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July 2024
Competition
The FTC voted to block Tempur Sealy International, Inc.’s proposed $4 billion acquisition of Mattress Firm Group Inc. The Commission contends Tempur Sealy ‒ the world’s largest mattress supplier and manufacturer ‒ will have the ability and incentive to suppress competition and raise prices for mattresses for millions of consumers once it acquires Mattress Firm, a large mattress retailer. The proposed vertical combination of Tempur Sealy’s manufacturing and supply operations with Mattress Firm’s vast retail footprint would give the combined company enormous power at multiple points of the mattress supply chain and, in particular, allow it to deny mattress rivals access to Mattress Firm’s retail network.
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Novant Health, Inc. terminated its proposed acquisition of two hospitals from Community Health Systems following an injunction pending appeal granted by a federal appellate court. According to a statement from the FTC’s Henry Liu following the abandonment, “Hospital consolidation diminishes quality of care and increases costs for critical services. Novant’s deal with Community Health Systems would have followed this same trend to the detriment of North Carolinians. With this deal off the table, Novant and Community Health Systems will continue to compete against one another, delivering better outcomes for patients in both quality of care and price.”
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FTC Chair Lina M. Khan, alongside Jonathan Kanter, Assistant Attorney General with the U.S. Department of Justice; Sarah Cardell, Chief Executive Officer of the U.K. Competition and Markets Authority; and Margrethe Vestager, Executive Vice-President and Competition Commissioner for the European Commission, issued a statement affirming a commitment to protecting competition across the artificial intelligence (AI) ecosystem to ensure effective competition that provides fair and honest treatment for both consumers and businesses.
The joint statement notes that while AI has the potential to become one of the most significant technological developments of recent decades, it also raises competition risks that may prevent the full benefits of AI from being realized. The enforcers pledged in the joint statement to remain vigilant for potential competition issues and expressed their determination to use available powers to safeguard against tactics that would undermine fair competition or lead to unfair or deceptive practices in the AI ecosystem. Competition issues in AI will be fact-specific but several common principles ‒ fair dealing, interoperability, and choice ‒ will generally help enable competition and foster innovation. While potential harms may be felt across borders, the joint statement makes it clear that U.S. decision-making will always remain independent and sovereign.
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Consumer Protection and Privacy
The FTC and two international consumer protection networks announced the results of a review of selected websites and apps that showed a large percentage of the websites and mobile apps examined may use dark patterns, digital design techniques that may manipulate consumers into buying products or services or giving up their privacy. The International Consumer Protection and Enforcement Network’s (ICPEN) annual review examined the use of possible dark patterns by 642 websites and mobile apps that offered subscription services from companies across the globe and in multiple languages. Officials from 27 authorities in 26 countries participated. Nearly 76% of the sites and apps examined as part of the review employed at least one possible dark pattern, and nearly 67% used multiple possible dark patterns. ICPEN coordinated its review with the Global Privacy Enforcement Network (GPEN), a network of more than 80 privacy enforcement authorities. GPEN’s review ‒ in which the FTC also participated ‒ focused on websites and apps using design patterns that may encourage individuals to provide more personal information than they intended. The 26 privacy authorities participating in the GPEN review of sites operating in various countries found that the majority of websites and apps examined used at least one potential dark pattern.
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The FTC and the Los Angeles District Attorney’s Office are taking action against NGL Labs, LLC and two of its co-founders for a host of law violations related to their anonymous messaging app (named for the text shorthand for “Not Gonna Lie”), including that the app was unfairly marketed to kids and teens, sent fake messages to drive up usage, tricked users into signing up for its paid service, and did not obtain consent for recurring charges. The defendants will pay $5 million to settle the lawsuit and will be banned from offering their “NGL: ask me anything” app to anyone under the age of 18. In their complaint, the FTC and Los Angeles DA’s Office allege that NGL and its co-founders not only actively marketed their service to children and teens, but that they also falsely claimed that its AI content moderation program filtered out cyberbullying and other harmful messages. Read the Bureau of Consumer Protection’s blog post here.
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The FTC filed a complaint charging two related groups of defendants with defrauding consumers nationwide by enrolling them, without their knowledge, into continuity plans where they are shipped and charged repeatedly for personal care products that they did not agree to purchase. The defendants allegedly deceived consumers with ads for “free” CBD and Keto-related personal care products, billing many for products they did not consent to purchase, signing many up for unwanted continuity plans, and debiting money from their bank accounts without prior authorization.
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Online career-training company Career Step, LLC has been ordered to pay $43.5 million in debt cancellation and cash to resolve charges brought by the FTC. The agency alleged the company lured consumers, specifically servicemembers and their families, with deceptive ads that falsely touted inflated employment outcomes, job placement, and partnerships with prominent companies. Career Step will pay $27.8 million in debt cancellation and $15.7 million in cash that will be used to provide redress to consumers who were harmed by its deceptive advertising. According to the FTC’s complaint, Career Step lured servicemembers with deceptive advertising on social media and on its website, where it markets its programs, using sales representatives and AI technology to persuade consumers to enroll. The company also marketed its services through military-focused publications, such as Military.com, and through events sponsored by the military, including job fairs, according to the FTC’s complaint.
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FTC Acts To Stop Two Student Loan Debt Relief Schemes
The FTC has stopped two student loan debt relief schemes in separate cases. First, in its initial case under the Impersonation Rule, the Commission stopped a scheme that bilked more than $20.3 million from consumers seeking debt relief, with the defendants pretending to be affiliated with the Department of Education. A federal court temporarily halted the scheme and froze its assets at the request of the FTC. According to the FTC complaint, the companies involved and four individual defendants preyed on consumers burdened with student loan debt and tricked them into paying hundreds to thousands of dollars in illegal junk fees. The FTC charged that defendants also falsely claimed that they would take over consumers’ student loans to get them loan forgiveness that did not exist.
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Separately, the FTC has stopped the operators of a scheme that it says tricked financially strapped consumers seeking student loan relief into paying hundreds of dollars in junk fees. The operators often targeted Spanish-speaking consumers in Puerto Rico, pretended to be affiliated with the Department of Education and its loan servicers, and made false promises of low, permanently fixed monthly payments and loan forgiveness. A federal court temporarily halted the scheme and froze its assets at the request of the FTC, which seeks to end the unlawful practices and secure redress for the thousands of consumers who have been harmed. U.S.- and Columbia-based corporate defendants and their owners and operators allegedly guaranteed permanent low, fixed monthly payments ‒ as low as $9 per month ‒ followed by generous lump-sum loan forgiveness of the remaining balance. In exchange for enrollment, the operators have charged consumers illegal advance fees of several hundred dollars followed by monthly fees of as much as $29.
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The FTC has taken a suite of actions to address growing concern about unfair and deceptive practices by franchisors ‒ to ensure that the franchise business model remains a ladder of opportunity to owning a business for honest small business owners. Among the actions announced are a policy statement that warns that franchisors’ use of contract provisions, including non-disparagement clauses that prohibit franchisees from communicating with the government, violate the law. The statement emphasizes that franchisee reports and voluntary interviews are a critical part of FTC investigations and franchisees’ reluctance or inability to file reports and discuss their experiences may hamper the agency’s work to protect franchisees. Threats of retaliation against a franchisee for reporting potential law violations to the government are unlawful. FTC staff also released new guidance explaining that franchisors cannot lawfully impose and collect fees from franchisees that were not previously disclosed. In response to the FTC’s request for information, franchisees reported ever increasing payment processing and technology fees that make it difficult to make a living, while others identified undisclosed fees for training, marketing, property improvement, or any other product or service required by the franchisor. The staff guidance makes clear that it is illegal for franchisors to impose undisclosed junk fees ‒ fees that raise costs and which may make the difference between a profitable franchise and an unsustainable one.
In Other News
The FTC testified before the House Energy and Commerce Subcommittee on Innovation, Data, and Commerce on the agency’s fiscal year 2025 budget and work to promote competition and protect consumers. Chair Lina M. Khan described agency accomplishments in furtherance of the Commission’s consumer protection, privacy, and competition missions. Chair Khan noted that every dollar of the FTC’s costs returned an estimated $14 in benefits to Americans through the Commission’s law enforcement efforts. For the testimony of Chair Khan and statements of the other FTC Commissioners, click the headline above.
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The FTC issued orders to eight companies offering surveillance pricing products and services that incorporate data about consumers’ characteristics and behavior. The orders seek information about the potential impact these practices have on privacy, competition, and consumer protection. The orders are aimed at helping the FTC better understand the opaque market for products by third-party intermediaries that claim to use advanced algorithms, artificial intelligence, and other technologies, along with personal information about consumers ‒ such as their location, demographics, credit history, and browsing or shopping history ‒ to categorize individuals and set a targeted price for a product or service. The study is aimed at helping the FTC better understand how surveillance pricing is affecting consumers, especially when the pricing is based on surveillance of an individual’s personal characteristics and behavior.
The FTC is using its Rule 6(b) authority, which authorizes the Commission to conduct wide-ranging studies that do not have a specific law enforcement purpose, to obtain information from eight firms that advertise their use of AI and other technologies along with historical and real-time customer information to target prices for individual consumers. The orders were sent to: Mastercard, Revionics, Bloomreach, JPMorgan Chase, Task Software, PROS, Accenture, and McKinsey & Co.
For the second time in as many years, the FTC has sent cease-and-desist letters – jointly with the U.S. Food and Drug Administration (FDA) – to several companies currently marketing edibles containing Delta-8 tetrahydrocannabinol (THC) in packaging deceptively similar to many foods children eat such as Froot Loops and Chips Ahoy! chocolate chip cookies. The agencies sent letters to the following companies: Hippy Mood; Life Leaf Medical CBD Center; Shamrockshrooms.com (online only); Mary Janes Bakery Co. LLC and Miami Rave LLC; and Earthly Hemps. According to the letters, children can suffer serious health consequences from eating products containing cannabis, and they are at special risk of consuming edible THC products that appear similar to traditional foods because children are less likely to focus on or be able to understand text on the product labels.
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The FTC published an interim report on the prescription drug middleman industry that underscores the impact pharmacy benefit managers (PBMs) have on the accessibility and affordability of prescription drugs. The interim staff report, which is part of an ongoing inquiry launched in 2022 by the FTC, details how increasing vertical integration and concentration has enabled the six largest PBMs to manage nearly 95 percent of all prescriptions filled in the United States, giving PBMs significant control over what drugs are available and at what price. The report describes how this vertically integrated and concentrated market structure has allowed PBMs to profit at the expense of patients by inflating drug costs and squeezing independent pharmacists. In particular, the report finds that vertically-integrated PBMs appear to have the ability and incentive to prefer their own affiliated businesses, creating conflicts of interest that can disadvantage unaffiliated pharmacies and increase prescription drug costs. It also found that PBMs and brand drug manufacturers sometimes negotiate prescription drug rebates expressly conditioned on limiting access to potentially lower-cost generic and biosimilar competitors.
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The FTC and DOJ Antitrust Division extended the deadline by 60 days for the public to comment on a joint Request for Information that seeks to identify serial acquisitions and roll-up strategies throughout the economy that have led to consolidation that has harmed competition. The new deadline to submit comments is September 20. The RFI seeks information on serial acquisitions and roll-up strategies in which corporate actors, including private equity owned businesses, become larger ‒ and potentially dominant ‒ through acquisitions of several smaller firms in the same or related business sectors or industries.
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