• The Federal Trade Commission (“FTC”) and Canada’s Competition Bureau are working together to educate consumers about worthless products purported to produce weight loss. In that regard, they announced on September 28 the translation of an educational teaser Web site about these ripoffs into French. The new French translation is at http://www.wemarket4u.net/fatfoe/francais/. The Web site is in English at http://wemarket4u.net/fatfoe/ and in Spanish at http://www.wemarket4u.net/fatfoe/espanol/. The teaser Web site is designed to reach consumers surfing online for weight-loss products. At first glance, the Web site appears to advertise a new product that guarantees fast, easy weight loss in all users, with no diet or exercise necessary to lose up to 10 pounds per week permanently. In reality, the claims made for “FatFoe” represent “red flags” to consumers because they are almost always false or misleading. When consumers try to order FatFoe, they learn the ad is a warning from the FTC and the Competition Bureau of Canada about diet rip-offs. Through the joint effort, the FatFoe Web site has also been registered in Canada at http://www.fatfoe.ca. More information from the FTC about diet and fitness is available at http://www.ftc.gov/dietfit/ and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580.

• On September 28, Superior Mortgage Corp. (“Superior”), a lender with 40 branch offices in 10 states and multiple Web sites, agreed to settle FTC charges that it violated federal law by failing to provide reasonable security for sensitive customer data and falsely claiming that it encrypted data submitted online. The settlement bars future deceptive claims and requires the company to establish data security procedures that will be reviewed by independent third-party auditors for 10 years. The FTC’s Safeguards Rule, enacted under the Gramm-Leach-Bliley Act, requires financial institutions, including lenders like Superior, to implement reasonable policies and procedures to ensure the security and confidentiality of sensitive customer information. Superior maintained customers’ Social Security numbers, credit histories, and credit card numbers, among other sensitive information. However, the FTC complaint alleges that Superior violated the Safeguards Rule because it failed to assess risks to its customer information until more than a year after the Safeguards Rule took effect; failed to implement appropriate password policies to limit access to company systems and documents containing sensitive customer information; did not encrypt or otherwise protect sensitive customer information before sending it by e-mail; and, failed to ensure that its service providers were providing appropriate security for customer information and addressing known security risks in a timely manner.

• The FTC and a partnership including cybersecurity experts, online marketers, consumer advocates, and federal officials launched a new multimedia, interactive consumer education campaign on September 27 to help consumers stay safe online. A comprehensive OnGuardOnline.gov Web site has tips, articles, videos, and interactive activities that will address topics such as: how to recognize scams on the Internet; how to shop securely online; how to avoid hackers and viruses; and, how to deal with spam, spyware, phishing, and peer-to-peer file-sharing. The partnership also developed an OnGuard Online brochure. Using straightforward, plain-language materials, the initiative aims to help computer users be on guard against Internet fraud, secure their computers, and protect their personal information.

• On September 27, the FTC announced federal court action taken against two groups of Canadian-based defendants, each allegedly engaged in widespread cross-border fraud schemes. In the first complaint, FTC v. Centurion Financial Benefits, the Commission alleged the defendants placed unsolicited outbound telemarketing calls to U.S. consumers, falsely offering them pre-approved MasterCard and Visa credit cards for an advance fee of $249. The second complaint, FTC v. Pacific Liberty Benefits, alleges the defendants engaged in the same type of fraud, with the company’s telemarketers promising credit cards, as well as an array of “complimentary” gifts, for $319. The FTC alleges that in neither case did consumers actually receive the credit cards or other goods that they were promised, and in each, U.S. consumers lost millions of dollars. In each case, the FTC contends the defendants’ conduct violated Section 5 of the FTC Act and the Telemarketing Sales Rule (“TSR”), as amended. Judges in the U.S. district court in Chicago, Illinois have issued temporary restraining orders barring the alleged illegal conduct and freezing the assets of defendants. In each case, Canadian law enforcement agencies also executed criminal search warrants and made arrests.

• The FTC announced on September 23 an opinion and order holding respondents Telebrands Corporation (“Telebrands”), TV Savings, L.L.C. (“TV Savings”), and their principal Ajit Khubani liable for disseminating unsubstantiated and false advertising for the Ab Force, a belt-like device that uses electronic stimulation to cause involuntary contraction of the muscles of the abdominal wall. The respondents reaped over $19 million from sales of the Ab Force, despite their admission that the product did not produce results. Based on its own analysis of the respondents’ Ab Force ads, the FTC – in an opinion authored by Commissioner Jon Leibowitz – concluded that the ads conveyed the claims alleged in the administrative complaint. The Commission also determined that other evidence – including a copy test and expert testimony – confirmed the Commission’s analysis. Before and during the Ab Force ad campaign, the respondents’ competitors advertised ab belts that were supposed to improve the physical condition of the user’s abdominal muscles and help the user lose inches and weight – without exercise. The respondents’ ads invited consumers to recall infomercials for competitors’ ab belts and to compare the Ab Force to them. However, the respondents were well aware that the Ab Force was useless for the health, weight loss, and fitness purposes advertised.

• On September 23, two companies and their owner, who sold travel services, were barred from violating the FTC’s Do Not Call (“DNC”) Rule after being charged with calling numbers on the National DNC Registry. In the complaint and stipulated final order announced, the FTC alleged that the Arizona-based defendants called hundreds of thousands of telephone numbers on the Registry. To settle the charges, the defendants not only are prohibited from calling consumers whose numbers are on the Registry, but also will pay $5,000 in civil penalties. There are currently more than 105 million numbers on the National DNC Registry. The defendants in the complaint and settlement, Cutting Edge Travel, LLC; Cutting Edge Marketing, LLC; and Jeffrey Cope, sold vacation packages and other travel-related services to consumers through outbound telemarketing calls. Both companies are owned by Cope and located in Tempe, Arizona. Cutting Edge Travel is the telemarketing arm of Cutting Edge Marketing. In its complaint, the FTC alleged the defendants violated the provisions of the TSR that relate to the National DNC Registry. Following the provisions’ implementation on October 17, 2003, the defendants allegedly called hundreds of thousands of numbers listed on the Registry.

• Concluding a case against several defendants who deceptively claimed they could register consumers on the Federal Communications Commission’s (“FCC”) DNC Registry to prevent telemarketing calls – before the Registry even existed – the FTC announced on September 20 a stipulated final court order and separate default judgment against the remaining two defendants in the case. The FTC’s original complaint charged defendants Telephone Protection Agency (“TPA”) and Alex McKaughn, Robert Thompson, and Rebecca Phillips with violating both the FTC Act and the TSR through their allegedly deceptive conduct. The court order announced bans McKaughn from all telemarketing activities and prohibits him from making misrepresentations similar to those alleged in the complaint. The default judgment against Thompson – TPA’s vice president – bans him from telemarketing and contains terms prohibiting marketing misrepresentations. The default judgment also includes a monetary judgment of more than $672,000, the amount of consumer harm the defendants allegedly caused. The FTC’s claims against TPA and Phillips were settled previously. According to the FTC’s complaint, the defendants cold-called consumers offering to list them on the FCC do not call list. At the time the calls were made, however, the FCC did not have a do not call list in place, and the defendants had no way of listing consumers, who were charged as much as $99.95 for their first year of service.

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