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Stay ADvised: What's New This Week, May 6

05.06.21
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In This Issue:

A Trio of Recent Cases Act to Curtail TCPA Claims

A federal district court in the Second Circuit issued an opinion in Katz v. Focus Forward LLP clarifying and narrowing the definition of "advertisement" under the Telephone Consumer Protection Act (TCPA), splitting with (and throwing shade at) the Third Circuit's more expansive view of that definition. The Katz decision joins Facebook, Inc. v. Duguid, 141 S. Ct. 1163, 1167 (2021) and Kaye v. Merck & Co., 2021 WL 1573910 (Summary Order, 2d Cir. April 22, 2021), in hewing closely to a strict, and straightforward, reading of the statutory language.

1. Katz v. Focus Forward LLP

In Katz, the question before the district court was whether an unsolicited fax inviting the recipient to participate in a paid survey constituted an advertisement within the meaning of the TCPA. The court held that based on the statutory definition of advertisement under the TCPA, defendant's fax was not an advertisement.

It all began when Focus Forward, a company that provides market research for clients through surveys, sent two faxes to plaintiff Bruce E. Katz seeking participants for market research studies. The faxes promised that participants would be paid a $150 honorarium for their efforts. Katz did not appreciate these faxes, and filed a class action suit against Focus Forward alleging that the faxes constituted an unsolicited advertisement that did not contain the required opt-out option in violation of the TCPA.

Under the TCPA, an "unsolicited advertisement" is defined as "any material advertising the commercial availability or quality of any property, goods or services which is transmitted…without…prior express invitation or permission." Katz argued that the faxes were ads because Focus Forward was offering to buy a service from him and then sell the collected data to its clients.

To support his argument, Katz relied primarily on the Third Circuit's decision in Fischbein v. Olson Research Grp., Inc., 959 F.3d 559 (2020), which held that such "faxed invitations to complete surveys for compensation" are "material advertising the commercial availability or quality of any property, goods, or services," under the TCPA." By contrast, Focus Forward argued that the faxes it sent were neither ads nor pretexts for later ads. The court agreed, and granted defendant's motion to dismiss.

Issuing a sharp rebuke of the Fischbein decision, U.S. District Court Judge Paul A. Crotty found that the Fischbein court had created a "new definition of 'advertisement' and compar[ed] the faxes at issue to that new definition rather than the statutory definition."

The court noted that the plain language of the TCPA clearly "does not say that any material advertising the availability of a commercial transaction" is an ad, but rather that advertisements are "any material advertising the commercial availability or quality of property, goods or services" (emphasis in the text). The court noted that:

Despite its initial circularity, the TCPA's statutory definition provides courts with a useful standard, keeping them from resorting to expansive dictionary definitions and subjective interpretations to discern the meaning of the word "advertisement" under the TCPA. Indeed, a thorough review of caselaw from neighboring circuits reveals that failure to adhere to the statutory language alters Congress's clear definition of the word "advertisement" into "a litigant's wishing well, into which, it sometimes seems, one may peer and find nearly anything he wishes.1

Katz joins a growing body of precedent adopting a tighter view of the TCPA's reach.

2. Facebook, Inc. v. Duguid

Also in April 2021, the U.S. Supreme Court called for a narrower and more common sense interpretation of the term "automatic telephone dialing system" (an ATDS or autodialer) under the TCPA, reversing the Ninth Circuit.

As defined by the TCPA, an "automatic telephone dialing system" is a piece of equipment with the capacity both "to store or produce telephone numbers to be called, using a random or sequential number generator," and to dial those numbers.2 Facebook had moved to dismiss the putative class action, arguing primarily that Duguid failed to allege that Facebook used an autodialer because he did not claim Facebook sent text messages to numbers that were randomly or sequentially generated.

Ultimately, the Ninth Circuit disagreed with Facebook, holding that plaintiff had stated a claim under the TCPA by alleging that Facebook's notification system automatically dialed stored numbers. An autodialer, the Court of Appeals reasoned, need not be able to use a random or sequential generator to store numbers; it need only have the capacity to "'store numbers to be called'" and "'to dial such numbers automatically.'"

The U.S. Supreme Court, however, disagreed, relying on a natural reading of the ATDS definition and the "conventional rules of grammar," which provide that "[w]hen there is a straightforward, parallel construction that involves all nouns or verbs in a series," a modifier at the end of the list "normally applies to the entire series." Accordingly, the Court held "that a necessary feature of an autodialer under § 227(a)(1)(A) is the capacity to use a random or sequential number generator to either store or produce phone numbers to be called," and remanded the case to the Ninth Circuit.

3. Kaye v. Merck & Co.

Lastly, the Second Circuit affirmed a decision issued by the U.S. District Court for the District of Connecticut that turned on the meaning of the term "unsolicited" and the scope of plaintiff's alleged consent to receiving marketing communications from Merck.

Merck retained a company called MedLearning to manage a series of telesymposia regarding various medical conditions. MedLearning was tasked with calling physicians to request permission to send a fax invitation to the telesymposium. The script mentioned that the symposium was sponsored by Merck. Although the plaintiff physician consented to receipt of an invitation to the symposium, plaintiff argued that the invitation turned out to be an unsolicited "advertisement" for Merck's drug products.

Affirming the district court, the Second Circuit also took a common sense approach, noting that "It is hard to imagine a symposium (at least one that a physician would want to attend) providing clinical information that does not address treatment. A reasonable doctor would expect a seminar addressing clinical treatment sponsored by Merck to showcase treatments manufactured by Merck." As such, the Second Circuit concluded that Kaye had consented to a fax advertisement, and found the claim had been properly dismissed.

Key Takeaways

The three decisions highlighted here are good news for media companies and other advertisers. Although the circuits remain divided on some of these issues, there appears to be a trend toward narrowing TCPA claims—once a runaway train in terms of consumer class action litigation—by reference to the plain meaning of the statutory language and common sense.

No More Section 13(b) Restitution: What SCOTUS's Decision in AMG Capital Management Means for the FTC, Consumers, and Existing FTC Orders

In April 2021, the U.S. Supreme Court held that the Federal Trade Commission (FTC) may not use Section 13(b) of the FTC Act, which grants the Agency power to obtain permanent injunctions against illegal conduct, to seek restitution and disgorgement, thereby resolving a split among federal circuit courts and reversing the Ninth Circuit decision on review.

For decades, the FTC has used Section 13(b) as a potent enforcement tool to obtain equitable monetary relief for consumer fraud victims from the district court, regardless of whether the Commission had conducted an administrative proceeding and issued a cease and desist order. (Beyond court orders, the availability of such relief was no doubt an important negotiating tool in reaching settlements with alleged offenders.) The Court's ruling in AMG Capital Management LLC v. FTC brings an end to this practice … at least for the time being.

Penning the unanimous decision for the Court, Justice Stephen G. Breyer wrote that Congress, in enacting § 13(b) and using the words "permanent injunction," never intended to authorize the FTC to seek equitable monetary relief directly in the district court. Rather, the FTC must use its authority under §§ 5 and 19(b) to seek restitution via its traditional (and much lengthier and more complex) administrative proceedings.

In reaching its conclusion, the Court first noted that the statutory text itself clearly "refers only to injunctions." The structure and language of the section also indicate that the relief granted by it is "prospective, not retrospective… stopping seemingly unfair practices from taking place while the Commission determines their lawfulness."

The structure of the FTC Act bears this out as well, wrote the Court, since other provisions explicitly provide for the return of moneys, Congress "likely did not intend for §13(b)'s more cabined 'permanent injunction' language to have similarly broad scope." As the Court reasoned, "the Commission may use § 13(b) to obtain injunctive relief while administrative proceedings are foreseen or in progress, or when it seeks only injunctive relief," but not "as a substitute for § 5 and § 19."

The Court was not swayed by the FTC's argument that multiple courts of appeal have accepted its interpretation of the section. Nor was it moved by policy considerations, noting that the issue was not whether the outcome was "desirable" but rather "to answer a more purely legal question."

The decision is especially impactful because the FTC has increasingly relied on Section 13(b) to seek monetary relief via the courts, eschewing the more cumbersome administrative process. It leaves the FTC without one of its most powerful and most oft-used tools to obtain redress for consumers harmed by scammers and fraudsters, one which yielded over $700 million in consumer redress funds in 2019 alone.

Reacting to the decision, the FTC asserted that "the Court has deprived [it] of the strongest tool we had to help consumers when they need it most." But the FTC has already been working on lawmaker action to restore the restitution power, and the Court in fact noted in its decision that the FTC was "free to ask Congress" for "further remedial authority" and "that it already has." The future of the FTC—and for scammers everywhere—may look very different depending on whether or not it can regain that power.

Key Takeaways

Some alleged scammers are already dancing in the wings. Sanctuary Belize, which is accused of running a vast real estate scam, has now appealed a $120.2 million judgment against it in light of AMG Capital Management. The FTC responded by filing a letter in the district court asserting that the district court retains jurisdiction over the receivership and redress plan, and can approve that plan in spite of the U.S. Supreme Court's decision.

U.S. District Judge Peter J. Messitte, who has presided for years over that litigation, set an expedited briefing schedule on this issue, with the receiver and FTC to file on May 7, 2021. The outcome of this case will obviously be significant. Stay tuned, the future of restitution promises to be an interesting one.

COVID-19 Fallout: DSSRC Takes Aim at Direct Marketers Preying on Consumers

Continuing its increased monitoring of direct marketing claims, the Direct Selling Self-Regulatory Council (DSSRC) of the Better Business Bureau (BBB) referred a nutritional supplements marketer to the FTC after the company failed to respond to the Council's repeated inquiries about questionable earnings and health claims. The inquiry is one of the DSSRC's growing roster of actions taken in response to aggressive marketing tactics used by some advertisers in light of the COVID-19 pandemic.

Since its inception in 2019, the DSSRC has been monitoring marketing claims made by the direct selling industry. The DSSRC initiated the inquiry into direct-seller Bulavita as part of its ongoing monitoring efforts, looking into potentially exaggerated earnings and immunity claims.

The DSSRC's inquiry notes that Bulavita has been in business since 2020, selling and encouraging salesforce members to sell "muscadine-based health and nutritional supplement products." It bills itself as the "premier source for natural health." The DSSRC expressed concern that, on the immunity front, Bulavita and its salesforce expressly and impliedly communicated that its supplements could treat or prevent COVID-19, and further sought to rope in consumer sellers with promises of financial windfall.

"Are you worried about the Corona Virus with your health or finances?" asked a salesperson on Facebook. "You can boost your immune system and health while boosting your wealth!" she continued. The company also touted the "Income opportunity of lifetime" and suggested that members of its salesforce could make "a million dollars a month…whatever you desire."

It should have come as no surprise to Bulavita that it found itself in the DSSRC's crosshairs. The company's cocktail of immune-boosting, COVID-19-fighting, and exceptional-earnings claims tick nearly every box in the DSSRC's Guidance on Earning Claims for the Direct Selling Industry (the Guidance). It will be the FTC's turn to determine whether to review next.

The DSSRC issued its Guidance in July 2020, just as many Americans turned to direct selling companies for opportunities in response to the pandemic's effect on the economy. The Guidance "comes at a time when the DSSRC and the FTC have seen an increase in questionable earnings claims during the ongoing coronavirus pandemic," said the DSSRC.

The Guidance is meant to provide direct selling companies and their salesforce with highlights of the types of direct marketing earnings claims that the DSSRC may find problematic and could potentially mislead consumers. These include:

  • General principles regarding the types of earnings claims which are misleading (e.g., any claim the company does not have reasonable basis to make and that is not substantiated).
  • The DSSRC will look at the "net impression" given by any earnings claim in making its determinations.
  • Earnings claims should either be capable of being substantiated or should include a "clear and conspicuous" disclosure about "generally expected results." The Guidance goes into detail about what a clear and conspicuous disclosure should and should not look like by way of multiple examples.
  • Some ads will qualify as earnings claims, even if they don't explicitly say so, such as depictions of lavish lifestyles.
  • Claims should state any costs incurred in joining a direct selling business.

Key Takeaways

The DSSRC has been very busy countering the rise in direct sellers attempting to capitalize on the economic hardships wrought by COVID-19. A look at the sheer exponential growth of administrative closures and decisions the DSSRC has undertaken since the start of the pandemic is telling. Before mid-March 2020, the DSSRC had just 14 decisions and 16 administrative closures under its belt. Since then it's tackled an additional 22 decisions and 142 closures.

Connecticut Hoping Third Time's the Charm With Proposed Digital Advertising Tax Bill

Connecticut is working hard to enact legislation to tax big digital advertisers. The state's legislature recently proposed yet another digital advertising tax bill, Connecticut's third such bill in 2021 (fourth in total). This move makes Connecticut the latest to do so since Maryland passed the first such tax in the nation over its governor's veto in February of this year. Maryland's legislature already amended its law, which is now awaiting the governor's signature.

In addition to Maryland and Connecticut, at least a few other states have sought to enact digital advertising taxes (e.g., New York, Indiana, and West Virginia). The trend appears to be fueled by two forces. For one, states are looking for revenue lost during the pandemic. Further, these bills appear aimed at taxing major tech companies, which some states may feel have benefitted with impunity from advertising revenue. Detractors of these digital advertising bills say the taxes will end up negatively affecting small businesses.

The latest such bill, Section 5 of Connecticut's SB 1106, would effectively tax companies netting at least $100 million in global annual gross revenues on their digital advertising services, which would include advertising on search engines, "digital interface[s]…and other comparable advertising services." The tax rate would vary from 2.5 percent to 10 percent of annual gross revenues from digital advertising services in the state. Revenues from the digital tax (and a new wage compensation tax that is also part of SB 1106) would go towards establishing an "Equitable Investment Fund."

Connecticut's SB 821, by contrast, would cast a narrower tax net. Its imposition of a 10 percent tax on the in-state digital advertising services of companies with worldwide annual gross revenues of over $10 billion seemingly directly targets big tech companies. The bill does not define digital advertising as of this writing.

Connecticut's most targeted digital advertising tax bill is SB 5645, which expressly seeks to establish a tax specifically on social media companies. It is also the vaguest, and does not specify how much the tax would be. It seeks to tax "social media provider companies" on the "annual gross revenue derived from social media advertising in the state."

All three bills of these bills are modeled on Maryland's digital advertising tax, but Connecticut's proposed SB 1106 hews closest to the Maryland law—although Maryland's imposes a tax of between 5 and 10 percent on digital advertising in the state. The tax applies to entities with over $100 million in global annual gross revenues. Like Connecticut's SB 1106, it defines digital advertising as including ads on digital interfaces and search engines. All three of the bills have been referred to Connecticut's Joint Committee on Finance, Revenue, and Bonding for further review.

Key Takeaways

The bills may face an uphill battle, given criticisms of similar bills such as they hurt small businesses, are vague, and/or unconstitutional (e.g., because they target only one form of commercial speech, violates the commerce clause), among other reasons. Yet, despite those criticisms, as the multiple creative attempts to tax digital advertising illustrate, the trend is towards taxation. It may just be a matter of figuring out the kinks.

FOOTNOTES

1  Id. at 8-9 (citing Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 273 (2d Cir. 1979)).
2  47 U.S.C. § 227(a)(1).

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