FTC, CFPB Target Mortgage Ads
Working with the Consumer Financial Protection Bureau, the Federal Trade Commission announced a collaborative effort targeting deceptive and misleading mortgage advertisements.
The agencies – which have concurrent jurisdiction over financial services companies – sent more than 30 warning letters to real estate agents, home builders, mortgage brokers, lenders, and lead generators, cautioning recipients that their ads may violate the Federal Trade Commission Act and the recently promulgated Mortgage Acts and Practices Advertising Rule (MAP Rule).
The MAP Rule, promulgated in 2011, prohibits misleading claims about government affiliation, interest rates, fees, costs, payments associated with the loan, and the amount of cash or credit available to the consumer. Violations of the Rule can result in injunction relief and civil penalties.
At a joint press conference, Thomas B. Pahl, Assistant Director in the FTC's Division of Financial Practices, said that in addition to the warning letters, the FTC has also opened investigations into 13 companies that could lead to enforcement actions. Kent Markus, CFPB Assistant Director of Enforcement, said his agency is looking into another six possible cases.
The agencies reviewed more than 800 ads, some in response to consumer complaints, Pahl said, which appeared in newspapers, direct mail, on websites, and on Facebook. Examples of the misleading claims include ads with images, symbols, and abbreviations suggesting that the advertiser is affiliated with the government, such as calling itself the "FHA" or the "Government Loan Department" or that include pictures of eagles, American flags, and President Barack Obama.
Other ads offered guaranteed loan approval and very low monthly payments without fully disclosing the conditions placed upon the offers, or offer very low "fixed" mortgage rates without a discussion of the loan terms.
The enforcement activity was "particularly important at this time," Pahl said. With lending down, the agencies "wanted to conduct a sweep to make sure that when mortgage advertisers start disseminating claims again, they are aware of the obligation that their ads don't contain deceptive claims."
The agencies declined to name the recipients of the letters and said that going forward the investigations will be conducted separately by the CFPB and FTC.
To read a model warning letter from the FTC, click here.
To see an example of a mock ad created by the FTC, click here.
Why it matters: For advertisers in the financial services industry, the first collaborative effort between the agencies serves notice that both the CFPB and the FTC are monitoring compliance with the MAP Rule and the FTC Act. At the press conference, the agency representatives spoke about the "spectrum" of law enforcement, that range from warning letters to investigations and enforcement action. How many claims are made, how clearly false they are, and the extent to which they may cause consumer harm, will all be considered by the agencies when deciding whether to send a warning letter or open an investigation, Markus explained. For example, an advertisement that implied a government affiliation with an asterisk and a small disclaimer at the bottom that denied any affiliation would more likely receive a warning letter than be the target of an investigation, Pahl said. "It's more of an art than a science," he concluded.
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FTC Working on Data Collection "Nutrition Label"
Chairman of the Federal Trade Commission Jon Leibowitz recently spoke at a conference and said the agency is attempting to develop a "nutrition label" for data collection, similar to those found on food and beverages.
In lieu of the traditionally long and complicated privacy policy – which is rarely read by consumers – the nutrition label would provide a "disclosure mechanism that websites can customize to succinctly tell consumers what kind of data they are collecting and how they are using it," Leibowitz explained during a panel discussion at the Wired For Change privacy conference in New York City.
Chairman Leibowitz said the Bureau of Consumer Protection is working in conjunction with the agency's chief technologist to select "five essential terms" that each company would need to include on the label.
Inspiration for the nutrition label may have come from Carnegie Mellon University, where a team of researchers proposed the idea earlier this year. "The nutritional label is something that people use regularly to compare products," Lorrie Cranor, an associate professor of computer science, engineering and public policy, told the International Association of Privacy Professionals. "It wasn't something that everybody was comfortable with in the beginning, but now it's really part of our everyday experience as consumers."
The Carnegie Mellon team created a chart with rows and columns for various data-related issues which, according to studies that have been conducted, have helped users to read and understand privacy policies. "We put it out there in hopes that it will inspire others to come up with new ideas," she added.
While the idea of a nutrition label for data collection has been introduced before, critics argue that data differs from food in ways that make the use of the label challenging. Ingredients in food can be simplified to numbers, such as 56 calories or 5 mg saturated fat, while data collection may require a more detailed explanation of how the company shares data with third parties.
Why it matters: The agency's plan to provide consumers with simplified data collection information is but another indicator that privacy concerns remain high on the agency's agenda.
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Suit Filed Over "Giant Soda" Ban
As expected, a lawsuit has been filed against the New York City Board of Health challenging the recently enacted ban on the sale of sugary drinks sold in containers larger than 16 ounces.
The Board of Health enacted the first-of-its-kind law in September, intending to combat rising obesity rates. The law covers the city's restaurants, street carts, theaters, delis, and sporting venues and prohibits the sale of beverages "sweetened with sugar or another caloric sweetener that contain more than 25 calories per 8 fluid ounces." Drinks sold in grocery stores and convenience stores are exempt, as are all alcoholic drinks and those that contain at least 51 percent milk.
Originally proposed by Mayor Michael Bloomberg, the ban now faces a legal challenge from seven industry groups and unions, including the National Restaurant Association and the American Beverage Association.
"The Board of Health's decision. . . to ban certain sizes of sweetened beverages in certain outlets, imposed by executive fiat, usurps the role of the City Council, violating core principles of democratic government and ignoring the rights of the people of New York City to make their own choices," according to the complaint. "The ban at issue in this case burdens consumers and unfairly harms small businesses at a time when we can ill afford it. Defendants do not have the legal authority to adopt this beverage ban, and it is arbitrary and capricious in its design and application."
Noting that both the State Legislature and the City Council have considered and rejected proposals to target beverages similar to those banned by the law, the groups argue that the ban was passed in violation of separation of powers principles. As an administrative agency made up of members appointed by the Mayor and not elected by the people, the Board of Health acted outside the scope of its authorized power by implementing policy of its own accord, the groups contend, in an end run around the legislative branch.
The law itself is also "substantively invalid because it is riddled with arbitrary exclusions, exemptions, and classifications," according to the complaint. The application of the ban to some establishments and not others means consumers will walk past a pushcart only to walk into a 7-Eleven and buy a Big Gulp or attend a baseball game and enjoy a 20-ounce beer. "The Board therefore is merely choosing winners and losers among businesses, distorting the beverage market, and placing every covered business. . . at a competitive disadvantage."
The suit seeks a declaration that the law is unconstitutional, as well as a permanent injunction against the implementation and enforcement of the ban, which is set to take effect March 12, 2013. The plaintiffs requested a decision from the court by December 15, 2012, "so that affected businesses can avoid expending funds to comply" with the law.
To read the Article 78 and Declaratory Judgment Petition in New York Statewide Coalition of Hispanic Chambers of Commerce v. The New York City Department of Health and Mental Hygiene, click here.
Why it matters: Industry groups had vowed to file a legal challenge to the law, so the suit came as no surprise. In a statement, the Mayor's Office defended the ban, calling the lawsuit "baseless." "The Board of Health absolutely has the authority to regulate matters affecting health, and the obesity crisis killing nearly 6,000 New Yorkers a year – and impacting the lives of thousands more – unquestionably falls under its purview," said Marc La Vorgna, the Mayor's chief spokesperson. He also pointed out that prior health initiatives by the Bloomberg administration faced similar controversy and survived legal challenges – including the ban on smoking and the mandatory disclosure of calorie information on restaurant menus. "Not only did those efforts fail, but our policies have been adopted in cities and states across the country," La Vorgna said.
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Red Light: Hyundai, Kia Face Suits Over Fuel Estimates
Carmakers Hyundai and Kia face at least a dozen class action lawsuits following an Environmental Protection Agency investigation in which it concluded that the companies overstated the fuel economy estimates of several vehicles.
The EPA found that the car manufacturers overstated the fuel efficiency on 13 different 2011, 2012, and 2013 vehicles by fudging the numbers from one to six miles per gallon depending on the car. For example, although Hyundai claimed the Elantra got 40 mpg on the highway, EPA tests revealed the car only got 38 mpg.
The companies agreed to lower their estimates on roughly 900,000 cars.
In a joint press release, Hyundai and Kia apologized to their customers and expressed regret about what they termed "procedural errors" at their joint testing facility. In addition to changing the estimates on the cars, the companies said they would reimburse consumers for the difference between the estimated and actual mileage.
Consumers who purchased cars with inflated estimates will receive a personalized debit card "that will reimburse them for the difference in the EPA combined fuel economy rating, based on the fuel price in their area and their own actual miles driven," plus 15 percent for their inconvenience, the companies promised. The debit cards can be refreshed as long as consumers own the car.
Despite the carmakers' assurances of restitution, class action suits quickly followed.
In one complaint, plaintiff Brian Reeves claims he bought a 2012 Kia Soul based on the company's fuel estimate that the car got 26 mpg in the city and 34 mpg on the highway, rather than the actual 23 mpg and 28 mpg the car actually achieved. Reeves seeks compensatory and punitive damages for violation of Missouri state law.
A second suit, filed in California federal court, seeks an estimated $775 million in damages for the class of car owners. Plaintiff Nicole Marie Hunter, who purchased a 2012 Hyundai Accent, relied upon the estimated 40 mpg highway driving estimate and would not have purchased the car or paid as much for it had she known its fuel economy was 3 percent lower, or roughly 38.8 highway mpg or less, she claims.
To read the complaint in Hunter v. Hyundai, click here.
Why it matters: "Consumers rely on the window sticker to help make informed choices about the cars they buy," Gina McCarthy, assistant administrator for the EPA's Office of Air and Radiation, said in a press release. "EPA's investigation will help protect consumers and ensure a level playing field among automakers." Not surprisingly, the EPA's investigation also resulted in multiple class action lawsuits, with almost a dozen filed less than one week after the EPA released its findings.
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Does California's Credit Card Law Apply Online?
The California Supreme Court heard oral argument in a challenge to the state's Song-Beverly Credit Card Act, which limits the collection of personal information when a credit card is used for a purchase.
Apple told the court that the law should only apply to brick-and-mortar stores and not online businesses.
Last year, the court issued the Pineda v. Williams-Sonoma decision, where it held that retailers may not collect zip codes from consumers who use their credit cards at the time of purchase.
The court's determination that zip codes constitute "personal identification information" under the Song-Beverly Credit Card Act spawned dozens of class action suits against retailers, including one against Apple.
Named plaintiff David Krescent alleged that Apple violated the Act when it requested his address and phone number to establish an iTunes account. A state trial court judge denied Apple's demurrer to the suit, and an appellate court declined to reverse.
On appeal to the state's highest court, Apple argued that the Act should be limited to physical stores where credit card verification is easier. Online companies need information such as an address and phone number in order to prevent credit card fraud and identity theft, Apple told the court.
"Computer criminals can engage in online credit card fraud on a vast automated scale, requiring even greater vigilance and verification than in person-to-person transactions," the company argued in its brief. "Unlike brick-and-mortar transactions, the only effective means that an online e-retailer has to prevent fraud is to ask the customer for personal identification information that a fraudster would have difficulty obtaining, namely, the cardholder's billing address and telephone number."
Despite passage of the law prior to the existence of sites such as iTunes, Krescent contends that the intent of the Act is to protect consumers and that it should be broadly interpreted. "The purpose of the Act is to prevent merchants from overreaching in their personal information requests," according to his brief. "The Legislature could have limited the Act, and could have stated the Act does not apply to any transaction where the merchant does not actually physically obtain the credit card. . . yet the Legislature deliberately chose not to do so."
A decision from the California Supreme Court is forthcoming. To read Apple's brief to the court, click here.
To read the plaintiff's brief to the court, click here.
Why it matters: A decision from the court applying the 1971 law to online transactions in 2012 could have huge ramifications for e-retailers, the vast majority of which collect information covered by the Song-Beverly Act.
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Use of a Celebrity's Name Not Transformative for First Amendment Protection, Court Says
The use of a celebrity's name on a product is not transformative to qualify for First Amendment protection, a California federal court judge recently ruled.
Buckyballs, the self-proclaimed "world's most popular desk toy," was sued by the estate of Buckminster Fuller for violation of his publicity rights and the Lanham Act. Fuller – whose nickname was Bucky – held 28 patents and was best known as the creator of the geodesic dome. The Carbon-60 molecule (the Buckminsterfullerene molecule) was also named in his honor because of its resemblance to the dome.
According to the complaint filed by the estate, Maxfield & Oberton (the maker of Buckyballs) acknowledged in a press release that the toy was "inspired and named after famous architectural engineer and inventor, R. Buckminster Fuller." The toys are round, rare earth magnets that can be combined to form various shapes, including one that resembles the Buckminsterfullerene molecule.
Maxfield & Oberton sought to dismiss the suit. The company argued that the plaintiff's claims were barred by the First Amendment under the doctrine of transformative use and that while the estate owns the rights to Buckminster Fuller's name, it does not own the name "Buckyballs."
But U.S. District Court Judge Lucy Koh said the use of the term "Buckyballs" was not transformative because the product itself does not "depict, reference, or involve" Fuller. "The simple use of a name is not an act of expression in the way that the creation or alteration of an image is, and a name cannot be transformed while remaining recognizable in the way that an image can," she wrote. Fuller's image is not also involved in the product, she noted, and "the Court cannot see how [the transformative use doctrine] could be applied to an individual's name when his image is not also involved."
Further, Judge Koh said that the defendant was not entitled to First Amendment protection for the use of a celebrity's name – transformed or otherwise – to sell an unrelated product. "It is the nature of an endorsement that the product endorsed has its own value, and that the endorsement serves merely to boost consumer interest or trust. If this fact could render the use of a celebrity's name 'transformative' and thus protected by the First Amendment, it would vitiate California's well-established right of publicity and the protections of the Lanham Act," she concluded.
The court also rejected the defendant's contention that the estate did not have rights to the specific term "Buckyballs." The toy maker's "argument is tantamount to a claim that the registered name, and only the registered name, without being altered in any way or combined with any other terms, can be protected under [California state law]. But this is not the law. As the Ninth Circuit has explained, '[t]he statute's reference to name or likeness is not limited to present or current use' and whether use of a variation on the plaintiff's name is sufficient to establish a violation 'is a question for the jury,' " Judge Koh said.
To read the court's decision in Estate of Buckminster Fuller v. Maxfield & Oberton, click here.
Why it matters: The court made a distinction between the use of a celebrity's name and the use of an image when publicity rights are in dispute. Judge Koh said that because the product itself allegedly misappropriates Fuller's name, it was "unclear for what 'work' [the defendant] is claiming First Amendment protection." The transformative use defense depends on the visual nature of a transformation, which necessitates an image, the court said. The court also deferred one other defense contention for the future: Maxfield & Oberton's argument that the Buckyballs were in fact named after the molecule and not the man. Judge Koh said the issue is a question of fact not suitable for resolution on a motion to dismiss.
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