Consumer Law
>> Summer 2010
IN THIS ISSUE
False Advertising
Second Circuit Remands Case for Examination of Whether eBay’s
Advertisements for Tiffany Merchandise were Likely to Mislead
Consumers................................................................................ 1
Delaware Federal Court Holds that Schering and Neutrogena
Sunscreen Ads were False and Misleading................................... 2
E-Tailing and Direct Marketing
Internet Advertising Company Pays $2.9M to Settle Claims of
CAN-SPAM Violations.................................................................. 2
Unfair & Deceptive Trade Practices
Vonage Reaches a $3 Million Settlement with Thirty-Two States
over Cancellation and Marketing Practices.................................. 3
Valero Enters into Assurance of Voluntary Compliance with 39
States to Reduce Sales of Tobacco Products to Minors............... 4
Internet Vitamin Distributor Refunds $34 Million Following
Settlement with Florida regarding Negative Option Marketing...... 5
Citibank Extends Free Checking Services following
Investigation by the New York Attorney General........................... 6
FTC Settles Bait and Switch Case against Ticketmaster.............. 7
Bankrupt Retailer Agrees to Honor 50% of its Unredeemed Gift
Cards after Objection from Connecticut, Massachusetts
and Rhode Island Attorneys General............................................ 7
Consumer Privacy
Massachusetts Issues New Data Security Regulations................. 8
Dave & Buster’s Settles with FTC on Consumer
Information Breach..................................................................... 8
LifeLock Reaches $12 Million Settlement with the FTC and ThirtyFive States to Resolve Allegations of Misrepresentations of their
Data Security Services............................................................... 9
Consumer Product Safety
CPSC Issues Final Rule on Durable Infant or Toddler Products.... 10
Dollar Tree Settles with Vermont over Children’s Products
Containing Cadmium and Lead.................................................. 10
Seventh Circuit Rules on Toy Manufacturer’s Insurance
Coverage Claim........................................................................ 11
Consumer Credit
U.S. Supreme Court Holds that Fair Debt Collection Practices
Act Bona Fide Error Defense Does Not Apply to Mistakes
of Law . ................................................................................... 11
Court Gives Teeth to Requirement of Good Faith Settlement
Negotiations in New York Residential Foreclosure Proceeding.... 12
Illinois Passes New Consumer Lending Legislation.................... 13
Newsbites. ......................................................................... 14
Consumer Law
>> Summer 2010
>>
FALSE
ADVERTISING
______________________
Second Circuit Remands Case for
Examination of Whether eBay’s
Advertisements for Tiffany Merchandise
were Likely to Mislead Consumers
In April, the United States Court of Appeals
for the Second Circuit affirmed the decision of the
United States District Court for the Southern District
of New York holding that eBay, the proprietor of an
auction website through which counterfeit Tiffany and
Company merchandise was sold, did not engage
in trademark infringement or trademark dilution.
Tiffany (NJ) Inc. v. eBay Inc. The Court found that
eBay’s sales of counterfeit Tiffany merchandise did
not constitute trademark infringement because (1)
eBay’s use of Tiffany’s mark was protected by the
doctrine of nominative fair use and (2) eBay did not
have contemporary knowledge of which particular
listings infringed on Tiffany’s trademark. The Second
Circuit also rejected Tiffany’s trademark dilution claim
because eBay also used the Tiffany marks to identify
authentic Tiffany merchandise.
However, the Second Circuit disagreed with the
Southern District’s finding that eBay did not engage
in false advertising. eBay advertised the sale of
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Consumer Law
>> Summer 2010
Tiffany merchandise in various ways, including providing
hyperlinks to listed Tiffany products and purchasing
advertising space on search engines directing users
to “find tiffany items at low prices.” Although eBay
sold counterfeit Tiffany products, the Second Circuit
agreed with the district court that the advertisements
were not literally false because eBay also sold authentic
Tiffany merchandise. However, the Second Circuit
refused to affirm the district court’s finding that eBay’s
advertisements of Tiffany merchandise were not likely
to mislead or confuse customers. The Second Circuit
held that an advertisement may not imply that all of
the goods offered on a website are genuine when,
in fact, a sizeable proportion is not. But the court
went on to state: “[a]n online advertiser such as eBay
need not cease its advertisements for a kind of goods
only because it knows that not all of those goods are
authentic. A disclaimer might suffice.” The Court
remanded the case to the district court to reconsider
Tiffany’s false advertising claim in light of its decision.
Delaware Federal Court Holds that
Schering and Neutrogena Sunscreen Ads
were False and Misleading
In April 2009, Schering-Plough HealthCare
Products, Inc., which manufactures Coppertone
sunscreens, brought an action in the United States
District Court for the District of Delaware against
another sunscreen manufacturer, Neutrogena
Corporation, alleging that Neutrogena’s advertisements
contained false and misleading statements in violation
of the Lanham Act and Delaware law. Neutrogena
counterclaimed that Schering’s Coppertone
commercials contained false and misleading claims
in violation of the Lanham Act and Delaware law. In
March 2010, the court held that both companies’
sunscreen ads contained false and misleading
statements in violation of the Lanham Act and Delaware
law. Schering-Plough HealthCare Products, Inc. v.
Neutrogena Corporation, Civ. No. 09-268-SLR (U.S.D.C.
D.Del.).
2
The Neutrogena ads at issue claimed that
Neutrogena Ultimate Sport was the “best line of sport
sun protection” and showed a side-by-side bar graph
comparison of combined UVA and SPF protection for
the Neutrogena product line and the rival Coppertone
sport line. The court held that the graph was literally
false because it combined a UVA value with an SPF
value; however, the SPF value already contains some of
the UVA value and UVA value is not a measure of skin
protection on its own.
The Coppertone commercial contained side-byside photographs of two men with shading representing
their respective levels of sunscreen coverage, with the
Coppertone subject depicted with more coverage.
The ad claimed the Coppertone product provided
“better coverage” than the comparable Neutrogena
product because the Coppertone product was“100%
sunscreen” while the Neutrogena product was “28%
chemical propellant.” The court held that this claim
was not supported by sufficiently reliable tests; in fact,
Schering never performed an in vivo coverage study on
either sunscreen spray.
The court concluded: “[b]oth parties failed in their
efforts to walk that fine line between literal truthfulness
and consumer deception in advertising. Sadly, it is the
American consumer who ultimately ends up the real
loser in these advertising wars.”
E-TAILING AND
DIRECT
MARKETING
______________________
>>
Internet Advertising Company Pays $2.9M
to Settle Claims of CAN-SPAM Violations
In May, online advertising company ModernAd
Media, LLC signed an Assurance of Voluntary
Compliance (“AVC”) with the Florida Attorney General
to terminate an investigation into the company’s
advertising and business practices. The company
denied any wrongdoing but agreed to pay $2.9 million
and abide by the terms of the AVC.
The Florida Attorney General’s Office had initiated
the investigation to determine whether the company
had violated the Federal Controlling the Assault of
Non-Solicited Pornography and Marketing (“CANSPAM Act”). The Office of the Attorney General was
particularly interested in whether ModernAd Media had
sufficiently disclosed material terms and conditions in
the company’s internet communications, comprising
solicitation of consumers through emails, internet “popup” windows, and paid advertisements linked to search
engines, such as Google. The Attorney General’s
Office found that many of these solicitations suggested
that consumers could receive “free” merchandise. The
focus of the investigation then turned to whether the
promotional gift merchandise was, in fact, “free,” and
whether the terms and conditions for receiving the
promotional items were displayed in a way that did not
mislead consumers.
The AVC requires that ModernAd Media not: (1) use
words that reasonably lead a person to believe that he
or she may receive something of value for free without
“clearly and conspicuously disclosing the material
terms, conditions and obligations” of each offer; nor
(2) use words such as “Test and Keep” or “Try and
Keep” in emails that suggest something of value will be
given in exchange for testing or trying that item without
clearly and conspicuously warning the consumer of the
existence of additional obligations in both the subject
line and the body of the emails.
ModernAd Media also agreed: (1) to disclose clearly
and conspicuously any and all material information that
would help consumers make informed decisions before
purchasing merchandise or participating in trial offers;
(2) to place a link to the terms and conditions of the
advertised offer on every webpage; (3) to place a link
labeled “Get Status” that allows consumers to access
current information about the consumer’s account
specifically related to the offer; (4) to cease using prechecked boxes for acceptance of terms and conditions;
(5) not to require consumers to qualify for a creditbased sponsor’s offer, such as a credit card, in order
to receive the gift; and (6) to clearly state the minimum
amount of time a consumer must be subscribed in
order to receive the gift for subscription-based offers.
In addition, ModernAd Media must disclose its
corporate name and contact information on all
webpages, even if the page is operated by a third party
contractor. The AVC also contains record keeping
provisions that will help the Florida Attorney General’s
Office monitor the company for compliance with the
terms of the agreement.
UNFAIR & DECEPTIVE TRADE
PRACTICES
______________________
>>
Vonage Reaches a $3 Million Settlement
with Thirty-Two States over Cancellation
and Marketing Practices
Last fall, the Attorneys General from thirty-two
states entered into a settlement agreement with
Vonage, an internet-based phone services provider.
Consumer complaints alleged difficulty in cancelling
phone service with Vonage, as well as confusing
marketing practices relating to the costs associated
with the company’s services. Vonage entered into the
settlement without admitting liability.
Vonage’s practice had been to pay compensation
incentives to its customer service representatives
for retaining customers who called to cancel their
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Consumer Law
>> Summer 2010
subscriptions or services. This practice led to customer
service representatives making it difficult for consumers
to cancel. Some customers reported that even after
they believed they had canceled their service, they
continued to receive monthly bills. The agreement
places strong limitations on Vonage’s practices relating
to dissuading customers from cancelling. For example,
customer service representatives may not attempt to
retain a canceling customer unless the customer gives
the representative his or her express consent for the
representative to address the customer’s concerns.
Further, Vonage is now required to record customer
cancellation calls and monitor and review a sample
of these calls for compliance with state laws and the
settlement agreement.
The agreement also addresses Vonage’s marketing
practices which allegedly led to consumer confusion
about costs. The states alleged, for example, that
consumers were sometimes required to purchase
other equipment in order to utilize “free” service, and
consumers that canceled their service within the
trial period still had to pay the cost of shipping the
equipment back to Vonage. Under the agreement,
Vonage must revise and clarify its disclosures relating to
their offers of “free” services, discounted service plans,
instant rebates, claims of “award winning service,”
“unlimited” calling plans, and money back guarantees.
The investigation of this case was led by
Connecticut, Illinois, Michigan, Oregon, Pennsylvania,
Texas, and Wisconsin. The other states participating
in the settlement are: Alabama, Arizona, Arkansas,
Florida, Hawaii, Idaho, Indiana, Kansas, Kentucky,
Louisiana, Maine, Missouri, Montana, New Hampshire,
New Jersey, New Mexico, North Carolina, North
Dakota, Ohio, South Carolina, South Dakota,
Tennessee, Vermont, Washington, and West Virginia.
Valero Enters into Assurance of Voluntary
Compliance with 39 States to Reduce
Sales of Tobacco Products to Minors
• Maintain a policy against increasing youth
demand for tobacco through in-store advertising.
In May, Valero Retail Holdings, Inc. (“VRH”) and
Valero Marketing and Supply Company (“VMSC”
and together “Valero”) entered into an Assurance of
Voluntary Compliance with the Attorneys General of
38 states and the District of Columbia regarding their
alleged illegal sales of tobacco products to minors. VRH
owns approximately 1,000 convenience store outlets
and VMSC has approximately 3,916 retail outlets under
the following trademarks: Valero, Beacon, Diamond,
Shamrock, Ultramar, Corner Store, and Stop N Go.
•
The states alleged that controlled compliance
checks conducted by state authorities to enforce laws
prohibiting the sale of tobacco to minors indicated
that Valero retail and wholesale outlets sold tobacco
products to persons under the age of 18. The
Attorneys General believed that such sales may violate
the consumer protection statutes of their respective
states and other laws.
Without admitting wrongdoing, Valero agreed to
adopt the following procedures to reduce sales of
cigarettes to minors:
• Implement stricter hiring policies for convenience store personnel.
• Provide comprehensive training to convenience store personnel regarding laws prohibiting tobacco sales to minors.
• Instruct convenience store personnel to check identification for all tobacco customers who appear to be under the age of 27.
• Arrange for an independent entity to perform random compliance checks to monitor sales practices at its retail outlets.
4
Require notification to Valero within five business days if a store receives notice of a
violation of federal, state, or local laws governing
the sale of tobacco products to minors.
In addition, Valero agreed to pay a total of $100,000
to the states.
The states that participated in the settlement
are Alabama, Alaska, Arizona, Arkansas, California,
Colorado, Connecticut, Delaware, District of Columbia,
Florida, Georgia, Hawaii, Idaho, Illinois, Iowa, Kansas,
Kentucky, Louisiana, Maine, Maryland, Massachusetts,
Michigan, Montana, Nebraska, Nevada, New
Hampshire, New Jersey, New Mexico, Ohio, Oklahoma,
Oregon, Pennsylvania, Tennessee, Texas, Utah,
Vermont, Virginia, Washington, and Wyoming.
Internet Vitamin Distributor Refunds $34
Million Following Settlement with Florida
regarding Negative Option Marketing
FWM Laboratories markets dietary supplements
through various websites. Since approximately October
2008, FWM advertised a trial offer whereby customers
had a fifteen day trial period to decide whether to keep
the trial bottle and to continue receiving additional
shipments. Unless the customer contacted FWM to
cancel future orders, FWM would bill the customer for
the trial bottle and begin shipping and billing monthly
supplies. The Florida Attorney General’s Office
received numerous complaints alleging that consumers
were unable to contact FWM by telephone, email,
or via FWM’s website and that the consumers were
billed for shipments that they had tried to cancel and
did not want. Following the complaints, the Florida
Attorney General’s Office investigated FWM’s trial offer
arrangement and related advertisements to determine
whether the company had engaged in negative option
marketing—transactions in which consumers’ inaction
is interpreted as consent to be charged for future goods
or services—without providing sufficient notice and
adequate means for consumers to cancel.
Following the investigation, the parties reached a
settlement last November in which FWM agreed to take
the following steps:
(a) Provide a link on its website to the full terms and conditions of the negative option offer.
(b)
Clearly and conspicuously disclose the material terms and conditions of the trial offer, including that (i) the fifteen day trial period includes a one
month supply and enrollment into an automatic delivery program, (ii) the period begins on the
day the product is ordered, (iii) to cancel and avoid further charge, the consumer must contact customer service by the expiration of
the trial period, and (iv) if the consumer does not cancel, the consumer’s credit card will be charged $xx.xx.
(c)
Refrain from using the terms “free,” “complimentary,” “risk free,” “without charge,” or similar phrases unless the offer terms are clearly and conspicuously disclosed in close proximity to the phrase.
(d)
Verify the consumer’s affirmative consent to the
offer and future charges by having the negative option billing terms within 300 pixels of the button or link that completes the consumer’s order. Pre-checked boxes may not be used.
(e) Send an electronic order confirmation within 24
hours. The confirmation should include all material terms and conditions.
5
Consumer Law
>> Summer 2010
(f) Ensure that any testimonials are true and accurate and derived from actual users.
(g) Disclose whether the consumer will incur any postage expenses in returning the product.
FWM also agreed to improve their customer service
capabilities so that consumers trying to cancel the trial
offer are able to do so. The company agreed to enact
a policy designed to ensure phone, email, live chat, and
written inquiries are responded to within 24 business
hours.
FWM also agreed to pay $200,000 in attorney’s
fees to the Attorney General and to make refunds that
to date have totaled more than $34 million.
Citibank Extends Free Checking Services
following Investigation by the New York
Attorney General
Earlier this year, Citibank and the New York Attorney
General’s Office entered into a letter agreement
whereby Citibank agreed to extend its policy related
to free checking accounts. Near the end of last year,
Citibank decided to alter its policy and charge monthly
and per-check fees if consumers’ account balances
fell below a minimum amount. The Attorney General’s
Office expressed concern that the company’s prior
advertising was deceptive and that the company had
failed to adequately notify customers of the change.
Under the prior policy, Citibank offered free
checking without minimum account balances if the
consumer used direct deposit or made two online bill
payments per month. Citibank advertised this policy on
its website and in flyers distributed at local branches.
Following its decision to require minimum account
balances, Citibank stopped advertising and offering
new checking accounts under the old policy. Since
the policy change would also affect current account
holders, Citibank mailed statement inserts reflecting
6
the new policy in monthly statements. The new policy
was planned to take effect three months after the
announcement, allowing time for two statement inserts
to current customers.
The Attorney General concluded that this
notice was inadequate and that Citibank’s prior
advertisements violated General Business Law §§
349 and 350 and Executive Law § 63(12), relating to
deceptive practices and false advertising. Discussions
between the two parties over several months led to the
following agreement:
a)
For accounts opened in the past year that had
qualified for free checking, Citibank will waive monthly service fees if the customer continues to qualify under the old terms. This extension will continue through December 31, 2010.
b) For all accounts that had qualified for free checking, Citibank will waive per-check fees if the customer continues to qualify under the old terms. This extension will continue through January 31, 2011.
c) Citibank will send a notification by mail to all customers eligible for the monthly service fee waiver and/or the per-check fee waiver describing the terms of those waivers, including the termination dates. Citibank will also provide notice in the customer’s November 2010 account statement.
d)
Citibank will post a notice on its consumer banking website advising consumers that any new customer can receive a per-check fee waiver with direct deposit or two monthly online bill payments through January 31, 2011, but that new accounts will be subject to a monthly service fee unless they maintain the minimum account balance.
The Attorney General’s press release stated that
the fees would have cost consumers tens of millions of
dollars.
FTC Settles Bait and Switch Case against
Ticketmaster
Earlier this year the Federal Trade Commission sued
Ticketmaster and its affiliate, TicketNow, in Federal
Court for the Northern District of Illinois for alleged baitand-switch tactics that were used to sell tickets to 14
Bruce Springsteen concerts in 2009.
The FTC’s complaint alleged that on February
2, 2009, when tickets went on sale for the Bruce
Springsteen & The E Street Band concerts that were
being held in May and June of 2009, Ticketmaster
displayed a “No Tickets Found” message in order to
steer consumers to Ticketmaster’s affiliate, TicketsNow,
an online ticket resale marketplace at which the
same tickets were selling for up to four times the face
value. Ticketmaster also allegedly displayed the same
misleading message for many other events during the
time frame at issue.
Additionally, during the time frame at issue,
TicketsNow permitted a limited number of ticket
resellers to “resell” speculatively. That is, when a
“ticket” was purchased from a speculative “reseller,” it
was that reseller’s responsibility to locate and provide
a ticket to the buyer. Consumers were not aware
that they were buying speculative tickets. Rather,
consumers believed that they had purchased a ticket
that the seller had “in hand.” Speculative reselling
became a particular problem when Bruce Springsteen’s
concerts at the Verizon Center in Washington, D.C.
were oversold and “sellers” of speculative tickets were
unable to acquire tickets to the concerts.
The FTC alleged that Ticketmaster’s conduct
violated Section 5(a) of the FTC Act. Pursuant to a
settlement, eligible consumers will receive a refund of
the difference between the face value of the ticket and
the amount paid for the ticket on TicketsNow. The
FTC’s redress administrator will determine who will
receive refunds based on purchase information stored
in TicketsNow’s database. In addition, the FTC sent a
warning letter to other ticket resale companies whose
practices may violate the law, advising such companies
to “review [their] own Web site[s] to ensure that [they]
are not making any misleading statements or failing to
provide material information to prospective purchasers
of tickets listed on [their] site[s].”
Bankrupt Retailer Agrees to Honor
50% of its Unredeemed Gift Cards
after Objection from Connecticut,
Massachusetts and Rhode Island
Attorneys General
Ski Market Ltd., Inc. is a Massachusetts-based
corporation that operated seven retail locations
in Connecticut, Massachusetts and Rhode Island
offering winter sports equipment and apparel. The
company filed for Chapter 11 bankruptcy protection
in the United States Bankruptcy Court for the District
of Massachusetts in late December 2009. In its
bankruptcy filings, Ski Market disclosed that it had close
to $300,000.00 in liabilities to holders of unredeemed
gift cards. As a debtor in possession, Ski Market was
still operating its stores but rejecting gift cards, returns
and exchanges.
During the course of the bankruptcy proceeding,
the Connecticut Attorney General filed an objection
arguing, among other things, that Connecticut law
required Ski Market to honor outstanding gift cards on
the same terms that they were sold before the company
filed for bankruptcy. The court held a hearing on the
objection, and the Offices of the Massachusetts and
Rhode Island Attorneys General joined in the objection.
After several media organizations publicized Ski
Market’s refusal to honor the gift cards, a stipulation
was reached among debtor’s counsel, the three state
7
Consumer Law
>> Summer 2010
Attorneys General, and the lender to the debtor in
possession, in which Ski Market agreed to honor half
the face value of its outstanding gift cards for an eightday period. The Bankruptcy Court judge approved the
stipulation.
>>
CONSUMER
PRIVACY
______________________
Massachusetts Issues New Data Security
Regulations
On March 1, 2010, new data privacy regulations
went into effect in Massachusetts implementing the
State’s Security Breach Statute (M.G.L. c. 93H), which
was designed to establish “minimum standards…
in connection with the safeguarding of personal
information contained in both paper and electronic
records.” While the statute was enacted in October
2007, regulators delayed implementation for more
than two years to clarify confusion over the statute’s
objectives and to address the effect of the State’s
current economic climate. The new regulations
establish a risk-based approach for implementing
the minimum standards required of every person
who “owns or licenses personal information about a
resident of the Commonwealth.” All owners or licensors
of personal information, as a means of protecting
Massachusetts residents, must now implement and
maintain a comprehensive security program containing
administrative, technical, and physical safeguards
appropriate to the size, scope, and type of business.
The regulations require that written security plans take
into account such factors as the amount of resources
available to a person or business, the amount of stored
data a particular person or business has, and the need
for security and confidentiality of both consumer and
employee information.
8
Written security programs that deal with electronic
information must also address access control
measures, implement the encryption of “transmitted
records and files containing personal information
that will travel across public networks,” and create
a “reasonably secure method of assigning and
selecting passwords” for both users and employees
with computer access. Furthermore, the regulations
allow for an assessment of technical feasibility when
determining the specific data protection programs
required of particular businesses.
Significantly, the new regulations also explicitly
extend to businesses outside of the state that
have personal information about a resident of
Massachusetts.
Dave & Buster’s Settles with FTC on
Consumer Information Breach
In March, restaurant and entertainment company
Dave & Buster’s, Inc. agreed to settle Federal Trade
Commission charges that the company failed to provide
“reasonable and appropriate security” for consumers’
personal information, in violation of Section 5(a) of
the FTC Act. The charges followed an investigation of
a hacker’s infiltration of the Dave & Buster’s computer
networks that compromised the security of over
130,000 credit and debit cards, resulting
in hundreds of thousands of dollars in fraudulent
charges.
The FTC’s complaint alleged that Dave & Buster’s
stored customers’ personal information, including credit
card account numbers, expiration dates, and electronic
security codes, to authorize card payments. Dave &
Buster’s collected this data at in-store card terminals,
transmitted the information to an in-store server,
and submitted the data to a third-party credit card
processing company. The breach occurred when the
hacker exploited vulnerabilities in the system’s security.
According to the FTC, the greatest susceptibilities in
the system included insufficient measures to detect
and block unauthorized access to networks, lack
of monitoring and filtering outbound traffic from its
networks, and failure to use readily available security
measures to limit access between in-store networks
and the rest of the corporate network.
Under the settlement, Dave & Buster’s agreed to
initiate a comprehensive information security program
with “administrative, technical, and physical safeguards
appropriate to the company’s size and complexity, the
nature and scope of its activities, and the sensitivity of
the personal information collected from consumers.”
The program consists of five central components: (1)
designation of an employee to coordinate and account
for the security program; (2) identification of material
risks to the security program; (3) implementation of
reasonable safeguards to control the risks; (4) taking
reasonable steps to select and retain service providers
capable of safeguarding personal information; and (5)
evaluation and adjustment of the security program in
light of material changes to the company or any other
circumstances that may affect the program.
In addition, Dave & Buster’s must obtain biennial
assessment reports from an independent third-party
professional for the next ten years. The assessor must
enumerate the safeguards implemented to secure the
system and evaluate the protection they provide. The
settlement also includes record-keeping provisions that
will facilitate the FTC’s monitoring for compliance with
the settlement terms.
company made a number of deceptive and misleading
claims to consumers in relation to the company’s
identity theft protection services. LifeLock entered into
the settlement without admitting liability.
LifeLock was accused of misrepresenting the
specific services it provided to protect and alert
consumers when their personal information is
compromised. For example, LifeLock’s advertisements
indicated that their customers with fraud alerts on
their consumer reports always receive a phone call
prior to the opening of new accounts, when in fact this
was not always the case. Further, LifeLock’s identity
theft prevention services did not prevent unauthorized
changes to customers’ address information, nor did
it provide ongoing monitoring or review of customers’
credit files. Additionally, it was alleged that the
company deceptively advertised that its $10 per month
service would protect against all forms of identity theft,
when in fact, it did not.
Under the settlement, LifeLock is prohibited from
misrepresenting its services by stating that: 1) it protects
against all types of identity theft, 2) it constantly
monitors the activity of every customer’s consumer
reports, and 3) a call is always received from a potential
creditor before a new credit account is opened in
the customer’s name. Further, LifeLock may not
misrepresent the risk of identity theft to consumers or
whether a particular consumer has become or is likely
to become a victim of identity theft.
LifeLock Reaches $12 Million Settlement
with the FTC and Thirty-Five States to
Resolve Allegations of Misrepresentations
of their Data Security Services
As part of the settlement, LifeLock has agreed
to pay $11 million in restitution that will be distributed
through a consumer redress program. Additionally,
LifeLock must pay $1 million to the participating states,
which the states may use for their legal fees or for
consumer protection programs.
Last winter the Federal Trade Commission and
the Attorneys General from thirty-five states entered
into a settlement agreement with LifeLock, an identitytheft protection company, following allegations that the
The states participating in the settlement are:
Alaska, Arizona, California, Delaware, Florida, Hawaii,
Idaho, Illinois, Indiana, Iowa, Kentucky, Maine,
9
Consumer Law
>> Summer 2010
Maryland, Massachusetts, Michigan, Missouri,
Mississippi, Montana, Nebraska, Nevada, New Mexico,
New York, North Carolina, North Dakota, Ohio,
Oregon, Pennsylvania, South Carolina, South Dakota,
Tennessee, Texas, Vermont, Virginia, Washington, and
West Virginia.
CONSUMER
PRODUCT
SAFETY
______________________
>>
CPSC Issues Final Rule on Durable Infant
or Toddler Products
The Consumer Product Safety Commission recently
issued a new rule regarding consumer registration
of durable infant or toddler products. The rule was
issued under a section of the Consumer Product
Safety Improvement Act of 2008 which requires the
CPSC to promulgate a final consumer product safety
rule that requires manufacturers of durable infant
or toddler products to: (1) provide a postage-paid
consumer registration form with each product; (2) keep
records of consumers who register such products
with the manufacturer; and (3) permanently place the
manufacturer name and contact information, model
name and number, and the date of manufacture on
each such product.
Compliance with the new rule was required on
June 28, 2010 for the following products: full-size and
non full-size cribs; toddler beds; high chairs, booster
chairs, and hook-on chairs; bath seats; gates and other
enclosures for confining a child; play yards; stationary
activity centers; infant carriers; strollers; walkers;
swings; and bassinets and cradles. Compliance with
the rule is required on December 29, 2010 for the
following products: children’s folding chairs, changing
tables, infant bouncers, infant bath tubs, bed rails and
10
infant slings. The rule applies to products that are
manufactured on or after those dates.
The registration form must include an option for
consumers to register through the Internet and a
statement that information provided by the consumer
shall not be used for any purpose other than to facilitate
a recall of or safety alert regarding that product. A
manufacturer that does not have a Web site must allow
consumers to register their product through e-mail.
These e-mail addresses must be set up to provide an
automatic reply to confirm receipt of the consumer’s
registration.
In addition, the rule requires each manufacturer
to maintain, for a period of not less than 6 years after
the date of manufacture of the product, a record of
registrants for each product that includes all of the
information provided by the registrant.
Dollar Tree Settles with Vermont over
Children’s Products Containing Cadmium
and Lead
In February, national discount retailer Dollar Tree
Stores, Inc. agreed to pay $100,000 to the State
of Vermont to settle allegations that it sold certain
children’s products containing toxic metals. Vermont’s
Attorney General had charged that Dollar Tree violated
the Vermont Consumer Fraud Act’s prohibition on unfair
and deceptive practices because it sold four products
– earrings, a necklace, a digital watch, and a pony tail
holder – with high amounts of lead and cadmium. The
Attorney General had the four products tested after
Dollar Tree had recalled certain other children’s jewelry
items in 2006 and 2007 due to their lead content. The
tests revealed that each of the four products contained
lead and/or cadmium in concentrations of at least
22,000 parts per million. As part of the settlement,
Dollar Tree agreed to stop selling any jewelry in Vermont.
Recently, cadmium has been the focus of various
regulatory efforts. Despite Vermont not having any lead
or cadmium restrictions in effect, Vermont’s Attorney
General pursued the action against Dollar Tree by
relying on Vermont’s general consumer protection law.
Several states, including Minnesota and Connecticut,
have recently passed laws limiting the amount of
cadmium in children’s jewelry or are considering such
restrictions. Cadmium found in children’s products
has also led to several Consumer Product Safety
Commission recalls this year and there are bills
regulating cadmium in children’s jewelry now pending in
Congress.
Seventh Circuit Rules on Toy
Manufacturer’s Insurance Coverage Claim
In April, the Seventh Circuit Court of Appeals
ruled in ACE American Ins. Co. v. RC2 Corp., Inc., 600
F.3d 763 (7th Cir. 2010) that a commercial general
liability policy held by the manufacturer of the popular
“Thomas & Friends” toys did not cover claims asserted
in consumer class actions alleging harm caused by
exposure to lead contained in toys manufactured
in China. In 2007, RC2, a U.S. company, recalled
over one million toys containing excessive levels of
lead in their surface coatings. This widely publicized
recall, credited in part with inspiring the Consumer
Product Safety Improvement Act of 2008, also spurred
numerous class action lawsuits.
RC2 maintained two separate lines of commercial
general liability insurance, one to cover occurrences
within the United States and the other, issued by ACE,
intended to cover occurrences outside the United
States. Unfortunately for RC2, its domestic policy
expressly excluded damages resulting from lead paint
exposure. RC2 thus sought coverage from ACE in the
class actions, claiming that its international policies
required coverage because the “occurrences” took
place in China and not the United States because
that is where the toys were manufactured. ACE filed
an action in the Northern District of Illinois seeking a
declaration that it had no duty to defend RC2. The
district court ruled that because the alleged negligent
manufacture of the toys had taken place in China,
which was within the coverage territory, the policies
potentially covered the damages and ACE therefore had
a duty to defend the claims against RC2.
The Seventh Circuit unanimously reversed this
ruling on appeal, holding that under Illinois law the
policies unambiguously excluded coverage because
the “occurrence” triggering coverage took place in the
United States. The court stated that the place of the
“occurrence” was where the alleged exposure took
place and not where the alleged negligent manufacture
took place. The court noted that adopting RC2’s
position would allow it to sweep any domestic event
into its international policies as long as it posited some
antecedent negligent act that occurred outside of the
United States.
>>
CONSUMER
CREDIT
______________________
U.S. Supreme Court Holds that Fair Debt
Collection Practices Act Bona Fide Error
Defense Does Not Apply to Mistakes
of Law
In April, the U.S. Supreme Court held that the Fair
Debt Collection Practices Act’s (“FDCPA”) bona fide
error defense does not apply to mistakes of law, thus
resolving a split among Circuit Courts of Appeal. In
Jerman v. Carlisle, McNellie, Rini, Kramer & Ulrich LPA,
130 S. Ct. 1605, a law firm sent a debtor a “validation
notice” under the FDCPA mistakenly stating the debtor
had to dispute the debt in writing. The FDCPA does
not require a written dispute; therefore, the debtor filed
a class action lawsuit claiming that the law firm violated
the FDCPA.
11
Consumer Law
>> Summer 2010
Justice Sotomayor, writing for the majority, invoked
the common maxim “that ignorance of the law will not
excuse any person, either civilly or criminally.” The
Supreme Court explained that the “law is no stranger”
to the idea that actions may be deemed “intentional for
the purposes of civil liability, even if the actor lacked
actual knowledge.” In reaching this decision, the Court
noted that Congress copied the relevant language of
the bona fide error defense from the Truth in Lending
Act (“TILA”), which was passed nine years prior to the
FDCPA. The Supreme Court saw no reason to believe
that Congress, when it enacted the FDCPA, disagreed
with three federal court decisions holding that TILA’s
bona fide error defense applied to clerical errors.
attorney’s fees, legal fees, costs, disbursements,
advances, or any other sums.
Justice Kennedy (joined by J. Alito) dissented,
suggesting that the majority’s opinion could lead to
the uncomfortable position of the attorney having to
resolve any ambiguity in the law against his client to
avoid potential liability for an error in interpretation.
The majority rejected this concern, stating that a
lawyer’s ethical duties to his clients are limited in
numerous circumstances by his ethical duties to uphold
the “laws and standards of professional conduct.” The
majority also dismissed concerns that its decision
would create a flood of litigation concerning errors in
debt collections.
Under New York law, the parties were required to
participate in a mandatory settlement conference. At
the conference, Emigrant submitted a loan modification
agreement under which portions of the default
interest accrued would be forgiven if defendants
made payments in accordance with the modification
for a period of 12 months. Under the agreement,
the defendants acknowledged that the modification
agreement would not prejudice Emigrant’s loan
acceleration or foreclosure rights.
Court Gives Teeth to Requirement of
Good Faith Settlement Negotiations
in New York Residential Foreclosure
Proceeding
In Emigrant Mtge. Co., Inc. v. Corcione, 2010 NY
Slip Op 20133 (Sup. Ct. Suffolk Co. 2010), the court
denied Emigrant Mortgage Company’s motion for
summary judgment in a residential foreclosure action
and assessed $100,000.00 in exemplary damages
“in light of Plaintiff’s shockingly inequitable, bad faith
conduct.” In addition, the court limited Emigrant to
collecting the outstanding principal balance of the loan
and barred any claims for interest, default interest,
12
In May 2008, the defendants, Jane and Anthony
Corcione, defaulted on their mortgage note. The court
found that, upon the default, the defendants made
significant, continuing, though ultimately unsuccessful,
efforts to reach a mutually satisfactory loan modification
with Emigrant. Emigrant then filed a foreclosure
action on July 23, 2009, more than a year after the
initial default. The court partially relied on Emigrant’s
delay in filing the foreclosure action when it denied the
application for interest and other sums beyond the loan
principal balance.
In contrast, the defendants, by signing the loan
modification agreement, agreed to waive their rights
under, as characterized by the court, “each and every
state and federal law in the State of New York intended
to regulate the mortgage banking industry.” Most
troubling to the court, the defendants also agreed
to waive the protections of the Bankruptcy Code’s
automatic stay.
The inclusion of these waivers convinced the
court that Emigrant did not approach the settlement
negotiations with the requisite good faith. As a result,
the court found the plaintiff’s actions regarding the loan
modification agreement to be “over-reaching, shocking,
willful, and unconscionable,” and the court used its
equitable powers to award exemplary damages against
Emigrant. The court stated that it was awarding the
exemplary damages to make an example of Emigrant
and discourage future bad faith conduct by Emigrant
or any other party during foreclosure settlement
negotiations.
Illinois Passes New Consumer Lending
Legislation
On June 21, Illinois Governor Pat Quinn signed
into law a bill further regulating short-term loans to
consumers. Payday loans, which have a term less than
six months, are regulated under prior legislation, and
the new law contains only minor modifications to this
regime. Consumer installment loans, which involve
installment payments over a slightly longer term, were
also regulated under prior legislation; the new law
targets these loans and provides additional protections
for consumers.
The new law creates two categories of consumer
installment loans: small consumer loans, involving less
than $4,000, and other consumer loans up to $40,000.
It creates several new rules for the first category:
•
The total payments made each month, including interest and fees, must be less than 22.5% of
the consumer’s gross monthly income, as verified from specific sources.
• The interest rate is capped at 99%.
• There must be at least six installment payments.
• The term must be at least six months.
• The loan must be fully amortizing, so there cannot be a balloon payment.
• The monthly handling fee is limited based on the size of the loan.
• Upon prepayment, the lender must refund any unearned interest or unearned portion of the
monthly fee.
With respect to installment loans between $4,000
and $40,000, the new law caps the interest rate at 36%
and requires the installment payments to fully amortize
the principal. Otherwise, the prior legislation remains
largely intact as it relates to these loans.
The law will go into effect in March 2011.
>>
NEWSBITES
______________________
The Federal Trade Commission is further delaying
enforcement of the Red Flags Rule until December
31, 2010. The FTC developed the Red Flags Rule,
which requires creditors and financial institutions to
develop identity theft prevention programs, under the
Fair and Accurate Credit Transactions Act. However,
the American Bar Association, the American Institute of
Certified Public Accountants, and the American Medical
Association sued to prevent the FTC from enforcing
the Red Flags Rule against their members. A House
bill introduced last year, as well as the recent Senate
version of the bill, would exclude from the Red Flags
Rule any health care practice, accounting practice, or
legal practice with 20 or fewer employees, as well as
certain other businesses as determined by the FTC.
As Congress believes it needs additional time to fix
the unintended consequences of the Red Flags Rule,
several of its members requested the delay.
• The origination fee is capped at $100 for
the initial loan, and this limit decreases for subsequent refinancings.
13
Consumer Law
>> Summer 2010
In one of the first cases brought by the Federal
Trade Commission under the amendment to its
Telemarketing Sales Rule prohibiting “robocalls” without
a consumer’s signed, written agreement (discussed in
the Winter 2009 edition of this Newsletter), the FTC in
April sued The Talbots, Inc., a woman’s apparel retailer,
and SmartReply, Inc., Talbots’ telemarketing company,
in Federal Court in Massachusetts, alleging that the
defendants made at least 3.4 million telephone calls
promoting the Talbots and J. Jill brands that violated
that amendment. Specifically, the FTC claimed that
these prerecorded messages violated its Telemarketing
Sales Rule because they did not: (1) tell consumers how
to opt out of receiving telemarketing calls from the seller
before delivering the seller’s sales pitch; (2) immediately
disconnect consumers who indicated that they did not
want to receive such calls; and (3) inform consumers
listening to the message that they can make a do-nocall request at any time during the call. Talbots and
SmartReply settled with the FTC, agreeing not to violate
the Telemarketing Sales Rule in the future, and with
Talbots paying a $112,000 civil penalty and SmartReply
paying $49,000 of a $112,000 civil penalty, with the
remainder stayed due to SmartReply’s inability to pay.
___________________________________________
In March, Maine Governor John E. Baldacci
signed into law “An Act to Protect Consumers from
Charges after a Free Trial Period.” Under this new
law, a seller may not make a free offer to a consumer
unless, at that time, the seller obtains billing information
directly from the consumer and the seller provides
the consumer with clear and conspicuous information
regarding the terms of the free offer. This law is the first
in the country to safeguard consumers from deceptive
free trial offers.
14
In March, BJ’s Wholesale Club, Inc. (“BJ’s”)
entered into an Assurance of Discontinuance with the
Maryland Attorney General to settle an investigation
of its use of buy-one-get-one free coupons. The
coupons required consumers to pay the difference
between the stated maximum value of the coupon
and the price of the purported “free” item. Under the
Assurance, BJ’s agreed not to represent that any of its
goods or services are “free” if consumers are required
to make any payment in order to acquire the goods or
service. BJ’s has agreed to pay restitution to Maryland
consumers who paid more than $1.00 to acquire a
“free” item, and to make a payment to the Attorney
General’s Office in the amount of any payment of less
than $1.00, which amount may be held in a trust for
consumers or used for consumer education or other
purposes permitted by State law. BJ’s also agreed to
provide the Attorney General’s Office with copies of all
advertisements or coupons for buy-one-get-one free
offers for a period of five years.
___________________________________________
In January, the New York Attorney General’s
Office reported that it had reached a multi-million
dollar settlement with H&R Block regarding its “Express
IRA” retirement account product. Depending on the
number of claims under the settlement, H&R Block will
refund between $11.4 million and $19.4 million in fees
charged to customers.
H&R Block is the nation’s largest provider of tax
preparation services. Since 2000, the company
opened more than 600,000 Express IRA accounts
for its tax preparation clients. The Attorney General’s
Office claimed that the majority of Express IRA
customers paid more in fees than they earned in
interest on the accounts. Furthermore, H&R Block’s
alleged failure to disclose the fees properly and its
description of the product’s “great” interest rates
allegedly violated New York’s consumer fraud laws and
breached H&R Block’s fiduciary duties to its clients.
In addition to the full refunds of fees charged
since 2000, H&R Block agreed to pay $750,000 in
fines, fees, and costs to the State. The company also
agreed to convert all existing Express IRA accounts to
a different IRA program that does not impose fees. The
settlement coincides with a settlement of a class action
based on the same conduct that was brought in the
U.S. District Court for the Western District of Missouri.
___________________________________________
Last November, California Attorney General
Edmund G. Brown Jr. sent letters to several major
retailers notifying the retailers that a children’s product
they were offering for sale contained illegal levels of
lead. The federal limit for lead content in a children’s
product is 300 parts per million (ppm), and tests of the
products at issue revealed lead levels between 677
ppm and 22,000 ppm. Brown’s letters also asked for
any toxicity tests the retailers had performed on the
product and any representations about toxicity made
by the manufacturer or supplier. Only the Federal
Consumer Product Safety Commission, to which these
findings have been sent, could order a recall of the
products.
The discoverer of the toxicity of the products at
issue, the Center for Environmental Health, had received
a grant from a 2008 settlement for excessive lead in
toys earmarked for improving monitoring of lead levels.
___________________________________________
Last November, Texas Attorney General
Greg Abbot filed two separate actions against
price-comparison websites. Both actions involve
allegations that the companies’ ostensibly neutral price
comparisons contain misleading information about the
reliability and the trustworthiness of the merchants.
The first action was against Intercept, LLC, which
operates several sites, and resulted in a judgment
requiring Intercept to correct unlawful practices and
either pay $300,000 or cease doing business. The
second action involved sites operated by Everyprice.
com Inc. These sites allegedly sell favorable treatment,
including designations such as “trusted sellers,”
“quality sellers,” or “recommended merchants,”
while holding themselves out as unbiased, honest
brokers. Customers who relied on these designations
have complained about merchants whose deceptive
practices did not warrant such positive descriptions.
The action against Everyprice.com seeks civil penalties
of up to $20,000 per violation of the Texas Deceptive
Trade Practices Act, attorneys’ fees, and restitution for
damaged consumers.
___________________________________________
Last winter, investigators from the Centers for
Disease Control and Prevention (“CDC”) successfully
traced contaminated pepper used on salami by using
data compiled from the use of supermarket shopper
cards. The data traced the contaminated pepper to
two spice suppliers – one in New York and one in New
Jersey. Supermarket shopper cards allow customers to
take advantage of special discounts, and supermarkets
ordinarily gather data from customers to improve
marketing capabilities. The data from the shopper
cards particularly aided the CDC’s investigation in this
case because purchasers of the contaminated salami
were often unable to recall the specific product or brand
they had purchased. The CDC did not request, nor
would the supermarkets release, an affected customer’s
shopper card data without first obtaining the customer’s
consent. Despite these precautions, privacy advocates
are concerned that this additional use of shopper card
data could lead to a system requiring customers to use
shopper cards at supermarkets.
15
Troutman Sanders Consumer Law Practice Group
Karen F. Lederer- Practice Group Leader
[email protected]
212.704.6319
Contributing Writers to this Issue:
David N. Anthony
Suraj K. Balusu
Christina H. Bost-Seaton
Charles P. Greenman
Jon S. Hubbard
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Karen F. Lederer
Assistant Editor
Eric L. Unis
16
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