Consumer Protection Update
Consumer Protection Committee
October 10, 2006
August T. Horvath
Anna S. McLean
Daniel K. Slaughter
1
FTC DECEPTION ACTIONS

“Q-Ray” Bracelets

Post Office Employment

Fraudulent Telemarketing of Telemarketing
Fraud Protection

Online Check Processing

Xanga.com

Hispanic Advertising Awareness Campaign
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Q-Ray Bracelets

“Ionized” bracelet
marketed through
infomercials supposedly
provided pain relief.

Court is expected to order
payment of $22.5 million
in net profits, plus $87 in
refunds to consumers.
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Post Office Employment

Success Express, Inc. placed
ads in classifieds nationwide,
claiming that they were hiring
for the post office.

Then sold consumers study packets for postal
examinations that did not guarantee
employment.

$8 million suspended judgment against
company and principals; $540,000 actually to
be collected.
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Online Check Processing

Qchex is an internet-based check creation and
delivery service.

FTC alleged Qchex created and sent checks drawn
on any bank account identified by a customer without
checking whether the customer has authority to write
checks on that account.

Scammers used it as conduit to draw fraudulent
checks.

Conduct enjoined; remedies not specified.
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Xanga.com

Xanga.com, a social networking site, was
challenged for a violation of COPPA.

Although nominally not allowed to join the site
if under 13, visitors were allowed to create
accounts even if they provided birthdate
indicating they were under 13; 1.7 million
people did so over past 5 years.

Penalty of $1 million is the largest ever
assessed by FTC for a COPPA violation.
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Hispanic Advertising Awareness
Campaign

FTC sent letters to 166 advertisers and 77 media
outlets warning them that their advertisements
targeting Hispanics, spotted during one-day (April 19)
surf of Spanish-language print, broadcast media and
internet, are potentially deceptive.

Over half of deceptive ads were health related,
especially weight-loss. Other key categories were
credit and business ops.

FTC worked with 60 “partners” including FDA, Postal
Inspection Service, state A.G.s, consumer groups,
and consumer protection agencies of Colombia,
Costa Rica, Mexico, Nicaragua, Panama.
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DOJ ACTION:
TOBACCO RICO CASE

U.S. District Court for D.C. issued opinion in DOJ
case filed in 1999 alleging conspiracy under RICO by
tobacco companies to deceive the American public
about health effects of smoking and environmental
tobacco smoke, addictiveness of nicotine, and health
benefits of light cigarettes, and by manipulating
design of cigarettes to sustain nicotine addiction.

Enjoined defendants from conduct, but denied
government request for $289 billion in ill-gotten gains
because RICO disallows disgorgement remedy.
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LEGISLATIVE DEVELOPMENT

“American Spirit Fraud Prevention Act” H.R.
3675 would amend FTC Act to authorize FTC
to seek double civil penalties for unfair or
deceptive acts that exploit reactions to
emergencies and major disasters.

Passed by House last October; reported by
Senate Commerce, Science and
Transportation Committee Sept. 27.
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INTERNATIONAL ACTIONS


CANADA

Econopro

Les Centres de Santé Minceur
CHINA

Procter & Gamble / SK-II
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Canada: Econopro

Canadian Competition Bureau
took action against marketers
of “Econopro”, which it called
“bogus fuel saving device.”

Required Injunctive relief,
publication of correction in
newspapers, and $15,000 in
administrative penalties.
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Canada:
Les Centres de Santé Minceur

Centres de Santé Minceur weight loss
centers marketed a variety of products
(Cellotherm, Cure de départ, Noctoslim,
Nopasim) with claims of spectacular results.

CCB imposed
injunction and
$70,000 penalties
against company
and principals.
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China:
Procter & Gamble / SK-II


Hong Kong actressspokesmodel for SK-II
claimed “"my facial wrinkles
and lines have been reduced
by 47 percent after using SK-II
for 28 days, and I look 12
years younger."
Consumer Lu Ping sued,
based on Guangdong Bureau
of Inspection and Quarantine
(GDBIQ) finding that most SKII cosmetics contained
chromium and neodymium
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ATTORNEY GENERAL ACTIONS

PayPal

United Egg Producers

Alltel

Automakers
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
A.G.s of 28 states settled with PayPal. They had
charged that PayPal failed to provide adequate
disclosures regarding dispute resolution and
chargeback, selection of funding sources, protection
programs, and other aspects of service.

Settlement provides for strict disclosure and
customer service standards to be followed by the
company.

PayPal agreed to pay $5.2 million ($1.7 million to
A.G.s, $3.5 million direct to customers).
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United Egg Producers


Egg industry agreed to
drop “Animal Care
Certified” label that
state A.G.s charged
implied higher level of
hen care.
Also agreed to pay $100,000 to states for
attorney fees, consumer education, and other
costs.
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
Florida A.G. sued Alltel Wireless October 4,
alleging that Alltel automatically enrolled
thousands of consumers for a free trial of a
roadside assistance program without
disclosing terms of the program and billing
customers without their specific consent.
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Automakers Sued for
Global Warming

California A.G. sued General Motors,
Ford, DaimlerChrysler, Toyota,
Honda, and Nissan on September 20
for creating a “public nuisance” by
producing millions of cars that emit
carbon dioxide and contribute to global warming.

Action seeks damages related to beach erosion,
reduced water supplies and pollution.

Suit is an effort to pressure manufacturers and federal
government to implement and enforce stricter
emissions limits and address global warming.
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GASOLINE PRICING UPDATE



New York City passes gasoline
price gouging law.
Idaho A.G. demands to know
why Idaho wholesale fuel
prices are higher than in other
states, receives answers from
refiners.
Utah contemplates whether to
do away with legislating
prohibiting low gas prices.
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PRIVATE ENFORCEMENT

McDonald’s obesity litigation

Supremes take FCRA insurance cases

Google keywords not trademark violation

Jurisdiction over spammers

Broadband internet not regulated by Cable
Act

AOL sued over Web posting of search info
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McDonald’s obesity case finally to proceed

Pelman v. McDonald’s Corp., S.D.N.Y. No. 02 Civ. 7891 (RWS),
9/16/06) denied defendant’s motion to strike/dismiss claims that
McDonald’s advertisements falsely implied its food was
nutritious, that it failed to disclose the use of certain additives,
and that nutritional information was not readily available at
certain New York restaurants.

Case (filed in 2002) had earlier been dismissed by same judge;
reversed by Second Circuit.

Court limited case to 40 ads.

Complaint adequately complied with Second Circuit’s
requirement that Pls identify specific ads and how they were
injured by the “scheme”; reliance on specific ads not required.
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Supremes grant review of Ninth Circuit FCRA cases

In Reynolds v. Harford Financial Services Group, 435 F.3d 1081
(9th Cir. 2006) and Spano v. Safeco Corp., 140 Fed. Appx. 746
(9th Cir. 2005), Ninth Circuit held that insurers who failed to
comply with FCRA’s adverse action notice requirement when
they charged higher rates based on consumers’ credit reports
could be liable for statutory and punitive damages under FCRA’s
“willfulness” standard if they “recklessly disregarded” the law.

Split from Sixth and Eight Circuits; agreed with Third Circuit

Question is whether actual knowledge of legal violation is
required.
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Google prevails against claim of keyword
infringement

In Rescuecom Corp. v. Google, Inc., N.D.N.Y., No. 5:04-CV1055 (9/28/06), Google prevailed on motion to dismiss against
claim that its sale of trademark-owner’s name as keyword to
bring up competitors’ sites was Lanham Act violation.

Rescuecom, a computer services franchising business, claimed
that Google violated its trademark by allowing competitors to
buy its name as a keyword so their sponsored links would
appear when Internet users searched for Rescuecom’s name.

Court held that keyword advertising is not “use in commerce”
because trademark is never displayed in Google’s search
results; nor did Pl allege that sponsored links displayed its
trademark.
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Jurisdiction over spammers

In EarthLink, Inc., v. Pope, et. al., N.D. Ga. No. 1:03-CV-2559JOF (8/31/06), the U.S.D.C. for the Northern District of Georgia
found that spammers who concealed their identities by funneling
spam through EarthLink’s mail servers to make it appear that
the emails originated with EarthLink were subject to jurisdiction
in Georgia.

Court found Defs could be sued in Georgia based both on such
“electronic contacts” as the “masking” process described above,
and under the “effects test” of Calder v. Jones, 465 U.S. 783
(1984), because Defs’ activities had sufficient “effects” in
Georgia to subject them to jurisdiction there.
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Cable Act does not apply to broadband
Internet service


In Klimas v. Comcast Cable Communications, Inc., 2006 WL
2772747 (6th Cir. 9/28/06), the SIxth Circuit held that the Cable
Communications Policy Act (CCPA), 47 U.S.C. section 521-561,
does not apply to broadband Internet services.
Putative class action suit challenged Comcast’s practice of
temporarily storing IP addresses and websites visited by its
broadband subscribers under privacy provisions of the CCPA.

District Court had dismissed on standing grounds.

Sixth Circuit affirmed, but on different grounds, holding that
Comcast’s Internet service was not a “cable system” and thus
was not regulated by the CCPA.
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AOL sued over Web search posting

On August 8, 2006, AOL announced it had removed a database
that had been temporarily posted on its website containing
20,000,000 search records of its members. By that time, other
sites had downloaded it and reposted it.

Doe 1 v. AOL LLC., N.D. Cal. No. C-06-5866-SBA (filed Sept.
22, 2006) alleges that although AOL represented that records
had been “anonymized,” search queries themselves revealed
information that could be linked with specific users.

Suit alleges nationwide class, claims under Electronic
Communications Privacy Act, 18 U.S.C. section 2702, and
California law.
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CALIFORNIA UCL § 17200

Retroactivity

Amendment

Class Certification and
Reliance/Causation

Definition of “Unfair”
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Proposition 64 - “Retroactivity”
•
Californians for Disability Rights v. Mervyn’s,
LLC, 39 Cal.4th 223 (2006) and Branick v.
Downey Savings and Loan Assoc., 39 Cal.4th
235 (2006)
- Prop. 64’s new standing rules (requiring that
plaintiffs have suffered “injury in fact” and “lost
money or property as a result of [the alleged]
unfair competition”) apply to cases pending at
the time of passage of Prop. 64
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Proposition 64 - Amendment
•
Court did not decide the issue raised by Branick - whether a
plaintiff without standing may amend to add a plaintiff with
standing. But the Court suggested such amendment would be
allowed. See Foundation for Taxpayer and Consumer Rights
v. Nextel Communications, Inc., 2006 WL 2699032 (Sept. 21,
2006) (amendment liberally allowed, as long as new plaintiff
has the same claim).
•
Query whether plaintiff without standing can file an action,
seek discovery to find plaintiff with standing, then amend. See
Pioneer Electronics (USA) Inc. v. Superior Court, 27
Cal.Rptr.3d 17 (2005) (intermediate court decision, now on
review by Cal. S. Ct., considering whether pre-certification
discovery of customer information allowed without affirmative
consent of customers).
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Class Certification and
Reliance/Causation

Pfizer v. Superior Court, 141 Cal.App.4th 290 (July 11,
2006), alleged representations re mouthwash as effective
as floss misleading. Held no cert. because:
- every member of a class must have suffered injury to
meet Prop. 64’s requirements
- likelihood of deception/harm is not enough – there must
be actual injury to each class member
- “as a result of” language of Prop. 64 imposes an
individual (not presumed) reliance/causation
requirement
- petition for review by Cal. S. Ct. on file, and multiple
requests for depublication made
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Class Cert. and Reliance (cont.)

In re Tobacco II Cases, 142 Cal.App.4th 891 (Sept. 5,
2006) – more traditional approach.
- Vasquez, 4 Cal.3d 800 (1971), allows for cert. based on
presumed reliance
- But not if the alleged misrepresentations “vary too much
among the class members”
- Here, general tobacco advertising not sufficient for
presumed reliance because representations varied,
different class members saw different representations,
and suffered harm (began smoking) at different times
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Definition of “Unfair”

Camacho v. Auto Club of So. Calif., 48 Cal.Rptr.3d 770 (Sept.
14, 2006)
- recognizes split of authorities after Cel-Tech, 20 Cal.4th 163
(1999), as to whether “old” definitions of unfair still apply to
consumer cases, and if not, what replaces them
- old standards (which require fact inquiry precluding pleading
challenge) now disapproved
- new standard, based on FTC Act, 15 U.S.C. § 45(n),
approves dismissal: (1) plaintiff uninsured at-fault motorist
is not “substantially harmed” by attempt to collect costs of
damage; (2) benefit of allowing collection outweighs
“injury” suffered by motorist, and (3) collection efforts
avoidable by obtaining insurance.
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Definition of “Unfair” (cont.)

McKell v. Washington Mutual, Inc., 2006 WL 2664130
(Sept. 18, 2006) – alleged overcharge for underwriting, tax
and wire transfer fees
- uses old standard disapproved by Cel-Tech, simply
weighing utility of the alleged conduct against the
harm to the consumer
- notes that standard requires “review of the evidence
from both parties” which cannot “usually be made on
demurrer.”
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