff uninsured at-fault motorist
        is not “substantially harmed” by attempt to collect costs of
        damage; (2) benefit of allowing collection outweighs
        “injury” suffered by motorist, and (3) collection efforts
        avoidable by obtaining insurance.

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       Definition of “Unfair” (cont.)

   McKell v. Washington Mutual, Inc., 2006 WL 2664130
    (Sept. 18, 2006) – alleged overcharge for underwriting, tax
    and wire transfer fees
    - uses old standard disapproved by Cel-Tech, simply
       weighing utility of the alleged conduct against the
       harm to the consumer
    - notes that standard requires “review of the evidence
       from both parties” which cannot “usually be made on

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