Articles Posted in FTC Consumer Protection Highlights

The Federal Trade Commission (“FTC”) brought a permanent halt on September 14, 2006 to four illegal spamming operations – including one that offered the opportunity to “date lonely wives” and two that hijacked the computers of unwitting third parties and used them to pelt consumers with graphic sexually explicit e-mail. The FTC charged the operators with sending spam that violated provisions of the CAN-SPAM Act, and halted the illegal spamming.

The CAN-SPAM Act requires that a spam e-mail contain accurate header and subject lines, identify itself as an ad, and include the sender’s postal address. It also requires that the spam give recipients an opt-out method, so consumers can elect not to receive messages from the spammer in the future. To ensure that consumers are not exposed to content they do not wish to view, the Adult Labeling Rule requires that senders use the phrase “SEXUALLY EXPLICIT: “in the subject line of sexually explicit e-mail messages and ensure that the initially viewable area of the message does not contain graphic sexual images. The consent agreements announced today settle charges that the spammers violated the CAN-SPAM Act, the Adult Labeling Rule, or both.

Cleverlink Trading Limited and its partners will give up $400,000 in ill-gotten gains to settle FTC charges that their spam, or that of their affiliates, violated federal law. The agency charged that their “date lonely wives” spam violated nearly every provision of the CAN-SPAM Act. It contained misleading headers and deceptive subject lines. It did not contain a link to allow consumers to opt out of receiving future spam, did not contain a valid physical postal address, and did not contain the disclosure that it was sexually explicit. It also included sexual materials in the initially viewable area of the e-mail, in violation of the FTC’s Adult Labeling Rule.

On September 11, 2006, a federal judge ordered a magazine subscription seller to pay a civil penalty of more than $5.4 million and give up more than $1.6 million of his ill-gotten gains for violating a 1996 Federal Trade Commission (“FTC”) consent order and the FTC’s Telemarketing Sales Rule (“TSR”). This amount is the largest civil penalty the FTC ever obtained for a violation of a consent order in a consumer protection matter.

Based on an FTC complaint filed by the U.S. Department of Justice, the court entered a judgment against Richard L. Prochnow of Atlanta. The court found that Prochnow violated the consent order through his ownership and control of Direct Sales International (“DSI”), which either directly or through its dealers: (1) failed to disclose or misled consumers regarding the cost of magazine packages and individual magazines; and, (2) made weekly cost representations even though consumers could not make weekly payments for the magazine packages.

The court also held Prochnow liable for DSI’s failure to tell consumers that their credit cards would be billed for membership in a buying club unless they called within thirty days to cancel, and its failure to provide consumers with information that would enable them to cancel, in violation of the TSR. The court further found Prochnow liable for false statements to consumers that publishers were paid in advance for magazines, which the Court found to be a violation of the TSR.

Social networking Web site operators Xanga.com, Inc. and its principals, Marc Ginsburg and John Hiler, will pay a $1 million civil penalty for allegedly violating the Children's Online Privacy Protection Act (“COPPA”), and its implementing Rule, under the terms of a settlement with the Federal Trade Commission (“FTC” or “Commission”) announced on September 7, 2006. According to the FTC, Xanga.com collected, used, and disclosed personal information from children under the age of 13 without first notifying parents and obtaining their consent. The penalty is the largest ever assessed by the FTC for a COPPA violation, and is more than twice the next largest penalty.

The complaint charges that the defendants had actual knowledge they were collecting and disclosing personal information from children. The Xanga site stated that children under 13 could not join, but then allowed visitors to create Xanga accounts even if they provided a birth date indicating they were not 13 years of age or older. Further, they failed to notify the children's parents of their information practices or provide the parents with access to and control over their children's information. The defendants created 1.7 million Xanga accounts over the past five years for users who submitted age information indicating they were not at least 13 years old.

Xanga.com is one of the most popular social networking sites on the Internet. After setting up a personal profile, users can post information about themselves for other users to read and respond to. On Xanga.com, users can create their own pages or Web logs (blogs) that contain profile information, online journals, text, hypertext images, as well as links to audio, video, and other files or sites. Information on the Xanga site is available to the general public through the use of global search engines such as Google and Yahoo. Incorporated in 1999 and based in New York City, privately held Xanga.com, Inc. was founded by Ginsburg and Hiler. In 2005, Xanga had about 25 million registered accounts.

On August 22, the manufacturer of a magnetic “fuel saving” and emissions-reduction device that did not save fuel or reduce emissions will pay $4.2 million to settle Federal Trade Commission (“FTC”) charges that his advertising claims were false. The FTC will seek to provide redress to consumers who bought the device based on the false advertising claims. In addition, the defendants will be banned from selling or manufacturing magnetic fuel savings and emissions reduction devices.
In October 2004, the FTC filed a suit in U.S. district court alleging that marketers, and the resellers working with them, were making deceptive claims for FuelMAX and Super FuelMax products. The Web site operators and their affiliates- made claims such as:

The Federal Trade Commission filed a complaint on August 15 in U.S. district court, seeking to halt an operation that downloads software barraging consumers with pop-ups demanding payment to make the pop-ups go away. The Office of the Attorney General of the State of Washington also sued the operators.

The FTC's complaint asked the court to order the defendants to give up their ill-gotten gains to provide for consumer redress. A U.S. district court judge denied a request by the FTC to issue a temporary restraining order. Trial on the merits of the case will be scheduled for a later time.

According to papers filed with the court, the defendants downloaded software that repeatedly pelted consumers' computers with pop-ups, accompanied by music that lasted nearly a minute, and could not be closed or minimized. These pop-ups demanded that consumers pay the defendants $29.95 to end the recurring pop-up cycle, claiming that consumers signed up for a three-day “free trial” of the defendants' Movieland Internet download services and did not cancel their “membership” before the trial period was over. Hundreds of consumers complained to the FTC. Most claimed they had never signed up for the “free trial,” never used Movieland's services, and never even heard of Movieland until they got their first demand for payment.

In an August 14 letter to the FCC, internet video distributor VDC Corp. (“VDC”), owner of VDC.com, complained that it is having difficulty securing carriage deals with established cable networks. While VDC.com distributes content from Discovery Communications, most of the company's carriage deals are with smaller cable networks such as The Pentagon Channel and Mav TV. The broadband video site also carries home-shopping channels QVC and ShopNBC. VDC chairman Scott Wolf said that VDC plans to seek relief from the FCC “in the next few weeks” under the FCC's program access rules. In his letter to FCC chairman Kevin Martin, Wolf alleges that some cable networks are balking at licensing their networks to VDC.com because of “external influence, mainly from the large [cable] MSOs.”

“Smaller channels like Anime Network, for example, have been afraid to license their channel to us, for fear of being thrown off the large cable systems. In this environment, it is already hard enough for smaller networks to become viable, it is unfair that their distribution options are limited because of pressure from large cable operators,” writes Wolf. He also said that VDC has been unable to reach a carriage agreement to carry C-SPAN's networks, even though C-SPAN has carriage deals with cable rivals such as MobiTV and AT&T's U-verse TV system.

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The Federal Trade Commission (“FTC”) announced on August 10 that it entered into a court settlement with Nomrah Records, Inc. and its president, Mark Harmon – named defendants in the recent DIRECTV telemarketing case. Under the settlement, filed by the U.S. Department of Justice on the FTC's behalf, Harmon will pay a $75,000 civil penalty and both he and the company will be barred from violating the Do Not Call (“DNC”) Rule and Telemarketing Sales Rule (“TSR”) in the future.

In December 2005, the Commission charged DIRECTV and other defendants that telemarketed on DIRECTV's behalf with violating the DNC Rule and the TSR by calling consumers, despite the fact that their numbers were on the National DNC Registry. In settling the charges, DIRECTV paid $5.3 million, representing at the time the largest-ever DNC penalty obtained by the Commission.

The stipulated final judgment and order against Nomrah and Harmon contains strong injunctive relief, barring Nomrah and Harmon from calling consumers on the DNC Registry, as well as from violating any other provisions of the TSR in the future. The judgment and order also requires Harmon to pay a $75,000 civil penalty, with the stipulation that $400,575 will become due if he is found to have misrepresented his financial condition to the FTC. Finally, the order contains standard record keeping and reporting terms to ensure the defendants comply with the order.

An operation selling Chinese herbal supplements was banned on August 9 from claiming its products treated or cured diseases, to settle Federal Trade Commission (“FTC”) charges it violated a previous court order. The FTC alleged the sellers of Dia-Cope, a pill claimed to prevent, treat, and cure diabetes, violated the order by misrepresenting the health benefits of their product and misrepresenting that clinical trials proved their claims. The defendants will also give up their ill-gotten gains – all of the assets they received from the sale of Dia-Cope.

The defendants originally sold “Sagee”, a Chinese herbal supplement that they claimed could improve memory and concentration, repair damaged brain cells, slow the aging of the brain, increase the learning ability of people with mental handicaps, and treat various diseases and conditions related to brain function, including Alzheimer's disease, senile dementia, schizophrenia, autism, cerebral hemorrhage, stroke, epilepsy, and Parkinson's disease. They advertised Sagee mainly in Chinese-language media; some ads also appeared in Vietnamese and English. The supplements were sold by distributors on the Internet and in some stores.

The FTC charged that the claims about Sagee were false and unsubstantiated and an order entered in January 2005 prohibited the defendants from making unsubstantiated health benefit, performance, or efficacy claims for any dietary supplement, food, drug, device, or service. The order also barred them from misrepresenting the existence, results, validity or conclusions of any scientific study.

The Federal Trade Commission will host three days of public hearings to examine how evolving technology will shape and change the habits, opportunities and challenges of consumers and businesses in the coming decade. The event will bring together experts from business, government and technology sectors, consumer advocates, academicians, and law enforcement officials to examine emerging technologies and to explore technologies that are currently evolving.
The public hearings, “Protecting Consumers in the Next Tech-ade,” will be held November 6-8 in The George Washington University Lisner Auditorium, 730 21st Street, NW, Washington, DC, and will be free and open to the public. Examples of new technologies will be on display during the hearings. On November 9, the FTC will invite law enforcers and other government officials to a non-public meeting to examine the implications emerging technologies will have for consumer education and consumer protection in the coming decade.

An agenda for the hearings will be published soon. Topics to be addressed at the hearings will include, but are not limited to:

On July 31, the U.S. District Court for the Northern District of Georgia barred a purported former preacher, his two sons, and his companies from selling a healthcare business opportunity promising consumers millions of dollars if they participated in an alleged network of Medicaid providers. In fact, according to the Federal Trade Commission (“FTC”) complaint, the defendants' business model required participants to break numerous state and federal laws.

Using “healthcare conferences” at hotels and convention centers across the United States, the defendants promised consumers that they would receive “guaranteed” Medicaid patients and would receive help from the lawyers, doctors, and other professionals on their staff in establishing their healthcare businesses. The FTC charged that the defendants misrepresented the assistance they would provide and that participants could legally earn money from the business, and did not provide participants with the required disclosure statement and earnings disclosures for a franchise. The U.S. District Court granted a temporary restraining order, prohibiting the defendants from continuing their deceptive business practices, freezing their assets, and appointing a receiver.

The operation targeted church-going audiences, advertising their upcoming conferences on Christian radio and television networks. Their traveling road show visited at least 18 different U.S. cities, drawing crowds of up to 1,000 attendees, with many persons paying a $65 registration fee to attend. The defendants held “conferences” in Atlanta, Baltimore, Durham, Chicago, Dallas-Ft. Worth, Memphis, Jacksonville, Nashville, Macon and Columbus, Georgia, St. Louis, Philadelphia, Jackson, Mississippi, Norfolk, Richmond, and Austin.