Consumer Protection UpdateConsumer Protection Update

May 2009May 2009

ABA Section of Antitrust LawABA Section of Antitrust LawConsumer Protection CommitteeConsumer Protection Committee

Patrice Hayden | Bahareh Mostajelean | Dana Rosenfeld | David Zetoony

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Agenda

• Legislative Update

• Federal Agency Update

• State Attorney General Update

• Private Litigation Update

• NAD Update

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Legislative Update

• Credit Card Accountability Responsibility and Disclosure Act of 2009, signed on May 22.

• Most of the provisions will take effect in 9 months– Prevents an issuer from raising a customer’s rate on an

existing balance unless the consumer is more than 60 days behind on a payment

– Prohibits applying interest rate charges to two full cycles of card balance

– Requires mailing bills 21 days before the due date– Prohibits charging over-the-limit-fees unless the cardholder

first opts-in to the charges

Dana Rosenfeld |

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Legislative Update: Credit Card Accountability

Responsibility and Disclosure Act of 2009 (cont’d)• Requires promotional rates to last at least six months; and • Prohibits increasing rates in the first year the card account is

opened. • Applies to gift cards (and gift certificates) - including both "store

gift cards" (issued by and usable  at a single retailer) and "general use" gift cards (those branded American Express, MasterCard or Visa.

• Expressly excludes other prepaid cards such as payroll cards, government benefit cards, teen cards, or general purpose reloadable cards.

• Limits service fees that prepaid companies charge for dormancy or lack of use

• Limits expiration dates so that the cards cannot expire until 5 years after issuance or after the last funds load. 

Dana Rosenfeld |

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Legislative Update

Financial Product Safety Commission• Bills introduced in March to create

5 member independent Commission– H.R. 1705 (Delahunt)– S. 566 (Durbin)

• In May, Obama Administration said itis considering a commission as part of a broad set of regulatory reform proposals to be unveiled in a few weeks.

Dana Rosenfeld |

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Federal Agency UpdateFDA and FTC Action on Fraudulent H1N1Influenza Products• public warning that Tamiflu and Relenza are

only FDA approved drugs to treat or prevent H1N1• announcement of joint law enforcement effort to

identify and pursue regulatory or criminal action• On May 14, FTC announced it had identified 10 web

sites making questionable flu treatment, prevention or cure claims: 4 had removed the claims; one was referred to FDA; 3 foreign sites referred to international counterparts; 2 still under review

Dana Rosenfeld |

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Federal Agency UpdateFood and Drug Administration (FDA)• General Mills received a warning letter from FDA on May 11, taking issue with

cholesterol-lowering claims Cheerios Toasted Whole Grain Oat Cereal. • The agency said claims that Cheerios can reduce bad cholesterol by an

average of 4% in six weeks, represent "serious violations" of the FDCA and render Cheerios a new, unapproved drug under the Act.

• FDA has authorized the use of a health claim associating soluble fiber from whole grain oats with a reduced risk of coronary heart disease, and General Mills does include this claim on its Cheerios box.

• But FDA said the cholesterol-lowering claims do not fall under the allowed soluble fiber health claim because they are presented as separate, stand-alone claims through their location on the package and other label design features.

• In addition, the claims language being used by General Mills attributes a degree of risk reduction for coronary heart disease to eating Cheerios, and this is not permitted under the soluble fiber health claim, according to the warning letter.

Dana Rosenfeld |

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Federal Agency Update-FTC• On May 4, FTC announced settlements with two individuals--Christopher Tomasulo and

Bonnie Werner—resolving charges of violating HOEPA and TILA, and imposing judgments of $2.7M each (suspended). Thomas C. Little, an attorney, also settled contempt charges from his role in facilitating the scam.

• The Commission sued them and 7 others in February 2008 as part of an ongoing effort to crack down on businesses that prey upon homeowners facing foreclosure, charged with luring homeowners into high-cost, short-term loans secured by an additional mortgage on their homes.

• The Home Ownership and Equity Protection Act violations from extending credit based on the value of consumers’ collateral without regard to their repayment ability, by requiring balloon payments after only 6 months, by providing negatively amortized loans that caused consumers to owe more at the end of the loan than at the beginning, and by failing to make required disclosures.

• Truth in Lending Act and Section 5 violations by grossly understating the loans’ APR and finance charges. They also were charged with violating TILA and Regulation Z by failing to make timely written disclosures and by failing to disclose accurately the amount being financed, the finance charge, the APR, the payment schedule, the total payment amount, and that the creditor has or will acquire a security interest in the consumer’s home.

Dana Rosenfeld |

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Federal Agency Update-FTCData Security Testimony and Enforcement• Eileen Harrington, Acting Director, before Consumer

Protection Subcommittee on HR 2221, the Data Accountability and Trust Act, in support of bill.

• Recommended that it cover paper as well as e-data, and that provisions covering data brokers be strengthened.

• Also announced administrative settlement with residential loan offeror/servicer, James B. Nutter & Co. for GLB privacy and safeguards violations.

• Failure to adopt adequate measures allowed an intruder to direct computer network to send spam emails and “could have” accessed PI without authorization.

Dana Rosenfeld |

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Federal Agency Update-FTC• FTC charged home mortgage lender Golden Empire Mortgage and

Howard Kootstra with violating ECOA by charging Hispanic consumers higher prices for mortgage loans than non-Hispanic white consumers.

• Defendants gave loan officers and managers wide discretion to charge, in addition to the risk-based price, “overages” through higher interest rates and higher up-front charges, and paid loan officers a percentage of the overages as a commission and failed to monitor whether Hispanic consumers were paying higher overages than non-Hispanic white borrowers.

• The complaint, filed in the Central District of CA alleged that the company’s policy and practice of allowing loan officers to charge discretionary overages resulted in Hispanics being charged higher prices because of their national origin – price disparities that are “substantial, statistically significant, and cannot be explained by factors related to underwriting risk or credit characteristics of the applicants.”

Dana Rosenfeld |

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Federal Agency Update-FTC• FTC obtained TRO shutting down a telemarketing campaign

bombarding U.S. consumers with hundreds of millions of “robocalls” in an effort to sell vehicle service contracts by suggesting they are extensions of OEM warranties.

• In two related complaints took action against both the promoter of the extended auto warranties, Transcontinental Warranty and its owner, as well as the telemarketing company that it hired, Voice Touch, its principals, and business partner Network Foundations.

• Described as a massive telemarketing scheme that uses random, pre-recorded phone calls to deceive consumers into thinking that their vehicle’s warranty is about to expire. Consumers who respond to the robocalls are pressured to purchase extended service contracts.

Dana Rosenfeld |

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Federal Agency Update-FTC

• The seller of extended auto warranties sued by the FTC allegedly took in more than $10 million on the sale of these service contracts.

• Consumers received robocalls at home, work, and on their cell phones, sometimes several times in one day. Businesses, government offices and even 911 dispatchers subjected to the calls.

• The telemarketing companies dialed every phone number within a particular area code and prefix sequentially, without knowing anything about the vehicles of the consumers they call, or whether those consumers’ numbers are on the Do Not Call Registry

Dana Rosenfeld |

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Federal Agency Update-FTC• On May 15th, the FTC obtained a TRO to stop an Internet-based operation that

pretends to operate “MakingHomeAffordable.gov,” the official Web site of the federal Making Home Affordable program for free mortgage loan assistance.

• The agency claimed defendants deceptively diverted consumers who searched online for the free government assistance program to commercial Web sites that offer loan modification services for a fee.

• Earlier this year, to help responsible homeowners afford to stay in their homes, President Obama announced the Making Home Affordable program to help eligible homeowners refinance or modify their mortgages. Using the resources on MakingHomeAffordable.gov, consumers in trouble with their mortgages can get help – at no cost – from trained housing counselors.

• This matter resulted from a multi agency effort that began in April in which Secretary Geithner, Chairman Leibowitz, AG Holder, HUD Secretary Donovan to crack down on foreclosure rescue scams and loan modification fraud.

Dana Rosenfeld |

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FTC - Initiatives and Announcements• Red Flags Compliance Guide: template for entities with a low risk of identity

theft – such as firms that know their customers personally - in developing written ID theft prevention programs. “Create Your Own Identity Theft Prevention Program: A Guided 4-Step Process,” www.ftc.gov/bcp/edu/microsites/redflagsrule/get-started.shtm.

• The FTC and the Searle Center on Law, Regulation, and Economic Growth at Northwestern University School of Law will host a 2 day event, “Protecting Consumers in Debt Collection Litigation and Arbitration: A Roundtable Discussion,” in Chicago, on August 5 and 6, 2009. This event follows the Commission’s 2009 Report, Collecting Consumer Debts: The Challenges of Change – A Workshop Report, which was issued in February and recommended that the debt collection regulatory system in the US be reformed and modernized. The Chicago event will be the first of these roundtable discussions for state court judges, government officials, debt collectors and their representatives, consumer advocates, and academics.

Dana Rosenfeld |

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FTC—Initiatives and Announcements• The FTC will hold a series of workshops titled “Can News Media Survive

the Internet Age? Competition, Consumer Protection, and First Amendment Perspectives.” The first workshop will be held on September 15, 2009.

• The workshops will consider possible business and non-profit models for news organizations, the role of targeted behavioral and other online advertising, whether additional, limited antitrust exemptions may be necessary under these unique circumstances, and the implications of online news for both copyright protection and the availability of broadband access.

• Witnesses will include journalists and other representatives of news organizations, privacy experts, direct marketers, online advertisers, academics, new media representatives (such as bloggers and local news Web sites), and consumer advocates.

Dana Rosenfeld |

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FTC—Staff Appointments• General Counsel: Will Tom, who has been practicing antitrust law as a partner in Morgan Lewis.

Will was was Deputy Director of BC and led the Bureau’s policy office under former Chairman Pitofsky. He previously served as counselor to the head of the Justice Department Antitrust Division.

• Deputy Director of the Bureau of Competition: Pete Levitas joins the agency from Dickstein Shapiro, LLP He formerly was Staff Director and Chief Counsel for the U.S. Senate Judiciary Committee’s Antitrust Subcommittee, and he was Antitrust Counsel to the Subcommittee Chairman, former U.S. Senator Mike DeWine. Levitas also worked in the Justice Department’s Antitrust Division, and as a Special Assistant U.S. Attorney in the U.S. Attorney’s Office in Washington, D.C.

• Associate Director for Competition Policy of the Bureau of Economics: Mark Frankena was Deputy Director for Antitrust in the Bureau for the past five years. He formerly served as Associate Professor of Economics at the University of Western Ontario, and as a principal at Economists Inc., an economics consulting firm where he specialized in antitrust litigation and the electric power industry.

• Deputy Director for Antitrust of the Bureau of Economics: Howard Shelanski was a law professor at the University of California at Berkeley, where he co-directed the Berkeley Center for Law and Technology and recently joined the Georgetown University Law Center faculty. Shelanski has served as chief economist for the Federal Communications Commission and as a senior economist for the President's Council of Economic Advisers.

• Deputy Director of the Office of Congressional Relations: Judy Bailey returns to the FTC after serving as Consumer Protection Counsel for the House Committee’s Consumer Protection Subcommittee. She also was counsel to the House Judiciary Committee’s former Monopolies and Commercial Law Subcommittee, and she worked for the FTC, including service in BCas Assistant Director, and as Deputy Executive Director and Acting Executive Director. She has worked at the FDIC and in private practice at Wilmer, Cutler & Pickering and Debevoise & Plimpton.

Dana Rosenfeld |

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State Investigations & Actions• "Operation False Charity"

– 47 states, DC, and FTC issued a new

consumer alert about telemarketers that solicit donations on behalf of veterans and military families. They warned that these paid solicitor/telemarketers keep an average of 67 cents of each donated dollar. The states and FTC offered tips and advice to help charitable donations reach their intended beneficiaries.

Bahareh Mostajelean |

State Update

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State Update• California

– YourTravelBiz online pyramid schemewas prohibited from false and deceptive marketing by being required to provide consumers with information in a clear and conspicuous manner about how difficult it is to make money by selling travel through YTB. YTB is prohibited from charging consumers $500 to be recruited into their scheme and YTB was required to pay $1 million in penalties, costs, and restitution.

– Total Call International, a calling card company, was prevented from boosting profits by charging hidden fees. The judgment requires Total Call to pay $300,000 in civil penalties.

Bahareh Mostajelean |

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State Update• Connecticut

– Gasoline & Automotive Service Dealers of America, Inc. wrote a letter to the CT AGannouncing that gasoline prices have soaredby 54 cents a gallon in Connecticut since February. The AGs office will ask federal authorities to investigate this recent spike in gasoline prices, and will contact other states for a multistate investigation.

– Marsh & McLennan Companies, Inc. settled with the AG for $2.4 million for alleged bid rigging, price fixing, and steering Connecticut businesses and consumers to favored insurers in exchange for millions of dollars in undisclosed kickbacks. Marsh was hired to find the best insurance coverage for its clients and instead allegedly steered them to insurers who paid kickbacks.

Bahareh Mostajelean |

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State Update• Florida

– US-Yellow, which is also known as Allied Telephone Directories, Global Directories, Inc., and Global Directories, LLC, was the subject of hundredsof consumer complaints filed with the Attorney General's Office. Many consumers reported they mistook the company's solicitation for a renewal notice from their local yellow pages directory and paid what they believed to be an invoice. The company cooperated with the state's investigation and, settled. US-Yellow will reimburse the state $90,000 for attorney's fees and investigative costs. The company has already reimbursed customers over $85,000 either through restitution or cleared account balances.

• Illinois:– U.S. Energy Savings Corp. agreed to allow hundreds of Illinois consumers to

terminate contracts and receive $1 million in restitution as a result of a lawsuit filed last year alleging that the alternative gas supplier sold fixed-rate gas contracts using misleading sales tactics that falsely promised significant consumer savings. The agreement also prohibits U.S. Energy Savings from using deceptive or unfair practices during the course of soliciting customers for natural gas supply contracts.

Bahareh Mostajelean |

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• Iowa:– “Private Right of Action” Consumer Law signed by Iowa

Governor. This new law creates a private right of legal actionfor Iowans who are victims of consumer fraud.

– "Get-Rich-Quick" Scheme of a NY city promoter banned from Iowa. Promoter, who claimed customers could make $25,000 in two weeks and touted other get-rich-quick schemes, was ordered not to operate in Iowa and to make a refund to any Iowan who asks for it. The get-rich-quick programs usually sold for about $25-30. They were marketed under names such as "Big Cash Flier," "How I made $99 an hour," "God Wants You to Be Rich," and "$1,000 a Day!"

• New York:– Debt Settlement Industry investigation ordered by AG with the issuance of

subpoenas to fourteen debt settlement companies. The subpoenas seek to uncover the companies‘ fee structures, how many people have benefited from the companies‘ services, and what kind of relief the companies are actually providing.

Bahareh Mostajelean |

State Update

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State Update• Texas:

– Four Debt Settlement companies were named in an enforcementaction for materially misrepresenting the nature of their services. The defendants misrepresented the availability and consequences of bankruptcy, made misleading credit repair claims, and misstated the effect of entering a debt settlement program. The Attorney General is seeking restitution for customers harmed by the defendants’ unlawful business practices, civil penalties of up to $20,000 per violation of the Texas Deceptive Trade Practices Act (DTPA) and attorneys’ fees.

– Three telemarketing firms were charged with participating in an unlawful scheme to sell vehicle service contracts, which were falsely marketed as extended warranties. The state is seeking a temporary injunction against the companies to prevent them from using spoof numbers; using an automated telephone dialing system to call cellular telephones; calling phone numbers listed on the Texas No-Call List; and, calling Texans using pre-recorded messages without Texans' prior consent. The state's enforcement action seeks $500 per violation of the FTC’s Telemarketing Sales Rule (TSR) - including $1,500 per knowing violation of the TSR; $1,000 per violation of the Texas No Call Act - including $3,000 per knowing violation of the act; $20,000 per violation of the Texas Deceptive Trade Practices Act; and attorneys' fees

Bahareh Mostajelean |

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State Update• Tennessee:

– Michelin North America, Inc. settled with the Tennessee AttorneyGeneral's Office and sixteen other states in the multistate investigation into allegations against the tire maker. TheAttorneys General allege that in May or June of 2008, Michelinpromoted questionable savings associated with its fuel-efficient tires in its ads. Under the terms of the settlement, Michelin must have reliable scientific evidence supporting any fuel efficiency claims used in advertising regarding its tires. Additionally, Michelin is paying the States $375,000. Tennessee's share is $48,750.

– “Notario Publico” advertisements: Three settlements and two lawsuits were filed involving companies allegedly using misleading advertisements promoting themselves as a “notario publico” in Tennessee. In many Spanish-speaking countries, a notario publico is a civil-law notary, or an attorney who has been specially appointed to grant public faith to certain common, everyday transactions. As a result, consumers often believe these individuals and the related transactions involve a higher level of trust and accuracy. Under Tennessee law, a notary public who is not licensed to practice law in Tennessee and advertises their services as a notary public must include in all advertisements a disclaimer in English that they are not an attorney licensed to practice law. The settlement with the businesses which advertised in Tennessee without the required disclaimer have agreed to modify their advertisements to comply with state law and to pay civil penalties and attorneys’ fees.

Bahareh Mostajelean |

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Private Litigation Update

• Meserole, et al., v. Sony Corp., 2009 U.S. Dist. LEXIS 42772 (S.D.N.Y. May 19, 2009)

– Putative class action against Sony for failing to disclose defects in rear projection television.

– Plaintiffs alleged violation of California Consumer Protection Act, or, in the alternative, consumer protection acts of 48 states. Allegations included:

• Knowing concealment of defects.

• Misleading advertisements that televisions had “stunning detail and clarity” and “highly accurate natural colors.”

– Court dismissed for failure to plead with particularity under Rule 9(b).

David Zetoony |

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Private Litigation Update

• In re Actimmune Marketing Litig., 2009 U.S. Dist. LEXIS 36133 (N.D. Cal. Apr. 28, 2009)

– Actimmune approved only for treatment of CGD.

– Putative class alleged InterMune and Genentech disseminated press releases, sent sales reps, and sent marketing materials to patients and physicians concerning benefits Actimmune had on IPF. Plaintiffs also alleged that sales reps were instructed to misrepresent scientific evidence supporting therapeutic benefits of drug.

– DOJ prosecuted InterMune for misbranding under 21 USC 451(f)(1) and reached a $42.5 million settlement.

– Court dismissed state consumer protection act claims for failure to plead with Rule 9(b) specificity.

David Zetoony |

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Private Litigation Update

• Reyes v. Olazabal, Case No. 2009-02006 (Va. Cir. Ct. – Fairfax May 7, 2009)

– Second case brought through ABA’s Fight Notario Fraud project http://www.fightnotariofraud.org

– Defendant, a non-lawyer, advertised herself on business card as a “Specialist in Taxes, Criminal, Family Law, Traffic and Immigration.” Defendant also stated that she could provide “legal assistance and notary public” services.

– Defendant agreed to double compensation of plaintiff’s damages and entry of an injunction and consent decree barring her from stating that she is a “specialist” or can provide “legal assistance” and requiring her to disclaim that she is not an attorney before providing notary services.

David Zetoony |

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Herbal Groups, Inc.

Case No. 5005 (Apr. 27, 2009)

• NAD initiated an inquiry in response to advertising claims for Prostalex Plus, a prostate health supplement.

– NAD expressed additional concern that “Prostate Health Blog” available via a link on the advertiser’s website was not an actual blog, but rather another advertising vehicle.

• In announcing the basis of its inquiry, NAD highlighted its initiative with the Council for Responsible Nutrition, “designed to expand NAD’s review of advertising claims for dietary supplements.”

• Although the advertiser declined to participate in the NAD process, it did submit a study on the supplement to NAD for review.

• NAD referred the case to the FTC and FDA for investigation and possible law enforcement action.

NAD Update

Patrice Hayden |

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Coca-Cola Company (Second Compliance Report)Case # 4438CII (NAD – Apr. 28, 2009) • Second Compliance Report stemming from claims by original challenger:

Stokely-Van Camp, Inc., maker of Gatorade. • Claims dated back to 2006. • Stokely challenged advertising for Powerade Zero as the successor to

Powerade Option– “Calories provide energy, but how much energy do you need”– Ads portrayed caloric differences in product without indicating the

differences between the products in replenishing energy depleted by strenuous activity.

• NAD recommended that Coca Cola include disclosure that Powerade Zero offered fewer calories AND less energy replacement, thus allowing consumers to make an informed purchase.

• Coca Cola declined to accept NAD’s recommendations, case referred to FTC.

NAD Update

Patrice Hayden |

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Southern Diversified Products, LLCCase No. 5009 (NAD – Apr. 29, 2009)• Southern Diversified advertised its Mythic Paints – a safer, premium paint• Valspar Corporation, maker of Valspar paints, challenged advertising claims by

Southern Diversified for its Mythic Paints. – Ingredient Claims “Zero VOCs, Zero Toxins and Zero-Carcinogens” and

“Toxin-free Coloring system”– Safety Claims – “Safe for People, Safe for Pets and Safe for Earth” – Comparative Claims – “Safe alternative to traditional paint” and “The only

paint product to guarantee high performance with no toxins”• In reaching its decision the NAD had to consider

– The reasonable expectations of the consumer; – The applicability of the regulatory framework and/or industry standards;

• Further, while advertiser has a right to market unique attributes of its products, must ensure such claims are truthful and narrowly drawn.

NAD Update

Patrice Hayden |

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Matrixx Initiatives, Inc. Case No. 5008 (May 1, 2009)• The Quigley Corporation, maker of Cold-Eeze, challenged Matrixx’ advertising for (oral)

Zicam Cold Remedy products. • Quigley alleged that while Matrixx had studies supporting its nasal gel formulations none of

the studies cited supported claims about the advertised oral products. – Extending claims for nasal products to all products– Website Claims:

• “Reduces the severity of cold symptoms.” • “Reduces the duration of the common cold.” • “Get over your cold faster with Zicam cold remedy.” • “Numerous physicians, including earn, nose, and throat specialists, … have come

forward in support of the science behind Zicam Cold Remedy.” • Studies on effectiveness of oral zinc formulations do not support the claims that oral Zicam

formulations will have same effectiveness. • NAD disallowed Matrixx’ shifting reliance on homeopathic provings for oral zinc to support

its claims regarding Zicam. • NAD recommended that:

– Matrixx add “may” to claims of reduction of the severity of symptoms for oral Zicam products,

– Citations to studies should indicate which Zicam product was tested, and – The “numerous physicians support the science behind Zicam” does not rise to a

“Doctor Recommended claim.”

NAD Update

Patrice Hayden |

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Bryan Cave LLP PresentersBryan Cave LLP Presenters

Dana Rosenfeld(202) 508-6032dbrosenfeld@bryancave.com

David Zetoony(202) 508-6030David.Zetoony@bryancave.com

Patrice Hayden(202) 508-6147pmhayden@bryancave.com

Bahareh Mostajelean(202) 508-6170Bahareh.Mostajelean@bryancave.com