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Each month, Arent Fox's advertising lawyers prepare this summary of major law enforcement actions announced by the U.S. Federal Trade Commission ("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 July involving major corporations.
II. FTC SWEEPS
The FTC did not conduct any sweeps in July.
III. FTC RULE ENFORCEMENT AND CIVIL PENALTY CASES
A. NCCP Ltd.
A Canadian-based company, NCCP Ltd. and its owner, Cary Title, have agreed to pay $100,000 to settle FTC charges that they falsely represented their credit card protection program including protection against potential Y2Krelated problems. This is the FTC's first Y2Krelated fraud case. The Commission alleged that the defendants' telemarketers violated the FTC Act and the Telemarketing Sales Rule ("TSR") by making false or misleading statements to induce consumers to purchase the company's services. As part of the settlement, NCCP Ltd. and Title have agreed to be permanently banned from engaging in the credit card protection and credit card registration business. The settlement also prohibits the defendants from making any misrepresentations of fact material to a consumer's purchasing decision.
The FTC filed its complaint against NCCP Ltd., doing business as National Credit Card Protection Ltd., and Cary Title in federal district court. NCCP Ltd. is a telemarketing company that purported to protect consumers from financial loss resulting from the loss or theft of their credit cards. The FTC alleged that NCCP's telemarketers falsely represented to consumers that they were calling from, or on behalf of, the consumers' credit card issuer. In addition, the FTC alleged that NCCP falsely stated that consumers had only 48 hours to report the loss or unauthorized use of their credit card to avoid liability for the charges. In fact, federal law limits consumers' liability for unauthorized charges to $50 per credit card, and there is no time limit for reporting loss, theft, or unauthorized use of a credit card.
The FTC further alleged that the defendants, in an effort to induce consumers to buy their credit card protection program, offered consumers a Y2K protection package that they said would obviate Y2K-related problems. The package consisted of nothing more than adhesive stickers. According to the FTC, the defendants told consumers that the adhesive stickers would safeguard against potential Y2K problems once they were applied to the consumers' credit cards. The Commission also alleged that the defendants failed to promptly disclose that they were conducting a sales call.
B. Fleet Finance, Inc. and Home Equity U.S.A.
Atlanta, Georgia-based Fleet Finance, Inc. ("Fleet Finance") and Home Equity U.S.A. have agreed to settle FTC charges that Fleet Finance often failed to provide accurate, timely disclosures of the costs and terms of home equity loans to consumers. The FTC also charged that the company, on numerous occasions, failed to provide or accurately provide consumers with information about their right to cancel their credit transaction. Fleet Finance's actions, the FTC charged, were deceptive and violated the Truth in Lending Act ("TILA") and its implementing Regulation Z, as well as Section 5 of the FTC.
As part of the proposed settlement of the charges, Fleet Finance and Home Equity U.S.A. will pay $1.3 million, covering redress and administrative costs, to certain consumers whose mortgage loans were originated or purchased by Fleet Finance or a prior nowdefunct corporation also called Fleet Finance, Inc., between January 1, 1990 and December 31, 1993. Fleet Finance and its successor corporations also would be prohibited from future violations of the TILA and from various misrepresentations of credit costs and terms.
C. Companies Engaged in "Cramming"
A scam that targets small businesses, religious organizations, charities, and foundations across the United States by "cramming" charges onto their telephone bills for services that were supposed to be free has been temporarily shut down by a federal District Court at the request of the Federal Trade Commission. According to the FTC, the defendants, through their telemarketing operations, called consumers touting the business benefits of having an Internet presence and offered to design and host an Internet web site for a "free" 30-day trial period. The FTC charged that the telemarketers failed to disclose to consumers that, unless consumers initiate the contact to cancel the service, the defendants would automatically begin charging consumers monthly fees of $19.95 or $24.95. Consumers were never told, the FTC's complaint alleges, that these charges for Internetrelated services would be added to their local phone bills. Further, the FTC charged that the defendants, in numerous instances, told consumers that they were legally obligated to pay for Internetrelated services charged to consumers' phone bills, when in fact, consumers were not legally obligated to pay the charges because consumers never authorized them. The FTC alleges that the scam has taken in more that $9 million for services that were never ordered. The FTC has asked the court to issue a preliminary injunction to prohibit the alleged deceptive practices pending the outcome of a trial, and to order an asset freeze against the defendants to preserve funds for consumer redress.
D. SlimAmerica, Inc.
A federal district court found that SlimAmerica, Inc. and its principals, Frank J. Sarcone and Robert Wyman, violated federal consumer protection laws by making false advertising claims about the efficacy of their "SuperFormula" diet product. The U.S. District Court for the Southern District of Florida, ruling after a trial that occurred in December 1997, found that the defendants violated the FTC Act by making deceptive claims in their ads for "SuperFormula," which ran in magazines such as Ladies Home Journal, Cosmopolitan, and McCall's Magazine. Because of these violations, the court ruled that the defendants should be permanently prohibited from such practices and pay more than $8.3 million in redress to consumers who purchased "SuperFormula." The court also ordered the individual defendants Sarcone and Wyman to post multimillion dollar performance bonds before engaging in any business related to weightloss products or services, or before engaging in the marketing of any product or services.
The FTC sued SlimAmerica, Inc., based in Deerfield Beach, Florida, Sarcone, and Wyman in December 1997. The defendants' ads and product literature featured SuperFormula as a "New Triple Medical Breakthrough" consisting of three different "weight loss weapons." The FTC alleged that the defendants' ads falsely stated that SuperFormula would "blast" up to 49 pounds off in only 29 days, "obliterate" five inches from waistlines, and "zap" three inches from thighs all without the need to diet or exercise. The ads also asserted that all of these claims had been validated by scientific studies, and that SuperFormula was endorsed by a medical doctor with credentials from a wellknown nutrition organization.
E. Telemarketing Companies
Two Fort Waynebased telemarketers charged by the FTC with deceptively convincing small businesses that they owe money for unordered advertisements in publications purported to be affiliated with "civic" or "charitable" organizations have agreed to settle the allegations. The charges were brought as part of "Operation Missed Giving," a sweeping nationwide campaign against fraudulent fundraising coordinated by the FTC, 40 states, and the American Association of Retired Persons (AARP). The joint initiative targeted telephone fundraisers who misrepresented ties with police departments, fire fighters, veterans groups, childrens' health organizations, and other community organizations. Named as defendants by the FTC in two separate complaints were T.E.M.M. Marketing, Inc., and Rodney L. Turner, Brian A. Edwards, and Michael D. Merryman, all officers of the company; and TriState Advertising Unlimited, Inc., company officer Jerome Anthony Wilkins, and Daryl Allen Bender. The settlements in these two cases permanently ban the individual defendants except Bender from selling advertisements in, or soliciting donations for, any publication. An order settling the allegations against Daryl Bender was filed with the court in April 1999.
F. OneSource Worldwide Network, Inc.
OneSource Worldwide Network, Inc., operating in Dallas, Texas, and its president, James Fobair, have settled FTC charges that they made false and unsubstantiated advertising claims for a laundry detergent substitute they sold. According to the FTC's complaint, OneSource and Fobair falsely touted their product, "The EarthSmart Laundry CD," as an effective substitute for laundry detergents that not only cleans laundry but does so without polluting the earth's waterways. The proposed settlement would prohibit OneSource and Fobair from claiming that the Laundry CD or any similar product cleans as well as conventional laundry detergent and would require them to pay $50,000 in disgorgement. These funds are to be divided equally among the FTC and six states that participated in this action: Arkansas, Illinois, Michigan, Missouri, Nevada and Texas. According to the FTC's complaint detailing the charges, the defendants manufactured, marketed, and distributed The EarthSmart Laundry CD a plastic disc filled with allegedly "structured water" that could be used in washing machines instead of conventional laundry detergents. The product sold for approximately $80. The defendants advertised on the Internet, in promotional materials, and in facetoface solicitations. Fobair also develop a multilevel marketing structure that sold the products through a network of distributors.
The FTC alleged that the defendants falsely claimed that The Laundry CD cleans laundry as well as conventional laundry detergent; that The Laundry CD cleans clothes by changing the molecular structure of water; that The Laundry CD is recyclable; and that scientific evidence proves that the product works. The complaint also alleged that the defendants did not have adequate substantiation for the claims they made about the product's environmental attributes or the product's ability to replace fabric softeners. In addition, according to the complaint, testimonials that appeared to reflect the typical or ordinary experience of users of the product were misleading because the testimonialists' experience was not typical.