More Examples of Costly Penalties and Fines for Alleged Advertising Law Violations

Summary

Advertisers, advertising agencies, and their attorneys are amazed by the growing size of costly fines and penalties assessed in Federal Trade Commission (FTC) and Court decisions in recent years. Recent Advertising Compliance ServiceÔ issues have analyzed these decisions offering practical, compliance-oriented analysis and commentary. As these decisions illustrate, ignorance of the fast-paced developments in advertising law can be a very costly proposition. Remember: You should carefully review all of your advertising copy to make sure your ads comply with advertising law's countless - and increasingly strict - requirements. Here are just a few examples of such cases examined in recent issues of Advertising Compliance ServiceÔ:

1. MARKETERS OF ALLEGED CURE-ALL ORDERED TO PAY OVER $119 MILLION

FTC ordered the marketers of Seasilver, an alleged cure-all, to pay over $119 million for failing to comply with an earlier order requiring them to pay $3 million in consumer redress.

According to FTC, two firms and their owners had paid under $1 million of the consumer redress that they agreed to pay. Under the Court's order, entered on June 20, 2006, the Seasilver marketers are now jointly and severally liable to pay the full amount of $119,237,000, plus interest

To enforce this judgment, FTC secured liens on defendants' assets, including a nursery, an aloe farm, and equipment. The two largest distributors of Seasilver, who were named in FTC's complaint and settled the charges, have made their separate court-ordered payments of $1 million and $500,000.

This case involved an "avalanche clause" that was part of an earlier settlement agreement. The case is a chilling example of what can happen to an advertiser if that advertiser fails to live up to the financial obligations spelled out in such an earlier agreement. Avalanche clauses essentially condition FTC's agreement to suspended judgments on defendants' truthful disclosures of their financial status. However, if defendants fail to do so, the court can reopen the case and reinstate a judgment for the full amount of consumer injury.

WHAT YOU SHOULD KNOW: In this case, the full amount for which these marketers are now jointly and severally liable is over $119 million. Advertisers entering into such agreements with FTC should be well aware of the implications of such avalanche clauses before agreeing to them.

(FTC v. Seasilver USA, Inc., et al., United States District Court, District of Nevada, Case 2:03-CV-00676-RLH-LRL, July 24, 2006.)

ACS ISSUE: Tab #4, False, Unfair, Deceptive, Article #231.

2. COMPANY FOUNDER SETTLES FTC DECEPTION CHARGES - CONSUMER REDRESS PROGRAM COULD TOTAL $35 MILLION

On January 9, 2006, FTC put a successful end to the largest case against deceptive credit counseling and debt management that FTC ever brought. The settlement is with Andris Pukke, founder of AmeriDebt, Inc., and with a related company owned by Pukke, DebtWorks, Inc. Under this agreement--if approved by a federal court--Pukke would give up "virtually all of his assets for a consumer redress program for victims of the deception, a fund that ultimately could total as much as $35 million."

NOTE: Stipulated final judgments are for settlement purposes only and do not constitute an admission by the defendants of a law violation. Stipulated judgments have the force of law when signed by the judge.

(FTC v. AmeriDebt, Inc., DebtWorks, Inc., Andris Pukke, and Pamela Pukke, also known as Pamela Shuster, U.S. District Court for the District of Maryland, Civil Action No.: PJM 03-3317; FTC File No. X040009, January 9, 2006.)

ACS ISSUE: Tab #4, False, Unfair, Deceptive, Article #219.

3. COURT ORDERS $26 MILLION IN REDRESS IN INVENTION PROMOTION CLAIMS CASE

A federal district court judge ordered an invention promotion operation to pay $26 million in consumer redress and ordered a permanent halt to the allegedly bogus claims the company used to recruit customers. In addition, the court ordered that in future dealings with consumers, the company make specific, detailed disclosures about their track record in helping inventors market their ideas.

(Davison & Associates, Inc., et al. v. FTC, United States District Court, Western District of Pennsylvania), Case No. 962 3310, Civil Action No. 97-1278, April 19, 2006.)

ACS ISSUE: Tab #4, False, Unfair, Deceptive, Article #223.

4. 9TH CIRCUIT UPHOLDS $17.7 MILLION CONSUMER REDRESS FROM INTERNET PROVIDER

The Ninth Circuit ruled that a mail solicitation for Internet service was deceptive as a matter of law under the meaning of the Federal Trade Commission Act. The district court denied the defendants' motions for summary judgment and granted FTC's motion in part. The district court concluded that the solicitation violated FTCA Section 5 as a matter of law. The district court concluded that the proper amount of consumer redress in this case was $17,676,897.

(FTC v. Cyberspace.com LLC, et al., No. 04-35428, No. 04-35431, United States Court of Appeals for the Ninth Circuit, 2006 U.S. App. LEXIS 17488, July 13, 2006.)

ACS ISSUE: Tab #15, New Media, Article #202.

5. $4.2 MILLION SETTLEMENT INCLUDES LIFETIME BAN

The manufacturer of a magnetic "fuel saving" and emissions-reduction device agreed to pay $4.2 million to settle FTC charges that its advertising claims were false. Additionally, FTC will seek to provide redress to consumers who bought the device based on the false advertising claims. Moreover, the defendants will be banned from selling or manufacturing magnetic fuel savings and emissions reduction devices.

Illinois, Eastern Division, FTC File No. 042-3138, FTC File No. X05 0002, Case No.: 04C 6901, August 22, 2006.)

NOTE: Stipulated final judgments and orders are for settlement purposes only and do not constitute an admission by the defendant of a law violation. Consent judgments have the force of law when signed by the judge.

ACS ISSUE: Tab #4, False, Unfair, Deceptive, Article #232.

6. FEDERAL COURT HALTS SPYWARE OPERATIONS - OPERATORS AGREE TO GIVE UP OVER $4 MILLION

An operation allegedly deceptively downloaded spyware onto unsuspecting consumers' computers, changing their settings and hijacking their search engines. A federal district court halted that operation at FTC's request. And the federal district court judge ordered the operators to give up over $4 million in allegedly ill-gotten gains. The court also ordered a halt to another spyware operator's "stealthy" downloads and barred the collection of consumers' personal information, pending trial.

NOTE: The Commission files a complaint when it has `reason to believe' that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendant has actually violated the law. The case will be decided by the court.

NOTE: Stipulated final judgments and orders are for settlement purposes only and do not constitute an admission of guilt.

(FTC v. Seismic Entertainment Productions, Inc., et al., United States District Court, District of New Hampshire, FTC File No.: 042 3125, May 4, 2006; FTC v. Odysseus Marketing, Inc., and Walter Rines, United States District Court, District of New Hampshire, Case No.: 1:05-cv-00330-SM, FTC File No. 042 3205, May 4, 2006.)

ACS ISSUE: Tab #15, New Media, Article #201.

7. LARGE WEIGHT-LOSS MARKETERS AGREE TO PAY $3 MILLION

Sellers making "questionable" weight-loss and fat-loss claims to market skin gels and diet supplements agreed to pay $3 million to settle FTC charges. The settlement bars future unsubstantiated claims and bars the marketers from misrepresenting studies or endorsements.

NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.

(In the Matter of Basic Research, L.L.C., et al., FTC File No. 002-3300, FTC Dkt. No. 9318, May 11, 2006.)

ACS ISSUE: Tab #5, Substantiation, Article #122.

8. CROSS-BORDER ADVANCE-FEE CREDIT CARD OPERATION SETTLES FTC CHARGES - AGREES TO PAY REDRESS OF $1.85 MILLION

A cross-border telemarketing enterprise agreed to settle FTC charges that their business tactics violated the FTC Act and FTC's Telemarketing Sales Rule (TSR). Under the settlement, they will pay full redress to consumers, totaling $1.85 million, and stop their allegedly illegal practices, including falsely promising consumers a "guaranteed" low-interest credit card for an advance fee, calling people whose telephone numbers are registered on the National Do Not Call (DNC) Registry, and failing to pay the required annual fee to access DNC-listed numbers.

NOTE: This stipulated final order is for settlement purposes only and does not constitute an admission by the defendant of a law violation. A stipulated final order requires approval by the court and has the force of law when signed by the judge.

(FTC v. 3R Bancorp, et al., United States District Court, for the Northern District of Illinois, Eastern Division, FTC File No. 042 3030, Civil Action No.: 04C 7177, May 24, 2006.)

ACS ISSUE: Bulletin #596, Brief News of Note.

9. FTC BANS DIRECT RESPONSE MARKETER FROM INDUSTRY - DEFENDANT AGREES TO PAY $1 MILLION

FTC banned the "mastermind" behind a "scheme" to sell dietary supplements from the direct response marketing of foods, unapproved drugs, and dietary supplements. FTC claimed that the defendant, A. Glenn Braswell, used claims that were allegedly false and unsubstantiated. The defendant was already under another consent decree arising from alleged violations of the FTC Act. As part of the settlement, Braswell also agreed to pay $1 million and turn over assets worth $3.5 million to settle FTC's charges. FTC also announced a settlement with one of the "expert" endorsers for Braswell's dietary supplement products.

NOTE: These stipulated final orders are for settlement purposes only and do not constitute an admission by the defendants of law violations. A stipulated final order requires approval by the court and has the force of law when signed by the judge.

(A. Glenn Braswell, January 3, 2006.)

ACS ISSUE: Tab #5, Substantiation, Article #119.

10. DEBT MANAGEMENT TELEMARKETERS AGREE TO PAY NEARLY $1 MILLION IN CONSUMER REDRESS AND PENALTIES

A credit counseling service and related companies and individuals agreed to pay $926,754 in consumer redress and civil penalties to settle FTC charges that they made false claims about their debt management program and violated FTC's Do Not Call Rule.

NOTE: The Commission files a complaint when it has `reason to believe' that the law has been or is being violated, and it appears to the Commission that a proceeding is in the public interest. The complaint is not a finding or ruling that the defendants have actually violated the law. The case will be decided by the court. A stipulated final judgment and order is for settlement purposes only and does not constitute an admission by the defendants of a law violation. Stipulated final judgments have the force of law when signed by the judge.

(USA v. Credit Foundation of America, et al., United States District Court Central District of California, Southern Division, FTC File No. 042 3044, Civil Action No. CV06-3654 ABC(VKx), June 15, 2006.)

ACS ISSUE: Tab #2, General Articles, Article #539.

[For more instances of costly fines and penalties, see Costly Fines and Penalties for Alleged Advertising Law Violations.]

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