Stay ADvised: What's New This Week
- Web of Debt-Ception: Federal Court Bans and Fines Debt Relief Scam Enterprise
- Nutrition Company Settles After “Superstarch” Claims Raise Issues
- Texting 411: New SMS and MMS Message Classification Ruling
- In Busy Week, NY Attorney General Settles with Multiple Privacy Violators
Web of Debt-Ception: Federal Court Bans and Fines Debt Relief Scam Enterprise
A federal district court judge granted a joint FTC and Florida attorney general motion for summary judgment against multiple operators of an alleged debt relief scam, resulting in hefty fines and an industry-wide ban. In their Complaint for Permanent Injunction and Other Relief, the Federal Trade Commission (FTC) and the state of Florida alleged that Kevin W. Guice and others violated the Telemarketing and Consumer Fraud and Abuse Prevention Act and the Florida Deceptive and Unfair Trade Practices Act by defrauding over 10,000 consumers seeking debt relief assistance. The regulators requested the court to grant “temporary, preliminary, and permanent injunctive relief, rescission or reformation of contracts, restitution, the refund of monies paid, disgorgement of ill-gotten monies, consumer redress, and other relief.”
The complaint alleged that the 13 defendants, through a “maze” of companies that created a “common enterprise,” engaged in prohibited telemarketing practices by selling vulnerable consumers fraudulent credit card debt relief services. Specifically, the defendants are accused of promising lower interest rates and government assistance to pay off debt related to credit cards. Each of the defendants played a role in the scheme, with some corporate shell companies responsible for hiring the telemarketers and others for moving money between companies, other defendants and financial institutions.
Over the course of the scam, “hundreds of thousands” of fraudulent calls were placed to consumers through the use of robocall technology and contacting consumers on the FTC’s “Do Not Call” registry. The defendants also used vague language in discussions with consumers that created confusion and implied relationships with major lenders that did not exist, promising debt relief and savings to duped borrowers. The defendants also requested money up-front and failed to provide necessary disclosures regarding additional fees their involvement would trigger for their customers. Rather than receive the positive results they promised, customers suffered lower credit ratings, higher interest rates and an increase in overall debt resulting from their dealings with the defendants.
In its Order and Permanent Injunction, the U.S. District Court for the Middle District of Florida permanently banned the defendant Kevin W. Guice from both telemarketing and debt relief industries, determining that he was the mastermind behind the convoluted debt relief scam. The order further bans Guice from directly or indirectly engaging in any “advertising, marketing, promoting, offering for sale” or selling in the debt relief industry. Significantly, the court also required that Guice pay restitution in the amount of $23 million and also surrender his personal luxury goods to account for his ill-gotten gains obtained through his scam enterprise.
Purported debt relief companies promising lower interest rates and savings for customers through telemarketing efforts including robocalling subject themselves to restitution, fines and potential industry bans if they fail to provide the promised benefits, do not include required disclosures or deceive customers. Creating complex corporate structures intended to shield bad actors from liability will likely not succeed.
Nutrition Company Settles After “Superstarch” Claims Raise Issues
A consumer who sued a nutritional supplement manufacturer that claimed to include a special “Superstarch” performance-enhancing ingredient in its product line has agreed to settlement of the matter, though on undisclosed terms. Plaintiff Kevin McCann alleged that the UCAN Company misled consumers with claims that its snack bar and drink mix supplements provided users with extra energy and performance enhancing benefits because it lacked support for such claims and, in fact, could actually harm certain users.
In his July 11, 2018 complaint, McCann alleged that UCAN marketed its Generation UCAN Superstarch Drink Mix, Generation UCAN Protein Drink Mix and UCAN Snack Bars products as “powered by a revolutionary, all-natural carbohydrate called ‘Superstarch,’ which produces ‘sustained energy,’ ‘optimized performance,’ ‘enhanced fat burn’ and ‘speedier recovery’…without the harmful and performance impairing side effects associated with gastrointestinal distress.” However, despite the promises made by UCAN’s marketing campaigns, McCann alleged that the company’s Superstarch additive not only failed to enhance performance but actually impaired it, as it increased gastrointestinal distress in its users.
McCann supported his allegations that UCAN violated federal and state advertising laws with laboratory tests and peer-reviewed research, challenging UCAN’s reliance on internal experiment results provided in white papers and one journal article in Nutrition magazine that referenced the basic ingredient comprising what UCAN called Superstarch or, hydrothermally modified cornstarch. McCann argued that the evidence presented in the white papers was deficient because the papers lacked appropriate disclosures regarding the methods used to verify their adequacy and efficacy. Further, he claimed that these papers were flawed as a leading researcher involved in the science had ties to the company.
The studies that McCann presented indicated that athletes did not exhibit any enhanced athletic performance attributes after using UCAN products. While one study did note some potentially positive benefits of using Superstarch as opposed to sweetener, McCann claimed that it failed to substantiate claims that Superstarch in UCAN products contributed to increased athletic performance between test groups.
McCann contended that UCAN’s use of Superstarch was “an obvious and transparent marketing ploy,” and that some misleading information distributed by UCAN constituted “disingenuous and dishonest” marketing. UCAN, according to McCann, not only failed to conduct appropriate product studies to substantiate its claims and ignored scientific evidence that refuted its claims, but also created a marketing campaign centered around “speculative and unsubstantiated performance-related claims” that were not supported by scientific evidence.
UCAN challenged McCann’s proposed class representation, which included consumers from multiple states, claiming defects in the procedural aspects of the attempted class certifications. Specifically, UCAN asserted that the plaintiffs failed to demonstrate that UCAN’s products did not improve athletic performance or caused gastrointestinal distress in other members of the putative class. Though UCAN initially moved for dismissal of the suit claiming that its advertising was not deceptive as there was no implication that the claims they made were backed by science, the company ultimately agreed to settle rather than face the costs and distractions of an uncertain litigation. Though the terms of the settlement are private, McCann filed a voluntary dismissal of the case, with prejudice, on December 11.Key Takeaway
Though the terms of the settlement are not public, this case is a good reminder to companies that make performance-related claims to possess reliable and scientific evidence, including peer-reviewed testing consistent with industry standards and untainted by improper conflicts of interest, to support such claims. In addition to running the risk of attracting regulatory scrutiny, consumers are also on the beat, watching out for and, in instances such as this, challenging claims that may appear to be too good to be true.
Texting 411: New SMS and MMS Message Classification Ruling
The FCC declared last week that short message service (SMS) and multimedia messaging service (MMS) messages are properly classified under the Communications Act as an information service offered by wireless carriers rather than telecommunications service, ending rounds of opposition between mobile service providers and other groups that included text messaging companies and consumer advocacy groups. The FCC touted the decision as a move toward promoting greater regulatory certainty that will allow wireless service providers to protect subscribers through robotext-blocking and other anti-spam filtering procedures.
The Communications Act classifies communications service platforms into either “telecommunications services” or “information services,” with the former subject to greater regulation. The act distinguishes between the types of services, denoting telecommunications services as those that offer transmissions “between or among points specified by the end user, of information of the user’s choosing without change in the form or content of the information as sent and received.” Information services are offerings “of a capability of generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications.” The act further provides similar divisions for cellphone providers, which are divided into commercial and mobile service categories.
According to the FCC, in 2017, 1.77 trillion text messages were sent and received in the U.S., and the efforts of wireless providers to prevent spam or unwanted and malicious text traffic are largely responsible for the popularity of this method of communication. Due to these efforts, the FCC estimates the spam rate for SMS at a shockingly low rate of less than 3 percent.
This ruling rejected pleas from texting companies and other parties, including consumer interest groups that petitioned for text messages to fall under the telecommunications services category. Such a classification would have rendered text message providers under the domain of common carrier rules promulgated by the FCC under the Communications Act. In its analysis, the FCC evaluated the service “with respect to the integrated finished product,” which in this case involved both the transmission itself as well as the other capabilities related to data processing and sharing of media beyond basic texts. Opponents of the ruling argued that texting services should be considered “add-on” rather than stand-alone features, and that the information service classification could open the door to unnecessary filtering, censorship and unchecked monitoring on behalf of mobile service providers.
Because SMS and MMS messages possess the capability to store, acquire, utilize, and retrieve, in addition to their transformative and processing abilities, the FCC determined they cannot be classified as telecommunications services marked by transmissions “without change in the form or content.” Further, such messages are not considered “interconnected services,” and, as such, are also excluded from the statutory definition of “commercial mobile services.” Further, the FCC determined this new classification would best serve the public interest so wireless messaging services can avoid becoming “plagued by unwanted messages” in the same ways they are flooded in the voice and email realms, which are notoriously rampant with spam.
By virtue of their ability to store, acquire, utilize, retrieve, transform and process communications, SMS and MMS providers are now officially classified by the FCC as information services rather than telecommunications services that offer transmissions among users “without change in the form or content of the information as sent and received.” Given this classification, it remains to be seen whether concerns expressed by opponents of this ruling during the public comment period regarding the ability of wireless carrier to access, monitor and filter will come to fruition.
In Busy Week, NY Attorney General Settles with Multiple Privacy Violators
The N.Y. Attorney General’s office had an extremely busy 2018, culminating in major settlements with companies accused of not adequately protecting consumer information when using their apps. Last week Attorney General Barbara Underwood announced settlements with Priceline.com LLC, Equifax Consumer Services LLC, Spark Networks Inc., and Credit Sesame Inc., for failing to employ proper safety mechanisms on their mobile apps to protect consumer information from unauthorized access, despite reasonably available knowledge that such protections were available. As a result, these companies will be required to enact privacy protections to better shield users from system vulnerabilities.
The actions against these companies focused solely on the operation of their mobile apps, specifically, vulnerabilities related to failures to authenticate SSL and TLS certificates, a well-known problem and liability pit for companies handing sensitive data through mobile device apps. The AG noted that these actions were not related to any actual data breach or hack but were brought because these companies’ privacy policies stated that they use “reasonable means” to protect consumer information, which the AG considered deceptive given the lack of protection offered to users of the app. As such, the AG hopes to use preventive measures such as these to increase security and privacy protections in order to prevent fraud and identity theft.
States are aggressively patrolling compliance with consumer privacy protections. To lessen the risk of AG actions and costly settlements, companies should work to ensure that commercially reasonable privacy protections are employed to proactively identify potential vulnerabilities.