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A Warning to One, A Warning to All?

As part of their ongoing effort to combat misinformation about COVID-19, federal agencies have issued warning letters to more than 150 companies. While companies know that a warning letter is serious and requires immediate attention, perhaps the greater challenge is what often follows: the so-called “piggyback” class action lawsuit.[1] And recently, plaintiffs’ attorneys have gone one step further: they have been filing “piggyback” class actions not against the company that received the warning letter but against competitors that make similar products.

Because warning letters are publicly available and posted prominently on various agency websites, consumers can view the warning letter and then file a “piggyback” class action against the recipient of the warning letter. Indeed, oftentimes these “piggyback” class actions merely recast the government agency’s allegations as claims for violations of various state consumer protection statutes. For example, in November 2013, the U.S. Food and Drug Administration (FDA) sent a genetic testing company a warning letter ordering it to stop selling and marketing one of its genome tests because the company had failed to show that the test actually worked. Five days later, the company was hit with a proposed class action for allegedly violating several California consumer protection laws.[2] Dozens of other companies – from hotel chains to cereal manufacturers – have also been hit with piggyback class actions based on warning letters.

But things have changed recently. Consumers have targeted companies that never received a warning letter. These proposed class actions are based largely – sometimes entirely – on the allegations in a warning letter directed to another company. In these cases, the plaintiffs’ theory is that, because the products are similar, the substance of the warning letter “applies equally” to the similar products.

This trend has continued in the COVID-19 era. On January 17, 2020, a week before the first reported case of COVID-19 in the United States, the FDA sent a leading hand sanitizer manufacturer a warning letter telling the company to stop advertising its product as one that can prevent an array of diseases, including Ebola, MRSA, and the flu. The FDA explicitly challenged the product’s claim that it “kills 99.99% of most common germs” because the claim allegedly lacked adequate scientific support. On the heels of FDA’s warning letter, at least six class actions were filed against the manufacturer.[3] Although the claims differ slightly, all of the lawsuits are premised on the same basic theory articulated in the FDA warning letter—which all of the complaints cite.

Then came the copycat piggyback lawsuits. The manufacturer of a competing hand sanitizer was sued in February and March 2020.[4] In one of the complaints, the plaintiff alleged that because both products have the same active ingredient, the FDA’s allegations about labeling apply to both products. Separately, a plaintiff sued a large retailer in a class action making similar claims about its generic hand sanitizer.[5] In that case, the plaintiff argued that the retailer’s labeling was also misleading because it had the same active ingredient as the brand name and implied that its product was as effective as the brand name.

So what should companies do? Here are proactive steps to protect against these lawsuits.

Review labels and advertisements. To protect against “piggyback” class actions, companies should ensure that they have reliable scientific evidence to support their products’ stated claims and alleged benefits, particularly if a competing product that makes similar claims has received a warning letter. Additionally, if a company compares its product to competing products, companies should check to see whether those competing products have ever been the subject of a warning letter.

Monitor guidance from relevant governmental agencies. Companies should also actively monitor guidance from relevant federal or state agencies. During the COVID-19 pandemic, agencies have issued and amended guidance more often than they typically do. For example, in March 2020 the FDA issued guidance temporarily relaxing regulatory requirements for production of certain hand sanitizer products. The FDA then revised that guidance on March 28, and again on April 15, 2020. Companies should stay abreast of the most recent guidance to ensure that they are complying with laws and regulations.

Monitor warning letters and enforcement actions against competitors. Of course, a company that receives a warning letter should seek legal advice to determine how to respond. But even if a company does not itself receive a warning letter, companies might learn about federal agencies’ warning letters and enforcement actions against other companies, particularly competitors or companies that make similar products. Where the products are similar, enterprising plaintiffs’ attorneys could repurpose a warning or enforcement action against one company’s product into the basis for a class action against its competitors. If a competitor has received a warning letter or been the target of an agency enforcement action, legal counsel may help assess their situation compared to the company’s.

Conclusion

It is a challenging time for companies in so many ways. These lawsuits might be the beginning of a trend of class actions filed both against companies whose products appear on the radar of governmental agencies during the COVID-19 pandemic and against companies that make similar products. The plaintiffs’ bar is closely monitoring agency warning letters. Companies should take that into consideration.

[1] John E. Villafranco and Daniel S. Blynn, The Case of the Piggyback Class Action, Nutritional Outlook (Sept. 2012) (defining a piggyback lawsuit as “a class action lawsuit filed by a private litigant against an advertiser or manufacturer after a federal agency…has already taken regulatory action against the same company on behalf of the public.”)

[2] Aeron v. 23andMe, Inc., No. 13-cv-02847 (S.D. Cal. filed Nov. 27, 2013); see also Dan Munro, Class Action Filed Against 23andMe, Forbes (Dec. 2, 2013, 11:04 PM), https://www.forbes.com/sites/danmunro/2013/12/02/class-action-law-suit-f….

[3] DiBartolo v. GOJO Industries, Inc., No. 20-cv-01530 (E.D.N.Y. filed Mar. 24, 2020); Miller v. GOJO Industries, Inc., No. 20-cv-00562 (N.D. Ohio filed Mar. 13, 2020); Jurkiewicz v. Gojo Industries, Inc., No. 20-cv-00279 (N.D. Ohio filed Feb. 9, 2020); Gonzalez v.Gojo Industries, Inc., No. 20-cv-00888 (S.D.N.Y. filed Feb. 1, 2020); Aleisa v. Gojo Industries, Inc., No. 20-cv-01045 (C.D. Cal. filed Jan. 31, 2020); Marinovich v. Gojo Industries, Inc., No. 20-cv-00747 (N.D. Cal. filed Jan. 31, 2020).

[4] David v. Vi-Jon, Inc., No. 20-cv-00424 (S.D. Cal. filed Mar. 5, 2020); Sibley v. Vi-Jon, Inc., No. 20-cv-00951 (N.D. Cal. filed Feb. 7, 2020).

[5] Taslakian v. Target Corp., No. 2:20-cv-02667 (C.D. Cal. filed Mar. 20, 2020)

ARTICLE BY J. Maxwell Heckendorn and Jeffrey Skinner at Schiff Hardin LLP.

For more on product’s COVID-19 claims, see the National Law Review Coronavirus News section.

Beware the COVID-19 Cure: The FTC Issues Warnings to Products Making COVID-19 Treatment Claims

With no approved vaccine, the world waits for the next big breakthrough in 2020’s medical emergency. Some companies already claim to have found it – and subsequently received warning letters from the Federal Trade Commission (FTC) for misbranding. The FTC is targeting companies promoting products with supposed COVID-19 cures, treatment or prevention for making illegal, unsubstantiated claims.

One of the FTC’s objectives is eliminating false and misleading information from the marketplace. The FTC Act defines false advertising as misleading in a “material respect,” which includes both affirmative statements and failure to “reveal facts material in the light of [the product’s] representations[.]” See 15 USC 55(a)(1).

The FTC accomplishes its goal by sending warning letters. Under the FTC Act, a product may be misbranded if it is promoted as a prevention, cure or treatment for COVID-19 – when in fact it has not been approved for such use by the Food and Drug Administration. Since March 2020, the FTC has issued more than 200 warning letters to various businesses that advertise wellness products and other services that allegedly address COVID-19.

In some instances, the claims involved a gross exaggeration of the product’s effectiveness. For example, the website “NothingsIncurable.com” advertised products alleged to “literally make you invulnerable.” The FTC concluded those claims constituted misbranding. But even when promotional statements do not include an explicit falsehood, overpromotion still can cross into misbranding. For example, businesses that claimed, “[this product] will target and increase your immunity to help ward off the COVID-19 virus” or that recommended their products as “scientifically proven to support healthy immune function” also were found to be misbranded.

In another example, a company included “Coronavirus” in the website navigation menu that led consumers to therapy kits intended to provide “specific nutrition” to “balance the terrain of the body to make it conducive to” its particular function. Although the product description did not reference COVID-19, the FTC concluded that the website navigation menu was suggestive enough to warrant a warning for misbranding.

Summary

The FTC warning letters advise businesses that “under the FTC Act, 15 U.S.C. § 41 et seq.,” they are prohibited from advertising “that a product or service can prevent, treat, or cure human disease unless you possess competent and reliable scientific evidence, including, when appropriate, well-controlled human clinical studies, substantiating that the claims are true at the time they are made.” In addition, products that claim or imply the ability to mitigate, prevent, treat, diagnose or cure COVID-19 must be approved drugs under section 505(a) of the Federal Food, Drug and Cosmetic Act. In each case, the FTC required a response from the business within 48 hours, detailing the actions taken to address the FTC’s concerns.

During this unprecedented health crisis, companies that sell consumer products should exercise caution when mentioning COVID-19 in advertising or promotional statements. Mentioning COVID-19 in relation to a product, even if the product is intended to address more routine health issues, could be misleading.

ARTICLE BY Molly E. Flynn and Kate M. Wittlake at Faegre Drinker.

For more on COVID-19, see the National Law Review Coronavirus News section.

FTC Attorney Discusses Regulatory Focus on Payment Processing Industry

The Federal Trade Commission consistently seeks to expand the scope of potential liability for deceptive advertising practices. From substantial assistance liability under the FTC’s Telemarketing Sales Rule to theories of agency or vicarious liability, ad agencies, ad networks, lead buyers and aggregators, lead purchasers, merchants and payment processors are all potentially accountable for facilitating the actions or omissions of those that they do business with.

Consider the latter and the FTC’s recent assault on the payment processing industry. It amply highlights third party accountability remedial theories and the imposition of reasonable monitoring duties.

In January 2020, the FTC announced that an overseas payment processor and its former CEO settled allegations that they enabled a deceptive “free trial” offer scheme. According to the complaint, the company, its principals and related entities marketed supposed “free trial” offers for personal care products and dietary supplements online, but instead billed consumers the full price of the products and enrolled them in negative option continuity plans without their consent.

To further the scheme, the defendants allegedly used dozens of shell companies and straw owners in the United States and the United Kingdom to obtain and maintain the merchant accounts needed to accept consumers’ credit and debit card payments, an illegal practice known as “credit card laundering.”

The FTC subsequently filed an amended complaint adding a Latvian financial institution and its former CEO to the case, alleging that they illegally maintained merchant accounts for the other defendants in the name of shell companies and enabled them to evade credit card chargeback monitoring programs.

In a press release, FTC attorney Andrew Smith, Director of the Bureau of Consumer Protection, stated that “[t]he FTC will continue to aggressively pursue payment processors that are complicit in illegal conduct, whether they operate at home or abroad.”

The FTC also recently announced that a payment processor for an alleged business coaching scheme settled charges that it ignored warning signs its client was operating an unlawful business coaching and investment scheme. Here, according to the FTC’s complaint, the company for years processed payments for a purported scheme that charged consumers hundreds of millions of dollars for allegedly worthless business coaching products, and that the company ignored numerous signs that the business was allegedly fraudulent.

The red flags listed in the complaint include questions about whether the company was a domestic or international company, the nature of its business model, the company’s purported history of excessive chargebacks, and claims the company allegedly made in its marketing materials.

Notably, the complaint also alleged that the company failed to follow its own internal policies and failed to review its clients’ business practices in detail, which, according to the FTC, would have revealed numerous elements that should have eliminated the client under those policies.

According to the FTC, even after the company took on the client, the client’s processing data immediately raised red flags related to the quantity of charges it processed and the number of refunds and chargebacks associated with those charges. When the client experienced excessive chargeback rates, instead of adequately investigating the causes of the chargebacks, the company responded by requiring the client to work closely with chargeback prevention companies, according to the FTC. The FTC alleged that the company failed to monitor the products its client was selling and the claims it was making to sell those products.

Again, the Director of the FTC’s BCP conveyed that “[i]gnoring clear signs that your biggest customer is a bogus online business opportunity is no way to operate a payment processing business.” “And, it’s a sure-fire way to get the attention of the FTC,” Smith stated.

Most recently, the FTC announced that a payment processor that allegedly helped perpetuate multiple scams has been banned under the terms of a settlement with the agency and the State of Ohio. Here, the FTC alleged that the defendants used remotely created payment orders and remotely created checks to facilitate payments for unscrupulous merchants, allowing them to draw money from consumer victims’ bank accounts.

Reaffirming the FTC’s focus on the payment processing industry, FTC lawyer Andrew Smith stated that “[p]ayment processors who help scammers steal people’s money are a scourge on the financial system.” “When we find fraud, we are committed to rooting out payment processors and other companies who actively facilitate and support these fraudulent schemes,” Smith stated.

The FTC is aggressively policing payment processors that bury their heads in the sand or go a step further and help cover up their clients’ wrongdoing. Either course of conduct could land them in legal hot water.

The settlement terms of the matters above include permanent bans, hefty monetary judgments and the surrender of assets.

ARTICLE BY Richard B. Newman at Hinch Newman LLP.

For more on FTC regulation, see the National Law Review Antitrust & Trade Regulation law section.

Price Gouging and Deceptive Advertising Practices Amidst COVID-19 Pandemic

The Federal Trade Commission, the Food and Drug Administration and state Attorneys General have bumped the protection of consumers in the midst of the COVID-19 crisis to the top of their respective lists, including, but not limited to, price gouging and unsubstantiated product efficacy claims. The U.S. Department of Justice has also issued a broad mandate regarding criminal enforcement of deceptive, fraudulent and predatory practices.

State Attorneys General

State Attorney General have actively been policing the advertising of claims related to products that purport to cure, treat or prevent COVID-19. This includes both express and implied claims (e.g., immunity-based claims).

Currently are no vaccines, pills, potions, lotions, lozenges or other prescription or over-the-counter products to treat or cure.

By way of example, a group of thirty-two state attorneys general recently sent letters to executives at prominent online retailers, urging them to help police price gouging. Additionally, the New York Attorney General has asked GoDaddy and other online registrars to halt and de-list domain names used for Coronavirus-related scams and fake remedies designed to unlawfully and fraudulently profit off consumers’ fears around the coronavirus disease.

The NY AG has also recently contacted Craigslist.com, calling on the company to immediately remove posts that attempt to price gouge users, or otherwise purport to sell items that provide “immunity” to the coronavirus or allow individuals to test for the disease. For example, the AG’s letter referred to posts that promoted an “immunity pack,” a fake coronavirus testing kit, and face masks that are not even proven to provide coronavirus-related protection. The AG also asked Craigslist to remove an advertisement for a bottle of Purell that was priced at over $200.

Price gouging on disinfectant products is also a priority.

State AGs and other federal agencies are actively investigating potential price gouging violations, filing enforcement lawsuits, issuing civil investigative demands (CIDs), and serving cease-and-desist warnings. The NYC Department of Consumer and Worker Protection (DCWP) – formerly the New York City Department of Consumer Affairs (DCA) – has also been policing local business that it believes are selling necessary products (e.g., cleaning products, diagnostic products and services, disinfectants [wipes, liquids, sprays], face masks, gloves, hand sanitizers, medicines, paper towels, rubbing alcohol, soap, tissues and basic food supplies).

The State of New York’s price gouging statute prohibits the sale of goods and services necessary for the health, safety and welfare of consumers at unconscionably excessive prices during any abnormal disruption of the market. During any abnormal disruption of the market for consumer goods and services vital and necessary for the health, safety and welfare of consumers, no party within the chain of distribution of such consumer goods or services or both shall sell or offer to sell any such goods or services or both for an amount which represents an unconscionably excessive price.

In the State of New York, whether a price is unconscionably excessive is a question of law for the court. The court’s determination that a violation has occurred shall be based on any of the following factors: (i) that the amount of the excess in price is unconscionably extreme; or (ii) that there was an exercise of unfair leverage or unconscionable means; or (iii) a combination of both factors in subparagraphs (i) and (ii).

Proof that a violation of has occurred can include, for example, evidence that: (i) the amount charged represents a gross disparity between the price of the goods or services which were the subject of the transaction and their value measured by the price at which such consumer goods or services were sold or offered for sale by the defendant in the usual course of business immediately prior to the onset of the abnormal disruption of the market; or (ii) the amount charged grossly exceeded the price at which the same or similar goods or services were readily obtainable by other consumers in the trade area. A defendant may be able to rebut such evidence by establishing that additional costs not within its control were imposed on the defendant for the goods or services.

Where a violation is alleged to have occurred, the AG may seek an injunctions, civil penalties and restitution.

Under the Rules of the City of New York, stores are prohibited from selling items that have been declared in short supply at excessively increased prices. NYC has recently issued an emergency rule prohibiting price increases above 10% on various products necessary to combat the coronavirus. New York State has now proposed legislation concerning medical supplies that includes a presumption that a price exceeding 10% of its price immediately prior to a public health emergency is to be considered unconscionably excessive.

Other states also utilize percentage-drive formulas when assessing excessive or unconscionable price increases, such as, without limitation, Arkansas, Florida, Michigan, Missouri, New Jersey, North Carolina, Ohio, Oklahoma, Pennsylvania, Tennessee, Texas, Utah, West Virginia, and Wisconsin. Some states impose liability upon manufacturers and distributors. Some states also impose civil fines and penalties for violations, in addition to potential criminal liability.

Any entity charged with price gouging during a public health emergency would be entitled to rebut an alleged violation of this new law with evidence that the additional costs not within the control of the defendant were imposed on the defendant for the consumer medical supplies.

FTC and FDA

The Federal Trade Commission and the Food and Drug Administration recently announced that it has issued joint warning letters to companies that allegedly had been disseminating unsubstantiated product advertising claims related to the coronavirus. The letters cite efficacy claims that are not supported by competent and reliable scientific evidence, as well as issues relating to unapproved and misbranded drugs.

On March 26, 2020, FTC lawyer and Chairman Joe Simons issued a statement setting forth the agency’s enforcement efforts to protect consumers from unfair and deceptive commercial practices and to educate the public. The FTC “will not tolerate businesses seeking to take advantage of consumers’ concerns and fears regarding coronavirus disease, exigent circumstances, or financial distress,” FTC lawyer Simons stated.

The FTC has also issued a press release calling attention to business-to-business scams that seek to exploit companies’ concerns about COVID-19, and sent letters to VoIP service providers and other companies warning them that “assisting and facilitating” illegal telemarketing or robocalls related to the coronavirus or COVID-19 pandemic is against the law.

“It’s never good business for VoIP providers and others to help telemarketers make illegal robocalls that scam people,” said FTC attorney Andrew Smith, Bureau of Consumer Protection Director. “But it’s especially bad when your company is helping telemarketers exploiting fears about the coronavirus to spread disinformation and perpetrate scams,” Smith stated.

Department of Justice

The U.S. DoJ has issued a broad mandate with respect coronavirus-related fraud, price gouging and product hoarding. In fact, it recently filed a number of federal criminal actions to combat fraud and other offenses related to the coronavirus pandemic.

Two of the actions were filed in California. One involving allegations that an individual solicited investments in a company he claimed would be used to market pills that would prevent coronavirus infections, as well as market an injectable cure for those who had already contracted the virus. The other, involving allegations that an individual mislabeled drugs that were purported to be a miracle cure for COVID-19.

Another two actions were filed in New Jersey. One involving charges of violating the federal Anti-Kickback Statute and conspiracy to commit health care fraud. The other, involving allegations of assault resulting from an individual who represented to have tested positive for COVID-19 that coughed on FBI agents, lied to them about his accumulation and sale of surgical masks, medical gowns and other medical supplies, and selling supplies to doctors and nurses at inflated prices. .

The DoJ also recently filed a civil wire fraud lawsuit in a Texas federal district court against a website (coronavirusmedicalkit.com) that was purportedly offering access to bogus World Health Organization vaccines.

Digital marketers, consumer-facing businesses and others in the supply chain should consider consulting with experienced FTC defense counsel to avoid unsupported efficacy claims and inadvertently charging unlawful prices for goods and services necessary for the health, safety and welfare of consumers.

ARTICLE BY Richard B. Newman of Hinch Newman LLP.

For more on FTC COVID-Actions, see the National Law Review Coronavirus News section.

FTC Announces 2020 Thresholds for Merger Control Filings Under HSR Act and Interlocking Directorates Under the Clayton Act

The Federal Trade Commission (“FTC”) has announced its annual revisions to the dollar jurisdictional thresholds in the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”); the revised thresholds will become effective 30 days after the date of their publication in the Federal Register. These changes increase the dollar thresholds necessary to trigger the HSR Act’s premerger notification reporting requirements. The FTC also increased the thresholds for interlocking directorates under Section 8 of the Clayton Act, effective as of January 21, 2020.

Revised HSR Thresholds

Under the HSR Act, parties involved in proposed mergers, acquisitions of voting securities, unincorporated interests or assets, or other business combinations (e.g., joint ventures, exclusive license deals) that meet certain thresholds must report the contemplated transactions to the FTC and the Antitrust Division of the U.S. Department of Justice (“DOJ”) unless an exemption applies. The parties to a proposed transaction that requires notification under the HSR Act must observe a statutorily prescribed waiting period (generally 30 days) before closing. Under the revised thresholds, transactions valued at $94 million or less are not reportable under the HSR Act.

A transaction closing on or after the date the revised thresholds become effective may be reportable if it meets the following revised criteria:

Size of Transaction Test

The acquiring person will hold, as a result of the transaction, an aggregate total amount of voting securities, unincorporated interests, or assets of the acquired person valued in excess of $376 million;

Size of Person Test

One party (including the party’s ultimate parent entity and its controlled subsidiaries) has at least $188 million in total assets or annual sales, and the other has at least $18.8 million in total assets or annual sales. If the acquired party is not “engaged in manufacturing,” and is not controlled by an entity that is, the test applied to the acquired side is annual sales of $188 million or total assets of $18.8 million.

The full list of the revised thresholds is as follows:

Original Threshold	2019 Threshold	2020 Revised Threshold (Effective 30 days after publication *in the Federal Register)*
$10 million	$18 million	$18.8 million
$50 million	$90 million	$94 million
$100 million	$180 million	$188 million
$110 million	$198 million	$206.8 million
$200 million	$359.9 million	$376 million
$500 million	$899.8 million	$940.1 million
$1 billion	$1,799.5 million	$1,880.2 million

The filing fees for reportable transactions have not changed, but the transaction value ranges to which they apply have been adjusted as follows:

Filing Fee	Revised Size of Transaction Thresholds
$45,000	For transactions valued in excess of $94 million but less than $188 million
$125,000	For transactions valued at $188 million or greater but less than $940.1 million
$280,000	For transactions valued at $940.1 million or more

Note that the HSR dollar thresholds are only part of the analysis to determine whether a particular transaction must be reported to the FTC and DOJ. Failure to notify the FTC and DOJ under the HSR Act remains subject to a statutory penalty of up to $43,280 per day of noncompliance.

Revised Thresholds for Interlocking Directorates

Section 8 of the Clayton Act prohibits one person from simultaneously serving as an officer or director of two corporations if: (1) the “interlocked” corporations each have combined capital, surplus, and undivided profits of more than $38,204,000 (up from $36,564,000); (2) each corporation is engaged in whole or in part in commerce; and (3) the corporations are “by virtue of their business and location of operation, competitors, so that the elimination of competition by agreement between them would constitute a violation of any of the antitrust laws.”¹

Section 8 provides several exemptions from the prohibition on interlocks for arrangements where the competitive overlaps “are too small to have competitive significance in the vast majority of situations.”² After the revised thresholds take effect, a corporate interlock does not violate the statute if: (1) the competitive sales of either corporation are less than $3,820,400 (up from $3,656,400); (2) the competitive sales of either corporation are less than 2 percent of that corporation’s total sales; or (3) the competitive sales of each corporation are less than 4 percent of that corporation’s total sales.

The revised dollar thresholds for interlocking directorates of $38,204,000 and $3,820,400 will be effective upon publication in the Federal Register; there is no 30-day delay as there is for the HSR thresholds.

1 15 U.S.C. § 19(a)(1)(B).

2 S. Rep. No. 101-286, at 5-6 (1990), reprinted in 1990 U.S.C.C.A.N. 4100, 4103-04.

ARTICLE BY Joel Mitnick and Ngoc Pham Hulbig of Cadwalader, Wickersham & Taft LLP.

For more on Hart-Scott-Rodino thresholds, see the National Law Review Antitrust Law and Trade Regulation section.

California Tackles Big Pharma’s Anticompetitive ‘Pay for Delay’ Practices That Slow Down Lower-Cost Generic Drug Development

California Gov. Gavin Newsom has signed AB 824, known as the “Pay-for-Delay” bill, blocking pharmaceutical companies from paying generic drug makers to not develop and bring lower-cost medicines to market. The law makes these so-called “reverse payment” settlements of patent disputes – which the Federal Trade Commission says cost consumers $3.5 billion a year – “presumptively anticompetitive.”

The new law provides that an agreement resolving a patent infringement claim is anticompetitive if the generic drug or biosimilar drug makers receive anything of value from the brand name company that’s claiming infringement, and if the generic maker agrees to slow-walk or stop research, development, manufacture, marketing, or sales of a generic product for any period of time. Exceptions are made in cases in which an agreement promotes competition.

The state Attorney General is authorized to seek civil penalties within four years of any violations of the law. Other remedies would be available under California’s Cartwright Act, Unfair Practices Act, or unfair competition laws.

Sidestepping Competition

The FTC has prosecuted brand name and generic drug companies and has sued to stop these reverse payment agreements which allow drug companies to “sidestep competition.” Earlier this year, for example, the FTC announced a global settlement of three separate federal antitrust lawsuits involving subsidiaries of pharmaceutical manufacturer Teva Pharmaceuticals Industries Ltd.

In one of the cases, Teva’s Cephalon company paid four generic drug manufacturers $200 million to back off on their plans to sell a generic version of Cephalon’s Provigil, a medication used to treat excessive sleepiness caused by sleep apnea, narcolepsy, or shift-work sleep disorder. Teva, which was able to delay the generic version for six years, agreed in its settlement to create a $25 million consumer fund and pay $69 million plus another $200,000 to cover the state’s legal fees. Teva was also barred from engaging in reverse-payment patent settlement agreements for 10 years.

In another instance, the FTC announced the settlement of its case against Endo Pharmaceuticals Inc., which paid Impax Laboratories $112 million not to go to market with a competing generic version of Endo’s Opana ER – a pain reliever in the opioid family.

Collusive Arrangements

Attorney General Xavier Becerra, AB 824’s sponsor, wrote that these kinds of pay-for-delay agreements are “collusive arrangements between brand-name drug companies and rival drug manufacturers” that allow the companies to charge monopolistic prices. “Pay-for-delay agreements hurt consumers twice – once by delaying the introduction of an equivalent generic drug that is almost always cheaper than the brand name and second by stifling additional competition because we know that when multiple manufacturers of generic drugs compete with each other, prices can be up to 90% less than what the brand name drug cost originally,” Becerra wrote.

Supporters of the bill included Health Access of California, the California Labor Federation, and the Small Business Majority. Another supporter, the California Public Interest Research Group, said brand-name drugs cost an average of 10 times and sometimes 33 times more than generics, adding that brand-name companies make billions in sales while generics are delayed.

All Those Opposed

The Association for Accessible Medicines (AAM) opposed the bill, saying it “penalizes procompetitive patent settlements that significantly expedite generic and biosimilar access.” Besides, the group argued, a federal framework already exists to review patent settlements, citing FTC v. Actavis, the 2013 decision in which the Supreme Court held that a brand drug manufacturer’s reverse payment to a generic competitor to settle patent litigation can violate the antitrust laws. The Supreme Court refused to call these agreements presumptively unlawful, instead saying the FTC had to prove its case as it would in any other “rule of reason” cases. The likelihood that a pay-to-delay settlement would have anticompetitive effects “depend[s] on its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification,” the Supreme Court ruled.

The pro-industry pro-tort reform Civil Justice Association of California called the bill “an enhanced, steroid infused codification” of the California Supreme Court’s 2015 decision in In re Cipro, which followed the U.S. Supreme Court’s FTC v. Actavis ruling.

Biopharmaceutical company Biocon opposed the bill for, it said, replacing the FTC with the State of California in the commission’s role as prosecutor of anticompetitive conduct.

The FTC’s Competition Bureau has been keeping track of the effectiveness of the Supreme Court’s FTC v. Actavis decision. In May 2019, FTC Chairman Joe Simons announced: “The data are clear: the Supreme Court’s Actavis decision has significantly reduced the kinds of reverse payment agreements that are most likely to impede generic entry and harm consumers.”

Commentary

There is simply no legitimate procompetitive justification for pay-for-delay settlements. They are explicit agreements between competitors to restrain competition and serve only to keep pharmaceutical prices unnecessarily high in this country. According to FTC data, pay-for-delay settlements cost consumers billions of dollars per year.

AB 824 simply aligns the law with the reality of this burden on the consumer, creating a presumption that such settlements are anticompetitive and requiring the settling parties to demonstrate why this is not the case. In fact, AB 824 essentially codifies the rule the FTC argued should govern pay-for-delay settlements in Actavis.

Critics of the law will challenge its legality, including its constitutionality under the dormant commerce clause. And while it may not withstand these legal challenges, AB 824 is an encouraging sign that lawmakers are beginning to understand the negative impact that pay-for-delay settlements have on competition in the pharmaceutical industry. We hope more states follow suit.

© MoginRubin LLP

ARTICLE BY Jennifer M. Oliver and Timothy Z. LaComb of MoginRubin. Edited by Tom Hagy for MoginRubin LLP. Photo of “worried man” by Nik Shuliahin via Upsplash.

For more on pharmaceutical regulation, see the National Law Review Biotech, Food & Drug law page.

FTC Attorney on Endorsement Guide Compliance

Influencer marketing and review websites have attracted a great deal of attention recently by states and federal regulatory agencies, including the FTC. The FTC’s Endorsement Guides addresses the application of Section 5 of the FTC Act to the use of endorsements and testimonials in advertising.

At their core, the FTC Endorsement Guides (the “Guides”) reflect the basic truth-in-advertising principle that endorsements must be honest and not misleading. The Guides suggest several best practices, including, but not limited to the following:

Influencers must be legitimate and bona fide users, and endorsements must reflect honest opinions.
Endorsers cannot make claims about a product that would require proof the advertiser does not have. Blogger and brands are potentially subject to liability for claims with no reasonable basis therefor.
Clearly and conspicuously disclose material connections between advertisers and endorsers (e.g., a financial or family relationship with a brand)
To make a disclosure “clear and conspicuous,” advertisers should use plain and unambiguous language and make the disclosure stand out. Consumers should be able to notice the disclosure easily. They should not have to look for it. Generally speaking, disclosures should be close to the claims to which they relate; in a font that is easy to read; in a shade that stands out against the background; for video ads, on the screen long enough to be noticed, read, and understood; and for audio disclosures, read at a cadence that is easy for consumers to follow and in words consumers will understand.
Never assume that a social media platform’s disclosure tool is sufficient. Some platforms’ disclosure tools are insufficient. Placement is key.
Avoid ambiguous disclosures like #thanks, #collab, #sp, #spon or #ambassador. Clarity is crucial. Material connection disclosures must be clear and unmistakable.
Do not rely on a disclosure placed after a CLICK MORE link or in another easy-to-miss location.
Advertisers that use bloggers and other social media influencers to promote products are responsible for implementing reasonable training, monitoring and compliance programs (e.g., educating members about claim substantiation requirements and disclosing material connections, searching for what people are saying and taking remedial action).
Statements like “Results not typical” or “Individual results may vary” are likely to be interpreted to mean that the endorser’s experience reflects what others can also expect. Therefore, advertisers must have adequate proof to back up the claim that the results shown in the ad are typical, or clearly and conspicuously disclose the generally expected performance in the circumstances shown in the ad.
Brands can ask customers about their experiences and feature their comments in ads. If they have no reason to expect compensation or any other benefit before they give their comments, consult with an FTC CID and defense attorney to assess whether a disclosure is necessary. If customers have been provided with a reason to expect a benefit from providing their thoughts about a product, a disclosure is probably necessary.

What about affiliate marketers with links to online retailers on their websites that get compensated for clicks or purchases? According the FTC, the material relationship to the brand must be clearly and conspicuously so that readers will be able to decide how much weight to give the endorsement. In some instances – like when the affiliate link is embedded in a product review – a single disclosure may be adequate.

When the review has a clear and conspicuous disclosure of a material relationship and the reader can see both the review containing that disclosure and the link at the same time, readers may have the information they need. However, if the product review containing the disclosure and the link are separated, readers may not make the connection.

Never put disclosures in obscure places, behind a poorly labeled hyperlink or in a “terms of service” agreement. That is not enough. Neither is placing a disclosure below the review or below the link to the online retailer so readers would have to keep scrolling after they finish reading.

Consumers should be able to notice disclosures easily.

U.S. regulators are not the only ones policing influencer disclosures. In fact, the Competition and Markets Authority, the British government agency that regulates advertising, recently sent numerous warning letters to British celebrities and other social media influencers. The CMA has also recently released its guidelines for influencers.

The FTC has already demonstrated that it monitors accounts of popular influencers. It has also demonstrated that it can and will initiate investigations and enforcement actions. Brands are well-advised to review promotional practices, implement written policies and monitoring protocols.

ARTICLE BY Richard B. Newman of Hinch Newman LLP.

For more on influencers, endorsement & advertising, see the National Law Review Communications, Media & Internet law page.

Payment Processor Held Accountable by FTC

The Federal Trade Commission and the Ohio attorney general recently initiated legal action against a payment processor arising from alleged activities that enabled its customers to defraud consumers.

According to the FTC, the defendants generated and processed remotely created payment orders (“RCPOs”) or checks that allowed unscrupulous merchants, including deceptive telemarketing schemes, to withdraw money from their victims’ bank accounts.

The FTC’s Telemarketing Sales Rules specifically prohibits the use of RCPOs in connection with telemarketing sales. RCPOs are created by the processor and result in debits to consumers’ bank accounts without a signature.

“To execute their payment processing scheme, Defendants open business checking accounts under various assumed names with banks and credit unions, the majority of which are local institutions,” according to the complaint. Within the last five years, the defendants opened at least 60 business checking accounts at 25 different financial institutions, mainly in Texas and Wisconsin, to enable their activity, the regulators said. “Defendants often misrepresent to the financial institution the type of business for which they open the account, and routinely fail to disclose the real reason for which they open the account—processing consumer payments for third-party merchants via RCPOs. Red flags about Defendants’ practices have led at least 15 financial institutions to close accounts opened by Defendants. When that happens, Defendants typically open new accounts with different financial institutions. ”

According to the Ohio AG and FTC lawyers, the defendants specifically market their RCPO payment processing service to high risk merchants. The complaint also alleges that the defendants are aware that some of their largest merchant- clients sell their products or services through telemarketing.

The FTC and Ohio AG also allege that the defendants violated the TSR by charging consumers advance fees before providing any debt relief service, failing to identify timely and clearly the seller of the purported service in telemarketing calls, and failing to pay to access the FTC’s National Do Not Call Registry.

The Ohio AG previously had previously filed suit against the defendants for similar violations.

According to the FTC CID attorneys, the telemarketing operations that defendants supported included, among others, student debt relief schemes, and a credit interest reduction scheme. The FTC and Ohio allege that using RCPOs, the defendants have withdrawn more than $13 million from accounts of victims of these telemarketing operations since January 2016.

“The FTC will continue to pursue such schemes aggressively, and hold accountable payment processors that are complicit in the illegal conduct,” FTC lawyer Andrew Smith said in a statement about the case.

The complaint alleges violations of the FTC Act and Ohio state law, and seeks injunctive relief plus disgorgement of alleged ill-gotten gains.

At the same time, the FTC and state of Ohio filed another enforcement action against one of the processor’s biggest clients based in Canada and the Dominican Republic.

Federal and state regulators have evidenced a willingness to both go after merchants that engage in unfair and deceptive practices that are injurious to consumers, as well as the payment processors that enable merchants to engage in such conduct.

Article by Richard B. Newman of Hinch Newman LLP.

Fore more FTC finance enforcement actions, see the National Law Review Financial Institutions & Banking law page.

Personal Email Management Service Settles FTC Charges over Allegedly Deceptive Statements to Consumers over Its Access and Use of Subscribers’ Email Accounts

This week, the Federal Trade Commission (FTC) entered into a proposed settlement with Unrollme Inc. (“Unrollme”), a free personal email management service that offers to assist consumers in managing the flood of subscription emails in their inboxes. The FTC alleged that Unrollme made certain deceptive statements to consumers, who may have had privacy concerns, to persuade them to grant the company access to their email accounts. (In re Unrolllme Inc., File No 172 3139 (FTC proposed settlement announced Aug. 8, 2019).

This settlement touches many relevant issues, including the delicate nature of online providers’ privacy practices relating to consumer data collection, the importance for consumers to comprehend the extent of data collection when signing up for and consenting to a new online service or app, and the need for downstream recipients of anonymized market data to understand how such data is collected and processed. (See also our prior post covering an enforcement action involving user geolocation data collected from a mobile weather app).

A quick glance at headlines announcing the settlement might give the impression that the FTC found Unrollme’s entire business model unlawful or deceptive, but that is not the case. As described below, the settlement involved only a subset of consumers who received allegedly deceptive emails to coax them into granting access to their email accounts. The model of providing free products or services in exchange for permission to collect user information for data-driven advertising or ancillary market research remains widespread, though could face some changes when California’s CCPA consumer choice options become effective or in the event Congress passes a comprehensive data privacy law.

As part of the Unrollme registration process, users grant Unrollme access to selected personal email accounts for decluttering purposes. However, this permission also allows Unrollme to access and scan inboxes for so-called “e-receipts” or emailed receipts from e-commerce transactions. After scanning users’ e-receipt data (which might include billing and shipping addresses and information about the purchased products or services), Unrollme’s parent company, Slice Technologies, Inc., would anonymize the data and package it into market research reports that are sold to various companies, retailers and others. According to the FTC complaint, when some consumers declined to grant permission to their email accounts during signup, Unrollme, during the relevant time period, tried to make them reconsider by sending allegedly deceptive statements about its access (e.g, “You need to authorize us to access your emails. Don’t worry, this is just to watch for those pesky newsletters, we’ll never touch your personal stuff”). The FTC claimed that such messages did not tell users that access to their inboxes would also be used to collect e-receipts and to package that data for sale to outside companies, and that thousands of consumers changed their minds and signed up for Unrollme.

As part of the settlement, Unrollme is prohibited from misrepresentations about the extent to which it accesses, collects, uses, stores or shares information in connection with its email management products. Unrollme must also send an email to all current users who enrolled in Unrollme after seeing the allegedly deceptive statements and explain Unrollme’s data collection and usage practices. Unrollme is also required to delete all e-receipt data obtained from recipients who enrolled in Unrollme after seeing the challenged statements (unless Unrollme receives affirmative consent to maintain such data from the affected consumers).

In an effort at increased transparency, Unrollme’s current home page displays several links to detailed explanations of how the service collects and analyzes user data (e.g., “How we use data”).

Interestingly, this is not the first time Unrollme’s practices have been challenged, as the company faced a privacy suit over its data mining practices last year. (See Cooper v. Slice Technologies, Inc., No. 17-7102 (S.D.N.Y. June 6, 2018) (dismissing a privacy suit that claimed that Unrollme did not adequately disclose to consumers the extent of its data mining practices, and finding that consumers consented to a privacy policy that expressly allowed such data collection to build market research products and services).

This article is by Jeffrey D Neuburger of Proskauer Rose LLP.

For more on data privacy see the National Law Review Communications, Media & Internet law page.

FTC Charges Two Japanese Corporations with Alleged HSR Avoidance Scheme

Two Japanese corporations each agreed to pay $2.5 million to settle Federal Trade Commission (“FTC”) charges of violating the premerger notification and waiting period requirements under the Hart-Scott-Rodino (“HSR”) Act.

According to the FTC’s complaint (the “Complaint”), the scheme began when an independent investigation in July 2015 (triggered by an earlier investigation by financial regulators) publicly revealed long-running financial irregularities within Toshiba Corporation (“Toshiba”) and that Toshiba had been overstating its profits by billions. To strengthen its financial statement for FY 2015, Toshiba attempted to sell its subsidiary Toshiba Medical Systems Corporation (“TMSC”), which conducts substantial business in the United States, before the end of FY 2016 (March 31, 2016). However, Toshiba did not resolve the TMSC sales process in a timely manner and found that, by early 2016, it would be almost impossible to file premerger notifications in several jurisdictions, including the United States, and receive premerger clearances in time.

To complete the acquisition before the end of FY 2016, the Complaint alleges that Toshiba and Canon Inc. (“Canon”), one of the potential bidders, devised a plan to (i) enable Canon to acquire TMSC, (ii) allow Toshiba to recognize proceeds from the sale by the end of FY 2016, and (iii) avoid filing the notification and observing the waiting period required by the HSR Act. In March 2016, the companies completed this multi-step process as follows:

Toshiba and Canon created a special purpose company, MS Holding Corporation (“MS Holding”), to use as the alleged HSR avoidance device.
Toshiba rearranged the corporate ownership structure of TMSC by creating (i) new classes of voting shares, (ii) a single non-voting share with rights custom-made for Canon, and (iii) options convertible to ordinary shares.
Toshiba sold TMSC’s non-voting share and newly created options to Canon for $6.1 billion while simultaneously transferring TMSC’s voting shares to MS Holding for a nominal payment of $900.
Canon later obtained formal control of TMSC’s voting shares by exercising its options in December 2016.

The Complaint concluded that the companies were hiding the “true nature of the acquisition” because Canon, and not MS Holding, (i) bore the risks/benefits of TMSC and (ii) became the beneficial owner of TMSC in March 2016 when it paid Toshiba $6.1 billion.

According to the Complaint, the scheme devised by Toshiba and Canon “had no purpose” other than to complete the sale of TMSC prior to March 31, 2016, and avoid the HSR Act’s waiting period requirements. The Complaint asked the Court to assess each Defendant a civil penalty of at least $6,360,000.

According to the proposed Final Judgement, each Defendant will pay a civil penalty of $2.5 million. The settlement also requires Defendants to establish and maintain a compliance program to address the alleged violations and comply with inspection and reporting requirements, among other imposed obligations.

Why does this matter?

Unlike most HSR penalty cases, this one did not allege a mistaken filing analysis but rather an alleged HSR Rule 801.90 (“Transactions or devices for avoidance”) scheme. A few notable takeaways:

Investment funds sometimes structure funds such that voting rights are given to the fund manager and economic rights given to the investors. This case stands for the proposition that, in such instances, the FTC will look through the formal division of voting/nonvoting securities to the substance of who has beneficial ownership of the shares (risk of gain and loss, etc.).
Although the statute says that “no person shall acquire” voting securities or assets without first making the required filing and observing the appropriate waiting period, the government here obtained voluntary civil penalties from the seller as well as from the buyer. When analyzing which party bears the risk of not filing HSR for a transaction, this case may be evidence that both sides bear the risk equally, at least in an 801.90 context.
Also note that, although the Complaint asks the court to assess each defendant a civil penalty of “at least $6,360,000,” the government accepted a settlement of $2.5 million each. Given the parties’ apparent decision that paying a potential civil penalty for not fiing an HSR notification was an acceptable cost of doing business, it seems that, with a fine of less than 1% of the $6.1 billion deal value, the regulators may be encouraging rather than discouraging such risk assessments despite having brought this case.

What happens next?

Companies and individuals should carefully determine whether they must observe the HSR Act’s notification and waiting period requirements before consummating their transactions in order to avoid fines of up to $42,530 daily (adjusted annually). HSR rules and filing obligations can be complex and may change through amendments to the regulations or through formal and informal interpretations issued by the FTC. Experienced HSR counsel should be consulted to determine if an acquisition may trigger a filing requirement and, if so, if an exemption is available.

This post was written by Joel Mitnick and Ngoc Pham Hulbig of Cadwalader, Wickersham & Taft LLP.

Read more on FTC Trade Regulation on the National Law Review Antitrust & Trade Regulation page.

Tag: FTC