Enhancement of FTC Powers Fuels More Aggressive Enforcement Initiatives

By Linda A. Goldstein

Just when you thought the Federal Trade Commission (FTC) couldn’t possibly become more aggressive in its enforcement efforts, several recent initiatives suggest even greater efforts by the FTC to expand its jurisdiction and authority.

In December of 2006, Congress approved the “Undertaking Spam, Spyware, and Fraud Enforcement With Enforcers Across Borders” Act, also known as the U.S. SAFEWEB Act. This Act-which was designed principally to provide the FTC with greater tools to protect U.S. consumer from spam, spyware and other fraudulent activities being generated abroad-has broadened the Commission’s ability to conduct enforcement efforts in coordination with its international counterparts. For example, the Act allows the FTC to share confidential information in consumer protection matters with law enforcement officials abroad and to obtain assistance from foreign law enforcement agencies, while protecting such information from public disclosure. The Act also prevents notifying subjects of investigations who may be likely to destroy evidence or move assets offshore. It also protects certain entities from liability for voluntarily disclosing information to the FTC regarding suspected fraud and deception. All of these provisions are designed to enhance the ability of the FTC to conduct investigations without notice to the targets and to work more closely with international law enforcement agencies in conducting such investigations.

The Act also permits the FTC to work with the Department of Justice to increase resources relating to foreign litigation, such as freezing foreign assets and enforcing U.S. court judgments abroad. Finally, the Act also authorizes the FTC to share information with criminal authorities in order to enhance information sharing with foreign agencies and increase potential criminal investigations of fraudulent conduct.

EXAMINING THE TRENDS
In recent months, we have witnessed two significant trends that may be related at least in part to the increased authority afforded to the FTC under the Act.

First, while the FTC has always been committed to cross-border enforcement where it has reason to believe that fraud is being perpetrated on U.S. citizens from abroad, it has also become more aggressive in monitoring the activities of U.S. companies abroad. Historically, many direct response marketers in the United States have assumed that, even if a product cannot be lawfully marketed in the United States, it can be distributed abroad, and international distribution has been an important
element of most direct marketing campaigns. The FTC may not, however, necessarily agree. In a number of non-public actions, the FTC has taken the position that, where a company has signed a consent order prescribing certain conduct and containing certain injunctive provisions, the terms of that order will apply not only to activities in the United States, but to activities directed abroad-even if the conduct is not prohibited by the laws of the foreign jurisdiction in which the conduct is taking place. This is an important point to keep in mind for any company that has entered into or may in the future enter into a consent order or stipulated judgment with the Commission. Essentially, for any company that is under order with the Commission, the FTC is taking the position that the injunctive provisions of the order will apply to any sales by the company either domestically or internationally, unless the order is expressly limited to domestic sales. And, with the increased enforcement authority afforded to the FTC under the U.S. SAFEWEB Act, the FTC has all of the tools in place necessary to monitor what activities companies located here in the U.S. are conducting abroad.

A second, equally disturbing, trend is the desire of the FTC to increase criminal prosecutions in cases where the FTC believes that the conduct has been particularly egregious or fraudulent. Evidence of this trend is best reflected by the recent announcement concerning the fate of Steven Warshak, founder of Berkeley Premium Nutraceuticals, which markets Enzyte products. Federal criminal prosecutors asserted that customers lost millions of dollars due to deceptive ad claims, improper credit card transactions, and a refusal to cancel orders or accept returns. A federal jury recently found Warshak guilty of conspiracy to commit mail fraud, bank fraud and money laundering. He faces up to 20 years in jail, and his company faces potentially significant financial penalties.

Another case involves stock trading. In March, the Associated Press reported that federal prosecutors indicted Linda Woolf and David Gengler on federal fraud charges, claiming that the pair passed themselves off as experts at trading stocks and persuaded consumers to pay from $3,000 to $40,000 to learn their “Teach Me to Trade” stock picking system. Woolf and Gengler marketed their alleged expertise and success in stock trading on infomercials and in hotel seminars. According to the AP article, the Securities and Exchange Commission has also filed civil fraud charges against the two.

At least one FTC staff attorney has warned that criminal prosecutions in cases involving egregious conduct and fraud are likely to increase in the near future.

What does this all mean for the direct response community? Over the past few years, we have witnessed increasingly aggressive enforcement techniques in the form of broader orders, higher penalties and asset freezes. It now appears that the FTC may be adding the threat of criminal prosecution to its arsenal of enforcement tools. And for those direct marketers who have often thought of the international market as a safe haven to dump product that cannot be sold in the United States, the gates to that safe haven appear to be closing.

Linda A. Goldstein is a partner and chair of the advertising, marketing and media division at Manatt Phelps & Phillips LLP in New York. She can be reached at (212) 790-4544. Charulata Pagar assisted in the preparation of this article. She is a partner at Manatt Phelps & Phillips LLP in its Los Angeles office.