Alerts

AD-ttorneys@law – February 7, 2020

Alerts / February 7, 2020

In This Issue:

Nutritional Coffee Company Shut Down for Pyramid Scheming

FTC slaps a restraining order on Success by Health, 20 years after the first time it sued its founder

Choices, Choices

Success by Health, a Nevada corporation that markets and sells coffee products as the foundation of an overall harmonious lifestyle brand, recently caught the attention of the Federal Trade Commission (FTC) based on its claims about some of its products.

Some of the claims made by Success by Health include health claims; for example, the company’s website reads, “We believe that when cared for correctly, the human body can live to 120 years of age.” The website also claims that Success by Health “[has] created the most powerful nutritional products, and the most up to date, customizable, fitness and nutrition plans.”

These claims would traditionally be interesting to the FTC as they make sweeping health promises and hyperbolic claims about the products’ efficacy. However, these health claims were not at issue in the recent complaint filed by the FTC. Rather, the FTC’s interest was piqued by Success by Health’s affiliate program, which led to a complaint filed earlier this year.

Success by Stealth?

In its complaint, filed in the U.S. District Court for the District of Arizona in mid-January 2020, the FTC accused Success by Health and a handful of the company’s officers and representatives (including someone referred to as a “chief visionary officer”) of potentially running a pyramid scheme.

At the center of the alleged pyramid scheme by Success by Health was a draconian program that charged $49 for affiliate status – which consisted mainly of the right to recruit further affiliates whose sales rolled up the chain. But the FTC alleges that there was no way to get a financial foothold within the program. “[Success’] marketing materials allegedly failed to disclose that to achieve [a promised $1 million in monthly commissions], an affiliate would have to recruit more than 100,000 affiliates working underneath them, the vast majority of whom would be losing money at any given time.”

The FTC also accused the defendants of running afoul of the FTC’s Mail, Internet, or Telephone Order Merchandise Rule by simply ignoring affiliate orders altogether and failing to provide refunds in those cases, and of violating the cooling-off rule, which grants consumers three days to cancel sales.

In this case, it wasn’t consumers who needed protection, as you might expect. Instead, the FTC alleges in its complaint that Success by Health failed to tell its affiliates that the “expensive … products and services” they were expected to buy from the company could be canceled under the rule.

The Takeaway

The main point of contention, the FTC alleges, is that affiliates were effectively competing with the company itself. “Any member of the public can buy SBH products from the company’s website, or an Affiliate Website, at the same ‘wholesale’ price that SBH offers to Affiliates,” the complaint reads. “SBH sets the pricing both on its website and on the Affiliate Websites. Affiliates do not have the ability to offer different prices on the internet.”

This arrangement, in addition to various allegedly deceptive lifestyle and income claims, is the basis for the FTC’s filing to secure a restraining order that shuts down the company while the case proceeds.

This is a rare case where an FTC filing is not immediately accompanied by a settlement, so there’ll be more to talk about soon, we’re sure. It will be interesting to see how Success by Health defends its affiliate program and claims.

Postscript: The founder of Success by Health, J.D. Nolan, was sued back in 2000 for running an earlier shopping network pyramid scheme. According to the FTC, “a 2002 court order that resolved the case barred Noland from participating in any future pyramid schemes and imposed other restrictions.”
The FTC is watching.

National Advertising Division Sends Mind Supplement Company to FTC

Creekside Natural Therapeutics made iffy comparisons with prescription drugs, says NAD

The Kids Aren’t All Right

We write about mind, memory and focus-improvement diet supplements all the time in these pages; claims made about and for such products are among the most commonly challenged by watchdog and government groups. So, it’s fair to say that such supplements have garnered quite a customer base.

Perhaps this crowded field made the children’s version of the supplements an inevitable next step in market development, but Focused Mind Jr. is the first such product we’ve run across. Its maker, Creekside Natural Therapeutics, boasts that the product is “a natural alternative to prescription pharmaceutical products which improves focus and memory in children.”

NAD Steps In

Claims such as these are likely to garner the attention of self-regulatory groups, such as the National Advertising Division (NAD), which is exactly what happened here. The Council for Responsible Nutrition, an industry group that works to “sustain and enhance a climate for our members to responsibly develop, manufacture and market dietary supplements, functional food and their nutritional ingredients,” hauled Creekside before NAD with a challenge to a number of claims about Focused Mind Jr.

NAD found that Creekside’s claims that the product was “clinically proven” to perform as advertised were at best unobtainable, since the company failed to provide any record of testing, clinical or otherwise, at all. In addition, NAD recommended the discontinuation of several product ingredient claims – namely, that active ingredients improved attention, alertness and cognitive function, as well as similar claims.

The Takeaway

However, the most interesting challenged claim was that Focused Mind Jr. was “a natural ‘alternative to’ prescription medications.” NAD ruled that such claims meant that parity between Focused Mind Jr. and prescription drugs had been established by head-to-head testing, which would be a “reasonable takeaway” from some of the advertising. Based on the lack of testing or other clinical evidence provided, NAD recommended that such claims comparing Focused Mind Jr.’s products with prescription medications be removed.

According to NAD, Creekside failed to either file a reply to the recommendations or announce its intention to appeal to the National Advertising Review Board. So, it should be no surprise that NAD is referring Creekside to the FTC. If the FTC decides to investigate these challenged claims, it will be interesting to see whether Creekside proffers any additional evidence for its claims that its products are natural alternatives and reasonably equivalent in efficacy to other prescription drugs. Regardless, this challenge is another example of the advertising community’s self-regulatory scheme at work to further ensure consumer protection and prevent deceptive advertising practices.

FTC Vanquishes Multi-Armed Free-Trial Octopus

‘Risk-free’ scamsters boasted a worldwide website and financial network

Tip of the Iceberg

The FTC recently put to bed a long-running dispute with an array of companies stretching from Wyoming to the United Kingdom. The companies were run by two gentlemen from California, Phillip Peikos and David Barnett, who the FTC alleged offered more than 50 products through more than 1,000 websites.

Ambitious, certainly, but there’s nothing wrong with that. It’s how they managed customer payments that landed them in hot water.

The FTC alleged that Peikos and Barnett used their products – the usual passel of weight-loss, clear-skin, sexual-performance and cognitive-improvement offerings – as bait to obtain credit and debit card information from unknowing consumers. The products were offered through “free” or “risk-free” trials with a typical shipping or handling fee of $4.95. A full month’s supply of product would be shipped to the customer – but if the customer failed to cancel the offer, they would be charged $90 a month until a cancellation call was placed.

The FTC claimed that Peikos and Barnett’s advertisements failed to explain the terms of the “free” trial, and that the cancellation process was overly difficult. The pair was charged with a variety of violations of the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA).

The Takeaway

After ordering the pair to cease activity, the FTC entered into a settlement in 2018. In addition to the prohibitions against future transgressions, Peikos and related defendants were forced to pay $60 million and Barnett $47.3 million as part of the settlement. The total yield from these orders after suspended payments was anticipated to be somewhere between $3 million and $6 million.

But the recent final order settled an additional layer of charges against a Latvian financial institution called SIA Transact Pro (along with its one-time CEO). In the FTC’s amended complaint, filed May 2019, SIA Transact was implicated in the dispute as the financial enabler for Peikos and Barnett, illegally maintaining merchant accounts for the pair and enabling them to evade financial oversight.

The final order banned SIA Transact from processing payments for “certain categories of merchants” and subjected the company to enhanced screening and monitoring procedures. The company was also hit with a $3.5 million judgment.

There’s a lot of ground to cover in this case. But diving into the court documents will provide the curious reader with a fascinating look at the inner financial, corporate and technological workings of a thoroughly modern fraud. This case is also another example of the FTC’s careful attention to marketing and financial schemes that potentially violate ROSCA, and the waves of consequences that may befall the creators and financiers of such business schemes for the sake of consumer protection.

HelloFresh Spars With Home Chef Over Flexibility Claims

NAD draws a series of instructive distinctions in its ruling

Top Chef!

No one expects the internal deliberations of NAD to be turned into a reality show. But we edged closer to that territory when NAD featured a showdown between home cooking companies – Relish Labs’ Home Chef and Grocery Delivery E-Services’ HelloFresh. Both companies offer at-home meal kits, a recent development in cooking that makes consumers feel good about themselves and allows them to concoct healthy recipes within their own homes.

HelloFresh recently challenged Home Chef to an advertising battle royal. NAD was, as it so often is, the judge.

Meat Swap

Home Chef offers a feature called “Customize It,” which allows subscribers to swap a new protein into a meal kit that originally featured a different protein ingredient. A customer could, for instance, substitute chicken for pork in a given meal.

HelloFresh objected to Home Chef’s advertising about the feature, which allegedly claimed that consumers enjoy more flexibility with their service than with HelloFresh.

NAD split its ruling. It believed that Home Chef could reasonably support its claims that “Customize It” offered more flexibility than HelloFresh’s offerings. But the watchdog presented concerns about how that flexibility was marketed, including phrases such as “more choices” and “new choices each week,” as well as “Rated #1 in Customer Satisfaction” claims.

NAD recommended that Home Chef add notices to its claims about “Customize It” on the webpages leading up to the subscription enrollment – notices explaining that the feature is limited to labeled meals, and that the options are limited to those selected by Home Chef. NAD also recommended that price increases incurred by the customization choices be outlined in the pages.

The Takeaway

Diving deeper, NAD grappled with quantitative claims – for instance, Home Chef’s claim that it has “up to 26 choices with ‘Customize It’ vs. HelloFresh 18 choices.” In this case, NAD concluded that a consumer would reasonably suppose that “choices” meant “recipes” – and that “doubling” or “upgrading” of protein, in addition to certain add-ons such as beverages, weren’t new recipes and should not be counted among the overall tally of choices.

NAD also addressed a satisfaction claim, namely that Home Chef was “Rated #1 in customer satisfaction.” The watchdog recommended that a disclaimer be added to “make clear that this claim is based solely on a customer satisfaction survey of Home Chef customers’ experiences with the advertiser’s service and avoid the implication that customer satisfaction was directly measured and compared between the parties’ respective services.”

Home Chef agreed to abide by NAD’s recommendations. Altogether, the case summary is worth a read: It’s a copious grab bag of advertising no-no’s that would benefit any marketer to review. It is also interesting to read how these home-delivery food businesses seek to differentiate themselves in a highly competitive market that doesn’t appear to be fading away.

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The Ad Industry Wants a Delay to CCPA Enforcement As It Considers CCPA Cookie Compliance Frameworks and Ongoing Rulemaking

A letter penned by the top ad industry trade associations (the American Association of Advertising Agencies, the Interactive Advertising Bureau (IAB), the Association of National Advertisers, the American Advertising Federation and the Network Advertising Initiative) was sent on Jan. 29 to California Attorney General (AG) Xavier Becerra requesting a delay in enforcement of the California Consumer Privacy Act (CCPA) until at least six months from the final promulgation of the regulations called for by that new law, which became effective on Jan. 1. Read more and subscribe here.

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