International Monthly: October 2016

 U.S. Competition, Consumer Protection and Privacy News


Consumer Protection and Privacy

Court Bans Slovak Firm from Business Directory Business

In an action brought by the FTC in 2013, a federal court has banned Construct Data, a Slovakia-based company, and two of its executives from the business directory business. The court’s default judgment against the corporate defendant and stipulated judgment and permanent injunction against the individual defendants have ended a scam that for years took millions of dollars from small businesses and non-profits in the United States and other countries. The FTC had alleged that, using direct mail, the defendants tricked retailers, home-based businesses, local associations and others into thinking they had a preexisting business relationship with the defendants. Many recipients did not notice a statement, buried in fine print at the bottom of a form, that by signing and returning it they were agreeing to pay $1,717 annually to the company for a listing on its website. Under the final orders announced by the FTC, the defendants are banned from the business directory business. The order against Construct Data imposes a $7 million default judgment, including the transfer of $344,000 to the FTC from the court’s registry. The order against the individual defendants imposes judgments of $2.1 million and $4.5 million, respectively, which will be suspended upon payment of $200,000.

FTC Charges Fake Prize Scheme Operators with Fraud

The FTC has charged Millenium Direct and other operators of a fake prize scheme with mailing phony prize notifications that tricked people into thinking they had won $1 million or more if they paid a $25 fee to collect the prize. According to the FTC complaint, the defendants targeted hundreds of thousands of mostly elderly consumers with their mass mailing campaign, which said “. . . this is NOT a preliminary or qualification letter of cash prize status; YOU HAVE WON A CASH PRIZE!” Those who paid received nothing, but their personal information was used for additional fake prize mailings and also sold to other schemes, causing many consumers to be inundated with more deceptive cash prize notifications and other offers. The case is part of an international initiative against mass-mail fraud, which has been identified as a major financial threat by the International Mass-Marketing Fraud Working Group, a network of civil and criminal law enforcement agencies from several countries, which is co-chaired by the FTC and the U.S. Department of Justice.

Marketers of Joint Pain Supplement Agree to Settle Charges of Deceptive Advertising and Endorsements

The sellers of Supple, a liquid supplement, have agreed to settle FTC charges that they falsely advertised that their product provided complete relief from chronic and severe joint pain caused by arthritis and fibromyalgia and was scientifically proven to eliminate joint pain. According to the complaint, infomercials for Supple featured one of the firm’s officials acting as a medical show-style host and another, the creator of the product, acting as the guest. They described Supple as a powerful all-natural drink that relieves joint pain in numerous ways. The FTC charges that these claims are false or not adequately substantiated. The complaint also alleges that one principal made unsubstantiated “expert endorsement” claims for the product, and falsely represented herself as an independent, impartial medical expert. The stipulated court order requires the defendants to have scientific evidence to back up any future claims they make about pain relief, disease treatment, and health benefits, and prohibits them from misrepresenting the results of any scientific study. It also prohibits them from deceptively representing that Supple’s endorsers are independent and objective when those endorsers have a close personal or financial stake in the company’s product sales.

Federal Appeals Court Finds Operator of Affiliate Marketing Group Liable for Helping to Promote Deceptive Weight-Loss Scheme

A U.S. Court of Appeals upheld a lower court ruling requiring the operator of an affiliate marketing group to pay $11.9 million for its part in helping to promote LeanSpa, a deceptively marketed weight-loss supplement. In issuing its ruling, the court found that LeadClick Media, LLC recruited affiliate marketers that used fake news sites to drive internet traffic to the LeanSpa website. The Court of Appeals rejected LeadClick’s claim of immunity under Section 230 of the Communications Decency Act (which generally protects publishers from liability for third-party content), finding such immunity inapplicable because LeadClick participated in the development of the deceptive content. The decision is the first by a higher-level federal court holding the operator of an affiliate marketing network liable for deception by third-party marketers. The appellate ruling also upheld lower court orders requiring LeadClick and its parent company to disgorge millions of dollars in ill-gotten gains.


FTC Releases Report on Patent Assertion Entities, Recommends Reforms

Patent Assertion Entity report

The FTC released a report on the business practices of patent assertion entities (PAEs), firms that acquire patents and seek to generate revenue primarily by asserting them against accused infringers. The report, Patent Assertion Entity Activity: An FTC Study, describes two types of PAE business models, and how each model uses patent infringement litigation. The report proposes several reforms to help reduce burdens on the judicial system from nuisance patent litigation while recognizing the important role patent infringement litigation plays in protecting patent rights. This report furthers the Commission’s commitment to addressing patent policy issues that began with its 2003 and 2011 reports on the relationship between competition and intellectual property.

Court of Appeals Reverses Lower Court and Upholds FTC Challenge to Pennsylvania Hospital Merger

The United States Court of Appeals for the 3rd Circuit reversed a lower court and ordered the merger of Penn State Hershey and Pinnacle Health Systems enjoined until the FTC conducts an administrative adjudication to determine whether the merger violates the antitrust laws. According to the Court of Appeals, the District Court misapplied the hypothetical monopolist test for determining the geographic market. The Court also concluded that the hospitals could not clearly show that their claimed efficiencies would offset any anticompetitive effects of the merger. Therefore, the court did not reach the question whether to adopt or reject an efficiencies defense, although it expressed skepticism that such a defense exists. Debbie Feinstein, Director of the FTC’s Bureau of Competition, issued a statement on the ruling, noting the Court found the FTC has a likelihood of success on the merits.

FTC Staff Testifies Against State Insulation of Proposed Hospital Merger from Antitrust Review

FTC staff presented comments and testimony to two Virginia health regulators, asserting that a “cooperative agreement application” by two hospitals, Mountain States Health Alliance and Wellmont Health System, for a merger to near-monopoly would present a “substantial risk of serious competitive and consumer harm in the form of higher healthcare costs, lower quality, reduced innovation, and reduced access to care.” State approval of such an agreement could supersede antitrust review. The FTC staff noted that the harm to consumers likely “would not be outweighed by any potential benefits of the merger, nor would it be eliminated or effectively mitigated by regulating the combined entity’s post-merger conduct. Competition is the most reliable and effective mechanism for controlling healthcare costs while preserving quality of care.”

In Other News

FTC and Agriculture Department Announce Agenda for Roundtable on Consumer Perception of Organic Claims

Organic Claims

The FTC and U.S. Department of Agriculture announced the agenda for an October 20 joint-agency roundtable on consumer perceptions of “organic” claims for non-agricultural products. One session will focus on consumer misconceptions of organic claims in the marketplace and the conclusions and limitations of the evidence concerning those misconceptions for non-agricultural products, one will discuss different potential approaches to improving organic claims to prevent deception, and one will cover broader policy approaches to address potentially deceptive claims. Additional details on the roundtable and speakers can be found on the event’s webpage. The event is free and open to the public, and will be webcast.

FTC Testifies Before Senate Commerce Committee About Agency’s Work

In testimony presented to the U.S. Senate Committee on Commerce, Science, and Transportation, FTC Chairwoman Ramirez and Commissioners Ohlhausen and McSweeny described the FTC’s work and estimated that in the last fiscal year its antitrust enforcement efforts saved consumers over $3.4 billion, while its consumer protection actions saved consumers $717 million. The testimony also noted the recent FTC settlement that requires Volkswagen to create a $10 billion compensation fund – the largest consumer refund program in the FTC’s history – to resolve allegations that the company unfairly sold cars with illegal defeat devices that cheated emissions tests and deceptively advertised these cars with claims that they were “clean.” In the testimony, the Commission called for several changes to the FTC Act that would enhance its ability to protect consumers and promote competition, including repeal of the common carrier exception to the FTC Act, which prevents the FTC from taking action to protect consumers in some cases involving telecommunications firms and other common carriers. The Commission also recommended that the FTC’s jurisdiction be extended to non-profit entities.

FTC Chairwoman Edith Ramirez Issues Statement on the Federal Communications Commission’s Broadband Consumer Privacy Proposal

FTC Chairwoman Edith Ramirez has issued a statement following the release of the Federal Communications Commission’s Fact Sheet on Broadband Consumer Privacy Proposal: “We know that consumers care deeply about their privacy, and I am pleased to see the FCC moving forward to protect the privacy of millions of broadband users across the country. The FTC, which has protected consumers’ privacy for decades in both the online and brick-and-mortar worlds, provided formal comment to the FCC on the proposed rulemaking, and I believe that our input has helped strengthen this important initiative.”