Jan 17, 2006
In This Issue:
Ever since California voters passed what is known as Proposition 65 in 1986, the food industry has been pushing Congress to override state food labeling laws.
Recently, it has made some progress. A bill that would ban many such laws cruised through the House Energy and Commerce Committee in December, and its sponsors include more than half the members of the House. Although a Senate version has yet to be introduced, the bill has already set off a stormy debate between the food industry and consumer activists and state food safety officials.
The complained-of laws require food manufacturers, restaurants, and grocery stores to post warnings about products containing ingredients that regulators consider harmful. They are often more stringent than Food and Drug Administration rules or apply to substances not covered by federal law. California’s Proposition 65, for example, requires businesses to disclose the presence of chemicals that the state believes cause cancer, birth defects, or other reproductive harm. Michigan and Connecticut require allergen warnings about preservatives such as sulfur dioxide at salad bars and other settings.
Two century-old laws—the Federal Food, Drug and Cosmetic Act and the Meat Inspection Act—give the federal government the authority to conduct sanitary inspections in meat-packing plants and regulate adulterated foods and the use of poisonous preservatives and dyes in foods. However, states can pass their own laws, especially in areas where the federal government hasn’t acted. Over the past few decades, as Americans became increasingly aware of food-related health problems, state and local governments have enacted laws to address regional needs or cover gaps in federal law.
The current federal bill would nullify any food safety and labeling laws considered “not identical” to FDA regulations. States could appeal to the FDA to keep their laws, but such exemptions would be granted only if the law covered an otherwise unprotected “important” interest, and wouldn’t “unduly burden interstate commerce,” or “cause any food to be in violation of any applicable requirement or prohibition under federal law.”
The proposed federal legislation would undo Proposition 65, according to a letter from California Attorney General Bill Lockyer to the bill’s main sponsor, Representative Mike Rogers (R-Michigan). In the past 17 years, Lockyer wrote, the law has forced “quiet compliance” among businesses, with many voluntarily removing chemicals that are on California’s list—now totaling 750—that would require labeling. But the law has also spurred a cottage industry in private lawsuits against businesses allegedly in violation of the Act, and has forced them to incur expenses to test products, develop alternatives, reduce discharges, and provide warnings. The federal bill is also opposed by many state attorneys general, food safety officials, and consumer activists, who argue that, although aimed at invalidating Proposition 65, the legislation would effectively nullify state and local food safety law nationwide.
Food industry lobbyists counter that inconsistent state laws add uncertainty, confusion, and expense to interstate commerce. They say the bill would still give states authority to respond to an imminent hazard, inspect foods and restaurants, and require labeling for freshness dating, religious dietary issues, organic designation, and geographic origin. The proposed federal law would cover warnings on labels, posters, public notices, advertising, “or any other means of communication.” It would allow states to require public service announcements on television or radio and billboards, said a vice president at the Grocery Manufacturers Association, the food and beverage industry’s main trade group.
Significance: Although the bill’s quick passage through the House Energy and Commerce Committee is an encouraging sign, it still faces a number of hurdles, including passage by the full House and Senate, and reconciliation of any differences in the House and Senate bills, before it becomes law.
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The estranged wife of the founder of AmeriDebt Inc., a credit counseling firm accused of bilking consumers of more than $70 million, settled charges with the Federal Trade Commission on December 30, 2005.
In the settlement, Pamela Pukke agreed to give up her ownership interest in two of the couple’s multimillion-dollar homes, which the FTC says were paid for with funds “derived unlawfully” from consumers. She is also expected to be one of the government’s witnesses against her husband, Andris Pukke, in a trial that started last week. Although the FTC doesn’t claim that she participated in deceptive business practices, it says she received the fruits of the fraud.
According to the FTC’s complaint, Andris Pukke preyed on financially strapped consumers who turned to his nonprofit firm to help improve their credit. The FTC said Pukke created AmeriDebt to funnel money to him and his for-profit company, DebtWorks Inc. AmeriDebt misled consumers by falsely marketing itself as a nonprofit organization with no upfront fees. In truth, the FTC said, consumers had to pay what AmeriDebt called a “voluntary contribution,” which often amounted to several hundred dollars. After signing with AmeriDebt, customers’ accounts were transferred to DebtWorks, which received $100 for each new account from AmeriDebt, followed by $25 a month as long as the consumer stayed on a debt-management plan. Between 1998 and 2003, the Pukkes received more than $70 million in income from DebtWorks, the FTC complaint says.
A class action lawsuit brought by former DebtWorks clients, making allegations similar to the FTC’s, is also set to be tried shortly. Pukke has denied the charges, arguing that consumers were able to pay their debts faster and less expensively as a result of AmeriDebt’s services.
According to court papers, Pamela Pukke’s name, not her husband’s, was listed on AmeriDebt’s incorporation papers in 1996. She continued to be listed as a director, but court papers say she never knew she was a director until a government deposition in 2004. She said she had no involvement with the company, though she may have signed some documents at her husband’s request. But, the filings argue, she didn’t know what she was signing. “He was my husband, so I trusted him, and if he said, ‘Sign this paper,’ I did,” she is quoted as saying. Pamela Pukke also said that in some cases, her name may have been signed by her husband, according to the plaintiffs’ filings.
The class action plaintiffs also cited a deposition by Pamela Pukke saying that she did not know her husband was a convicted felon until a government official appeared at her door. In 1996, Andris Pukke pleaded guilty to a federal charge of trying to defraud consumers by falsely promising debt-consolidation loans. The U.S. attorney said Pukke collected more than $38,000 in what the U.S. attorneys’ office called a “sham” lending operation. Pukke agreed to refund the money and not engage in any advance-fee-for-loan operation in the future. He was sentenced to three years’ probation and fined $5,000. According to a plaintiff’s court filing, “when [Pukke] confronted her husband, he admitted the conviction, but discounted its significance.” The Pukkes separated in January 2003.
The FTC said it believes Pamela Pukke received more than $4 million from the allegedly deceptive business practices. Under the settlement, she will give up assets worth about $1.8 million. The FTC said the money will be used to provide refunds to consumers.
Significance: The FTC’s lawsuit against Andris Pukke is part of an ongoing federal government crackdown on the credit counseling industry, targeting illegal and misleading sales tactics, high fees, and little assistance in cutting debt. The Internal Revenue Service is currently auditing 60 credit counseling companies to determine whether executives have misused their organizations’ tax-exempt status for personal gain. We will keep you posted on the outcome of Pukke’s trial.
America Online Inc. has agreed to pay up to $25 million to settle charges that it wrongfully billed customers for some online services and products.
The company allegedly billed consumers for online services and products, such as additional AOL accounts or desk calendars, that they didn’t order, according to several proposed class action lawsuits. AOL is also accused of charging for services and goods orders that customers had tried to cancel.
Besides making cash compensation, AOL will provide account credit, forgive unauthorized charges, and donate services to charity, the statement said. AOL will pay as much as $8 million in fees to the customers’ lawyers, the agreement says. Cash compensation for individuals will depend on whether the customer previously complained to AOL and can provide documentation of the billing.
Class members must complete a two-page claim form following four pages of instructions, return any merchandise they didn’t order, and submit any supporting documentation within 60 days of court approval of the settlement.
A settlement administrator said in a statement that AOL denies the truth of the plaintiffs’ allegations, or that a class manageable for trial is certifiable. “AOL is settling this action simply to avoid the burden and expense of litigation,” the administrator said.
ICT Group Inc., a Newtown, Pennsylvania-based company that provides AOL with call-center services, was also named in the suit. It is indemnified by AOL, and not responsible for paying the costs and fees of the settlement, the company said.Significance: Companies must always take care to monitor the activities of third-party vendors handling billing and other customer-related functions, since the law typically holds them liable for the acts or omissions of “agents” who are acting within their authority.
The mastermind behind a scheme to sell dietary supplements with allegedly misleading claims has been banned from the direct response marketing of foods, unapproved drugs, and dietary supplements.
The defendant, A. Glenn Braswell, who was already under another consent order stemming from alleged violations of the FTC Act, also will pay $1 million and turn over assets worth $3.5 million to settle the charges by the Federal Trade Commission. The FTC also announced a settlement with one of the “expert” endorsers for Braswell’s products.
Braswell sold dietary supplements, mostly through direct mail advertising, including the Journal of Longevity, a direct mail ad that purported to be a health-information magazine. The products the FTC targeted, Lung Support Formula, AntiBetic Pancreas Tonic, Gero Vita G.H.3, ChitoPlex, and Testerex, were supposed to cure, prevent, or treat a variety of illnesses such as Alzheimer’s disease, diabetes, and emphysema. The FTC alleged these ads, aimed at elderly consumers, used false and misleading claims of medical or scientific “breakthroughs,” expert endorsements, and misrepresentations of the results and applicability of scientific studies. According to the FTC, Braswell’s operation was one of the largest U.S. direct mail marketers of health-related products at the time.
The settlement bans Braswell not only from direct response marketing (with a few exemptions, such as FDA-approved product claims), but also from making false, misleading, or unsubstantiated health claims, misrepresenting endorsements, making unsubstantiated endorsements, or misrepresenting scientific evidence for any foods, drugs, dietary supplements, and health-related products and services. Braswell already was under a 1983 consent order to resolve the FTC’s charges related to his marketing of baldness and anti-cellulite products.
The FTC also announced a settlement with Hans Kugler, who the agency says was an expert endorser for Lung Support Formula and Gero Vita G.H.3. The FTC’s complaint charged that Kugler did not have the required expertise or a reasonable basis for his endorsements. The settlement prohibits him from making future endorsements, unless they are based on competent and reliable scientific information and an actual exercise of his represented expertise, as well as misrepresentations about scientific tests or studies. Kugler will pay $15,000 in settlement of the allegations.
The settlements with Braswell and Kugler means that all of the seven corporate defendants and four of the five individual defendants have settled the FTC’s charges in this case. Litigation continues against Chase Revel.
Significance: Because no marketer is legally permitted to make false or misleading claims about its products, including such a provision in a consent order may seem redundant. However, the provision means that the FTC will have additional firepower against a repeat offender. Anyone already subject to a consent order can expect the FTC to demand much harsher sanctions the second time around, as was the case with Braswell. In addition, violations of a consent order are subject to civil penalties of up to $11,000 per violation per day.
An Internet service provider has won a record $11.2 billion judgment against a Florida man who sent millions of unsolicited e-mails advertising mortgage and debt consolidation services.
The judgment was issued December 23, 2005, against James McCalla, who is also barred from accessing the Internet for three years. The lawsuit claimed that McCalla sent more than 280 million illegal spam e-mails into a network operated by CIS Internet Services, which provides online connections in eastern Iowa and parts of Illinois.
The lawsuit, filed in 2003 by CIS owner Robert Kramer, initially named a multitude of defendants, many of whom were later dropped from the suit. In 2004, judgments totaling more than $1 billion were issued against Cash Link Systems of Florida, AMP Dollar Savings Inc. of Arizona, and TEI Marketing Group Inc. of Florida. According to the complaint, each of the defendants used the “cis.net” domain in the e-mails as part of a false return address to disguise their source and deflect complaints to CIS.
Kramer claimed that under state law he was entitled to $10 per illegal e-mail, and he said that he expects to see the money.
Significance: Although the amount of the judgment is impressive, it’s virtually certain that it will remain largely uncollected. Judgments against spammers are notoriously difficult to enforce.
Federal agents seized 5,000 cases of bread from a Minnesota warehouse on January 10, 2006. The seizure was an effort to get one of the country’s largest organic bakers in line with new labeling rules by the Food and Drug Administration that went into effect January 1, 2006. (See the January 9, 2005, issue of AdvertisingLaw@manatt for an article discussing the new rules.)
The suspect loaves had been baked by French Meadow, a popular organic bakery based in Minneapolis. The seized bread included spelt and Kamut among the listed ingredients, which the new rules classify as wheat, a potentially dangerous allergen. The designation is one that French Meadow co-owner Steve Shapiro takes exception to, along with many others in the natural food industry. “There (are) spelt bakeries all over the United States that have certainly been making spelt for many years. And (they) consider it a separate grain that, certainly, most people who are wheat sensitive can tolerate,” Shapiro told a Minneapolis news channel. The bakery said it has been selling spelt for 16 years, and Kamut for “about 10” years, totaling “millions” of loaves.
“The bread contained two substances which are part of the wheat family,” countered U.S. Attorney Tom Heffelfinger, who ordered the seizure. He called French Meadow’s labels “misleading” if they continue to refer to spelt and Kamut as “wheat alternatives.”
French Meadow said it is aware of just one allergic reaction, involving Kamut. On that statistic, French Meadow and Heffelfinger seem to agree. “Although it is not public record, I understand there’s at least one reported incident of an allergic reaction to this bread,” Heffelfinger said.
Shapiro said his company has been “somewhat reluctantly” working on a new label and will begin using temporary labels in compliance with the new law as soon as the wording is approved. He said members of the spelt industry are seeking clarification of the new rules.
Significance: As this action demonstrates, the FDA’s new labeling rules are being applied not just to the ingredient lists on packaged goods, but also to the characterization or description of food products. Food marketers are well-advised to check the packaging of all of their products against the FDA’s new rules. See http://www.cfsan.fda.gov/~dms/alrguid2.html for the agency’s Guidance for Industry: Questions and Answers Regarding Food Allergens, including the Food Allergen Labeling and Consumer Protection Act of 2004 (Edition 2).
Jeffrey S. Edelstein
Linda A. Goldstein
Alan M. Brunswick
Christopher A. Cole
Jennifer N. Deitch
R. Bruce Dickson
Gene R. Elerding
Michael L. Grazio
William M. Heberer
Susan E. Hollander
Angela C. Hurdle
Felix H. Kent
Christopher T. Koegel
Jill M. Pietrini
Lisa C. Rovinsky
Lindsay M. Schoen
Linda A. GoldsteinPartner
Jeffrey S. EdelsteinPartner
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