Deceptive Debt Collectors Agree to $60+ Million Settlement with NY AG and CFBP

A proposed $66 million settlement between the New York Attorney General and the Consumer Financial Protection Bureau (CFBP) on the one hand and the operators of a debt collection scam enterprise on the other will ban the latter from continuing what NY AG Letitia James called a “vast illegal debt collection network.”

In 2016, the NY AG and CFPB charged Douglas MacKinnon and his companies Northern Resolution Group LLC and Enhanced Acquisitions LLC, and Mark Gray of Delray Capital LLC with violations of the federal Fair Debt Collection Practices Act (FDCPA), the Consumer Financial Protection Act, and various New York State laws. The complaint alleged that the defendants purchased millions of dollars in consumer debt and then engineered a vast network of nationwide debt collection offices that inflated these debts to extract additional amounts from consumers.

These tactics included adding a fabricated $200 charge to debts for collection as well as engaging in “overbiffing,” short for “over balance in full,” which assessed thousands of dollars that consumers didn’t owe on top of debts. Using automated dialing systems, defendants called consumers with false threats claiming that their personal property would be seized, wages garnished, and driver licenses revoked if they did not pay these amounts. In addition to employing these aggressive and illegal debt collection tactics, the defendants further threatened consumers with prosecution and misrepresented their identity by claiming to be calling from government agencies and courts.

“There is zero tolerance for individuals who use illegal and unconscionable tactics to cheat consumers out of their hard-earned money,” said Attorney General Letitia James. “Not only did the defendants force consumers to pay more than they owed, but they falsely threatened to have consumers arrested for not complying with these predatory practices. This settlement demonstrates our commitment to protecting consumers.”

Aside from imposing multimillion-dollar fines in restitution and penalties and permanently barring MacKinnon and Gray from operating any debt collection business, the settlement prohibits them from misrepresenting any financial products or services and profiting from any of the personal information they collected in the course of conducting their scheme.

Once approved by the court, the stipulated final judgments and orders settling the matter will have the force of law. 

Key Takeaways 

The remedy obtained in this matter – a significant monetary penalty and a permanent ban against the defendants from operating in the debt collection industry --sends a clear message that fraudulent activities by debt collectors will not be tolerated and will result in stiff and severe penalties.

California Sues Nonpro it Over Allegedly Misleading Solicitations Scheme

California Attorney General Xavier Becerra has filed a lawsuit against nonprofit Move America Forward, alleging that the organization engaged in deceptive marketing practices while soliciting donations.

Move America Forward is a California 501(c)(3) corporation whose stated mission is to support American troops, primarily by sending care packages and letters to service members stationed abroad. The complaint, filed in the Superior Court of California, Sacramento County, alleges the nonprofit made misrepresentations to potential donors about the scope of its influence and affiliations.

According to the complaint, Move America Forward and the individual named defendants—all of them members of the board of the nonprofit—engaged in “unlawful, unfair, fraudulent or deceptive business practices” in their solicitations for the nonprofit and on social media marketing.

The crux of the allegations claim that while Move America Forward is, in fact, a nonprofit corporation operating under Section 501(c)(3) of the IRS Code, its directors and defendants Salvatore Russo and Shawn Callahan used the organization to funnel money to their private for-profit endeavors, charging Move America Forward fees for services and personally pocketing those funds.

The complaint also alleged that the nonprofit shared its resources with political action committees and used charitable donations to support political campaigns, in violation of IRS rules.

As a result of these misrepresentations and the organization’s political activities, donors had a “flawed view of Move America Forward’s charitable reach, and … a false sense of the effectiveness of the administration and Move America Forward’s mission,” the complaint alleges. The action further alleges that the entity claimed content as its own that was plagiarized from other organizations, used pictures and quotes from veterans without permission.

The lawsuit requests removal of all the individual defendants from any management role within Move America Forward and that those same defendants be banned from operating charities or soliciting donations in California. Attorney General Becerra is also pursuing financial restitution for breaches of fiduciary duty and for aiding and abetting breach of fiduciary duty, self-dealing, unjust enrichment and other violations of California law.

In a press release on its website responding to the allegations, Move America Forward maintains that California’s suit is itself politically motivated.

Key Takeaways

Legal stakes involving alleged fraudulent practices can be raised considerably when politicized, and even more so when service members are exploited for profit. As Attorney General Becerra stated in his press release: “Our troops and their commitment to our country should never be used for deceitful gimmicks,” and “preying on donors’ support for military service members and veterans with deceptive marketing not only hurts generous donors, but also hurts military families.” The Attorney General stressed that his office “is committed to holding fraudulent charities accountable.”

What’s in a Name? Meat Industry and Plant-Based Manufacturers Face Off over “Meat” Label

To label or not to label a plant-based burger as meat; that is the question now pitting the meat industry against manufacturers of plant-based meat substitutes. Egged on by meat industry lobbyists, some states have passed laws restricting the use of “meat” and “dairy” solely to animal-based products, claiming other uses of these words are misleading. But some plant-based food manufacturers say these laws are unconstitutional and have begun fighting back in the courts.

Plant-based meat substitutes have been widely available in the marketplace for years, but issues involving their nomenclature has only recently come to the fore as these products have become more sophisticated and popular among consumers. Companies like Impossible Burger and Beyond Meat offer products that increasingly taste, look, and feel like the real thing.

According to a recent report, 10% of the growth in plant-based burgers has occurred in “quick service” food restaurants -- traditionally the domain of animal products. And interestingly, this same report maintains that a staggering 95% of these meatless products are consumed by carnivores. McDonald’s currently sells a plant-based burger, Burger King is planning one, and Del Taco, Dunkin Donuts and even White Castle have all jumped on the plant-based meat bandwagon in some form. The trend is so big that Arby’s even went in the other direction and created a meat “carrot,” perhaps in an attempt at some marketing humor.

As the market for plant-based meats has heated up, the meat industry has supported laws that ban labeling plant-based meat substitutes from using terminology traditionally reserved for animal meat. Advocates of these new food-labeling laws maintain the question is not about stifling competition but about proper labeling and avoiding consumer confusion, claiming the issue is keeping the market fair and protecting consumers from deception.

Rep. David Hillman of Arkansas, a state that passed arguably the strictest law banning plant-based meat labeling (curiously named “An Act to Require Truth in Labeling of Agricultural Products That Are Edible by Humans”), observed “this is a fairness issue and only affects those who intentionally mislead people.”

The stated purpose of the Arkansas law is “to protect consumers from being misled or confused by false or misleading labeling of agricultural products that are edible by humans,” and it outlaws labeling a wide variety of plant-based products with names traditionally used on products from meat to dairy to honey. It even bans the term “cauliflower rice.”

A recently enacted Mississippi law also bans certain types of labels by mandating that: “any food product containing cell-cultured animal tissue or plant-based or insect-based food shall not be labeled meat or as a meat product.”

But plant-based product manufacturers and civil rights organizations like the American Civil Liberties Union (ACLU) are fighting back at what they say is an attempt by the states to stifle competition amounting to an unconstitutional encroachment on free speech. In Arkansas, the ACLU filed suit on behalf of Tofurky, a veteran in the meatless meat market, and other plaintiffs, arguing that the law violates the First and Fourteenth Amendments. Tofurky says there is no confusion, that consumers know the difference between an animal-based burger and a veggie burger.

“Our labels are not trying to trick consumers into buying our vegan foods,” says Daniel Staackmann, founder of the Plant Based Foods Association. Regarding Mississippi’s law, he noted that plant-based producers “aim to clearly communicate what our foods are made from for those actively seeking vegan foods and others considering incorporating them into their diet. [The] law is not about clearing up consumer confusion, it’s about stifling competition and putting plant-based companies at a disadvantage in the marketplace.”

Plant-based food manufacturers and their advocates note these new laws will create more confusion, not less: “Consumers know that ‘peanut butter’ is not made from cows, but the product’s name efficiently informs them that it spreads like butter… If companies are forced to describe their products as ‘savory plant-based protein,’ consumers are likely to be much more confused about exactly what it is they’re putting on their plates. And that’s the real purpose of these label censorship laws: creating confusion to protect favored economic interests,” said ACLU attorney Brian Hauss.

Key Takeaways 

Depending on who you ask, the differing approaches to labeling by animal meat and plant-based meat substitute manufacturers is either about avoiding consumer confusion and mislabeling or an attempt to stifle competition. How statutes restricting the nomenclature of plant-based products that mimic offerings traditionally derived from animals will fare in court could carry significant repercussions as the segment of the population interested in meat alternatives and technology’s ability to provide them continue to advance.

FDA Warns Kratom Herb Sellers to Stop Illegal Marketing 

The Federal Drug Administration (FDA) recently issued letters to marketers and distributors of the controversial herb kratom, warning them to stop marketing and selling products with the ingredient as a treatment for opioid addiction and other medical conditions.

The FDA expressed concern about marketing kratom as a treatment for opioid withdrawal symptoms, pointing to a lack of reliable evidence to support this use and that such claims may actually contribute to the opioid epidemic. The agency also alleges that these companies are marketing the herb as a supplement to increase energy and focus, treat pain, and enhance relaxation.

Letters to Kratom NC and Cali Botanicals warn the companies to stop marketing the herb products for opioid cessation and pain treatment. Specifically, the FDA expressed concern with claims that kratom can “treat pain and addiction,” is “generally used for its [sic] sedation and pain killing effects,” and that it “has essential uses in combating opioid addiction and the harrowing withdrawal that comes with kicking the habit.” The FDA warned that marketing the herb’s ability in this manner violates the federal Food, Drug and Cosmetic Act.

“The marketing and sale of unapproved opioid addiction treatment products is a potentially significant threat to the public health. Therefore, FDA is taking measures to protect consumers from products that, without approval by FDA, claim to diagnose, mitigate, prevent, treat or cure opioid addiction,” said the FDA in its warning letter to Kratom NC.

The FDA further warned the companies they are illegally misbranding kratom by failing to provide adequate directions for use as required, and by selling “new drugs” without prior FDA approval. Kratom is considered a “new drug” under the law because it is not generally recognized as safe or effective for the recommended use.

In a letter to consumers, the agency also expressed concern about possible salmonella contamination of the products and warned the public not to use them, although it admitted that it knows of no reported cases of illness due to contaminated kratom. At the time of this writing, it appeared that both Kratom NC and Cali Botanicals had removed the opioid addiction treatment claims from their websites but were still offering the product for sale. 

Key Takeaways

The FDA’s warning letters highlight the agency’s pursuit of companies selling products that capitalize on or could contribute to the current opioid crisis. This matter is also a reminder that marketing products as providing disease-prevention benefits – which are specifically reserved for approved drugs – without FDA approval is illegal. As the FDA noted in its press release announcing the warning letters: “Health fraud scams like these can pose serious health risks. These products have not been demonstrated to be safe or effective for any use and may keep some patients from seeking appropriate, FDA-approved therapies. Selling these unapproved products with claims that they can treat opioid addiction and withdrawal and other serious medical conditions is a violation of the Federal Food, Drug, and Cosmetic Act.”

No Points for You! Class Action Filed Against Gym for Cancelling Rewards Program

Members of a Chicago-area health club chain filed a proposed class action suit alleging that the club violated the Illinois Consumer Fraud and Deceptive Practices Act and unjustly enriched itself by abruptly terminating the gym’s rewards program and rendering members’ hard-earned rewards points worthless.

According to the plaintiffs’ complaint filed in Illinois state court, the Chicago Athletic Clubs LLC ran a points program rewarding members for purchases and other patronage. Members were told that they would be able to redeem these points for personal training sessions, merchandise, free membership dues, and the like.

Last July, the club abruptly cancelled the program, leaving plaintiffs unable to take advantage of the points they had accumulated, the complaint alleges. Class members say they spent time and money at the gym and on social media promoting the gym in the quest to amass points. The program’s cancellation without notice made it impossible for members to redeem the value of their points, the plaintiffs charge. Meanwhile, at no time did the gym communicate to customers that the points could expire or that the program could be cancelled.

“Acting as reasonable consumers, plaintiffs and subclass members would not have spent the time, energy or money to purchase goods and services from defendants, post on social media about defendants or refer others to become members of defendants’ gyms if [they] had known that defendants would terminate the CAC Rewards Program without prior notice and refuse to allow CAC Rewards members to redeem the unused [points] they accrued,” alleges the complaint.

The plaintiffs claim the gym attempted to reinstate the rewards program in a limited capacity after plaintiffs filed suit but that because the reinstated program did not provide the opportunity to earn additional points but only to use existing points, it deprived gym members of the opportunity to take advantage of the higher-point value items many had been pursuing.

Plaintiffs seek that “at a minimum” class members receive the value of their remaining points. The proposed scope of the class includes all active gym members as of July 16, 2018, the date the rewards program was cancelled.

Key Takeaways  

Chicago Athletic Clubs’ failure to communicate that its loyalty reward points would expire or include any information about expiration or potential termination of the program in any program materials is of key importance to the plaintiffs’ case. To avoid similar causes of action, companies conducting loyalty rewards programs should ensure that the terms governing the program allow for termination at any time in the operator’s sole discretion and with or without notice to members. Even with such rights reserved in the agreement, which are presumably accepted by members upon enrolment, it is still advisable to inform members if the program will be terminated or materially changed so that they have an opportunity to redeem earned points prior to the effective date.