Stay ADvised: What's New This Week, June 22
In This Issue:
- FTC Flogs Financing Fraudsters for (Allegedly) Filching Funds
- NAD Puts the Lid on Latest Challenges to Air Wick Claims
- Post Foods Files Appeal as Sugary Cereal Suit Goes Sour
- Judge Deep Fries Much of ‘Potato Skins’ False Ad Suit Against TGI Friday’s Utz and Inventure
FTC Flogs Financing Fraudsters for (Allegedly) Filching Funds
Seeking an injunction and payment of restitution, the Federal Trade Commission (FTC) has filed a lawsuit accusing a New York small business financing company and its principals of a host of deceptive and unfair practices, starting with misrepresentations and ending with threats of bodily and reputational harm.
The FTC alleges that the defendant RCG Advances, LLC (formerly Richmond Capital Group, LLC, and currently doing business as Viceroy Capital Funding and Ram Capital funding) together with its principals (collectively, the defendants), systematically deceived small businesses about the terms of their cash advances, and used illegal and unfair debt collection prices to obtain payment, all in violation of the FTC Act.
According to the complaint, the defendants misrepresented the terms of their financing products to their customers. On its website, the company advertised that it did not require any "personal guarantee of collateral from business owners." Imagine the FTC's dismay, then, to learn that the defendants' customer contracts required just that: the former and current versions of defendants' customer contracts contained provisions specifically labeled "Personal Guarantee of Performance" and "Personal Guarantee," respectively, both of which committed signatories to personal guarantees in the event of default.
The FTC also alleged that RCG Advances advertised that it charged "no upfront fees" and would pay a specific financing amount to its customers. When it came time to deliver on the promised financing, however, the defendants allegedly deducted multiple fees, which in some cases amounted to tens of thousands of dollars, from the financing amount. Many of these fees were "buried in Defendants' contracts, without any language alerting customers that they are withdrawn upfront," said the FTC, while other withheld amounts "are not disclosed anywhere in the contract."
The complaint further maintains that the company's misrepresentations were deliberate and premeditated: defendants' internal emails show RCG Advances expressly directed its staff to charge customers higher fees and advance customers smaller amounts than those provided under the contract.
Defendants' collections practices were perhaps the most unsavory of the violations alleged in the FTC's complaint. According to the FTC, on multiple occasions representatives of RCG Advance made threatening collection calls using "obscene or profane language" and in some instances even threatened physical violence, going so far as to tell one customer that they would "break his jaw" if he did not pay up, and telling another that they would "beat the sh*t out of" that customer.
Customers also allegedly received threats to their reputation, with one being told that the defendants would falsely accuse him of being a child molester if he failed to pay. These practices likely "caused consumers to fear for their physical safety and forego important contractual and legal rights," said the FTC, including the right to reduce or dispute the amount of their debt to the defendants.
Finally, defendants required their customers to confess judgment for the full amount owed, which enabled RCG Advances to seize customer assets in the event customers failed to pay, in stark contrast to provisions in RCG Advances' customer contracts which provided that a customer would not be in breach for delayed or reduced payments due to a slowdown in that customer's business. By filing confessions of judgment, RCG Advances was able to go to court immediately after a claimed default, receive an uncontested judgment, and seize assets it was not contractually allowed to seize, says the FTC. According to the complaint, RCG Advances even filed confessions of judgement against consumers whose payments were late due to technical errors.
This case is a reminder of how easily small businesses can fall prey to unscrupulous lenders and be swayed by deceptive representations. The FTC's pursuit of RCG signals its intent to enforce protections for small businesses which may be especially vulnerable and seeking financial aid in this challenging economic climate.
NAD Puts the Lid on Latest Challenges to Air Wick Claims
Sometimes claims do not pass the NAD's smell test. NAD recently recommended that Reckitt Benckiser (RB) discontinue certain "natural" claims for its Air Wick home fragrance products, while finding the advertiser could support the claim "lasts up to 60 days" when the product is operated on the low setting.
S.C. Johnson, a competitor of Reckitt Benckiser, challenged claims Reckitt Benckiser made online about its Air Wick Fragrance Essential Mist and Air Wick Scented Oils, on product packaging, and in television advertisements, all of which expressly or impliedly promoted the products' scent ingredients as "natural." For example, RB claimed that "Air Wick Essential Mist is an Expression of Nature, transforming natural essential oils into a fragrant mist," that the products are "[i]nfused with 100% natural essential oils," and that the product "Naturally Diffuses Fragrance into Mist." These claims often appeared in conjunction with imagery that allegedly reinforced the natural messages, including an image that "depicts oil dripping directly from a leaf into a brown bottle similar to ones used for 100% essential oils sold for diffusion."
"Though it was undisputed that these products contain some measure of natural essential oils, the focus was on whether RB's advertising reasonably conveys any unsupported messages about the 'natural' content," reasoned NAD. Consistent with prior cases, NAD determined that consumers viewing the "natural" claims could reasonably assume that the product contains only natural oils and no synthetic ingredients—a message RB could not support.
Also consistent with prior cases involving claims that products are "made with natural ingredients," NAD noted that the claim "infused with natural essential oils" is not per se misleading. However, NAD recommended Scented Oil packaging be modified to highlight the "infused with" language (rather than the "natural essential oils" portion of the claim).
SCJ also took issue with claims that the product "lasts up to 60 days" and that it lasts "20% longer than other brands." RB decided to discontinue use of the "20% longer than other brands" claim, so NAD did not review the merits of that challenge. With respect to the claim "Lasts up to 60 days" on the lowest setting, RB relied on in-house testing measuring the weight of fragrance left after 60 days, as well as olfactive testing establishing that the weight of fragrance remaining should emit detectable fragrance. Although SCJ objected to RB's use of "bridging data" and complained that RB had not tested every product, NAD found that RB had shown a reasonable basis for its claim.
RB said it would comply with NAD's recommendations.
NAD recognizes that companies are free to promote their use of natural ingredients, provided that they do so in a qualified manner that does not exaggerate the extent to which a product or ingredient is natural. Even if a claim does not describe a product or ingredient as "100% natural," NAD has continuously recognized that consumers of "natural" products may reasonably expect that they do not contain any artificial or synthetic ingredients unless the presence of such ingredients is clearly disclosed. In-house testing, including bridging data, may provide a reasonable basis to support an advertiser's claims.
Post Foods Files Appeal as Sugary Cereal Suit Goes Sour
Post Foods LLC (Post) has asked an appeals court to decertify a class of plaintiffs in a lawsuit alleging that the company falsely advertised its cereals as healthy despite being laden with sugar.
The 2016 complaint alleges that Post violated California Unfair Competition Law, False Advertising Law, and the Consumers Legal Remedies Act by misleadingly marketing 31 of its high-sugar cereals as healthy and wholesome.
Plaintiffs had asked the district court to certify a class made up of all California consumers who purchased since 21012 for personal or household consumption any of Post's high-sugar cereals bearing health and wellness claims. In March of this year, the court certified nine subclasses of consumers who allegedly would not have purchased as much of the cereal had they not been misled about its sugar content, finding that plaintiffs provided an admissible theory of liability to prove damages.
Now, Post is asking the circuit court to reexamine the lower court decision, arguing that the lower court's damages calculation was flawed and that the case presents a unique opportunity for the 9th Circuit to clarify class certification law under Federal Rule of Civil Procedure 23(b)(3).
Calling the litigation "an ideal case in which to resolve the split because the facts directly present the question of when evidence of a common understanding is required," Post argues that plaintiffs failed to provide any evidence for their allegations that all class members interpreted Post's marketing claims in the same way that plaintiffs alleged – such as that Post's use of the phrase "4 Wholesome Grains" was commonly understood by class members to mean that the cereal was "healthy."
Further, Post argues the class should be decertified because "plaintiffs' damages model failed to limit its measurement of damages to the statements on Post's cereal packages that plaintiffs challenge," instead focusing on the injuries that resulted directly from Post's alleged false advertising practices. In their response, the plaintiffs countered that Post failed to actually show how the lower court erred in its decision.
This case may be an important one to follow both to clarify class certification requirements the minimum standards for damages assertions.
Judge Deep Fries Much of ‘Potato Skins’ False Ad Suit Against TGI Friday’s Utz and Inventure
TGI Friday's Inc. (TGIF) and Utz Quality Foods LLC (Utz) scored a victory after a New York federal judge dismissed claims against both the restaurant and the snack giant alleging that the pair falsely advertised their "Sour Cream & Onion Potato Skins" potato chip snacks, allowing to stand only claims against Inventure Foods Inc. (Inventure).
Plaintiff Solange Troncoso filed the class action suit against TGIF, Utz, and Utz's subsidiary snack manufacturer Inventure in March 2019. Troncoso claimed that she purchased a bag of "TGI Fridays Sour Cream & Onion Potato Skins" chips under the impression that they contained real potato skins, only to later discover that the snack, in fact, "does not contain any actual potato skins," and thus plaintiff had purchased "a [p]roduct with significantly less value than was warranted by its representations."
Troncoso alleged false and deceptive advertising claims and fraud and sought class certification, statutory and compensatory damages, and an injunction to prevent the defendants from marketing and labeling the chips as "Potato Skins." Troncoso also accused the defendants of deliberately marketing its "Potato Skins" products as containing more nutritious ingredients to grab the attention of more health-conscious consumers.
U.S. District Judge Katherine Polk Failla disagreed as to TGIF and UTZ, finding that plaintiff failed to show a sufficient connection between the companies and the allegedly misleading ads. Judge Failla found that "no reasonable consumer could believe that the snack chips" offered on store shelves and "sold at room temperature in gas stations" contained actual slices of potato skins, or "would be identical in taste or substance to an appetizer" served hot in TGIF's restaurants.
Further, Judge Failla held that TGIF could not be liable for misleading labeling on the potato chips since it had no control over the marketing of the snacks. TGIF has merely licensed its name and trademark to Inventure for use on the snack product's packaging, which the court said was not enough to claim that the company was involved in any other aspect of the marketing: "[A]n allegation that a party has licensed its trademark to appear on a product is not, by itself, sufficient to state a claim for liability for misleading representations that appear on that product," noted Judge Failla.
Although plaintiff argued that TGIF sells the products on its Amazon page with a representation that the chips contain real potato skins, plaintiff failed to allege that she actually viewed this page or relied on its claims in making her purchase. Thus, Judge Failla concluded that Troncoso had failed to state a valid claim against TGIF.
Similarly, Judge Failla noted that plaintiff had not alleged that Utz took part in the allegedly misleading marketing and failed "to establish that Utz was itself involved with the allegedly misleading labels."
Judge Failla also dismissed Troncoso's request for an injunction, noting that since plaintiff "failed to allege an intent to purchase the snack chips in the future," there was no danger that plaintiff would suffer the same injury again in the future, and therefore plaintiff lacked standing to obtain injunctive relief.
However, the judge did accept plaintiff's claim that Inventure's marketing misled her into thinking the chips had potato peels as an ingredient, allowing the claim for fraud against Inventure to proceed.
In a nod to the TGIF's and Utz's of the world, although they had best be aware of advertising claims made on their behalf, a licensor/licensee relationship is not in and of itself sufficient to establish sufficient control or knowledge over marketing decisions for liability to attach.