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Stay ADvised: What's New This Week, June 15

06.17.20
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In This Issue:

Credit Card Processor Settles FTC Complaint Alleging It Facilitated Deceptive Practices

The blinders worn by payment processing company Qualpay provided no protection whatsoever from FTC suit and the consent order the company ultimately agreed to, which prevents it from working with business coaching companies as well as other identifiably "high risk" merchants. Qualpay's settlement comes with a $46,779,358 price tag, suspended for inability to pay.

The Qualpay saga began in 2017 when it took on MOBE Ltd. (aka "My Online Business Education") as a client. MOBE is a multilevel marketer and seller of business coaching services, against which the FTC filed suit in June of 2018. Qualpay drew the FTC's ire because, time after time after time, it ignored red flag after red flag after red flag, facilitating, according to the FTC, MOBE's bilking consumers for hundreds of millions of dollars in return for "worthless business coaching products."

As the FTC describes it, Qualpay worked hard to ignore everything from MOBE's credit history, high chargeback rate, and negative online reviews, to MOBE's deception about where the company was headquartered, concerns raised by the acquiring bank as well as the credit card companies, and a business method that used textbook get-rich-quick claims to pitch its products. The FTC alleged Qualpay ignored its own internal policies and continued to service MOBE long after it knew or should have known of the company's illegal activities, in violation of the FTC Act's prohibition on "unfair or deceptive acts or practices in or affecting commerce."

Even after the FTC filed suit against MOBE and a judge froze its assets, Qualpay continued to service other companies doing much the same thing, companies against which the FTC went on to allege engaged in similar deceptive activities. Only after the FTC took direct legal action did Qualpay stop providing payment processing services the FTC claims furthered MOBE's and others fraudulent schemes. In addition to the suspended monetary payment, Qualpay is barred from seeking any recovery of MOBE Ltd. assets held by the receiver in that company's bankruptcy.

Interestingly, the Qualpay complaint followed FTC action in March against five affiliate marketers which the FTC alleged had advertised and promoted MOBE's services using false claims and misleading testimonials about how much money consumers could make. As Andrew Smith, Director of the FTC's Bureau of Consumer Protection, said then, "These so-called 'affiliates' helped MOBE swindle consumers out of millions of dollars by making outlandish and false earnings claims."

He added that, "Affiliates should take note that the FTC will hold you personally and financially accountable for false or unsubstantiated marketing claims." So too should other companies, like Qualpay, who facilitate these services. Of Qualpay Andrew Smith said, "Ignoring clear signs that your biggest customer is a bogus online business opportunity is no way to operate a payment processing business. And it's a sure-fire way to get the attention of the FTC."

Key Takeaways

The FTC has been casting an ever-wider net around those not only at the center of activity it deems deceptive, but those who help make it all possible. If this case illustrates one thing, it's the hazards of relying on "it wasn't my job to keep watch" as a defense.

CA Court Splits the Difference on FTC v. Lending Club False Ad Motions

And the beat goes on with the FTC's false advertising suit against LendingClub, albeit with fewer claims, following a California court's ruling on cross motions from both parties. Although most of the suit will proceed to trial as scheduled (currently October), the court granted both sides partial wins, finding for the FTC on one count regarding deceptive loan approval communications, but denying the FTC's bid for summary judgment regarding the complaint's key claims that LendingClub charged hidden fees and made unauthorized loan account withdrawals. The court dismissed as moot a consumer financial privacy claim under the Gramm-Leach-Bliley Act.

The FTC's 2018 litigation against LendingClub has spawned one amended complaint, a host of motions and a very strong response from LendingClub both denying the allegations and at the same time very publicly changing some of its practices. The core of the litigation centers on allegations that LendingClub falsely represented that it would charge "no hidden fees," when according to the FTC it in fact deducted "origination" fees from loan proceeds. LendingClub claims consumers were well aware of these fees.

The FTC further claimed that in many cases LendingClub falsely represented that loans had been approved even when it knew that a consumer would not be eligible for the mortgage and that LendingClub continued to assess charges on closed and paid-off loans, all in violation of the FTC Act. LendingClub has not only continued to fight the allegations, it actually provides litigation updates via blog post.

In early Fall, upon learning that LendingClub had discontinued advertising claiming "no hidden fees," Magistrate Judge Jacqueline Scott Corley encouraged the parties to settle and avoid "an enormous waste of court resources." With no settlement in sight, however, the Judge was forced to rule on the FTC's summary judgement motion as well as LendingClub's cross motions.

In narrowing the case in favor of the FTC, at least with respect to loan approval communications, Judge Corley noted that facts presented by the FTC showed that LendingClub's representations about its loan approval process left a "misleading net impression" that consumer loans had been approved when they had not. The FTC's evidence further showed that many customers were actually misled by the misrepresentations, further bolstering the agency's case, said the court.

Not so with respect to the "hidden fees" allegations. There the judge ruled material questions of fact remained as to whether consumers were aware of the "origination fees," as LendingClub maintained they were.

As to cross motions for summary judgment on the claim that LendingClub made unapproved withdrawals from customer accounts, the judge denied both parties' motions. The FTC had argued that Lending Club made unapproved automated withdrawals, while LendingClub had argued that it had a low error rate and a history of refunding customers when a mistake was made. In denying both parties' motions on this count, Judge Corley found a genuine issue of fact remained regarding these withdrawals.

Finally, the court granted the FTC's request for partial summary judgment on several of LendingClub's affirmative defenses, leaving intact its fair notice defense, whereby LendingClub argued that it could not have had fair notice of its liability under the FTC Act for its unapproved withdrawals since its error rate was so low. Stay tuned for trial come the Fall.

Key Takeaways

When faced with an FTC complaint, most companies choose to settle, generally without admission of liability. The FTC's burden to prove deception is not a small one, however, and for those who choose to fight, as LendingClub is doing here, the risk may be high, but the potential rewards may be still higher.

FTC Funeral Home Rule Investigation Exposes Noncompliance

Jessica Mitford wrote The American Way of Death in 1963. Her expose of the funeral industry led to change in what many saw as a highly corrupt system that preyed upon those at their most vulnerable. The FTC's Funeral Rule was enacted in 1984, providing clear parameters for a variety of funeral home goods and services.

Nonetheless, deception continues. After an undercover investigation spanning five states, the Federal Trade Commission (FTC) has released its findings which show continuing violations of the Funeral Rule, in particular with respect to pricing data.

The FTC's investigation "found failures to disclose timely itemized pricing information" in 17 of the 90 funeral homes under examination. The FTC's Funeral Rule requires funeral homes, inter alia, to provide consumers with an itemized pricing list for goods and services.

Besides pricing, the Funeral Rule mandates that funeral homes clearly disclose matters such as the consumers' right of selection and available but voluntary funeral services. The Rule also prohibits funeral homes from misrepresenting any legal requirements or requiring consumers to buy certain goods or services as a condition for the provision of services.

All of the funeral homes the FTC found noncompliant elected to participate in the FTC's program for first-time violators of the Funeral Rule, after the agency reached out to the businesses in question. The Funeral Rule Offender's Program (FROP) is a training program run by the National Funeral Directors Association (NFDA). It allows first-time violators to participate in a compliance training and monitoring program on the Rule in lieu of other enforcement action. Participants must also make a payment to the U.S Treasury in place of a civil penalty and pay annual administrative fees.

In addition to pricing violations, a few of establishments were found to have minor compliance issues. The FTC sent these funeral homes warning letters asking them to provide evidence of compliance upon receipt of correspondence. In conjunction with the press release announcing the results of the investigation, the FTC released a blog post and "tip sheet" for funeral service providers, laying out a reminder on who must comply with the Funeral Rule and how.

Key Takeaways

As the need for funeral home services has risen, so, too, has the need to ensure compliance with FTC rules on pricing and other funeral-related transparency—particularly in light of the deficiencies identified in a recent FTC investigation.

Frustrated Father of Parkland Shooting Victim, Advocacy Groups File FTC Deceptive Marketing Complaint v. Smith & Wesson

The father of a student slain in the Marjory Stoneman Douglas High School shooting in Parkland, Florida, has submitted a complaint and request for investigation to the Federal Trade Commission (FTC) asking the agency to look into the marketing practices of gunmaker Smith & Wesson.

Parkland parent Fred Guttenberg submitted the official complaint jointly with gun safety advocate organizations Everytown Law and Brady, arguing that Smith & Wesson, maker of the weapon used by the shooter, is engaging in “deceptive and unfair” marketing.

The 34-page complaint avers that Smith & Wesson’s marketing of its AR-15 style assault rifle “encourages and facilitates mass shooters,” and makes the case that the company’s marketing strongly contributed to the shooting that killed Guttenberg’s daughter and 16 other school students and staff. The 19-year-old Parkland shooter used an M&P15 .223 rifle marketed by Smith & Wesson. M&P rifles were also used in three other mass shootings since 2012.

Mr. Guttenberg and the gun control groups argue that Smith & Wesson deliberately invokes the military in promoting its guns, featuring ads in which members of the military carry what appear to be Smith & Wesson guns alongside such slogans as “To Uphold. To Protect. To Defend” and “The Line of Duty.” Indeed, the “M&P” in the product name stands for “Military & Police.”

This advertising is misleading, say complainants, because the vast majority of Smith & Wesson’s sales are to civilians. They argue that the company turns to this kind of marketing in order to “use the halo of military association” to appeal to young males.

Noting that young people are “highly susceptible to advertising,” the complaint also accuses Smith & Wesson of marketing to young people and children via social media and ads that invoke “first-person shooter” video games. The complaint further notes that the company uses Instagram to market its guns to the parents of young children, including in images featuring kids holding assault rifles. In addition to asking the FTC to investigate the company and prohibit these advertising practices, the Complaint urges the FTC to require Smith & Wesson to add warnings to its marketing materials.

Although the complaint acknowledges that the law does not per se forbid Smith & Wesson from selling its rifles, it makes the case that the FTC has taken action against companies for violations of the FTC Act even when they were technically allowed to sell the product they marketed:

“To be clear, Complainants understand that current federal law, and the law of Florida and many other states, does not expressly prohibit Smith & Wesson from selling its AR-15-style rifles. But similar realities have not stopped the FTC from finding other companies’ marketing to violate the FTC Act. And that reality does not excuse what Complainants urge this agency to investigate, i.e., the deeply troubling facts about Smith & Wesson’s marketing practices, which Complainants strongly believe are deceptive and unfair and have contributed to deadly shootings, including the shooting that took the life of Jaime Guttenberg and so many others.”

The complaint avers that the FTC “would be well within its authority” to find Smith & Wesson’s marketing practices in violation of the FTC Act. Whether the FTC will take action remains an open question.

Key Takeaways

In 1998, settlement by the then four largest tobacco companies with 46 states Attorneys General led to sweeping changes in the marketing and promotion of cigarettes. This past fall, the Federal Trade Commission issued orders to a group of e-cigarette manufacturers for information regarding their advertising, and promotional methods. Will the FTC heed calls to review the advertising and promotional practices of gun manufacturers? Maybe. Stay tuned.

FTC Coronavirus Warning Letters Counter

The FTC continues its enforcement of cases against companies marketing false cures and treatments for COVID-19. The agency recently announced it filed an additional 35 warning letters targeting unsupported claims about treatments or cures for the coronavirus, bringing the total tally of warning letters up to more than 160.

The agency also separately sent a second round of six letters to multi-level marketers (MLMs) accused of the same false marketing of corona-cures, bringing the total letters sent to such companies up to 14. In contrast to the warning letters, MLM letters target both false health claims and earnings claims MLMs have made for sales of deceptive COVID-19 cures.

As of June 11, 2020, the FTC reported 45,890 consumer fraud complaints related to COVID-19 or stimulus payments, with associated consumer losses of more than $56 million.

California AG and San Diego DA Announce "Largest" Timeshare False Ad Settlement

In what the state called the largest such settlement in its history, California has reached an agreement with Welk Resorts Inc. (Welk) resolving allegations it engaged in misleading marketing and sales tactics in marketing timeshare resorts in the United .States. and Mexico.

The case arose out of consumer complaints made to the offices of California Attorney General Xavier Becerra and the San Diego District Attorney Stephan Secure. The resulting investigation by the state “revealed that Welk was making false statements and misrepresentations in high-pressure sales presentations at its resort in Escondido, California. These deceptive business practices harmed consumers considering timeshare purchases,” said Becerra.

The complaint filed by Attorney General Becerra and District Attorney Secure accused Welk of repeatedly making false and misleading statements in the course of advertising its timeshare program that promoted far better terms than the company actually offered. These included statements falsely claiming that the timeshare interests were real estate transactions and false promises that consumers could resell their timeshare interests to Welk in the future.

The complaint also claimed that Welk misrepresented a program for purchasers to earn money on their timeshares and the resale value of such interests. It also accused Welk of falsely advertising different levels of timeshare ownership and pricing and refinancing options.

To settle claims under California’s Timeshare Law, the Vacation Ownership Timeshare Act of 2004 (VOTA), False Advertising Law (FAL), and Unfair Competition Law (UCL), Welk agreed to pay up to a $3.5 million in consumer restitution. The settlement agreement:

  • Allows consumers who previously submitted a written complaint with the option to (1) rescind their timeshare purchase agreement with Welk and obtain a full or partial refund or, (2) retain their timeshare interest and instead obtain restitution in the form of cash, a resort credit, or additional timeshare points; and
  • Provides notice to other potential victims and the opportunity for them to submit a claim for restitution in the form of cash, a resort credit, or additional timeshare points.

The stipulated judgment also obligates Welk to put in place a compliance program aimed at educating its sales force to ensure compliance with the law. Welk must also pay $2 million in penalties and costs.

Key Takeaways

State and federal enforcement may be COVID-fraud focused, but traditional deception remains. Marketers should remember that regulators are not looking away, especially as the country begins its path to reopening.

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