CONSUMER PROTECTION UPDATECONSUMER PROTECTION UPDATE

April 2007April 2007

CONSUMER PROTECTION UPDATECONSUMER PROTECTION UPDATE

April 2007April 2007

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Agenda

• ABA Spring Meeting• Federal Trade Commission Update• Self-Regulatory Initiative• State Attorneys General Update • National Advertising Division

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ABA Spring Meeting

• Consumer Protection Sessions

• FTC Chair’s Report

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FTC Update: Highlights Workshops Rebate Cases Commission Testimony on FY 2008 Budget Report on Violent Entertainment Second Gift Card Settlement ID Theft Task Force Report Do Not Call Registry: Report to Congress

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Workshops• Announcements

– Spam Summit: The Next Generation of Threats and Solutions (July 11—12)

– Collecting Consumer Debts: The Challenges of Change (October 10-11)

• Workshops in April– Proof Positive: New Directions in ID Authentication

• methods to reduce ID Theft though enhanced authentication incorporating privacy standards and consideration of consumer usability issues.

– Rebate Debate• consumer perspectives on rebates; challenges businesses

face when they offer rebates; and “best practices” in the offering and fulfillment of rebates.

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Rebate Enforcement Action• Soyo, Inc.

– Deceptive claims in connection with rebate program for computer motherboards and other consumer electronics.

– Promised checks in 10 to 12 weeks– Thousands experienced significant delays--even a year or

longer--in getting rebate check.– 95% of checks delivered later than 12 weeks after valid

request postmarked (average was 24 weeks)– Order includes injunctive relief and redress provision to

pay all rebates past due.

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• InPhonic, Inc.– Online retailer offers rebates on mobile phones with wireless service.– Failed to disclose adequately prior to purchase that consumers would have

to wait 3-6 months to submit rebate request, and 6-9 months after purchase to get rebate.

– Misrepresented consumers could resubmit application if InPhonic deemed it incomplete

– Misled consumers about number of wireless bills that had to be submitted with rebate application

– Unfairly failed to provide consumer with materials needed to submit a complete rebate application

– Order: injunctive provisions and redress to consumers who applied for a rebate but denied a rebate check based on the challenged practices.

Rebate Enforcement Action

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Senate Commerce Testimony on FY 2008 Budget Request

• Requested $240 million/1,084 FTE• Increase of $17 million from 2007• Focus of Consumer Protection Mission in 2008:

– Data security

– ID theft

– DNC enforcement

– Financial services

– Advertising—weight loss, health related claims

– Media violence ratings

– Childhood obesity

– New technology driven threats, such as spam and spyware

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Report on Marketing Violent Entertainment to Children

• 5th follow-up report to Congress regarding the movie, music, and video-game industries' self-regulatory programs and their marketing of violent entertainment products to children.

• Report found that all 3 industries generally comply with their own voluntary standards regarding the display of ratings and labels; however:

– they continue to market some R-rated movies, M-rated video games and explicit-content recordings on television shows and Web sites with substantial teen audiences.

• Results of the FTC's mystery shop, where unaccompanied children, ages 13-16, were sent into retailers to make a purchase  also  indicate that while video game retailers have made significant progress in limiting sales of M-rated games to children, movie and music retailers have made only modest progress limiting sales.

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Gift Cards • In the Matter of Darden Restaurants

– Alleged deceptive practices in advertising and selling restaurant gift cards.

– This is the second FTC enforcement action alleging inadequate disclosure of applicable terms and conditions related to "dormancy fees."

– For cards sold before February 2004, Darden deducted a $1.50 fee after 15 months of non-use; for cards sold after February 2004, Darden deducted a $1.50 fee after 24 months of non-use.

– FTC alleged that Darden inadequately disclosed the fee by: • noting it in fine print on the back of the card • obscuring it with miscellaneous other information • marketing cards in restaurants without notifying consumers of the fee, and • marketing cards on Web sites without disclosing the fee

– Consent order requires Darden to restore fees deducted from consumers' gift cards and to disclose -- at point of sale and on the front of any card -- fees and expiration dates.

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• Task Force:

– Established by Presidential Order on May 10, 2006.

– Chaired by Attorney General and FTC Chairman.

– Comprised of 17 federal agencies.

Identity Theft Task Force

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Identity Theft Task Force

Recently issued Strategic Plan for Combating Identity TheftRecently issued Strategic Plan for Combating Identity Theft

• Recommendations:

– Reduce the use of Social Security numbers by federal agencies.

– Establish national standards for safeguarding personal data.

– Establish national standards for providing notice of security breach.

– Create National Identity Theft Law Enforcement Center to coordinate law enforcement agencies.

– Add new crimes that will impose a two-year mandatory sentence for “aggravated identity theft.”

– Eliminate interstate communication element to statute criminalizing theft of electronic data.

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The National Do Not Call Registry:

Annual Report to Congress for 2006• 132 million telephone numbers on DNC Registry by end of FY 2006• Industry’s compliance with TSR’s DNC provisions is high and

consumers are receiving fewer unwanted telemarketing calls.• FTC received 1,148,955 DNC complaints from 374,937 unique

registered numbers.

• 6,824 entities paid fees totaling $21,698,970 for access to Registry.

• 58,816 entities accessed 5 or fewer area codes at no charge

• 845 entities claimed “exempt organization” status for free access.

• Most states merged lists.

– 7 states maintain own lists (Indiana, Louisiana, Missouri, Tennessee, Texas, Wisconsin and Wyoming)

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Industry Self Regulation:

ATA “SRO” Project• “A Teleservices Consumer Bill of Rights”

• Centralization of FTC and FCC regulations, FTC and FCC opinions and enforcement actions, and state rules into one set of coherent Standards.

• Streamlining and standardization of key terms and concepts.

• Substantial reduction of the complexity currently reflected in the intersection of state and federal rules.

• IVR Standards for Inbound Calls (including a Press “0” Standard).

• Inclusion of privacy/data security guidelines within the scope of the Standards.

• “Nuts and bolts” compliance: extensive Standards created for purposes of documentation, recordkeeping, and monitoring/testing.

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State AG Update

• State AG’s Investigate Relationships Between College and Student Loan Providers.

• CS Stars settles data security breach investigation with New York AG.

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State AG UpdateStudent Loan Investigation

• NY and other states investigating over 100 schools and 6 lenders.• Allegations:

– Colleges did not disclose that students could select lenders not on preferred list.

– Students were directed to call lenders; lenders represented themselves as being college employees.

– All lenders on some preferred lists had arrangements to sell their loans to a single lender. This arrangement was not disclosed.

– Colleges accepted free services from preferred lenders, without disclosing to students.

– College employees accepted travel and gifts from lenders, without disclosing to students.

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State AG UpdateStudent Loan Investigation, cont.

• 21 Schools have agreed to a Code of Conduct which includes– Prohibition on receiving anything of value from lender in exchange for

preferential treatment (e.g. no revenue sharing– College employees prohibited from taking anything of more than nominal

value.– Preferred lender lists must be based solely on best interest of students.– Preferred lender lists must disclose criteria for selection.– Students must be told that they have right to deviate from preferred list.– Preferred vendors must disclose agreements to sell loans to other lenders.– Employees of lenders must not identify themselves as employees of the

college.

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State AG UpdateStudent Loan Investigation, cont.

• NY is considering codifying the Code of Conduct as the Student Lending Accountability, Transparency and Enforcement (“SLATE”) Act of 2007.

• NY AG has brought suit against schools and lenders that have not settled and accepted Code of Conduct

– NY AG announced intent to sue Drexel University.– NY AG has brought suit against Education Finance Partners.

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State AG Update

CS Stars Settlement with NY AG Over Data Security Breach– CS Stars maintained names, addresses and social security numbers of 540,000

workers comp recipients on behalf of New York Special Funds Conservation Committee (non-profit).

– May 9, 2006 employee noticed computer missing.– June 29, 2006 CS Stars notified Special Funds and FBI.– FBI requested no notifications be sent – June 30, 2006 notified NY AG, Consumer Protection Board, and NY office of

Cyber Security.– July 18, 2006 began sending consumer notices with FBI’s permission. – July 25, 2006 FBI recovered missing computer. Investigation indicated no

improper access of information.– CS Stars and NY AG reached settlement for $60,000 (cost of investigation) and

agreement to issue proper notifications in future.

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National Advertising Division Update

• Similasan Corp. – Earache Relief Ear Drops

• Kraft Food – DiGiorno Harvest Wheat Crust Pizza

• Gelita Health Products – CH-Alpha

• Lifestyle Lift Holdings – Lifestyle Lift mini-facelift

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NAD Update

Similasan Corporation USA – Earache Relief Ear Drops• NAD requested substantiation for Similasan’s claims in print

advertisements and product packaging. • Express claims at issue:

– “Recommended by Pharmacists six times more often for Ear Pain over Tylenol, Motrin, and Aleve combined.”

– “Healthy Relief.”

– “Relieves Pain, Soothes & Calms, Safe for Use with Antibiotics”

• During the inquiry, Similasan notified NAD that it would permanently discontinue using the “Recommended by Pharmacists” claim. – Claim was made based on results of survey by Pharmacy Times

Magazine.

– Survey later discovered to have flawed methodology.

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NAD UpdateSimilasan Corporation USA (cont.)

• “Healthy Relief” claim likely to be understood by consumers to be a product claim, not a performance claim.

– Was placed directly under the brand name in product packaging.

– Not listed in connection with performance claims.

• Two distinct components to last claim.

– Efficacy claim: “Relieves Pain, Soothes & Calms”

• Two clinical studies were submitted; neither used a formulation similar to the advertisers.

• Excerpts from homeopathic texts demonstrated that the individual ingredients have the potential efficacy of relieving symptoms.

• Nothing to indicate that the combination of ingredients is efficacious.

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NAD UpdateSimilasan Corporation USA (cont.)

• Two distinct components to last claim.

– Efficacy claim: “Relieves Pain, Soothes & Calms”

– Safety claim: “Safe for use with Antibiotics”

• The fact that homeopathic products are highly diluted doesn’t provide sufficient support for the claim that the product is safe to use with antibiotics.

• Competent and reliable scientific evidence of safety claims is particularly important for homeopathic drugs as marketers aren’t required to prove the product’s safety prior to selling them to the public.

• NAD recommended that the this claim be discontinued in its entirety.

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NAD Update

• NAD sought substantiation for claims made on product packaging and in print advertisements.

• Representative claims include:

– “25% less fat* …*Than frozen pepperoni pizza”

– “A tasty way to enjoy whole grain”

• Implying that the crust is made from 100% whole wheat

• During the course of the inquiry, Kraft noted the qualifying language for the first claim was modified.

– “25% less fat* …*Than the leading frozen pepperoni pizza”

• Kraft was able to demonstrate that this pizza did have at least 25% less fat than the leading frozen pepperoni pizza.

Kraft Foods – DiGiorno Harvest Wheat Crust Pepperoni Pizza

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NAD Update

Kraft Foods (cont.)• “A tasty way to enjoy whole grain”

– NAD felt this claim implied the crust is made from 100% whole wheat.

– Crust is actually made from a blend of 1/3 whole wheat and 2/3 refined wheat flours.

– Yet, a “serving” of the pizza actually provided a consumer with 10g of whole wheat:

• This is more than half the USDA recommendation of 16g per serving.

– NAD felt this was reasonable substantiation for the claim. – However, Kraft volunteered to clarify the quantitative information

concerning its whole grain content in future advertising and package labeling.

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NAD UpdateGelita Health Products – CH-Alpha • NAD request was part of a new initiative with the Council for

Responsible Nutrition to expand NAD’s review of claims for dietary supplements.

• Claims from the print advertisements include: – “CH-Alpha contains Bioactive Collagen Peptides™, a breakthrough

combination of amino acids and peptides, derived from natural collagen nearly identical to that found in your own joints.”

– “CH-Alpha is scientifically proven to promote joint health.”

– After just two to three months, you will regain the freedom of flexibility.”

• The advertiser submitted evidence sufficient to show that consumers ingesting collagen hydrolysate, the active ingredient, do, in fact, show improvement in the collagen in between their joints.

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NAD UpdateGelita Health Products (cont.) • “CH-Alpha contains Bioactive Collagen Peptides™, a breakthrough

combination….”

– NAD determined that this claim merely describes the product and its ingredients.

– The collagen hydrolysate is the same as that used in the studies and in the product itself.

– The word “breakthrough” is more than puffery and Gelita presented a reasonable basis for its use of the term.

• Also new to the U.S. market.

• This evidence also supported the claim that “After just two to three months, you will regain the freedom of flexibility.”

• NAD recommended that the claim that CH-Alpha is scientifically proven to promote joint health be discontinue the claim or modify it to connote the benefit accrues only to those with pre-existing joint problems.

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NAD Update

Lifestyle Lift Holdings, Inc. – Lifestyle Lift ®

• NAD requested substantiation for certain express and implied performance claims made for the Lifestyle Lift® mini facelift procedure.

• Claims included:

– Express Claim: “Results are immediate, return to work quickly looking like you did up to 20 years ago!”

– Implied Claim: The results described and depicted are typical of what consumers can expect.

– Implied Claim: The procedure presents no risks.

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NAD Update

Lifestyle Lift Holdings, Inc. (cont.) • “Results are immediate; return to work quickly:

– Scientific articles showed that while this procedure had shorter recovery time and fewer risks than a traditional facelift, the results and recovery for some patients might not be “quick”

– In fact could take up to a week.

– Disclosure in ad and patient consent form both acknowledge that the results might not be immediate and recovery might not be quick.

– NAD recommended that the advertiser discontinue the “Results are immediate claim” and provide a definition for “quickly” (e.g. return to work by one week.)

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NAD UpdateLifestyle Lift Holdings, Inc. (cont.) • The results are typical; up to 20 years younger, before and after photographs:

– NAD determined there was no evidence in the record to support a claim that consumers typically looked up to 20 years younger.

• Despite the fact that there are scientific methods for determining the impact of a product on age appearance.

– Before pictures were taken in a manner to amplify the bad areas, while after pictures highlighted the good areas.

– Patients testimonials are anecdotal evidence insufficient to support qualified improvement or implied typicality claims.

– Lack of patient complaints is merely suggestive of some level of consumer satisfaction, not proof of the claims.

– NAD recommended that the advertiser discontinue the typicality claims and patient testimonials unless they comply with FTC Guides, and that the advertiser ensure that before and after photos accurately represent changes consumers can expect.

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Questions?

Thank You

Bryan Cave LLP

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Presenters

Dana Rosenfeld(202) 508-6032dbrosenfeld@bryancave.com

Patrice M. Hayden(202) 508-6147pmhayden@bryancave.com

David Zetoony*(202) 508-6030david.zetoony@bryancave.com

Joseph Sanscrainte(212) 541-2045joseph.sanscrainte@bryancave.com

Jill Zucker(202) 508-6122jmzucker@bryancave.com

* Licensed to practice law only in Virginia and the District of Columbia.