Arent Fox Alert: FTC REVIEW: June 1999


Each month, Arent Fox's advertising lawyers prepare this summary of major law enforcement actions announced by the U.S. FTC ("FTC") during the previous month. The summary highlights FTC advertising actions against well-known corporations engaged in national advertising, law enforcement "sweeps," and civil penalty actions.

I. FTC ACTIONS INVOLVING MAJOR CORPORATIONS

There were no FTC actions in June involving major corporations.

II. FTC SWEEPS

A. Internet Coupon Surf Day

The FTC and the Coupon Information Center (CIC), a non-profit entity that combats coupon fraud conducted a Internet Coupon "Surf Day." Fifty-one Internet advertisements were identified as potentially fraudulent coupon related schemes. The advertisers were sent e-mail messages warning about the consequences of running such schemes. The targeted sites fall into two categories of business opportunities. Some of the sites offer a work-at-home coupon clipping scam, where consumers are told that they can earn substantial amounts of money clipping coupons. Other sites advertise a business opportunity where consumers are told that they can make money by selling to others "coupon certificate booklets." The consumers purchase the booklets at a "reduced" price and then sell them for $20 or $50 to others. The problem with the coupon certificate booklet business opportunity schemes is that they often make exaggerated earnings claims. Also, the certificates in the booklets carry significant restrictions on where and when the coupons can be redeemed.

III. FTC RULE ENFORCEMENT AND CIVIL PENALTY CASES

A. Continental Gown Cleaning Service, Inc.

Continental Gown Cleaning Service, Inc., a New York based dry cleaning operation, four related drycleaning companies operating at the same address, and the two individuals who controlled them, have agreed to settle FTC charges that they violated the FTC Act by providing improper care labels to wedding gown manufacturers who attached the improper labels to the gowns they manufactured and sold. Continental Gown Cleaning Service, Inc., Nationwide Gown Cleaning Service, Inc., Prestige Gown Cleaning Service, Inc., Gown Cleaning Service, Inc., Jonathan Ashley, Ltd., Lewis Weissman and Gary Marcus (collectively Continental Gown) solicited gown manufacturers and importers to label gowns with care instructions such as ADry Clean Only by Zurcion Method, Continental 1-800-441-GOWN, manufacturers guaranteed processing. The FTC's complaint alleged that these care labels violate the Commission's Care Labeling Rule because they recommend drycleaning but do not name a drycleaning solvent that can be used without damaging the gowns and do not warn that certain modifications must be made to the normal drycleaning process for delicate gowns such as wedding gowns. The FTC alleged that the care labels distributed by Continental misled consumers by making the unsubstantiated claim that gowns with those labels could only be cleaned by the Zurcion Method. The complaint also alleged that Continental made false and unsubstantiated advertising claims that the Zurcion Method was patented, that these gowns could only be cleaned by the Zurcion Method, and that it was the only cleaner who could clean these gowns safely and effectively. In addition, the FTC alleged that Continental did not disclose to consumers the material limitations and conditions of its guarantee of the wedding gowns it cleaned and preserved.

B. Cramming Allegations

In a crackdown on operations that targeted hundreds of thousands of small businesses, "cramming" charges onto their telephone bills for services that were supposed to be free, the FTC has halted the illegal practices of Internet web site "service" providers who have caused millions of dollars in losses in the last 18 months.

According to the FTC, the defendants hired telemarketers who targeted small businesses touting the business benefits of having an Internet presence and offering to design and host an Internet web site for the business for a "free" 30day trial period. Some small businesses were told they were under "no obligation" after the trial period; but that they would be billed at the end of trial period unless they canceled. Others were told that no charges would be incurred unless the business ordered the web site on a permanent basis and approved future charges. Other businesses refused to accept the free offer, but agreed to receive an information package. But small businesses were still charged for the "free" trial. Many were billed repeatedly, month after month, even those who had not agreed to accept the trial offer and those who had canceled.

The FTC charges were filed against Wazzu Corporation, Jayme Amirie, Kenneth Gharib and Kirk Waldfogel of Fountain Valley, CA; Shared Network Services, LLC and Peter Westbrook, d/b/a 1st Page in Lodi, CA; and WebViper, LLC, Tigerhawk, LLC, Thomas J. Counts, Patrick C. Taylor, and Richard M. Bogdanas, individually and d/b/a Yellow Web Services. All Web Viper corporate and individual defendants are based in Montgomery, AL, except Richard M. Bogdanas who resides in Chalk Lake, TX.

C. American TelNet

In a deal that would provide more than $39 million in redress for U.S. consumers, American TelNet (ATN), one of the largest providers of "audiotext" services audio entertainment services offered over the telephone has agreed to settle FTC charges that ATN tried to collect charges for 900number audiotext services from thousands of consumers, even though the services had not been accessed from the consumers' phones. The settlement also would resolve FTC allegations that ATN denied tens of thousands of consumers their rights under federal law to contest charges for ATN's 900 number audiotext services on the consumers' phone bills. In addition, the FTC alleged that ATN violated the FTC's Pay-Per-Call Rule by charging consumers for audiotext services provided through 800 or other toll-free numbers, by charging consumers for "preamble" disclosures required by law to be provided free at the beginning of a 900 number program, and by failing to adequately disclose price information in advertising 900 number services. The settlement would bar the illegal practices, require that $37.4 million in unpaid disputed charges be written off and would require $2 million in redress for consumers who disputed charges, but ultimately paid them.

D. Tiger Direct, Inc.

Tiger Direct, Inc., a large mail order seller of computer products, has agreed to settle FTC charges that it made false and misleading statements in its ads and promotional materials about its onsite warranty service. The FTC alleged that Tiger Direct unqualifiedly represented that it would provide one year onsite warranty service for Tigerbrand computer systems, which it depicted in its ads as including a keyboard, speakers and a mouse, and that it would provide such warranty service within a reasonable period of time. In fact, the FTC said, the company provided onsite service only in limited circumstances and would not provide such service for the computer mouse, keyboard and speakers. Further, consumers that requested warranty service endured frustrating and lengthy delays. The FTC alleged that by disclaiming implied warranties, failing to disclose material warranty terms, and failing to clearly designate its warranty as "full" or "limited," Tiger Direct violated provisions of the Magnuson-Moss Warranty Act, and the FTC's Pre-Sale Availability Rule and the Disclosure Rule. The proposed settlement would prohibit Tiger Direct from misrepresenting the terms and conditions of its onsite warranty and require it to comply with the relevant provisions of the Warranty Act, the Disclosure Rule, and the PreSale Availability Rule.

Tiger Direct, based in Miami, Florida, advertises, sells and distributes computer products, including hardware, software, and accessories, in catalogs, magazines, package inserts, by direct mail, and on the Internet. Tiger Direct sells brand name computer products such as Compaq, Hitachi and Toshiba as well as its own "Tiger" brand. Its ads and promotional materials contained statements such as "ONE YEAR ONSITE WARRANTY!" for its Tigerbrand computer "complete systems."

E. Fraudulent Domain Names

As many as 13,000 consumers in at least nine countries who were duped by a copycat Internet domain name registry will qualify for refunds under an agreement announced by Australian and U.S. consumer protection agencies. The FTC targeted the Internet domain name scam being operated out of Australia, and alerted Australian Competition and Commission ("ACCC") authorities, who charged the company and its principal with misleading and deceptive conduct. The case has been settled by the ACCC with the establishment of a trust fund, which will return $A250,000 to victims worldwide and bar the defendant from using the name "Internic."