The US operators of Lumosity, a program that describes itself as offering ‘brain training’, have agreed to settle charges laid by the United States Federal Trade Commission (FTC), which alleged that they deceived customers with unfounded claims that Lumosity games can help users perform better at work and in school, and reduce or delay cognitive impairment associated with age and other serious health conditions. Too good to be true?

The FTC’s Case

The defendants in the FTC’s case were Lumos Labs Inc, Kunal Sarkar (its CEO) and Michael Scanlon (its co-founder and, director and, until August 2013, its Chief Scientific Officer), (collectively Lumosity). Essentially, the FTC alleged that Lumosity:

  • made false or unsubstantiated representations about ‘real-world’ benefits associated with use of the Lumosity program;
  • made false or unsubstantiated representations that using the Lumosity program delays age-related cognitive decline;
  • made false or unsubstantiated representations that using the Lumosity program reduces cognitive impairment associated with health conditions including Turner syndrome, post-traumatic stress disorder, attention deficit hyperactivity disorder, traumatic brain injury, stroke and side effects of chemotherapy;
  • made false representations that scientific studies proved particular ‘real-world’ benefits associated with use of the Lumosity program; and
  • engaged in a deceptive act or practice, in or affecting commerce, by publishing customer testimonials without disclosing that they solicited the testimonials as part of a contest involving prizes.

This conduct was alleged to be in breach of the United States Federal Trade Commission Act (FTC Act), which prohibits conduct including unfair or deceptive acts or practices in, or affecting, commerce. The FTC Act also prohibits the dissemination of false advertisements for the purpose of inducing purchase of products including ‘devices’, and ‘services’ (the FTC alleged that Lumosity’s offering was both a ‘device’ and a ‘service’).

More information can be found in the FTC’s media releasecomplaint and the ‘stipulated final judgment and order for permanent injunction and other equitable relief’.

Lumos Labs has agreed to pay US$2 million to the FTC (which agreed to the ‘suspension’ of the full proposed judgment of US$50 million on the basis of its financial condition). Lumosity has also consented to injunctive orders that prohibit it from making a range of misrepresentations in the future.  The Court has now made the orders sought by the parties.

As the FTC Act regime bears some similarities to the Australian prohibition on misleading or deceptive conduct (section 18 of the Australian Consumer Law (ACL)) and false or misleading representations (section 29 of the ACL), it is worth asking…

Is Australia next?

Lumosity’s settlement with the FTC raises a question as to whether the ACCC will now investigate Lumosity for misleading/deceptive conduct and false/misleading representations under the ACL. It is not clear whether Lumosity made similar representations in Australia but given the publicity the matter has received, we would expect the ACCC to be considering the matter.

Deterrence vs addressing third party harm

The settlement between Lumosity and the FTC provides for the US$2 million payment to be used in a consumer redress (i.e. compensation) scheme which will be administered and overseen by the FTC. The FTC’s original complaint stated that the case was brought under s 13(b) of the FTC Act, which allows the FTC to seek a variety of orders, including orders addressing consumer harm. The FTC sought ‘such relief as the Court finds necessary to redress injury to consumers resulting from Defendants’ violations of the FTC Act, including, but not limited to […]restitution, the refund of monies paid, and the disgorgement of ill-gotten monies’.

While US$2 million remains a substantial sum, if the US$50 million proposed judgment was the amount the FTC considered necessary to redress consumer injury, the US$2 million that will actually be paid will not go far toward doing so. We infer from this that the FTC may have taken into consideration other issues in effecting a settlement at that amount. Among those considerations may have been the deterrent effect of a settlement of this size, in circumstances wherecivil penalties for unfair and deceptive practices under the FTC Act are very low ($10,000 per violation) and this may be a factor that would draw a regulator towards harm-based remedies and settlements which are not subject to any inherent limit.

The Australian position

In Australia, the usual practice is for the Court to impose a penalty (with the primary purpose of deterrence), with private parties needing to either seek redress themselves (alone or as part of a class-action) or rely on any redress orders sought by the ACCC. While the ACCC can seek those orders under s 239 of the Australian Consumer Law, historically it has done so sparingly (eg against Reebok in 2015, which required Reebok to $35 to each customer with proof of purchase). We are not aware of any case in which the ACCC has sought redress orders that it needs to oversee and/or administer itself.

It is worth noting that the ACCC also has power under s 237 of the Australian Consumer Law to commence proceedings on behalf of persons who have suffered, or are likely to suffer, loss or damage from contraventions, which has been infrequently used.

The payment (voluntary or otherwise) of redress for contravening conduct is a relevant factor in assessing the appropriate penalty to be imposed by the Court in Australia.

Coles – third-party redress through Court-enforceable undertaking

A notable case in which third party redress resulted from ACCC action was the Coles case. In 2014, the ACCC resolved its unconscionable conduct proceedings against Coles with an agreement to pay $10 million in pecuniary penalties, and with Coles entering into a Court-enforceable undertaking to establish a formal process, overseen by an independent arbiter, to provide options for redress for over 200 suppliers affected by its conduct. That process resulted in independent arbiter Jeff Kennett AC ordering Coles to refund more than $12 million to its suppliers.

The Coles matter shows the potential for redress schemes to increase the total amounts paid by companies who have contravened the Australian Consumer Law (in the Coles case, the redress amounts significantly exceeded the penalties) Nonetheless, in that case, which involved ‘serious, deliberate and repeated’ misconduct by one of Australia’s largest corporations, the combined total of penalties/redress was about $22 million – significantly less than the US$50 million in the Lumosity case, which would appear on some levels to be less serious. While the US economy is significantly larger than the Australian economy, such comparisons are fraught with difficulties, given the very different frameworks and laws involved in each case.

Conclusions

The US approach to unfair or deceptive acts or practices in, or affecting, commerce, focuses heavily on addressing consumer detriment. While there are a number of ways under Australian law through which the ACCC can obtain consumer (or non-party based remedies, some might argue that they are not being used to the fullest extent possible.

In Australia, we predict that redress orders/schemes (whether voluntary, Court-ordered or pursuant to Court-enforceable undertakings) will play a greater role in consumer law enforcement in the coming years.