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ALLEGED INTERNET PYRAMID SCHEME MARKETERS TO PAY $75,000 UNDER SETTLEMENT WITH FTC
FTC has negotiated a settlement with The Mentor Network, Inc. and Parviz Firouzgar, marketers of an allegedly fraudulent pyramid scheme promoted partially via the Internet. The settlement would require them to pay $75,000 into a fund for consumer redress, and would bar them from operating any chain or pyramid marketing program. The settlement also includes provisions designed to ensure that payments to participants in multi-level marketing programs operated by the defendants come primarily from sales of goods or services to non-participants rather than from recruiting new participants.
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FTC filed charges in the Mentor Network case as part of Operation Missed Fortune, the broadest federal-state coordinated law-enforcement and consumer-education effort ever initiated. Missed Fortune targeted alleged get-rich-quick self-employment schemes, and resulted in more than 75 law-enforcement actions by FTC and 25 states. FTC alleged in this particular case that the defendants made false and misleading earnings claims in connection with their pyramid scheme that nominally involved the sponsorship of needy children in foreign countries. According to FTC's complaint, defendants claimed that consumers could receive as much as $12,285 by--
- (1) paying $24 to join "MentorVision";
- (2) paying $30 per month for a minimum of one year; and
- (3) recruiting three other people.
They also provided distributors with promotional materials containing false claims for use in recruiting other participants, said FTC. Upon filing charges in federal district court in November 1996, FTC obtained a temporary restraining order barring defendants from making misrepresentations as to profits or earnings in an investment program, freezing their assets, and appointing a receiver over the defendants' business. These provisions were continued in a preliminary injunction to which the defendants agreed in December.
The proposed consent judgment and order to settle the FTC charges, if approved by the court, would bar defendants from engaging or assisting in any manner in the advertising, promoting or offering of any chain or pyramid marketing program, and from making or assisting another in making any misrepresentation about a material fact--including earnings or whether the program has government approval--of any marketing or investment program.
This settlement was filed March 17, 1997 in U.S. District Court for the Central District of California, in Santa Ana, and requires court approval to become binding.
NOTE: This consent judgment is for settlement purposes only and does not constitute an admission by the defendant of a law violation. Consent judgments have the force of law when signed by the judge.
(The Mentor Network, Inc., FTC File No. X970015, Civil Action No. SACV 96-11-4 LHM (EEx), March 18, 1997; materials relating to this FTC matter are available on the Internet at FTC's World Wide Web site at: http://www.ftc.gov.)
FTC AGREEMENT WITH GERBER WOULD BAR UNSUPPORTED "DR. RECOMMENDED" CLAIMS
A proposed FTC agreement with Gerber Products Company would settle FTC charges over Gerber's claim that four out of five pediatricians recommend Gerber baby food. In fact, FTC alleged, the study on which Gerber relied showed that only 12% of the pediatricians surveyed recommend Gerber. The study also found that, of those doctors surveyed who in fact recommend baby food, 82% didn't recommend any specific brands of baby food, and of those pediatricians who did recommend baby food, only 16% recommended Gerber. The settlement would bar the company from representing the extent to which doctors or other health professionals recommend baby and toddler foods or representing any recommendation or endorsement of these products unless it has competent and reliable evidence that substantiates the claim. Gerber also would be prohibited from misrepresenting any survey or research.
Gerber's ads expressly claimed that 4 out of 5 pediatricians who recommend baby food recommend Gerber, said FTC. According to FTC's complaint, these ads, which appeared on TV and radio and in print, represented that Gerber had studies or surveys to support the "4 out of 5 claim." The complaint alleges that this claim is false, explaining that Gerber relied upon a specific survey in which 562 doctors responded to questions concerning baby food. Of these 562 pediatricians, 408 responded that they recommend baby food to their patients at least once per week. Of the 408 pediatricians who recommend baby food, only 76 recommend specific brands, and 67 of those recommend Gerber. Thus, only 67 of the 408 pediatricians who recommend baby food, or some 16%, recommend Gerber to their patients, FTC said.
FTC's complaint also alleges that Gerber's ads made a broader implied claim that 4 out of 5 pediatricians recommend Gerber. Gerber did not present adequate evidence to support the second claim that 4 out of 5 doctors recommend Gerber, FTC's complaint alleges. Accordingly, this claim is unsubstantiated, said FTC's complaint.
The proposed settlement would bar Gerber from making any claims about the extent to which doctors or other health, nutrition, child care, or medical professionals recommend baby or toddler food, or about the recommendation, approval, or endorsement of such products by any of these professionals, unless the company possesses competent and reliable evidence that substantiates the claim. The agreement also would bar Gerber from misrepresenting the results or existence of any survey, test, or research. Gerber wouldn't be barred from making truthful, non-misleading statements about survey results.
NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $11,000.
(Gerber Products Company, FTC File No. 962 3175, March 12, 1997; materials relating to this FTC matter are available on the Internet at FTC's World Wide Web site at: http://www.ftc.gov.)
FTC: CASE-BY-CASE APPROACH IN DIET PROGRAM AREA BENEFITS CONSUMERS
FTC's "case-by-case approach to challenging deceptive practices and weight-loss claims in the diet industry has provided substantial improvements in truthful advertising and continues to provide significant benefits to consumers." So said FTC in a letter to the Center for Science in the Public Interest (CSPI). FTC was responding to a petition from CSPI and several other groups asking the Commission to require by rule that commercial weight-loss centers make certain pre-sale disclosures relating to program costs, duration, efficacy and safety.
While FTC agreed with petitioners about the importance of accurate weight-loss information for consumers, FTC told CSPI that the Commission's staff will consider holding a public conference "to explore ways to increase pertinent information." Nevertheless, the agency denied the groups' request to conduct the rulemaking. FTC noted that the possible added benefits of conducting a rulemaking wouldn't outweigh the costs, given the improvements in truthful advertising achieved by case-by-case enforcement and the prospect of further exploring the petitioners ' issues in a public conference.
FTC's letter denying the petition said that it--
"agrees that it is vitally important that diet programs make truthful claims to consumers about weight loss, weight maintenance, safety and other matters. ... However, the Petition does not offer sufficient empirical or other evidence for this proposition to warrant commencing a costly rulemaking proceeding."
(Denial of Petition for Rulemaking, March 6, 1997; materials relating to this FTC matter are available on the Internet at FTC's World Wide Web site at: http://www.ftc.gov.)
COMPANY PRESIDENT MUST SELL HIS HOME TO SETTLE FTC CHARGES
Best Marketing, Inc. agreed to settle FTC charges brought in July 1996 as part of "Project Jackpot," a major federal/state enforcement effort targeting firms that offered purportedly valuable prizes to consumers to induce them to purchase products. FTC alleged that the company and its president, Edward Hexter, also known as David D. Best, misrepresented the value of prizes they awarded to small business owners who bought advertising specialty products. The settlement bars the company and Hexter from misrepresenting the nature or value of any prize awarded in a prize promotion, and bars defendants from failing to disclose that no purchase or payment is necessary to win a prize. Also, the settlement requires Hexter to--
- Post a $500,000 bond before engaging in or assisting others engaged in telemarketing activities, and
Transfer the majority of his corporate and personal assets--totaling some $75,000--to FTC as a disgorgement remedy.
- Sell his home and transfer a portion of the net proceeds of the sale to FTC.
(The funds collected by FTC will be deposited in the U.S. Treasury.)
"Project Jackpot," coordinated by FTC, resulted in 56 enforcement actions against 79 defendants in 17 states. FTC filed eight actions, the State Attorneys General filed 43 actions, and the U.S. Postal Service filed five actions.
The settlement was filed in the U.S. District Court for the Southern District of Florida, Fort Lauderdale Division, on February 26, 1997. The settlement, which is subject to the court's approval, was signed by the judge on February 28, 1997.
NOTE: This stipulated final judgment and order for permanent injunction is for settlement purposes only and does not constitute an admission by the defendants of a law violation. The judgment has the force of law when signed by the judge.
(Best Marketing, Inc., Civil Action No. 96-6781-CV- ZLOCH, FTC Matter No. X96 0077, March 6, 1997; materials relating to this FTC matter are available on the Internet at FTC's World Wide Web site at: http://www.ftc.gov.)
FTC LAW JUDGE UPHOLDS CHARGES AGAINST ANTILOCK BRAKE MAKER
An FTC Administrative Law Judge has found that the "ABS/Trax" add-on braking system marketed by Automotive Breakthrough Sciences, Inc. and ABS Tech Sciences, Inc., and purported to function just like factory-installed antilock brakes (ABS), does not, in fact, sense the rate of rotation of the car's wheels or the degree of wheel slip to correct such slippage. Accordingly, Judge Lewis F. Parker barred respondents from using the initials or the term ABS in their product's name and from representing that the product is an ABS system or that it prevents wheel lock-up, skidding or loss of steering control in emergency situations. The Judge also ordered respondents to take steps to notify all distributors and purchasers that FTC has found that the respondents' claims to the contrary are false.
FTC alleged in its 1995 complaint that Automotive Breakthrough made false and unsubstantiated advertising claims that--
- the ABS/Trax system is an ABS system that protects against wheel lock-up, skidding and loss of steering control in emergency stopping situations;
- installation of the brake system will qualify vehicle owners for an automobile insurance discount; and
- the system complies with the ABS standards of the National Highway Traffic Safety Administration (NHTSA) and the Society for Automotive Engineers.
According to Judge Parker's decision, the ABS/Trax device "is a simple hydraulic accumulator, meaning that during heavy brake pedal application, the resilient membrane can expand to accept some brake fluid. When the pedal is released, the brake fluid is returned to the brake lines." He added:
"Accumulators are not themselves ABS, because accumulators alone do not have the capacity to measure wheel speeds, make error determinations, and issue control signals to adjust the brake torques and braking response to actively and automatically control the degree of rotation of wheel slip of one or more of the wheels during the braking maneuver."
In addition, according to the decision, NHTSA tests on the ABS/Trax device demonstrated that it does not prevent lock-up in situations where a vehicle without antilock brakes would experience lock-up, resulting in a loss of control. In fact, according to Judge Parker, "the test vehicle performed no better with the devices turned on than it did when they were turned off . . . ." Other independent tests showed similar results; those submitted by the respondents that showed differing results were conducted using unreliable methods, the Judge said.
Accordingly, Judge Parker found the defendants' claims were false or unsubstantiated or both. His order specifically bars defendants from using the initials or term ABS in conjunction with, or as part of the name of, the add-on braking system at issue or any substantially similar product. Also, the order bars all three defendants from claiming that this or any substantially similar product:
- is an antilock braking system;
- prevents or substantially reduces wheel lock-up, skidding, or loss of steering control in emergency stopping situations;
- will qualify a vehicle for an automobile insurance discount in a significant proportion of cases;
- complies with a specified Society of Automotive Engineers performance standard or the NHTSA standard for antilock braking systems;
- has been proven in tests to reduce stopping distances by at least 30 percent when the vehicles's brakes are applied at a speed of 60 miles per hour; or
- provides antilock braking system benefits that are at least equivalent to those provided by factory-installed ABS systems.
The order also requires respondents to have substantiation for future claims that any braking system they offer will cause a vehicle to stop in a shorter distance in emergency stopping situations or make a vehicle safer to operate, than a vehicle not equipped with the system; as well as for claims about the absolute or comparative attributes, efficacy, performance, safety or benefits of such a system.
NOTE: Judge Parker's order is subject to review by the full Commission either on the Commission's own motion or appeal by the respondents. If not appealed within 30 days, it becomes the Commission's decision and order and will be effective 60 days after it is served on the respondents.
(Automotive Breakthrough Sciences, Inc., et al., FTC Dkt. No. 9275, March 11, 1997; materials relating to this FTC matter are available on the Internet at FTC's World Wide Web site at: http://www.ftc.gov.)
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March 1997 Advertising Law News...
From: Advertising Compliance Service.
NOTE: Here is where you can find advertising law information based on news briefs that appeared in past issues of the Reference Service, Advertising Compliance Service; it examined an advertising law-related action during the month of March 1997.
