Internet Marketers Settle FTC Allegations They Deceived Consumers With False Claims of Free Trial Offers and Unauthorized Continuity Plans

Apex Capital Group, LLC – including its two principals Philip Peikos and David Barnett – and the twelve (12) entities it controlled (collectively, “Apex Capital”) have agreed to two separate court orders settling the Federal Trade Commission’s (“FTC”) allegations related to Apex Capital’s operation of a multi-national scheme to defraud consumers through free trial and negative option plans.

The FTC alleged that Apex Capital marketed supposed “free trial” offers to consumers for personal care products and dietary supplements online, but instead charged consumers the full price for these products and enrolled them in negative option plans without their consent. To further this scheme, the FTC alleges Apex Capital used dozens of shell companies and straw owners in the US and UK to engage in “credit card laundering” – an illegal process by which credit card payments are processed through other companies’ merchant accounts – including manipulating chargeback levels, artificially spreading sales transactions across multiple merchant accounts (load balancing), and running low dollar value sales through merchant accounts that did not reflect actual sales to consumers (microtransactions).

Under both court orders, Apex Capital is permanently barred from using negative option plans, including using negative option features on a trial basis or as an add-on to a sale, to sell dietary supplements, cosmetics, foods, or drugs. If Apex Capital use a negative option plan to sell any other products, they are required to provide enhanced disclosures, secure consumer’s express informed consent prior to purchase, and provide a simple mechanism to stop recurring charges, using the same mechanism that the consumer used to purchase the products. Further, the court orders bar Apex Capital from credit card laundering and engaging in tactics to avoid fraud/risk monitoring programs, including load balancing and microtransactions.

Takeaway: As we have previously blogged, free trial and negative option plans continue to be an enforcement priority for the FTC, with strict guidelines for how they may be operated fairly and transparently for consumers. With both federal and state regulators continuing to pay attention to these hot areas, marketers considering free trial programs and negative option sales strategies should continue to be careful to follow all applicable rules.

 

FTC Settles with Beauty Brand Over False “Organic” and “Vegan” Claims

Last month, the Federal Trade Commission (“FTC”) announced a $1.76 million settlement with Truly Organic, Inc. and its CEO over allegations that the company’s personal care products advertised as “100% organic” were anything but.

According to the FTC’s complaint, since at least 2015, the company advertised a range of personal care products including body washes, lotions, baby products, haircare, bath, and cleaning sprays as “certified organic, “USDA certified organic,” and “Truly Organic.” The company also claimed its products were “vegan,” despite the presence of animal-derived ingredients like honey and lactose. The FTC contended that none of the company’s products had been certified in compliance with USDA’s NOP. Further, many of the company’s products contain non-organic ingredients included only in lists that are buried among other text on product labels and websites, or contain no organic ingredients at all. The FTC further alleged that some of the company’s products contain non-organic ingredients that can be organically sourced, such as non-organic lemon juice. Other products contain non-organic ingredients that the USDA prohibits in organic handling, such as the chemicals cocamidopropyl betaine and sodium coco surfactant.

Truly Organic, who neither admitted nor denied the allegations, agreed to pay a monetary judgment of $1.76 million. Additionally, Truly Organic is barred from making future claims that its products are “organic,” “vegan,” or provide any environmental or health benefits without adequate substantiation and competent and reliable scientific evidence.

Takeaway: The FTC continues to be vigilant about policing deceptive environmental or health claims such as “organic” and “all-natural.” Importantly, the FTC is continuing to seek monetary relief against advertisers in addition to any consent decree.

 

New York attorney general continues to pursue cybersecurity compliance with latest lawsuit

New York Attorney General (AG) Letitia James has sued Dunkin’ Brands, Inc. (franchisor of Dunkin’ Donuts) over two data breaches in 2015 and 2018, accusing the company of mishandling a series of cyberattacks that together compromised more than 320,000 customer accounts.

In the complaint filed last week, AG James accused Dunkin’ of engaging in fraudulent practices and false advertising by misrepresenting to consumers the nature of the cyberattacks. The complaint goes on to allege that Dunkin’, by failing to notify consumers of the breaches or to take sufficient steps to investigate and safeguard consumer data, violated not only its internal data security procedures but also New York data breach notification and consumer protection laws.

The Dunkin’ lawsuit is just one of the latest examples of how the attorney general’s office is making cybersecurity a priority. To read more on New York attorney general’s recent data enforcement efforts and our recommendations for compliance, click here.

FTC Issues Warning Letters to Three CBD Companies

This week, the Federal Trade Commission (“FTC”) sent warning letters to three companies that sell cannabidiol (“CBD”) products regarding the health claims found in the companies’ advertisements.

The companies sold a variety of products containing CBD, including oils, tinctures, capsules, creams, and “gummies.” Each company claimed that its CBD products can prevent, treat, or cure serious diseases, health conditions, and chronic pain. One company claimed that its product could treat pain better than opioid painkillers and that CBD was “clinically” proven to treat a host of diseases, including Alzheimer’s, cancer, and multiple sclerosis.  The company further claimed that it participated in “thousands of hours of research” with Harvard researchers.  The other two companies likewise made similar claims that their CBD products could treat pain and other conditions such as depression, fibromyalgia, heart disease, cancer and autism.

The FTC’s letters urged the companies to review their marketing claims to ensure they are supported by competent and reliable scientific evidence. The letters warned the companies that selling CBD products without such substantiation could draw legal action and an order to refund money to consumers. The companies have 15 days within receipt of the letter to respond to the FTC’s inquiry and provide the specific acts they have taken to address the FTC’s concerns.

Takeaway: Marketers selling CBD products should avoid making any express or implied health or therapeutic benefit claims about their products unless they are properly substantiated with competent and reliable scientific evidence.

 

New, state-approved label for environmentally certified “Green Button” textiles (Grüner Knopf) launched in Germany

On 9 September 2019, the German Federal Ministry of Economic Cooperation and Development (Bundesministerium für wirtschaftliche Zusammenarbeit und Entwicklung – BMZ) introduced a new, state-regulated environmental label for “Green Button” (Grüner Knopf) certified textiles with a press release, available here. The BMZ also launched the official Green Button website, which is available in German at www.gruener-knopf.de.

To read more on the introduction of the Green Button, how it works and industry feedback, click here.

FTC Announces Two More Actions Enforcing The Consumer Review Fairness Act

Last month, the Federal Trade Commission (“FTC”) announced two new actions under the Consumer Review Fairness Act (“CRFA”) against companies that allegedly used non-disparagement provisions in consumer “form contracts” in connection with their respective services to rent properties. These two actions follow the FTC’s inaugural CRFA actions against three companies last month, which we previously wrote about here.

According to the FTC’s complaints, the two companies had contracts with consumers that barred the consumers from posting negative reviews about the property or companies. The agreements also stated that a breach of the provision would result in liquidated damages.

The FTC’s proposed consent orders prohibit the companies from offering a form contract to any consumer that contains a review-limiting contract term or requires that a customer accept such terms as a condition of the company complying with the contract. Furthermore, the orders require the companies to notify affected consumers that the challenged contract provisions are void, and that they have the right to post honest reviews online. Lastly, the proposed orders impose compliance and reporting requirements on the companies.

Takeaway: The FTC is making CRFA enforcement a priority. Advertisers should take note and ensure that their consumer form contracts do not violate the terms of the CRFA by prohibiting or restricting consumers’ rights to post honest reviews, and that they do not impose penalties on consumers for exercising that right.

FTC Continues Enforcement Against Deceptive “Free” Trials and Negative Option Plans

Last month, the Federal Trade Commission (“FTC”) announced settlements with operators of a worldwide negative option scam, in which online marketers deceptively advertised “risk free” trial offers of its products, but charged consumers full price for the trial products and automatically enrolled them in negative-option continuity plans without their knowledge or consent.

As we previously wrote about here, the defendants engaged in allegedly deceptive practices in the marketing and sale of skincare products, electronic cigarettes, and dietary supplements. While the defendants claimed to offer free trials of their products for $4.95 or less, in actuality, consumers who accepted the trial offers were charged as much as $98.71 for a single shipment and enrolled in continuity plans. The FTC alleged that these deceptive sales practices violated Section 5 of the FTC Act, the Restore Online Shoppers’ Confidence Act (“ROSCA”) and the Electronic Fund Transfer Act (“EFTA”).

The FTC’s orders (1) prohibit the defendants from advertising “risk free” trial offers when in actuality consumers will be charged full purchase prices and enrolled in continuity plans; (2) require that the defendants provide clear and conspicuous disclosures to consumers and obtain their express informed consent before charging them for a transaction that includes a negative option feature; (3) require the companies to provide consumers with a simple mechanism for cancelling the product or service; and (4) require that the defendants receive written authorization from consumers before making any electronic fund transfers. Lastly, the orders impose $48.1 million and $123.1 million judgments respectively against the defendants, which will be partially suspended upon reduced payments to the Commission.

Takeaway: Negative option plans continue to be an enforcement priority for the Commission and this case serves as an important reminder that this FTC will be looking to obtain real money damages against advertisers.

 

FTC and Law Enforcement Partners Join Forces To Wring Out Illegal Robocalls

Last month, the Federal Trade Commission (“FTC”) and its law enforcement partners announced their joint crackdown on illegal robocalls entitled, “Operation Call it Quits.” The operation is part of the FTC’s ongoing effort to stop the “universally loathed pre-recorded telemarking calls.”

“Operation Call it Quits” includes 94 enforcement actions targeting operations around the country that are responsible for more than one billion calls pitching a variety of products and services. The latest operation includes four new cases and three new settlements from the FTC, which include: (1) a $25.3 million financial judgment against Lifewatch, and an $8.9 million financial judgment against two of its business partners, who were accused of bombarding primarily elderly consumers with at least one billion unsolicited robocalls to pitch “free” medical alert systems; (2) a case involving robocalls to financially distressed consumers, especially elderly consumers, who were offered bogus credit card interest rate reduction services; (3) a case where consumers were charged up to $22,500 for fraudulent money-making opportunities; (4) a case where the defendants dialed millions of phone numbers on the Do Not Call registry in an attempt to develop leads for home solar energy companies; and (5) a case involving the use of an autodialer to send out millions of illegal robocalls and calls to numbers listed on the Do Not Call registry.

In addition to the FTC’s actions, 25 federal, state and local agencies lodged 87 enforcement actions as part of the initiative.

Takeaway: This joint effort by the FTC and local and state officials illustrates that combatting robocalls remains a top priority, especially where consumers experience harm from falling victim to such scams.

 

Vaping Companies Take a Hit From The FTC and FDA Over Social Media Endorsements

Earlier this month, the Federal Trade Commission (“FTC”) and the U.S. Food and Drug Administration (“FDA”) issued joint warning letters to four companies that market flavored e-liquid (vaping) products. The letters cite postings by influencers on social media sites endorsing the companies’ products and state that the influencers’ posts failed to include a required nicotine warning and a disclosure as to the influencers’ “material connection” to the companies.

According to the FDA, the featured e-liquids were “misbranded” because the social media posts failed to include a mandatory nicotine warning statement, in violation of the Federal Food, Drug, and Cosmetic Act (FD&C Act). Specifically, under the FD&C Act, all advertisements for e-liquids must bear the following warning: “WARNING: This product contains nicotine. Nicotine is an addictive chemical.” The letters also warned the marketers of their responsibility to ensure that their products and all related labeling and/or advertising on their websites or on any other websites or media in which the companies advertise comply with each applicable provision of the FD&C Act.

The FTC determined that the companies’ failures to disclose the presence of and risks associated with nicotine in their social media posts raised concerns that the posts could violate the FTC Act. Also, the FTC reminded the companies that all endorsements by social media influencers must adhere to the FTC’s Endorsement & Testimonial Guidelines by clearly and conspicuously disclosing any material connection between the endorser and the companies. As such, the FTC urged the companies to review their social media marketing to ensure compliance with the Guides. The FTC also suggested that if the companies have a social media policy, they should evaluate how it applies to the posts identified in the warning letters and posts by other endorsers. If the companies do not have such a policy, the FTC urged them to consider implementing one that provides appropriate guidance to endorsers.

Takeaway: These FTC/FDA warning letters underscore the fact that the FTC and FDA share joint jurisdiction over food, drug, cosmetic and tobacco claims made in social media posts. Their joint enforcement effort in this area coincides with the general Congressional view that vaping amongst teens is a major issue in need of regulation.

 

FTC Seeks Public Comments to Children’s Online Privacy Protection Rule

Last week, the Federal Trade Commission (“FTC”) announced it is seeking public comment on the effectiveness of amendments made by the agency in 2013 to the Children’s Online Privacy Protection (“COPPA”) Rule, and whether additional changes are needed. In connection with this initiative, the FTC will hold a public workshop on October 7, 2019.

COPPA requires certain websites and other online services that collect personal information from children under the age of thirteen to provide notice to parents and obtain verifiable parental consent before collecting, using, or disclosing personal information from these children.

While the FTC generally reviews its rules every ten years, FTC Chairman Joe Simons explained the reasoning behind the agency’s escalation of its review of the COPPA Rule: “In light of rapid technological changes that impact the online children’s marketplace, we must ensure COPPA remains effective. We’re committed to strong COPPA enforcement, as well as industry outreach and a COPPA business hotline to foster a high level of COPPA compliance. But we also need to regularly revisit and, if warranted, update the Rule.”

The FTC has identified certain categories of questions in which it will be seeking public comment:

  • Has the Rule affected the availability of websites or online services directed to children?
  • Does the Rule correctly articulate the factors to consider in determining whether a website or online service is directed to children, or should additional factors be considered? For example, should the Rule be amended to better address websites and online services that may not include traditionally child-oriented activities, but have large numbers of child users?
  • What are the implications for COPPA enforcement raised by technologies such as interactive television, interactive gaming, or other similar interactive media?
  • Should the Commission consider a specific exception to parental consent for the use of education technology in schools?
  • Should the Commission modify the Rule to encourage general audience platforms to identify and police child-directed content uploaded by third parties?

The FTC’s review of the COPPA Rule could have tremendous implications for social media and those operating general interest websites. You can be sure we will be following this area closely in the months to come. Be sure to subscribe to our future client alerts for further updates.

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