Andrew B. Lustigman Adam Z. Solomon Safia A. Anand

ABA Section of Antitrust Law Consumer Protection Committee:

Consumer Protection Update April 2013 Presented by

OLSHAN FROME WOLOSKY LLP

May 13, 2013

Scott A. Shaffer

Federal Update

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FTC Files First Case Against Mobile Cramming

FTC v. Wise Media, LLC, Brian M. Buckley, and Winston J. Deloney, Defendants, and Concrete Marketing Research, LLC, Relief Defendant , 13-CV-1234 (N.D. Ga.).

Defendants allegedly billed consumers for so-called “premium services” that sent text messages with horoscopes, flirting, love tips and other information.

Complaint alleges that consumers were signed up for these services at random, and that the operation placed repeating charges of $9.99 per month on mobile phone bills, without consumer knowledge or permission.

According to the complaint, in many instances, Wise Media sent text messages to consumers that suggested they were subscribed to the services, which many consumers dismissed as spam and ignored. Even if consumers responded via text indicating that they did not want the services, they were charged on their mobile phone bills on an ongoing basis.

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FTC Wins Court Judgment Against Remaining NHS Defendants

FTC v. NHS Systems, Inc., et al., No. 08-2215 (E.D. Pa.)

Complaint was initially filed in May 2008 and alleged that the defendants called consumers and made a number of misrepresentations, often saying that they are affiliated with U.S. government. Deceived consumers and charged them $29.95 or $299.95 for grants, tax refunds, tax rebates, or health benefits.

Court entered judgment against five individuals and telemarketing operation they ran for violating the FTC Act and the TSR.

Defendants are permanently barred from operating under a variety of names, from telemarketing, charging consumers’ bank accounts, and making false and misleading statements.

Order requires defendants to pay almost $6.9M.

Cross border cooperation with Canadian authorities.

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FTC Announces Staff Report on Mail or Telephone Order Merchandise Rule

In 2007, the FTC sought public comment on how the Rule could be amended to address changes in technology and commercial practices. The report recommends that the FTC amend the rule as previously proposed in September 2011. The proposed amendments would:

Clarify that the Rule covers orders placed over the Internet;

Revise the Rule to allow sellers to provide refunds and refund notices to buyers by any means at least as fast and reliable as first-class mail;

Clarify sellers’ obligations when buyers use payment methods not spelled out in the Rule, such as debit cards or prepaid gift cards; and

Require that refunds be made within seven working days for purchases that were made using third-party credit, such as Visa or MasterCard cards. For credit sales where the seller is the creditor (such as merchants using their own store charge cards) the refund deadline would remain one billing cycle.

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FTC Seeks Input On Privacy And Security Implications Of Internet Of Things

• FTC is interested in the consumer privacy and security issues posed by the growing connectivity of consumer devices, such as cars, appliances, and medical devices, and invites comments on these issues in advance of a public workshop to be held on November 21, 2013 in Washington, D.C. Submission deadline is June 1, 2013:

• What are the significant developments in services and products that make use of this connectivity (including prevalence and predictions)?

• What are the various technologies that enable this connectivity (e.g., RFID, barcodes, wired and wireless connections)?

• What types of companies make up the smart ecosystem?

• What are the current and future uses of smart technology?

• How can consumers benefit from the technology?

• What are the unique privacy and security concerns associated with smart technology and its data? For example, how can companies implement security patching for smart devices? What steps can be taken to prevent smart devices from becoming targets of or vectors for malware or adware?

• How should privacy risks be weighed against potential societal benefits, such as the ability to generate better data to improve health-care decisionmaking or to promote energy efficiency? Can and should de-identified data from smart devices be used for these purposes, and if so, under what circumstances?

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FTC Approves Final Order Settling Charges Against Software And Rent-to-Own Companies

Accused Of Computer Spying FTC has approved nine final orders settling charges that seven rent-to-own

companies and a software design firm and its two principals spied on consumers using computers that consumers rented from them.

The settlements will prohibit the use of geophysical location tracking without consumer consent and notice, and bar the use of fake software registration screens to collect personal information from consumers.

The rent-to-own stores will also be prohibited from using information improperly gathered from consumers to collect on accounts.

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FTC Warns Data Brokers That Provide Tenant Rental Histories They May Be Subject To Fair

Credit Reporting Act The FTC has sent warning letters to six website operators that share

information about consumers’ rental histories with landlords that they may be subject to the requirements of the Fair Credit Reporting Act (FCRA).

FCRA requires covered companies to protect the privacy of tenants whose information they collect, including ensuring that those requesting information about tenants have a legitimate reason to acquire it.

Covered companies also have an obligation to ensure that the information they provide is accurate, to give consumers a copy of the information about them on request, and to allow consumers to dispute information they believe is inaccurate.

Covered companies must notify landlords of their requirements if they use the data to deny housing to a tenant, and to notify the sources of their information of the requirement that they provide accurate information.

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FTC Fraud Survey

FTC Survey for 2011 Shows An Estimated 25.6 Million Americans Fell Victim To Fraud (10.8 percent of the adult population).

Top Categories:

Weight-Loss Products

Prize Promotions

Unauthorized Billing for Buying Club Memberships

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Textiles and Jewelry Developments

FTC is Proposing Changes to its Textile Labeling Rules

Require that certain textiles sold in the United States carry labels disclosing the generic names and percentages by weight of the fibers in the product, the manufacturer or marketer name, and the country where the product was processed or manufactured. Comments must be received by July 8, 2013. The Rules implement the Textile Fiber Products Identification Act.

FTC to Host Roundtable on Possible Changes to Jewelry Industry Marketing Guidelines

FTC to host public roundtable on June 19, 2013 in Washington DC to discuss possible changes to the FTC’s Jewelry Guides. The Roundtable will discuss the marketing of alloy products containing precious metals in amounts below the Guides’ minimum thresholds, and surface applications of precious metals.

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State AG Update

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T-Mobile Settles with Washington AG Regarding “No Contract” Advertising

T-Mobile launched a new type of wireless service plan, claiming to offer “no restrictions,” “no annual contract” and no requirement that the consumer “serve a two-year sentence.”

However, this new plan does not include a phone. Instead, the company provides the option for consumers to purchase a phone at a monthly rate over a two-year term. They also offer the opportunity to bring your own phone or pay the entire cost of the phone up front.

AG alleged company failed to adequately disclose that customers who purchase a phone using the 24-month payment plan must carry a wireless service agreement with T-Mobile for the entire 24 months— or pay the full balance owed on phone if they cancel earlier.

Consumers who cancel their wireless service face an unanticipated balloon payment for the phone equipment – in some cases higher than termination fees for other wireless carriers depending on how early they cancel. Instead of a “two-year sentence” for wireless service, consumers face a different two-year “sentence” to avoid a lump-sum balloon payment for the phone.

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T-Mobile Settles with Washington AG Regarding “No Contract” Advertising

Based on terms of settlement claims first stated on March 26, 2013.

Under the settlement, T-Mobile will not:

Misrepresent consumers' obligations under its contracts, including those contracts that have not restrictions or limitations; and

Fail to adequately disclose that customers who terminate their T-Mobile wireless service before their device is paid off will have to pay the balance due on the phone at the time of cancellation.

All consumers who purchased T-Mobile service and equipment between March 26 and April 25, 2013, can obtain a full refund for their telephone equipment and cancel their service plans without being required to pay the remaining balance owed on their devices.

T-Mobile to pay fees and costs of $26,046.40.

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Missouri AG Obtains Judgment Against Marketer that Sent Solicitations Designed to

Look as Phone Bills Judgment obtained against UST Development Inc., and owner David Bell.

Advertising services by distributing deceiving solicitations to Missouri businesses and government agencies. The solicitations are designed to look as though they are phone bills due for payment.

The Attorney General obtained a judgment that ordered defendants to pay $60,000 in civil penalties as well as reimburse the state in the amount of $3,750 for the investigation.

Defendants are prohibited from doing business in the state of Missouri and from sending solicitations to Missouri consumers.

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Court Order Bars Iowa Telemarketer from Iowa Fundraising

Iowa undercover phone line recorded what Iowa AG called a “highly deceptive pitch” from a for-profit company that claimed it was raising money to grant the wishes of terminally ill Iowa children.

Calls being made by Telequal LLC attempting to solicit money on behalf of “A Child’s Dream Foundation.”

In fact money was for an out of state charity that has no special Iowa focus, and 85% of every dollar donated went to the telemarketer, not to sick kids.

According to the order, the defendants are prohibited from moving operations to another state and then calling into Iowa.

The defendants are also barred from ever using any of Telequal’s donor information again, including the names of Telequal’s out-of-state donors.

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Maryland AG Settles with Company that Accessed Credit Records Without Authorization

Washington Home Remodelers, a Maryland based home improvement contractor, and the company's owner, Daniel Bronstein, allegedly accessed consumers' credit records without their permission and before it established a business relationship with the consumer, in order to determine whether it would keep scheduled sales appointments.

The company was also accused of failing to use licensed salespersons; under Maryland law, a person who sells home improvement services must be licensed by the Division of Labor, Licensing and Regulation.

Under the settlement, defendants can access a consumer's credit records only after they first notify the consumer of the inquiry and only if they receive the consumer's permission or if they have an existing business relationship with the consumer.

The defendants agreed to pay a civil penalty of $25,000, which would double to $50,000 if either breaches the terms of the settlement.

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State Legislation Update

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Florida House Bill 155

Effective date: April 10, 2013.

The new Florida laws provide that a game promotion may only be conducted by a for-profit commercial entity. A game promotion is defined under Florida law as “a contest, game of chance, sweepstakes, or gift enterprise ... in connection with and incidental to the sale of consumer products or services, and in which the elements of chance and prize are present.”

The law also defines an “operator” of a game promotion as a “retailer who operates a game promotion or any person, firm, corporation, organization, or association or agent or employee thereof who promotes, operates, or conducts a nationally advertised game promotion” which leaves open the question of whether regional or local game promotions are prohibited or permitted.

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The new Florida amendments prohibit a non-profit organization from operating a game promotion - i.e., a sweepstakes in connection with and incidental to the sale of consumer products or services.

Revisions clarify that the law is intended to only permit games of chance run by commercial entities on a “limited and occasional basis” as a marketing tool incidental to the sale of a product or service.

Florida law continues to allow a non-profit organization to operate a "drawing by chance" so long as 1) it is not a “game promotion”; and 2) no consideration (donation) is required to participate. It also prohibits a non-profit from engaging in a drawing by chance that includes instant win or pre-selected winning number promotions.

Florida House Bill 155

Private Litigation Update

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JOHNSON v. WEST PUBLISHING

Johnson v. West Publishing Corporation, Nos. 12-1172, 12-1176, 2013 WL 1442513 (8th Cir. April 9, 2013)

The 8th Circuit reversed a district court decision that held that the Driver’s Privacy Protection Act (“DPPA”) prohibits a reseller of personal information from obtaining driver’s license information from states or third parties, when the reseller’s only purpose is to resell the information to other third parties.

West Publishing resells personal information obtained from state DMVs. The DPPA places limits on the situations in which individuals can obtain that sort of personal information. West only resells the information to individuals with a “legitimate” use for the information, as that term is defined by statute.

Plaintiffs brought a class action suit alleging that since West itself did not need the driver’s license information for any of the statutorily defined legitimate uses, but obtains the information to stockpile and then resell to third-parties who do use the information for legitimate uses, it had violated the DPPA.

The district court held for the plaintiffs, that the DPPA prohibits wholesale resellers from obtaining, in bulk, every driver’s personal information – even where there is no evidence of specific misuse.

The 8th Circuit reversed, however, in accord with its prior decision in Cook v. ACS State & Local Solutions, Inc., 663 F.3d 989 (8th Cir.2011), where it had held that (1) bulk obtainment of driver information for a permissible purpose does not violate the DPPA; and (2) the DPPA explicitly permits the resale of drivers’ information, and it does not require that resellers must first use the information themselves.

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FL Supreme Court Class Action Ruling

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McKenzie Check Advance of Florida, LLC v. Betts, No. SC11-514, 2013 WL 1457843 (Fl. Sup. April 11, 2013)

The Florida Supreme Court sided with a payday loan company in a ruling that keeps customers from banding together to file class action suits, citing a Supreme Court Decision, CompuCredit Corp. v. Greenwood, ---U.S.---, 132 S.Ct. 665, 668-69, 181 L.E.2d 586 (2012).

The decision overturned the lower court ruling which held that the payday-loan company’s arbitration clause was unconscionable. The lower court invalidated the contracts because borrowers were unable to seek justice since lawyers were unwilling to pursue individual claims for relatively small amounts of money.

An appeals court upheld the decision, but since the U.S. Supreme Court ruled last year that California law could not invalidate language in AT&T contracts that calls for disputes to be settled through arbitration rather than lawsuits, citing the Federal Arbitration Act, the Florida Supreme Court said that the ruling also applied here.

The ruling means that anyone signing contracts with small print that says disputes must be settled through arbitration rather than lawsuits, cannot later get together with other unhappy customers and file a class action lawsuit.

Merchants' Attorneys Seek $720M In Fees In Visa, MasterCard Multi-District Litigation

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In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 05-md-01720 (EDNY)

Counsel for merchants in a multidistrict antitrust litigation who allege that Visa and MasterCard charged excessive swipe fees to accept their cards, recently asked the Court to award $720 million in attorneys' fees, which would come out of a proposed settlement in the case. This amount is about 10% of the proposed settlement payout, which is estimated at approximately $7 billion. Some of the details of the settlement include:

Cash Portion - Cash payment to class members based on a percentage of the Visa/MC interchange fees paid from 1/1/04-11/28/12 - monies to be paid after the matter has been fully resolved (including any appeals of the settlement by objectors).

Release - In addition to typical releases, the settlement contains a unique future release:

Will bar any merchant claims based upon the future effect in the U.S. of any Visa or MasterCard rules, as of 11/27/12

Releases will not bar claims involving new conduct or rules in the future that are not substantially similar to either existing conduct or rules or conduct modified by the settlement. Releases also will not bar claims involving certain specified standard commercial disputes arising in the ordinary course of business.

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Merchants' Attorneys Seek $720M In Fees In Visa, MasterCard Multi-District Litigation

Next steps - 5/28/13 is the deadline for a merchant to provide notice of its

intent to:

1. submit an objection to the terms of the Settlement Agreement, and/or

2. opt-out of participating in the monetary award class. A merchant that opts-out preserves its right to litigate the claims alleged in the complaint with respect to events and conduct that occurred during the period covered by the litigation; however, if Final Approval of the settlement is granted and upheld on appeal, claims arising on or after 12/1/12 that are based on the same or substantially similar Card Network Operating Rules will be barred by the broad covenant not to sue that is part of the settlement (and one of its most troubling elements).

US SCT Denies Cert On Graphic Warning Label Cigarette Package Challenge

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American Snuff v. United States, No. 12-521, 2013 WL 1704718 (April 22, 2013)

A group of manufacturers and sellers of tobacco products brought suit challenging the 2009 Family Smoking Prevention & Tobacco Control Act. They claimed that it violated their First Amendment free-speech rights, constituted an unlawful taking under the Fifth Amendment, and was an infringement of their Fifth Amendment due process rights.

The Sixth Circuit’s Decision: The Sixth Circuit upheld most of the provisions.

Curbing juvenile tobacco use is a substantial government interest that is directly advanced by the Act’s provisions.

The act’s ban on the use of color and imagery in most tobacco advertising was vastly overbroad, and thus violated the First Amendment.

However, the Act’s compelled commercial-speech disclosure, which mandated graphical and textual warnings on cigarettes and smokeless-tobacco products, is not unconstitutional. Such disclosures are reasonably related to government’s interest in preventing consumer deception. Disc. Tobacco City & Lottery, Inc. v. United States, 674 F.3d 509, 2012 WL 899073 (6th Cir. 2012).

The Supreme Court Denies Certiorari

On April 22, 2013, the Supreme Court declined to hear the tobacco companies’ appeal, thus implicitly upholding the Sixth Circuit’s decision.

Telephone Consumer Protection Act Decisions

1. In Friedman v. Torchmark Corp., 2013 WL 1629084 (S.D. Cal. Apr. 16, 2013), the court dismissed a class action-lawsuit because a prerecorded telephone call inviting the plaintiff to view a free recruiting webinar was construed as an offer of employment, not as an unsolicited advertisement or telephone solicitation.

2. In Hurst v. Mauger, 2013 WL 1686842 (N.D.Ill. Apr. 16, 2013), the court granted summary judgment to a payment processer because it was not legally responsible for a text message sent by one of its clients (even though the payment processor earned a commission on the advertised transaction). The defendant “undisputedly received some benefit from the sale” but according to the court, such a benefit did not rise to the level that the text messages could be said to have been sent “on behalf of or for the benefit of” that defendant.

3. In Emanuel v. The Los Angeles Lakers, Inc., CV 12-9936 (C.D. Cal. Apr. 18, 2013), a class-action lawsuit against the Los Angeles Lakers basketball team over a single unsolicited text message was dismissed. Incredibly, the text message in question was a thank you text sent by the Lakers in response to the plaintiff, who sent in a text message of his own hoping to have it displayed on the scoreboard during the game.

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Telephone Consumer Protection Act Decisions

4. In Bank v. Independence Energy Group, LLC, 12-cv-1369 (E.D.N.Y. May 1, 2013), the court had previously dismissed a TCPA class action for lack of federal jurisdiction, a ruling which seemed inconsistent with Mims v. Arrow Financial Svcs, LLC, 132 S.Ct. 740 (2012) where the United States Supreme Court held that claims made under the TCPA were federal question claims that support district court jurisdiction. On May 1st, the judge denied a motion for reconsideration on the basis that New York law does not permit TCPA class actions. An appeal has already been filed with the Second Circuit.

5. In Rei Stern v. DoCircle, Inc., 12-cv-2005 AG (C.D. Cal. Apr. 15, 2013), text messages were sent to a plaintiff who alleged he never signed up to receive them. The texts did not solicit any purchases, but rather simply confirmed an opt in request. The mere allegation that the plaintiff never provided defendants with his cell phone number was sufficient to defeat a motion to dismiss

6. A new TCPA filing worth watching is Dominguez v. Yahoo!, Inc., 13-cv-01887 (E.D.Pa. Apr. 10, 2013),The plaintiff’s new cell phone number received 4,700 unwanted text messages from Yahoo! because the phone’s prior owner had signed up for them. Plaintiff made multiple complaints to Yahoo! and the FCC but Yahoo! refused to stop the texts. Yahoo!’s customer service supervisor allegedly said “sue me”, and the plaintiff did just that.

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NAD Decision Update

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NAD Decisions

1. In Interhealth Nutraceuticals, Inc. (Case #5569), a challenge against the manufacturer of an ingredient used in dietary supplements, NAD ruled that the advertiser/ manufacturer lacked adequate substantiation for many of its claims. There were two significant aspects to NAD’s decision which go beyond the particular facts of the challenge. First, NAD held that the phrase “clinically studied” was for all intents and purposes identical to a “clinically proven” claim and therefore required the same level of substantiation. Second, because the claims at issue were made to the retail sellers of the finished supplements who then included the unsupported claims in ads directed towards the public, NAD found the ingredient manufacturer had a duty to prevent retailers from disseminating the claims that were now recommended for discontinuation by NAD. Failure to do so would subject the ingredient manufacturer to NAD compliance proceedings.

2. In USP Labs, LLP (Case #5571), NAD rejected a randomized, controlled, double-blind pilot study as substantiation for product claims because the sample size of the study was too small. Despite “encouraging results” and the clinical nature of the study, NAD found the ten-subject pilot study to be too preliminary in nature to establish the claims.

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NAD Decisions

3. In Bausch & Lomb, Inc. (Case #5548R), NAD recommended a contact lens solution maker discontinue certain claims contained in an advertorial that was directed towards eye-care practitioners. Although eye-care practitioners are more sophisticated than general consumers, ads directed towards them must still be truthful and accurate.

4. In Matrixx Initiatives, Inc. (Case #5567), NAD asked homeopathic cold remedy manufacturer to discontinue “clinically proven” claims with respect to many, but not all products advertised. The advertisements failed to specify which products were “clinically proven” and therefore the use of that term was overbroad.

5. In American Society for the Prevention of Cruelty To Animals (Case #5564), NAD determined that the ASPCA had a reasonable basis to support its advertising campaigns but it asked that the ASPCA modify its website to explain it had no direct local affiliations with local SPCAs or humane associations. This is significant because NAD found it had jurisdiction over charitable advertising. The challenger has stated it intends to appeal to the NARB.

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NAD Decisions

6. In Morton Salt, Inc. (Case #5573), NAD decided that a study backing claims for a water softening product was insufficient to support the advertiser’s unqualified comparative superiority claim. Disclaimers are not adequate to save performance claims when they contradict the main message. Also, a disclaimer that requires a consumer to lift and turn over a 25-50 pound bag in order to be read is per se inadequately located.

7. In Energizer Personal Care, LLC (Case #5574), NAD reiterated that an advertiser is obligated to support all reasonable interpretations contained in its advertising including messages it may not have intended to convey. Here, visuals of explosions of water in razor ads conveyed, in NAD’s opinion, a claim that the shaving gel would continue moisturizing skin after shaving was complete. There was no support for such a claim Also, advertisers making “up to” claims must demonstrate that a substantial percentage of consumers are likely to achieve the maximum results promised under normal circumstances. This standard was met.

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QUESTIONS / CONTACT INFORMATION

OLSHAN FROME WOLOSKY LLP Park Avenue Tower

65 East 55th Street

New York, New York 10022

Phone: 212-451-2300

Fax: 212-451-2222

Andrew B. Lustigman: alustigman@olshanlaw.com

Adam Z. Solomon: asolomon@olshanlaw.com

Safia A. Anand: sanand@olshanlaw.com

Scott A. Shaffer: sshaffer@olshanlaw.com

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