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Stay ADvised: What's New This Week, October 28

By Marc Roth, Nancy J. Felsten, and Robert J. Driscoll
10.31.19
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FTC Settlement Resolves Complaint Against Misleading Aloe Supplement Company

The Federal Trade Commission (FTC) approved a settlement barring Nature City, a Boca Raton, Florida, supplement company, from making false claims about the efficacy and curative powers of its product and assessing a multimillion dollar penalty on the company.

Nature City sells aloe-vera based supplements called TrueAloe and AloeCran. According to the FTC, since May 2002 Nature City and its owners, Carl and Beth Pradelli, falsely claimed that the products could allay a range of maladies primarily affecting seniors, including high cholesterol, chronic pain, colitis, acid reflux, diabetes and more, all of which were “clinically tested and confirmed.” In its complaint, the FTC alleged that these claims were false and constituted deceptive marketing in violation of the FTC Act.

One advertisement used historical figures as spokespeople of sorts, claiming Gandhi, Cleopatra and even Christopher Columbus were advocates of the ingredients found in the supplements, according to the complaint. Alongside pictures of these notable figures read the claim: “Pain says GOODBYE when you say ALOE! Modern science is now proving what these historical leaders knew about this legendary plant. . .” In reality, the claims were bogus, not backed up by any reliable scientific evidence, and in violation of the law, said the FTC.

Additionally, the company featured glowing testimonials supposedly from satisfied customers, touting the product’s healing powers. However, according to allegations, these testimonials were not independent opinions but rather reviews paid for by Nature City. Defendants did not disclose this fact, in further violation of the FTC Act, said the agency.

In addition to the monetary judgment, which was reduced to $537,500 due to defendants’ inability to pay, the settlement prohibits the company from making misleading claims about its products’ health benefits. Any future claims must be supported by “competent and reliable scientific evidence to substantiate that the representation is true.”

Further, Nature City must “conspicuously” disclose any “material connection” between itself and any individuals providing testimonials to avoid the impression that glowing reviews are independent when they are in fact incentivized. The company must also notify any customers who purchased the products starting on October 1, 2014, about the contents and requirements of the settlement. Notably, the order does not bar the company from operating, as the FTC has done in the past with companies accused of similar wrongdoing.

Key Takeaways

Another day, another supplement company accused of making exaggerated claims in an effort to sell its products in a competitive marketplace. As Andrew Smith, the director of the FTC’s Bureau of Consumer Protection put it when explaining why the FTC has prioritized pursuing cases against such businesses: “The FTC has shown over and over that it will go after companies that we believe are peddling false health claims about their pills and potions,” he said. “Our settlement with Nature City is the latest example, and we’re especially concerned that the company targeted older adults and tried to steer them away from standard medical treatments.”

Separate FTC Settlements Highlight FTC Enforcement of Deceptive Marketing in E-Commerce

Deceptive marketing tactics are not limited to supplement companies, as we have seen in the past and as two recent FTC matters demonstrate. In these actions, the FTC settled claims against two e-commerce companies accused of engaging in deceptive marketing designed to deceive consumers.

First, the FTC accused Texas-based Sunday Riley of passing off paid reviews as independent opinions (like those in the Nature City matter above), but it took the concept a few steps further by posting reviews deliberately assigned to and composed by employees and management. Sunday Riley sells cosmetics with dreamy names like Luna Sleeping Oil and Blue Moon Tranquility Cleansing Balm at the beauty chain Sephora and on Sephora’s website. According to the FTC complaint against the company, from 2015 to 2017 the company’s managers and CEO undertook a campaign to write and post multiple fabricated five-star reviews of its products on the Sephora site using fake accounts.

The FTC says the company enlisted its employees to post favorable reviews, asking them to create three separate Sephora accounts with different identities and even providing step-by-step instructions on how to draft the reviews and which products to review. CEO Riley communicated a direct link between the fake online activity and increasing sales, telling employees that “If you see a negative review – DISLIKE it,” and noting that “After enough dislikes, it is removed. This directly translates into sales!!” Even when Sephora removed the reviews, which alerted Sunday Riley that the retailer was aware of the ruse, Sunday Riley used a VPN account to hide its identity and re-posted more false reviews.

The second FTC settlement resolves the agency’s first-ever case involving the sale of fake social media followers. The FTC’s complaint averred that Devumi LLC and its principals offered a service that created thousands of fake social media followers for thousands of influential clients. According to the FTC, the company enabled social media users eager to increase their online capital to obtain the “means and instrumentalities to commit deceptive acts or practices,” a violation of the FTC Act.

With over 4,000 sales of YouTube subscribers, and more than 58,000 orders for fake Twitter followers, the now-defunct company used Devumi.com, TwitterBoost.co and other websites to sell these deceptive followers and views. On Twitter, LinkedIn, Pinterest, YouTube and other social platforms, Devumi sold fake followers to boost the social media status of clients looking to buy social media influence, including celebrities, athletes, motivational speakers, law firm partners and others. In turn, the fake followers enabled Devumi’s customers to “deceive potential clients, investors, partners and employees.”

The proposed Sunday Riley order prohibits defendants from posting any further fake reviews. As for Devumi, the settlement imposes a judgment of $2.5 million, which has been mostly suspended due to defendants’ inability to pay the full amount. It bans defendants from the alleged activities and prohibits them from making any further related misrepresentations.

Key Takeaways

The settlements against these online businesses resolve allegations of different types of wrongdoing, but they highlight the FTC’s continued enforcement of activities against e-commerce companies that capitalize on misleading marketing. The Sunday Riley matter sends a message to companies that they will face repercussions for writing fake reviews, even (or especially) when done “in-house.” As for Devumi, this case highlights how companies that create fake social media followers also violate the FTC Act. As for Devumi’s clients, no word on whether the FTC will pursue them for hiring Devumi and buying the fake followers, but this matter should be a wakeup call to those who seek to develop a robust social media following through deceptive means.

Manufacturers Voluntarily Change Country of Origin Claims Following FTC Investigation

The Federal Trade Commission (FTC) will not take action against two companies regarding country of origin claims made for their products after they voluntarily agreed to remedy the problematic claims.

In the first matter, an iron manufacturer aptly named Iron Company agreed to make changes to its country of origin claims following an FTC investigation, leading the agency to close the investigation without formal action. The agency had initially expressed concerns to the company that certain of its country of origin claims were unsupported. The FTC asserted that Iron Company’s broad claims that its products were made in the USA “may have overstated the extent to which the products” are actually manufactured in the United States.

The FTC informed Iron Company that in order to claim a product is “Made in the USA,” “all or virtually all” of the product must be manufactured in the United States. Some Iron Company products, the FTC noted, were in fact made in the United States, but others were only assembled in the U.S. from foreign components, and still others were entirely imported. This did not meet the Made in the USA standard, said the FTC, and the agency urged Iron Company to amend its these claims accordingly. In the agency’s closing letter, the FTC noted that in response to its concerns, Iron Company “implemented a remedial action plan to clarify its representations,” including removing broad U.S-origin claims from company marketing, clarifying that only certain products meet the standard, and verifying the origin of individual products.

The FTC also opted to not take action against BedHead Pajamas, a maker of sleepwear, regarding its country of origin claims. The agency did not question the Los Angeles-based company’s claim that its pajamas are made in the USA, as the company in fact manufactures the sleepwear here. But it did take issue with what it asserted was the company’s failure to comply with the Textile Products Identification Act, which requires companies to disclose whether any textiles used to manufacture goods are imported.

The company voluntarily undertook significant remedial steps in response. It updated its marketing materials by removing broad unqualified statements that the products are made in the USA and labeling on garments to reflect correct the country of origin. As of this writing, the company points out on its website that while the products are made in the USA, they are made of “imported luxurious fabrics.”

Key Takeaways

These cases highlight the FTC’s continuing efforts to monitor the marketplace for deceptive country of origin claims and specifically, those claiming “Made in USA.” In the case of BedHead, the FTC made clear that a country of origin claim that complies with the Made in the USA standard may nevertheless be deceptive if it fails to disclose that textiles used to make the product are of foreign origin. Companies that sell products of imported textiles and wish to make a Made in the USA claim must ensure that “all or virtually all” of the product is made or assembled in the USA, with appropriate qualifiers as to the origin of its components, in compliance with the Textile Act and Textile Rules.

Fewer Telemarketers Accessing the National DNC Registry, More Consumers Registering

Fewer telemarketers bought access to the federal Do Not Call (DNC) Registry this year than in previous years, according to a recent report on DNC data for FY 2019 issued by the Federal Trade Commission (FTC). The report also found fewer consumer complaints, but the FTC attributed that dip not to an actual drop in complaints but the fact that data was not collected during the government shutdown of 2019. This is the eleventh year that the FTC has released the Data Book, as the report is called.

According to the FTC’s report, just over 2,000 organizations paid for access to the DNC list in FY 2019, down from the prior year. The number of telemarketers that accessed data for five area codes they are entitled to view for free was also down. This data demonstrates a pattern of diminishing DNC registry access by telemarketers starting in 2015.

The report also found that consumer complaints about telemarketers dropped to 5.4 million for FY 2019 as compared to just over 7 million complaints reported in FY 2017, although the FTC noted this drop is likely due to the unavailability of data during the period of 2019’s government shutdown rather than from any real decrease in consumer complaints.

Of the complaints received, the vast majority (71 percent) concerned robocalls. Of these, most involved impostor scams with more than 574,000 complaints logged in this area, representing a significant increase from FY 2018. Next followed complaints about calls regarding medical issues and prescriptions, followed by debt reduction programs, which was the most complained-about issue in FY 2018.

The top five states reporting complaints per population remained the same as last year, with Colorado in first, followed by Oregon, Arizona, New Jersey and Nevada.

Consumer registration for the DNC registry is also up, with New Hampshire leading the way with the highest number of registrants as a percentage of the state’s population. Nationwide, over four million more people registered their telephone number in FY 2019.

Key Takeaways

The type of complaints reported in the DNC Report mirrors what we have been reporting on here – consumer frustration with recorded robocalls pitching products and services that are dubious at best and fraudulent at worst. The drop in telemarketer paid and free access to the registry may signal either telemarketer disregard for the list or a decrease in the number of legitimate sellers engaging in outbound sales calls. Or, it may relate to an increase in the fees in 2019 to access the list.

New York AG Settles with Energy Company Over Deceptive Practices Netting Nearly $2 Million for Affected Consumers

New York Attorney General Letitia James has secured a $1.95 million settlement against a large energy service company over accusations of deceptive business practices. The settlement resolves allegations that U.S. Gas & Electric (U.S. G&E) defrauded New York residents out of hundreds of thousands of dollars per year.

U.S. G&E is an “energy saving company” (ESCO) that resells energy purchased on the open market to consumers, as differentiated from a utility. In New York, consumers may obtain gas and electricity from either an ESCO or a utility. Among the false and deceptive practices alleged by Attorney General James, U.S. G&E made a number of deceptive statements about its business and pricing in order to attract customers. It promised consumers savings that never materialized and many consumers actually saw higher bills after switching.

Attorney General James also alleged that the company violated Do Not Call laws, provided inadequate customer service, passed itself off as a utility and, worse, signed up consumers for the service without their consent.

The settlement not only obligates the company to pay $1.95 million in restitution but also requires it to take steps to ensure it no longer engages in further deceptive activity. Specifically, the company must train customer service representatives to give consumers accurate information about the service, record customer calls to monitor representations made during these calls, refrain from promising false savings, and implement disciplinary procedures in the event of a violation of law. Funds from the settlement will go to New York residents who purchased electricity from the company.

U.S. G&E is not the first ESCO to come within Attorney General James’ scope. The settlement is part of a wide-ranging and lengthy investigation by the AG’s office into the ESCO industry in New York, which has resulted in over $4 million dollars in payments from companies engaged in tactics similar to those of U.S. G&E.

“U.S. Gas & Electric took advantage of tens of thousands of innocent New Yorkers, fleecing them out of millions of dollars,” said Attorney General James. “Not only are we securing restitution for New Yorkers who were ripped off, but we’re continuing our efforts to root out fraud and deceit in the energy services industry,” she added.

Key Takeaways

Aside from U.S. G&E deceptively representing itself as a utility and signing up customers without their consent, this case serves as another reminder that companies should not advertise savings they can’t deliver. As Attorney General James put it: “This settlement should send a clear message to the energy industry that we will fight to hold accountable companies that defraud New Yorkers out of their hard-earned money.”

On a Tip from Ad Watchdog TINA, California Acts Against MyPillow Over Deceptive Marketing

In an update to a story we covered in Stay ADvised earlier in the year, California has filed suit against MyPillow over allegations that the company made misleading marketing claims and violated the terms of a 2016 stipulated judgment concerning allegedly misleading health claims the company previously made about the pillow. This new action also alleges that MyPillow’s “sleep study” promoting the pillow’s health benefits is bogus and unsupported by reliable scientific evidence.

Notably, this action was prompted by a letter from advertising watchdog Truth in Advertising (TINA) to the California AG, demonstrating that regulators do sometimes act on TINA referrals. This should raise a red flag for advertisers finding themselves in the sights of watchdog organizations: Engaging in activity that draws TINA scrutiny may result in real consequences.

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