ABA Section of Antitrust Law

Consumer Protection and Corporate Counseling

Committees

November 2006 Consumer Protection Update

Robert M. Langer & Steven B. Malech

December 4, 2006

© 2006 Wiggin and Dana

Agenda

• Federal Trade Commission Update• State Attorneys General Update• The Children’s Advertising Review Unit• Lanham Act Litigation• Other Litigation

Preventing Spyware Distribution

• FTC law enforcement focuses on 3 questions:– Were consumers aware of the software

installation?– What harm did the installation cause?– How difficult is “uninstallation” of software?

Goals: To preserve the consumer’s ability to decide which program to install and retain, and to prevent substantial harm

SPYWARE/ADWARE• FTC announced the resolution of

two separate enforcement actions against spyware distributors:– FTC v. Odysseus Marketing

Inc., 05-cv-330 (D.N.H., filed 9/21/05)

– FTC v. Seismic Entertainment Productions, Inc., 04-377-JD

– Settlements end the unlawful distribution of spyware by these companies to unsuspecting consumers.

SPYWARE Cont’d• Odysseus advertised a bogus software program that purported to allow

consumers to engage in anonymous peer-to-peer file sharing.

• In fact, the software was bundled with spyware that launched unwanted pop-up ads, interfered with the operation of commercial search engines and transmitted consumers’ personal information to Odysseus Marketing.

• Odysseus is barred from downloading or installing software without the express consent of consumers, enjoined from installing software that is not easily uninstalled, required to destroy all personal information collected from consumers and prohibited from misrepresenting the function of any software.

• Odysseus’ principal, Walter Rines, must obtain a $500,000 performance bond prior to downloading or installing any software that displays ads, modifies a Web browser or collects personal information.

• Odysseus is fined $1.75 million, but only had to pay $10,000 because of the defendants’ inability to pay. (If it the Court finds at some future time that the defendants misrepresented their financial condition, they must pay the entire amount)

SPYWARE Cont’d• The FTC alleged that John Martinson paid Seismic Entertainment to promote,

advertise and sell two anti-spyware programs. In doing so, Seismic Entertainment allegedly installed spyware that could only be removed by purchasing and installing the two “anti-spyware” programs – “Spy Wiper” and “Spy Deleter.”

• The FTC also alleged that, if consumers didn’t purchase the program, they were allegedly forced to “spend substantial time and money to fix the problems” these programs caused. (See FTC press release dated Nov. 21, 2006 at www.ftc.gov/opa/2006/11/seismicodysseus.htm.)

• Pursuant to the settlement, Martinson was enjoined from installing or downloading software without express consumer consent and from downloading or installing software that exploits security defects in web browsers, that redirects browser searches or that modifies the functions of a search engine.

• A judgment of $1.86 million entered against Martinson, but he only had to pay $40,000 because of his financial condition. If the court finds Martinson misrepresented his ability to pay, Martinson must pay the entire amount of the judgment.

MORE SPYWARE• FTC v. ERG Ventures, LLC, 3:06-CV-578 (D.

Nev. Filed Oct. 30, 2006)

• Court grants TRO (Oct. 31, 2006) that (1) freezes the assets of the Defendants;(2) orders an accounting; (3) orders preservation of records; and (4) enjoins the Defendants from installing “mal-ware.”

• Defendants allegedly distributed free software that was secretly bundled with spyware that installed advertising toolbars, changed browser homepages, created pop-up ads – including “sexually explicit” ads, tracked internet usage and disabled anti-spyware or anti-virus software.

YET MORE SPYWARE• In re Zango, Inc., No. 052 3130.

• FTC alleged that Zango used both deceptive and unfair means to distribute adware (which monitors internet use and creates unwanted pop-up ads).– Deception allegations based on purported installation of adware

without warning or user consent by secretly bundling the adware with other software.

– Unfair practice allegations based on Zango’s alleged failure to provide consumers with information about the existence, location or removal of the adware, often causing consumers to spend substantial time and money to remove the unwanted software.

• Proposed Consent Order prohibits Zango from using adware or downloading software without verifying or obtaining the express consent from the consumer, requires Zango to create a mechanism by which consumers can complain and/or uninstall the adware, and requires disgorgement of “$3 million in ill-gotten gains.”

CAN-SPAM

• CAN-SPAM Act requires commercial e-mailers to give recipients an opt-out and to honor unsubscribe requests within ten days.

• Yesmail, a commercial marketing service, allegedly failed to honor unsubscribe requests within the required period when its spam filter software filtered out the unsubscribed requests as spam.

• Yesmail, in addition to the civil penalties, is permanently prohibited from violating the CAN-SPAM act, including by failing to include in its email a functioning return e-mail address.

U.S.A. v. Yesmail, Inc., C-06-6611 (N.D. Cal. Oct. 27, 2006).

Unwanted e-mails lead to $50,717 civil penalty.

FTC v. EPIXTAR CORP. ET AL., 03-CV-8511

• Stipulated final judgment bars defendants from misrepresenting the nature of their ISP services, details specific disclosures defendants must make while marketing to consumers and prohibits the defendants from billing consumers without express consent.

• A “Referee” is established to adjudicate consumer refunds and credits. FTC claims that $3.6 million has already been refunded.

• FTC complaint, filed in 2003, alleged that the Defendants misrepresented the terms of their services, leading consumers to believe that they had a 30 day free trial.

• FTC alleged that defendants failed to tell consumers: (1)the service must be cancelled before the end of the free trial period to avoid billing; (2) how to cancel the service; (3) when the trial period began or ended; or (4) the date on which the consumer would be charged.

• FTC also alleged that the Defendants charged consumers who declined the service and unfairly billed consumers without their consent.

PROTECTING CONSUMER DATA

• FTC complaint alleges that between Sept. 2005 and Dec. 2005, a hacker exploited security flaws in Guidance’s systems, collecting sensitive consumer data, including credit card numbers and financial information.

• Guidance represented to its customers that their data was safe.

• Settlement requires Guidance to: designate an employee to coordinate information security; design safeguards to control risks identified through risk assessment process; retain service providers capable of providing the necessary safeguards and contract with those providers to monitor the safeguarding.

• Settlement also requires Guidance to obtain, within six months and then again every other year for ten years, a third-party certification of the effectiveness of its security program.

Computer data security company settles with FTC over charges that security failures allowed hackers to access credit card data for thousands of consumers (In re Guidance Software, 062 3057).

Miscellaneous FTC Matters

1. Canadian brothers and their companies settle charges that they deceived elderly US residents by offering false Australian lottery winnings. FTC v. Newport Group, C03-31662 (W.D. Wash)

2. A Florida company settled charges that it made false and unsubstantiated claims about the ability of a diet supplement to increase the height of children. FTC v. Sunny Health Nutrition Technology & Products, Inc., et al., No. 8:06-CV-2193-T-24EAJ (M.D. Fla.)

3. A scam selling prep materials for non-existent post-office jobs was shut down. Simmons v. FTC, 3:0 (M.D. Tenn.)

NEWPORT

• FTC alleged that the brothers and their companies would contact consumers and convince them to pay fee, ranging from $500 to $35,000, to cover the costs of taxes and processing of their “winnings” in an Australian or other foreign lottery.

• These actions, mostly done through telemarketing, allegedly violated Section 5 of the FTC Act and the Telemarketing Sales Rule.

• The settlement creates a $1.8 million suspended judgment and requires the payment of $232,700 Canadian dollars and $57,500 in U.S. dollars for consumer redress.

Sunny Health• Defendants claimed that the ‘HeightMax’ diet

supplement would cause users aged 12-25 to grow as much as 2 to 3 inches in six months. Defendants also claimed that ‘HeightMax’ was created and tested through research and clinical trials.

• Defendants also created a fake expert ‘William Thompson’ to pitch their products.

• Settlement imposes a $1.9 million suspended judgment (based on financial representations) and restitution of $375,000

Simmons

• Defendants falsely claimed that they were affiliated with the U.S. Postal Service and that postal jobs were available.

• Defendants sold study materials for a fictitious postal entrance exam. Passing the exam, according to the defendants, guaranteed a job with the Postal Service. As described by the FTC, the defendants “sold worthless prep materials for jobs that didn’t exist.”

• Defendants agreed to “give up all of their material assets.”

• A monetary judgment of approximately $1.3 million was imposed, but suspended because of defendants’ financial condition

State Attorney General Update

• Omnicare Settlement

• U.S. Dept. of Energy to Issue Energy Efficiency Standards for Certain Consumer Goods

• Rent-A-Center

• Spyware Slayer

• State-chartered subsidiaries of national banks

• Omnicare Settlement

• U.S. Dept. of Energy to Issue Energy Efficiency Standards for Certain Consumer Goods

• Rent-A-Center

• Spyware Slayer

State AG Update

• OMNICARE: A long term care pharmacy that provides drugs to Medicaid beneficiaries in 47 States

Company allegedly switched forms

and dosages of medications without

the consent of the prescribing

physician and/or the patient

Allegations include substitution of:

Zantac tablets for capsules;

Generic Prozac capsules for tablets; and

One 15 mg dose into two 7.5 mg doses

No admission of liability, but agreement to

pay $49.5 million to U.S. and 42 states.

State AG Update (Cont.)State of New York et al. v. Bodman, No. 05 Civ. 7807 and No. 05 Civ. 7808 (S.D.N.Y.).

Background: 15 states (including CA, CT & NY), the City of NewYork and 3 public interest groups sued the U.S. Department of Energy to force compliance with deadlines for issuance of energy efficiency guidelines set forth in the Energy Policy and Conservation Act . DOE was 6-13 years late in complying.

Resolution: Consent judgment establishing binding schedule for setting overdue guidelines for 22 types of household and commercial appliances, including air conditioners, heaters, furnaces, clothes dryers and kitchen appliances.

Claimed Benefits: Financial savings, reduced dependence on foreign oil,Reduced pollution and increased capacity of electrical grid

State AG Update (Cont.)

• California AG alleged that RAC (the nation’s largest rent-to-own company) failed to disclose the true cost of its rent-to-own program and deceptively marketed its Preferred Customer Club.

• Settlement and Final Judgment calls for:– Payment of $7 million in restitution– Injunctive relief prohibiting certain

practices; and– The deposit of $7 million in

unclaimed “restitution” funds from a private lawsuit into a special consumer protection trust.

People v. Rent-A-Center, Inc. et al., No. OGC06-45887 (Cal. Super. Ct.)

State AG Update (Cont.)

• Defendants promoted “Spyware Slayer” remove non-existent spyware

• Defendants also provided download services, but only disclosed fees after obtaining personal information.

• Settlement included:– Restitution to Washington

victims– $300,000 civil penalties (all

but $25,000 suspended)– $30,000 attorneys’ fees

• State AGs also seek to protect consumers against spyware

• State of Washington v. High Falls Media, No. 06-2-37298 (King Co. Sup. Ct. 2006)

State AG Update (Cont.)

• Watters v. Wachovia Bank, 05-1342 (U.S. Supreme Court)• Background: Dispute between the States and Federal

government regarding the enforcement of consumer protection statutes against the subsidiaries of national banks. Primarily driven by State challenges to predatory lending practices.

• The National Bank Act and OCC regulate national banks. Pursuant to § 484 of National Bank Act, national banks are not subject to State regulation

• The OCC, in adopting the regulations at 12 C.F.R. 7.4006, expanded the reach of this exemption to cover subsidiaries of national banks

• The State of Michigan sought to regulate Wachovia Mortgage, a state-chartered non-bank subsidiary of Wachovia Bank, a national bank. Wachovia opposed such regulation on the basis of § 484.

State AG Update (Cont.)

• District Court and Sixth Circuit: Michigan cannot regulate Wachovia Mortgage

Questions presented to Supreme Court:1. Is the OCC’s conclusion that federal regulations

preempt state laws regulating mortgage lending as applied to State-chartered non-bank operating subsidiaries entitled to judicial deference under Chevron doctrine?

2. Does a federal regulation, by equating a State-chartered non-bank operating subsidiary with a national bank for purposes of federal preemption of State regulation, violate the Tenth Amendment?

CARUchat-avenue.com: provides chat rooms, message boards and links to other chat sites and services. CARU initiated anInvestigation based on its routine monitoring of advertising to kids:

• “According to the United States Attorney General, one in five children has been approached sexually on the Internet.” During its investigation, a CARU staff member posing as an 11 year old, was “immediately approached to enter a private chat and to engage in sex talk by a user that identified him as being 22 years old.” CARU “notified an appropriate law enforcement agency.”

• CARU concluded that the website operator failed to: (1) neutrally screen for age; (2) obtain parental consent for use by children under 13; (3) provide certain contact information; and (4) provide links to the privacy policy on each page where a child could disclose personal information.

• CARU also concluded that the website operator had “actual knowledge” that it was collecting personal information from children under 13, and that the site is “directed to children”

• The operator, although agreeing to make some changes, did not agree with all of CARU’s findings and CARU referred the operator to the FTC

CARU (Cont.)Kidschat.net – website composed of several chat rooms, one of which was linked to another website run by chat-avenue.com

• The website failed to properly screen for age or obtain parental consent for use of children under 13.

• “More than once, a CARU staff member was solicited for sex or nude picture immediately upon entering a the chat room and declaring herself to be 10 or 11 years old.”

• The website posted many advertisements and links to websites that were inappropriate for children, including some for dating and singles sites

• The website operator has added some safeguards (such as neutral drop down birthday menu). The operator also removed some of the features that attracted young children,

• CARU concluded more changes needed to be made, such as the implementation of a tracking system so users could not simply gain access by changing their date of birth, the removal of the terms “kids” and “children” from the description tags, and the change the domain name to remove the word “kids”

CARU Developments

Children’s Food and Beverage Initiative• Initiative will shift the mix of advertising messaging to children to

encourage healthier dietary choices and healthy lifestyles• Participating companies agree to devote half their advertising directed

toward children in various different media to messages encouraging good nutrition or healthy lifestyles

• Specific initiatives:– (1) limits products shown in interactive games to healthier dietary

choices– (2) stops advertising of food or beverage products in elementary

schools– (3) stops food and beverage product placement in editorial and

entertainment content– (4) reduces use of third-party licensed characters in advertising that

do not conform to the Initiative’s product or messaging criteria

CARU Developments (Cont.)Revised CARU Guidelines• Provides new authorization for CARU to take

action against unfair and misleading advertising to children

• Prohibits “blurring” – advertising that obscures the line between editorial content and advertising messages

• Requires advertisements in interactive games to make clear to children that the commercial message is an advertisement

Lanham Act Litigation

• Issue: Does the failure to properly identify the origin of a foreign-made product in violation of the Tariff Act constitute a per se violation of Section 43(a) of the Lanham Act?

• Believing the answer was “yes,” plaintiff moved for summary judgment

York Group, Inc. v.

York Southern, Inc.,

2006 WL 3057782

(S.D. Tex. Oct. 25, 2006)

Lanham Act Litigation (Cont.)

• Background: Casket manufacturer alleged that several of its distributors were importing coffins manufactured in China, but failing to label them “Made in China” as required by the Tariff Act of 1930 – which requires that “foreign products be permanently marked with their country of origin.” The manufacturer asserted that the Tariff Act violations constituted a per se violation of Section 43(a) of the Lanham Act.

• Relying on a previous 5th Circuit case to conclude that the “Court should not allow a party under another guise of a Lanham Act claim to create a private right of action where none exists under the regulatory or statutory scheme,” the district court held that the per se claim was not legally viable.

• Declined to follow a Southern District of New York case holding that the “failure to designate country of origin in violation of the Tariff Act violates § 43(a) of the Lanham Act as a matter of law.”

Lanham Act Litigation (Cont.)

• Issue: Did the misappropriation of the copyrighted works of radiologist constitute unfair competition in violation of Section 43(a) of the Lanham Act and New York common law?

• Defendants allegedly:– represented &

advertised that they authored Plaintiff’s copyrighted reports;

– sent out reports that she authored without her signature or consent; &

– Misrepresented the facts surrounding the use of her reports

Lanham Act Litigation (Cont.)

• Defendants moved to dismiss pursuant to F.R.C.P. 12(b)(6) on the grounds that copyright infringement did not give rise to a misrepresentation or false designation of origin claim under the Lanham Act or to a state law unfair competition/fraud claim.

• The district court denied the motion, holding that, at this stage of the proceedings, Plaintiff might be able to demonstrate facts sufficient to prove her claims.

Other Litigation

• Kraft’s Response: – listed on the All ingredients label– Will re-label the product “to make

it clearer that the dip is guacamole flavored”

– Source: Florida Sun-Sentinel Internet Edition, 11/30/06

• California resident sues Kraft Foods• Alleges that avocado is less than 2% of “Kraft Dips” Guacamole • No federal requirement regarding how much avocado a product must contain to be called guacamole

Other Litigation (Cont.)

• Operator of websites, including sites “devoted to opposing spam messages” like sueaspammer.com,” pursued a claim against Cruise.com for 11 e-deals containing erroneous, but non-material, errors

• Operator alleged violations of CAN-SPAM and Oklahoma law

Omega World Travel, Inc. v. Mummagraphics, Inc., No. 05-2080 (4th Cir. Nov. 17, 2006)

• CAN-SPAM preempted Oklahoma anti-spam law because bare falsity did not trigger CAN-SPAM’s preemption exemption.

•Bare falsity standard would “swallow the rule and undermine the regulatory balance that Congress established.”

Other Litigation (Cont.)Court dismissed both CAN-SPAM claims

(1) Allegation: Inaccurate header information violated CAN-SPAM prohibition against the use of materially false or misleading “header information” (i.e., information that would permit an Internet access service to identify locate or respond to the person initiating the e-mail). Held: Inaccuracy was not material, as the spam e-mails were “chock full” of ways to identify and locate the sender. Each message had (a) the required “send no more” link, (b) a toll-free number, (c) a Florida mailing address and local phone number, and (d) reference to the Cruise.com webpage.

(2) Allegation: Appellees failed to remove e-mail box from the E-Deals list within 10 days, violating CAN-SPAM requirements that marketers use an internet-based mechanism for permitting spam recipients to request not to receive future emails, and that the operator to honor that request within ten business days.Held: Appellant could not show a “pattern or practice” of refusing to meet the ten day requirement. Rather, operator could only point to one email address that received the e-deal mailing beyond the ten day threshold.

Presenter

• Robert M. Langer is a member of Wiggin and Dana and head of the firm’s Antitrust and Trade Regulation Practice Group. Mr. Langer is involved in all aspects of antitrust, consumer protection and trade regulation counseling and litigation, representing clients before the Federal Trade Commission, the Antitrust Division of the United States Department of Justice, as well as offices of state attorneys general throughout the United States. His clients include consumer products providers, direct marketers, domestic telecommunications companies, hospitals, insurance companies, pharmaceutical companies, retailers and sweepstakes sponsors.

• Mr. Langer, who was the Assistant Attorney General in charge of the Antitrust and Consumer Protection Department of the Office of the Connecticut Attorney General prior to joining Wiggin and Dana, currently serves as both the Finance Officer and the Co-Chair of the Janet D. Steiger Fellowship Project of the ABA’s Section of Antitrust Law. He previously served in multiple other capacities with the Section of Antitrust Law, including Consumer Protection Coordinator, Council member, Chair and Vice-Chair of the Consumer Protection Committee, Co-Chair of the Legislation Committee, Co-Chair of the Federal and State Legislative Policy Task Force, Vice-Chair of the Continuing Legal Education Committee and Chair of the State Antitrust Enforcement Committee. 

Presenter

• Steven Malech is a Senior Associate with Wiggin and Dana’s Litigation Department and Antitrust and Trade Regulation group. He represents clients in a broad variety of consumer protection matters involving administrative investigations and litigation. He also counsels clients on compliance with state and federal regulations and statutes regarding advertising, consumer protection and promotional marketing. His experience includes the representation of direct marketers, insurance companies, newspapers, pharmaceutical manufacturers, providers of various consumer products and retailers.

• He is a member of the American Bar Association and is active in the consumer protection and Section 2 committees of the Associations’ Section of Antitrust Law. He is a member of the Connecticut Bar Association’s Antitrust & Trade Regulation Section and a member of the Executive Board of the Connecticut Bar Association’s Business Torts Committee. Steve also belongs to the Promotional Marketing Association.

ACKNOWLEDGEMENTS

•We greatly appreciate the assistance in the preparation of these materials provided by:

Robert Huelin

Marianne Sadowski

and

Seth Huttner