Stay ADvised: What's New This Week, May 25
In This Issue:
- NAD and CRN Conclude Joint Health & Dietary Supplement Monitoring Program
- Deceptive E-Commerce Marketers Settle FTC Suit for $1.2 Million
- Class Action Claims Grubhub Falsely Advertising Restaurants Are Closed for Business
- Fake "Free Trial" Marketers Settle FTC Charges, Must Pay More Than $4 Million
- Ninety-Five More Coronavirus Scam Warning Letters Sent, Says FTC
- Crowdfunder Who Kept Product Contributions for Himself Permanently Barred From Crowdfunding
- Although Voluntarily Modified, NAD Says Brain Health Supplement's "#1" Ad Claims Still Deficient
NAD and CRN Conclude Joint Health & Dietary Supplement Monitoring Program
As of June 1, 2020, the Council for Responsible Nutrition Foundation (CRN) and the National Advertising Division (NAD) will discontinue the joint CRN/NAD monitoring program for the dietary supplement industry.
Beginning in 2006, the CRN/NAD program has been a public-private effort between NAD and the leading trade organization for dietary supplement manufacturers. As part of the initiative, CRN grants of over $3.5 million enabled NAD to widen the scope of its oversight over dietary supplement advertising. Throughout its run, the CRN/NAD program closed more than 360 cases challenging advertising claims for dietary supplements, including claims promising to accelerate weight loss, prevent heart disease, and remedy maladies as diverse as computer eye strain and the fear of public speaking.
Similar to NAD's self-monitoring challenges, NAD notes that the "unique and effective ad-monitoring and peer-to-peer process conducted by NAD has encouraged cooperation and allowed companies the opportunity to voluntarily change non-compliant behavior before facing potentially serious consequences from the FTC and other law enforcement agencies." NAD also said that the program contributed to increased watchdog awareness of deceptive marketing in the supplement industry and led to an uptick in competitor challenges of suspect claims about health supplements. Indeed, nary a month has passed without some enforcement effort in the category, whether on the part of NAD, the Federal Trade Commission (FTC), or the watchdog Truth In Advertising (TINA).
The move to wrap up the program does not mean an end to NAD's monitoring of dietary supplement ads, said the organization, which pledged to continue monitoring unsubstantiated advertising claims in the industry and to close review of challenges to these types of claims, including those brought by CRN. NAD noted that it has also implemented its Single Well-Defined Issue Fast Track (SWIFT) program, which may help by "further encouraging responsible industry."
The organization signaled that it may focus its efforts in this area on the "most impactful" advertising claims with the "greatest penetration into the market," according to NAD senior attorney Kat Dunnigan, who led the CRN/NAD program for eight years. "NAD is not leaving the space," said Dunnigan. "We will be looking at dietary supplement claims, and we encourage other companies to bring their claims to us."
Aside from increased competitor challenges and review of dietary supplement claims at NAD, the CRN/NAD initiative produced a wealth of useful information for advertisers about substantiation of claims. According to CRN, the "true value" of the initiative has been providing "clear and consistent guidance to an industry that is advertising about a deeply personal issue of universal concern: human health."
Deceptive E-Commerce Marketers Settle FTC Suit for $1.2 Million
The operators of companies accused of running a "business coaching scheme" recently agreed to pay at least $1.2 million to settle an FTC complaint alleging that they used deceptive marketing online to targeted people who were trying to start new businesses. According to the allegations, the defendants found many of their targets by purchasing consumers' contact information from other online business coaching operations that had already deceived the targets.
The complaint charges Position Gurus, Top Shelf E-commerce and their principals Aaron Poysky, Stacy Griego and Samuel Cohen Brown with violations of the FTC Act, the Telemarketing Sales Rule (TSR), and the Consumer Review Fairness Act (CRFA). The latter makes it illegal for companies to include clauses in consumer form contracts limiting consumers' ability to write disparaging content about a company.
To hook consumers, the companies claimed they could drive significant sales traffic to online stores using their marketing solutions, which often cost thousands of dollars each. These included services such as social media page design, press releases, article marketing and more. Per the FTC, in reality, defendants' services hardly ever drove traffic to their customers' websites or resulted in any significant improvement in their sales. In fact, according to the FTC, most of the businesses targeted by defendants did not survive.
Further, the FTC said the companies made grandiose and false claims that consumers would not have to pay for the services, since the services would pay for themselves with "other people's money." They claimed that consumers who purchased their services would recoup the cost through sales and would ultimately not pay for the services out of pocket. For the majority of consumers, who never recouped the cost of the services, this did not turn out to be the case.
Moreover, the FTC stated the telemarketers also misrepresented the financial information they obtained from customers. They asked for detailed financial information, falsely claiming this information would be used to see if consumers qualified for the marketing services. In reality, the information was used to determine how much to charge.
In addition to the settlement payment, which was pegged at $16,331,011 but has been reduced due to defendants' inability to pay, the terms of the settlements bar the companies from marketing business coaching services or making any related misleading statements.
As this case attests, there's a difference between aggressive sales tactics and illegal sales tactics. By enticing consumers with false promises of earnings big enough to cover all their costs, and by using misrepresentations to make their pitch, defendants crossed the line from legitimate sales to illegal sales.
Class Action Claims Grubhub Falsely Advertising Restaurants Are Closed for Business
A suit against meal delivery service Grubhub alleges that the company "willfully and knowingly" falsely advertises restaurants not working with its platform as being closed in order to drive business to its own restaurant customers.
Denver bar and restaurant Freshcraft filed the proposed class action lawsuit alleging that Grubhub knowingly and deliberately falsely advertised that it and other restaurants not affiliated with Grubhub are closed. According to Freshcraft, Grubhub does this by deliberately creating landing pages that make it appear as if restaurants are not accepting orders rather than showing that the restaurant is simply not available on the platform.
Family-owned Freshcraft alleges that when consumers search for it on Grubhub or Google, they are taken to a page that looks like it is the restaurant's Grubhub order page, which informs potential customers that the restaurant is not taking orders. The page then suggests other restaurant options—all Grubhub partner restaurants—that visitors can order from instead. Per the Complaint, Freshcraft is not closed; in fact, Freshcraft is open for business and is affiliated with a competing delivery platform, it said.
The company alleges that Grubhub was posting the deceptive ads before the coronavirus pandemic damaged the restaurant industry. But the effect of COVID-19 on the restaurant industry makes Grubhub's actions all the more damaging and egregious, it argues.
"In the midst of the greatest public health and economic crisis in living memory, Grubhub, one of the largest restaurant delivery services in the United States, is knowingly employing a nationwide false advertising campaign to steer patrons to its partner restaurants by falsely declaring that its competitors are closed or not accepting online orders when they are in fact open for business," said Freshcraft.
So powerful are Grubhub's ads that the delivery service's deceptive landing pages claiming that Freshcraft is closed for business actually come up higher on Google search results than Freshcraft's own website, said the restaurant.
The complaint alleges that Grubhub's false and misleading advertising statements constitute a violation of the Lanham Act. Plaintiffs seek an injunction and damages.
Freshcraft's lawsuit makes the point that during the time of the coronavirus pandemic Grubhub's actions are all the more egregious because they could mean an end to these restaurants' business. Meanwhile, Grubhub faces additional litigation along with other delivery platforms over factually related allegations that the delivery platforms are engaging in monopolistic practices that hurt consumers.
Fake "Free Trial" Marketers Settle FTC Charges, Must Pay More Than $4 Million
Free trial offers with hidden terms and conditions continue to draw the FTC's ire. The FTC has settled a complaint filed against AH Media Group the FTC alleged had advertised deceptive "free trial" offers for its cosmetics products and dietary supplements. The settlement order bans the company from any such further deceptive action.
According to the FTC's original July 2019 complaint, AH Media Group engaged in a trio of false advertising and deceptive business practices: first it offered consumers deceptive free trial offers; then it continued to bill consumers by signing them up for a negative option plan without their consent; and, finally, it hid behind a web of straw companies to process consumer payments.
To start, the complaint alleges AH Media sold eight lines of cosmetics and dietary supplements, marketing them as able to promote younger-looking skin and weight loss, though there's currently no word on the efficacy or veracity of those claims. With the promise on their websites of a free product tria, AH Media and the individual defendants in the case collected consumer credit card information and then charged consumers $90 for the supposedly "free trials," alleged the FTC.
Having pocketed the credit card details, the company allegedly proceeded to enroll consumers in a recurring subscription and to charge them monthly subscription fees, all without their knowledge or consent.
"The defendants claimed consumers would have to pay only a small shipping and handling fee for the trial while hiding the actual cost. After two weeks, the defendants charged consumers $90 for the trial product and enrolled them in unwanted and costly negative option subscription plans," said the FTC.
To evade detection, the complaint alleged defendants used a "network of shell companies and straw owners to process consumer payment." In this manner, they allegedly managed to dodge underwriting requirements and monitoring programs.
As the complaint and this subsequent settlement attests, these efforts to sidestep enforcement did finally meet their end. In addition to the multimillion dollar judgment assessed against AH Media and the other defendants in two separate orders, and the prohibition on offering deceptive free trials and negative options, the settlement requires AH Media and its co-defendants to provide "clear and conspicuous" disclosures about their fees and refunds.
If it's true that there's no such thing as a free lunch, it's also true that there's very often no such thing as a free trial. As shown by the FTC's numerous enforcement actions against scammers offering fake free trials and deceptive negative option offers, these types of scams are ubiquitous. Such activities often also involve instances of false advertising in violation of the FTC Act, the Restore Online Shoppers' Confidence Act (ROSCA), and the Electronic Fund Transfer Act, which protects consumers against unauthorized credit card transactions such as negative option fees.
Ninety-Five More COVID-19 Scam Warning Letters Sent, Says FTC
As part of the Federal Trade Commission (FTC)'s ongoing efforts to protect consumers from COVID-19 scams, in the month of May alone the agency sent an additional 95 warning letters to companies accused of peddling bogus cures for COVID-19.
These letters are part of the FTC's ongoing enforcement efforts specifically targeting COVID-19 scams, with almost 150 letters already having been sent to companies and individuals. In addition to peddlers of false COVID-19 cures such as vitamins, colloidal silver, essential oils and IV "therapies" pursued by past letters, the recent batches also target alternative medicine companies including Chinese medicine, musical medicine, homeopathic treatments, advanced bio-energetic therapies, and companies claiming to sell curative electromagnetic fields, said the FTC. The Commission also has sent letters to several Voice over Internet Protocol (VoIP) service providers, warning them that it is illegal to aid or facilitate the transmission of pre-recorded telemarketing robocalls touting supposed COVID-19-related products or services, and multi-level marketers.
The FTC warns these marketers to cease falsely claiming that their products cure or treat COVID-19. Because these "efficacy claims made by the marketers" are not supported by scientific evidence, they are unsubstantiated and, as such, they violate the FTC Act, says the FTC.
"It is unlawful under the FTC Act … to advertise that a product can prevent, treat, or cure human disease unless you possess competent and reliable scientific evidence, including, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made," writes the FTC in the letters.
Among the companies who received the letters are a wide variety of businesses offering allegedly bogus COVID-19 cures. For example, one company offers "musical medicine," promising to help heal via its special program, which they implore should be listened to "THROUGH SPEAKERS ONLY!!!!!" and just before an "outbreak." It instructs users to "begin listening when the virus is reported in your community or if you think you have the virus."
Other recipients of the enforcement letters include: a provider of "Ozone Therapy" that it says can cure "Coronavirus Disease 2019;" a water filter company that claims its product "flushes out viruses from your bloodstream," and provides a list of recommendations for fighting COVID-19 which includes diligent drinking of its water "every day;" and a Chinese medicine center that markets its medicine as having already worked in China for recovery from the virus.
The warning letters give recipients 48 hours to both comply with the FTC's instructions to take down the offending material and notify the FTC of steps taken to remedy the alleged violations. It warns companies that if they fail to comply, the FTC may seek an injunction and/or restitution to consumers.
As the barrage of false advertising of COVID-19 cures continues, so, too, do the FTC's enforcement efforts. From the looks of it, these types of cases are not going away any time soon. But the agency may soon be stepping up enforcement beyond warning letters. As we recently covered on Stay ADvised, the FTC filed its very first action for false advertising of COVID-19 cures against a company called Whole Leaf Organics just last month.
Crowdfunder Who Kept Product Contributions for Himself Permanently Barred From Crowdfunding
The operator of a deceptive crowdfunding campaign settled a Federal Trade Commission (FTC) complaint which alleged that, rather than using the funds he raised to deliver the promised goods, he took the money for himself instead.
As Stay ADvised covered last year, the FTC filed a complaint alleging that Texas-based Douglas Monahan and his company iBackPack duped consumers into pouring money to crowdfund his technical backpack campaign on platforms like Indiegogo and Kickstarter, but never delivered a single backpack and instead pocketed his contributors' money for his own personal use. Now the order settling the matter permanently bars Monahan from engaging in any crowdfunding activities in the future.
The May 2019 complaint charged iBackPack and Monahan with violations of the FTC Act. It alleged that Monahan raised money on multiple crowdfunding sites for the product, which was billed as a smart backpack incorporating a battery for charging personal devices, cables and even a Bluetooth speaker.
Though the backpack sounded very appealing to many consumers, who altogether contributed hundreds of thousands of dollars to the campaign with the expectation that they would receive an iBackPack once the product was ready for market, Monahan failed to deliver a single backpack.
Instead, said the FTC, Monahan kept missing delivery dates while still opening up new crowdfunding campaigns selling "updated" versions of the product, as well as spinoffs such as MOJO, a shoulder bag incorporating the same type of "smart" capabilities. Meanwhile, Monahan used the money from contributions for his own personal expenses and to market the products in order to receive additional contributions.
To cover his tracks and prevent the crowdfunding platforms from kicking him out, Monahan made false statements to consumers about the status of the backpack, the shoulder bag, and another smart cable product he marketed on the sites, saying that the various products would be available shortly, were "on their way there," or were "finished," when none of that was true.
The settlement permanently bars Monahan from crowdfunding and from misrepresenting his ability to deliver any good or service or the terms on which he will provide a refund. In addition, Monahan agreed to an $800,000 judgment, which has been suspended due to his inability to pay, but will be fully reinstated should it become apparent that he misrepresented that inability, said the FTC.
With the proliferation of crowdfunding campaigns, the FTC has pledged to pursue companies that "misuse the money they raise," as it has done here by banning Monahan from crowdfunding platforms altogether. As Andrew Smith, Director of the FTC's Bureau of Consumer Protection, said in a statement, "Crowdfunding is a legitimate way to raise money for your business venture, so long as you use that money for the business and not yourself."
Although Voluntarily Modified, NAD Says Brain Health Supplement's "#1" Ad Claims Still Deficient
The National Advertising Division (NAD) has issued a ruling recommending that brain health supplement maker Factor Nutrition discontinue the claim that its Focus Factor brain health supplement is "America's #1 Clinically Studied and Patented Brain Health Formula," following a challenge by Quincy BioScience, Inc., maker of Prevagen brain health dietary supplement.
Prevagen initially challenged Factor Nutrition's claim that its product is "America's #1 Brain Health Supplement," which the company used on its packaging, labeling, and online. During the challenge, Factor Nutrition agreed to voluntarily discontinue the claim and use a modified claim instead: "America's #1 Clinically Studied and Patented Brain Health Formula."
The modification, however, was insufficient to satisfy NAD standards. Breaking the claim down into its constituent parts, NAD found that the advertiser did not possess the evidence necessary to support its "America's #1 Clinically Studied . . . Brain Health Supplement" claim, i.e., (1) competent and reliable testing on Focus Factor; (2) sales data for Focus Factor; or (3) evidence that any competitor that outsells Focus Factor is lacking reliable testing to support a brain health benefit.
The advertiser argued that "Focus Factor has been tested in a well-conducted human clinical trial" and that only a few brain supplements on the market have likewise been tested. Regarding the challenger's Prevagen brain health supplement, the advertiser argued that it does not fall in the category of products that are "clinically tested," noting that the challenger's advertising claims and its supporting "Madison Study" are currently the subject of litigation brought by the Federal Trade Commission and the New York Attorney General. The advertiser argued that the FTC reviewed the Prevagen study and concluded that the study found Prevagen provides no cognitive benefits to consumers. However, as NAD noted, litigation is still pending in the Prevagen matter. Critically, NAD found that the advertiser failed to meet its burden to substantiate the brain health claims about its own product.
NAD next analyzed the second portion of the revised claim, the "patented health formula" claim that Focus Factor is "America's #1…Patented Health Formula." Factor Nutrition argued that its patent on the product covering "brain health and mental performance" sufficiently supported the claim, while Quincy BioScience's patent on Prevagen was only on "certain ingredients" and not on the "finished product."
NAD disagreed, finding that while it was true that Focus Factor did have a patent, its product contained ingredients not listed on that patent, casting doubt on whether the "patented health formula" advertised truly "covers the entire finished formula." NAD further noted that even if Focus Factor did have such a patent, consumers were unlikely to draw the intended distinction between the Focus Factor patent and competitors' ingredient patents.
Factor Nutrition said it would abide by NAD's recommendation to discontinue the claim, though it was said it was "disappointed" with some of the organization's findings.
Factor Nutrition's attempt to narrow its efficacy and sales claims by adding several qualifications was insufficient to overcome a fundamental NAD precept: advertisers making health-related efficacy claims must have competent and reliable scientific evidence as support. NAD practitioners reviewing the Factor Nutrition claim may find themselves missing the traditional decision format, which included a detailed description of the parties' positions and support, separate and apart from the actual NAD Decision. Although the recent change to NAD's decision format makes sense for a number of reasons, the reader may feel that a more fulsome description of the evidence would actually have been more instructive here.