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Stay ADvised: What's New This Week, September 2

By Marc Roth, Nancy J. Felsten, and Robert J. Driscoll
09.04.19
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FTC Workshop on Made in USA Marketing Claims Planned for September

On the heels of the Federal Trade Commission’s (FTC) recent stepped-up enforcement of improper Made in the USA claims, the agency announced that will hold a public half-day workshop evaluating the Made in USA enforcement program and to consider whether - and how - enforcement measures for country-of-origin claims should be strengthened.

Currently no FTC-issued regulation specifically addresses country-of-origin claims. The FTC regulates such claims under its general Section 5 authority against deceptive acts and practices. The last time the agency considered how to enforce these claims was in 1997, when the agency issued its Enforcement Policy Statement on U.S. Origin Claims (Policy Statement), its last concrete guidance on the application of Section 5 to Made in the USA claims in advertising and labeling.

The Policy Statement sets forth the country-of-origin standard: companies claiming “all or virtually all” of their products are made in the USA must have a reasonable basis for asserting that claim when they make it. The Policy Statement also provides guidance for marketers on how to make “appropriately qualified” claims.

Two decades later, this area of the guidance remains a hot topic. Beside recent enforcement actions as covered here, and other FTC country-of-origin actions such as the FTC’s April 2019 settlement with a marketer of Chinese-made water filtration systems claiming they were “designed and made in the USA,” FTC Commissioner Rohit Chopra recently released a statement urging civil penalties for Made in USA fraud:

“If enforcers are unable to defend our national brand, this puts small firms that rely on the Made in USA label at a disadvantage in online marketplaces flooded with counterfeits. Twenty-five years ago, Congress gave the FTC a strong tool to defend the Made in USA brand, but the agency has never deployed it. It is time to do so.”

The FTC now wants to know whether improvements to the Made in the USA enforcement program are warranted. The upcoming September 26, 2019, workshop in Washington, D.C., will consider measures to strengthen the program and review consumer perception of the term “Made in the USA” and what that means for enforcement.

According to the FTC, the workshop will begin by exploring consumer perception of U.S. origin claims. Panels at the event will discuss policy and debate “appropriate enforcement measures and remedies.” The FTC also plans to hear experts with different perspectives on the issue—from large and small manufacturing industry reps to consumer groups.

Ahead of the workshop, the FTC is soliciting public comments on consumer perception and interpretation of Made in USA claims. The questions are primarily concerned with consumer perception and interpretation of Made in USA marketing claims, as well as the financial effect of such claims on companies who use them.

The FTC further asked for public comment on the costs and benefits of a bright-line versus a flexible standard for enforcing country-of-origin claim cases. Additionally, the FTC seeks feedback on deceptive U.S. origin claims by foreign companies, given current jurisdictional and regulatory limits.

Key Takeaways

All signs point to tightening compliance standards for use of the “Made in USA” moniker and enforcing country of origin claims. At a May hearing, the FTC informed Congress it would hold the upcoming workshop specifically to strengthen remedies against violators of this standard going forward.

FTC Settlement Bans Cryptocurrency Pyramid Scheme

It should surprise no one that bad actors would inevitably find a way to profit from the rising crypto-tide. Case in point: the Federal Trade Commission (FTC) recently settled a complaint against a group of individuals accused of running a chain referral scheme (akin to a pyramid scheme) that lured unwitting participants into paying thousands of dollars with the promise of earning back much more.

Defendants Thomas Dluca, Louis Gatto, Scott Chandler, and Eric Pinkston allegedly ran a multi-level marketing scheme under the names Bitcoin Funding Team and My7Network. These chain referral schemes advertised themselves on social media, YouTube, and in conference calls, promising participants large earnings in return for a payment in cryptocurrency to enroll in the scheme.

In every other way, the defendants’ ruse was no different than your run-of-the mill pyramid scheme. As with those scams, the operation’s success relied on the recruitment of new members. Participants had to make an initial bitcoin payment to an earlier member plus pay a fee to the “Funding Team” in order to get in on the “deal,” opening up members’ eligibility to recruit other members and receive payments from them in turn.

Defendants represented that participants could win big in exchange for the initial cryptocurrency payment, promising returns as much as $80,000 based on an investment of $100. A winning proposition, right? Wrong, it turns out.

In reality, few, if any, profited, and the majority of participants actually failed to recoup even their initial investments, according to FTC allegations. A fourth defendant, Scott Chandler, promoted another crypto scheme promising a fixed rate of return, which also failed to deliver, according to the FTC.

All that changed in February 2018, when the FTC filed a complaint alleging violations of the FTC Act based on defendants’ misrepresentations in the marketing and promotion of the scheme. In March 2018, a court granted the FTC a temporary restraining order freezing defendants’ assets while the case proceeded.

The current proposed settlements, if approved, resolve the matters against all the individual defendants by imposing steep fines and barring the group from operating or promoting any multi-level marketing or chain referral program. The settlements further prohibit defendants from misrepresenting potential income that participants in any investment opportunity may receive.

“This case shows that scammers always find new ways to market old schemes, which is why the FTC will remain vigilant regardless of the platform – or currency used,” the FTC’s Bureau of Consumer Protection said in a statement. “The schemes the defendants promoted were designed to enrich those at the top at the expense of everyone else.”

Key Takeaways

Whatever one may say about these defendants, they were certainly not lacking in creativity. Though pyramid schemes may be tried and true fraud methods, defendants applied a new currency to an old trick, and the FTC took note. The case is a reminder that a pyramid scheme claiming high returns for a buy-in – even if the payment is in the ether – is still an illegal pyramid scheme.

Seventh Circuit Tosses FTC Restitution Award Against Credit Monitoring Scheme

The Seventh Circuit recently reversed a $5.2 million-dollar restitution award granted to the Federal Trade Commission (FTC) against a credit monitoring service accused of deceiving consumers. In a decision overturning well-settled precedent in favor of the FTC obtaining financial remedies in certain fraud cases, the appeals court held the statute under which the agency sued does not authorize the judgment, but affirmed the decision in all other respects.

The lower court previously ruled in favor of the FTC over charges that Credit Bureau Center LLC and its owner Michael Brown violated of Section 13(b) of the FTC Act. The complaint alleged Brown used a negative option feature to attract customers, offering a “free credit report and score” while tacking on a $29.94 monthly membership subscription to unwitting consumers.

Upending the decision, the appeals court held that the statute only authorizes relief for injunctions and restraining orders, not restitution awards. The FTC cannot pursue both injunctive and remedial relief under the same statute, the appeals court explained.

The decision is significant in that it overturns the 1989 landmark decision in FTC v. Amy Travel, which had been the longstanding precedent, and now creates a split with eight other jurisdictions, including the Fifth Circuit. Amy Travel had stood for the proposition that restitution may be an ancillary form of relief available to the FTC to carry out its authority to grant permanent injunctions under Section 13(b).

The panel reasoned that Supreme Court jurisprudence since Amy Travel was decided had significantly limited implied remedies. Given the Supreme Court’s stance, the earlier decisions “cannot be used as Amy Travel saw them—a license to categorically recognize all ancillary forms of equitable relief without a close analysis of statutory text and structure,” the panel wrote.

Instead, the appeals court noted that “Since Amy Travel, the Supreme Court has clarified that courts must consider whether an implied equitable remedy is compatible with a statute’s express remedial scheme… And it has specifically instructed us not to assume that a statute with ‘elaborate enforcement provisions’ implicitly authorizes other remedies.”

The appeals court affirmed the lower court’s decision in all other aspects, including liability findings based on how defendants posted Craigslist ads tricking consumers into signing up for the credit monitoring service. The complaint further alleged the company, formerly doing business as MyScore LLC, sent emails offering tours to prospective renters if they first obtained a credit report using defendants’ websites.

Key Takeaways

The Seventh Circuit’s decision will likely have significant ramifications for the FTC when it seeks legal action to obtain restitution awards and for companies faced with the threat of such an action. In a strongly worded three-judge dissent, U.S. Circuit Judge Diane Wood wrote that the court was “tying the hands” of a government agency and criticizing the court for overturning widely held precedent without debate and discussion by the full court.

Reacting to the decision, the FTC said it limits its “ability to recover money for consumers [which] is an essential and long-established tool in our enforcement arsenal.” For its part, counsel for defendants categorized the ruling as “not only an important decision that limits the FTC’s power to seize assets, it’s also highly significant to all of the companies that use negative option advertising on the internet.”

CFPB and Arkansas AG Settle with High-Interest Credit Broker Targeting Veterans

The Consumer Financial Protection Bureau (CFPB) and Arkansas Attorney General Leslie Rutledge recently entered into a proposed settlement with a company accused of bilking consumers, mostly disabled veterans, out of large portions of their pensions.

The CFPB and Arkansas AG’s joint complaint alleged that while acting as brokers of high-interest credit to veterans and other consumers, Voyager Financial Group, BAIC, SoBell, and individual defendant owner and operator Andrew Gamber violated the Consumer Financial Protection Act of 2010 (CFPA) and the Arkansas Deceptive Trade Practices Act.

In exchange for an upfront one-time lump sum payment, defendants allegedly purchased a portion of the consumers’ pension and disability funds, sometimes for periods up to a decade. To receive the payment, defendants required that veterans assign their VA benefits directly to the companies. According to the CFPB and Attorney General Rutledge, these contracts, in addition to being deceptively marketed, were void because Federal law prohibits agreements granting a right in a veteran pension payment.

The complaint centered on a litany of misrepresentations defendants made to consumers about the services offered, including:

  • The credit contracts brokered by defendant were enforceable;
  • The product was not a high-interest credit offer;
  • Consumers would receive their funds shortly; and
  • There was an applicable interest rate assessed in exchange for provided credit. 

According to the complaint, when some consumers complained about the transactions, defendants allegedly lied and responded they were legal.

The proposed deal bans Gamber and his companies from the credit industry, meaning the defendants cannot broker, offer, or arrange agreements between pension recipients and t\hird parties. The settlement also imposes a judgment of $2.7 million for consumers affected by the fraud, $75,000 to the Arkansas Attorney General’s Consumer Education and Enforcement Fund in lieu of a civil money penalty, and a nominal payment of one dollar to the CFPB.

Unable to pay the full consumer redress judgment, Gamber was ordered to pay $200,000 in restitution, as well as the CFPB and Arkansas AG payments. Defendants must comply with certain monitoring requirements. The proposed settlement remains pending final approval of the court.

Key Takeaways

With this action, the CFPB continues its pursuit of companies seeking to take advantage of veterans, a stated goal of the agency, which also offers training programs for veterans to avoid scams. We expect to see more actions by the CFPB alone and in conjunction with attorneys general pursuing companies that seek to take advantage of veterans with high-interest credit offers.

Attorneys General Join Telcoms on Anti-Robocall Partnership

A coalition of U.S. Attorneys General from 50 states and the District of Columbia recently formed a partnership with 12 major telecommunication companies with the aim of tackling the never-ending barrage of robocalls that continues to assail American consumers and preoccupy legislators, regulators, and now the telecommunications industry.

The coalition agreed to eight principles to facilitate the investigation and prosecution of illegal robocalls. According to the principles, the telecoms will implement technological developments which, alongside the law enforcement work of AGs, are meant to assist states in prosecuting illegal robocalls. The agreement is an outcome of 2018 Robocall Technologies Working Group, a coalition of Attorneys General who formed a bipartisan working group to end illegal robocalls.

Under the agreement, the telecoms will offer free call blocking and labeling, analyze and monitor network traffic, and cooperate in “traceback” investigations that law enforcement use to determine the origin of calls. The principles also include the implementation of “stir/shaken” call authentication, a technical framework of caller ID authentication that helps combat caller ID spoofing that has enabled robocall operators to evade detection by consumers.

The AG partnership knows no aisle – it is a wholly bi-partisan initiative. New York Attorney General Letitia James stated that the “bad actors running these deceptive operations will soon have one call left to make: to their lawyers. Thanks to the phone companies’ prevention efforts and the bipartisan Attorneys’ General enforcement efforts, the days of preying upon, misleading, and taking advantage of individuals throughout our state and this country will soon be numbered.”

Texas Attorney General Ken Paxton agreed, stating that “Texans’ private phones are being taken over by constant calls, invading their privacy and all too often defrauding them of their hard-earned money. My office has a history of aggressively pursuing illegal telemarketers through litigation. And now we look forward to working with voice service providers to squash scammers’ access to Texans. We won’t stop until the robocalls do.”

Some states took the announcement as an opportunity to encourage the Federal Communication Commission (FCC) to step up enforcement. California Attorney General Xavier Becerra stated that his office has “repeatedly” urged the FCC to take action against robocalls that is “consistent with today’s agreement between state attorneys general and telecommunications carriers.”

Key Takeaways

This announcement follows on the heels of the Senate proposed Stopping Bad Robocalls Act, as we recently covered here. That act targets the exemption for telecom companies from FTC oversight, and its proposed expansion of FTC jurisdiction over robocalling may have contributed to this recent development. Whether or not that is the case, “the principles offer a comprehensive set of best practices that recognizes that no single action or technology is sufficient to curb the scourge of illegal and unwanted robocalls,” said Henning Schulzrinne, Professor of Computer Science and Electrical Engineering at Columbia University.

If this partnership works well, the principles under the partnership may provide AGs with important and effective tools from telecom companies to fight illegal robocalls. The principles, however, do not impose any liability on its signatories for failure to adhere to them. In addition, do not expect rapid results as the agreement notes that the “principles may take time for the voice service providers to plan for and implement.”

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