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May It Please The Internet

May It Please The Internet: The Federal Trade Commission Comes Calling

By John DiGiacomo

Federal Trade Commission

John Di Giacomo:

Hey everyone, this is John Di Giacomo, and I’m joined as always, by my business partner, Eric Misterovich. Eric, how are you?

Eric Misterovich:

I’m doing great, John. How are you?

John Di Giacomo:

You are listening to the May It Please The Internet podcast, and we’re talking about the Federal Trade Commission and enforcement actions that have been recently taken by the Federal Trade Commission. And Eric, I’ll let you get us started. Why don’t you tell us about the FTC and what it does?

Eric Misterovich:

Yeah, so the stuff comes into play when you’re talking about actions that your business is taking online to maybe convince people to buy your good or service. And there is a line that you can’t cross in terms of how you are portraying your good or your service, or the benefits it may have or certain features it may have. And when you cross this line into unfair or deceptive acts, the FTC is this government watchdog that exists out there that can really enforce its rules and really hit you with some strong monetary fines and other injunctive relief to shut down your business and really stop you from whatever you’re doing that they think is wrong.

So the FTC, it’s here to protect consumers, it’s here to stop some of the deceptive acts that happen. And I think people don’t really think they can be in the crosshairs of this kind of enforcement action, but no matter the size of your business, you’re not immune from it. And I thought it would be helpful for people to see what the FTC actually does and the things that people are getting in trouble for.

John Di Giacomo:

Yeah, that’s a great summary. So the FTC is this federal regulatory body that prevents against unfair competition in the marketplace. And there’s section five of the FTC Act, which is really what applies in most cases to internet businesses or businesses that would be kind of interested in this podcast. And it’s pretty broad regulatory and enforcement authority, so it is authority to prohibit unfair methods of competition that affect commerce or unfair and deceptive acts or practices that affect commerce. And the FTCs authority is limited by this idea of administrative law called the Chevron doctrine, which in short, gives the FTC this kind of broad authority to prosecute civilly violations that are viewed to be of unfair competition or cause displacement in the marketplace.

So where you see this in the internet context quite a bit is there will be larger cases where there’s a merger or acquisition that the FTC has concerns with because it will limit competition. It will go after businesses for violations of the Sherman Act, for collusion or price fixing or some other anti-competitive behavior. It goes after businesses for false advertising, it goes after businesses for … well, this week I dealt with the case involving agreements to not bid on competitor’s keywords, which would be potentially an FTC issue if they were aware of it, because it’s considered anti-competitive, and there’s a whole line of cases involving keyword bidding and agreements between competitors to not bid on each other’s keywords.

So again, the FTC is this large regulatory authority, it also has some pretty interesting powers when it comes to actually enforcing that authority. So it has the power to subpoena, it has these powers to perform these pre-suit investigations or civil investigative demands, that’s typically in the antitrust area. So if you get a letter from the FTC, it’s not a pleasant day, let’s just start there.

Eric Misterovich:

Things have gone wrong, definitely, if you’re getting that kind of letter. But the things that the FTC is looking at are also things that we look at when we have clients calling us about really bad actors online, or if they have a problem. You see this a lot in Amazon, where our client has a problem with a competitor, maybe it has to do with copyright or trademark or something. But the first thing, one of the things we’re going to do right away is look at the competitor’s site and see what kind of claims they’re making. So things like BPA free or organic materials or made in the USA even, those kinds of claims, if they’re not true, are what can lead to the FTC to take action against you. And if we are representing someone, we would take those kinds of misstatements or false statements and try to really enforce them ourselves through either false advertising or unfair competition cause of action.

John Di Giacomo:

Yeah, that’s a great explanation and I want to put a pin here just to note that the FTC will handle very large cases, but again, we’ve seen very large cases where the FTC gets involved in online issues, for lack of a better word, but where you think, well, why is the FTC treading into this territory? And it’s really specifically because they see this as a problem that could affect the entire marketplace. But there are also state level issues that we’re not going to address in this podcast, but for example, recently I saw a demand letter from a prosecuting attorney in Southern California over false advertising claims over a consumer product. So just because you fall outside of the target of the FTC, these are still things that you should be concerned about. You may not be big enough for FTC action, but the same rules apply at the state level. So this is important not just for larger businesses, but also smaller businesses as well.

Eric Misterovich:

And I think it’s important to also just take a step back and think about this is government action. And of course government action can be political in nature. But I think when you see what people are doing wrong, to me it makes sense that there is someone out there watching for these kinds of actions, because in a lot of these cases, it’s difficult for a plaintiff or even a class action of plaintiffs to pursue these kinds of claims because sometimes there may not be that much money in damages available to entice a plaintiff’s attorney, but there’s still deceptive acts happening. And I don’t know, just everything about the government is so toxic right now, that to me, I like seeing this kind of stuff. I think most of these enforcement actions make sense. Some of the fines are surprisingly large or small in some cases, which maybe that has political connotations or not. But I don’t know, just with government and everything political being so toxic, I kind of like seeing some policing that help people, help everyone. These enforcement actions help everyone equally.

John Di Giacomo:

Yeah. And they’re often things that you’re not even paying attention to. So there are very sharp, vigilant people that work within these governmental bodies that yeah, I agree, that do extremely important work, both at the FTC level and at the attorney general level within the individual states. But let’s talk-

Eric Misterovich:

Yeah, let’s talk about some of these. And one of them, when we see, like you had mentioned, maybe there’s new developments in the law or new developments in the economy and the government’s paying attention. One area that I noticed in some of these recent enforcement actions is the gig economy, the Uber drivers or the DoorDash delivery people. Basically anyone that’s being paid on a 1099 through some kind of larger platform, and there’s two enforcement actions that relate to this. And the first one is home advisor or Angie’s List. I think we all remember Angie’s List, been around for a while, eventually it changed names, and I think it’s business model has evolved throughout time, but most recently their business model was primarily based on lead generation. People come to Angie’s List looking for a contractor and contractors pay Angie’s List for those leads. Well, it turns out the way that Angie’s List was classifying these customers was deceptive.

They would have them tick a box or classify them as ready to hire, not window shopping and have all of these promises that these leads are valuable leads of people that are ready to make a purchasing decision. And it turned out that was not the case at all, and that they had really no substantive reason to claim these people were able to make these purchases. Home advisor also somewhat tricked contractors and thinking certain services or products by home advisor, Angie’s List was free and they were not free, there were upcharges. And the FTC was able to get a $7.2 million fine against Angie’s List home advisor for these lead generation services. And this was primarily intended to help these small independent contractors that are getting paid from homeowners, like on a 1099 basis.

John Di Giacomo:

7.2 million, that’s quite a bit. How was that fine assessed, was that like a consent judgment?

Eric Misterovich:

Yeah, I believe it was a consent judgment. The case, if I’m remembering correctly, lasted quite some time, but I think it ultimately ended in that consent judgment. The fine was broken up into two sections, depending on what they did wrong, but pretty hefty fine there. And so the takeaway from that is they were making a killing lying to the neighborhood contractor and the people were paying these monthly fees, 30, 45 bucks a month in hopes of getting these leads, and the leads were all garbage.

John Di Giacomo:

Yeah. And I think it’s helpful to explain, there are a number of ways that the FTC can enforce these types of regulations against you, one of which is a consent order or a commission order or a consent judgment. A lot of times that’s the best outcome, and that is simply because there’s some level of negotiation between you and the FTC over how much you’re going to pay and you’re not going to bet the farm on the outcome. So in a lot of these cases, it’s going to be a very painful amount of money, but there’s going to be some level of discussion that allows you to avoid losing everything, filing for bankruptcy, whatever it might be, allows you to continue operating provided you fix the initial problem and pay a pretty hefty fine. And so in a lot of these cases, as we’ll see as we talk through them, you’re going to see hefty fines, but they’re going to be a commensurate to the ability to pay because a lot of times smart attorneys will negotiate these as deals,` as opposed to going full bore into litigation with the FTC.

Eric Misterovich:

Yeah, I think ability to pay is probably one of the biggest factors here, because there’s some that the actions are really egregious and bad and the fines are small, but I think it’s just that entity is never going to have $7.2 million to pay that fine, but the FTC can still make an example out of them, even if the fine is smaller, which would hopefully deter other people.

But another gig economy in enforcement action had to do with Turbo Tax. We all know Turbo Tax, and I think the first thing you think about of Turbo Tax is the word free. It’s free. It’s free to use. You can file your tax return for free with Turbo Tax. Turns out you can’t, at least the vast majority of people can’t. And one of the big findings here was again, gig economy workers who are paid on 1099 are not eligible for a free tax return through Turbo Tax. So the government said two thirds of all taxpayers would not qualify for a free tax return through Turbo Tax, so it has a pending lawsuit against Turbo Tax right now, still in litigation, but they really hammered on how often Turbo Tax uses the word free in its advertising. And that rings true to me, that’s what I remember when I think about Turbo Tax.

John Di Giacomo:

Yeah, I always remember seeing the big standup display in the store that said free on it, and so that makes complete sense. What about Fashion Nova? I read about this Fashion Nova case and like many other sites, they accept user-generated content, user-generated reviews. What do they do there? I mean, they were blocking negative reviews, is that what happened?

Eric Misterovich:

Yeah, so they sell apparel, I believe the complaint was saying they’re adding thousands of listings a week through their website. I’m on it right now. And under each product, they had a section for a review of each product. And I’m looking at it right now, of course the one I’m looking at has one five star review. They had a software system established such that anything that was negative was not automatically posted and would go in to be manually reviewed before it was able to be shown on the website. So of course it was never shown on the website. And so there was all of these negative reviews that were attempted to be posted to the website, that they blocked from ever appearing. And this one did settle in a consent order at a $4.2 million fine. So hefty fine for a review manipulation type issue. So we don’t have all the details, but you can just imagine this was done at a pretty amazing scale to reach that big of a fine.

John Di Giacomo:

Yeah. And again, that’s a great outcome because who is going to attack review manipulation? I mean, as you know, and we have clients that contact us and they tell us that their competitors are manipulating reviews on Amazon, for example, we quote them a fee to file litigation against their competitor, and then they typically say, “Well, I’m not going to act as a private attorney general and sue my competitor over this, but it still makes me upset.” So again-

Eric Misterovich:

Yeah, yeah.

John Di Giacomo:

This is a place where these types of agencies really do great work.

Eric Misterovich:

And I’m looking at an item right now, it looks like a brand new item because there’s only three reviews, two five star reviews, but one one star review. And that really changes, I mean, I rely on reviews all the time, I know that it maybe carries too much weight and I know personally how many games can be played with reviews, but I still rely on them. And so people that don’t have our experience of all the black hat tactics people use to manipulate these things, they’re going to rely on these reviews, and when they see only five star reviews, they’re going to be tricked, it’s as simple as that.

John Di Giacomo:

Yeah, I can’t shop on Amazon anymore. I try to buy things and I look at the reviews and all I see are the cases that we’ve handled over the years. I just fall into a hole of disinformation, I’m like, “Is this real? Can I research this person that’s left this review? Who knows?”

Eric Misterovich:

Well, let’s talk about Amazon, this one really hits home to me. This is a company called DK Automation. They also went by 10 or 15 other business names, but this one just, they are playing the hits of deceptive advertising, deceptive practices and just snake oil salesman here. So they promised that they would build you a turnkey Amazon Empire that would generate passive income on autopilot.

John Di Giacomo:

Oh, passive income is a huge red flag. I mean, that alone should have told people no.

Eric Misterovich:

Yeah, well, and it gets a lot worse. So they had different tiers that you could subscribe to. One of them was a quote, “Amazon done for you package,” that promised 50 to 80% annual returns.

John Di Giacomo:

Was this run by Income Store?

Eric Misterovich:

Yeah, Income Store, famously a Ponzi scheme that basically did exactly this, where they took on investment and said they would build a store that would promise a certain amount of returns. Anytime you see anyone promising a return, it’s a scam. I mean, it’s as simple as that. No one should be making those kinds of promises. This was primarily operated by two main guys that claimed they were Amazon experts and had eight figure Amazon stores, the lingo we’re all used to. Of course, they implemented a crypto program that had a, I think they called it a fully automated algorithm crypto trading bot that would make you money while you sleep. The complaint noted that they promised that even while crypto was crashing in value, and they promised there the returns were even better, 65 to 84% was what they promised in their crypto returns. I don’t know where they got those numbers from and I think they made them up.

Doesn’t stop there, they had a program called That Lifestyle Ninja Training Program, which-

John Di Giacomo:

Sick.

Eric Misterovich:

… purported, it’s disgusting, purported to teach you how you can start a passive income business so that you can quit your day job. Of course there was a very small disclaimer after pages and pages of examples of how they’ve changed people’s lives, there’s a small disclaimer that these were for illustrative purposes only or something to that effect. The FTC thought that was deceptive. DK Automation accidentally emailed all of their clients, and one of the people that received the email replied all and basically said, “This sucks. I’m not making any money at all. I’ve lost all my money. This is a complete scam.” And a lot of people started responding and saying the same things. And then in response to that, they amended their terms of use agreement to prevent and prohibit any disparaging comments about the company.

John Di Giacomo:

That was poor lawyering. That’s a terrible idea.

Eric Misterovich:

Which we get this question a lot, not a lot, we get this question occasionally of can I include a non-disparagement clause in my terms of use to prevent negative reviews?

John Di Giacomo:

You could.

Eric Misterovich:

You could, not sure you should. And yeah, that’s one where you got to take a deep breath and say, “Okay, there’s a lot to get through to fully explain this answer, but this is why you don’t do it because it’s unfair, it’s deceptive. People should really never be prevented from telling the truth. And if you have to do that, it’s a real bad sign about your business, I think.” So I was surprised on this one because somewhere in the complaint it was alleged that they’ve made $52 million from this scam. And it looked like, and I think this was a consent order, that the fine was under three million, I think it was 2.6, where they were going to agree to pay. Which maybe that 52 number was, I don’t know, maybe that was inflated or something, because it seems like a small fine if they really made $52 million for, to me, this is again, just textbook lying to make money.

John Di Giacomo:

Yeah, I have a lot of problems with these types of businesses. I mean, anyone who says or leads with they’re an eight figure seller and then tries to tell you to listen to them in some authority or fashion, like sure, maybe you are an eight figure seller, but if your margins are 10%, then you’re a small business. Eight figure seller is not an impressive thing to me at all. And then promises to get guaranteed returns, definite red flag, passive income, always a red flag. Anyone who tells you that you can make money off drop shipping on Amazon, huge red flag, big problems there. So yeah, I’m not surprised that the FTC chose to pursue this one. Unfortunately, they probably were so big that that’s the one that the FTC decided to go after, but there are 1,000 more like them. So watch out for them, if you are listening to this podcast.

Eric Misterovich:

Yeah, I’ve had people come to me with these, they’re essentially coaches and communities that help people grow Amazon businesses and then they’re buying up their clients Amazon businesses, but they buy them on these crazy terms where they’re not going to pay you anything for the first six months because they’re like, “Well, we’re going to invest that money back into the business and we’re going to grow it and blah, blah blah.” And it’s just like, in what world do you sell a business and you don’t get anything for six months, a profitable business, these are real businesses that are making money and you’re just going to give it to them in the hopes that they do better? Crazy room for people to do bad things here. But here’s a couple that I think are maybe the most egregious just in terms of, I don’t know, ickiness factor, I’ll call it.

One is a company called Legacy Cremation, which offered cremation services. However, it lied about where it was actually located, lied about its prices and it both threatened and failed to return cremated remains to its customers. And I found out, I didn’t even know this was a rule, FTC has a funeral rule that applies to anyone that provides funeral services, that the consumers have a right to receive, basically just a price list, without any selling tactics. There should just be a piece of paper or a website that has the entire lists of prices for those services, without the kind of pressure or sales mini tactics that can come into play. This entity violated all of these things, but I think it’s a relatively small place, it was a $275,000 fine. Seems incredibly low given what they did. And I believe this one was broken up into several installment payments.

John Di Giacomo:

Yeah. That’s particularly egregious. I remember when my mom died and I was sitting in the room and we were buying a casket and the guy was like, I mean it’s that hard sell where he says, “Well, you wouldn’t want your loved one in this one, you’d want him in this one with the pearl handle.” And you’re getting that pitch right at the worst moment, so it makes complete sense that the FTC would want to treat those as special cases.

Eric Misterovich:

Yeah, I mean, that’s disgusting and wrong in every possible way. Another one that’s wrong, BetterHelp. If you listen to any podcasts, you’ve probably heard commercials about BetterHelp and getting counseling services provided online, supposedly this great new innovation in providing mental health services to the world, and an easier way of receiving them. Except they were selling all your data to Facebook, which they didn’t tell you they were doing, and that’s completely effed up and the FTC is taking action against them.

John Di Giacomo:

Yeah. That seems like a no-brainer. So in this field, FTC has authority to go after you for making misstatements within your privacy policy. So if you have somebody draft a privacy policy for you, it’s very important to ensure that it adequately reflects your business practices and that any use of personal or personally identifiable information is conspicuously disclosed to the user. And I’m sure in this case that’s not what happened, they probably used a form or a template and wasn’t built out very well, and then there was obviously transfers of third parties, which probably wasn’t disclosed. So yeah, that’s pretty hideous.

Eric Misterovich:

Yeah, I don’t know all the details on this one. Basically the summary was that they promised to keep this data private and then sold it to Facebook and Snapchat. It looks like BetterHelp is complying to some extent, there has been a consent order reached, but it doesn’t look like the case is over. I think this has to do with they have to provide basically all the evidence of what they did. So I’m sure in the next, I don’t know, months or years, we’ll hear about a big fine that they get hit with. Another one that’s bad, which I got to say I take a little joy in seeing this one, some distributors of essential oils were subject to FTC enforcement for making claims that the essential oils could treat, prevent or cure COVID.

John Di Giacomo:

Oh man, that’s awesome.

Eric Misterovich:

Yeah, that’s great. I love this.

John Di Giacomo:

What?

Eric Misterovich:

People in my life like essential oils and I smile and nod and snicker behind my back, I guess. Sometimes I will bring it up and just say, “This is crazy.” But yeah, I mean, this is right, they shouldn’t be doing that. And of course it doesn’t cure COVID and you shouldn’t be allowed to say it does.

John Di Giacomo:

Seems pretty straightforward. Other areas where I’ve seen FTC action are claims about hair regrowth. So that’s a particularly sensitive area where making claims about products restoring hair or limiting hair loss, those types of things, is very, like you said earlier, you gain a competitive advantage if you can say we grow hair back or people within this group, this cohort didn’t lose hair. And in many cases those types of statements are false, so it is an area of high regulation, high interest to the FTC. And herbal supplements, like herbal supplements, essential oils, anything that falls within an FDA exception, definitely is an area rife for FTC enforcement. So if you’re making any kind of health claim, you should be concerned, yes, 100%, yeah.

Eric Misterovich:

Yeah, absolutely. And then the last one here, it’s not all that exciting, it just goes to show that no one is kind of out of reach, it’s a mattress company, DreamCloud mattresses, they claim their products were 100% made in the USA and they weren’t. It said that all of their products were finished overseas and some of their products were entirely made overseas. And I think this is one where I could see people making this claim thinking, who’s ever going to know? Who would ever find out? And this will help me, people like American made. And if you’re lying, it can really come back to bite you. This one’s still pending, but these are the kind of tactics I think people don’t realize the kind of hot water they can end up in by what they think is little, maybe a white lie.

And in this case, some of their products largely were made in the US but they were finished overseas. And so when they said 100% US made, it was false even though parts of it were US made. And I think that just goes to show people are watching, and competitors too, if they know your product, if you’re lying, they’re the ones submitting these tips. The FTC may not find you alone, but if you’re doing bad things and you’re competing against people, they have a vested interest in shutting you down and they can make those kinds of complaints and get that attention brought onto you.

John Di Giacomo:

Yeah, that’s where I typically see it is in any textiles. So textiles, there are specific labeling requirements, T-shirts, clothing. If you make a claim about the origin of it, you should have an attorney look at it because there’s very specific things that you need to say, depending on whether it’s made, printed, finished in the US, outside of the US, et cetera. And we’ve had our clients come to us and say, “Our competitors say that their products are made in the US. Our costs are much higher. Obviously they’re not being made in the US. We can see their container ships coming over so we know that they’re not made in the US. What do we do?” And outside of filing an unfair competition lawsuit or some false designation of origin or some other related claim, the answer is talk to the attorney general, talk to the FTC, see if they’ll take that enforcement action for you.

Eric Misterovich:

Yeah. And we’ve tried to pursue those kinds of claims. Our product’s flammable, we’ve had that tested, our product’s truly organic, we’ve had silicone grade and health grade silicone claims, we’ve had those kinds of things tested. And yeah, I mean, the competitors are going to go to pretty great lengths when you are making false claims or they’re going to test your claims and make sure they’re not false. And so don’t think you’re too small for this kind of action, to fall in the crosshairs of this kind of investigation.

John Di Giacomo:

Yeah, you’re never too small and it can come from the strangest places. Well, thanks, Eric, I appreciate it, and that’s all we have for today. So until next time, again, this is the May It Please The Internet podcast, and we’ll talk to you soon.

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