Consumer Protection Update
ABA Antitrust Section
August T Horvath
Federal Trade Commission
FTC Obtains Temporary Restraining Order Against Stored-
Value Card Marketers
FTC v. EdebitPay, LLC, C.D. Cal., No. CV074880ODW(AJWx); FTC File No.
The FTC’s request for a temporary restraining order and asset freeze
against a business engaged in marketing stored-value cards has been
The defendants debited a $159.95 “application and processing” fee from
consumers’ bank accounts, even though several of the consumers had
no contact with the defendants or had applied for unrelated short-term
The defendants claimed on their Web sites that the cards carried “No
Annual Fees” and had “No Security Deposit,” but failed to clearly disclose
the processing fee.
Following the restraining order, the FTC will seek to permanently bar the
defendants from further violations and will seek to force a forfeiture of the
FTC Settles Prepaid Stored Value Card Actions
FTC v. Remote Response Corp., et. al., S.D. Fla., No. 06-20168-CIV; FTC File No. 052-3137
The FTC has entered into a stipulated final order with defendants, banning them from
telemarketing and from selling credit cards, stored value cards, phone cards, and
health discount plans, among other items
Defendants had targeted Spanish-speaking consumers through advertisements on
Defendants marketed various pre-paid cards, which frequently did not work. They
also offered free trial periods for a discount health plan, but either did not actually
provide the free trial period or failed to respond to consumers’ attempts to cancel the
trial period before the payment period began
In addition to being banned from selling such items in the future, defendants agreed
to pay $4,164,558
The FTC has approved a final consent order with respect to Kmart's gift card program.
Kmart must reimburse the dormancy fees for eligible consumers and must publicize
the refund program on its website
Consumers may contact Kmart to determine if they are eligible for a refund; to obtain
a refund, consumers must provide their gift card number, mailing address, and
If the consumer is found eligible, Kmart will mail consumers a new gift card with a
balance equal to the improperly deducted fees
Filing of Final Monetary Judgment in Matter of Verity
FTC v. Verity International, Ltd., S.D.N.Y., No. 00 Civ. 7422-LAK, FTC File No. 002-
The FTC authorized the filing of a stipulated final monetary judgment for over $1.6
Defendants had engaged in deceptive and unfair billing practices by charging the
phone bills of consumers after the defendants’ pornography web sites were
At times, the consumers who were charged were not the same consumers who
accessed the websites
In all cases, bills reflected charges for phone calls to Madagascar, when, in fact,
internet usage was “short stopped” in London
In addition to paying a monetary judgment, defendants were permanently barred
from billing or offering such services to U.S. consumers
Operators of Boiler Room Scam Banned from Telemarketing
FTC v. The Results Group L.L.C., D.C. Az., No. CV 06-2843-PHX-JAT,
FTC File No. 062-3205
Defendants had engaged in deceptive telemarketing by selling
home-based internet business opportunities to consumers
Defendants misrepresented statistics portraying how much money
consumers earned with the business and pressured consumers to
spend money on advertising in order to increase the profitability of
their internet businesses
In addition to the telemarketing ban, defendants have been ordered
to return approximately $435,000 to consumers
Spam Advertising Bogus Weight-Loss Products Must Cease
FTC v. Sili Neutraceuticals, LLC, N.D. Ill., No. 07 C 4541, FTC
File No. 072-3124
Defendants and the FTC have agreed upon a stipulated
The FTC alleged that defendants violated the “CAN-SPAM
ACT” by illegally sending e-mail messages about weight-
loss products and human growth hormone anti-aging
products to consumers
As alleged by the FTC, defendants used “Web form
hijacking” – a spam tactic in which the spammer sends the
spam message from an unrelated, third-party site, which
causes the message to appear to come from that third-party
Following this injunction, the FTC will ultimately seek to
permanently bar the defendants from further violations, and
will also seek forfeiture of ill-gotten gains
FTC Cracks Down on Phony Weight-Loss Products
This month, the FTC took action to restore money to consumers who had previously
purchased bogus diet and exercise products
FTC Requests the Return of Money to Consumers who Purchased “Ab Force”
In August of 2006, the Fourth Circuit upheld a ruling that marketers violated federal
law by intentionally making deceptive claims that an electronic muscle stimulator
would lead to weight loss
This August, the FTC filed a complaint seeking money for the consumers who
purchased the Abdomen belts from the defendant marketers. Over 700,000 belts and
related products were sold, earning about $16 million.
Refunds for Consumers Who Purchased Weight Loss Drug
From August 6 until September 15, 2007, the FTC will be accepting refund requests
from consumers who bought Xenadrine EFX between February 1, 2002 and May 22,
2006. This action is being taken pursuant to the FTC’s settlement, with the marketers
of Xenadrine EFX, of false advertising charges
Weight-Loss Patch Manufacturers to Pay $180,000
In order to settle FTC claims that Transdermal Products International Marketing
Corporation and William H. Newbauer sold bogus weight-loss patches through false
advertising, the defendants will cease selling the patches and will pay $180,000
Settlement also bars defendants from making claims identified by the FTC as “red
flags” for weight-loss products, such as claiming that a product rubbed or worn on
the skin leads to weight loss
Operators Who Placed Unauthorized Charges on Phone Bills
to Pay $1.2 Million in Settlement Fees
FTC v. Websource Media, L.L.C., et. al., S.D. Tx., Civ. No. H-06-1980, FTC File
Defendants cold-called small businesses and nonprofits and offered them a
free “trial” Web site service
Even when consumers did not agree to participate in the free “trial,” the
defendants charged their phone bills, later claiming that they had
“verification recordings” of an employee authorizing the charges
Defendants entered into a stipulated final judgment with the FTC to pay $1.2
million to settle the charges brought against them
The FTC settlement will bar the unlawful practices the defendants have been
The defendants were charged under sections 5(a) and 13(b) of the Federal
Trade Commission Act
FTC and Subprime Mortgage Servicer Agree to Modified
In 2003, Fairbanks Capital Corp. and Fairbanks Capital Holding Corp. agreed to pay $40
million to settle charges of unfair, deceptive, and illegal practices in servicing subprime
mortgage loans. The 2003 settlement with the FTC also limited Fairbanks’s ability to charge
fees to consumers and engage in certain practices when servicing mortgage loans.
In 2004 Fairbanks changed its name to Select Portfolio Servicing, Inc. and SPS Holding
A recent review of SPS’s compliance with the 2003 settlement has resulted in several
modifications. Among other changes, SPS must:
Cease marketing non-required products, such as home warranties, for five years
Limit charging attorney’s fees in connection with bankruptcies and foreclosures
Provide monthly mortgage statements for customers
Continue to allow an auditor to oversee compliance with the settlement until 2013
SPS will now be allowed to hold or reject a customer’s payment if it is more than $25
short of the monthly principal and interest that is due, provided that adequate notice is
given to the customer
FTC Comments on Louisiana State Bar Association’s
Proposed Revisions to Attorney Advertising Rules
FTC recommends that Louisiana refrain from banning forms of
advertising that are not inherently or actually misleading
FTC suggests that the Louisiana Bar, rather than leveling a ban on
advertising, instead provide guidance on how some advertising may
be deceptive and how such potential problems may be cured
The FTC refers to the New York State Unified Court System Rules as an
example after which Louisiana could model its rules
Upcoming FTC Town Hall on Online Behavioral Advertising
and Privacy Issues
FTC will host a discussion on the privacy implications of “behavioral
advertising” on November 1-2 in Washington DC
Consumer advocates, industry representatives, technology experts, and
academics will discuss the practice of tracking consumers’ online activities to
Discussion will touch upon:
how online behavioral advertising works
whether the data collected is personally identifiable or anonymous
what security protections are in place to guard the consumer data that
whether the online data-collection practices of companies are being
disclosed to consumers
what standards should govern practices related to online behavioral
State Attorney General
Florida AG Sues Deceptive Florist
Florida AG alleges that a New Jersey corporation, “Florist in
Miami,” created 53 false listings of florists that appeared to be
in Florida and led customers to believe that flower orders
were being filled from Florida, when in fact they were being
filled from New Jersey.
Sued for over 150 violations of Florida
Florida AG Sues Intelliflix
Florida AG claims DVD
advertises movies that
are not actually available and
ships more slowly than claimed.
Customers who wanted to cancel membership were told they
could only do so at the end of an enrollment year.
Suit calls for company to cease all business operations and
be enjoined permanently from online video rental business.
Connecticut AG Sues Car Dealership
Connecticut AG alleges that Crabtree Subaru and Crabtree
Dodge falsely advertised credit terms to lure customers into
False testimonials from nonexistent customers were allegedly
used to tout the dealer.
Various discounts and special prices promoted by the dealer
also allegedly were not available.
New York AG Probes Home Health Care
New York AG: “The evidence we’ve obtained to date
suggests endemic, persistent fraud and malfeasance at all
levels of the home health care industry.”
Unqualified aides and other personnel
Fraudulent billing and collection practices
Fifty subpoenas have been sent to certified home health
agencies in the New York City area.
“The findings from these subpoenas will help us put together
a global picture of the extent of the problem and a roadmap
California AG Settles with Vocational School
California AG alleged that The Corinthian School deceptively
overstated the percentage of students who had obtained
employment from its vocational courses, inflated the starting
salary of its graduates, and created unrealistically high
expectations to attract prospective students.
Settlement provides $5.8 million in restitution for tuition paid
by students in reliance on the claims, including $1.5 million as
debt cancellation, the balance as a refund.
$700,000 payment to AG for civil costs and penalties.
Nebraska AG Investigates Gas Price Advertising
Gas station in North Platte at I-80 interchange advertised
price on gasoline, but it was only available at some pumps.
Other pumps were substantially higher priced. Consumers
allegedly were deceived into using higher-priced pumps.
Competitor at same interchange noted
tactic and followed suit.
AG commenced investigation, served CID.
Much media attention, public outcry.
Signs have now changed to disclose that
the advertised price is available at only some
AG and some consumers not satisfied.
Allstate Ins. Co. v. Abbott, 2007 WL 2192895 (5th
Cir. Aug. 1, 2007).
Texas law restricted the right of automobile
insurers to own and operate auto body
repair shops and to participate in joint
marketing with “tied” repair facility.
Auto insurer, having purchased a chain of
60 repair shops in 14 states, challenged
this law as violation of dormant Commerce
Clause and First Amendment.
Held: The Texas law is an unconstitutional restriction on
commercial speech. Insurer may own repair shops and influence
customers to use them, provided it discloses affiliation. Prohibiting
this is an impermissibly broad restraint on truthful speech.
Court rejected Texas’s argument that advertisements guiding
consumers to insurer-owned shops are inherently misleading and
therefore ineligible for protection.
Shroyer v. New Cingular Wireless Servs., Inc.,
2007 WL 2332068 (9th Cir. Aug. 17, 2007)
Suit by consumer class against cellular telephone provider
alleging that the 2004 merger with AT&T
injured consumers through deterioration in
service quality, claiming violations of state
and common law fraud and false advertising
Case removed to federal court
under CAFA; California judge granted motion
to compel arbitration.
Ninth Circuit holds that Cingular’s class arbitration waiver was
unconscionable and therefore entire arbitration clause void
under California law; claims may proceed.
Naftulin v. Sprint Corp., 2007 WL 2429499 (N.Y.
Sup. Aug. 27, 2007).
Consumer plaintiff sought national class certification of class of
subscribers to Sprint’s 3000-minute $49.99 Add-A-Phone Plan,
alleging common law fraud and seeking New York subclass based
on GBL Sect. 349, 350 violations.
Plan was intended to be test-marketed only in
Detroit and Washington DC, but advertising was
inadvertently distributed nationwide by Staples. Those who signed
up elsewhere in nation were given other plans and offered chance to
deactivate without fee.
Class certification denied because of individual issues as to
inducement to sign up, what contract was actually provided to
customers, and how much compensation was already received for
Pennsylvania Employees Ben. Trust Fund v. Zeneca Inc.,
2007 WL 2376312 (3d Cir. Aug. 17, 2007).
State employee benefit fund brought class action against drug
manufacturer alleging deceptive advertising of Nexium heartburn
and acid reflux disease drug as superior to Prilosec under Delaware
Consumer Fraud Act and other state statues.
Affirming dismissal of action, the Third Circuit held that while outside
the DCFA’s explicit exemption for conduct that complies with FTC
rules, the action was preempted by highly specific FDA regulations
for prescription drug advertising.
FDA has issued extensive regulations
governing prescription drug advertising
which shows intent to exercise close
supervision. Case for preemption is
especially strong when the advertising is
based on FDA-approved labeling.
Romond v. Valiant Home Remodelers, 2007 WL
2362853 (N.J. Super. A.D. Aug. 21, 2007).
Consumers sued window contractor alleging that they had
relied on a brochure shown to them by its president featuring
a large bow window having five lights and narrow mullions.
What they got instead had wide
mullions and the lights consistent
mostly of frosted glass.
HELD: Remodeler is bound by
appearance of window shown in
brochure. Under NJ Consumer Fraud Act, it must provide a
window similar to that shown in the brochure, where customer
had focused on brochure illustration specifically in
conversations leading to purchase.
Weinstein v. Saturn Corp., 2007 WL 2429397
(N.D. Cal. Aug. 23, 2007)
Consumer sued alleging that Saturn’s advertisements for the OnStar
system installed in Saturn cars was deceptively implied that that
system performs the task of “navigation of automated phone
systems,” when in fact it does not.
Court granted motion to dismiss claim. Plaintiff failed to show that
Saturn advertisements and/or brochures contained such a claim
expressly, nor could one reasonably infer such a claim. Plaintiff
alleged that a Saturn dealer employee made this claim, but failed to
allege that Saturn can be held vicariously liable for it. Plaintiff also
failed to allege that Saturn had an affirmative duty to allege that the
OnStar system lacked the desired capability (i.e. that it was a
Claims against dealer were allowed to proceed but were remanded
to state court.
In re Tobacco Cases II, 41 Cal. 4th 1257 (Cal.
Consumer class action against tobacco companies for alleged
scheme to market cigarettes to minors was alleged as violation of
California UCL and false advertising law.
California Supreme Court held action preempted by Federal
Cigarette Labeling and Advertising Act.
This reverses a prior ruling of the Court, Mangini v. R.J. Reynolds
Tobacco Co., 7 Cal. 4th 1057 (Cal. 1994), that the FCLAA does not
preempt UCL claims that tobacco companies advertised in a manner
that encouraged minors to begin smoking, based on intervening
U.S. Supreme Court decision, Lorillard Tobacco Co. v. Reilly, 533
U.S. 525 (2001), holding that the FCLAA preempted state statute
banning outdoor cigarette advertisements near schools, parks and
Good v. Altria Corp., 2007 WL 2460039 (1st Cir.
Aug. 31, 2007).
Class of smokers sued tobacco company alleging that claims that a
cigarette was “light” and had “lowered tar and nicotine” were
deceptive under the Maine UTPA.
Reversing district court, the First Circuit held these claims not
preempted by FCLAA, not implicitly preempted by FTC oversight of
tobacco advertising, and not barred by MUTPA exemption for
activities permissible under federal law.
Distinguished from Lorillard: Here, State is not trying to outlaw
specific advertising activities, but to enforce general “state-law duty
not to deceive” which is
“broader than a duty based on smoking
and health and therefore beyond the
reach of FCLAA preemption.”
Time Warner Cable v. DirecTV, Inc., 2007 WL
2263932 (2d Cir. Aug. 9, 2007)
Lanham Act claim by cable provider against satellite TV
provider alleging that satellite provider falsely advertised
superiority of picture signal provided by satellite as compared to
Affirming in part district court grant of prelim-
inary injunction, Second Circuit holds claims that it is
“impossible to obtain the best picture” from cable or that
consumers should not “settle” for the quality
of cable are likely to be proven misleading.
However, internet ads showing exaggerated
demo of poor cable quality are so extreme
as to be puffing, not likely believed by consumers.