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Stay ADvised: What's New This Week, September 28

10.01.20
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In This Issue:

FTC Teaches Online Learning Company the ABCs of Negative Option Billing

The Federal Trade Commission (FTC) recently taught a valuable lesson to an online children's education company about the fundamentals of negative option marketing and illegal billing practices. As part of the settlement with the FTC, Southern California-based Age of Learning, Inc. will pay $10 million, amend its billing practices, and refrain from making certain representations about its negative option plans.

Age of Learning operates ABCmouse Early Learning Academy, a membership-based online learning platform for young children that provides lessons in math, reading, and other subjects. The FTC's complaint against Early Learning states that between 2015 and 2018 the company advertised a "Special Offer" giving users 12 months of access for $59.95. However, what Age of Learning did not communicate to members was that subscriptions would renew automatically and did not include instructions on how to end their membership despite promising "Easy Cancellation" at the time of enrollment.

According to the FTC, the company would not accept cancelation requests via phone or email (for those who could actually find this contact information) and instead required members to navigate through a complicated cancellation mechanism on its website. Despite many users communicating their intent to terminate their memberships using a variety of methods outside the cancellation mechanism, ABCmouse customer service representatives would not budge.

In order to satisfy Age of Learning's cancellation requirements, members would have to navigate to the "Billing" section of their account online, click the "Membership" box, and then find a link in small, light-colored font on the lower-left corner of the "Membership" page, which read "Cancellation Policy."

The FTC found that this process was hardly elementary and noted that along the way members were presented with links to a "Customer Support" page allowing users to send messages via a "Contact Us" form, which many users used to request termination of their membership. In fact, the FTC says that as many as 100,000 members sent cancellation requests via this method, but were rebuffed with messages stating "A member's account can only be cancelled by that member on the site itself, not via email or any other means."

Even when members were able to access Age of Learning's cancellation mechanism, ABCmouse continued to make it unnecessarily difficult for users to end their subscriptions. Members were presented with several more pages to navigate, including those with promotional offers and links that would remove them from the cancellation path.

Furthermore, some users, who had signed up for additional services like Age of Learning's "Assessment Center," continued to be charged for this additional subscription despite canceling their ABCmouse membership. In a cruel twist of fate, users were unable to access their ABCmouse accounts and terminate their "Assessment Center" subscription because their membership had been deactivated.

The proposed settlement offer prohibits Age of Learning from misrepresenting services as "free," "trial," "sample," or "no obligation" when users must take extensive steps to avoid future charges. Additionally, Age of Learning must disclose to consumers the action the consumer must take to avoid future charges, the total charge and, if applicable, the frequency of the charges if cancellation is not requested, and the deadline by which the user must act to stop recurring charges. Lastly, Age of Learning agreed to obtain subscribers' informed consent before enrolling them in automatic billing and to provide simple mechanisms to cancel subscriptions.

Key Takeaways

Even in the age of seemingly ubiquitous COVID-19 related scams, the FTC is still paying attention to its traditional enforcement priorities. Companies that engage in offering goods and services using negative option plans remain firmly on the FTC's radar.

FTC Complaint Remodeled to Include Real Estate Celebrities

A pair of celebrity real estate investors have been added to a Federal Trade Commission (FTC) complaint looking to foreclose on a money-making scheme that allegedly fleeced consumers out of $400 million. The amended FTC complaint adds Dean Graziosi and Scott Yancey as defendants to the case, which already included Nudge, LLC and its affiliated companies.

According to the FTC, Nudge used Graziosi and Yancey to lure consumers into a real estate money-making scheme that advertised itself as providing educational training to help ordinary people make money flipping real estate. In reality, the operation was a marketing funnel to sell more expensive "training" packages to unwitting consumers.

"We believe these two TV personalities each made millions of dollars by assisting and facilitating this real estate investment rip-off," said Andrew Smith, Director of the FTC's Bureau of Consumer Protection. "They were instrumental to the scheme and took a cut of the profits, and that's why we're seeking to add them to our case against the program's operators."

Using a combination of direct mail and infomercials, Nudge advertised its "Preview Events" as a way for consumers to find real estate at below market rates and gain access to financing without using their own money. However, consumers who attended the Preview Events learned little, if anything, on how to move real estate. Instead, according to the FTC, Nudge used the events as an opportunity to sell three-day "Workshops" priced at over $1,100.

The Workshops followed essentially the same floorplan as the Preview Events, promising to teach more real estate sales secrets but were actually a mechanism for the defendants to sell "Advanced Training." Those who attended the Advanced Training were promised access to "exclusive" events called Buying Summits or Investor Expos where they could buy property at below market value prices.

As it turned out, the property offered to consumers at the Buying Events and Investor Expos was actually owned by Nudge itself and sold for a 20 percent markup – a detail that was not disclosed to buyers. Further, consumers were offered personalized real estate coaching programs called the "Inner Circle," priced at tens of thousands of dollars or more.

Since the scheme began in 2015, the FTC estimates three quarters of a million people attended Nudge's events but the vast majority of them did not become successful at real estate, did not make any money using the defendants' system, or did not even recoup the cost of attending the paid events. Worse still, many ended up in substantial debt and some even lost their life savings thinking they could make money with Nudge's real estate buying system.

Key Takeaways

Although the alleged activity here was egregious, this case is a reminder that celebrity endorsers share liability with the companies they promote.

Supplement Maker Tells Supreme Court "No Actual Harm" Still Hurts Business

The question of what constitutes injury sufficient to maintain an action under the Lanham Act may be headed to the U.S. Supreme Court. A California dietary supplement maker recently petitioned the Court to review the 9th Circuit's affirmance of summary judgement for defendant Nutrivita Laboratories Inc. on the grounds that plaintiff could not prove "actual injury" resulting from defendant's allegedly false advertising. VBS Distribution Inc. claims that the 9th Circuit erred when it affirmed the trial court's dismissal of its case, in a decision petitioner claims upends the precedent on requisite injury in all or most jurisdictions.

According to VBS Distribution, both its "JN-7 Best" and Nutrivita's "Artho-7" products are marketed to a niche audience as a way to relieve muscle and joint pain. VBS Distribution argued that Nutrivita falsely claimed in a 2013 newspaper ad that its Arthro-7 product was "100% Herbal" and that because of this false representation consumers would perceive VBS Distribution's product as inferior. The Lanham Act provides relief, inter alia, where a materially false statement has caused or will likely cause monetary loss or damage to reputation "proximately caused" by the defendant's advertising.

This case took an interesting procedural turn when, after the District Court initially denied VBS Distribution's motion for preliminary injunction, the 9th Circuit reversed and remanded. When the District Court again ruled against VBS Distribution – this time granting summary judgement to Nutrivita and dismissing the case – the 9th Circuit agreed. The District Court held that that even though there was a disputed issue of fact as to whether Nutrivita's product was "100% Herbal," plaintiff presented "no evidence [it] suffered any economic or reputational injury" from defendant's claim that its supplement was "100% natural herbal." The Court ruled that the "conclusory" affirmation from plaintiff's CEO regarding reputational harm and likely diversion of sales was insufficient.

On appeal for round two, the 9th Circuit panel affirmed, in a split decision marked "non-precedential," likewise finding that VBS Distribution failed to present sufficient evidence to show that it suffered actual injury. By contrast, the dissent claimed that, at least at the summary judgement stage, the plaintiff had alleged enough, even if somewhat weakly, noting: "At trial, VBS may well lose if it is unable to provide anything stronger. But at this stage of the proceedings, we are not permitted to 'weigh the evidence.'"

VBS Distribution's petition to the U.S. Supreme Court asserts that the 9th Circuit misapplied the Lanham Act's provisions on what evidence of harm must be presented in order to have standing to proceed past the summary judgment stage. Plaintiff avers that the 9th Circuit "brushed aside" its prayer for damages and injunctive relief when the majority stated that VBS Distribution waived the issue of injunctive relief on appeal by failing to address the issue in its appellate brief. Plaintiff noted that it was a "puzzling application of the waiver doctrine" since the District Court did not mention injunctive relief when it issued summary judgment.

Key Takeaways

This is one to watch. Should the Supreme Court take the case, it may prove to be the most important Lanham Act decision since its landmark 2014 decision in Lexmark.

Cannabis Brand Ignite Looks to Torch TCPA Lawsuit

The luxury cannabis company Ignite International Ltd. has asked a Nevada federal judge to just say "no" to a proposed Telephone Consumer Protection Act (TCPA) class action lawsuit on the grounds that plaintiff failed to establish standing. Many have predicted a flurry of cannabis related lawsuits of all kinds that have not quite materialized.

This one is interesting, not so much because of the substance – an arguably garden variety TCPA action – but because of the defendant, former poker-player turned Instagram household name and now cannabis entrepreneur Dan Bilzerian. Plaintiff Tyler Baker's lawsuit alleged that the Bilzerian-founded and run Ignite sent him (and potentially others) an automated text message asking if he would like to sign up to receive notifications from the company, despite never consenting to receive texts and being signed up for a do-not-call registry since 2004.

In its motion to dismiss the case, Ignite points out that plaintiff had signed up for a company sweepstakes the same month he allegedly received the lone text message and that his complaint failed to mention that he opted into receiving such messages when he signed up for the promotion. Ignite highlighted language in the sign up form for its sweepstakes, which shows the phone number as optional information and included the following disclaimer:

By completing this form, you are signing up to receive our emails and can unsubscribe at any time. I agree to receive recurring automated text messages at the phone number provided. Consent is not a condition to purchase. Msg & data rates may apply. I may opt out of receiving SMS updates at any time by replying STOP. Click to view our Terms of Service.

Ignite's motion also notes that plaintiff failed to show he suffered any injury by receiving the single text message, allegedly sent from the company. Ignite pointed to multiple federal appeals court cases in which TCPA claims were dismissed on the grounds that plaintiffs, who claimed they received a single unsolicited text message, failed to establish a concrete injury in fact.

Next, Ignite asserts that plaintiff's claim failed to show that Ignite used an automatic telephone dialer system (ATDS) using a random or sequential number generation process to send the text message or that the complaint provides any evidence that the company's unidentified ATDS "has the capacity to store numbers on a list and to dial from a list." Ignite's motion to dismiss goes on to point out that calling from a list of prepared phone numbers does not constitute a violation of the TCPA.

Ignite's motion to dismiss went on to tackle the proposed class the complaint sought to represent. Here, defendant asserted that the defined class would include individuals who received text messages not sent using an ATDS, and would therefore not have standing to assert a TCPA claim. Ignite characterized Baker's proposed class as any person who received any text messages from Ignite within a 21-month period and would require "highly individualized inquiries" during discovery and therefore render the class overbroad.

Key Takeaways

Ignite used the TCPA statute to argue a plaintiff cannot just receive a single text from an unidentified entity to have standing to sue. That sounds right. We shall see.

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