FTC Continues Crackdown on Operations that Target Financially Distressed Consumers

FTC Settles Charges Against Debt Relief Operation

Federal Trade Commission
Press Release – August 23, 2011

Complaint:

• The Federal Trade Commission (“FTC”) alleged that Debt Relief USA, Inc. and its principals made deceptive claims that consumers who enrolled in their program could eliminate from 40% to 60% of their credit card debt and ultimately be out of debt in one (1) to two (2) years.
• According to the FTC, in most cases consumers paid thousands of dollars in up-front fees, but failed to have their credit card debt reduced.
• Few consumers received the promised results.

Proposed Settlements:

• The proposed settlement orders ban Debt Relief USA, Inc. from doing further business, and its principals, from marketing any financial products and services in the future.
• The principals are required to protect and dispose of any and all consumer personal information in their possession or control.

FTC Settles Three (3) False Marketing Investigations

Federal Trade Commission
Press Release – August 25, 2011

Marketers:
Truman Foreclosure Assistance, LLC:

• The FTC alleged that defendants charged up-front fees ranging from $1500 to $3000, falsely claiming that consumers could get their mortgages modified or stop their homes from being foreclosed on. 
• Defendants boasted a 90% success rate and a 100% money-back guarantee.
• According to the FTC, in many cases after consumers paid the up-front fees, defendants failed to provide information about the status of their communication with the consumers’ lenders, failed to contact the consumers’ lenders or obtain mortgage loan modifications, and denied refunds to homeowners for whom they failed to obtain modifications.
• Under the settlements, two (2) of the principals overseeing the operation were ordered to pay $1.8 million and are banned from marketing or helping others to market any mortgage relief and/or foreclosure rescue product or service in the future.

Fedmortgageloans.com:

• The FTC alleged that defendants falsely marketed their debt relief and mortgage assistance relief services as being affiliated with the federal and state government.
• According to the FTC, defendants led consumers to believe that they were eligible for a federal or state government loan modification or debt relief program.
• The settlement imposes a $1,080,931 judgment against the defendants, who are also banned from marketing or helping others to market mortgage assistance relief and/or debt relief products or services.

Making Home Affordable:

• The FTC alleged that defendants impersonated “MakingHomeAffordable.gov,” a federal government website that helps eligible homeowners refinance or modify their home mortgages.
• Specifically, consumers looking for the federal program were diverted to commercial websites that advertised loan modification services.
• One defendant made such claims as “Instantly Stop Foreclosure” and “Guaranteed Solutions to Lower Your Rate Today.”
• The FTC has previously settled with six (6) other defendants in this case.
• Here, the final settlement was reached with Mr. Scott Lady, in the amount of $710,415.
• Lady is prohibited from offering mortgage modification products and services in the future.

Take Away:

• It should be getting clearer with each issue of our Newsletter that the FTC is scrutinizing programs aimed at financially-strapped consumers.
• The actions and settlements are continuous.
• Marketers making false claims about a product or service, especially those geared toward a consumer’s financial vulnerability, should reconsider their approach.

Mobile Apps Developer Settles COPPA Charges

United States v. W3 Innovations, LLC (N.D. Cal., No. CV-11-03958-PSG, Aug. 12, 2011)
FTC File No. 102 3251 - August 15, 2011

FTC Complaint:

• Defendants develop and distribute mobile applications (“apps”) for the iPhone and iPod Touch that enable users to play games and share information online.
• The Federal Trade Commission (“FTC”) alleged that several of defendants’ apps were directed to children and were listed in the “Games-Kids” section of Apple, Inc.’s App Store.
• The apps at issue allegedly encouraged children to email their comments and submit blogs via email to defendants. 
• According to the complaint, defendants collected and maintained thousands of email addresses from users of these apps.
• The FTC alleged that defendants also allowed children to publicly post information, including personal information, on message boards.
• According to the FTC, defendants violated the Children’s Online Privacy Protection Act (“COPPA”) and the FTC’s COPPA Rule by illegally collecting and disclosing personal information from tens of thousands of children under the age of 13 without obtaining their parents’ prior consent.

COPPA Rule:

• The FTC’s COPPA Rule requires that website operators notify parents and obtain their consent before they collect, use or disclose children’s personal information.
• Website operators are also required to post a privacy policy that is clear, understandable and complete.

FTC Proposing Revisions to COPPA Rule:

• The FTC is seeking to revise the COPPA Rule as online use increases and technology evolves.
• The major changes to the COPPA Rule affect the following areas: definitions, parental notice, parental consent mechanisms, confidentiality and security requirements and the safe harbor provision.
• The revisions expand the definition of “personal information” to include a child’s location, as well as identifiers used in behavioral advertising.
• The amendments would streamline and clarify the notice that operators must provide to parents prior to collecting personal information from children.
• The revisions would also enhance parental consent requirements by adding new methods to obtain verifiable consent (such as scans of signed parental consent forms and video-conferencing), and eliminate the “email plus” method, often considered to be less reliable.
• The FTC is seeking public comment on the proposed amendments. Comments must be received by November 28, 2011.

Take Away:

• This is the FTC’s first case involving mobile apps and, in all likelihood, it will not be the last.
• Developers and marketers of apps for children should be apprised of, and conduct their marketing of such programs within, COPPA laws and rules.
• The FTC is seeking to update COPPA and to finalize the amendments in 2012.

Connecticut AG Questions Groupon About Deal Expiration Dates

State of Connecticut – Office of the Attorney General, George Jepsen
Press Release – July 14, 2011

Letter to Groupon:

• In a letter dated July 12, 2011, the Connecticut Attorney General, George Jepsen, inquired about the business practices of Groupon, Inc. (“Groupon”), to determine whether it is subject to, and in compliance with, Connecticut law governing gift certificates.
• Groupon is a “deal of the day” website and focuses on major geographic markets throughout the world. Groupon sends its members daily email messages featuring “deals” associated with purchases from various businesses.
• The Attorney General is asking for detailed information associated with Groupon’s daily deals, as he wrote, “[i]t appears that what Groupon, Inc. sells or offers may fall within the definition of a gift certificate under Connecticut law.”
• Connecticut law prohibits gift certificates from being sold or issued subject to an expiration date.

Applicable Law:

• Connecticut General Statutes, § 42-460:
  “no person may sell or issue a gift certificate . . . that is subject to an expiration date,” and “no gift certificate or any agreement with respect to such gift certificate may contain language suggesting that an expiration date may apply to the gift certificate.”
• § 3-56a defines gift certificates as:
  “. . . a record evidencing a promise, made for consideration, by the seller or issuer of the record that goods or services will be provided to the owner of the record to the value shown in the record . . . .”

Take Away:

• Many states have enacted gift card laws that provide restrictions on expiration dates.
• On a national level, the Electronic Funds Transfer Act was amended to prohibit the sale and issuance of gift certificates/cards with expiration dates of less than five (5) years.
• Daily deals may fall within the definition of gift certificates under state and/or federal law. We will continue to monitor the Attorney General’s progress in this matter.

FTC Brings Another Action Against Payday Loan Marketers, Freezes Assets

FTC v. Direct Benefits Grp. (M.D. Fla., No. 6:11-cv-01186, July 18, 2011)
Federal Trade Commission
Press Release – August 1, 2011

Federal Trade Commission (“FTC”) Complaint::

• Defendants’ websites, mypaydayangel.com and juniperloans.com, feature online loan applications that request that consumers provide their personal information, such as their Social Security, driver’s license and bank account numbers. 
• Toward the bottom of the defendants’ payday loan application websites, assorted third-party program offers for food, travel and merchandise discounts are featured.
• Consumers who click “submit” a payday loan application, are automatically enrolled into the unrelated third-party programs, and are charged up to $59.90 per month and later up to $99.90 per year.
• According to the complaint, consumers often failed to notice the program offers and some who declined the offers were still charged for the programs.
• Defendants allegedly sent consumer bank account information to payment processors in order to debit consumer accounts.
• Consumers allegedly learned of the non-payday loan-related charges by finding unexpected debits on their bank account statements and often had difficulty getting the debits reversed.

Violation of the FTC Act:

• Defendants are charged with violating the FTC Act by obtaining consumer bank account information and debiting accounts without consent, as well as failing to disclose that, in addition to using such information for a payday loan application, defendants would also use it to charge consumers for enrollment in other programs and services.

Take Away:

• As indicated in the press release, the FTC is continuing its effort to "protect financially strapped consumers during the economic downturn."
• This action and the recent court order requiring Swish Marketing to pay $4.8 million for alleged deceptive payday loan practices highlights the FTC's goal to put an end to such operations.

Fraud Allegations Against MyLife.com Withstand Motion to Dismiss

Clerkin v. MyLife.com, Inc. (N.D. Cal., No. 11-527, Aug. 15, 2011)

Complaint:

• Plaintiffs allege that MyLife.com, Inc. (“MyLife”) operates an Internet website providing subscribers with a list of fake names of people supposedly “searching for you.”
• Plaintiffs Clerkin and Mendez both allege receiving email messages purporting that people were searching for them, when in fact no one was. 
• Clerkin signed up for MyLife at $21.95 for one (1) month, but was later charged $155.40.  MyLife refunded only $104.55 to Clerkin.
• Mendez signed up for a $5.00 trial subscription, but was charged $60.00, which MyLife failed to refund to Mendez.
• Among other claims, plaintiffs brought an action for fraud under California’s Consumer Legal Remedies Act (“CLRA”).
• With such a claim of fraud, plaintiffs are required to satisfy the “heightened” pleading requirements contained in Section 9 of the Federal Rules of Civil Procedure. 
• Plaintiffs contend that their CLRA claim has two (2) bases: (1) MyLife’s misrepresentations in its email solicitations to plaintiffs that someone was looking for them; and (2) MyLife’s billing practices.
• Plaintiffs also attempted to hold individual defendant officers liable, alleging that they authorized the company’s misconduct.
• MyLife and the individual defendants moved to dismiss for failure to state a claim and for lack of personal jurisdiction. 

Court Decision:

• The court refused to grant MyLife’s motion to dismiss, finding that plaintiffs satisfied the Rule 9 burden of pleading fraud by alleging that the website produces “a list of fake names” for those who sign up. 
•  The court found that plaintiffs’ allegations suggest that MyLife’s statement that people were looking for them was false or deceptive.
• The court also found that the allegations that MyLife’s billing practices violated the CLRA satisfied the pleading requirements of Rule 9.  Specifically, plaintiffs signed up for a particular subscription, but MyLife billed them for another.
• The court dismissed the claims against the individual officers for lack of personal jurisdiction and, in another instance, for failure to state a claim. 

Take Away:

• The court noted that there were three (3) pending putative class actions against MyLife and consolidated the following two (2) actions into this proceeding: McCrary v. MyLife.com, Inc., Case No. C 11-2353 CW (N.D. Cal.), and Brock v. MyLife.com, Inc., Case No. C 11-3073 CW (N.D. Cal.).
•  We will continue to follow and report on further developments in this action.

Court Orders Payday Loan Marketer to Pay $4.8 Million

FTC v. Swish Mktg., Inc. (N.D. Cal., No. C09-03814, Sept. 29, 2010)
Federal Trade Commission
Press Release – July 21, 2011

FTC Complaint (as reported in our November 2010 Issue):

• The Federal Trade Commission ("FTC") alleged that Swish Marketing, Inc. ("Swish") and its three (3) officers operated short-term or "payday" loan websites. 
• According to the complaint, the websites featured an online loan application form. 
• Once an applicant applied for a loan online, users were given various "prompts" leading to product offers unrelated to the subject loan, each with "yes" and "no" buttons. 
• The FTC alleged that "no" was pre-checked for three (3) of the offers, while "yes" was pre-checked for a debit card offer, including fine print disclosing that the consumer consents to having his/her bank account debited.
• At the completion of the form, consumers who clicked "finish matching me with a payday loan provider" and had not checked "no" for the debit card, were ultimately charged for the debit card. 
• Further allegations claimed that some of the websites described the card as a "bonus" while disclosing the fee in fine print below the "submit" button, charging consumers up to $54.95 for each card.

August 2009 Charges:

• In 2009, the FTC charged Swish and VirtualWorks, LLC (“VirtualWorks”), the debit card company that helped to design the online offers, with deceptive business practices.
• VirtualWorks has already settled the charges against them.

April 2010 Charges:

• The FTC amended the complaint against Swish and its officers alleging that defendants sold consumer bank account information to VirtualWorks without consumer consent. 
• These allegations included the fact that the officers of the company were aware of consumer complaints regarding unauthorized debits.

Swish Officer Settles, October 2010:

• Jason Strober, an officer of Swish, agreed to pay $850,000.
• Among other things, Mr. Strober is prohibited in the future from misrepresenting material facts about a product or service, including the cost or method for charging consumers.

Court Order:

• The court ordered Swish to pay more than $4.8 million for deceptive marketing practices. 
• The company is now banned from marketing products with a “negative-option” program (where a consumer’s silence or failure to reject a product is considered an agreement to make a purchase).
• Swish is required to obtain consumers’ informed consent before using their personal information.
•  Further, the order bars the company from:
  1. misrepresenting material facts about any product or service;
  2.  misrepresenting that a product or service is free or a “bonus” without disclosing all material terms and conditions;
  3. charging consumers without first disclosing what billing information will be used, the amount to be paid, and how and on whose account the payment will be assessed; and
  4. failing to monitor their marketing affiliates to ensure that they are in compliance with the order.

Take Away:

• The FTC's action is indicative of its intolerance with deceptive marketing practices. The court’s order evinces its support for the FTC’s ongoing efforts in this business space.