Tag: FTC

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.

© 2020 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;

or

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 $94million but not more than $376 million, and the Size of Person thresholds below are met.

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.

© Copyright 2020 Cadwalader, Wickersham & Taft LLP

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.

There is no legitimate pro-competitive justification for pay-for-delay of generic drugs by brand name pharma companies. It's the consumer who pays the price. 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. 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:

  1. Influencers must be legitimate and bona fide users, and endorsements must reflect honest opinions.
  2. 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.
  3. Clearly and conspicuously disclose material connections between advertisers and endorsers (e.g., a financial or family relationship with a brand)
  4. 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.
  5. Never assume that a social media platform’s disclosure tool is sufficient.  Some platforms’ disclosure tools are insufficient.  Placement is key.
  6. Avoid ambiguous disclosures like #thanks, #collab, #sp, #spon or #ambassador.  Clarity is crucial.  Material connection disclosures must be clear and unmistakable.
  7. Do not rely on a disclosure placed after a CLICK MORE link or in another easy-to-miss location.
  8. 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).
  9. 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.
  10. 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.

© 2019 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.

© 2019 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).

© 2019 Proskauer Rose LLP.
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:

  1. Toshiba and Canon created a special purpose company, MS Holding Corporation (“MS Holding”), to use as the alleged HSR avoidance device.
  2. 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.
  3. 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.
  4. 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.

© Copyright 2019 Cadwalader, Wickersham & Taft LLP
Read more on FTC Trade Regulation on the National Law Review Antitrust & Trade Regulation page.

 

Fake Followers; Real Problems

Fake followers and fake likes have spread throughout social media in recent years.  Social media platforms such as Facebook and Instagram have announced that they are cracking down on so-called “inauthentic activity,” but the practice remains prevalent.  For brands advertising on social media, paying for fake followers and likes is tempting—the perception of having a large audience offers a competitive edge by lending the brand additional legitimacy in the eyes of consumers, and the brand’s inflated perceived reach attracts higher profile influencers and celebrities for endorsement deals.  But the benefits come with significant legal risks.  By purchasing fake likes and followers, brands could face enforcement actions from government agencies and false advertising claims brought by competitors.

Groundbreaking AG Settlement: Selling Fake Engagement Is Illegal

On January 30, 2019, the New York Attorney General announced a settlement prohibiting Devumi LLC from selling fake followers and likes on social media platforms.  Attorney General Letitia James announced that the settlement marked “the first finding by a law enforcement agency that selling fake social media engagement and using stolen identities to engage in online activity is illegal.”[i] 

Devumi’s customers ranged from actors, musicians, athletes, and modeling agencies to businesspeople, politicians, commentators, and academics, according to the settlement.  Customers purchased Devumi’s services hoping to show the public that they or their products were more popular (and by implication, more legitimate) than they really were.  The AG said Devumi’s services “deceived and attempted to affect the decision-making of social media audiences, including: other platform users’ decisions about what content merits their own attention; consumers’ decisions about what to buy; advertisers’ decisions about whom to sponsor; and the decisions by policymakers, voters, and journalists about which people and policies have public support.”[ii]

Although the Devumi settlement did not impose a monetary punishment, it opened the doors for further action against similar services, and the AG warned that future perpetrators could face financial penalties.

Buyers Beware

Although the New York AG’s settlement with Devumi only addressed sellers of fake followers and likes, companies buying the fake engagement could also face enforcement actions from government agencies and regulatory authorities.  But the risk doesn’t end there—brands purchasing fake engagement could become targets of civil suits brought by competitors, where the potential financial exposure could be much greater.

Competing brands running legitimate social media marketing campaigns, and who are losing business to brands buying fake likes and followers, may be able to recover through claims brought under Lanham Act and/or state unfair competition laws, such as California’s Unfair Competition Law (“UCL”).[iii] 

The Lanham Act imposes liability upon “[a]ny person who, on or in connection with any goods or services, … uses in commerce any … false or misleading description of fact, or false or misleading representation of fact, which … is likely to … deceive as to the … sponsorship, or approval of his or her goods, services, or commercial activities by another person” or “in commercial advertising … misrepresents the nature, characteristics, qualities, or geographic origin of … goods, services, or commercial activities.”[iv]

Fake likes on social media posts could constitute false statements about the “approval of [the advertiser’s] goods, services, or commercial activities” under the Lanham Act.  Likewise, a fake follower count could misrepresent the nature or approval of “commercial activities,” deceiving the public into believing a brand is more popular among consumers than it is.

The FTC agrees that buying fake likes is unlawful.  It publishes guidelines to help the public understand whether certain activities could violate the FTC Act.  In the FAQ for the Endorsement Guides, the FTC states, “an advertiser buying fake ‘likes’ is very different from an advertiser offering incentives for ‘likes’ from actual consumers.  If ‘likes’ are from non-existent people or people who have no experience using the product or service, they are clearly deceptive, and both the purchaser and the seller of the fake ‘likes’ could face enforcement action.” (emphasis added).[v]  

Although there is no private right of action to enforce FTC Guidelines, the Guidelines may inform what constitutes false advertising under the Lanham Act.[vi]  Similarly, violations of the FTC Act (as described in FTC Guidelines) may form the basis of private claims under state consumer protection statutes, including California’s UCL.[vii]

While the Devumi settlement paved the way for private lawsuits against sellers of fake social media engagement, buyers need to be aware that they could face similar consequences.  Because of the risk of both government enforcement actions and civil lawsuits brought by competitors, brands should resist the temptation to artificially grow their social media footprint and instead focus on authentically gaining popularity.  Conversely, brands operating legitimately but losing business to competitors buying fake engagement should consider using the Lanham Act and state unfair competition laws as tools to keep the playing field more even.

[i]Attorney General James Announces Groundbreaking Settlement with Sellers of Fake Followers and “Likes” on Social Media, N.Y. Att’y Gen.

[ii] Id.

[iii] Cal. Bus. & Prof. Code § 17200, et seq.

[iv] 15 U.S.C. § 1125(a).

[v] The FTC’s Endorsement Guides: What People Are Asking, Fed. Trade Comm’n (Sept. 2017) .

[vi] See Grasshopper House, LLC v. Clean & Sober Media, LLC, No. 218CV00923SVWRAO, 2018 WL 6118440, at *6 (C.D. Cal. July 18, 2018) (“a ‘plaintiff may and should rely on FTC guidelines as a basis for asserting false advertising under the Lanham Act.’”) (quoting Manning Int’l Inc. v. Home Shopping Network, Inc., 152 F. Supp. 2d 432, 437 (S.D.N.Y. 2001)).

[vii] See Rubenstein v. Neiman Marcus Grp. LLC, 687 F. App’x 564, 567 (9th Cir. 2017) (“[A]lthough the FTC Guides do not provide a private civil right of action, ‘[v]irtually any state, federal or local law can serve as the predicate for an action under [the UCL].’”) (quoting Davis v. HSBC Bank Nev., N.A., 691 F.3d 1152, 1168 (9th Cir. 2012)).

 

© 2019 Robert Freund Law.
This post was written by Robert S. Freund of Robert Freund Law.

FTC Settlement with Video Social Networking App Largest Civil Penalty in a Children’s Privacy Case

The Federal Trade Commission (FTC) announced a settlement with Musical.ly, a Cayman Islands corporation with its principal place of business in Shanghai, China, resolving allegations that the defendants violated the Children’s Online Privacy Protection Act (COPPA) Rule.

Musical.ly operates a video social networking app with 200 million users worldwide and 65 million in the United States. The app provides a platform for users to create short videos of themselves or others lip-syncing to music and share those videos with other users. The app also provides a platform for users to connect and interact with other users, and until October 2016 had a feature that allowed a user to tap on the “my city” tab and receive a list of other users within a 50-mile radius.

According to the complaint the defendants (1) were aware that a significant percentage of users were younger than 13 years of age and (2) had received thousands of complaints from parents that their children under 13 had created Muscial.ly accounts.

The FTC’s COPPA Rule prohibits the unauthorized or unnecessary collection of children’s personal information online by internet website operators and online services, and requires that verifiable parental consent be obtained prior to the collecting, using, and/or disclosing personal information of children under the age of 13.

In addition to requiring the payment of the largest civil penalty ever imposed for a COPPA case ($5.7 million), the consent decree prohibits the defendants from violating the COPPA Rule and requires that they delete and destroy all of the personal information of children in their possession, custody, or control unless verifiable parental consent has been obtained.

FTC Commissioners Chopra and Slaughter issued a joint statement noting their belief that the FTC should prioritize uncovering the role of corporate officers and directors and hold accountable everyone who broke the law.

 

©2019 Drinker Biddle & Reath LLP. All Rights Reserved

Sears Seeks to Modify FTC Order on Online Tracking

In 2009, Sears Holding Management settled with the Federal Trade Commission (FTC) over allegations that the company’s online tracking activity exceeded what they told consumers. Now, Sears has submitted a petition requesting that the FTC reopen and modify its settlement order, arguing that changing technology since 2009 has made the order’s definition of “tracking applications” too broad and has put them at a competitive disadvantage.

The 2009 FTC complaint charged that Sears “failed to disclose adequately the scope of consumers’ personal information it collected via a downloadable software application, telling consumers that the software would track their “online browsing,” without telling them that it also collected information from third-party websites consumers visited such as their shopping cart information, online bank statements, and drug prescription records. Sears was required to stop collecting data from participating consumers and to destroy what they’d collected.

Sears now argues that the definition of “tracking application” in the FTC’s order now applies to most software on nearly all platforms, making them “out of step with current market practices without a corresponding benefit in combatting threats to consumer privacy.” The definition of tracking applications is so broad, Sears claims, that it “encompasses all of Sears’ current mobile apps, forcing Sears to handle disclosures differently than other companies with mobile apps and disadvantaging Sears in the marketplace.” Sears claims that modification of the order would allow the retailer to align with current tracking practices used by their competitors.

 This post was written by Sheila A. Millar ,Tracy P. Marshall & Nathan A. Cardon of Keller and Heckman LLP.,© 2017
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