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08/9/2017

FTC Destroying Family-Run Tech Support Business Without Evidence of Wrongdoing or Due Process

Washington, D.C. – Cause of Action Institute (“CoA Institute”) is stepping in to defend a small family-run tech support company, Vylah Tec, LLC (“V-Tec”), after the Federal Trade Commission (“FTC”) targeted the company and conducted an hours-long raid of the company’s headquarters on suspicion of “deceptive” sales practices. The raid was initiated as part of a politically-hyped campaign known as Operation Tech Trap headed by the FTC in conjunction with the Florida Attorney General’s office.

V-Tec is a small start-up owned by Robert Cupo that operates out of a single office in Fort Myers, Florida, and provides tech support to customers who buy electronic devices from the Home Shopping Network and other shopping channels. Individuals who purchase electronic devices such as laptops, printers and tablets are provided pre-paid tech support with their purchase. On top of its tech support operation, V-Tec also generates revenue from selling third-party antivirus and other data security software to customers who want additional security on their devices.

The FTC’s sting-like raid, assisted by local police, included hands-in-the air orders, the temporary confiscation of employee cell phones, and police-escorted bathroom breaks. One mother was told she could not leave to pick up her kids from daycare and police officers would use her phone to call and tell them she had been detained for questioning. Despite the hostile raid, FTC investigators were apparently unable to uncover any concrete evidence of wrongdoing by the company.

Nevertheless, a Florida District Court judge was sufficiently convinced by FTC lawyers to grant the government a preliminary injunctive order against V-Tec. This punitive process includes turning the company’s operation over to a third-party receiver and freezing the assets of the Cupo family members. CoA Institute has filed a motion to stay the District Court’s order.

CoA Institute Senior Counsel Cynthia Crawford: “When the government puts a company in its crosshairs, the process becomes the penalty. In this case, the court’s decision to allow an injunctive order is akin to using a sledgehammer to swat a fly. Freezing assets and turning the business over to a receiver is steadily draining V-Tec’s finances and destroying its reputation. Meanwhile the court’s action is harming the thousands of customers who are not receiving the support they paid for. We urge the court to reevaluate the flawed evidence FTC presented and stay this destructive order so that the Cupo family can have their day in court before the company is destroyed.”

In court, the FTC argued that V-Tec’s sales pitches for the software are deceptive, citing two examples of recorded calls. However, the FTC clearly mischaracterized its evidence and failed to support accusations fundamental to FTC’s case. Much of the evidence presented is either incomplete or incorrect. For example, the government in open court, played a portion of a tech support call that they wrongly alleged as deceptive “upselling.” What the government omitted, however, was that the technical support representative stayed on the phone after the customer declined to purchase additional software and addressed the caller’s problem.

A second transcript the FTC submitted in court mislabeled the so-called guilty party as a V-Tec employee, when in fact the person trying to harm the consumer did not actually work for V-Tec. A brief investigation of the call and the surrounding context would have made that clear. A V-Tec support representative actually protected the consumer in that instance, disconnecting the other individual from the call and disabling his remote access to the caller’s computer.

Instead of protecting consumers, the court’s injunction order is causing the most significant consumer harm. Since May 3, 2017, V-Tec has failed to answer over 100,000 customer calls. Many of these are likely customers with lifetime service contracts who, instead of receiving the product they paid for, are stuck in a never-ending hold loop. The order also froze assets of individuals with no actual stake in V-Tec. These individuals cannot access their savings and are struggling to pay for basic life expenses, or in one case, access funds of a wholly unrelated business.

The full motion for stay is available here.

For information regarding this press release, please contact Zachary Kurz, Director of Communications: zachary.kurz@causeofaction.org

 

 

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07/13/2017

CoAI to President Trump: Appoint Commissioners to FTC

Letter urges swift action to break deadlock, free U.S. businesses from unwarranted, abusive enforcement actions

Washington, D.C. – Cause of Action Institute (“CoA Institute”) sent a letter to President Trump, imploring him to move quickly to appoint one or more commissioners to fill current vacancies at the Federal Trade Commission (“FTC”). The letter suggests that just one additional commissioner could break deadlock to halt the agency’s pattern and practice of regulatory overreach and rein in recent unconstitutional enforcement actions that harm the economy and the rule of law.

The letter states that although the FTC’s acting chair, Maureen Ohlhausen, “has done a commendable job of addressing the excesses and lawlessness that plagued the agency, the acting chair cannot fully right the ship unless and until you appoint one or more commissioners who share her commitment to advancing economic liberty and believe that responsible businesses should have the freedom to succeed, unfettered by rogue regulators chasing chimerical harms.”

The letter states:

“The acting chair’s ability to promote competition and protect the free market and consumers from overregulation and overreach is hamstrung by the current gridlock on the Commission. Although Congress intended for the Commission to be an independent, bipartisan, five-member administrative body, there are currently only two commissioners: Acting Chair Ohlhausen, a Republican, and Commissioner Terrell McSweeney, a Democrat.

“Because a majority of commissioners must vote to approve most Commission actions, and because only one of the two current commissioners shares the administration’s commitment to cutting bureaucratic red tape to grow the economy, the Commission is hopelessly deadlocked on important policy issues affecting the entire private economy, such as the FTC’s controversial efforts to regulate data security, technology, and privacy for all U.S. businesses citing its authority under Section 5 of the FTC Act to prohibit ‘unfair’ or ‘deceptive’ business practices.”

The letter highlights several controversial “midnight” enforcement actions initiated just before the Trump administration began, that were undertaken in the absence of proven consumer harm. For instance, as the acting chair explained in her dissent from one such “midnight” enforcement action:

“[I]n the Commission’s 2-1 decision to sue Qualcomm, I face an extraordinary situation: an enforcement action based on a flawed legal theory (including a standalone Section 5 count) that lacks economic and evidentiary support, that was brought on the eve of a new presidential administration, and that, by its mere issuance, will undermine U.S. intellectual property rights in Asia and worldwide. These extreme circumstances compel me to voice my objections.”

The letter concludes, “[T]he acting chair should not be the lone (and thus powerless) voice of reason and sound economic policy on the Commission. For these reasons, we respectfully ask that you expeditiously appoint one or more Commissioners to the FTC at your earliest convenience to assist the Acting Chair in furtherance of this Administration’s efforts to reduce regulatory burdens and improve Americans’ liberty to create.”

The letter was signed by John J. Vecchione, president and CEO of CoA Institute. The full letter is available here

For information regarding this press release, please contact Zachary Kurz, Director of Communications: zachary.kurz@causeofaction.org

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06/30/2017

LabMD and the FTC–Rough Day for the Government

On January 21, 2017 LabMD v. FTC, a case where we here at Cause of Action Institute weighed in with a friend of the Court brief on behalf of affected medical professionals [see brief here], was argued.  You should listen to it here.

CoA Institute also represented LabMD in the FTC proceedings and in collateral federal court actions seeking to halt the FTC’s administrative prosecution in the U.S. District Court for the Northern District of Georgia and in the U.S. Court of Appeals for the Eleventh Circuit. The arguments made here, and seemingly grasped by the 11th Circuit at oral argument, have been made by CoA Institute for quite some time.  This case was heard before three experienced jurists Gerald B. Tjoflat, Charles R. Wilson and Senior U.S District Court Judge Eduardo C. Robreno. (Interestingly, Judge Robreno is within the Third Circuit but sat on the 11th here).

Suffice to say it was not a good day for the ham-handed actions of the FTC in this case. The Court focused on the fact there appeared to be no harm to anyone from the action sued upon.  “A tree fell and nobody heard it, that’s the case we have here,” said Judge Tjoflat (if my memory for voices is accurate).  A nice summary of some of the more pungent comments from the bench were listened to, are found in Westlaw, and transcribed here:

“Counsel, let me put it this way. What the aroma that comes out of this case is that Tiversa was shaking down private industry with the help of the FTC, with the threat of going to the FTC. If you don’t cooperate, we will go to the FTC. It may well be how they got some of their clients…

“That’s an aroma, with falsifications to the commission. The administrative law judge just shredded Tiversa’s presentation, just totally annihilated it.”

In this case, the FTC with no consumer complaints, and no evidence of injury, and with no prior standards issued by the FTC for data security, put a company many physicians relied upon completely out of business. This is so even though the medical privacy act embodied by HIPAA was not violated.

The FTC relied on false information from Tiversa. “Oh, Come on!” said Judge Tjoflat responding to the assertion the FTC did not rely on that information to prosecute the matter.   Their own ALJ heard the facts (presented by CoAI) and destroyed the case and the Commission just overruled it; an appeal to Power and not Reason.  Judge Wilson specifically asked how LabMD would know it’s procedures would violate any standard.

The 11th Circuit already stayed the FTC Order with an Order of its own that bodes ill for Government.  Now we have this oral argument where the FTC was completely friendless.

Douglas Meal of Ropes & Gray, who argued the matter for LabMD, deserves kudos for a job well done. as does the rest of the Ropes & Gray team.  I will also note that Patrick Massari and Michael Pepson did a splendid job on the amicus brief which argument was also mentioned by the Court.

John J. Vecchione is President and CEO of Cause of Action Institute.

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06/16/2017

Can FTC Ignore the Law to Expand its Power to Regulate Internet Providers?

Cause of Action Institute (“CoA Institute”) has filed an amicus curiae (“friend of the Court”) brief in the U.S. Court of Appeals for the Ninth Circuit in FTC v. AT&T Mobility LLC (“AT&T”) in support of AT&T during the pendency of rehearing en banc of an appeal regarding whether the Federal Trade Commission (“FTC” or “Commission”) has statutory authority to regulate common carriers such as Internet Service Providers (“ISPs”) and telephone companies under Section 5 of the FTC Act.

In September 2016, a unanimous three-judge Panel on the U.S. Court of Appeals for the Ninth Circuit ruled that because the plain language of the FTC Act categorically exempts common carriers like AT&T from FTC regulation under Section 5, the FTC lacks statutory authority to regulate businesses like AT&T. (Instead, such businesses are regulated by a different federal agency, the Federal Communications Commission (“FCC”) under a different federal statute, the Communications Act.)  Consistent with the judicial role and respect for the separation of powers, the Panel explained that “[i]t is not for us to rewrite the statute so that it covers only what we think is necessary to achieve what we think Congress really intended.  That is a job for Congress, not the courts.”

The FTC subsequently filed a petition for rehearing en banc supported by a number of “friend of the Court” briefs arguing that the full Ninth Circuit should vacate the Panel decision and rehear the case because, among other things, the Panel decision was inconsistent with their views regarding sound public policy and left a supposed “regulatory gap” that the FTC should be allowed to “fill.” On May 9, 2017, the Ninth Circuit granted the FTC’s petition.

Concerned about this development, our brief argues that the Court should decide the case the same way the Panel did; that is, calling balls and strikes and deciding the case based on the statute’s plain text rather than a federal agency’s subjective views on what it thinks is enlightened public policy for the entire country. Our brief argues that such an approach respects Congress’s legislative role under Article I of the U.S. Constitution, as well as the separation of powers.  That is because under the U.S. Constitution only the People’s elected representatives in Congress—not a federal agency like the FTC or FCC and not a federal Court—are allowed to rewrite federal law in response to public policy arguments.

As our brief also notes at pages 3-4: “CoA’s interest in this case also stems from its view that, regardless of whether the FTC’s policy goals are sound, the FTC has now “spun out of the known legal universe and … [is] now orbiting alone in some cold, dark corner of a far-off galaxy, where no one can hear the scream ‘separation of powers.’”

These fitting words, describing FTC’s recent forays in Art. III Courts under Section 5, are not hyperbole, but instead reflect a very disturbing reality. FTC’s self-appointed mantle as perverse executive-agency posse comitatus, a poseur arrogant and lawless unto itself, whose overreach and overregulation do not serve the American people or the public interest.

The full brief can be found here.

Patrick Massari is assistant vice president at Cause of Action Institute

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05/17/2017

FTC vs. D-Link Systems: What They’re Saying

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05/11/2017

Court Orders Dismissal of D-Link Corp. from FTC Data Security Case

SAN FRANCISCO – U.S. District Judge James Donato has instructed the Federal Trade Commission (“FTC”) to dismiss Taiwan-based D-Link Corporation (“D-Link Corp.”) from a case brought by the FTC in the U.S. District Court for Northern District of California involving unfounded allegations as to security practices for routers and IP cameras. On April 3, 2017, D-Link Corp. filed a motion to dismiss the case because the Court lacked jurisdiction over the company. FTC’s dismissal of D-Link Corp. renders that motion moot. The case will now proceed with California-based D-Link Systems, Inc. as the sole Defendant.

Cause of Action Institute Assistant Vice President Patrick Massari: “The FTC sued a Taiwanese-based corporation without any factual predicate or consumer victims, real or imagined, exceeding the bounds of its regulatory authority. We are grateful for the Court’s directive and pleased with this resolution of issues raised by D-Link Corp.’s motion to dismiss.  We look forward to continuing to vigorously defend this case on behalf of D-Link Systems, Inc.”

Background:

In early January, the FTC filed a complaint against D-Link Systems Inc. and D-Link Corp. The complaint makes vague and unsubstantiated allegations, without asserting a single data breach of any product sold in the U.S. by either company. Instead, the FTC’s complaint relies on unspecified press reports and mere speculation that consumers were placed “at risk,” but fails to allege, as it must, that consumers suffered or are likely to suffer actual or substantial injury. D-Link Systems continues to stand behind its products and maintains a robust range of procedures to address potential security vulnerabilities.

For information regarding this press release, please contact Zachary Kurz, Director of Communications: zachary.kurz@causeofaction.org

 

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01/31/2017

Cause of Action Institute Files Motion to Dismiss FTC’s Baseless Data Security Charges Against D-Link Systems Inc.

WASHINGTON – Cause of Action Institute (“CoA Institute”) on behalf of D-Link Systems, Inc. today filed in the U.S. District Court for Northern California a Motion to Dismiss the baseless charges brought by the Federal Trade Commission (“FTC”) regarding the company’s security practices for consumer routers and IP cameras.

In an eleventh-hour attempt to expand its own authority to regulate the Internet of Things (“IoT”) before the new administration took office, the FTC in early January filed a complaint against D-Link Systems. The complaint makes vague and unsubstantiated allegations, without asserting a single data breach of any product sold by D-Link Systems in the U.S. Instead, the FTC speculates that consumers were placed “at risk,” to be hacked, but fails to allege, as it must, that consumers suffered or are likely to suffer actual substantial injuries. D-Link Systems stands behind its products and maintains a robust range of procedures to address potential security vulnerabilities.

“This is a case of politicized government overreach without justification or any evidence of consumer injury,” said Patrick Massari, assistant vice president, CoA Institute. “In fact, to her credit, Acting Chairwoman Ohlhausen voted not to bring this case and has spoken out against the agency filing other lawsuits ‘on the eve of a new presidential administration’ that are based on a flawed legal theory and lack economic and evidentiary support.

“This case should be dismissed now. Congress did not delegate to FTC the authority to regulate data security for IoT companies, and therefore FTC’s putative regulation is beyond its legal power. Moreover, the FTC fails in its Complaint to plead the basic elements of proof necessary for a Section 5 ‘unfairness’ violation. The FTC’s action sets a dangerous precedent, whereby the federal government could subject liability to any company that makes an internet-connected product. The FTC’s lawsuit violates D-Link Systems’ due process rights, and will no doubt have a chilling effect on innovation. For these reasons we have urged the Court to dismiss this Complaint in its entirety.”

The FTC has no authority under Section 5(n) of the FTC Act to declare unlawful an act or practice “on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition.” As D-Link Systems Inc.’s Motion to Dismiss points out, the FTC’s Complaint pleads legal conclusions couched as hypothetical, speculative factual allegations.  FTC’s “deception” allegations should also be dismissed for failure to meet the heightened pleading standards set by Federal Rule of Civil Procedure 9(b), which requires such claims to be pled with particularity.

Read the full Motion to Dismiss here Exhibits can be found here

About Cause of Action Institute:  Cause of Action Institute is a 501(c)(3) non-profit working to enhance individual and economic liberty by limiting the power of the administrative state to make decisions that are contrary to freedom and prosperity by advocating for a transparent and accountable government free from abuse.

For information regarding this press release, please contact Zachary Kurz, Director of Communications: zachary.kurz@causeofaction.org

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