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Gaming company to pay $520 million to resolve FTC allegations
On December 19, the DOJ filed a complaint on behalf of the FTC against a video game developer for allegedly violating the Children’s Online Privacy Protection Act (COPPA) by failing to protect underage players’ privacy. The FTC also alleged in a separate administrative complaint that the company employed “dark patterns” to trick consumers into making unwanted in-game purchases, thus allowing players to accumulate unauthorized charges without parental involvement. (See also FTC press release here.)
According to the complaint filed in the U.S. District Court for the Eastern District of North Carolina, the company allegedly collected personal information from players under the age of 13 without first notifying parents or obtaining parents’ verifiable consent. Parents who requested that their children’s personal information be deleted allegedly had to take unreasonable measures, the FTC claimed, and the company sometimes failed to honor these requests. The company is also accused of violating the FTC Act’s prohibition against unfair practices when its settings enabled, by default, real-time voice and text chat communications for children and teens. These default settings, as well as a matching system that enabled children and teens to be matched with strangers to play the game, exposed players to threats, harassment, and psychologically traumatizing issues, the FTC maintained. While company employees expressed concerns about the default settings and players reported concerns, the FTC said that the company resisted turning off the default setting and made it difficult for players to figure out how to turn the voice chat off when the FTC did eventually take action.
Under the terms of a proposed court order filed by the DOJ, the company would be prohibited from enabling voice and text communications unless parents (of players under the age of 13) or teenage users (or their parents) provide affirmative consent through a privacy setting. The company would also be required to delete players’ information that was previously collected in violation of COPPA’s parental notice and consent requirements unless it obtains parental consent to retain such data or the player claims to be 13 or older through a neutral age gate. Additionally, the company must implement a comprehensive privacy program to address the identified violations, maintain default privacy settings, and obtain regular, independent audits. According to the DOJ’s announcement, the company has agreed to pay $275 million in civil penalties—the largest amount ever imposed for a COPPA violation.
With respect to the illegal dark patterns allegations, the FTC claimed that the company used a variety of dark patterns, such as “counterintuitive, inconsistent, and confusing button configuration[s],” designed to get players of all ages to make unintended in-game purchases. These tactics caused players to pay hundreds of millions of dollars in unauthorized charges, the FTC said, adding that the company also charged account holders for purchases without authorization. Players were able to purchase in-game content by pressing buttons without requiring any parental or card holder action or consent. Additionally, the company allegedly blocked access to purchased content for players who disputed unauthorized charges with their credit card companies, and threatened players with a lifetime ban if they disputed any future charges. Moreover, cancellation and refund features were purposefully obscured, the FTC asserted.
To resolve the unlawful billing practices, the proposed administrative order would require the company to pay $245 million in refunds to affected players. The company would also be prohibited from charging players using dark patterns or without obtaining their affirmative consent. Additionally, the order would bar the company from blocking players from accessing their accounts should they dispute unauthorized charges.
FTC proposes to permanently ban credit repair operation
On December 15, the FTC announced proposed court orders to permanently ban a group of companies and their owners (collectively, “defendants”) from offering or providing credit repair services. In May the FTC filed a complaint against the defendants for allegedly violating the FTC Act, the Credit Repair Organizations Act, and the TSR, among other statutes, by making deceptive misrepresentations about their credit repair services and charging illegal advance fees (covered by InfoBytes here). At the time, the U.S. District Court for the Middle District of Florida granted a temporary restraining order against the defendants. The proposed court orders (see here and here) were agreed to by the defendants, and contain several requirements: (i) a permanent ban against the defendants from operating or assisting any credit repair service of any kind; (ii) a prohibition against making unsubstantiated claims “about the benefits, performance, or efficacy of any good or service without sufficient supporting evidence”; and (iii) the release of numerous possessions that will be liquidated by a court-appointed receiver and used by the FTC to provide refunds to impacted consumers. The proposed court orders also include a total monetary judgment of more than $18.8 million, which is partially suspended due to the defendants’ inability to pay.
FTC, Florida permanently shut down grant funding operation
On December 8, the FTC and the Florida attorney general announced that a Florida-based grant funding company and its owner (collectively, “defendants”) will be permanently banned from offering grant-writing and business consulting services as a result of a lawsuit the regulators brought against the defendants in June. As previously covered by InfoBytes, the complaint alleged that the defendants violated the Consumer Protection Act, the FTC Act, and the Florida Deceptive Unfair Trade Practices Act by deceptively marketing their services to minority-owned small businesses. Among other things, the defendants (i) promised grant funding that did not exist and/or was never awarded; (ii) misled customers about the status of grant awards; and (iii) failed to honor a “money-back guarantee” and suppressed customer complaints. The defendants agreed to the terms of a proposed court order, which would ban them from providing grant-related services and business consulting, and prohibit them from making misrepresentations regarding advertised products or services. Defendants would also be required to turn over certain property to be sold in order to provide refunds to affected businesses. The proposed order also includes a more than $2 million monetary judgment, which is partially suspended due to defendants’ inability to pay.
FTC takes action against debt relief operation
On November 30, the FTC announced an action against three individuals and their affiliated companies (collectively, “defendants”) for allegedly participating together in a credit card debt relief scheme since 2019. The FTC alleged in its complaint that the company violated the FTC Act and the Telemarketing Sales Rule (TSR) by using telemarketers to call consumers and pitch their deceptive scheme, falsely claiming to be affiliated with a particular credit card association, bank, or credit reporting agency and promising they could improve consumers’ credit scores after 12 to 18 months. The defendants also allegedly misrepresented that the upfront fee, which in some cases was as high as $18,000, was charged to consumers’ credit cards as part of the overall debt that would be eliminated, and therefore consumers would not actually have to pay this fee. The District Court for the Middle District of Tennessee granted the Commission’s request to temporarily shut down the scheme operated by the defendants and froze their assets. The complaint requests, among other things, a permanent injunction to prevent future violations of the FTC Act and the TSR by the defendants.
DOJ, FTC, Wisconsin AG sue timeshare scammers
On November 22, the DOJ, FTC, and the Wisconsin attorney general announced a civil enforcement action against 16 defendants for allegedly using deceptive sales practices to sell timeshare “exit services” to consumers, mostly involving senior citizens. The complaint, which was filed in the U.S. District Court for the Eastern District of Missouri, alleged that the defendants failed to assist consumers in exiting their timeshare contracts while collecting large fees for the incomplete service. The complaint also alleged that the defendants deceived consumers into registering for timeshare exit services by, among other things, falsely claiming that consumers could not exit timeshare contracts on their own, and that the defendants were affiliated with legitimate companies. The complaint further alleged that the defendants failed to notify consumers of their rights under federal and state law to cancel their contracts with defendants within three business days. The complaint noted that the defendants allegedly deceived consumers into paying over $90 million to the defendant companies for services that were not delivered. The complaint also stated that the defendants’ actions violated the FTC Act, the FTC’s rule concerning the cooling-off period for sales made at home or other locations, and certain Wisconsin state laws concerning fraudulent misrepresentations and direct marketing. The complaint seeks monetary relief, civil penalties, and injunctive relief. According to the DOJ, the defendants’ timeshare exit services are also the subject of lawsuits filed by the Alaska and Missouri attorneys general in June 2022.
FTC sues company for deceptive schemes
On November 16, the FTC announced an action against a company that markets and sells business opportunities for allegedly pitching deceptive moneymaking schemes promising big returns to consumers. Claims were also brought against the company owners. The FTC alleged in its complaint that the defendants violated the FTC Act, the Business Opportunity Rule, and the Consumer Review Fairness Act by selling business packages and business coaching through an internet retailer under various names that promised consumers they could “generate passive income on autopilot.” However, the FTC claimed the defendants charged consumers between $5,000 and $100,000 for the programs and used fake consumer reviews in their marketing and sales pitches. Few consumers ever made money from these schemes, the FTC said. Additionally, the defendants allegedly charged consumers thousands of dollars to participate in a cryptocurrency investment service, which defendants claimed could generate profits for consumers “while you sleep.” According to the FTC, the defendants harmed consumers by, among other things, (i) deceiving them about potential earnings; (ii) using fake testimonials; (iii) suppressing negative reviews and promising refunds to consumers if they removed their complaints; (iv) threatening to sue dissatisfied consumers and adding language to contracts to prevent consumers from leaving negative reviews; and (v) failing to provide required disclosures when selling their programs.
Under the terms of the proposed stipulated order, the defendants will be prohibited from making deceptive earnings claims and misleading consumers about the nature of their products, including the likelihood of profits. Defendants must also stop engaging in behavior that interferes with consumer reviews and complaints. The defendants will also be required to pay $2.6 million in monetary relief. The proposed order includes nearly $53 million in total monetary judgment, which is partially suspended due to defendants’ inability to pay.
FTC looks to Section 5 in enforcing “unfair” competition
On November 10, the FTC issued a policy statement announcing that it would “rigorously enforc[e] the federal ban on unfair methods of competition.” According to the announcement, the FTC intends to make wider use of the FTC Act to police companies that use unfair tactics to try to gain a competitive advantage. “When Congress created the FTC, it clearly commanded us to crack down on unfair methods of competition,” FTC Chair Lina M. Khan said. “Enforcers have to use discretion, but that doesn’t give us the right to ignore a central part of our mandate. Today’s policy statement reactivates Section 5 and puts us on track to faithfully enforce the law as Congress designed.” In enacting Section 5, Congress purposely introduced the phrase “unfair methods of competition” in the statute to distinguish the FTC’s authority from the definition of “unfair competition” at common law, the policy explained, adding that Section 5 was designed to extend beyond the reach of antitrust laws. However, recognizing that a static definition would become outdated, Congress afforded the FTC flexibility to adapt to changing circumstances. The policy statement lays out the FTC’s approach for policing unfair methods of competition, and will allow the Commission to, among other things, sue companies under its mandate to protect consumers from fraudulent practices, price discrimination, exclusive deals and loyalty rebates, and misleading business practices such as commercial bribery and false or deceptive advertising.
FTC fines ISP $100 million for dark patterns and junk fees
On November 3, the FTC announced an action against an internet phone service provider claiming the company imposed “junk fees” and made it difficult for consumers to cancel their services. The FTC alleged in its complaint that the company violated the FTC Act and the Restore Online Shoppers’ Confidence Act by imposing a series of obstacles, sometimes referred to as “dark patterns”, to deter and prevent consumers from canceling their services or stopping recurring charges. Consumers who were able to sign up for services online were allegedly forced to speak to a live “retention agent” on the phone during limited working hours in order to cancel their services. The company also allegedly employed a “panoply of hurdles” to cancelling consumers by, among other things, making it difficult for the consumer to locate the phone number on the website, obscuring contact information, failing to consistently transfer consumers to the appropriate number, imposing lengthy wait times, holding reduced operating hours for the cancellation line, and failing to provide promised callbacks. Additionally, the FTC claimed the company often informed consumers they would have to pay an early termination fee (sometimes hundreds of dollars) that was not clearly disclosed when they signed up for the services, and continued to illegally charge consumers without consent even after they requested cancellation. According to the FTC, consumers who complained often only received partial refunds.
Under the terms of the proposed stipulated order, the company will be required to take several measures, including (i) obtaining consumers’ express, informed consent to charge them for services; (ii) simplifying the cancellation process to ensure it is easy to find and use and is available through the same method the consumer used to enroll; (iii) ending the use of dark patterns to impede consumers’ cancellation efforts; and (iv) being transparent about the terms of any negative option subscription plans, including providing required disclosures as well as a simple mechanism for consumers to cancel the feature. The company will also be required to pay $100 million in monetary relief.
FTC takes action against ed tech provider for lax data security
On October 31, the FTC announced an administrative action against an education technology (ed tech) provider claiming that the company’s allegedly poor data security practices exposed millions of users and employees’ sensitive information, including Social Security numbers, email addresses, and passwords. According to the FTC’s complaint, due to the company’s alleged failure to adequately protect the personal information collected from its users and employees, the company experienced four data breaches beginning in September 2017, when a phishing attack granted a hacker access to employees’ direct deposit information. Less than a year later, another data breach involved a former employee using login information the company shared with employees and outside contractors to gain access to a third-party cloud database containing personal data for roughly 40 million users. In the following two years, the company experienced two more data breaches through phishing attacks that exposed sensitive employee data, including medical and financial information. Claiming violations of Section 5(a) of the FTC Act, the Commission alleged the company failed to implement basic security measures, stored personal data insecurely, and failed to implement a written security policy until January 2021, despite experiencing three phishing attacks.
Under the terms of the proposed decision and order, the company would be required to take several measures to address the alleged conduct, including (i) documenting and limiting data collection; (ii) providing users access to collected data and allowing them to submit requests for deletion; (iii) implementing multifactor authentication or another authentication method to protect user and employee accounts; and (iv) implementing a comprehensive information security program that would encrypt consumer data and provide security training to employees, among other things.
This action is part of the FTC’s ongoing efforts to make sure ed tech providers protect and secure personal data they collect and do not collect more information than necessary. As previously covered by InfoBytes, the FTC issued a policy statement in May warning ed tech providers that they must fully comply with all provisions of the Children’s Online Privacy Protection Act when gathering data about children. The FTC emphasized that ed tech providers may not harvest or monetize children’s data, cannot force children to disclose more information than is reasonably necessary for participating in their educational services, and must have procedures in place to keep the data secure, among other things.
4th Circuit says AMG Capital does not alter FTC’s $120.2 million judgment
On November 1, the U.S. Court of Appeals for the Fourth Circuit predominantly upheld a district court’s final judgment in an FTC action involving a Belizean real estate scheme. As previously covered by InfoBytes, the FTC initiated the action in 2018 against several individuals and corporate entities, along with a Belizean bank, asserting that the defendants violated the FTC Act and the Telemarketing Sales Rule (TSR) by advertising and selling parcels of land that were part of a luxury development in Belize through the use of deceptive tactics and claims. In 2019, a settlement was reached with the Belizean bank requiring payment of $23 million in equitable relief, and in 2020, the district court ordered the defaulted defendants to pay over $120.2 million in redress and granted the FTC’s request for permanent injunctions (covered by InfoBytes here and here). Later, in 2021, the district court denied a request to set aside the $120.2 million default judgment, disagreeing with the defendants’ argument that the U.S. Supreme Court’s decision in AMG Capital Management, LLC v. FTC (which unanimously held that Section 13(b) of the FTC Act “does not authorize the Commission to seek, or a court to award, equitable monetary relief such as restitution or disgorgement”—covered by InfoBytes here) nullified the judgment. The district court stated that the AMG Capital decision does not render judgments in the case void, and that “[i]n its Opinion rendered before the Supreme Court reached its decision, the Court considered the effect that a decision in AMG Capital adverse to the FTC might have, reasoning that: ‘this Court’s findings of fact and determinations as to liability—including contempt of court and violations of the Telemarketing Services Rule —would not be affected by a decision in AMG.’” (Covered by InfoBytes here.)
On appeal, the 4th Circuit determined that the defendants advanced “a mixed bag of factual and legal challenges” to various contempt orders, equitable monetary judgments, permanent injunctions, and default judgments, finding that there was no abuse of discretion by the district court. While the appellate court reversed the $120.2 million judgment after finding it to be invalid under the Supreme Court’s decision in AMG Capital, it noted that because the defendants violated the FTC Act and the TSR they cannot escape the judgment. “The findings made by the district court show that [the defendant’s] Belizean business venture was dishonest to the core,” the 4th Circuit wrote. “The district court correctly surmised that this sort of deception lies at the heart of what the FTC is empowered to seek out and stop.” According to the appellate court, while “the FTC may seek injunctive relief under Section 13, the Supreme Court held in AMG Capital that it does not authorize the FTC to seek, or a court to award, ‘equitable monetary relief such as restitution or disgorgement.’” However, the defendant “latches onto this last point, claiming that the judgment in the  case must be thrown out under AMG Capital. ... Vacating that judgment does not help [him], however, because he already has a $120.2 million judgment against him for contempt of the telemarketing injunction, and the FTC has conceded that it is not seeking $240.4 million against [him].” Essentially, AMG Capital “does not undercut the injunctive relief entered under Section 13(b), and the $120.2 million order can be upheld under the contempt judgment, so AMG does not in fact change the bottom line,” the 4th Circuit concluded.
- Keisha Whitehall Wolfe to discuss “Tips for successfully engaging your state regulator” at the MBA's State and Local Workshop
- Max Bonici to discuss “Enforcement risk and trends for crypto and digital assets (Part 2)” at ABA’s 2023 Business Law Section Hybrid Spring Meeting
- Jedd R. Bellman to present “An insider’s look at handling regulatory investigations” at the Maryland State Bar Association Legal Summit