January 29, 2012

After Bump in the Road, FTC Puts the Brakes on Gas Mileage Device

Seller Beware: Consumer Protection Insights for Industry

Although the FTC has yet to finalize the revised Green Guides over a year since the comment period ended without final action, green claims, particularly ones that stretch credulity, are still an enforcement priority. The FTC recently settled with the marketers of the "Hydro-Assist Fuel Cell." The settlement brings to a close an almost three-year long litigation in the District of New Jersey over the veracity of the marketers' claims, including that the device would "Turn Any Vehicle into a Hybrid." In its January 2009 complaint and TRO brief, the FTC alleged that the marketers--Dennis Lee, Dutchman Enterprises LLC, and United Community Services of America Inc. (d/b/a UCSA Dealers Group LLC)--misrepresented that the device could improve fuel economy. The marketers claimed that the device could improve fuel mileage by 50% to 261% through a combination of mixing hydrogen produced by electrolysis with the car's gasoline and pre-treating the gasoline so that it burned more completely. The FTC argued that the marketers' claims violate the laws of thermodynamics--the device has to consume more energy than it can produce.

The court granted the TRO and set a date for a preliminary injunction hearing. After the first preliminary injunction hearing in February 2009, the magistrate judge issued a report recommending that the preliminary injunction be denied. The magistrate judge concluded that the FTC failed to establish that there was probable cause that the FTC Act had been violated for the following reasons: (1) the FTC didn't rebut the marketers' proffered scientific evidence with specificity; (2) while the FTC's expert was an expert in physics, he was not an expert in automotive engines; (3) the FTC's expert had not examined or tested the device; and (4) the FTC's expert acknowledged that adding hydrogen to gasoline could increase fuel efficiency and that a similar device being developed at MIT had potential.

In a lucky twist of fate for the FTC, the recording of the first preliminary hearing was inaudible, preventing a true transcript of the proceeding, and the court ordered a new hearing. Taking advantage of the do-over, the FTC submitted supplemental expert reports and briefing to address the magistrate judge's concerns while maintaining that the magistrate judge had improperly interpreted the FTC's burden. The parties eventually entered into a stipulated preliminary injunction and ultimately a settlement agreement.

The settlement includes a $2,738,950 monetary judgment, all but $230,356 of which will be suspended upon the transfer of the assets of certain bank accounts to the FTC for consumer redress. The settlement order prohibits the defendants from marketing any product purporting to generate energy, reduce energy consumption, or improve energy efficiency. Defendants are permitted to sell their remaining stock of "Hydro-Assist Fuel Cells" as long as they don't represent that the device generates energy, reduces energy consumption, or improves fuel efficiency and they prohibit by contract their dealers from making such claims. Defendants are obligated to monitor their dealer's advertising and report violations to the FTC. With respect to other products, defendants are prohibited from making any false or misleading representations and from making representations without competent and reliable evidence. Defendants are further prohibited from using customer information obtained in connection with the marketing and sale of the "Hydro-Assist Fuel Cell&" device.

We suspect it unlikely that the FTC will pursue vigorously cases related to claims that are new subjects of the proposed revised Green Guides until this new guidance is final. After that time, we expect to see a flurry of enforcement activity. In the meantime, take a hard look at any green claims and make sure they are substantiated and properly explained so consumers understand the breadth and limits to the environmental benefits your product offers. If it looks too good to be true, know the FTC may well come knocking.

© Arnold & Porter Kaye Scholer LLP 2012 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

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