- NAD to PR Telephone Company Refusing Participation in its Proceeding: Off to the FTC You Go!
- Water Filtration Company Settles Class Action Suit Claiming It Spam-Called Consumers
- Massachusetts AG Sues E-Cigarette Manufacturer for Advertising to Minors
- It’s Double the Lawsuit, Double the Enforcement as FTC Sues Two Companies Under the Consumer Review Fairness Act
- Operators of Fake Free Trial Scheme Settle with FTC for Over $9 Million
NAD to PR Telephone Company Refusing Participation in its Proceeding: Off to the FTC You Go!
The National Advertising Division (NAD) has referred the Puerto Rico Telephone Company to the Federal Trade Commission (FTC) following the company’s refusal to participate in a proceeding before the industry self-regulating body concerning certain of the company’s advertising claims.
The matter arose after AT&T challenged certain of Puerto Rico Telephone Company’s Claro Wireless Service’s advertising claims before the NAD. Companies often turn to the NAD with allegations of misleading advertising claims by competitors. In this case, Puerto Rico Telephone Company declined to participate in the NAD’s proceedings.
AT&T alleged that certain of the advertising claims made by Puerto Rico Telephone Company promoting the reach and power of its Claro Wireless telephone provider service are unsupported. These include claims that the Claro Wireless Service is the “Most Powerful Network,” “The best offer on the most powerful network,” the “only provider in Puerto Rico that can provide mobile telephony and broadband, landline telephony and broadband and landline video services through one island-wide network,” and the use of the “#TheMostPowerfulNetwork” hashtag.
Puerto Rico Telephone Company declined to participate in the NAD proceeding, contending that its advertising is truthful and that in any event NAD lacks jurisdiction over the matter because the company’s advertising is not disseminated nationally or to a substantial portion of the United States.
Following its standard procedure, the NAD then referred the matter to the FTC for possible enforcement action. As per its usual protocol, the NAD stated that its referral of the matter to the FTC or its recommendations regarding advertising claims do not equal a finding of wrongdoing.
This case is a reminder that companies that elect not to voluntarily participate in NAD proceedings when their advertisements are challenged risk being subject to FTC enforcement, which could involve a longer review process and the potential for steep fines. In contrast, the NAD’s self-policing process often results in shorter review and decision-finding times and no financial implications. It is possible that upon reviewing the referral the FTC may launch an investigation into the carrier’s practices and seek information in regards to their advertising. If so, the agency may determine that violations of law may have been committed and offer an opportunity to settle. Or it may not take any action at all. But in many cases, an advertiser facing an FTC investigation, after hearing from the agency, will either modify or discontinue the advertising in question.
Water Filtration Company Settles Class Action Suit Claiming It Spam-Called Consumers
A water filtration company that allegedly spammed callers with prerecorded telephone messages has agreed to pay more than $20 million to settle a class action lawsuit claiming the calls violated the Telephone Consumer Protection Act (TCPA), according to a recent motion for preliminary approval of class settlement filed by the parties in California federal court.
Enagic USA Inc. sells water filtration and ionization systems through a network of distributors who it says are independent contractors of the company. According to the motion for approval, plaintiff Edward Makaron first received a prerecorded call from, or on behalf of, Enagic on his cellphone in May 2015 that lasted for 22 minutes. During the call, the pre-recorded message urged him to buy the Enagic water filtration machine as well as to become a distributor for the company.
Makaron filed the lawsuit against the company in June 2015, alleging that its use of an autodialing system and pre-recorded messages violated the TCPA. Makaron, on behalf of the class, claimed Enagic controlled the calls, while Enagic says its network of distributors made the calls. In March 2018, a court certified the class of approximately 1.8 million people who allegedly received a prerecorded call from Enagic or its distributors between July 2011 and March 2018.
Under the terms of the recent settlement, Enagic agreed to pay $21.6 million to class members who received the spam calls and an injunction estimated at an additional $6 million to the company. Each class member will be entitled to receive approximately $12 from the monetary reward.
According to the motion, the settlement provides “substantial injunctive relief,” requiring Enagic to update its policies to explicitly and clearly prohibit its distributors in “boldface capitalized letters” from using illegal auto-dialing systems. The company must also implement TCPA compliance training and enforcement protocols and send to class members biannual status reports outlining compliance efforts for two years.
“A very strong factor in resolving this matter was the $6,000,000 value placed on this extraordinary injunctive relief,” the motion avers.
Enagic has denied all wrongdoing and said it would also have fought class certification had the case moved forward, according to the motion.
“Defendant has vigorously contested the claims asserted by plaintiff in this litigation,” the recipients said Wednesday. “While both sides strongly believe in the merits of their respective cases, there are risks to both sides in continuing the action.”
When it comes to TCPA class action lawsuits, it seems history repeats itself as the suits and settlements continue unabated. The lesson for companies that authorize third parties to sell their products remains the same: Monitor distributors and third parties hired to market the products to ensure compliance with TCPA and enact compliance methods, or risk being compelled to do so via settlement order, millions of dollars later.
Massachusetts AG Sues E-Cigarette Manufacturer for Advertising to Minors
“Can you name a better combo” than e-cigarettes and M&Ms? The state of Massachusetts thinks you can. Massachusetts Attorney General Maura Healey recently filed a 30-page complaint against e-cigarette manufacturer Eonsmoke accusing the company of promoting its tobacco products via ads like the one above—which allegedly appeared on the advertiser’s Instagram—to minors in violation of Massachusetts state law.
The complaint against the New Jersey-based company filed in the Business Litigation Session of Boston’s Suffolk Superior Court alleges that Eonsmoke not only marketed its products to minors in violation of state law but also illegally sold its products to minors in the state without verifying age between the years 2015 and 2018. The current legal age to purchase tobacco in Massachusetts is 21, raised from the age of 18 effective this year.
Eonsmoke sells e-liquid nicotine in flavors tailored to a young audience, like “sour gummy” and “cereal loops,” and promotes the products on social media using memes and images that appeal to minors, alleges the complaint.
“This advertising plainly appeals to young people and contributes to youth use of vaping products,” the complaint avers.
Prior to filing the complaint, Massachusetts sent a cease and desist letter to Eonsmoke in September 2018 warning it to stop selling products to Massachusetts residents.
Eonsmoke “took a page out of the Big Tobacco playbook by peddling nicotine” to minors, Attorney General Healey said in a statement about the lawsuit.
The company denies wrongdoing. Eonsmoke CEO Michael Tolmah has said that the company is concerned about youth vaping as well, which is why it has “been cooperating with [Healey’s] office and why we have taken some of the most aggressive actions of anyone in the industry to combat youth usage, including ceasing sales to the state on our website, scrubbing our social media channels, and enacting strict age verification online.”
This lawsuit is the first such matter filed since the state began investigating the e-cigarette industry last summer. It follows on the heels of regulation implemented by Attorney General Healey in 2015 to prevent the sale of e-cigarettes to minors.
Eonsmoke is the first but likely not the last e-cigarette manufacturer to be targeted by Massachusetts. The state is investigating other e-cigarette companies as well. The September cease and desist letter was also sent to e-cigarette company Direct Eliquid LLC. Attorney General Healey is also investigating popular e-cigarette manufacturer Juul Labs for allegedly marketing to minors. In a possible sign that Juul Labs is preparing for impending litigation with Massachusetts, Martha Coakley, Healey’s predecessor as the state’s attorney general, announced she will be leaving her law firm to join the government affairs team at Juul Labs.
Massachusetts is not the only state investigating e-cigarettes. North Carolina filed a lawsuit against Juul Labs earlier in May—the first state to do so.
Whether Eonsmoke ultimately succeeds in this case, the message here is clear - Massachusetts and other states alongside it are ramping up regulation and enforcement against e-cigarette and vaping companies that target their marketing to minors, just as they targeted traditional tobacco companies for the same thing in the past.
It’s Double the Lawsuit, Double the Enforcement as FTC Sues Two Companies Under the Consumer Review Fairness ActThe Federal Trade Commission (FTC) this month filed two administrative complaints and concurrent proposed orders alleging violations by two companies of the Consumer Review Fairness Act (CRFA), which prohibits businesses from including nondisparagement clauses in consumer form contracts. The move represents a continuation of the agency’s ramped-up enforcement of the CRFA.
The CRFA prohibits businesses from providing form contracts that contain contractual provisions barring consumers from posting negative reviews online or penalizing consumers who do so. It defines “form contracts” as agreements used in the sale or lease of goods or services that consumers do not have a meaningful opportunity to negotiate. The law went into effect on March 14, 2017.
Defendants in the separate complaints are two companies, one a Florida vacation rental company and the other a property manager in Maryland, accused by the FTC of including in their form contracts a non-disparagement clause and a provision penalizing customers for breaching the nondisparagement clause in violation of the CRFA.
The complaint against Shore to Please Vacations LLC alleges that the company included a “disclaimers” provision in form contracts it used when providing online vacation house rental services to consumers from June 2017 through at least August 2017. The “disclaimers” provision contained the following: “By signing below, you agree not to defame or leave negative reviews (includes any review or comment deemed to be negative by a Shore to Please Vacations LLC officer or member, as well as any review less than a “5 star” or “absolute best” rating) about this property and/or business in any print form or on any website.” The form contracts also included a clause that warned of steep penalties for those who disparaged the company: “Due to the difficulty in ascertaining an actual amount of damages in situations like this, breaching this clause … will immediately result in minimum liquidated damages of $25,000 paid by you to Shore to Please Vacations LLC.”
Similarly, the FTC’s complaint against Staffordshire Property Management accused the company of using illegal form contracts in hundreds of company transactions from February 2016 to October 2018. The contracts contained an “authorization, agreement & release consent form” stating that “[t]he Applicant … specifically agrees not to disparage [Staffordshire], and any of its employees, managers, or agents in any way, and also agrees not to communicate, publish, characterize, publicize or disseminate, in any manner, any terms, conditions, opinions and communications related to [Staffordshire], this application, or the application process.” Staffordshire’s form contract also stated that breach of the clause would entitle the company to recover damages.
The proposed settlement orders provide injunctive relief against the companies. Each proposed consent order prohibits the use of contract terms that in any way limit or penalize customers who post reviews. The orders further require the companies to notify consumers who signed the offending form contracts that the provisions are null and void and customers are free to post honest reviews online. Finally, the proposed orders impose compliance and reporting requirements on each company.
In the Shore to Please case, the proposed order also requires the company to dismiss with prejudice a lawsuit it filed against a customer for violating its illegal nondisparagement clause.
Other cases that are part of a recent trend by the FTC of enforcing violations of the CRFA include a complaint against a Pennsylvania-based HVAC company, a Massachusetts-based flooring firm, and a Nevada-based horseback trail-riding company. All these cases pursued companies that used the same type of nondisparagement clauses in their form contracts, and all resulted in proposed orders barring the companies from using these clauses and requiring customers to be notified that the provisions are null and void.
Key TakeawaysIn its press release announcing the complaints and orders, the FTC emphasized that these matters are part of ongoing FTC enforcement of the CRFA. The agency aggressively pursues companies that abuse consumer form contracts that limit or prohibit consumers’ rights to post negative reviews online. Of particular note is the fact that the FTC filed its complaint against Shore to Please for violating the CRFA during a short two-month period in 2017. The message is clear: Companies should steer entirely clear of nondisparagement clauses in non-negotiated consumer contracts or risk ending up in the FTC’s crosshairs.
Operators of Fake Free Trial Scheme Settle with FTC for Over $9 MillionWhat started out as a small “shipping and handling” fee consumers paid for goods ballooned into multiple and more expensive charges. Thus began an online scheme that defrauded unwitting consumers out of tens of millions of dollars and which ended this past month as the operators of an online negative option scam that charged customers for a sham “free trial” settled a complaint against them with the FTC. The defendants agreed to turn over more than $9 million in assets and stop all illegal activities.
In June 2018, the FTC filed a complaint against San Diego-based internet marketers Triangle Media Corporation, Jasper Rain Marketing LLC, Hardwire Interactive Inc. and individual defendant Brian Phillips. The FTC filed an amended complaint in December 2018 adding defendants Global Northern Training Limited and Devin Keer. In the complaints the FTC alleged that defendants made a number of misrepresentations and fraudulent charges while advertising products online, including skin creams, electronic cigarettes, and dietary supplements. The FTC charged defendants with violating the FTC Act, the Restore Online Shoppers’ Confidence Act (ROSCA), and the Electronic Fund Transfer Act (EFTA).
Specifically, the FTC alleged that defendants advertised their products on various websites, blogs and surveys with false promises of “RISK FREE” trial offers. When customers clicked on the ads, they landed on a website that promised they could receive the advertised product for the cost of shipping and handling alone—about $4.95. While charging a shipping and handling fee to receive a free product is not uncommon, in this case the FTC alleged that customers who accepted the offer were charged as much as $98.71.
Further, defendants enrolled consumers in a negative option plan without their consent or knowledge, said the FTC. Negative option plans charge customers for goods and services until affirmatively cancelled. Defendants then created deceptive confirmation pages that tricked consumers into ordering more products, for which they were charged full price and enrolled in yet more negative option plans, according to the FTC.
The two orders announced this past month settle the charges against all defendants and contain both monetary and injunctive relief. The first announced settlement order resolves charges against Triangle Media Corp., Jasper Rain Marketing LLC, and Brian Phillips. The order prohibits defendants from misrepresenting any material facts about a negative option plan, including any fees and cancellation policies associated with the plan. Second, the order requires defendants to comply with ROSCA, which means providing “clear and conspicuous” disclosures, getting customers’ informed consent before assessing charges for negative option plans, and providing a means for customers to cancel any orders. The order also requires defendants to obtain consumer’s informed consent before making electronic transfers of funds from their account and to provide customers with a copy of their written authorization. The order will be partially suspended if defendants make a payment just shy of $400,000 and relinquish any rights to assets currently under court-appointed receivership.
The second order, settling charges against Hardwire Interactive, Global Northern Trading, and Devin Keer (who helped create the scheme from outside the United States), prohibits the same conduct as the first order and also imposes a $123.1 million judgment, to be partially suspended after payment of just over $3 million. Defendants must turn over more than $5 million of their assets.
“Products touted as ‘risk free’ shouldn’t come loaded with hidden costs and obligations,” said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. “The FTC will continue to bring actions against this kind of deceptive and unfair marketing, and will seek to return money to victimized consumers.”
In this case, the FTC has continued to demonstrate its intolerance for offers involving deceptive “free trial” and continuity enrolment practices. Companies utilizing free trials and negative option programs should design them carefully to address legal and regulatory requirements and ensure that they include clear and conspicuous disclosure of material terms and appropriate consent mechanisms. In addition to complying with a myriad of federal requirements for these offers under ROSCA and the EFTA, sellers must also be aware of over a dozen state laws governing these practices. In many ways these laws exceed the federal requirements of clearly and conspicuously displaying enrollment terms, obtaining consumer consent and providing an easy way to cancel by also requiring order confirmation notices and notices prior to billing after a free trial and before each renewal.