Read 1-9170%20TS%20SUMMER%20NL6.pdf text version

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

Consumer Law

>> Summer 2010

E-Tailing and Direct Marketing

Internet Advertising Company Pays $2.9M to Settle Claims of CAN-SPAM Violations ................................................................. 2

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 1

>>

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

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.

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."

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.

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

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

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

3

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

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: · Implementstricterhiringpoliciesfor convenience store personnel. · Providecomprehensivetrainingtoconvenience store personnel regarding laws prohibiting tobacco sales to minors. · Instructconveniencestorepersonneltocheck identification for all tobacco customers who appear to be under the age of 27. · Arrangeforanindependententitytoperform random compliance checks to monitor sales practices at its retail outlets.

· Maintainapolicyagainstincreasingyouth demand for tobacco through in-store advertising. · RequirenotificationtoValerowithinfive business days if a store receives notice of a violation of federal, state, or local laws governing the sale of tobacco products to minors.

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.

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

4

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.

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. 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. 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]."

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

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

b)

c)

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.

>>

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.

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. 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. The states participating in the settlement are: Alaska, Arizona, California, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Maine,

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

LifeLock Reaches $12 Million Settlement with the FTC and Thirty-Five States to Resolve Allegations of Misrepresentations of their Data Security Services

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

8

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.

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.

CONSUMER PRODUCT SAFETY ______________________

>>

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.

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.

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

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

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.

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

>>

10

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. 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.

attorney's fees, legal fees, costs, disbursements, advances, or any other sums. 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. 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. 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.

· Themonthlyhandlingfeeislimitedbasedonthe size of the loan. · Uponprepayment,thelendermustrefund any unearned interest or unearned portion of the monthly fee.

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: · Thetotalpaymentsmadeeachmonth,including interest and fees, must be less than 22.5% of the consumer's gross monthly income, as verified from specific sources. · Theinterestrateiscappedat99%. · Theremustbeatleastsixinstallmentpayments. · Thetermmustbeatleastsixmonths. · Theloanmustbefullyamortizing,sothere cannot be a balloon payment. · Theoriginationfeeiscappedat$100for the initial loan, and this limit decreases for subsequent refinancings.

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.

>>

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

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.

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.

14

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 Seth Klein Karen F. Lederer Adam S. Libove John C. Lynch Craig Maxey Arielle Moskowitz Bennet J. Moskowitz Eric L. Unis Kevin P. Wallace Mary Jane Yoon

ATLANTA 600 Peachtree Street, NE Suite 5200 Atlanta, GA 30308-2216 404.885.3000 CHICAGO 55 West Monroe Street Suite 3000 Chicago, IL 60603-5758 312.759.1920 HONG KONG Suite 3403 Two Exchange Square 8 Connaught Place, Central Hong Kong 852.2533.7888

LONDON 6th Floor Hasilwood House 60 Bishopsgate London, United Kingdom EC2N 4AW 44.0.20.7038.6650 NEW YORK The Chrysler Building 405 Lexington Avenue New York, NY 10174 212.704.6000 NEWARK 1 Riverfront Plaza 3rd Floor Newark, NJ 07102 973.645.0772

NORFOLK 150 W. Main Street Suite 1600 Norfolk, VA 23510 757.640.0004 ORANGE COUNTY 5 Park Plaza Suite 1200 Irvine, CA 92614-8592 949.622.2700 PORTLAND 805 SW Broadway Suite 1560 Portland, OR 97205 (503)290-2400 RALEIGH Two Hannover Square 434 Fayetteville Street Suite 1900 Raleigh, NC 27601 919.835.4100

RICHMOND Troutman Sanders Building 1001 Haxall Point Richmond, VA 23219 804.697.1200 SAN DIEGO 550 West B Street Suite 400 San Diego, CA 92101-3599 619.235.4040 SHANGHAI 23/F CITIC Square 1168 Nanjing West Road Shanghai 200041 86.21.6133.8989

TYSONS CORNER 1660 International Drive Suite 600 McLean, VA 22102 703.734.4334 VIRGINIA BEACH 222 Central Park Avenue Suite 2000 Virginia Beach, VA 23462 757.687.7500 WASHINGTON, DC 401 9th Street, NW Suite 1000 Washington, DC 20004-2134 202.274.2950

Consumer Law is a publication of the Consumer Law Practice Group of Troutman Sanders LLP.

Readers are encouraged to reproduce articles for educational purposes. In doing so, credit must be given to Troutman Sanders LLP and Consumer Law. Please advise our editor of all reprints. This newsletter is intended to inform you of recent changes in the law, upcoming regulatory deadlines or significant judicial opinions that may impact your business. It does not render legal advice or legal opinion.

Editors Charles P. Greenman Karen F. Lederer

Assistant Editor Eric L. Unis

16

750 lawyers | 50 practice areas | troutmansanders.com

Information

9 pages

Report File (DMCA)

Our content is added by our users. We aim to remove reported files within 1 working day. Please use this link to notify us:

Report this file as copyright or inappropriate

747269

You might also be interested in

BETA