Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—NDIll: Marketer of “Ageless Male” Dietary Supplements Could Have Violated Illinois Consumer Fraud and Deceptive Business Practices Act, (Nov 29, 2012)

By Peter Reap, J.D., LLM

NAC Marketing Company, LLC, seller of “Ageless Male” dietary supplement pills, could have committed unfair practices in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFA) when it automatically debited an individual’s (John Sharkey’s) bank account and processed a renewal shipment of dietary supplements to him after he signed up for a free trial, the federal district court in Chicago has decided (John L. Sharkey v. NAC Marketing Company, LLC, November 28, 2012, Kendall, V.). However, Sharkey failed to adequately allege a proper cause of action for deceptive acts and practices under the ICFA or that NAC violated the Electronic Funds Transfer Act (EFTA).

NAC’s motion to dismiss Sharkey’s claim for violation of the EFTA was granted with prejudice. NAC’s motion to dismiss the claim for violation of the ICFA was denied with respect to Sharkey’s unfair practices claim, and granted with prejudice to amend with respect to the deceptive practices claim.

Background

Through television and radio advertising, NAC offers consumers a free trial offer for its “Ageless Male” dietary supplement pills. For the free trial offer, the customer pays a shipping and handling fee, receives a 10-, 15-, or 30-day supply of the product, and is automatically enrolled in NAC’s “Preferred Free Shipping” program.

Sharkey contacted NAC on or about February 24, 2012, and ordered a free trial of the product. NAC debited Sharkey’s bank account for $6.99, the cost of shipping and handling. Sharkey received the product and a printed receipt summarizing his order, and containing a “Special Message” identifying Sharkey as a “Preferred Shipping Customer.” The message stated that the program offered “the convenience of savings plus automated shipping.” The message further provided, “If you need to adjust your shipping interval, hold an order or cancel your participation in this program please call customer service at 1-800-943-6465.”

On April 23, 2012, approximately two months after Sharkey ordered a free trial of the product, NAC processed a second debit of Sharkey’s bank account, this time for $41.94, and sent a second shipment of pills. Sharkey returned the second shipment of the pills upon receipt.

Sharkey did not affirmatively order the second shipment of pills, nor did he provide written authorization for the second debit to his account. NAC did not send Sharkey advance written notice of the debit, and Sharkey did not anticipate additional shipments without further action on his part. Sharkey alleges that automatic renewal under the “Preferred Shipping Program” was not clearly and conspicuously disclosed when he contacted NAC in response to its advertising.

Electronic Funds Transfer Act

Sharkey alleges NAC violated § 1693e of the EFTA by debiting his account without written authorization and advanced written notice of the amount to be debited. The EFTA provides “a basic framework establishing rights, liabilities, and responsibilities of participants in electronic fund and remittance transfer systems,” the court noted.

The regulation implementing § 1693e of the EFTA, under which Sharkey brought his cause of action, dealt primarily with transfers between consumers and their financial institutions, but included provisions applicable to transfers from a consumer’s account by a third party. The “preauthorized transfers” provision set forth in § 1693e required a designated payee to obtain consumer authorization in writing before transferring funds from the consumer’s account, and seek additional authorization any time the amount varied.

The facts, as alleged by Sharkey and assumed to be true, did not give rise to a plausible entitlement to relief under § 1693e of the EFTA, the court determined. That provision was limited to the rights and obligations of parties utilizing “preauthorized electronic fund transfers.”

To qualify as a preauthorized transfer under § 1693e, the electronic fund transfer must be “authorized in advance to recur at substantially regular intervals.” The EFTA’s implementing regulation, known as “Regulation E,” defined “advanced authorization” of a “preauthorized electronic fund transfer” as “one authorized by the consumer in advance of a transfer that will take place on a recurring basis, at substantially regular intervals, and will require no further action by the consumer to initiate the transfer.”

The transfer at issue here was not authorized in advance, nor was it set to recur at substantially regular intervals, the court explained. Sharkey’s complaint specifically alleged that NAC’s processing of an additional electronic debit transaction in the amount of $41.94 was unauthorized, not preauthorized. Furthermore, Sharkey failed to allege NAC made recurring transfers at substantially regular intervals. Thus, the transaction was outside the purview of § 1693e of the EFTA, according to the court.

Illinois Consumer Fraud and Deceptive Business Practices Act

The ICFA is a regulatory and remedial statute intended to protect consumers, borrowers, and business persons against fraud, unfair methods of competition, and other unfair and deceptive business practices. The Illinois Appellate Court has interpreted the statute to be disjunctive, allowing separate claims for unfair acts or practices and deceptive acts or practices.

Unfair acts or practices. Sharkey’s complaint properly stated a cause of action for unfair practices, the court ruled. In determining whether conduct is “unfair” under the ICFA, Illinois courts looked to the following factors: (1) whether the practice offends public policy; (2) whether it is immoral, unethical, oppressive, or unscrupulous; and (3) whether it causes substantial injury to consumers. A complaint did not need to allege all three to properly state an unfairness claim.

Sharkey’s ICFA unfairness claim was predicated on violations of the EFTA and Telemarketing Sales Rule, 16 C.F.R. Pt. 310 (TSR). The TSR required “clear and conspicuous” disclosure of any “negative option feature.” A “negative option feature” was defined as: “in an offer or agreement to sell or provide any goods or services, a provision under which the customer’s silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer.”

Sharkey’s complaint alleged NAC’s “failure to make clear and conspicuous disclosure and its violation of the EFTA was unfair, in that it was contrary to public policy, as set forth in the EFTA and Telemarketing Sales Rule.” These allegations pointed to a specific practice – failing to make clear and conspicuous disclosures – and identified the statute and regulation that formed the basis for Sharkey’s contention that the alleged practice violated public policy. These pleadings were sufficient to state a cause of action for unfair practices under the ICFA. Also, because Sharkey tied his unfairness claim to both the EFTA and TSR, he could plausibly be entitled to relief under the ICFA even if he was unable to demonstrate a violation of the EFTA.

NAC argued that Sharkey failed to allege an unfair practices claim because he did not plead that the unfair policy presented a “total absence of the oppressiveness and lack of meaningful choice.” However, the requirement to prove some degree of oppressiveness or lack of meaningful choice has been specifically rejected by the Illinois Supreme Court, the court observed.

Deceptive acts and practices. Sharkey failed to state a cause of action for deceptive acts or practices under the ICFA, the court determined. In order to state a deceptive acts or practices claim under the ICFA, Sharkey was required to allege: (1) a deceptive act or practice by NAC; (2) NAC intended Sharkey rely on the deception; (3) the deception occurred in the course of conduct involving trade and commerce; and (4) actual damage to the plaintiff (5) proximately caused by the deception.

Sharkey did not sufficiently plead two requisite elements of an ICFA claim—intent and materiality—according to the court. Sharkey did not allege that NAC’s failure to obtain authorization for additional shipments was essential to the transaction that gave rise to this case. Sharkey’s complaint was also bereft of any suggestion that he would have acted differently, perhaps by cancelling his participation in the Preferred Free Shipping program before receiving the April shipment, had NAC clearly and conspicuously disclosed its negative option feature or sought written authorization from Sharkey before enrolling him in the program. While Sharkey’s return of the second shipment of pills immediately upon receipt suggested that he would not have been interested in the Preferred Free Shipping program had he been aware of it, he was required to allege with sufficient particularity the facts that made NAC’s omission or concealment material.

Sharkey also failed to allege that NAC intended for Sharkey to rely on its deception. Unlike common law fraud claims, which required the plaintiff to establish a defendant’s intent to deceive, the intent required by the ICFA was merely the defendant’s intent that the plaintiff in the action rely on the information the defendant gave to plaintiff. Sharkey’s complaint was wanting of any reference to NAC’s intent with respect to its alleged failure to make clear and conspicuous disclosures of its negative option feature.

NAC’s motion to dismiss that portion of the ICFA claim alleging deceptive acts and practices was granted, but without prejudice and with leave to amend, as the court explained that it could be possible for Sharkey to plead the intent and materiality elements with sufficient particularity.

The case is No. 12 C 4354.

Cathleen M. Combs (Edelman, Combs, Latturner & Goodwin, LLC) for John L. Sharkey. Stephen J. Rosenfeld (Mandell Menkes LLC) for NAC Marketing Company, LLC.

Cases: ConsumerProtection StateUnfairTradePractices IllinoisNews