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| New FTC Administration Continues Along The Old Path On February 6, 2002, Federal Trade Commission Bureau of Consumer Protection Associate Director Lee Peeler, Esq. presented a workshop entitled "Green Lights and Red Flags in Advertising" at the Association of the Bar of the City of New York. Discussing the FTC's criteria for evaluating whether or not to bring a particular case, Mr. Peeler started that certain factors are considered, including giving case selection priority to cases that are appealed from self-regulatory bodies such as the National Advertising Division of the Better Business Bureau. The FTC will also consider whether there is an outside party, other than the FTC, that would be better suited to bring a particular case. Mr. Peeler stated that the FTC will bring cases against an advertiser as well as the advertiser's advertising agency in certain situations. In a normal claim substantiation case, the FTC will go against the advertising agency only if the agency knew, or should have known, that a particular claim was false. In this situation, the advertiser and the advertising agency are held to the same standard. If, however, the advertising involves scientific clinical studies of a more complex nature, the FTC will hold the advertising agency to a much lower standard than the advertiser, because advertising agencies have much familiarity with hard scientific evidence. Mr. Peeler assured the attendees of the workshop, however, that the FTC had no intentions of stepping up enforcement against advertising agencies as a general practice, but rather will only bring cases against both the advertiser and agency simultaneously when necessary. In commencing his discussion about the new FTC administration's enforcement agenda, Mr. Peeler emphasized the fact that the new FTC administration headed by Timothy J. Muris, believes that the Pitofsky-era FTC administration had its priorities in the right place. Mr. Peeler stressed that the FTC would focus a good portion of their enforcement attention on privacy, classic fraud, dietary supplement claims, weight loss claims and negative option plans, in order to continue the enforcement agenda set by the previous FTC administration. In order to perpetuate their privacy, agenda the FTC has made it clear that they will not seek any new privacy legislation, but will instead use existing laws to accomplish their enforcement objectives. As such, the FTC privacy enforcement agenda is based upon a series of meetings that established a privacy framework. This framework, explained Mr. Peeler, focuses on the misuse of information once it has been collected, as opposed to scrutinizing the existing terms of a company's data collection and sharing terms prior to a violation. Additionally, and in a quite surprising statement of policy, the FTC will not make a distinction between the misuses of information in the online or offline world - both will be treated equally. According to the FTC, since the injury is the same to the consumer whether data is misused in an online or offline environment, there should be no distinction between violations. The FTC believes that if a company makes a promise to the public in a privacy policy, and such policy is violated, this violation is deceptive whether the violation occurs online or offline. Furthermore, the FTC has suggested that information handling procedures as described on web sites of major retailers should also apply to the handling of information collected offline. Mr. Peeler noted that accomplishments have already been made in the realm of privacy, including the newly introduced amendments to the Telemarketing Sales Rule, which suggest the development of a national do-not-call list system and a possible ban on the exchanging of credit card information between telemarketers (a practice known as "upselling"). The FTC has also sponsored a workshop on Gramm-Leach-Bliley notice requirements and has recently entered into a settlement with Eli Lilly for privacy policy violations. Eli Lilly was charged by the FTC of disclosing, without authorization, sensitive personal information collected from consumers through its Prozac.com web site. The FTC reasoned that, though the disclosure of the personal information was unintentional, Eli Lilly's privacy policy, which claimed confidentiality for collected personal information, was deceptive because Eli Lilly did not maintain sufficient measures to protect the sensitive information collected. In determining how far a company must go to safeguard collected information, the FTC believes that the level of sensitivity of personal information should dictate the level of security appropriate to protect such information. Mr. Peeler confirmed the longstanding FTC priority of enforcement against fraud, especially fraud contained in SPAM emails. In furtherance of this enforcement policy, on February 12, 2002, the FTC announced a sting-operation that forced seven originators of fraudulent SPAM emails to settle with the FTC. The defendants electronically mailed chain letters that promised recipients $46,000 in return for a $5 payment. Pursuant to the final judgments, the defendants may no longer promote, market, advertise, offer for sale, sell, or assist others in any chain marketing scheme. Additionally, the judgments bar any misrepresentations about potential earnings or benefits that can be derived from any marketing scheme and misrepresentations about the legality of any program. The defendants must also return any future monies received from this chain-letter scheme and must keep various records to easily allow the FTC to monitor the future activities. In other crackdowns on fraud, on February 14, 2002, the FTC filed a complaint in federal district court against the promoters of the purported psychic telephone line featuring the alleged-psychic "Miss Cleo." The FTC accused the defendants of promising a "free" reading to callers and not delivering on this claim. According to the FTC's complaint, the defendants misrepresent the true cost of the "psychic" services in advertising and during calls, charge consumers for services that are not ordered and engage in deceptive collection practices. In continuation of the FTC's highly successful actions against dietary supplements and false medical remedies, entitled Operation Cure All, Mr. Peeler stated that there would be continued enforcement of unsubstantiated claims regarding these products - especially in light of the events of September 11th. The FTC will focus its efforts on cracking down on products that make false claims about curative effects on anthrax or smallpox or that claim to cure or prevent the effects of materials used for bio-terrorism. On January 2, 2002, after sending out 50 warnings to promoters of alleged cures for anthrax and other bio-terrorism agents, the FTC sent an additional 71 emails, focusing on promoters of such protection devices as air filters, gas masks, protective clothing, and ultraviolet light mechanisms. The new emails warn distributors of these alleged anti-terrorism products that high standards must be met, and rigorous tests are required, before any claims can be made of preventing biological or chemical threats. On February 27, 2002, the FTC announced a settlement regarding deceptive advertising charges against the marketers of a do-it-yourself anthrax test kit and a dietary supplement which was advertised as curing a number of deadly diseases, including Anthrax and Ebola. According to Howard Beales, the Director of Consumer Protection at the FTC, "these companies used inaccurate and unfounded claims to sell peace of mind." Another hot enforcement area according to Mr. Peeler is compliance with the FTC's Prenotification Negative Option Rule, which applies to plans or clubs that send merchandise automatically to a consumer, unless the consumer specifically tells the seller not to send such merchandise. The FTC Rule requires that companies engaging in negative option marketing plans make affirmative disclosures about their plans, clearly and conspicuously, in all promotional materials that are used to enroll in the plans. The disclosures include any minimum purchase obligations, methods of membership cancellation, procedures for merchandise rejection and relevant deadlines. In May of 2001, the FTC settled with Creative Publication International, a publisher of "how-to" books for violations of the Prenotification Negative Option Rule when they lured consumers into accepting "free trial" books and then enrolled consumers into book clubs without obtaining proper consent and without disclosing club operating procedures. Mr. Peeler stated that deceptive weight loss claims will continue to be an area of enforcement priority for the FTC, and there will be cases brought against companies such as Enforma, a company that marketed products called the "Fat Trapper" and "Exercise in a Bottle." Enforma falsely claimed that these products would block the absorption of fat and increase the body's fat burning capacity. In other miscellaneous topics discussed by Mr. Peeler, he stated that in bringing certain cases such as "mousetrapping," confusingly similar domain name cases, unauthorized billing and some breach of contract cases, the FTC will rely on its "unfairness" authority. Pursuant to Section 5 of the FTC Act, an act or practice may be deemed "unfair" if "the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition." © 2002 Davis & Gilbert LLP |
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