New York AG Asks Court to Bench DFS
In the continuing drama surrounding Daily Fantasy Sports (DFS), New York's Attorney General Eric Schneiderman responded to lawsuits by DraftKings and FanDuel by seeking a preliminary injunction to halt their operations in the state.
Following news reports of insider trading and multiple lawsuits, the New York AG sent cease and desist letters to the two largest DFS sites. In response, DraftKings and FanDuel filed suit against the AG's office seeking a temporary restraining order, a move denied by the court.
Schneiderman fought back with his own lawsuits against the two sites in which he reiterated his reasoning that DFS constitutes gambling under New York law. "DFS is nothing more than a rebranding of sports betting," according to the complaint against DraftKings. "It is plainly illegal."
According to the AG, the games at issue are based on chance, not skill, and the outcomes depend on events over which participants have no control. "The moment a DFS player submits a wager, he becomes a spectator whose fate is sealed by the real-game performance of athletes. A player injury, a slump, a rained out game, even a ball taking a bad hop, can each dictate whether a bet wins or loses."
Traditional fantasy sports—which fall under an exception in the Unlawful Internet Gambling Enforcement Act—differ from DFS due to its competitive draft and the ability of the participants to trade, drop, and add players, and change lineups, Schneiderman said. He emphasized the "substantial control" participants have over how the league is administered and scored. By contrast, DFS games run on a daily and weekly basis. They allow no trading or adjusting of lineups, they do not make use of a competitive draft format, and they lack the significant strategy inherent in traditional fantasy leagues.
"Rather than a new type of fantasy league, DFS simply devised another way to bet on sports," the AG said. "A DFS lineup is a parlay bet in which the relevant variables are the athletes."
Advertising by DraftKings contributed to the problem with its "promises of easy riches for a lucky few sports fans," the AG wrote. "It's the simplest way of winning life-changing piles of cash" and "They make winning easier than milking a two-legged goat" were typical examples. DraftKings also embedded key words related to gambling in the code on its website that led search engines to return to the site when consumers searched for terms including "fantasy golf betting" and "daily fantasy basketball betting."
The AG contends that DFS presents a serious and growing threat to those with gambling-related illnesses, particularly young males, and notes that numerous players have allegedly called the company's customer service to cancel their accounts "and to plead with DraftKings to permanently block them from playing." Accordingly, the AG's enforcement actions request a preliminary injunction against both DraftKings and FanDuel.
To read the complaint in New York v. DraftKings, click here.
To read the complaint in New York v. FanDuel, click here.
Why it matters: The battle over DFS continues, and these lawsuits are just the latest salvo in the campaign to declare daily fantasy sports illegal gambling. No matter the outcome, the impact on DFS has been significant. Other states are considering following New York's lead (including a proposal from the Massachusetts Attorney General that would ban DFS in the state for participants under the age of 21 and prohibit college sporting events as the basis for DFS competition). The companies have significantly pulled back on their multimillion-dollar ad campaigns.
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Telemarketing Sales Rule Changes Final, FTC Bans Payment Methods
Finalizing amendments to the Telemarketing Sales Rule, the Federal Trade Commission banned four types of payment methods the agency claims are "favored by con artists and scammers."
Specifically, marketers are now prohibited from using unsigned checks, remotely created payment orders, "cash-to-cash" money transfers, and payment via a "cash reload" mechanism used to add funds to existing prepaid cards. When applying the traditional unfairness test—asking whether the practices caused or were likely to cause substantial injury to consumers that was neither reasonably avoidable by consumers nor outweighed by countervailing benefits to consumers or competition—the FTC said each of the four payment methods in telemarketing transactions constituted an abusive practice.
"The record demonstrates that the telemarketing use of each of these payment methods has resulted in rampant abuse that has caused substantial harm to consumers," according to a Commission statement by Chairwoman Edith Ramirez and Commissioners Julie Brill and Terrell McSweeny. The abuse has persisted "despite significant law enforcement efforts" by the FTC and other agencies. "Indeed, gaps in our financial system make it difficult to detect and stop fraudulent use of these payment methods. And, in contrast to the overwhelming evidence of telemarketing fraud exploiting the use of these payment methods, we find almost no evidence that they are being used for legitimate telemarketing purposes."
Opponents of the ban argued that the prohibition is premature and impinges on legitimate and emerging uses of the four payment methods, but the FTC disagreed. Although law enforcement has tried for years to control "the widespread abuse" of the payment methods, no progress has been made. This frustration was evidenced in the supporting comments filed by law enforcement authorities, including 24 state Attorneys General, the Department of Justice, and the Consumer Financial Protection Bureau after the ban was proposed, the agency added.
Commissioner Maureen Ohlhausen gave voice to the opposition in a dissenting statement. She argued that the ban failed to recognize the benefits to consumers or the resultant competition from the payment methods now prohibited. "Although the record shows there is consumer injury from the use of novel payment methods in telemarketing fraud, it is not clear that this injury likely outweighs the countervailing benefits to consumers and competition of permitting novel payments methods," she wrote.
Other changes to the Rule include a requirement that the goods or services must be described in the tape recording in which the consumer provides his express verifiable consent to be charged and that the ban be extended on advance fees on recovery services to cover losses in prior telemarketing and non-telemarketing transactions.
In addition, provisions related to the National Do Not Call Registry were tweaked to state that a seller or telemarketer must demonstrate that it has an existing business relationship with, or has received an express written agreement from, a consumer it calls if the consumer's number is on the Registry. The agency emphasized that sellers are prohibited from sharing the cost of the fees to access the Registry, and also specified that if a seller or telemarketer does not obtain the information needed to place a consumer's number on its entity-specific do not call list, the seller or telemarketer is disqualified from the safe harbor for isolated or accidental violations.
To read the amended Telemarketing Sales Rule, click here.
To read the Commission's statement, click here.
To read Commissioner Ohlhausen's dissenting statement, click here.
Why it matters: Telemarketers should familiarize themselves with the changes, which take effect 60 days after publication of the Federal Register notice. The FTC noted that given existing Bank Secrecy Act requirements, the amendments should not impose any significant additional costs to the payments industry and that because the agency has "found virtually no evidence of legitimate telemarketing uses of the four payment methods at issue," the ban should not have a major impact on legitimate telemarketing activity.
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FTC Sues Dietary Supplement Maker Over False Claims to Cure Addiction as Part of Law Enforcement Sweep
In one part of a law enforcement sweep targeting dietary supplement marketers, the Federal Trade Commission filed suit against multiple defendants that allegedly used misleading claims to convince consumers that their products can help treat—and even cure—individuals who are addicted to opiates, prescription pain medications, and illegal drugs including heroin.
Sunrise Nutraceuticals touted its Elimidrol dietary supplement as the "#1 opiate withdrawal supplement" that is "guaranteed to work," and help to "permanently overcome withdrawal—the first time" because of its proprietary blend of herbs and other compounds.
According to Sunrise, Elimidrol is non-addictive, non-habit forming, and has demonstrated a high success rate, as evidenced by purported testimonials from opiate-dependent customers. One testimonial on the company's website raved that Elimidrol "saved my life," and that the user "noticed within 30 minutes of the first dose that I was actually feeling pretty comfortable and I had a new sense of 'clarity' in me."
But the FTC said that Sunrise's claims are false and unsubstantiated, and requested that a Florida federal court halt the claims and order redress for consumers.
Concurrently, the Commission announced two partial settlements against marketers for making unsupported claims for weight loss supplements and sent 20 warning letters to companies that advertise and sell dietary supplements online for weight loss.
Health Nutrition Products and related defendants were the subjects of one of the settlements with the FTC in connection with unsubstantiated weight loss claims for a dietary supplement. In fact, three individual defendants agreed to refrain from selling any weight loss products, programs, and services. That settlement also included a $2.7 million judgment against repeat offender Crystal Ewing and her company, along with an order that prohibited future deceptive conduct. Additionally, a suspended monetary judgment that required the sale of certain assets was also assessed against another individual.
The other deal involved several companies and individuals targeted by the agency in a case against NPB Advertising for capitalizing on the green coffee bean diet fad with the Pure Green Coffee dietary supplement. In addition to a ban on the deceptive acts and practices described in the complaint, the agreement imposed a $30 million judgment, which will be suspended after the turnover of monies and sale of assets.
Finally, the Commission cautioned 20 companies that weight loss claims found on their websites are potentially misleading. "Your site contains claims of extraordinary weight loss that do not appear to be supportable by scientific evidence," the Commission wrote, describing the type of scientific evidence necessary to make such claims. The FTC's warning letters also expressed concern about the use of consumer testimonials on the websites. The agency declined to name the recipients.
To read the complaint in FTC v. Sunrise Nutraceuticals, click here.
To read the complaint and stipulated final judgment in FTC v. Ewing, click here.
To read the complaint and stipulated final judgment in FTC v. NPB Advertising, Inc., click here.
To read a warning letter from the Commission, click here.
Why it matters: In conjunction with the Department of Justice, Department of Defense, Food and Drug Administration, and other agencies, the FTC has made dietary supplement manufacturers and advertisers a focal point for enforcement. Over the past year, the agency has taken actions involving dietary supplements ranging from those that promise to help consumers lose weight to products that claim to help children with speech disorders and those that claim to reverse gray hair.
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ALJ Tosses FTC Lawsuit Over Poor Data Security—Will Industry Feel the Impact?
Ruling in a closely watched data security case, an administrative law judge of the Federal Trade Commission dismissed a lawsuit against LabMD for allegedly violating Section 5 of the Federal Trade Commission Act for failing to take appropriate security measures to protect the information of its customers.
The case was based on two incidents that the Commission said involved the disclosure of patient information from LabMD's networks. The first occurred in 2008 when a third party notified the company that an insurance aging report was available on a peer-to-peer file-sharing network. The report contained personal information about roughly 9,300 LabMD clients, including names, dates of birth, and Social Security numbers. In the second incident, day sheets, and copied checks—with names and Social Security numbers—for approximately 600 LabMD clients were found in the possession of individuals who pleaded no contest to identity theft charges.
The FTC filed suit in August 2013. LabMD fought the charges on two fronts, both in the administrative proceeding and in federal court, where the Eleventh Circuit Court of Appeals affirmed the dismissal of LabMD's complaint against the Commission in January on procedural grounds (ruling that the complaint was not a "final" agency action as required by the Administrative Procedure Act).
LabMD then moved to dismiss the administrative proceedings. The company argued that the FTC failed to carry its burden under Section 5 of the FTC Act. In an Initial Decision, Administrative Law Judge D. Michael Chappell agreed.
Section 5(n) of the FTC Act requires that for an act or practice to be deemed unfair it must cause or be likely to cause substantial injury to consumers; the injury must not be reasonably avoidable by consumers themselves; and the injury must not be outweighed by countervailing benefits to consumers or to competition.
The agency was only able to demonstrate hypothetical or theoretical harm to consumers enough for LabMD's liability, ALJ Chappell said.
As to the first event, the ALJ stated that the FTC presented no proof of harm, either in the form of identity theft or emotional damage, or likely future harm. With regard to the second incident, the agency failed to present proof connecting the exposure of the documents to any failure on the part of LabMD to reasonably protect data on its computer network.
"Under the evidence presented, to conclude that consumers whose personal information is maintained on [LabMD's] computer network are 'likely' to suffer a data breach and subsequent identity theft harm would require speculation upon speculation," ALJ Chappell said. "Among other things, it would have to be assumed that, at some unknown point in the future, [LabMD's] computer system will be breached by a presently unknown third-party who, at some undetermined point thereafter, will use the stolen information to harm those consumers."
The FTC's theory that all LabMD clients with data residing on the company's networks faced a risk of identity theft similarly did not persuade ALJ Chappell. Lacking evidence from the agency about the degree of risk or probability that such a data breach would occur, the allegations were too speculative to support a finding that injury to consumers was "likely," he said.
"Fundamental fairness dictates that proof of likely substantial consumer injury under Section 5 requires proof of something more than an unspecified and hypothetical 'risk' of future harm, as has been submitted in this case," he added.
At best, the Commission "has proven the 'possibility' of harm, but not any 'probability' or likelihood of harm," the ALJ stated. "To impose liability for unfair conduct under Section 5(a) of the FTC Act, where there is no proof of actual injury to any consumers, based only on an unspecific and theoretical 'risk' of a future data breach and identity theft injury, would require unacceptable speculation and would vitiate the statutory requirement of 'likely' substantial consumer injury."
Dismissing the entirety of the Commission's complaint, ALJ Chappell wrote that the preponderance of the evidence "fails to show that [LabMD's] alleged unreasonable data security caused, or is likely to cause, substantial consumer injury."
In a statement, the Commission expressed disappointment with the decision and said it is considering whether to file an appeal.
To read the decision in In the Matter of LabMD, click here.
Why it matters: Albeit a loss for the FTC in the area of data security enforcement, the decision did not tackle the issue of whether the agency has jurisdiction to enforce standards in the data security ecosystem based on its Section 5 powers. LabMD expressly reserved its jurisdictional challenge for an anticipated appeal to the federal court, leading to a possible replay of FTC v. Wyndham Worldwide Corp., where the Third Circuit Court of Appeals affirmed the power of the FTC to regulate corporate cybersecurity.
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