ROSCA and GLBA acts provide potential paths to monetary relief
By: Donnelly L. McDowell (with content from John E. Villafranco)
With the FTC’s fight on the Hill for new 13(b) authority ongoing, two recent enforcement actions signal that the Commission plans to use its civil penalty authority in novel ways with significant implications for the direct selling industry.
In the wake of the Supreme Court’s unanimous decision in favor of AMG Capital Management—which stated that the FTC lacks authority to obtain monetary redress under Section 13(b) of the FTC Act—then Acting Chair Rebecca Slaughter vowed to lobby Congress in response.
Her goal was to “restore and strengthen the powers of the agency” and consider new ways to obtain money from companies through enforcement. Two months after the AMG decision, the
FTC continues to make good on those promises.
Already, two recent enforcement actions signal that the Commission plans to use its civil penalty authority in novel ways with significant implications for the direct selling industry.
Civil Penalties for Subscriptions and Negative Option Marketing
In a complaint against MoviePass, the FTC alleged that the company violated the Restore Online Shoppers’ Confidence Act (ROSCA) by deceptively advertising its “one movie per day” monthly subscription service. The complaint alleges that MoviePass used tactics to prevent subscribers from using the service as advertised, thus making the “one movie per day”
Beyond the facts of the case, the action has significant implications for any company that offers subscription plans or free trials. ROSCA applies to “negative option features,” defined as any agreement to sell or provide goods or services under which the customer’s silence or failure to take an affirmative action is interpreted by the seller as acceptance of the offer.
The statute requires sellers to clearly and conspicuously disclose all material terms of the transaction before obtaining the consumer’s billing information, obtain express informed consent before charging for the service, and provide simple mechanisms to stop recurring charges.
Before the MoviePass action, the FTC had used ROSCA to bring enforcement against sellers of subscription programs or free trial offers that failed to disclose the terms of the subscription or
free trial, such as when or how much the consumer would be billed.
The action against MoviePass is notable because, for the first time, the FTC alleges a violation of ROSCA when the “undisclosed material terms do not relate specifically to the negative option feature but, instead, to the underlying good or service marketed through the feature,” as Commissioner Christine Wilson put it in her concurring opinion.
Commissioner Wilson acknowledged that in the wake of the AMG decision, “[t]he temptation to test the limits of our remaining sources of authority is likely to be strong.”
Ultimately, Commissioner Wilson joined the two Democratic Commissioners supporting the settlement because she was convinced that ROSCA prohibited the conduct in question and because the settlement did not require the company to pay civil penalties.
Her Republican counterpart, Commissioner Noah Phillips, was not convinced. In his dissenting opinion, Commissioner Phillips expressed concern about the “announcement of sweeping new liability” under ROSCA and a failure to define standards for “material terms” that could put companies at risk for extensive civil penalties without fair notice.
Civil Penalties under the Gramm-Leach-Bliley Act
One week after the MoviePass action, the FTC initiated another enforcement action also based on a novel theory of its civil penalty authority by filing an amended complaint against RCG Advances, a merchant cash advance provider, alleging that the company violated the Gramm-Leach-Bliley Act (GLBA) and seeking civil penalties.
The FTC first sued RCG in June 2020, alleging that the company deceived small businesses by misrepresenting terms of cash advances and using unfair collection practices to compel them to pay.
With AMG foreclosing the capacity to obtain monetary redress as previously sought, the FTC filed an amended complaint alleging violations of GLBA for use of fraudulent statements in an attempt to obtain consumer information.
GLBA is generally intended to protect consumer financial privacy by limiting when financial institutions can disclose consumers’ nonpublic personal information.
In the amended complaint, the FTC cites a seldom cited provision that prohibits any person from using false statements to obtain customer information.
While GLBA only applies to customer information of a “financial institution,” that term is defined broadly to apply to companies that engage in any financial activity and thus covers many entities that would not traditionally be considered a financial institution.
In seeking civil penalties under GLBA, the FTC advanced a novel theory that it has the authority to do so under GLBA. The agency states that it can enforce penalties “in the same manner and with the same power and authority as the [FTC] has under the Fair Debt Collection Practices Act [FDCPA],” which was amended in 2010 to provide that violations may be enforced “in the same manner as if the violation had been a violation of a Federal Trade Commission trade regulation rule.”
Notably, the Government Accountability Office (GAO) as recently as February 2019 issued a report noting that the “FTC does not have civil penalty authority for violations of requirements under the Gramm-Leach-Bliley Act (GLBA).”
While the limits of this theory are likely to be tested in litigation, for now, the FTC has signaled that it may try to pigeonhole broader deception violations under GLBA to the extent they even arguably relate to consumer information related to “financial activities.”
More to Come under New FTC Chair Lina Khan
The actions under ROSCA and GLBA send a clear signal that the FTC will continue to push the envelope to expand its civil penalty authority by testing new legal theories in enforcement.
We can expect the FTC to pursue this enforcement strategy concurrently while also continuing to seek new legislation from Congress, providing authority to obtain monetary redress under Section 13(b). Former Acting Chair Slaughter and Commissioner Chopra have both supported these initiatives.
While Commissioner Chopra is expected to be confirmed as CFPB Director soon and thus depart the Commission, President Biden’s appointment of Lina Khan as FTC Chair means that Chopra can pass the torch to Khan as standard bearer for aggressive enforcement.
At age 32, Chair Khan is mostly known for advocating for increased regulation for big tech, but is expected to similarly support a hardline approach to enforcement overall.
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