Tag: FTC

FTC Files Much-Anticipated Monopolization Charges Against Broadcom

Also Paves Way for Private Actions

As predicted by some, the Federal Trade Commission issued a complaint charging Broadcom Inc. with illegally monopolizing several markets for semiconductor chips used to deliver television and broadband internet services. The Commission simultaneously issued a proposed consent order that, if approved, would settle the FTC’s charges against Broadcom and allegedly restore competition in the impacted markets. But this is likely just the beginning of Broadcom’s antitrust issues in the U.S. because the FTC’s complaint provides an effective roadmap for Broadcom customers to collect treble damages for their overpayments.

The Complaint and Consent Decree

The FTC alleges that Broadcom has monopoly power in three separate semiconductor chip markets: (i) systems-on-a-chip (“SOCs”) for set top boxes, (ii) SOCs for DSL broadband devices, and (iii) SOCs for fiber broadband devices. It also determined Broadcom is one of a few significant suppliers of other chips relevant to the investigation, which include wi-fi chips that enable the devices to connect to wireless internet and front-end chips that convert analog signals to digital signals for the devices. Collectively, the FTC refers to these chips as the “Relevant Products.”

According to the FTC, Broadcom maintained its monopoly power through unlawful practices beginning in 2016. At that time, Broadcom began facing competitive threats from nascent rivals in the monopolized markets, which was largely fueled by Broadcom customers (cable and internet service providers and original equipment manufacturers (“OEMs”)) attempting to lessen dependence on Broadcom and foster competition in these markets. Around the same time, customer demand began shifting significantly from broadcast STBs (i.e., traditional cable STBs) to streaming STBs that access content via the home’s broadband modem.

In response to the competitive threats and changing market dynamics, Broadcom endeavored to maintain its monopoly power rather than compete on the merits.

Through a series of long-term contracts entered with service providers and OEMs, and through an accompanying campaign of threats and retaliation, Broadcom induced customers to purchase or use Broadcom’s relevant products on an exclusive or near-exclusive basis.

Broadcom’s misconduct had significant anticompetitive effects, including: (i) foreclosing competitors from a substantial share of the relevant markets, (ii) causing higher prices for customers, (iii) preventing rivals from reaching necessary scale by stopping OEMs and service providers from purchasing relevant products from them, (iv) reducing customer choice and innovation by impeding rivals’ development efforts and/or causing them to divert money and resources from the relevant markets, and (v) erecting significant barriers to entry and expansion.

The consent order prohibits Broadcom from entering into these same types of exclusivity or loyalty agreements with its customers for the supply of the monopolized chips. Broadcom also must stop conditioning access to or requiring favorable supply terms for these chips on customers committing to exclusivity or loyalty for the supply of other relevant chips. And, finally, the consent order explicitly prohibits Broadcom from retaliating against customers for doing business with rivals. The consent order will remain in place for 10 years and Broadcom is required to submit a compliance report to the court annually. The FTC will publish the consent agreement package in the Federal Register with instructions for filing comments. Comments must be received 30 days after publication. The Commission provided an analysis of the agreement to assist those who wish to comment.

The complaint and consent decree are significant for several reasons beyond restoring competition in the relevant markets.

For one, the complaint bestows purchasers of Broadcom’s relevant products with most facts needed to plead a Section 2 monopolization case for treble damages. The complaint defines the relevant markets, explains that Broadcom has monopoly power in at least the monopolized markets, describes how Broadcom unlawfully maintained its monopoly power, and explains how Broadcom’s misconduct harmed competition and caused purchasers to pay higher prices.

Second, the complaint substantiates claims that Broadcom’s anticompetitive conduct extends beyond the relevant markets identified in the complaint. For example, Western Digital, the largest manufacturer of hard disk drives in the U.S., alleged that Broadcom engaged in strikingly similar misconduct in that market. Specifically, Western Digital alleged in a 2017 public court filing that Broadcom demanded that Western Digital buy certain components for its hard disk drives exclusively from Broadcom and eliminate avenues from which it could buy these components from rivals. Broadcom threatened to cut off supply of necessary components if Western Digital did not capitulate.

Broadcom customers in any market should consider whether they have been impacted by misconduct like that flagged by the FTC.

If so, then they should analyze two things: (i) whether they have made sufficient purchases to warrant filing a private action to recover treble damages and (ii) whether they should file a comment during the notice period concerning the adequacy (or lack thereof) of the consent decree. Given that Broadcom is subject to both judicial oversight for the next 10 years and an anti-retaliation clause in the consent order, companies should feel comfortable filing an action or comment against Broadcom.

© MoginRubin LLP
For more articles on the FTC, visit the NLRAntitrust & Trade Regulation section.

Rulemaking Petition Seeks SEC Guidance on NFTs

A recent rulemaking petition to the SEC requests that the agency issue a concept release on nonfungible tokens, or NFTs. The petition is hopeful that an SEC rulemaking paired with an opportunity for public input will resolve regulatory uncertainty for parties looking to create NFTs and facilitate their sale.

The petition opens by noting that the federal securities laws, first written in the 1930s, “provide a crude mechanism for the regulation of NFTs.” It then uses the SEC’s Howey guidance to consider whether NFTs should be deemed securities for purposes of the federal securities laws. The petition observes that if NFTs are deemed securities, platforms facilitating their sale and secondary trading may be deemed exchanges, broker-dealers or alternative trading systems under SEC rules. However, consistent with the market’s current approach to the issue, the petition also posits that if an NFT “relates to an existing asset and is marketed as a collectible with a public assurance of authenticity on the blockchain, it should not be deemed a security.”

To allay any potential uncertainty in the future, the petition urges the SEC to issue a concept release (which is the SEC’s term for an advance notice of proposed rulemaking under the Administrative Procedure Act) on the status and regulation of NFTs under the federal securities laws. Because NFTs do not typically function as traditional securities, the petition advocates that the SEC provide guidance that defines when an NFT is a security and what type of registration is required by firms facilitating the trading of NFTs. Doing so will, according to the petition, stimulate innovation and promote market integrity, capital formation, and protection of investors.

As we have previously noted, new SEC Chairman Gary Gensler brings a deep understanding of blockchain and digital assets to the agency. The crypto community has been hopeful that he will also bring a more progressive attitude towards the regulation of digital asset securities. Mr. Gensler is scheduled to testify for the first time as SEC chairman before the full House Financial Services Committee on May 6, 2021, but his prepared testimony does not address digital assets. As NFTs continue to proliferate, weighing in on this asset class will provide a great deal of insight to Chairman Gensler’s broader approach to the crypto space in his new role.

Copyright © 2021, Hunton Andrews Kurth LLP. All Rights Reserved.

ARTICLE BY Scott H. Kimpel of Hunton Andrews Kurth
For more articles on NFTs, visit the NLR Corporate & Business Organizations

COVID-19: FTC Acts Fast, Lambasts Missing Masks

Section 5 of the Federal Trade Commission Act (15 U.S.C. Section 45(a)) provides worthwhile remedies for the types of unfair competition that intellectual property practitioners find quite familiar, and practitioners should give them due consideration.  Selling COVID-19 masks you don’t have provides a good example.

In a case filed in early July (FTC press release) the FTC took a Staten Island business to task, along with its owner, for claiming that masks, respirators and other “PPE’s” (personal protection equipment) was “in stock” and “would ship the next day” (Complaint).  The website “supergooddeals.com” continues to lead off with its signature slogan, “Pay Today, Ships Tomorrow” (https://supergooddeals.com/; also accessed by the author on July 31, 2020).

Apparently starting in March 2021, supergooddeals.com began selling PPE.  According to the FTC complaint, the website claimed that the desired masks were “IN STOCK” (complaint paragraphs 19 and 20).  The FTC complaint gives no indication as to whether or not the “in stock” claim was accurate, but instead pleads the examples of several consumers who never received masks, and numerous complaints to which supergooddeals.com never responded.

The FTC complaint also implies that to the extent that some orders may have been shipped, they were shipped on terms that were far less favorable than supergooddeals.com advertised, and when shipments never arrived (or perhaps were never sent) supergooddeals.com failed to give buyers the opportunity to change their mind, or offer a refund or any modification in price terms (e.g. Complaint paragraphs 29-31).

Supergooddeals.com also apparently attempted to conceal their failures (worse verbs could be applied) by producing shipment labels carrying the promised shipping date, but for packages that either would never ship, or shipped much later than the labelled date.  Supergooddeals.com apparently didn’t realize that when a business creates its own USPS shipping labels, “An electronic record is generated on the ship date indicating that your package has been mailed and the Postal Service is expecting to see your package that day.” Click-N-Ship Field Information Kit

(For those of us that may merely be tardy, the same USPS webpage suggests mailing the package on the next business day.  Checking for a friend.)

The FTC also asserted MITOR (“Mail, Internet, or Telephone Order Merchandise,” 16 CFR Part 435) which defines the terms in the name, defines unfair and deceptive practices in context, requires certain activities, and lists some exceptions (including, for reasons known only on K Street, “orders of seeds and growing plants”).

So, the alleged infractions include:

  • Advertising a delivery date that you know you cannot meet,
  • Advertising items that you don’t have in stock
  • Producing a false mailing label in an attempt to prove the shipping date, and
  • Failing to cancel orders when requested or provide prompt refunds

The Federal Trade Commission Act has worthwhile remedies for such activities, and as the Complaint indicates (paragraphs 58 and 59) the FTC plans to seek them against supergooddeals.com.

So, the people get their money back from supergooddeals.com and all’s well that ends well. Right?

Not exactly.  The FTC Act offers no private right of action in these circumstances.  The Fair Debt Collection Practices Act (FDCPA) 15 USC Section 1692(d) which is generally under the Federal Trade Commission, provides private remedies in the consumer debt arena, but a private party otherwise has no right to the remedies sought against supergooddeals.com under the FTC Act.

At this point, however, the intellectual property (“IP”) practitioner may have an extra arrow up his or her sleeve:  Section 43(a) of the Lanham Act (15 USC 1125(a)) if—IF—the parties can be defined as competitors in the section 43(a) sense.

FTC § 5(a)

Lanham Act § 43(a)

Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.

(1)Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which—

Anchor(A)

is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or

Anchor(B)

in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person’s goods, services, or commercial activities,

shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.

The Lanham Act applies to false representations (etc.) about goods and services in interstate commerce, but plaintiffs attempting to stretch section 43 (a) too far have been turned down e.g., Radiance Found., Inc. v. NAACP, 786 F.3d 316 (4th Cir., 2015) (The Radiance Foundation, an African American influenced pro-life organization, criticized the NAACP over the NAACP position on abortion.  The NAACP issued a cease and desist letter and the Radiance Foundation filed a declaratory judgment complaint arguing that neither trademark infringement nor dilution had occurred.  The NAACP counterclaimed under (inter alia) section 43(a).  The Fourth Circuit held that for a number of reasons, including the lack of competing goods or services in the section 43(a) sense, the NAACP did not have a trademark remedy in these circumstances.)

Supergooddeals.com certainly dealt (and continues to deal) in “goods” in the sense of section 43(a).  Nevertheless, the “hundreds of” consumers listed in (e.g.) paragraph 26 of the FTC complaint don’t have a section 43(a) remedy against supergooddeals.com because such customers are not “competitors” of supergooddeals.com in the sense required by section 43(a).  Stated more formally, for individual defrauded customers, the answer to, “whether a legislatively conferred cause of action encompasses a particular plaintiff’s claim” is “no.” (Lexmark Int’l, Inc. v. Static Control Components, Inc., 572 U.S. 118, 132 (2014). (“A consumer who is hoodwinked into purchasing a disappointing product may well have an injury-in-fact cognizable under Article III, but he cannot invoke the protection of the Lanham Act—a conclusion reached by every Circuit to consider the question.”)

Does Pat Peoples have any Silver Lining here?  Well, yes. In addition to a possible contractual remedy, most states have some form of general “unfair competition is illegal” statute as well as consumer protection remedies.

For the time being, however, these defrauded consumers have Uncle Sam on their side, and when “Uncle” sues he usually gets the job done.

 

Copyright 2020 Summa PLLC All Rights Reserved

ARTICLE BY Philip Summa and Summa PLLC.
For more FTC PPE Actions see the National Law Review Coronavirus News section.

FTC Proposes New Rule Codifying “Made in USA” Policy

On July 16, 2020 the FTC published a notice of proposed rulemaking in which it announced its intention to codify its long-time enforcement policy regarding products labeled as “Made in the USA” (MUSA); these claims are currently enforced through the FTC’s general authority to prevent unfair and deceptive practices.

The proposed rule does not change the substantive criteria on which such claims will be evaluated and rather is primarily intended to (1) strengthen the FTC’s enforcement mechanism by making it easier for the FTC to assess civil penalties against those making unlawful MUSA claims and (2) give marketers more regulatory certainty. Under the proposed rule, a MUSA claim may, as before, only be made where (1) the final processing or assembly occurs in the USA, (2) all significant processing that goes in the product occurs in the USA, and (3) all or virtually all of the ingredients or components of the product are made and sourced in the U.S. While the proposed rule would apply to a broad range of product labels, it would also apply to MUSA claims found outside of the product label such as mail order catalogs and mail order promotional materials defined to include “any materials, used in the direct sale or direct offering for sale of any product or service, that are disseminated in print or by electronic means, and that solicit the purchase of such product or service by mail, telephone, electronic mail, or some other method without examining the actual product purchased.”  The proposed rule would not apply to qualified MUSA claims.

Comments to the proposed rule are due by September 14, 2020.

© 2020 Keller and Heckman LLP

For more on labeling regulation, see the National Law Review Administrative & Regulatory law section.

FTC Reports to Congress on Social Media Bots and Deceptive Advertising

The Federal Trade Commission recently sent a report to Congress on the use of social media bots in online advertising (the “Report”).  The Report summarizes the market for bots, discusses how the use of bots in online advertising might constitute a deceptive practice, and outlines the Commission’s past enforcement work and authority in this area, including cases involving automated programs on social media that mimic the activity of real people.

According to one oft-cited estimate, over 37% of all Internet traffic is not human and is instead the work of bots designed for either good or bad purposes.  Legitimate uses for bots vary: crawler bots collect data for search engine optimization or market analysis; monitoring bots analyze website and system health; aggregator bots gather information and news from different sources; and chatbots simulate human conversation to provide automated customer support.

Social media bots are simply bots that run on social media platforms, where they are common and have a wide variety of uses, just as with bots operating elsewhere.  Often shortened to “social bots,” they are generally described in terms of their ability to emulate and influence humans.

The Department of Homeland Security describes them as programs that “can be used on social media platforms to do various useful and malicious tasks while simulating human behavior.”  These programs use artificial intelligence and big data analytics to imitate legitimate activities.

According to the Report, “good” social media bots – which generally do not pretend to be real people – may provide notice of breaking news, alert people to local emergencies, or encourage civic engagement (such as volunteer opportunities).  Malicious ones, the Report states, may be used for harassment or hate speech, or to distribute malware.  In addition, bot creators may be hijacking legitimate accounts or using real people’s personal information.

The Report states that a recent experiment by the NATO Strategic Communications Centre of Excellence concluded that more than 90% of social media bots are used for commercial purposes, some of which may be benign – like chatbots that facilitate company-to-customer relations – while others are illicit, such as when influencers use them to boost their supposed popularity (which correlates with how much money they can command from advertisers) or when online publishers use them to increase the number of clicks an ad receives (which allows them to earn more commissions from advertisers).

Such misuses generate significant ad revenue.

“Bad” social media bots can also be used to distribute commercial spam containing promotional links and facilitate the spread of fake or deceptive online product reviews.

At present, it is cheap and easy to manipulate social media.  Bots have remained attractive for these reasons and because they are still hard for platforms to detect, are available at different levels of functionality and sophistication, and are financially rewarding to buyers and sellers.

Using social bots to generate likes, comments, or subscribers would generally contradict the terms of service of many social media platforms.  Major social media companies have made commitments to better protect their platforms and networks from manipulation, including the misuse of automated bots.  Those companies have since reported on their actions to remove or disable billions of inauthentic accounts.

The online advertising industry has also taken steps to curb bot and influencer fraud, given the substantial harm it causes to legitimate advertisers.

According to the Report, the computing community is designing sophisticated social bot detection methods.  Nonetheless, malicious use of social media bots remains a serious issue.

In terms of FTC action and authority involving social media bots, the FTC recently announced an enforcement action against a company that sold fake followers, subscribers, views and likes to people trying to artificially inflate their social media presence.

According to the FTC’s complaint, the corporate defendant operated websites on which people bought these fake indicators of influence for their social media accounts.  The corporate defendant allegedly filled over 58,000 orders for fake Twitter followers from buyers who included actors, athletes, motivational speakers, law firm partners and investment professionals.  The company allegedly sold over 4,000 bogus subscribers to operators of YouTube channels and over 32,000 fake views for people who posted individual videos – such as musicians trying to inflate their songs’ popularity.

The corporate defendant also allegedly also sold over 800 orders of fake LinkedIn followers to marketing and public relations firms, financial services and investment companies, and others in the business world.  The FTC’s complaint states that followers, subscribers and other indicators of social media influence “are important metrics that businesses and individuals use in making hiring, investing, purchasing, listening, and viewing decisions.” Put more simply, when considering whether to buy something or use a service, a consumer might look at a person’s or company’s social media.

According to the FTC, a bigger following might impact how the consumer views their legitimacy or the quality of that product or service.  As the complaint also explains, faking these metrics “could induce consumers to make less preferred choices” and “undermine the influencer economy and consumer trust in the information that influencers provide.”

The FTC further states that when a business uses social media bots to mislead the public in this way, it could also harm honest competitors.

The Commission alleged that the corporate defendant violated the FTC Act by providing its customers with the “means and instrumentalities” to commit deceptive acts or practices.  That is, the company’s sale and distribution of fake indicators allowed those customers “to exaggerate and misrepresent their social media influence,” thereby enabling them to deceive potential clients, investors, partners, employees, viewers, and music buyers, among others.  The corporate defendant was therefor charged with violating the FTC Act even though it did not itself make misrepresentations directly to consumers.

The settlement banned the corporate defendant and its owner from selling or assisting others in selling social media influence.  It also prohibits them from misrepresenting or assisting others to misrepresent, the social media influence of any person or entity or in any review or endorsement.  The order imposes a $2.5 million judgment against its owner – the amount he was allegedly paid by the corporate defendant or its parent company.

The aforementioned case is not the first time the FTC has taken action against the commercial misuse of bots or inauthentic online accounts.  Indeed, such actions, while previously involving matters outside the social media context, have been taking place for more than a decade.

For example, the Commission has brought three cases – against Match.com, Ashley Madison, and JDI Dating – involving the use of bots or fake profiles on dating websites.  In all three cases, the FTC alleged in part that the companies or third parties were misrepresenting that communications were from real people when in fact they came from fake profiles.

Further, in 2009, the FTC took action against am alleged rogue Internet service provider that hosted malicious botnets.

All of this enforcement activity demonstrates the ability of the FTC Act to adapt to changing business and consumer behavior as well as to new forms of advertising.

Although technology and business models continue to change, the principles underlying FTC enforcement priorities and cases remain constant.  One such principle lies in the agency’s deception authority.

Under the FTC Act, a claim is deceptive if it is likely to mislead consumers acting reasonably in the circumstances, to their detriment.  A practice is unfair if it causes or is likely to cause substantial consumer injury that consumers cannot reasonably avoid and which is not outweighed by benefits to consumers or competition.

The Commission’s legal authority to counteract the spread of “bad” social media bots is thus powered but also constrained by the FTC Act, pursuant to which the FTC would need to show in any given case that the use of such bots constitute a deceptive or unfair practice in or affecting commerce.

The FTC will continue its monitoring of enforcement opportunities in matters involving advertising on social media as well as the commercial activity of bots on those platforms.

Commissioner Rohit Chopra issued a statement regarding the “viral dissemination of disinformation on social media platforms.” And the “serious harms posed to society.”  “Social media platforms have become a vehicle to sow social divisions within our country through sophisticated disinformation campaigns.  Much of this spread of intentionally false information relies on bots and fake accounts,” Chopra states.

Commissioner Chopra states that “bots and fake accounts contribute to increased engagement by users, and they can also inflate metrics that influence how advertisers spend across various channels.”  “[T]he ad-driven business model on which most platforms rely is based on building detailed dossiers of users.  Platforms may claim that it is difficult to detect bots, but they simultaneously sell advertisers on their ability to precisely target advertising based on extensive data on the lives, behaviors, and tastes of their users … Bots can also benefit platforms by inflating the price of digital advertising.   The price that platforms command for ads is tied closely to user engagement, often measured by the number of impressions.”

Click here to read the Report.

© 2020 Hinch Newman LLP

Supreme Court Decides to Rule on FTC’s Disgorgement Authority

As previously blogged about here, the Supreme Court recently upheld the SEC’s disgorgement authority but imposed certain limits, including consideration of net profits.  FTC defense practitioners immediately began to consider how the ruling might potentially impact FTC investigations and enforcement actions, including how it might bear upon other judicial challenges to whether Section 13(b) of the FTC Act authorizes the FTC to obtain equitable monetary relief.

On July 9, 2020, the Supreme Court granted certiorari in the AMG Capital Management and Credit Bureau Center matters that should now decide the issues of whether Section 13(b) permits courts to award disgorgement.

In AMG v. FTC, the Ninth Circuit held that courts’ equitable powers include awarding equitable monetary relief, including disgorgement.  In contrast, the Seventh Circuit in FTC v. Credit Bureau Center recently disregard years of precedent when it held that the express terms of Section 13(b) illustrate that Congress only authorized injunctive relief, not equitable monetary relief or disgorgement.

The two matters have been consolidated and with a total of one hour allotted for oral argument.   The importance of these matters cannot be overstated as they conclusively resolve splits of authority relating to whether or in what circumstances FTC lawyers are entitled to seek equitable monetary relief in the form of disgorgement.

© 2020 Hinch Newman LLP

The DOJ and SEC Have Updated Their Foundational Foreign Corrupt Practices Act Resource

The U.S. Department of Justice (DOJ) and Securities and Exchange Commission (SEC) recently published an updated guide to the Foreign Corrupt Practices Act (FCPA), a key resource for corporate whistleblowers around the world.

The FCPA is a U.S. law that prohibits the payment of anything of value to foreign government officials in order to obtain a business advantage. The FCPA also requires publicly traded corporations to make and keep books and records that accurately reflect transactions of the corporation to ensure that no bribes were paid.

This singular law is extremely important to global corporate accountability because it ensures that U.S. companies can be held accountable for corrupt actions abroad. Additionally, because this law is a part of the Dodd-Frank Act, whistleblowers from around the world may anonymously and confidentially report such corruption to the SEC and receive an award for successful tips. The U.S. government has successfully prosecuted many foreign corporations under the FCPA and has issued millions of dollars in rewards to both U.S. and non-U.S. whistleblowers.

This new guide adheres to this standard by providing significant, easy to follow information on the scope of the FCPA, potential consequences for FCPA violations, and whistleblower protections. In this new edition, the DOJ and SEC expand their guidance on a number of issues citing new cases and the new DOJ FCPA Corporate Enforcement Policy, which all anticorruption advocates, including potential whistleblowers, and corporate compliance professionals should review and understand.

The complete list of topics on which updated definitions and guidance is provided is as follows:

  • Intermediaries

  • Gifts as bribes

  • Instrumentalities of foreign governments

  • Third party payments

  • The “local law defense”

  • Successor liability for corporations

  • Conspiracy liability

  • Applicable statutes of limitations

  • Criminal liability for accounting violations

  • Factors that the Justice Department considers in determining how to resolve a corporate criminal case

  • DOJ FCPA Corporate Enforcement Policy (a new official DOJ policy), including examples of when the DOJ will decline to prosecute

  • How corporate and individual cooperation is evaluated

  • Components of an effective compliance program

Copyright Kohn, Kohn & Colapinto, LLP 2020. All Rights Reserved.

For more on the Foreign Corrupt Practices Act, see the National Law Review Antitrust and Trade Regulation section.

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)

© 2020 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.

© 2020 Faegre Drinker Biddle & Reath LLP. All Rights Reserved.

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.

© 2020 Hinch Newman LLP