Internet fraud update: Under the FTC Act, the Federal Trade Commission is empowered to prevent businesses from using unfair methods of competition or engaging in unfair or deceptive practices. 15 U.S.C. § 45(a)(2). However, under the version of the FTC Act that existed prior to 2006, the FTC did not have the authority to regulate such practices unless the business involved “commerce” (i.e. sales, shipments) within in the United States. (Fn1) This meant that a business that was solely engaged in the export of goods to countries outside the U.S. was not subject to the FTC’s jurisdiction.
With the rise of the Internet, it became easy for businesses to set up shop in the U.S., but limit their business solely to export to other countries, and thus avoid FTC prosecution for unfair and deceptive trade practices. Because the FTC’s ability to share information about U.S. residents with foreign prosecutors was also limited, this meant that a lot of bad behavior by exporters went unchecked. According to the FTC, this could have made the United States a “haven for fraud.”
In December 2006, Congress passed the U.S. SAFE WEB Act, which amended the FTC Act to fill these loopholes. The U.S. SAFE WEB Act permits the FTC to provide investigative assistance to foreign law enforcement agencies, including conducting investigations to collect information and evidence for these foreign agencies. 15 U.S.C. § 46(j). It also permits the FTC to share investigative materials, such as documents, written reports or answers to questions and transcripts of oral testimony with foreign law enforcement agencies. 15 U.S.C. § 57b-2(6).
In addition, the Act expanded the FTC’s jurisdictional reach to permit it to directly regulate acts involving foreign commerce that: (i) cause or are likely to cause reasonably foreseeable injury within the United States; or (ii) involve material conduct within the United States.
Since the law was signed, the FTC has reported using it in only one prior investigation which was concluded earlier this year. (For a discussion of this case, see our blog post of July 17, 2009). The FTC has recently announced the second use of the U.S. Safe Web Act in its regulatory action against Los Angeles-based Jaivin Karnani and his company Balls of Kryptonite, LLC. (“Karnani”).
According to the FTC’s complaint, Karnani operates two websites, www.bestpricedbrands.co.uk and www.bitesizedeals.co.uk, which sell consumer electronics, such as cameras, video game systems, and computer software exclusively to customers in the United Kingdom. (Fn2) By using the suffixes “co.uk”, stating prices in pounds sterling, referring to the “Royal Mail” and using U.K. addresses, the websites gave U.K. customers the impression that they were located in the U.K. and subject to U.K consumer protection laws.
The complaint also alleged that Karnani’s websites didn’t deliver what they promised. Customers were shipped goods with power chargers that were not compatible with U.K. power systems. Because the goods shipped were not manufactured for the U.K. or E.U. markets, customers did not receive manufacturer warranties. Goods were shipped slowly and customer complaints about this slowness were ignored. Customers were also charged high restocking fees.