Consumer Protection Update

1. Consumer Protection Update Consumer Protection Committee October 10, 2006 August T. HorvathAnna S. McLeanDaniel K. Slaughter

2. FTC DECEPTION ACTIONS • “Q-Ray” Bracelets • Post Office Employment • Fraudulent Telemarketing of Telemarketing Fraud Protection • Online Check Processing • Xanga.com • Hispanic Advertising Awareness Campaign

3. Q-Ray Bracelets • “Ionized” bracelet marketed through infomercials supposedly provided pain relief. • Court is expected to order payment of $22.5 million in net profits, plus $87 in refunds to consumers.

4. Post Office Employment • Success Express, Inc. placed ads in classifieds nationwide, claiming that they were hiring for the post office. Then sold consumers study packets for postal examinations that did not guarantee employment. $8 million suspended judgment against company and principals; $540,000 actually to be collected.

5. Online Check Processing • Qchex is an internet-based check creation and delivery service. • FTC alleged Qchex created and sent checks drawn on any bank account identified by a customer without checking whether the customer has authority to write checks on that account. • Scammers used it as conduit to draw fraudulent checks. • Conduct enjoined; remedies not specified.

6. Xanga.com • Xanga.com, a social networking site, was challenged for a violation of COPPA. • Although nominally not allowed to join the site if under 13, visitors were allowed to create accounts even if they provided birthdate indicating they were under 13; 1.7 million people did so over past 5 years. • Penalty of $1 million is the largest ever assessed by FTC for a COPPA violation.

7. Hispanic Advertising Awareness Campaign • FTC sent letters to 166 advertisers and 77 media outlets warning them that their advertisements targeting Hispanics, spotted during one-day (April 19) surf of Spanish-language print, broadcast media and internet, are potentially deceptive. • Over half of deceptive ads were health related, especially weight-loss. Other key categories were credit and business ops. • FTC worked with 60 “partners” including FDA, Postal Inspection Service, state A.G.s, consumer groups, and consumer protection agencies of Colombia, Costa Rica, Mexico, Nicaragua, Panama.

8. DOJ ACTION: TOBACCO RICO CASE • U.S. District Court for D.C. issued opinion in DOJ case filed in 1999 alleging conspiracy under RICO by tobacco companies to deceive the American public about health effects of smoking and environmental tobacco smoke, addictiveness of nicotine, and health benefits of light cigarettes, and by manipulating design of cigarettes to sustain nicotine addiction. • Enjoined defendants from conduct, but denied government request for $289 billion in ill-gotten gains because RICO disallows disgorgement remedy.

9. LEGISLATIVE DEVELOPMENT • “American Spirit Fraud Prevention Act” H.R. 3675 would amend FTC Act to authorize FTC to seek double civil penalties for unfair or deceptive acts that exploit reactions to emergencies and major disasters. • Passed by House last October; reported by Senate Commerce, Science and Transportation Committee Sept. 27.

10. INTERNATIONAL ACTIONS • CANADA • Econopro • Les Centres de Santé Minceur • CHINA • Procter & Gamble / SK-II

11. Canada: Econopro • Canadian Competition Bureau took action against marketers of “Econopro”, which it called “bogus fuel saving device.” • Required Injunctive relief, publication of correction in newspapers, and $15,000 in administrative penalties.

12. Canada: Les Centres de Santé Minceur • Centres de Santé Minceur weight loss centers marketed a variety of products (Cellotherm, Cure de départ, Noctoslim, Nopasim) with claims of spectacular results. CCB imposed injunction and $70,000 penalties against company and principals.

13. China:Procter & Gamble / SK-II • Hong Kong actress-spokesmodel for SK-II claimed “"my facial wrinkles and lines have been reduced by 47 percent after using SK-II for 28 days, and I look 12 years younger." • Consumer Lu Ping sued, based on Guangdong Bureau of Inspection and Quarantine (GDBIQ) finding that most SK-II cosmetics contained chromium and neodymium

14. ATTORNEY GENERAL ACTIONS • PayPal • United Egg Producers • Alltel • Automakers

15. A.G.s of 28 states settled with PayPal. They had charged that PayPal failed to provide adequate disclosures regarding dispute resolution and chargeback, selection of funding sources, protection programs, and other aspects of service. • Settlement provides for strict disclosure and customer service standards to be followed by the company. • PayPal agreed to pay $5.2 million ($1.7 million to A.G.s, $3.5 million direct to customers).

16. United Egg Producers • Egg industry agreed to drop “Animal Care Certified” label that state A.G.s charged implied higher level of hen care. Also agreed to pay $100,000 to states for attorney fees, consumer education, and other costs.

17. Florida A.G. sued Alltel Wireless October 4, alleging that Alltel automatically enrolled thousands of consumers for a free trial of a roadside assistance program without disclosing terms of the program and billing customers without their specific consent.

18. Automakers Sued for Global Warming • California A.G. sued General Motors,Ford, DaimlerChrysler, Toyota, Honda, and Nissan on September 20 for creating a “public nuisance” by producing millions of cars that emit carbon dioxide and contribute to global warming. • Action seeks damages related to beach erosion, reduced water supplies and pollution. • Suit is an effort to pressure manufacturers and federal government to implement and enforce stricter emissions limits and address global warming.

19. GASOLINE PRICING UPDATE • New York City passes gasoline price gouging law. • Idaho A.G. demands to know why Idaho wholesale fuel prices are higher than in other states, receives answers from refiners. • Utah contemplates whether to do away with legislating prohibiting low gas prices.

20. PRIVATE ENFORCEMENT • McDonald’s obesity litigation • Supremes take FCRA insurance cases • Google keywords not trademark violation • Jurisdiction over spammers • Broadband internet not regulated by Cable Act • AOL sued over Web posting of search info

21. McDonald’s obesity case finally to proceed • Pelman v. McDonald’s Corp., S.D.N.Y. No. 02 Civ. 7891 (RWS), 9/16/06) denied defendant’s motion to strike/dismiss claims that McDonald’s advertisements falsely implied its food was nutritious, that it failed to disclose the use of certain additives, and that nutritional information was not readily available at certain New York restaurants. • Case (filed in 2002) had earlier been dismissed by same judge; reversed by Second Circuit. • Court limited case to 40 ads. • Complaint adequately complied with Second Circuit’s requirement that Pls identify specific ads and how they were injured by the “scheme”; reliance on specific ads not required.

22. Supremes grant review of Ninth Circuit FCRA cases • In Reynolds v. Harford Financial Services Group, 435 F.3d 1081 (9th Cir. 2006) and Spano v. Safeco Corp., 140 Fed. Appx. 746 (9th Cir. 2005), Ninth Circuit held that insurers who failed to comply with FCRA’s adverse action notice requirement when they charged higher rates based on consumers’ credit reports could be liable for statutory and punitive damages under FCRA’s “willfulness” standard if they “recklessly disregarded” the law. • Split from Sixth and Eight Circuits; agreed with Third Circuit • Question is whether actual knowledge of legal violation is required.

23. Google prevails against claim of keyword infringement • In Rescuecom Corp. v. Google, Inc., N.D.N.Y., No. 5:04-CV-1055 (9/28/06), Google prevailed on motion to dismiss against claim that its sale of trademark-owner’s name as keyword to bring up competitors’ sites was Lanham Act violation. • Rescuecom, a computer services franchising business, claimed that Google violated its trademark by allowing competitors to buy its name as a keyword so their sponsored links would appear when Internet users searched for Rescuecom’s name. • Court held that keyword advertising is not “use in commerce” because trademark is never displayed in Google’s search results; nor did Pl allege that sponsored links displayed its trademark.

24. Jurisdiction over spammers • In EarthLink, Inc., v. Pope, et. al., N.D. Ga. No. 1:03-CV-2559-JOF (8/31/06), the U.S.D.C. for the Northern District of Georgia found that spammers who concealed their identities by funneling spam through EarthLink’s mail servers to make it appear that the emails originated with EarthLink were subject to jurisdiction in Georgia. • Court found Defs could be sued in Georgia based both on such “electronic contacts” as the “masking” process described above, and under the “effects test” of Calder v. Jones, 465 U.S. 783 (1984), because Defs’ activities had sufficient “effects” in Georgia to subject them to jurisdiction there.

25. Cable Act does not apply to broadband Internet service • In Klimas v. Comcast Cable Communications, Inc., 2006 WL 2772747 (6th Cir. 9/28/06), the SIxth Circuit held that the Cable Communications Policy Act (CCPA), 47 U.S.C. section 521-561, does not apply to broadband Internet services. • Putative class action suit challenged Comcast’s practice of temporarily storing IP addresses and websites visited by its broadband subscribers under privacy provisions of the CCPA. • District Court had dismissed on standing grounds. • Sixth Circuit affirmed, but on different grounds, holding that Comcast’s Internet service was not a “cable system” and thus was not regulated by the CCPA.

26. AOL sued over Web search posting • On August 8, 2006, AOL announced it had removed a database that had been temporarily posted on its website containing 20,000,000 search records of its members. By that time, other sites had downloaded it and reposted it. • Doe 1 v. AOL LLC., N.D. Cal. No. C-06-5866-SBA (filed Sept. 22, 2006) alleges that although AOL represented that records had been “anonymized,” search queries themselves revealed information that could be linked with specific users. • Suit alleges nationwide class, claims under Electronic Communications Privacy Act, 18 U.S.C. section 2702, and California law.

27. CALIFORNIA UCL§ 17200 • Retroactivity • Amendment • Class Certification and Reliance/Causation • Definition of “Unfair”

28. Proposition 64 - “Retroactivity” • Californians for Disability Rights v. Mervyn’s, LLC, 39 Cal.4th 223 (2006) and Branick v. Downey Savings and Loan Assoc., 39 Cal.4th 235 (2006) - Prop. 64’s new standing rules (requiring that plaintiffs have suffered “injury in fact” and “lost money or property as a result of [the alleged] unfair competition”) apply to cases pending at the time of passage of Prop. 64

29. Proposition 64 - Amendment • Court did not decide the issue raised by Branick - whether a plaintiff without standing may amend to add a plaintiff with standing. But the Court suggested such amendment would be allowed. See Foundation for Taxpayer and Consumer Rights v. Nextel Communications, Inc., 2006 WL 2699032 (Sept. 21, 2006) (amendment liberally allowed, as long as new plaintiff has the same claim). • Query whether plaintiff without standing can file an action, seek discovery to find plaintiff with standing, then amend. See Pioneer Electronics (USA) Inc. v. Superior Court, 27 Cal.Rptr.3d 17 (2005) (intermediate court decision, now on review by Cal. S. Ct., considering whether pre-certification discovery of customer information allowed without affirmative consent of customers).

30. Class Certification and Reliance/Causation • Pfizer v. Superior Court, 141 Cal.App.4th 290 (July 11, 2006), alleged representations re mouthwash as effective as floss misleading. Held no cert. because: - every member of a class must have suffered injury to meet Prop. 64’s requirements - likelihood of deception/harm is not enough – there must be actual injury to each class member - “as a result of” language of Prop. 64 imposes an individual (not presumed) reliance/causation requirement - petition for review by Cal. S. Ct. on file, and multiple requests for depublication made

31. Class Cert. and Reliance (cont.) • In re Tobacco II Cases, 142 Cal.App.4th 891 (Sept. 5, 2006) – more traditional approach. - Vasquez, 4 Cal.3d 800 (1971), allows for cert. based on presumed reliance - But not if the alleged misrepresentations “vary too much among the class members” - Here, general tobacco advertising not sufficient for presumed reliance because representations varied, different class members saw different representations, and suffered harm (began smoking) at different times

32. Definition of “Unfair” • Camacho v. Auto Club of So. Calif., 48 Cal.Rptr.3d 770 (Sept. 14, 2006) - recognizes split of authorities after Cel-Tech, 20 Cal.4th 163 (1999), as to whether “old” definitions of unfair still apply to consumer cases, and if not, what replaces them - old standards (which require fact inquiry precluding pleading challenge) now disapproved - new standard, based on FTC Act, 15 U.S.C. § 45(n), approves dismissal: (1) plaintiff uninsured at-fault motorist is not “substantially harmed” by attempt to collect costs of damage; (2) benefit of allowing collection outweighs “injury” suffered by motorist, and (3) collection efforts avoidable by obtaining insurance.

33. Definition of “Unfair” (cont.) • McKell v. Washington Mutual, Inc., 2006 WL 2664130 (Sept. 18, 2006) – alleged overcharge for underwriting, tax and wire transfer fees - uses old standard disapproved by Cel-Tech, simply weighing utility of the alleged conduct against the harm to the consumer - notes that standard requires “review of the evidence from both parties” which cannot “usually be made on demurrer.”