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District Court awards injunctive relief to FTC in deceptive advertising case
On August 9, the U.S. District Court for the Northern District of Georgia ruled that the FTC provided “broad and detailed” evidence of alleged deceptive advertising and unfair fee practices in its $550 million case against a technology company and its CEO (collectively, “defendants”). As previously covered by InfoBytes, the FTC filed a suit in 2019, alleging the defendants made deceptive representations to customers and charged hidden, unauthorized fees in connection with the company’s “fuel card” products in violation of Section 5 of the FTC Act. In 2019, when the agency filed its lawsuit, legal precedent held that the FTC could obtain restitution for consumers directly through such civil proceedings in federal court. However, in April of 2021, the Supreme Court held in AMG Capital Management, LLC v. FTC that the FTC does not have statutory authority to obtain equitable monetary relief under Section 13(b) of the FTC Act. (Covered by InfoBytes here.) Following that decision, the FTC filed a motion to stay or voluntarily dismiss in an attempt to preserve the possibility of obtaining monetary relief for injured consumers in federal court while pursuing claims against the defendants through the agency’s administrative process, but the district court denied the motion, concluding that the “balance of equities does not weigh in favor of a stay or dismissal without prejudice.”
In its most recent order, the district court ruled that the FTC provided compelling and overwhelming evidence, including advertisements, internal marketing studies, and a “plethora of customer complaints” that showed the defendants are liable for multiple violations of the FTC Act. Among other things, the court noted that the evidence showed that the defendants knew that many customers were unaware of certain fees when they signed up for the fuel cards and that the defendants’ terms and conditions governing the fees were “inscrutable” and confusing. However, the district court partially granted defendants’ request for summary judgment on monetary relief, ruling that in light of the Supreme Court’s decision in AMG Capital Management, the FTC cannot obtain a monetary award for the violations until the agency exhausts its administrative litigation process. A hearing will be held to determine the nature of the required injunctive relief.
FTC probes cryptocurrency exchange operators
On August 9, the FTC issued an order denying a petition to quash a civil investigative demand (CID) against the operators of a cryptocurrency exchange regarding allegations of a December 2021 data breach. According to the order, the FTC “is investigating potential law violations arising out of [the company’s] operation and marketing of [the company], and whether Commission action to obtain monetary relief would be in the public interest.” The agency issued a virtually identical CID to the company on May 11 seeking details on what the company disclosed to consumers regarding the security of their crypto assets and how they have handled customer complaints. The FTC noted that investigation includes inquiries regarding the company’s “representations concerning its advertised exchange services; allegations that consumers have been denied access to their accounts; and concerns about the security of customer accounts especially in light of a publicly reported 2021 security breach that resulted in consumer loss of more than $200 million in cryptocurrency.” Among other things, the FTC is seeking to determine if the business practices of the operation in marketing and operating the company “constituted ‘unfair [or] deceptive . . . acts or practices . . . relating to the marketing of goods and services,’ or ‘[m]anipulative [c]onduct,’ ‘on the Internet’ (Resolution No. 2123125); constituted “deceptive or unfair acts or practices related to consumer privacy and/or data security’ in violation of Section 5 of the FTC Act (Resolution No. 1823036); or violated the GLB Act, its implementing rules, or Section 5 regarding ‘the privacy or security of consumer [financial] information.”
FTC charges healthcare company with fraud
On August 8, the FTC announced it has taken action against a healthcare company, two subsidiaries, and the former CEO and former vice president of sales (collectively, “defendants”) for allegedly misleading consumers about their health insurance plans and using deceptive lead generation websites. According to the complaint, the defendants, along with their third-party partners, allegedly engaged in deceptive sales practices in violation of the FTC Act, the Telemarketing Sales Rule, and the Restore Online Shoppers Confidence Act (ROSCA). These practices included allegedly (i) lying to consumers about the nature of their healthcare plans; (ii) bundling and charging junk fees for unwanted products that were typically not clearly disclosed (consumers were often charged for these additional products after they cancelled their core healthcare plans); and (iii) making it difficult for consumers to cancel their plans. The FTC further alleged that the company (which sells association memberships and other healthcare-related products to consumers, often through telemarketing companies and lead generators), as well as the former CEO and former vice president of sales, were aware of the agents’ misconduct but allegedly “took steps to disguise and further the deception” instead of stopping the deceptive practices.
The FTC stated that the company and two of its subsidiaries have agreed to a proposed court order, which requires the payment of $100 million in consumer redress. The proposed order also requires the company to contact current customers and allow them to cancel their enrollment. The company is also required to send refunds to consumers who cancel right after their order is entered. Additionally, the proposed order prohibits the company from misleading consumers about their products, requires the disclosure of total costs and limitations prior to purchase, and requires consumers to provide express informed consent before they are billed. The company must also provide a simple and easy-to-use cancellation method and closely monitor other companies that sell its products.
The FTC also filed separate proposed court orders against the individual defendants (see here and here), which impose similar prohibitions and permanently bans them from playing any role in the sale or marketing of any healthcare-related product or service. The proposed orders also prohibit the former CEO from engaging in deceptive or abusive telemarketing practices, and bans the former vice president of sales from participating in any telemarketing whatsoever in the future.
FTC fines company $62 million for FTC Act violations
On August 1, the FTC announced a consent order against an online home buying firm for allegedly making misleading claims. According to the complaint, the company allegedly advertised to potential sellers using misleading and deceptive information. The complaint also alleged that the company violated provisions of the FTC Act by, among other things, misrepresenting: (i) market value prices when making offers to buy homes by including downward adjustments to such values; (ii) the manner in which it made money on transactions; (iii) that consumers likely would have paid the same amount in repair costs whether they sold their home through the company or in traditional sale; and (iv) that consumers paid less in costs. The firm issued a statement regarding the FTC settlement stating that, among other things, it “strongly disagree[s] with the FTC’s allegations,” and that the FTC’s allegations “are related to activity that occurred between 2017 and 2019 and target marketing messages the company modified years ago.” The statement also noted that the settlement will allow the firm to “focus on helping consumers buy, sell and move with simplicity, certainty and speed.”
According to the consent order, the company is required to pay the FTC $62 million, which is expected to be used for consumer redress. The company is also prohibited from making deceptive, false, and unsubstantiated claims to consumers about how much money they will receive or the costs they will have to pay to use its service. Additionally, the company is required to have “competent and reliable evidence” to support any representations made about the costs, savings, or financial benefits associated with using its service, and any claims about the costs associated with traditional home sales.
FTC brings action against payment processor for misleading small businesses
On July 29, the FTC announced a settlement with a payment processing company and two of its sales affiliates (collectively, “defendants”) to resolve claims that they “trapp[ed] small businesses with hidden terms, surprise exit fees, and zombie charges.” The FTC alleged that the defendants made false claims about fees and cost savings, including “false and baseless claims about their processing services” to lure merchants, many of whom had limited English proficiency. According to the complaint, once merchants were enrolled, the defendants allegedly withdrew funds from their accounts without their consent and made it difficult and expensive for them to cancel the service. The complaint also alleged that the defendants violated the Restore Online Shoppers’ Confidence Act (ROSCA) by failing to disclose material terms, by charging consumers without their express informed consent, and by failing to provide a simple mechanism for consumers to cancel the agreements.
Under the terms of the proposed settlement, the defendants are, among other things, prohibited from making misrepresentations, making unsubstantiated claims, and using unfair debiting practices. The defendants will also be prohibited from making withdrawals from any of their customers’ bank accounts without authorization. The defendants must pay $4.9 million to the FTC, which will be used to provide refunds to affected businesses.
FTC sues national retailer for allegedly facilitating money transfer fraud
On June 28, the FTC filed a complaint against a national retailer for allegedly allowing its money-transfer services to facilitate fraud. The complaint alleges the retailer knew about the role money transfer services play in scams but failed to properly secure the services offered at its stores, thus allowing money to be sent to “domestic and international fraud rings.” According to the FTC, at least 226,679 complaints totaling more than $197 million were received by several money transfer services companies about fraud-induced money transfers that were sent from or received at one of the retailer’s stores between January 1, 2013 and December 31, 2018. An investigation by the FTC purportedly revealed that the retailer’s practices allegedly harmed consumers by, among other things, (i) allowing the payout of suspicious money transfers, which allowed scammers to retrieve fraud proceeds at one of the retailer’s stores; (ii) failing to have in place a written anti-fraud policy or consumer protection program until November 2014; (iii) allowing cash pickups for large payments, often through the use of fake IDs; (iv) failing to display or provide materials warning consumers about potential frauds; (v) failing to effectively train or retrain employees; and (vi) allowing money transfers to be used for telemarketing purchases, which are prohibited under the Telemarketing Sales Rule (TSR) due to the high risk of fraud.
According to the complaint, the retailer “is well aware that telemarketing and other mass marketing frauds, such as ‘grandparent’ scams, lottery scams, and government agent impersonator scams, induce people to use [the retailer’s] money transfer services to send money to domestic and international fraud rings. Nevertheless, [the retailer] has continued processing fraud-induced money transfers at its stores—funding telemarketing and other scams—without adopting policies and practices that effectively detect and prevent these transfers.”
The complaint seeks a permanent injunction, monetary relief, civil penalties, restitution, and other relief for each violation of the FTC Act and the TSR. The FTC also requests the “rescission or reformation of contracts, the refund of money, the return of property, the payment of damages, public notification, or other relief necessary to redress injury to consumers damages.”
The retailer issued a press release following the FTC’s announcement, stating that it considers the agency’s claims to be “misguided and legally flawed,” and that the civil lawsuit “was approved by the FTC by the narrowest of margins after Chair Lina Khan refused [the retailer] the due process of hearing directly from the company.” The retailer noted that the FTC’s decision comes after DOJ declined to pursue the case in court. Among other thing, the retailer contended that because it maintains robust anti-fraud measures there is no need for injunctive relief requiring the retailer to change its practices. The retailer pointed to the U.S. Supreme Court’s ruling in AMG Capital Management LLC v. FTC, which limited the FTC’s ability to obtain monetary relief in federal court (covered by InfoBytes here), to argue that the FTC “pivoted their focus in this case after AMG to a distorted interpretation of the TSR to effectively try and hold [the retailer] strictly liable for money transfers that third-party criminals reportedly persuaded some consumers to send.” The retailer added that “[s]witching their main legal theory to the TSR is an obvious attempt to get around the Supreme Court’s ruling in AMG.”
FTC, Florida file complaint against grant funding operation
On June 27, the FTC and the Florida attorney general filed a complaint against a Florida-based grant funding company and its owner (collectively, “defendants”) alleging that the defendants violated the Consumer Protection Act, the FTC Act, and the Florida Deceptive Unfair Trade Practices Act. According to the complaint, the defendants deceptively marketed grant writing and consulting services to minority-owned small businesses by, among other things, (i) promising grant funding that did not exist and/or was never awarded; (ii) misleading customers about the status of grant awards; and (iii) failing to honor a “money-back guarantee” and suppressing customer complaints. The complaint also alleged that the owner relied on funds that she acquired through the federal Paycheck Protection Program Covid-19 stimulus program to start the company. The U.S. District Court for the Middle District of Florida issued a restraining order with asset freeze, appointment of a temporary receiver, and other equitable relief order against the defendants, which also prohibits them from engaging in grant funding business activities.
FTC finalizes action against e-commerce platform for data breach cover up
On June 24, the FTC announced a final decision and order against two limited liability companies (respondents) accused of allegedly failing to secure consumers’ sensitive personal data and covering up a major breach. As previously covered by InfoBytes, the respondents—former and current owners of an online customized merchandise platform—allegedly violated the FTC Act by, among other things, misrepresenting that they implemented reasonable measures to protect customers’ personal information against unauthorized access and misrepresenting that appropriate steps were taken to secure consumer account information following security breaches. The complaint further alleged that respondents failed to apply readily available protections against well-known threats or adequately respond to security incidents, which resulted in the respondents’ network being breached multiple times. Under the terms of the final settlement, one of the respondents is required to pay $500,000 to victims of the data breaches. The other respondent is required to provide notice to consumers impacted by a 2019 data breach. Among other things, the order prohibits respondents from misrepresenting their privacy and security measures and requires that respondents implement comprehensive information security programs that are assessed by an independent third party.
FDIC updates Consumer Compliance Examination Manual’s UDAAP provisions
On June 17, the FDIC announced updates to its Consumer Compliance Examination Manual (CEM). The CEM includes supervisory policies and examination procedures for FDIC examination staff when evaluating financial institutions’ compliance with federal consumer protection laws and regulations. The June update modifies Section VII Unfair, Deceptive, or Abusive Acts or Practices to reflect the FDIC’s existing supervisory authority regarding UDAP and UDAAP under Section 5 of the FTC Act, and Sections 1031 and 1036 of the Dodd-Frank Act, respectively. Among other updates, the new Section VII changes language related to the Equal Credit Opportunity Act and Fair Housing Act to add a reference to Dodd-Frank UDAAP provisions. The updated section provides the following:
ECOA prohibits discrimination in any aspect of a credit transaction against persons on the basis of race, color, religion, national origin, sex, marital status, age (provided the applicant has the capacity to contract), the fact that an applicant’s income derives from any public assistance program, and the fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. The FHA prohibits creditors involved in residential real estate transactions from discriminating against any person on the basis of race, color, religion, sex, handicap, familial status, or national origin. FTC UDAPs and Dodd-Frank UDAAPs that target or have a disparate impact on consumers in one of these prohibited basis groups may violate the ECOA or the FHA, as well as the FTC Act or the Dodd-Frank Act. Moreover, some state and local laws address discrimination against additional protected classes, e.g., handicap in non-housing transactions, or sexual orientation. Such conduct may also violate the FTC Act or the Dodd-Frank Act.
With respect to the legal standards for “unfair” and “deceptive” under the FTC Act and Dodd-Frank, Section VII notes that these standards are “substantially similar.”
FTC bans MCA providers, returns $2.7 million to consumers
On June 6, the FTC obtained a stipulated court order permanently banning a company and owner from participating in the merchant cash advance and debt collection industries. As previously covered by InfoBytes, last June the FTC filed an amended complaint against two New York-based small-business financing companies and a related entity and individuals (including the settling defendants), claiming the defendants engaged in deceptive and unfair practices by, among other things, misrepresenting the terms of their merchant cash advances, using unfair collection practices, deceiving consumers about personal guarantees, forcing consumers and businesses to sign confessions of judgment, providing less funding than promised due to undisclosed fees, and making unauthorized withdrawals from consumers’ accounts. Under the terms of the stipulated order, the settling defendants are required to pay a more than $2.7 million monetary judgment to go towards refunds for harmed consumers and must vacate any judgments against former customers and release any liens against their customers’ property. The announcement notes that the settling defendants are also “prohibited from misleading consumers about any key facts about any good or service, including any fees, the total cost of the product, and other facts that reflect their deceptions in this case.”
Earlier in January, a stipulated order was entered against two other defendants (covered by InfoBytes here), which permanently banned them from participating in the merchant cash advance and debt collection industries and required the payment of a $675,000 monetary judgment.