Articles
- PayDay Loan Company Challenges Constitutionality of CFPB
- DirecTV Successful in $4 Billion Advertising Suit
- FTC Requests Comment on Additional Authority for Security & Data Privacy
- Goop to Pay Out $145,000 to Settle False Advertising Claims
- Bargained-For Consent a Key Issue in Recent TCPA Defense
PayDay Loan Company Challenges Constitutionality of CFPB
An action initiated by the Consumer Financial Protection Bureau (CFPB) against a pay-day lender has resulted in the company’s challenging the constitutionality of the bureau before the Fifth Circuit. In May 2016 the CFPB alleged that Mississippi-based All American Check Cashing, Inc. and others had engaged in tactics designed to hide check cashing fees from consumers and to block consumers from backing out of transactions that they had already initiated. The CFPB’s complaint further claimed that the company made misleading statements about its payday loan product benefits and consequently denied customers refunds when overpayments were made on balances due.
After a failed attempt to defeat the action on the pleadings before the Southern District of Mississippi in March 2018, All American challenged the CFPB’s statutory authority before the Fifth Circuit, arguing that the CFPB was unconstitutionally structured because, among other things, it was led by a single director whom the U.S. President could not fire at will, violating the principle of separation of powers. As a result, All American contended, the CFPB should be precluded from pursuing injunctive relief and from seeking penalties and redress on behalf of affected consumers.
If successful, the challenge will result in a split in the circuits that would put the issue of the agency’s constitutionality before the Supreme Court. Now that the CFPB has filed its response, the appellants have until October 1 to file their reply brief. The appellants’ current petition – requesting that the Fifth Circuit hear an interlocutory appeal as an initial matter en banc – is still pending.
Key Takeaways
This case provides additional incentive to consider jurisdictional and regulatory/constitutional authority when considering defenses to false advertising claims raised by a government agency. A thorough review of the complaint and questioning the legal authority of that agency remains a viable and, when appropriate, advisable defense strategy for named defendants. Given the controversial history of the CFPB and the current administration’s frustration with its broad authority, the outcome of this decision could have significant implications for its future.
DirecTV Successful in $4 Billion Advertising Suit
DirecTV has succeeded on several counts underlying a $4 billion Federal Trade Commission lawsuit in which the satellite television giant was accused of misleading customers in connection with its subscription advertising and contracts. The judge determined that the agency did not have sufficient proof to show that advertisements for DirecTV misled or deceived consumers regarding the price of the service.
The FTC launched its lawsuit against DirecTV in March 2015 after years of unsuccessful settlement attempts, accusing the company of disseminating misleading marketing materials in which unwitting consumers had to agree to early cancellation fees as high as $480 and price hikes up to $45 per month. The FTC suit sought injunctive relief as well refunds for affected consumers. However, the court’s ruling last week effectively gutted these claims.
Following a bench trial, Judge Haywood Gilliam, Jr. of the Northern District of California ruled that the proof of deception offered by the FTC in seeking statutory penalties and consumer redress for 33 million customers was insufficient to support its case in chief. In particular, Judge Gilliam noted that the FTC did not prove that DirecTV’s online banner ads, TV commercials, direct mailings, and newspaper ads violated relevant laws prohibiting false and deceptive advertising.
Key to the FTC’s complaint were ads for a 12-month programming package for an initial “teaser” discount that included an allegedly inadequately disclosed rate increase for subsequent years as well as a two‑year minimum contract requirement. The FTC noted that in the second year, DirecTV prices increased by as much as $45 per month and cancellation fees of $480 were applied when a customer attempted to cancel prior to the end of the two-year period.
The FTC alleged that DirecTV misled consumers by failing to clearly and conspicuously disclose the material terms of the offer – a violation of Section 5 of the Federal Trade Commission Act and the federal Restore Online Shoppers Confidence Act of 2010. The FTC claimed that the terms were hidden in fine print or were too dense to read, effectively misleading the reasonable consumer regarding the terms of the offer. In sum, the FTC claimed the overall “net impression” of these disclosures was deficient and thus deceptive and misleading.
The court struggled with determining what net impression was created by more than 40,000 pages of challenged advertisements and concluded the burden of proof for proving deception had not been met.
As background, the court noted, Section 5 of the FTC Act prohibits deceptive or unfair acts or practices that affect commerce. A practice is “deceptive” if a material representation is likely to mislead reasonable consumers. If key information is omitted from an advertisement, an otherwise truthful advertisement could still be deceptive. The burden of proof of a violation of the FTC Act may be met by showing that a challenged representation is likely to mislead based on the net impression the advertisement creates. Although this was the line of argument pursued by the FTC in the DirecTV case, the court found that the sample advertisements submitted by the agency were not deceptive or misleading. In particular, the court noted that important disclosures were presented in boldface in the center of the advertising page and DirecTV’s use of an asterisk after a presentation of the introductory offer price directed consumers to an additional section of the advertisement with additional details about the rates incurred after the expiration of the promotional period.
Key Takeaways
This decision is a significant blow for the FTC in that its proffering of thousands of pages of advertisements to support its “net impression” claims fell flat with the court, and its experts’ testimony as to how consumers view ads was criticized and discredited. This long-running case is an important win for DirecTV as well as other sellers of auto-renewing products and services. While disclosing the material terms of any offer clearly and conspicuously remains the law of the land and reflects best practices for any company, the FTC’s ability to successfully challenge continuity and auto-renewal offers in the future will be impacted by Judge Gilliam’s decision here.
But DirecTV is not out of the woods yet. Notably, the court did not approve DirecTV’s motion for judgment about statements made on DirecTV’s website. The disclosures about the contract period and rates were only provided to online consumers who hovered their mouse over a different section of the website. The court deferred judgment over whether or not the website’s net impression was deceptive.
FTC Requests Comment on Additional Authority for Security & Data Privacy
The Federal Trade Commission recently announced that it is accepting comments on its request to Congress for additional authority for regulating corporate privacy and data security issues. Unlike other federal agencies that have express Congressional authority to establish and enforce data security standards, such as the Department of Health and Human Services under the Health Insurance Portability and Accountability Act, the FTC has no such authority and is seeking to expand its role in this area, particularly following a rebuff from a federal appeals court on its jurisdiction to bring such cases under its general consumer protection mandate.
This story starts in 2013 when the FTC filed suit against now‑defunct medical testing firm LabMD following a highly publicized data breach that impacted nearly 10,000 consumers. Using its general unfairness authority under Section 5(a) of the FTC Act, the agency alleged that LabMD failed to develop and implement appropriate security protocols on the computer networks it managed. Rather than LabMD agreeing to implement a stringent information security program, the matter was brought before an FTC Administrative Law Judge, and during its pendency, the agency issued a cease and desist order directing LabMD to create and implement a variety of data protective measures.
LabMD challenged the order by arguing that the agency lacked authority to regulate data security practices in the absence of direct authorization from Congress. The case went on for several years until this past June when the 11th Circuit agreed with LabMD and vacated the order.
Despite this decision and the obstacles experienced by the FTC in relation to it, the agency is still in pursuit of official authority in this arena.
Joseph Simons, the new FTC Chairman, has already raised this topic with legislators, but the official process has now moved to the public input stage. During a July session of Congressional testimony, Simons explained to legislators that the FTC requires more authority because Section 5 does not provide for an appropriate deterrent capability in data security cases, such as civil penalties. As such, the FTC has limited opportunity to prevent data security issues from emerging or to hold companies accountable after the fact.
In particular, the FTC wants formal authority to assign civil penalties for data security and privacy cases after a breach has occurred, enhanced authority over common carriers and non-profits (industry categories over which it currently does not have regulatory authority) and ability to implement rules through the Administrative Procedure Act (APA). Currently, FTC rules are issued pursuant to the Magnuson-Moss Warranty Act.
Under the Administrative Procedure Act (APA), according to Simons, the FTC does not have appropriate rule making authority as it relates to data security and privacy issues of a general nature.
Simons noted that under his leadership, data security would be a key issue, stating that “The FTC will use every tool in its arsenal to address consumer harm.” To date, more than 50 general privacy cases and 60 cases alleging lack of appropriate data security systems have been brought by the agency.
The Federal Register notice from the FTC requested input from economists, IT professionals, consumers, business representatives, academics and attorneys regarding this proposed extension of authority. The notice seeks comments regarding the willingness of affected parties to work with the Commission regarding post investigation and enforcement issues as well as whether or not the perception of the agency’s investigative processes could be improved. Following receipt of this initial feedback the agency will hold open meetings during which it will solicit additional comments.
Key Takeaways
With the fight for enhanced and formal authority underway, businesses should be aware of evolving rules, interpretations and standards related to data privacy, especially if the agency’s new requested roles are approved.
Goop to Pay Out $145,000 to Settle False Advertising Claims
The lifestyle brand promoted by actress Gwyneth Paltrow known as Goop, Inc. recently settled a lawsuit with numerous district attorneys in California regarding the promotion of products that were allegedly falsely advertised. In addition to injunctive relief, the settlement requires Goop to pay $145,000 to cover these agencies’ investigative costs.
The complaint accused the company of marketing certain products as effective for the treatment of disorders and diseases without possessing sufficient competent and reliable scientific evidence to support the claims.
Officials in California initiated the false advertising lawsuit against Goop following an investigation that revealed unfounded health claims associated with three different products on the company’s website, including Jade and Quartz Eggs, which allegedly boosted women’s health and sexual energy, and a brand of essential oils promoted by the company, which allegedly fought depression. The settlement also noted that the company made unsubstantiated claims that its perfume worked as an antibiotic and could improve memory and that walking barefoot would cure insomnia.
Truth in Advertising (TINA), a consumer advocacy group, initially referred these claims to the district attorneys last year. Its executive director, Bonnie Patten, noted that the popularity of the health and wellness category has contributed to increasingly more requests by her group for regulatory investigations regarding deceptive and misleading marketing claims. Even more alarming, she shared that the TINA website has collected more than 2,000 different examples of businesses in the wellness space making claims related to disease treatment.
The Goop products that came under fire are still available for sale on the company’s website but now have new descriptions.
Key Takeaways
Despite the relatively small monetary element of the settlement, this case underscores that regulators are very much still monitoring compliance with advertising rules and guidelines in particular with respect to products and companies making health-related claims. A growing number of lawsuits have also been associated with unconfirmed health benefits, including a false advertising lawsuit against Jessica Alba’s The Honest Company that was settled last summer for $1.5 million.
Companies involved in selling products with purported health-related benefits should be careful when making claims that swerve into uncharted health-related territory, and of course be sure to possess competent and reliable scientific evidence for such claims.
Bargained-For Consent a Key Issue in Recent TCPA Defenses
Whether or not a consumer has given prior express consent and has the ability to revoke that consent is of critical importance for companies defending Telephone Consumer Protection Act (TCPA) cases.
A key threshold question in many TCPA cases is whether or not a party who has been contacted via mobile phone has given express consent to receive text messages or calls transmitted by a party using an automatic telephone dialing system. Another issue that increasingly has received attention from potential plaintiffs is whether previously granted consent has been revoked. A recent line of cases have held that a consent provision included in an “arms-length and bargained-for agreement” precludes a call recipient from unilaterally rescinding previously granted consent.
In a recent Alabama district court case, a consumer claimed that she had been contacted 184 times on her mobile phone through the use of an automated telephone dialing system (ATDS) in violation of the TCPA. The TCPA specifically prohibits calls made to mobile devices that use a prerecorded voice, artificial voice, or made through an ATDS, without the consent of the called party.
In this case, when applying for a line of credit, plaintiff provided her cell phone number to the creditor and signed a contract authorizing the creditor and any associated debt collection agency to contact her using a prerecorded messaging system or a predictive/automated dialing system.
Citing Osorio v. State Farm Bank (11th Cir. 2014), the court held that decisions regarding consent and the ability to revoke consent must be considered under the “common law concept of consent.” The court noted that consent that is freely given may be unilaterally revoked, “but only in the absence of any contractual restriction to the contrary.”
A leading Second Circuit case and others following it have found where consent is given in a bargained‑for agreement requiring modifications to that agreement be mutually agreed to in writing by the parties, unilateral revocation is not viable. Reyes v. Lincoln Automotive Financial Services involved a car lease application that included a provision that allowed the dealership and its collection agencies to contact the lessee through the use of artificial or prerecorded voice messages, emails, use of automatic telephone dialing systems, text messages and manual calling methods.
In the Reyes, case, the plaintiff fell behind on regularly scheduled payments and the defendant began collection attempts by calling the plaintiff’s mobile phone. Despite the plaintiff’s attempt to revoke his consent by stating “do not call me on this phone anymore,” the calls continued and the plaintiff filed a TCPA action. The Second Circuit granted defendant’s summary judgment motion, ruling that settled contract law does not allow a party to a legally bargained-for agreement to unilaterally modify that agreement.
Key Takeaways
Despite the respect afforded to the Second Circuit and the fact that various courts throughout the country have followed the Reyes ruling, many courts have reached a contrary conclusion, siding with consumers who have sought relief from persistent collection calls. Until the FCC addresses this issue in a rulemaking or there is a split among circuits forcing the Supreme Court to rule on this issue, companies that rely on a consent provision in a consumer agreement to continue placing calls to mobile phones run the risk of being sued under the TCPA. While adding consent provisions in consumer agreements like the ones described above may provide protection in the face of a challenge, they are by no means a silver bullet in dismissing a TCPA claim.