FTC v. Balls of Kryptonite

Last updated

FTC v. Balls of Kryptonite
Court United States District Court for the Central District of California
Full case nameFEDERAL TRADE COMMISSION, Plaintiff, v Jaivin Karnani, BALLS OF KRYPTONITE, LLC, a California Limited Liability Company, all doing business as Bite Size Deals, LLC and Best Priced Brands, LLC, and INTRIGUE INC., a Belize corporation, doing business as Crazy Cameras, Defendants.
DecidedMay 20, 2011
Citation(s)CV 09-05276 DDP (Ex).
Court membership
Judge(s) sitting Dean D. Pregerson

FTC v. Balls of Kryptonite is an enforcement action brought in 2009 by the U.S. Federal Trade Commission (FTC) in United States District Court for the Central District of California. The defendant was Jaivin Karnani, a Southern California man, his company Balls of Kryptonite LLC, and several other corporate names they did business as. In 2011 the FTC secured a court order barring Karnani and Balls of Kryptonite from engaging in many of the deceptive business practices that had brought him to the agency's attention. [1]

Contents

For several years before the FTC brought its case, Karnani had been selling consumer electronic devices such as cameras, video game systems and computer software to customers in the United Kingdom. Despite being physically located in California, he registered his websites in British domains, quoted prices in pounds sterling and took other steps to suggest that the business was physically located in the U.K. Customers who bought the merchandise at the prices quoted, usually significantly lower than other, established British retailers, found that delivery took in some cases far longer than the promised 48 hours even though their credit cards were charged immediately and they were told they could not cancel their orders. In many cases, the goods they received were inoperable since they had never been intended for sale in the British or European markets, and were thus not protected by warranty.

Complaints to the U.K.'s Office of Fair Trading (OFT) led to the FTC's enforcement action. In response to its initial complaint [2] Judge Dean D. Pregerson issued a temporary restraining order barring Karnani and his companies from misrepresenting their location on their websites along with the other practices customers had complained to OFT about. [3] It was the first time the FTC had brought an action against an American company that did business exclusively abroad, its first action enforcing the U.S./EU Safe Harbor Privacy Program [4] and one of the first uses of its expanded ability to coordinate its efforts with foreign counterparts under the SAFE WEB Act Congress had passed several years earlier. [5]

The FTC's decision to pursue the case came in for some criticism. Some commentators, who thought the case title was humorous enough to make extended references to the Superman comics in their commentary, questioned whether the commission's action against a retailer who did not deceive any American consumers was a wise use of its limited resources, and whether it might have been better to prosecute him in Britain. Another, in the course of criticizing the failings of the European Union's Data Protection Directive when it came to dealing with cloud computing, did not criticize the enforcement action as such but showed that it pointed out how much more work needed to be done in ensuring compliance with the Safe Harbor Program.

Background

In 2006, the FTC later alleged, Karnani, a resident of Pasadena, California, created two companies, Best Price Brands LLC and Bite Size Deals LLC. He then registered websites in their names with the .co.uk top-level domain, offering consumer electronics such as cameras, video game systems, and computer software. Prices were given in pounds sterling—often considerably below those charged by other online retailers. [2]

The domain name and the pound pricing led many visitors to believe that the company was based in the United Kingdom. British consumers began ordering items from the site in late 2006. Many found the goods and services deficient, and even fraudulent. [2]

For example, the company charged buyers' credit cards for their purchases immediately, promising delivery within 48 hours. Many orders, however, did not ship for weeks. Customers who called or emailed about this were often ignored, with those who persisted and/or supplemented their queries with complaints to the Better Business Bureau told that there were delays, such as the item being out of stock, which they had never consented to or been informed of prior to their purchase. When they tried to cancel their orders they were informed that "company policy", which they were not made aware of prior to purchase, did not allow them to do so at that point. [2]

Those to whom goods were delivered were often equally dissatisfied. Instructions were sometimes in Spanish or Chinese, making it difficult to use the product. Some products were shipped with plugs and internal wiring meant for the U.S. market, making them unusable in Britain (in a few cases, the company did provide a power converter, the FTC conceded). Even products usable in Britain turned out not to have been manufactured for sale there, or in the European Union (EU) generally, meaning they were not covered by manufacturers' warranties. [2]

Those who attempted to return products met with similar resistance from the website owner, Balls of Kryptonite LLC, which Karnani formed and merged the other two companies into in mid-2007. They were variously told that the time limit for a refund has passed, or that a 50% restocking fee would be deducted from it. [2]

Customers seeking refunds had to mail the products back at their own expense. Only then did some learn that, despite the domain name, pricing and British address given in some correspondence, the company was actually located in California. This could have made them liable for the import taxes and customs duties on the goods. [2]

The company did state its true location on its websites, but not "clearly and conspicuously" enough to offset the perception that they were British, the FTC later said. This deceit had impacts beyond invalidating any warranties. It meant that, contrary to what British buyers may have thought, their country's regulations on mail-ordered products did not apply to their purchases. Karnani and Balls of Kryptonite also claimed on their website that they had self-certified their compliance with the U.S.-E.U. Safe Harbor Program for protection of personal data, when in fact they had not. [2]

Enforcement

The dissatisfied customers complained to Britain's Office of Fair Trading, which handles consumer protection issues. Officials there got in touch with their counterparts at the FTC in the U.S. They were able to take action due to the Undertaking Spam, Spyware, And Fraud Enforcement With Enforcers Beyond Borders Act of 2006, commonly known as the SAFE WEB Act, which Congress had passed at the commission's request to help them coordinate actions against Internet fraudsters who operate across international boundaries with similar agencies in other countries, such as OFT. Most relevant to its case against Karnani, the legislation had clarified that the FTC had authority over American companies that did business exclusively with customers abroad. Its action against Karnani and Balls of Kryptonite was the first it had undertaken against one. [6]

In July 2009 commissioners voted 4–0 to proceed with the complaint; [6] it was formally filed later that month in federal court for the Central District of California. [2] A week later Judge Dean D. Pregerson issued a temporary restraining order barring Karnani, Balls of Kryptonite, any of his other companies (including one he had incorporated in Belize) and anyone employed by him from misrepresenting the company's physical location or its participation in any program sponsored by a third party through any means and delaying orders without giving the buyer a chance to consent to the delay or cancel it. The order also required that he make corporate financial records available to the FTC on request and not start any new companies without notifying their attorneys. [3]

Two years later, the FTC and Karnani settled the case with a consent decree. The defendants agreed to make the prohibitions of the 2009 order permanent. They were further barred from processing any transaction until the goods were ready to ship and not disputing any customer chargebacks made prior to a year before the decree. A $500,000 judgement against the defendants was entered, but suspended due to their inability to pay unless business records submitted in response to the FTC's requests were found to be falsified. Karnani and the other defendants admitted no wrongdoing. [1] [7]

Analysis and commentary

A few weeks after the consent decree, three lawyers at Arnold & Porter commented on the disposition of the case on their firm's consumer-protection law blog.

The FTC's investigation of BOK raises an interesting question as to whether foreign consumers will become the FTC's new Lois Lane, leaving US consumers to be the former childhood sweetheart but still close friend, Lana Lang ... While there is nothing in the FTC's mandate that requires it to exclusively protect US consumers, one could question whether this investigation was the most efficient use of the FTC's resources given that that the goods were sold into the UK market and only UK customers were targeted by the allegedly deceptive acts.

The references to the Superman characters were a running gag in the post, prompted by the use of "kryptonite" in the defendant company's name. "[I]t could also be argued that it would have been more appropriate to prosecute BOK under Metropolis's—or rather, the UK's consumer protection laws," they observed. "With increasingly more commerce being conducted over the Internet, it is likely that cross-border fraud similar to what occurred in this case will become more common," they concluded. "As a result, the FTC may have tough decisions as to where to direct their resources, especially given the current budget crisis." [8]

Related Research Articles

The Federal Trade Commission Act of 1914 is a United States federal law which established the Federal Trade Commission. The Act was signed into law by US President Woodrow Wilson in 1914 and outlaws unfair methods of competition and unfair acts or practices that affect commerce.

The Robinson–Patman Act (RPA) of 1936 is a United States federal law that prohibits anticompetitive practices by producers, specifically price discrimination.

<span class="mw-page-title-main">United States antitrust law</span> American legal system intended to promote competition among businesses

In the United States, antitrust law is a collection of mostly federal laws that regulate the conduct and organization of businesses to promote competition and prevent unjustified monopolies. The three main U.S. antitrust statutes are the Sherman Act of 1890, the Clayton Act of 1914, and the Federal Trade Commission Act of 1914. These acts serve three major functions. First, Section 1 of the Sherman Act prohibits price fixing and the operation of cartels, and prohibits other collusive practices that unreasonably restrain trade. Second, Section 7 of the Clayton Act restricts the mergers and acquisitions of organizations that may substantially lessen competition or tend to create a monopoly. Third, Section 2 of the Sherman Act prohibits monopolization.

<span class="mw-page-title-main">Federal Trade Commission</span> United States government agency

The Federal Trade Commission (FTC) is an independent agency of the United States government whose principal mission is the enforcement of civil (non-criminal) antitrust law and the promotion of consumer protection. The FTC shares jurisdiction over federal civil antitrust law enforcement with the Department of Justice Antitrust Division. The agency is headquartered in the Federal Trade Commission Building in Washington, DC.

A grey market or dark market is the trade of a commodity through distribution channels that are not authorized by the original manufacturer or trade mark proprietor. Grey market products are products traded outside the authorized manufacturer's channel.

<span class="mw-page-title-main">List price</span> Price that the manufacturer recommends for a retailer to charge

The list price, also known as the manufacturer's suggested retail price (MSRP), or the recommended retail price (RRP), or the suggested retail price (SRP) of a product is the price at which its manufacturer notionally recommends that a retailer sell the product.

The Office of Fair Trading (OFT) was a non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforced both consumer protection and competition law, acting as the United Kingdom's economic regulator. The intention was for the OFT to make markets work well for consumers, ensuring vigorous competition between fair-dealing businesses and prohibiting unfair practices such as rogue trading, scams, and cartels. Its role was modified and its powers changed by the Enterprise Act 2002.

<span class="mw-page-title-main">BlueHippo Funding</span>

BlueHippo Funding, LLC was an installment credit company operating in the USA founded by Joseph Rensin that claimed to offer personal computers, flat-screen televisions and other high-tech items for sale to customers with poor credit. In an article published November 25, 2009 titled BlueHippo files for bankruptcy: Company blames its bank; was accused of violating settlement with FTC, Eileen Ambrose reported that the company "was forced to file for protection under Chapter 11." On Wednesday December 9, 2009, the company filed for Chapter 7 bankruptcy after having its funds frozen by their payment processor. A petition to a Delaware bankruptcy judge to release the funds was denied. The company's advertised toll-free phone number and website are no longer functioning.

A robocall is a phone call that uses a computerized autodialer to deliver a pre-recorded message, as if from a robot. Robocalls are often associated with political and telemarketing phone campaigns, but can also be used for public service or emergency announcements. Multiple businesses and telemarketing companies use auto-dialing software to deliver prerecorded messages to millions of users. Some robocalls use personalized audio messages to simulate an actual personal phone call. The service is also viewed as prone to association with scams.

Fashion Originators' Guild of America v. FTC, 312 U.S. 457 (1941), is a 1941 decision of the United States Supreme Court sustaining an order of the Federal Trade Commission against a boycott agreement among manufacturers of "high-fashion" dresses. The purpose of the boycott was to suppress "style piracy". The FTC found the Fashion Guild in violation of § 5 of the FTC Act, because the challenged conduct was a per se violation of § 1 of the Sherman Act.

Consumer protection is the practice of safeguarding buyers of goods and services, and the public, against unfair practices in the marketplace. Consumer protection measures are often established by law. Such laws are intended to prevent businesses from engaging in fraud or specified unfair practices to gain an advantage over competitors or to mislead consumers. They may also provide additional protection for the general public which may be impacted by a product even when they are not the direct purchaser or consumer of that product. For example, government regulations may require businesses to disclose detailed information about their products—particularly in areas where public health or safety is an issue, such as with food or automobiles.

This report is the result of a student task force exploration of the Federal Trade Commission (FTC), completed over the course of a summer job led by Ralph Nader. The seven law student volunteers began their evaluation of the FTC in June 1968, and published a revised and expanded version of the report as a book in January 1969.

In re Gateway Learning Corp, 138 F.T.C. 443 File No. 042-3047, was an investigatory action by the Federal Trade Commission (FTC) of the Gateway Learning Corporation, distributor of Hooked on Phonics. In its complaint, the FTC alleged that Gateway had committed both unfair and deceptive trade practices by violating the terms of its own privacy policy and making retroactive changes to its privacy policy without notifying its customers. Gateway reached a settlement with the FTC, entering into a consent decree in July 2004, before formal charges were filed.

Vemma Nutrition Company was a privately held multi-level marketing company that sold dietary supplements. The company was shut down in 2015 by the FTC for engaging in deceptive practices and pyramid scheming.

<i>United States v. Google Inc.</i>

United States v. Google Inc., No. 3:12-cv-04177, is a case in which the United States District Court for the Northern District of California approved a stipulated order for a permanent injunction and a $22.5 million civil penalty judgment, the largest civil penalty the Federal Trade Commission (FTC) has ever won in history. The FTC and Google Inc. consented to the entry of the stipulated order to resolve the dispute which arose from Google's violation of its privacy policy. In this case, the FTC found Google liable for misrepresenting "privacy assurances to users of Apple's Safari Internet browser". It was reached after the FTC considered that through the placement of advertising tracking cookies in the Safari web browser, and while serving targeted advertisements, Google violated the 2011 FTC's administrative order issued in FTC v. Google Inc.

Lens.com, Inc. v. 1-800 Contacts, Inc., 686 F.3d 1376, is a decision by the United States Court of Appeals for the Federal Circuit which ruled that when software merely acts as a "conduit" for providing services over the internet, and does not have an independent value per se, it does not constitute a "good" being "sold or transported in commerce" for the purposes of establishing whether or not a trademark for "computer software" has been "abandoned" under 15 U.S.C. § 1064 and 15 U.S.C. § 1127

United States v. Parke, Davis & Co., 362 U.S. 29 (1960), was a 1960 decision of the United States Supreme Court limiting the so-called Colgate doctrine, which substantially insulates unilateral refusals to deal with price-cutters from the antitrust laws. The Parke, Davis & Co. case held that, when a company goes beyond "the limited dispensation" of Colgate by taking affirmative steps to induce adherence to its suggested prices, it puts together a combination among competitors to fix prices in violation of § 1 of the Sherman Act. In addition, the Court held that when a company abandons an illegal practice because it knows the US Government is investigating it and contemplating suit, it is an abuse of discretion for the trial court to hold the case that follows moot and dismiss it without granting relief sought against the illegal practice.

A hub-and-spoke conspiracy is a legal construct or doctrine of United States antitrust and criminal law. In such a conspiracy, several parties ("spokes") enter into an unlawful agreement with a leading party ("hub"). The United States Court of Appeals for the First Circuit explained the concept in these terms:

In a "hub-and-spoke conspiracy," a central mastermind, or "hub," controls numerous "spokes," or secondary co-conspirators. These co-conspirators participate in independent transactions with the individual or group of individuals at the "hub" that collectively further a single, illegal enterprise.

<span class="mw-page-title-main">Consumer Review Fairness Act</span>

The Consumer Review Fairness Act of 2016, signed into law by President Barack Obama on December 14, 2016, is a federal consumer protection statute banning the use of gag clauses in non-negotiable consumer form contracts.

World Patent Marketing (WPM), founded in 2014 by Scott G. Cooper was a fraudulent Miami-based corporation that presented itself as an invention-promotion firm but was later determined by the Federal Trade Commission (FTC) to defraud investors seeking to market inventions. In March 2018, following an FTC investigation, World Patent Marketing was shut down and Cooper was banned from the patent industry and ordered to pay nearly $1 million in FTC fines.

References

  1. 1 2 FTC v. Jaivin Karnani, Balls of Kryptonite , CV 09-05276 DDP (Ex). (C.D. Cal., 2011)
  2. 1 2 3 4 5 6 7 8 9 "Complaint for Permanent Injunction and Other Equitable Relief" (PDF). Federal Trade Commission. July 20, 2009. Retrieved March 5, 2015.
  3. 1 2 "Temporary Restraining Order with Other Equitable Relief; Show Cause Hearing for Plaintiffs Application for Preliminary Injunction". Federal Trade Commission. July 31, 2009. Retrieved March 5, 2015.
  4. ↑ "FTC's First Safe Harbor Enforcement Action". Hunton & Williams. September 8, 2009. Retrieved March 5, 2015.
  5. ↑ Rothbard, William (August 19, 2013). "FTC becoming more aggressive on misleading advertising practices". Shoemoney.com . Retrieved March 5, 2015.
  6. 1 2 "Court Halts U.S. Internet Seller Deceptively Posing as U.K. Home Electronics Site" (Press release). Washington. Federal Trade Commission. August 6, 2009. Retrieved March 5, 2015.
  7. ↑ "FTC Settlement Bans Online U.S. Electronics Retailer from Deceiving Consumers with Foreign Website Names" (Press release). Washington. Federal Trade Commission. June 9, 2011. Retrieved March 5, 2015.
  8. ↑ Mudge, Amy; Choi, Chester; Watts, Alex (August 1, 2011). "Is it a Bird? Or a Plane? No, it is the FTC Spreading its Wings to Protect British Consumers". Arnold & Porter . Retrieved March 5, 2015.
This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.