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stayADvised: What's New This Week, August 12

By Marc Roth, Nancy J. Felsten, and Robert J. Driscoll
08.15.19
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FTC and Ohio Attorney General Obtain Injunction Shuttering Consumer Debt Scam

In response to joint complaints filed by the Federal Trade Commission (FTC) and the Ohio Attorney General, a federal judge issued a temporary restraining order enjoining the operations of various telemarketing and payment processing companies accused of defrauding consumers struggling with credit card debt out of millions of dollars.

Two separate complaints filed in El Paso, Texas federal court in July alleged that a group of payment processors and telemarketing companies orchestrated a deceptive scheme that used illegal tactics to sell sham credit card interest reduction services, then charged for those services with illegal methods. The complaints allege violations of the FTC Act, the Telemarketing and Consumer Fraud and Abuse Prevention Act (Telemarketing Act) (and its implementing Telemarketing Sales Rule (TSR)) and Ohio fraudulent consumer sales and telemarketing laws.

The complaint filed against Educare Centre Services, Tripletel and others alleges that the defendant telemarketing companies bilked consumers out of more than $11.5 million dollars by selling sham credit card interest rate reduction services to consumer debtors in distress. According to the complaint, the companies promised they would reduce consumers’ credit card interest rates, but the relief never materialized. When dissatisfied consumers tried to collect on the companies’ promise of a “100 percent money back guarantee,” defendants routinely failed to deliver and instead threatened them with litigation.

To process payments for their supposed credit card interest rate reduction services, Educare and Tripletel used third-party payment processors Madera Merchant Services and B&P Enterprises. In turn, these companies used remotely created payment orders (RCPOs), essentially a remotely-created check, to withdraw funds from consumers’ checking accounts. According to the complaint against Madera and B&P, Madera’s and B&P’s use of RCPOs violated the TSR, which prohibits telemarketing companies from using RCPOs to obtain payment for goods and services. RCPO use by or on behalf of telemarketing companies is outlawed because it can be used to obtain unauthorized access to consumer bank accounts. According to the FTC, Madera and B&P used RCPOs to withdraw more than $13 million from accounts of telemarketing victims.

"This case is another reminder for consumers to stay away from any company promising to reduce debt for an advance fee," said Andrew Smith, Director of the FTC’s Bureau of Consumer Protection. "The FTC will continue to pursue such schemes aggressively, and hold accountable payment processors that are complicit in the illegal conduct."

The temporary restraining orders have halted the defendants’ operations and frozen their assets while the cases proceed.

Key Takeaways

Neither the FTC nor the courts will look favorably on schemes like this one which, if the allegations are true, are clearly designed to take advantage of vulnerable consumer debtors. What’s more, payment processors should be careful with whom they do business because, as this case illustrates, the FTC will actively pursue action against payment processors using RCPOs to process payments in connection with telemarketing sales. Madera, the payment processor in this case, allegedly had reason to be concerned even before the complaints were filed: According to the Ohio Attorney General, many of the more than 60 bank accounts the company apparently opened in at least 25 different financial institutions were closed within six months due to high return rates.

Proposed Senate Robocall Measure Targets FTC Act Exemption for Telecom Cos.

The fight against robocalls continues, and this time the target is the telecom industry. Three U.S. senators introduced a bill that would end the common carrier exemption in the Federal Trade Commission Act (FTC Act) for telecom companies and, the senators say, strengthen protections against illegal robocalls. At the same time, however, the removal of the barrier to FTC oversight over telecoms would affect not just robocalling, but potentially any trade practices involving telecoms.

With the ink not yet dry on the Stopping Bad Robocalls Act, a bipartisan bill targeting illegal robocalls that was passed by the House on July 24, Senator and presidential candidate Amy Klobuchar and Senators Dianne Feinstein and Richard Blumenthal have jointly introduced another bill they say will combat the "dramatic" increase in robocalls.

While the Stopping Bad Robocalls Act gives the FCC additional enforcement tools and provides consumer protections and tougher penalties for scammers, the newly proposed Senate bill – the Protection from Robocalling Act -- has a narrower scope. If passed, it would end the existing exemption applicable to common carriers with respect to telecoms.

How did this exemption come about? Provisions in the FTC Act exempting telecom companies from the agency’s jurisdiction came into because other federal agencies already extensive regulated common carriers. Today, as these regulations have been rolled back, the senators say that the exemption for telecom companies should be eliminated to empower the FTC to combat illegal robocalling on the telecoms front.

The Senate already passed a bill more broadly targeting robocalls in May of this year, its version of the House’s Stopping Bad Robocalls Act. The discrepancies between the Senate and House versions will be ironed out in informal negotiations this August, according to reports.

Key Takeaways

While the Stopping Bad Robocalls Act is a broad measure that provides protections against illegal robocalls, the proposed Protection from Robocalling Act targets the current exemption for telecom companies from FTC oversight. There was notable consternation when the FCC briefly changed the regulatory classification of broadband Internet access service to designated it as common carriage, because it removed FTC jurisdiction over the service, including privacy oversight—but in early 2018 the FCC reclassified broadband Internet access service as an information service, and the FTC regained jurisdiction. The Protection from Robocalling Act swings that pendulum even further giving the FTC more jurisdiction – not just over robocalling, but over the trade practices of common carriers generally.

After Weighing Evidence, NAD Recommends Unloading Weighted Blanket Claims

The National Advertising Division (NAD) recommended recently that a weighted blanket manufacturer modify and cease certain marketing claims about its product’s effects on sleep and anxiety.

Weighting Comforts LLC manufactures weighted blankets that, according to the company’s website, "provide comfort for people suffering from sleeplessness and anxiety." NAD, the advertising investigative unit of the Council of Better Business Bureaus, reached out to Weighting Comforts as part of its routine monitoring program. Following a review of the advertiser’s marketing, NAD recommended that the company discontinue claims that the blankets reduce anxiety and modify claims that they help improve sleep.

According to NAD, Weighting Comforts made express and implied marketing claims in ads and testimonials linking its weighted blankets to anxiety reduction and sleep improvement. Among the company’s express claims was the assertion that its "blankets are designed for you if you’re battling symptoms of Anxiety, Insomnia, PTSD, Restless Leg and Depression." It also claimed that weighted blankets “have been proven to increase serotonin and melatonin in your body, which helps you relax, feel calmer, and fall asleep much easier.”

The company advertised testimonials in which customers touted the weighted blankets' ability to help reduce anxiety. In one testimonial, a customer raved: "The security and safety that I felt instantly when I crawled under this blanket has allowed me two whole weeks without nightmares! I can physically feel my body relax as soon as the weight settles in around me."

When NAD reached out to Weighting Comforts with a request for substantiation of these claims, the company told NAD it would stop making certain challenged express claims. But NAD noted that this still left other questionable claims unaddressed. To determine whether these remaining claims were supported, NAD examined the evidence the company provided to substantiate the claims. Specifically, NAD looked at whether the company’s sleep improvement and anxiety reduction claims were "supported by competent and reliable scientific evidence."

In support of the improved sleep claim, Weighting Comforts had relied on a Swedish study that looked at whether weighted blankets could have a positive impact on adults with chronic insomnia. NAD determined that the study, although reliable, did not sufficiently support the claims, and recommended that Weighting Comforts modify its advertisements to better reflect the study’s findings. For example, the weighted blanket ads should state that the blankets may improve sleep quality, rather than that they definitely do so.

NAD took an even less congenial stance towards the anxiety-reduction claims. According to NAD, the study that Weighting Comforts relied on to support its claims that the weighted blankets reduce anxiety is flawed: " [T]here were fatal flaws which rendered the [study] insufficiently reliable to support the challenged anxiety reduction claims. Namely, the study tested a non-representative test population (individuals with low to no anxiety), the subjects were limited to using only one type of weighted blanket, the control group was limited to using no blanket instead of being afforded the choice of a sheet or non-weighted blanket, and the subjects were tested for a 5-minute interval which does not reflect a typical consumer’s sleep experience." Thus, NAD concluded, the company’s claims about the blankets' ability to reduce anxiety are not sufficiently supported by the study, and should be discontinued. NAD said that instead, Weighting Comforts could tout that the blankets provide users with a sense of security.

According to the NAD’s press release on the matter, Weighting Comforts said it would comply with NAD’s recommendations.

Key Takeaways

In analyzing whether the claims were supported, NAD not only examined whether claims were consistent with the studies’ stated conclusions, but looked deeper at whether the claims were "supported by competent and reliable scientific evidence," that is, whether the studies themselves were sound. The lesson for advertisers that wish to sleep well at night is to make sure that evidence presented to NAD to substantiate claims is airtight and scientifically sound.

NAD Recommends Maker of "Crepe Erase" Tone Down Product Performance Claims

It’s not only weighted blankets that trouble NAD. This month the self-regulatory body also recommended that Guthy-Renker discontinue or modify a number of claims it makes about its Crepe Erase Anti-Aging Body Care Treatment System, a skin care system the company markets as an anti-aging product. Disagreeing, the advertiser vowed to appeal.

In marketing Crepe Erase, Guthy-Renker promotes products it says have substantial abilities to reduce "crepey" skin, which, as the name suggests, is skin that, due to aging or other factors, takes on a wrinkled appearance reminiscent of the tasty French treat. NAD made its recommendations following a review it conducted as part of its routine monitoring program.

In its press release announcing the matter, NAD noted that "the advertiser makes strong performance claims, coupled with before and after photographs, which promise consumers noticeable and dramatic improvements in crepey skin. NAD considered whether the evidence in the record supports the challenged claims when the products are used in accordance with their use instructions."

The cumulative effect of NAD’s recommendations centered on toning down and tempering the advertiser’s claims about the products. For starters, NAD recommended that claims touting the products' anti-aging qualities be either discontinued or modified. Studies put forth by the company in support of these claims, although methodologically sound, were "not a good fit" for the challenged claims because they communicated far less expansive benefits than the advertiser claimed and because "the results fall short of complete or near elimination of skin crepiness." Therefore, the claim that "Crepe Erase is the leading anti-aging body care system clinically shown to reverse crepey-looking skin" should be discontinued, as should the claim that it can "prevent accelerated aging."

NAD also recommended that the claim that the products can "transform your dry, crepey winter skin into softer, smoother, younger-looking skin all year round" should be discontinued since the studies were not conducted in winter and nothing in the study was sufficiently reliable to justify claims about the products' impact on winter-affected skin.

The rest of NAD’s recommendations centered on similar concerns about claims that do not properly qualify the evidence provided. NAD instructed that before and after photographs used to show the effects of the products be more representative of the products' actual effects and not simply depict outlier results. Along these lines, it also recommended the company qualify what it said were misleading claims that the creme is the "#1 anti-aging system" and the "#1 solution" and instead convey that the creme is the #1 "selling" creme. Guthy-Renker had also promoted a testimonial in which a plastic surgeon said Crepe Erase is the only product he recommends to reverse signs of aging. NAD recommended this claim be discontinued or modified so it is clear that the doctor’s recommendation is based on his personal experience with patients and not comparisons to other anti-aging products.

Guthy-Renker took issue with many of NAD’s recommendations and has said that it will appeal the decision to the National Advertising Review Board.

Key Takeaways

This matter is another opportunity to see how NAD analyzes supporting information, especially medical studies. Unlike in Weighting Comforts, NAD found the studies provided by Guthy-Renker to be medically sound, but it took issue with the company’s use of these studies to make grand pronouncements about its product. Although it did not say so in so many words, NAD’s analysis really appeared to be a repudiation of advertising tactics that take modest results and exaggerate them as glowing, far superior results in advertisements. Slow, steady and qualified is the way to go when using medical studies to make advertising claims.

Coffee Meets Bagel: Plaintiff Meets Dismissal (of Case) 

An Illinois state judge dismissed a putative class action complaint against Coffee Meets Bagel alleging that the dating app violated the state’s consumer fraud laws when it refused to grant refunds for cancelled subscriptions. The case was dismissed on the grounds that the named plaintiff failed to plead actual damages by not pleading that he wanted a refund from the app.

Coffee Meets Bagel is a popular dating app that has nearly a million users in the Chicago area alone, according to the complaint. Named plaintiff Pandi Rrapo became one of those users in October 2018, when he joined the app and purchased a one-month premium Coffee Meets Bagel subscription. Two days later, however, he apparently had a change of heart on the premium subscription and cancelled it. Shortly thereafter, he sued the company, alleging that by including a no-refund policy in its terms of service it was violating the state’s Dating Referral Services Act (DRSA), which plaintiff alleged makes it illegal for the company to have a no-refund policy. The complaint also alleged violations of Illinois consumer fraud and deceptive practices law, and a common law unjust enrichment claim.

Where the plaintiff faltered, said Judge Anna M. Loftus, was in failing to plead actual injury by not alleging that he attempted to get a refund. Critically, because the DRSA requires actual damages, the plaintiff pled that he was unable to get a refund, but he did not in any way plead that he wanted a refund, said the Judge.

"The problem for plaintiff is that his allegations do not quite connect all the dots," said Judge Anna M. Loftus. "The complaint alleges plaintiff was wrongfully deprived of the right to a refund, but not that he wanted one in the first place ... plaintiff's own motivation is an essential element connecting the allegedly violated right with the actual damages required for his case."

The judge also found fault with plaintiff’s failure to attach the terms of service to the complaint, noting that the "plaintiff’s case hinges on the Terms of Service" since, after all, Coffee Meets Bagel’s liability can only be established if the terms of service contain the offending language showing its no-refund policy. Coffee Meets Bagel had also attempted to dismiss the case based on several jurisdictional clauses, but the court found those arguments unavailing.

Judge Loftus granted plaintiff 21 days to amend the complaint accordingly.

Key Takeaways

This case is a reminder that, where a cause of action requires actual damages, plaintiffs must attempt to obtain the remedy they seek before filing suit in order to prove actual injury. Here, Rrapo ran to the court to file the suit, but he forgot to seek his refund beforehand, based on the facts alleged in the complaint. Even when the violations of law alleged are based on the inclusion or exclusion of certain language in company documents (in this case the terms of service), plaintiffs must still allege actual injury to proceed under the DRSA.

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