• On April 29, the Federal Trade Commission (“FTC”) announced Integrated Capital, doing business as National Student Financial Aid (“NSFA”), and its principal, Alan Wilson, had been found in contempt for violating terms of an August 2003 stipulated final order requiring them to make certain disclosures in connection with the marketing and sale of academic goods or services. In a ruling from the U.S. District Court for the District of Nevada, Judge David Hagen ordered NSFA and Wilson to offer full refunds to all consumers who purchased NSFA’s services between August 6, 2003 and July 17, 2004. In August 2003, the FTC filed a complaint and stipulated order settling charges that NSFA misrepresented its college financial aid services. The order, approved by the court, required the defendants to make certain affirmative disclosures in their oral sales presentations, including: (1) purchasing NSFA’s services did not guarantee that a consumer will get financial aid or get more financial aid than the consumer otherwise could have obtained without purchasing NSFA’s services; (2) purchasing NSFA’s services did not guarantee that a consumer’s child will be accepted by any college or university; (3) NSFA provided no services until it received a completed questionnaire, that certain services had to be specifically requested, and that failure to utilize any services did not entitle consumers to a refund; (4) consumers might not realize the full benefit of NSFA’s services if their children were within six months of graduating from high school, had not made reasonable efforts to complete necessary paperwork for admissions and financial aid, or were only considering attending community college; and (5) consumers who were not U.S. citizens might not be eligible for federal or state financial aid. In its order finding the defendants in contempt, the court found that they failed miserably to make the affirmative disclosures during NSFA’s sales presentation. The court stated that the affirmative disclosures were included in the stipulated final order because they related to the core areas of the defendants’ business practices that attracted the FTC’s attention in the first place.

• The FTC issued its eighth quarterly announcement summarizing the agency’s enforcement efforts against telemarketing fraud and abuse. The quarterly enforcement update lists significant case developments in 21 federal district court cases occurring between February and April 2005. A Web page containing the “Quarterly Update for April 2005” also contains a list of enforcement actions involving telemarketing that have seen developments since October 1, 2002, with links to press releases related to each of these actions. The Web page also contains information about 148 actions involving the use of the telephone to market goods or services. This information covers cold-call outbound telemarketing, as well as inbound calls generated from advertisements or other solicitations to purchase products or services. The quarterly enforcement update and the telemarketing fraud and abuse enforcement links are, respectively: http://www.ftc.gov/bcp/conline/edcams/telemark fraudenforcement/update05apr.htm and http://www.ftc.gov/bcp/conline/edcams/telemarkfraudenforcement/ index.html. In addition to helping consumers learn about the Commission’s enforcement actions, the Web page and the quarterly enforcement update provide consumers with easy access to information about the specific frauds and abuses perpetrated using telephone calls and the types of matters prosecuted by the Commission, including matters brought under the Telemarketing Sales Rule and its National Do Not Call Registry.

• On April 26, the FTC filed two proposed stipulated orders in federal court resolving charges that the marketers of AB Energizer, an electronic abdominal exercise belt, falsely advertised that using the AB Energizer caused weight loss, inch loss, and six-pack abs without exercise. These orders are part of a global settlement resolving the FTC’s lawsuit and related actions brought by county and city prosecutors in California. Under the settlements, AB Energizer marketers and certain retailers collectively will pay over $2 million, of which over $1.4 million will be for consumer redress. The balance will go to the California prosecutors for costs and civil penalties. The FTC and California orders bar the defendants from making the challenged false advertising claims for the AB Energizer or any similar device, and contain other injunctive relief to prevent future deceptive advertising. The stipulated final orders settle the Commission’s court actions against the following defendants: Electronic Products Distribution, L.L.C.; AB Energizer Products, Inc.; Abflex USA, Inc.; AB Energizer, L.L.C.; Thomas C. Nelson; Martin Van Der Hoeven; Douglas Gravink; and, Gary Hewitt. The defendants are based in Southern California, with most located in San Diego. An amended complaint filed with the stipulated orders adds Gravink and Hewitt to the FTC’s original complaint. The FTC recognizes the invaluable role of prosecutors from the City of San Diego and the California counties of Napa, Solano, and Sonoma in reaching a settlement that maximized the amount of redress available for AB Energizer purchasers.

• The FTC announced on April 21 that it is seeking public comment on its implementation of the Children’s Online Privacy Protection Act (“COPPA”) through the Children’s Online Privacy Protection Rule. The FTC is also seeking additional comment on the COPPA Rule’s sliding scale approach to obtaining parental consent, which takes into account how information gathered from children will be used. As COPPA requires, the FTC is conducting a review of the COPPA Rule five years after its effective date and is seeking public comment on its implementation of COPPA through the Rule. The Rule imposes certain requirements on operators of Web sites or online services directed to children under 13 years old and other Web sites or online services that have actual knowledge that they are collecting personal information from a child under 13 years old. The Commission requests comment on the costs and benefits of the Rule as well as on whether it should be retained, eliminated, or modified. Public comment will be accepted on all aspects of the Rule during the 60-day comment period.

• On April 13, the FTC and the Attorney General of California asked a U.S. District Court Judge to order a halt to an operation that sent millions of spam messages touting mortgage loans and other products and services. The agencies charge that the operation violates federal and state laws, and have asked the court to freeze the defendants’ assets pending trial and order a permanent halt to the illegal spamming. According to papers filed with the court, the defendants use third-party affiliates or button pushers to send spam hawking mortgage loans and other products and services. Hyperlinks in the spam take consumers to Web sites operated by the defendants. Consumers fill in data and the information is passed along to lead companies and by them to lenders. One mortgage broker sought, and was given assurances by the defendants that they were complying with provisions of the CAN-SPAM Act. In fact, most of the 1.8 million e-mail messages sent to the FTC by the public demonstrate that they were violating almost every provision of the Act.

• According to a FTC staff report released April 11, the number of obviously false weight-loss claims in television, radio, and print advertisements for dietary supplements, topical creams, and diet patches appears to have dropped from almost 50 percent in 2001 to 15 percent in 2004. With the rapid increase in obesity in America, many Americans look to weight-loss ads for products to trim pounds. Industry sources estimate that consumers spend billions of dollars each year on products and services that purport to promote weight loss. Many of these products, however, do not deliver what they promise. In a 2002 report, the FTC staff found that nearly half of weight-loss ads surveyed in 2001 made claims that clearly were false. To help stem this tide of deceptive weight-loss advertising, in 2003, the FTC asked the media not to run ads containing obviously false weight-loss claims. To judge the effectiveness of its call for media screening, the FTC staff conducted the non-scientific Weight-Loss Advertising Survey: 2004. Although the decline in deceptive ad claims is significant, the survey results show there are still areas for improvement. The FTC will continue its efforts to encourage the media voluntarily to screen out clearly false weight-loss advertisements. The survey reviewed the nature and frequency of weight-loss advertising for certain products available over-the-counter running on television and radio or in newspapers and magazines – all media that can screen out ads before running them.

Authored by:
Camelia Mazard
202-218-0028
cmazard@sheppardmullin.com