Consumer Advertising Law Blog

And Then There Were 5: Julie Brill and Edith Ramirez Unanimously Confirmed As FTC Commissioners

The Senate has confirmed President Obama’s nominees for FTC Commissioners, Julie Brill and Edith Ramirez. With this action, Commissioner Pamela Jones Harbour will be stepping down. As we previously blogged, Julie Brill was an Assistant Attorney General for Consumer Protection and Antitrust for the state of Vermont for 20 years, and she more recently was the Senior Deputy Attorney General and Chief of Consumer Protection and Antitrust for North Carolina. Edith Ramirez was a partner at Quinn Emanuel in Los Angeles, focusing the majority of her practice on copyright and trademark infringement.

After being nominated by the President on November 17, 2009, the two women had their confirmation hearings before the Senate Commerce Committee in December, 2009. The panel reported the nominations to the Senate a short time later.

FTC Chairman Jon Leibowitz now has a full complement of commissioners, as well as a working Democratic majority for the first time since he became chairman. Leibowitz said of the confirmations, "They are both exceptionally talented and committed, and will bring a wealth of experience, knowledge and new energy to the Commission." The two other current members are William Kovacic and J. Thomas Rosch, both Republicans. Kovacic’s term expires in September 2011, and Rosch’s term expires one year later. What does this mean for consumer protection enforcement? We predict more focus and movement on privacy and data security initiatives, likely heightened coordination with state AGs, and aggressive enforcement of financial fraud.

FTC Posts Top Consumer Complaints for 2009

Every year, the FTC posts its stats on consumer complaints received for the last year. The full report can be found here and breaks down consumer complaints by type and number by state. The FTC is also seeking to publicize how consumers can lodge complaints, releasing an animated video of how to file a complaint and giving examples of the types of complaints the FTC handles. Complaints received by the FTC can come through a phone hotline or online. The complaints are housed in the Consumer Sentinel Network, a secure online database available to domestic and international law enforcement with complaints that flow to the FTC, the Better Business Bureaus, the US Postal Service, and the Internet Crime Complaint Center, among others.

So what does this mean for legitimate businesses not engaged in fraud and scam tactics? Know that the FTC and other law enforcement agencies are well coordinated. Know consumer complaints get looked at and not just filed away for an annual stats report. Know the areas where there are more complaints get more enforcement attention. While having a well trained and responsive customer service plan is not a slam dunk defense to deceptive or misleading marketing allegations, having an outlet and remedies available for customers where things do not go as planned may prevent disgruntled calls or emails to the FTC or BBBs to air their grievances. This is one ranking list no industry aspires to make.

Topping this year’s charts are:

Rank - Category - # of Complaints (% of total complaints)

1.    Identity Theft: 278,078 (21%)

2.    Third Party and Creditor Debt Collection: 119,549 (9%)

3.     Internet Services: 83,067 (6%)

4.     Shop-at-Home and Catalog Sales: 74,581 (6%)

5.     Foreign Money Offers and Counterfeit Check Scams: 61,736 (5%)

6.     Internet Auction: 57,821 (4%)

7.     Credit Cards: 45,203 (3%)

8.     Prizes, Sweepstakes and Lotteries: 41,763 (3%)

9.     Advance-Fee Loans and Credit Protection/Repair: 41,448 (3%)

10.   Banks and Lenders: 32,443 (2%)

11.   Credit Bureaus, Information Furnishers and Report Users: 31,629 (2%)

12.   Television and Electronic Media: 26,568 (2%)

13.   Health Care: 25,414 (2%)

14.   Business Opportunities, Employment Agencies and Work-at-Home Plans: 22,896 (2%)

15.   Computer Equipment and Software: 22,621 (2%)

UPCOMING WEBINAR: Searle Study on State Consumer Protection Litigation

The editors of the Consumer Advertising Law Blog would like our readers to know about an upcoming event that may be of interest to you, a panel discussion of the Searle Civil Justice Institute (SCJI) Preliminary Report on State Consumer Protection Acts (CPAs): An Empirical Investigation of Private Litigation. (See below for key findings of the report)

The event will be held on Monday, March 8, 2010 at noon eastern. It is sponsored by the ABA Antitrust Section Private Advertising Litigation Committee and by Northwestern School of Law. The panel will be held by phone and webinar and also offered in person at Arnold & Porter LLP’s Washington, DC office. To join us in person, please email keena.pearsall@aporter.com. To register to join the teleconference, click here.

The preliminary report was published in December. The panel will discuss the report, the methods used, and the next steps for the project.

Panelists at the event will include:

• Henry Butler, Executive Director, Searle Center in Law, Regulation & Economic Growth, Northwestern School of Law
• Geoffrey Lysaught, Director, SCJI, Northwestern School of Law
• Jodie Bernstein, Of Counsel, Kelley Drye, former FTC Director of Consumer Protection
• Fern O’Brian, Partner, Arnold & Porter LLP and Chair of SCJI Board of Overseers
• Teresa Schwartz, J.B & Maurice C. Shapiro Professor (Emeritus) of Public Interest Law, George Washington University Law School

Following are the key findings of this interim report:

• Litigation under CPAs has increased dramatically since 2000: Between 2000 and 2007 the number of CPA decisions reported in federal district and state appellate courts increased by 119%. This large increase in CPA litigation far exceeds increases in tort litigation as well as overall litigation during the same period.
• Vague statutory definitions of prohibited conduct are a major driver of CPA litigation: Whether a CPA statute has vague language prohibiting some general type of conduct rather than a specific list of illegal actions is an important potential contributor to the level of CPA litigation in the state. States with vague definitions of prohibited conduct have more CPA litigation.
• CPAs are becoming more favorable and generous to consumer litigants: Between 1995 and 2007, the expected value of recovery for potential plaintiffs increased dramatically as measured by CPA requirements to bring a cause of action and available remedies. In 2004, the state CPAs that were the most favorable to plaintiffs were New Hampshire, Massachusetts, and Connecticut. The states with CPAs that were the least favorable to plaintiffs were Colorado, Maryland, and Georgia.
• States with CPAs that are more favorable to consumers have more CPA litigation: The expected value of recovery under a given state’s CPA appears to contribute to the amount of litigation that makes use of the act. States that allow more generous remedies and make it easier for consumers to win in court see more CPA litigation.
• Most CPA claims would not constitute illegal conduct under FTC consumer protection standards. The Searle Shadow FTC found that 78% of a sample of CPA claims would not constitute legally unfair or deceptive conduct under FTC policy statements. While relatively few CPA claims would constitute illegal conduct under the FTC standard (22%), even fewer (12%) would result in FTC enforcement.
• Almost 40% of CPA claims where the consumer plaintiff prevailed at trial would not constitute illegal conduct under FTC consumer protection standards: In a sample of CPA claims where the consumer plaintiff prevailed in court, the Searle Shadow FTC found that 38% of these successful claims would not constitute illegal conduct under the FTC standard. Although most of these successful cases would meet the FTC illegality standards, only 23% would likely be enforced by the FTC.

Vladeck Reviews Enforcement Priorities for E-Marketing

FTC BCP Director David Vladeck spoke earlier this month at the Electronic Retailing Association’s Great Ideas Summit in New Orleans. His remarks give insight into where the BCP may focus its enforcement efforts as to e-marketing. Vladeck explained, “Internet commerce offers tremendous potential benefits for consumers, but it has also opened the door to new types of deceptive and unfair practices.” Today, it is not unusual that a marketer’s message will go through one or more third parties, including a “scientific expert, advertising agency, celebrity endorser, call center employee, or marketing affiliate -- before it finally reaches the consumer.” Given this climate, Vladeck stated, the FTC is focused on ensuring that “transparency and disclosure rule the day.”

Under this rubric, Vladeck discussed the following:

• Endorsement Guides - An important change to the Endorsement and Testimonial Guides has to do with the use of disclosures in testimonials. Specifically, Vladeck advised that “the use of a disclaimer such as ‘results not typical’” as, for example, commonly used in advertising for weight loss products, “is no longer a safe harbor for the claims made in testimonials.” While an advertiser may use best case testimonials, he or she “should clearly and conspicuously disclose the generally expected results consumers can expect in the depicted circumstances.” Better yet, an advertiser should “use testimonials that actually reflect what your product of services is likely to deliver.” Vladeck appreciates that there is confusion in the industry on disclosing generally expected results but in his view, as a practical matter noted “if you are selling a product to consumers . . . you are already required to have substantiation for all of your performance claims [and so] you should already know what results consumers can generally expect to achieve with your product.” That said, he highlighted that the Guides refer to disclosing expected results in the depicted circumstances and did concede that the Staff understands that “consumer behavior patterns can vary wildly” and the standard is not “to be able to calculate a precise mathematical average for the expected results among all potential product users in all situations.” Vladeck recognized this as a “period of adjustment for everyone” but warned there would be near future enforcement activity in this area.
• Social Media Marketing - Here, Vladeck emphasized that an existing need for disclosure of material connections between endorsers and advertisers now also applies to blogs and “word of mouth” marketing. Where a blogger turns its website into a “commercial venture” by promoting an advertiser’s product “in exchange for free products, payments or other significant perks,” he or she must disclose that connection. Who will the FTC target? Vladeck stated that “our focus will remain on the conduct of advertisers rather than on individual endorsers” and the focus will be on “practices that are the most egregious or the conduct that is likely to cause the greatest consumer injury.”
• Affiliate Marketing - Vladeck expressed a “growing concern” that marketing affiliates (who drive traffic to a website in exchange for payment of a commission for sales) use “false or deceptive claims about the product, fake blogs, and other content that is not clearly identified as advertising or fails to disclose the material connection to the seller.” Vladeck indicated that the FTC is bringing enforcement actions to stop such deceptive and unfair practices. He was clear that “legitimate marketers can and should play an important role in bringing more order and accountability to the affiliate marketing industry.” Vladeck advised companies using affiliate networks to (1) give detailed guidelines to affiliates as to what information should be contained in advertising, (2) do “quality control on the back end once consumers are directed to your website,” and (3) if “you start to hear things from consumers that seem not quite right,” then “follow up and investigate.”

- Marianne El Sonbaty and Amy Mudge

Targeting Grandfathered Drugs with Claims of Misrepresentation - Private Enforcement of the FDCA?

The Federal Food, Drug and Cosmetic Act (“FDCA”) imposes specific requirements governing the approval, labeling and promotion of prescription drugs. FDA has exclusive authority to enforce those requirements.

The FDCA grandfathers out of the approval requirements products that were on the market before the statute was enacted. This exception recently created a conundrum for the federal district court in New Jersey, which addressed whether a plaintiff can sue under the Lanham Act claiming that the mere marketing of a grandfathered product, as the FDCA allows, falsely implies FDA approval. In Mutual Pharmaceutical Co., Inc. v. Watson Pharmaceuticals, Inc., Watson was selling a gout medication, which, it argued, was grandfathered. Mutual, unlike Watson, sought FDA approval to manufacture and sell the drug for gout, as well as the exclusive right to market it for a different, rare disease. Upon receiving FDA approval, Mutual, along with two other companies, sued Watson. Mutual alleged that by disseminating advertisements and product information through various channels, Watson falsely implied its drug was FDA-approved.

Watson moved to dismiss the complaint as a disguised effort to enforce the FDCA. Mutual’s claim, Watson contended, required the Court to determine an issue only FDA could decide -- whether Watson needed FDA approval to sell the drug. The Court disagreed. The question under the Lanham Act, the Court found, was not whether Watson needed FDA approval, but whether it falsely implied that it had FDA approval. The Court cited survey evidence in the complaint reflecting the inaccurate perception by consumers that FDA had approved the product. Interestingly, though, the survey dealt not with any advertising claims by Watson but rather with the belief by consumers that pharmacy computers would only display FDA-approved drugs. Watson argued that if marketing its product through traditional channels was sufficient to create the false implication of FDA approval, it could not market the product even though the FDCA allowed it to do so. Nevertheless, the court found that the facts as pled were sufficient to defeat the motion to dismiss.

This result --treating the mere marketing of an allegedly grandfathered drug as inherently misleading and subject to injunction-- is troubling. Arguably, such an injunction either would conflict with the FDCA where the Act did not require FDA approval for marketing, and would enforce the Act through a private right of action where approval was required.

Just how troubling the case is -- and how much latitude it affords for private claims -- is unclear. In an earlier case a California District Court declined to be drawn into what it viewed as enforcement of the FDCA. The plaintiffs in In re Epogen and Aranesp Off-Label Marketing & Sales Practices Litigation brought a RICO claim based on the defendants’ alleged off-label marketing of a kidney drug, in violation of the FDCA. The Court found that the “existence of federal enactments-i.e., the FDCA and accompanying regulations-making off-label promotion illegal, is central to many of Plaintiffs' claims . . . . Allowing Plaintiffs to proceed on a theory that Defendants violated RICO by engaging in off-label promotion, without specific allegations that Defendants made false or misleading statements, would, in effect, permit Plaintiffs to use RICO as a vehicle to enforce the FDCA.” In dismissing the complaint, the Court noted that the plaintiffs were free to bring claims based on wholly separable private causes of action stemming from the same activity.

To be sure, the artful tailoring of the complaint in Mutual Pharmaceutical, while sufficient to skirt a motion to dismiss, may not suffice to sustain the case beyond that stage. If plaintiffs do succeed, it will doubtless require substantial legal debate, not to mention further litigation, to determine where, between Mutual Pharmaceutical and Epogen, the balance tips from a separate, cognizable cause of action to an impermissible private effort to enforce the FDCA.

- Robert Weiner and Jessica Halbert

UPCOMING WEBINAR: Consumer Products: Avoiding the Crossfire Between State and Federal Regulation

The editors of the Consumer Advertising Law Blog wanted to let our readers know about an upcoming webinar that may be of interest to you, entitled, "Consumer Products: Avoiding the Crossfire Between State and Federal Regulation". [Full disclosure: Our firm, Arnold & Porter LLP, is sponsoring the event]

In recent years, state legislatures and regulatory agencies have taken a more active role in regulating consumer products as varied as light fixtures, mattresses, candy, jewelry, auto parts, toys, and antiperspirants. At the same time, federal agencies, such as the Consumer Product Safety Commission (CPSC), are becoming more active. Manufacturers and retailers alike must attend to increasing differences among these requirements, with potentially expensive consequences. This seminar will review major new requirements, provide an update on California Proposition 65, and discuss practical approaches to compliance.

Panelists at the event will include: 

• Eric Rubel, Partner, Arnold & Porter LLP, Former General Counsel, CPSC
• Harrison Pollak, California Deputy Attorney General
• Robert Scofield, D.Env., MPH, Principal Scientist
• Trenton Norris, Partner, Arnold & Porter LLP

The event will take place from 8:30 AM to 10:30 AM PST on March 16, 2010. The event is being offered both in person at Arnold & Porter LLP's San Francisco office as well as via webinar. For more information, please click here for an RSVP link.

Mind Over Matter - Can a Placebo Trigger a Biological Response?

The medical journal The Lancet recently reported that placebos may sometimes have a biological effect on the body.  For example, when patients with Parkinson’s disease were given dummy pills their brains actually released dopamine, which resulted in the patients feeling better.  This finding might raise some intriguing advertising substantiation questions.  As you all know, the FTC’s view is that health related claims often should be supported by one or more clinical studies, which in turn, should be double-blind, placebo controlled, etc.  But suppose the placebo mimicked the biological effect of the tested product to such a degree that there was no statistically significant difference between the two.  Shouldn't the product be able to make the relevant claim?  Further, could an advertiser successfully defend a Section 5 case by arguing that even if the product doesn’t work, its advertising was so effective that consumers' belief that the product works created the promised benefit?  If so, should it matter that it was the advertising, and not the product, that really resulted in the product performing as claimed?  The 7th Circuit recently rejected a defense -- in the Q-Ray Bracelet case -- that a product truthfully claimed to reduce pain based upon a perceived placebo response.  In that case, though, there was no proof of an actual physical response, just that the user perceived less pain.  No doubt the medical community will be monitoring this topic with interest.  In the meantime for all of us naturally skeptical lawyers, maybe a little belief now and then isn’t such a bad thing.

- Randy Shaheen

States Target Debt Collectors' Deceptive Practices

As the FTC heightens its scrutiny of debt collection and debt settlement practices at the federal level, states throughout the country are also cracking down on debt settlement and collection firms.

With debt collection practices topping the list of consumer complaints to state attorneys general (AGs) in 2008 (the last year for which data is available), many state attorneys general have stepped up their fraud and deceptive business practices enforcement actions against debt collection and settlement companies, bringing lawsuits under state laws designed to safeguard consumers. Many of the suits allege that the targeted debt settlement firms have misled consumers, capitalizing on these consumers’ precarious economic positions while doing little or nothing to improve their financial standing.

For example, in Illinois, Attorney General Lisa Madigan recently filed suit against seven debt settlement firms and six of their executives under the Illinois Consumer Fraud and Deceptive Practices Business Act, contending that they had engaged in deceptive marketing and imposed excessive consumer fees for their services; the complaints seek to enjoin the accused from practicing in the state and impose restitution and associated fines on the parties. 

Last week, the office of the New York Attorney General secured $275,000 in restitution for victims of a debt collection agency that employed scare tactics - including the impersonation of law enforcement officials - to intimidate consumers into settling their debts, despite the fact some of them owed no money at all. 

State legislatures have also begun to take action to tighten the regulatory grip on such companies.  Lawmakers in North Carolina, Maryland, Idaho, Colorado, New York, and Arkansas have recently enacted laws that restrict the permissible activities of debt collectors. Among the provisions currently under consideration in states such as Minnesota, New Jersey, and Massachusetts are laws that would bar agencies from collecting on long-delinquent debts by convincing consumers to make payments that effectively renew the default date, increase the amount of property that consumers can exempt from collection, and expand penalties against those found guilty of abusive collection practices.

In these difficult economic times, it is not surprising that states are making concerted efforts to delineate acceptable versus unacceptable consumer debt collection practices.  Indeed, the fraudulent and deceptive behaviors targeted in these actions and proposed laws appear to address egregious cases.  These actions hopefully will not also deter legitimate debt collection and debt settlement agencies and the benefits they provide to businesses and consumers. 

- Beth DeSimone and Lindsey Carson

GUEST POST: Spain Media Bill Provides Opportunities and Limits for Advertisers

A bill has been introduced in the Spanish Parliament containing an in-depth reform of media law. Amongst the many points subject to reform are the rules on television advertising. Some of the reforms have been expected for a long time; some are a relative surprise. 

Among the most relevant are: the Media bill recognizes the right to create channels devoted to commercial communications and self-promotional programs. Media operators are also entitled to broadcast advertising, teleshopping, TV promotion, programmes containing product placement and sponsored programmes. These options may be taken for granted in the US, but product placement, for instance, was until recently not regulated and posed legal issues in Spain as well as in other European jurisdictions.

There are some special limitations to advertising and promotion: (i) news programmes cannot be sponsored; (ii) only films, short films, documentaries, series, sports and entertainment programmes may contain product placement; (iii) product placement within children’s programmes is banned; and (iv) neither sponsorship nor product placement can affect the programme content or its timing.

Beware! Growing Danger of False Patent Marking Suits

Marking a product with the number of its underlying patent is good practice––it provides notice of the patent and is a prerequisite for certain types of damages in infringement actions. Falsely marking a product, however, can create problems and recent developments in false marking law merit a closer look at marking practices. Recent cases have increased the potential bounty available in false marking suits. 

Section 292 of the Patent Act provides that: 

Whoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article, the word “patent” or any word or number importing that the same is patented, for the purpose of deceiving the public . . . Shall be fined not more than $500 for every such offense. 

35 U.S.C. § 292(a). Under § 292(b), half of the $500 fine is kept by the plaintiff, and the other half goes to the United States. According to the statute, “[a]ny person may sue for the penalty.” This provision is not new, but recently the Federal Circuit made clear that the $500 fine is awarded for each wrongly marked article. Previously, some courts had not interpreted “offense” to mean each wrongly marked article.  

In Forest Group, Inc. v. Bon Tool Company, 590 F.3d 1295 (Fed. Cir. Dec. 28, 2009) the lower court, and a court in a parallel proceeding, had issued claim constructions of the patent-in-suit that required elements not met by the plaintiff patentee’s own products. Despite these orders, the plaintiff continued to label its products with the patent number. The lower court then issued a single $500 fine to the plaintiff based on this continued marking in the face of the court orders. The Federal Circuit affirmed the lower court’s decision that the plaintiff had engaged in false marking, but announced that the marking statute “clearly requires that each article that is falsely marked with intent to deceive constitutes an offense . . . .” The court remanded the case for a determination of the total penalty based on each item sold with the false marking. 

The Federal Circuit did not provide clear guidance on what it takes to prove an intent to deceive, but it did make clear that its opinion was not meant “to suggest that multiple claim constructions or summary judgments are required before the requisite knowledge for false marking can be found.” Indeed, more frequently, false marking problems arise when marking continues even after the patent has expired. If false marking is proven, a company that sells thousands of units of product a year may quickly find itself on the receiving end of a large fine if it knowingly marks its products with inapplicable patent information.

The key lessons: (1) Implement a regular program to ensure that markings are removed when a patent expires. (2) Review markings after claims construction and summary judgment decisions. (3) Seek an independent counsel’s opinion when false marking is a potential problem. (4) Only use “patent pending” after filing for patent protection.

- Monty Agarwal and Aaron Schur

New Credit Card Rules Spare Retailers from Extra Check-Out Counter Approval Burdens

Consumer retailers can breathe a sigh of relief. The Credit Card Accountability, Responsibility and Disclosure Act (“CARD Act”) will not be a major impediment to point-of-sale consumer credit approvals when its regulations become effective on February 22, 2010. 

The CARD Act was signed into law in May 2009 to create new standards and disclosure requirements for open-end consumer credit plans. The CARD Act amends the Truth in Lending Act (“TILA”), and most of the CARD Act’s provisions become effective on February 22, 2010 - at the same time as new regulations issued by the Federal Reserve Board (“Board”) implementing these new requirements. 

One provision of the CARD Act requires that a card issuer consider a consumer’s ability to pay before opening a consumer credit account, or increasing that consumer’s credit limit. In October 2009, the Federal Reserve Board (“Board”) proposed regulations that would have required that a consideration of a consumer’s ability to pay include a review of the consumer’s income or assets as well as current obligations. In undertaking that review, the Board proposed to permit a card issuer to rely on information provided by the consumer or information in a consumer’s credit report.  

These proposed requirements were of serious concern to retailers that issued point-of-sale consumer credit, such as through store brand credit cards that often are offered by retailers at the check-out counter because the requirements would have potentially required retailers to verify a consumer’s income or assets while the customer waited at the check-out counter. There was even concern that the customer would need to provide documentation such as tax forms or pay stubs. These proposals in many retailers view would have impeded or prevented a consumer from instantly obtaining even a small line of credit at the point-of-sale. The requirement could have also discouraged the consumer from completing the sale that led that consumer to the check-out counter - something retailers do not want to see happen. Fortunately for the retailers, the Board provided some clarity to its proposal when it finalized the CARD Act regulations in anticipation of the February 22, 2010 effective date. Under the Board’s final rule, card issuers must still review information about a consumer’s income, assets, or current obligations before issuing credit or increasing a credit limit. However, in undertaking this review, a card issuer may “consider information obtained through any empirically derived, demonstrably and statistically sound model that reasonably estimates a consumer’s income or assets.” This clarification will allow retailers to continue to issue credit at the point-of-sale, without requiring the consumer to provide documentation of income, assets, or current obligations, as long as the retailer can verify a consumer’s ability to pay through a third party, such as a credit reporting agency. Assuming that checkout lanes have this capability, retailers can continue to offer credit cards at the point of sale without slowing those lines down -- welcome news to retailers and customers alike. 

 - Beth DeSimone and Brian Larkin

FTC Asks Once Nicely - Warning Letter to Retailers Seeks to Cut Down Deceptive Bamboo Labeling

After bringing recent enforcement actions against several companies for falsely advertising products as “100% bamboo fiber” when they were in fact made of rayon, the FTC sent out a warning to more than seventy-eight companies urging them to review their bamboo products and correct any misleading labeling. (Although rayon is created from the cellulose found in trees and plants, including bamboo, it is a man-made fiber that is processed with harsh chemicals and not considered to be environmentally friendly.) The FTC hopes that the warning letters will “serve as a wakeup call to all companies, regardless of their size.”, and the letters went to well known names as Bed, Bath & Beyond and Amazon.com. 

The warning letters contain a synopsis of FTC decisions regarding the use of proper fiber names in textile labeling and advertising, and are intended to give companies time to take curative steps by removing or correcting any false or misleading bamboo references. If any of the letter recipients is later found to have mislabeled rayon products, the FTC can seek civil penalties of up to $16,000 per violation. The warning letters, as well as the recent enforcement actions brought against companies selling rayon, highlight the FTC’s continuing commitment to prosecute misleading “green” advertising.

While the FTC is still working on revisions to its Green Guides, the Commission is struggling with the appropriate limits to place on marketers, so as not to allow them to convey to consumers a deceptive and overly broad message while touting benefits of a product for the environment. However, in its decisions regarding bamboo, the FTC made it clear it would be appropriate for companies to advertise “Rayon Made with Bamboo,” which truthfully conveys the fact that the manufacturers used bamboo to make the rayon but does not overstate the benefits of the product. Marketers should take a close look at any environmental claims being made about their products and make sure any limitations are clearly conveyed with appropriate disclaimers. 

- Danielle Sims and Randy Shaheen

FTC Chairman Calls for Expanded Consumer Protection Powers over the Financial Services Industry

Last Thursday, February 4, 2010, at a hearing before the Senate Committee on Commerce, Science, and Transportation, Federal Trade Commission (FTC) Chairman Jon Leibowitz urged Congress to grant the FTC increased powers to safeguard consumers from unscrupulous providers of financial services and products. He also described his vision for the relationship between the FTC and the proposed Consumer Financial Protection Agency (CFPA). Given the continued controversy surrounding the establishment of the CFPA as an independent agency, granting the FTC enhanced powers in the consumer financial arena as Chairman Leibowitz suggests might satisfy some of the CFPA’s critics.  

Specifically Leibowitz identified three key measures that he contended would allow the FTC to better protect consumers facing the economic crisis: 

1. Streamlining the FTC’s rulemaking procedures, 
2. Giving the FTC the power to bring charges directly against aiders and abettors of financial fraud, and
3. Expanding the FTC’s remedial powers. 

Currently, the FTC Act requires the FTC to promulgate rules under the Magnuson-Moss Act, a process which has more burdensome procedural requirements than the Administrative Procedures Act (APA) notice and comment procedures used by most federal agencies. These heightened requirements for FTC rulemaking were originally imposed because of the FTC’s perceived broad jurisdiction over the economy and were designed to restrain the FTC’s scope of regulation. Referring to the Magnuson-Moss process as “medieval” and “draconian,” Leibowitz argued that the process prevents it from responding nimbly and effectively to new challenges and threats to consumers. He noted that other agencies with extensive authority over the economy, such as the Securities and Exchange Commission (SEC) and the Federal Reserve Board enact rules under the APA notice and comment process, and emphasized that, when it has been allowed to use the APA notice and comment process in specific circumstances, the FTC has been thorough and circumspect in its rulemaking activity. 

Leibowitz also encouraged Congress to “provide explicit authority for the FTC to take law enforcement action against those who provide substantial assistance to another while knowing, or consciously avoiding knowing, that the person is engaged in unfair or deceptive practices.” While the FTC has been able to bring charges against such aiders and abettors under alternative legal theories of culpability, Leibowitz maintained that direct and express authority would facilitate such actions.

Thirdly, Leibowitz urged Congress to expand the FTC’s law enforcement powers to include independent litigating authority as well as the ability to seek civil penalties for FTC Act violations. Under current law, the FTC must refer to the Department of Justice (DOJ) all cases in which it seeks civil penalties, and Leibowitz contended that the 45 days that the DOJ then has to decide whether to take the case or refer it back to the FTC creates undue delay in bringing actions against alleged violators of the FTC Act. In addition, while the FTC is currently empowered to seek civil penalties for violations of specific laws, Leibowitz asked Congress to grant it the authority to bring such suits for unfair and deceptive practices in general, arguing that such power would deter more effectively financial and other types of fraud. 

Finally, Leibowitz addressed the Obama Administration’s proposal to establish the CFPA. Under the provisions of the financial reform bill that passed the U.S. House of Representatives, H.R. 4173, the CFPA would have authority to regulate and in certain circumstances examine and enforce standards in the offering of financial products and services to consumers. Leibowitz stressed that while the FTC supports the increased focus on consumer protection which has, in his words been treated as the “orphaned stepchild” by the federal banking authorities, he noted that Congress will need to define carefully and explicitly the jurisdictional boundaries between the CFPA and the FTC in enforcing consumer protection in this area in order to prevent confusion and inefficiency. 

As the Senate takes up financial reform in the next few months, including increasing consumer protection, Leibowitz has made his intentions clear that he would like the FTC to be at the forefront of these efforts. The Senate may give him his wish, especially if the establishment of a separate CFPA is abandoned in favor of increased protection at the existing agencies. 

 - Beth DeSimone

The Power of I: Advertisers Attempt to Demystify Online Advertising for Consumers

Those of you who shop online, use web-based mail, or spend any amount time perusing websites online (and that covers, well, almost everyone), may have come across an advertisement that left you wondering, “How did I get this ad?” Soon, thanks to a blue symbol with a little white “i”, your question will be answered with the click of a link.

Heeding calls for more self-regulation and concerns of privacy advocates, the Federal Trade Commission, and Congress, the advertising industry has come up with a standardized icon -- referred to as the "Power I" -- that will let consumers know how advertisers use web surfing history, demographic profiles, and other personal data to display ads tailored to the interests of the specific online user. Once a consumer clicks on the Power I, they will be taken to a page detailing why certain ads are being shown to them. Although there is no legal requirement that companies that use online advertising adopt the Power I, industry groups hope that it catches on so that it can be used in the argument against the need for further prescriptive government regulation. An online campaign initially aimed at explaining the system behind web advertisements to consumers has already been launched. The second stage of the online campaign will focus on the "Power I" specifically.

The FTC undoubtedly will keep a close eye on the effectiveness of the Power I, and it is likely companies will have to do more in the way of making online advertising practices more transparent to consumers. For the Power I to be “powerful,” though, most, if not all, advertisers will have to adopt it, and consumers will have to learn to interact with the Power I in a meaningful way. If it works, however, the Power I may be seen as a key step toward better information for consumers about their online privacy and making the process behind behavioral advertising more visible. Nevertheless, this step alone is unlikely to stave off legislation or industry wide regulation, and advertisers will probably have to focus on other key behavioral advertising issues, such as consent, re-use of data, and data retention.

- Danielle Sims, Nancy Perkins, and Sean Morris

Warning to Internet Retailers: Careful with Online Discount Club Partnerships

In January, New York’s Attorney General announced that his office was investigating 22 popular online businesses that link consumers to fee-based membership clubs, allegedly without their knowledge. The NY AG also announced a settlement agreement with the online movie ticket retailer Fandango, which linked consumers to online membership clubs and transferred consumers’ credit and debit card information to them.

According to the NY AG’s investigation, consumers shopping online often are presented with a discount or cash-back incentive offer as they complete their purchases. When consumers click on an offer banner, they are unknowingly directed to a membership program’s website where they are urged to accept the discount offer or cash-back incentive. The AG’s investigation found that consumers do not realize that by accepting such offers they are joining a fee-based membership program because information about the program and its fees are buried in the website’s fine print. Small, recurring charges then appear on the consumers’ credit or debit card statements. The three major online discount clubs reportedly take in US$1 billion annually, much of which the NY AG alleges is fraudulently acquired.

The NY AG’s investigation follows on the heels of a report issued in November 2009 by the Senate Committee on Commerce, Science, and Transportation. The Report, “Aggressive Sales Tactics on the Internet and Their Impact on American Consumers,” summarizes the Committee’s investigation of online discount clubs operated by the direct marketing companies Webloyalty, Affinion/Trilegiant, and Vertrue. The Report concludes that “these three companies use highly aggressive sales tactics to charge millions of American consumers for services the consumers do not want and do not understand they have purchased.”

The NY AG’s settlement with Fandango requires the company to stop sharing customers’ credit and debit card information with online discount clubs; suspend contracts with existing discount clubs until Fandango can implement reforms to protect online shoppers from being deceived by discount and cash-back advertisements that appear on Fandango’s website; notify customers when they are redirected to a discount club’s website; and pay $400,000 into a consumer redress fund.

E-commerce businesses that link to online discount clubs operated by companies like Webloyalty, Affinion/Trilegiant, and Vertrue should consider taking steps to inform consumers when they are entering a website operated by one of these companies and to avoid sharing financial information about their customers with such companies. These steps could avoid an investigation and/or enforcement measures like those imposed on Fandango.

- Victoria Shapiro

FTC Proposed Consent Order With Tanning Association Pales in Comparison to Possible Revised Consent Language

Since its loss in the Lane Labs case (see here for prior blog on the case), FTC Staff has been clear it intends to modify its traditional requirement of “competent and reliable scientific evidence.” The Bureau Director has indicated that under his watch the BCP will include more precise language in orders as to the amount and type of scientific evidence necessary to support health claims, as well as an effort to harmonize with FDA requirements. He indicated that an “outlier study” even if well conducted should not be sufficient basis for a health claim. New language being proposed by Staff, but not to our knowledge accepted by the Commission and made available for public comment, includes a definition of competent and reliable scientific evidence consisting of:

1. at least two adequate and well-controlled human clinical studies,
2. of the product at issue or substantially similar product,
3. conducted by different experts independently of each other,
4. that conform to acceptable designs and protocols and whose results, when considered in light of the entire body of relevant and reliable scientific evidence, are sufficient to substantiate the health claim.

Time will tell if this proposal with considerably heightened standards for substantiating health claims will become the new norm. In the meantime the FTC continues to bind respondents to the old standard. This past week, the FTC accepted a proposed agreement containing a consent order from the Indoor Tanning Association in relation to the promotion of indoor tanning products and facilities.

In March of 2008, the Indoor Tanning Association launched the “Get the Facts About Tanning” campaign purported to dispel various myths created and disseminated by sun-hating dermatologists and the nefarious sunscreen industry. The Indoor Tanning Association allegedly claimed:

• No compelling scientific evidence exists that tanning causes melanoma
• The rewards of “soaking up the sun” outweigh the risks of overexposure
• Indoor tanning is considered by many to be a safer alternative to tanning outdoors
• A study by the National Academy of Sciences determined that the risks of not getting enough UV light far outweigh the hypothetically minute risk of skin cancer
• And last but not least, indoor tanning is a government-approved, controlled environment designed to give you a tan without ever burning.

The FTC’s complaint alleged that these claims were false and unsubstantiated because tanning does in fact increase the risk of skin cancer, including squamous cell and melanoma skin cancers and the National Academy of Sciences study never determined that the risks of not getting enough ultraviolet light far outweigh the risk of skin cancer. The Complaint alleges that while the ITA promoted the benefits of causing the skin to generate Vitamin D, it did not disclose that consumers can increase their Vitamin D levels through exposure to ultraviolet levels lower than that needed to tan.

The proposed consent order contains provisions prohibiting respondent from making any future representations about the health related risks or benefits of tanning and Vitamin D in connection with the advertising or sale of tanning, unless they possess competent and reliable scientific evidence sufficient in quality and quantity based on standards generally accepted in the relevant scientific fields to substantiate that the representations are true. Representations in non-commercial settings, including ITA lobbying efforts, are carved out of the consent. The order further requires that ads making claims about the safety or health benefits of indoor tanning are required to make this disclosure: “NOTICE: Exposure to ultraviolet radiation may increase the likelihood of developing skin cancer and can cause serious eye injury.”

- Amy Mudge and Tiana Russell

Cuomo to Citi: Extend Free Checking Promo

Banks who have been contemplating imposing fees on “free” checking account to make up for the expected loss in income from the Federal Reserve’s new regulations, effective July 1, 2010 (that will restrict banks and thrifts from imposing overdraft fees on ATM or one-time debit card transactions without the opt-in consent of a consumer) may want to reconsider. (See an analysis of the overdraft fee rules here)

On February 1, 2010, New York Attorney General Andrew Cuomo announced that his office had entered into an agreement with Citibank, N.A. to delay its plan to impose monthly fees on checking accounts that had been advertised as “free” for one year. This agreement was the result of an investigation commenced by the New York Attorney General’s office in response to Citibank’s plan to impose a $9.50 monthly fee for the bank’s “EZ Checking” and “Access” deposit accounts, unless depositors maintained a $1,500 average balance in Citibank accounts. Until November 2,2009, Citibank advertised that these accounts were eligible for "free checking" with direct deposit or twice-monthly online bill payment. (click here for the agreement) According to the Attorney General’s press release, these “free checking” advertisements never disclosed that this service could be terminated at Citibank’s discretion.

The agreement delays the imposition of the monthly fee through December 31, 2011 for customers both in New York and throughout the United States who have EZ Checking and Access checking accounts which were opened between January 1, 2009 and November 5, 2009 . Per check fees are also waived for qualifying customers through January 31, 2011. The agreement also requires Citibank to provide additional notices to owners of these accounts starting in February 2010, and also to post notice on its website advising that fees will be imposed on these accounts commencing in January 2011 if customers do not meet the minimum balance requirements.

While the agreement only applies to Citibank, Attorney General Cuomo stated in announcing the settlement that “we will continue to scrutinize fees that banks are charging customers.” Other attorney generals also may commence their own investigations. In addition, accounts advertised as “free” or “totally free” or “forever free” could be at risk for false and deceptive advertising claims under either Section 5 of the Federal Trade Commission Act or state deceptive practices laws if the institution offering such products decides to change the terms of such accounts to impose monthly or other fees.(See also the FTC Guide concerning the use of the word, "free" here)

- Beth DeSimone

FCC Proposes Revised Telemarketing “Robocall” Rules

The Federal Communications Commission (FCC or Commission), which regulates telemarketing under the Telephone Consumer Protection Act (“TCPA”), has proposed revised telemarketing rules governing prerecorded telemarketing calls — so called “robocalls” — to harmonize its rules with the Federal Trade Commission’s (FTC) recently amended Telemarketing Sales Rule, adopted pursuant to the Telemarketing Consumer Fraud and Abuse Prevention Act. While most entities that use robocalls are regulated by both the FTC and the FCC, certain entities (such as common carriers, banks, and insurance companies) fall only under the FCC’s jurisdiction and have been subject to less restrictive standards since the FTC amended its Rule in 2008. The FCC’s proposed changes would not affect robocalls by or on behalf of tax-exempt non-profit organizations; calls for political purposes or for other noncommercial purposes; and calls initiated for emergency purposes. Comments are due 60 days and reply comments are due 90 days after the proposed rules are published in the Federal Register, which has not occurred as of this blog. Comments may be filed electronically using the Electronic Comment Filing System (ECFS).

Proposed Changes to FCC Rules: The FCC has proposed five amendments to conform its rules with the FTC’s more restrictive rules.

How Long Can Your Product Be New and Improved?

We thought we would take this opportunity to remind readers of the basics of “new and improved” advertising. In an oldie but goodie advisory opinion from 1967, the FTC opined that while it wanted to maintain flexibility to address particular situations (but of course!), that “it would be inclined to question use of any claim that a product is ‘new’ for a period of time longer than 6 months" (with a limited test market exception). The “6 Month Rule” was thus born and is still generally alive and well, although not the basis for recent enforcement activity. In addition to the general time frame, the FTC advised that the product in question must actually be entirely new or “has been changed in a functionally significant and substantial respect.” A package change alone, or some other insignificant or insubstantial change, does not support a “new” claim. There are more specific rules or guidance for new claims for refurbished products or for textiles.

- Amy Mudge

Claims of Alleged “Greenwashing” Squeak Past Motion to Dismiss

While marketers await the expected overhaul of and revisions to the FTC’s Environmental Marketing Guides, the existing FTC’s Green Guides should not be ignored. For example, the Guides advise that use of seals of approval should be accompanied by information that explains the basis of the award. Further, if the seal implies that a third-party has certified the product, the certifying party must be independent from the advertisers and have professional expertise in the area that is being certified. The FTC warns marketers against using environmental seals suggesting that a product is environmentally superior to other products if the manufacturer cannot substantiate this broad claim.

Recently, the Northern District of California denied S.C. Johnson & Son’s motion to dismiss state law claims for unfair competition and false advertising arising from SCJ’s labels for its Windex and Shout products (find the opinion here). The plaintiff, whose complaint we previously reported on here, alleged that SCJ’s “Greenlist” label is deceptively designed to look like a third party seal of approval, which it is not, and that the label falsely represents that the products are environmentally friendly. The label features a stylized drawing of two leaves and a stem. On the reverse side of the label, which is read through the back of the Windex packaging, the text states: “Greenlist™ is a rating system that promotes the use of environmentally responsible ingredients. For additional information, visit www.scjohnson.com.”

The putative class representative, Wayne Koh, alleged that he and others would not have purchased Greenlist-labeled Windex at its allegedly premium price had he known that Greenlist was actually created by SCJ, not a third party, and that Windex is not environmentally friendly.

SCJ argued that Koh had not alleged a cognizable injury under California’s Unfair Competition Law, Bus. & Prof. Code § 17200 et seq., and that no reasonable consumer could have found the Greenlist label misleading. The court recognized that being induced to purchase a product one would not otherwise have purchased is not loss of money or property within the meaning of Section 17200 as long as one still received the benefit of the bargain. Here, however, the plaintiff argued that he did not receive the benefit of the bargain because he paid more for a product that he believed was environmentally superior to other products. Thus, the court allowed the claim to proceed.

The court also rejected SCJ’s argument that no reasonable consumer could have found the Greenlist label misleading, stating that whether a business practice is deceptive is usually a question of fact that is not appropriate for decision on a motion to dismiss. The facts that the Greenlist label makes no mention of a third party, describes Greenlist as a “rating system” (not a seal of approval), and directs consumers to SCJ’s own website “may weaken the case for deceptiveness,” according to the court, but these facts do not allow the court to rule on the issue as a matter of law.

Finally, the court allowed Koh to include claims arising from a Greenlist label on Shout products even though plaintiff purchased only Windex. The court reasoned that Koh alleged that SCJ used the Greenlist label on multiple products, including one that he purchased, and there is no bright line rule that different product lines cannot be covered by a single class.

So when do we expect the proposed revisions to the FTC’s Green Guides to be announced? If we had a nickel for every time we were asked that question, we would be very green. Our best guess is late spring based on unofficial conversations with FTC Staff. In the meantime, marketers should continue to exercise considerable caution in making broad, general green claims and in using seals or other references to certification as the plaintiffs’ bar is not delaying action pending FTC updates.

- Vicki Shapiro and Amy Mudge

Vladeck Calls for "Baked In", Not "Half-Baked" Protections for Consumer Data

The FTC gathered in the west yesterday, holding the second in its series of Internet "Privacy Roundtables" at Berkeley Law School. Like the first round table last month in Washington (previously reported on here), the event yesterday brought together representatives from business, consumer advocacy groups, and government to wrestle with the privacy issues faced in this age when just about every visit to a website, update of a social media profile, or use of an iPhone app results in the collection of consumer data. And also like last month, the panels sometimes became "politely heated" as the participants expressed differing views regarding how to address the issues.

The day began with Commissioner Pamela Harbour stating that, what with all the privacy concerns consumers face, "good" businesses have an opportunity to compete for market share on the privacy point, a sentiment repeated in later panels. Nevertheless, she also noted her view that market forces are not sufficient to protect consumers, because (among other reasons) it is "difficult for consumers to define their expectations" for privacy. BCP Director David Vladeck followed, picking up on the theme of continued concern that many consumers do not understand the privacy issues they face, and that privacy protections for new technology should thus be "baked in at the beginning, rather than half-baked" add ons later.

The panels then addressed issues ranging from the particular issues raised by social networking sites, what happens to consumer data in the "cloud," and how mobile devices bring their own unique issues.

As readers of this blog know, it seems pretty clear that the FTC is looking to move away from a self-regulatory "notice and consent" model for dealing with privacy and toward a prescriptive world. Comments at this Berkeley roundtable were consistent with that, but obviously no solutions were reached. Now it's on to the third and last in the round table series, this time back in DC.

If you are interested in watching the webcast of the Berkeley Roundtable, it is available here.

- Sean Morris

FHA Uses New Standards and Enforcement Tools to Avoid being Called “the Next Subprime”

The Federal Housing Administration (“FHA”) has announced two initiatives in the last two weeks to avoid being the cause of the next subprime crisis. These initiatives aim to punish lenders who may have fraudulently marketed and sold FHA-backed loans to consumers, while also reducing the riskiest consumers’ access to FHA-backed loans. The FHA is a government mortgage insurer, and a division of the Department of Housing and Urban Development (“HUD”). If a mortgage meets FHA’s criteria, then the agency will insure the lender of the mortgage against losses caused by a homeowner’s default.

After the collapse of the subprime mortgage market in 2007, the volume of FHA-backed mortgages increased exponentially, as it remains one of the few mortgage products that lenders could market as a low downpayment option. The potential for fraud and other losses on these high volume loans have prompted the FHA to announce new standards and seek enforcement measures.

The new policies create more stringent standards for consumers that are marketed FHA-backed loans. FHA will increase the up-front mortgage insurance premium from 1.75% to 2.25%, while also seeking legislative power to charge a higher annual mortgage insurance premium. FHA will also limit the availability of 3.5% downpayment mortgages to borrowers who are not considered subprime, with all other borrowers required to provide at least a 10% downpayment. Additionally, FHA will propose a reduction in allowable seller concessions from 6% to 3% to conform with industry standards.

The FHA also is aggressively investigating lenders and seeking greater enforcement powers against lenders suspected of fraud. This month, the FHA issued fifteen subpoenas to lenders with high loan failure rates. In announcing these subpoenas, the FHA stated that it will use the HUD’s Inspector General’s powers to thoroughly examine the loss claims of these companies and determine whether fraud or misrepresentations may have been involved. Additionally, this week, the FHA permanently withdrew FHA approval for three mortgage lenders, while also suspending a fourth.

HUD has stated that it will seek to complement FHA’s current efforts by lobbying to Congress for additional HUD enforcement powers aimed to further reduce the risk of fraud in the FHA mortgage process. For example, HUD will seek the power of indemnification from lenders who directly endorse FHA-backed mortgages in lieu of submitting initial paperwork on an applicant to HUD. Additionally, HUD will lobby for legislative authority to withdraw nationwide FHA-approval for lenders on the basis of their actions within one region.

While these initiatives have the potential to reduce the availability of mortgages marketed to borrowers by strengthening requirements now and aggressively using its enforcement powers to combat possible fraudulent actions, the FHA may be able to avoid the mistakes of the subprime market for both lenders and borrowers.

UPDATE: For a more extensive write-up on this issue, go here.

- Beth DeSimone and Brian Larkin

Not So “Wonderful” for POM Wonderful: Federal District Court Tosses Case Based on Lack of Standing Under California’s Prop 64

We have been following and reporting on Pom Wonderful’s multiple challenges to competitor's advertising (see here and here, including their record for surviving the 12(b)(6) hurdle. A recent opinion dampened Pom's more recent winning streak. The decision marks another trial court’s views on what it takes to establish standing under California’s Unfair Competition Law and False Advertising Law after the passage of the voter initiative known as Proposition 64 -- an issue that will soon be addressed by the California Supreme Court.

In POM Wonderful LLC v. Welch Foods, Inc., Judge Matz, of the Central District of California, granted Welch’s motion for judgment on the pleadings. Pom alleged that Welch’s purported false statements regarding the amount of pomegranate juice in its “White Grape Pomegranate” juice blend deprived Pom of “business and goodwill,” injured its “relationship with existing and prospective customers,” and “resulted in increased sales” of Welch’s products “while hindering the sales of” Pom’s products. Judge Matz concluded that Pom had no standing to maintain a claim under California’s Unfair Competition Law (UCL) or California’s False Advertising Law (FAL). Proposition 64 amended these statutes to require a private party suing under them to show that it has suffered “injury in fact and lost money or property as a result of” UCL or FAL violations. The Court found that to establish “lost money or property” Pom had to plead and prove entitlement to restitution. It went on to hold that “Pom has not alleged a loss that would entitle it to restitution” because “Pom does not allege that Welch is in possession of money or property which Pom possessed, nor has Pom pointed to any money that it has been required to expend as a result of Welch’s unfair business practices or false advertising.” Rather, as in the seminal California Supreme Court case, Korea Supply Co. v. Lockheed Martin Corp., Pom “seeks to recover ‘nonrestitutional disgorgement of profits’ that are nothing more than a ‘contingent expectancy of a payment from a third party’ -- in this case, consumers.” In so holding, Judge Matz pointed to a decision in a nearly identical case, Pom Wonderful, LLC v. Tropicana Products, Inc.et al., where Judge Fischer reached a similar conclusion.

The Pom v. Welch Foods opinion contrasts with an earlier decision we reported on reported on here, in which Judge Otero, also of the Central District of California, rejected Coke’s argument that Pom lacked standing to pursue its UCL and FAL claims. There, Judge Otero reasoned that restitution under the UCL is proper if the plaintiff has lost money or property in which it has a “vested interest,” and Pom had a “vested interest” in profits derived from Coke’s allegedly unlawfully increased market share. As such, Pom had standing to bring its UCL and FAL claims.

The Pom decisions are examples of the continuing debate about what is required to show standing under the UCL. Welch Foods sides with those courts that have held that a plaintiff has lost “money or property” -- and therefore has standing to sue under the UCL -- only if he or she can show entitlement to restitution, i.e., the return of money that defendant took directly from plaintiff by means of the UCL violation. Other cases take a broader view of what constitutes “lost money or property.” In fact, this precise issue is before the California Supreme in the Kwikset case. The resolution of Kwikset may influence Pom’s claims against Welch Foods and other competitors. For instance, if the Kwikset Court defines “lost money or property” to include lost revenues caused by a competitor’s UCL violation, Pom may be able to establish standing. For now, however, the POM v. Welch Foods suggests that, at least in Judge Matz’s courtroom, a plaintiff will not be able to satisfy the “lost money or property” requirement by simply alleging a loss in market share based on the conduct of a competitor.

- James Speyer and Rachel Chanin

FTC Round Table Tango: Agency and Congress Dance Steps Hint At Where Online Privacy Legislation Is Going

The FTC announced today the agenda for its second privacy roundtable discussion, scheduled for January 28, in Berkeley, California “to explore the privacy challenges posed by the vast array of 21st century technology and business practices that collect and use consumer data.” This second recent foray into online privacy follows the first roundtable, held December 7, 2009, in Washington DC. Although the focus of these roundtables is wider than using consumers' information to support Behavioral Advertising (BA), a bit of background on that practice and the history behind these discussions, provide perspective on some of the issues involved.

A Brief History

As long-time readers know, the FTC has been engaged in a dance with industry for years over using consumers' personal information to support different business activities, including BA (the “tracking of a consumer’s activities online - including the searches the consumer has conducted, the web pages visited, and the content viewed - in order to deliver advertising targeted to the individual consumer’s interest”). When the music first started the FTC and industry seemed to be doing a waltz, moving together in both apposition and concordance, and the FTC in 2007 seemed happy to let industry take a self-regulatory spin. With the changing of administrations, the waltz gave way to alternating turns of break-dancing. First industry, then the FTC, sought to anticipate the other and vied for the crowd's attention. The Network Advertising Initiative (NAI), jumped on stage early, modifying its existing online self-regulatory code of conduct in December, 2008, anticipating the FTC’s release of “final” self-regulatory principles by two months. The FTC issued those principles in February, 2009, with staff in the accompanying report. Congress, watching from the sidelines, grumbled it wasn't overly fond of the music, and began to mutter about changing the tune completely. The Interactive Advertising Bureau (IAB), until then mostly silent, broke onto the floor in July, suggesting Congress stay on the sidelines because the dance floor was full and the dancers already doing quite fine on their own. The FTC then sidled closer to where Congress was standing, and said that it too was thinking it might be time to change the music once and for all. Since then, the dance has slowed to a crawl as everyone has waited to see what music Congress decides to put on and occasionally suggesting the current tune was still snappy and shouldn't be changed just yet.

Tupperware™ Parties And Prescription Drug Marketing: FDA Puts The Lid On A Drug Promotional Campaign

Ever since the Tupperware Company revolutionized direct-to-consumer (“DTC”) marketing through its famous “Tupperware™ parties” of the 1950s, manufacturers have been trying mimic its success. Pharmaceutical manufacturers are among the latest to revive this “old school” technique, and FDA has taken notice.

On January 12, 2010, FDA’s Division of Drug Marketing, Advertising, and Communications (“DDMAC”) posted a December 30, 2009 letter to Bayer HealthCare Pharmaceuticals Inc. (“Bayer”) on its website objecting to a script for a live consumer-directed program for the drug Mirena® entitled “Mirena Simple Style Statements Program” (“Program”). Mirena (levonorgestrel-releasing intrauterine system) is a drug delivery system indicated for intrauterine contraception for up to five years. The drug carries various contraindications and warnings and the FDA-approved label (“PI”) requires that patients be “reexamined and evaluated 4 to 12 weeks after insertion, and once a year thereafter, or more frequently if clinically indicated”.

The Program was developed as a partnership between Bayer and Mom Central, a commercial social networking site “dedicated to providing busy moms with smart household and parenting solutions”. According to FDA’s letter and the allegedly violative Program script, the Bayer-sponsored Program is presented in a consumer’s home or another private setting (such as a private restaurant party). A Mom Central representative starts the presentation with a scripted introduction and then hands the presentation off to a nurse practitioner who follows a scripted Mirena product presentation. After a question and answer session, the nurse practitioner (who Bayer says is trained to keep her messaging consistent with the Mirena PI) hands off the presentation to a stylist who offers fashion tips. The overall effect is to present Mirena as an attractive option to busy moms who are looking for a “lifestyle solution”.

The Mirena FDA letter underscores the need for the pharmaceutical industry to balance clever “lifestyle marketing” with FDA’s standards for substantiation for quality of life claims and risk/benefit balancing. In particular, FDA takes objection to statements in the Program script which suggest that Mirena increases levels of intimacy, romance, and emotional satisfaction. In FDA’s view, these statements overstate Mirena’s efficacy because they have not been proven to be quality of life outcomes supported by substantial clinical experience, noting that 5% of clinical trial patients actually reported decreased libido as a side effect. Further, the nurse practitioner was scripted to state that busy moms who use Mirena, “look and feel great”. FDA points out that this statement, among others, minimizes the risks associated with use of Mirena, which include, irregular bleeding, ovarian cysts, back pain, weight increase, acne and other risks which are not only inconsistent with “feeling great” but are also important risks that need to be communicated to consumers. Finally FDA notes that the script states that Mirena has “no daily, weekly, or monthly routines to comply with” as part of its overall message that Mirena fits into a convenient lifestyle. In fact, FDA notes that the Mirena PI requires both patient and physician follow up.

While presenting a prescription pharmaceutical product as an attractive lifestyle option may be a clever way to advertise directly to consumers, FDA’s response to this consumer program script has made clear that drugs are not Tupperware.

- Daniel Kracov and Mahnu Davar

Pharma Company Beats Back Class Action, But Illinois Supreme Court Buys Indirect Deception Theory

Bayer recently persuaded the Illinois Supreme Court to grant it summary judgment in a putative class action case, but, in the process, the Court affirmed that the theory of indirect deception was recognized under the Illinois Consumer Fraud Act (see the opinion here).

In the case, a consumer who had been prescribed a cholesterol lowering drug argued that Bayer had misled her and other potential class members by omitting certain potential side effects of the drug. Plaintiff did not allege any direct communication with Bayer, but rather argued that she had been indirectly deceived as a result of Bayer’s failure to communicate certain risk information to doctors. The Illinois Supreme Court affirmed the validity of a claim based upon indirect deception, noting that it is “enough that the statements by the defendant be made with the intention that it reach the plaintiff and influence his action and that it does reach him and that he does rely upon it, to his damage.” Bayer, however, still had the last laugh as the court found that the plaintiff failed to allege that her particular doctor was deceived by Bayer and that such a showing was necessary for application of the doctrine.

On a related note, the FTC has lately also been making noises that it intends to pursue deceptive business-to-business environmental claims under the appropriate circumstances. Given Section 5’s emphasis on consumer deception it seems likely that the FTC may rely upon the notion of indirect deception as well.

- Randy Shaheen

CA Prop. 64: Has the “Shakedown Loophole” Been Closed?

Before 2004, California’s Unfair Competition Law (UCL) and False Advertising Law (FAL) were unique in allowing “representative actions” by anyone against any business for any practice alleged to be unlawful, unfair, or fraudulent. These laws’ breadth led to abusive suits by plaintiffs’ lawyers that were hard to defend. Nevertheless, they repeatedly withstood legislative reform efforts.

The business community eventually resorted to a ballot proposition, and so, in late 2004, California voters were deluged with ads asking them to to “close the shakedown loophole” that “allows private lawyers to file frivolous lawsuits against small businesses even though they have no client or evidence that anyone was damaged or misled.” Prop. 64 passed by a wide margin.

Five years later, following a number of court decisions interpreting Prop. 64, some are asking whether its backers achieved their goals. It’s a mixed bag. On issues of retroactivity, “tester” standing, and virtual representation, defense lawyers and their clients have prevailed. But on more significant issues of “placeholder” plaintiffs, absent class members, and reliance, plaintiffs’ lawyers have prevailed. The courtroom battles continue.

Undoubtedly, Proposition 64 corrected some of the more egregious practices of the past. It is no longer possible for plaintiffs’ lawyers to challenge a business practice unless they can find at least one person who claims an actual monetary loss as a result. They cannot represent unnamed consumers without such a plaintiff, and they cannot sue on behalf of activist groups who have not been harmed themselves. Nevertheless, UCL and FAL claims have not subsided. In fact, ironically — in light of Proposition 64’s overriding goal — the continuing uncertainty surrounding these important statutes may have created more, rather than less, litigation.

For a more extensive write-up on this issue, click here.

- Trent Norris

Birdsong v. Apple: Just Because You Might Hurt Yourself Doesn’t Mean You Get to Sue

The close of the last decade may have brought with it the end of breach of warranty and unfair competition claims based on hypothetical, rather than actual, injuries, at least in the Ninth Circuit.

On December 30, 2009, the Ninth Circuit Court of Appeals affirmed the Northern District of California’s dismissal of Joseph Birdsong’s iPod “hearing loss” case against Apple, Inc. Birdsong’s allegations were typical of many recent “consumer protection” class actions: that a product is defective because it poses a hypothetical risk to users who can ignore warnings and common sense and use a product unsafely. Specifically, Birdsong and his co-plaintiff claimed that iPod users who turned the volume way up might eventually suffer hearing loss. Based on this scenario, the plaintiffs brought several breach of warranty claims and an unfair competition claim under California’s Unfair Competition Law or “UCL.”

The court found that the plaintiffs had not stated breach of warranty claims because, although an iPod -- designed to be used with earphones as well as external speaker systems -- is capable of playing loud music for hours on end, that only means that users can choose to take risks with their hearing, not that the iPod was lacking in quality. Moreover, just because plaintiffs were able to imagine how to make the iPod safer -- better earbuds, volume control software, warnings printed on the iPod itself (Apple’s design team would collectively faint!), or a digital volume meter -- doesn’t mean the absence of those features actually hurt anyone.

Consumer Advertising Law Blog Goes Mobile - iPhone App Is Now Available

Arnold & Porter LLP has just launched its first mobile phone application that provides our readers a unique way to access the reporting and analysis created by the attorneys who contribute to this blog.

If you have an iPhone or iPod Touch, you can download the application by clicking here (iTunes link).

We welcome your reactions to our iPhone application.

- The Consumer Advertising Law Blog Team

Illinois Court Decides iTunes Must Face the Music

Apple previously sold iTunes gift cards with packaging that stated “Download $xx worth of entertainment to enjoy on your Mac or Windows PC. . . . Songs are 99¢ and videos start at $1.99.” In April 2009, Apple changed its pricing structure and raised the price of a limited number of songs on iTunes to $1.29. Plaintiffs, who alleged purchases of iTunes gift cards in March 2008 and May 2009, filed a class action alleging false advertising and breach of contract. Apple alleged that it stopped shipping the challenged gift cards to retailers “long before” the price restructuring in 2009, and it argued that price information appearing on old gift cards should not require Apple to sell all iTunes songs for 99¢ forever. A federal judge recently denied Apple’s motion to dismiss. (Owens v. Apple, Inc., No. 09-cv-0479-MJR (S.D. Ill. 2009)).

Apple’s motion to dismiss relied on several arguments. Of interest here is Apple’s claim that the complaint failed to satisfy the new pleading standard set forth in Bell Atlantic v. Twombly.

Announcing the Consumer Advertising Law Blog - The Kindle Edition

The Consumer Advertising Law Blog team is always looking for better ways to connect with our readers. We are pleased to announce that the blog is now available via Amazon’s Kindle Reader. To obtain wireless delivery of our blog on the Kindle, click here. Note: While Amazon charges $0.99 per month for delivery of the blog content to your Kindle device, the company is offering a 14-day free trial.

Holiday Jingles: Claims or Puffs?

Many of you have likely struggled with the line between puffery and claims. With that in mind, and in celebration of the holiday season, we offer the following “Is It Puffery or a Claim” quiz.

1. Does Santa really check his list once and then twice?
2. Is it fun to ride in a one horse open sleigh?
3. Is the dreidel really made out of clay?
4. Do angels sweetly sing?
5. Did the other reindeer really love Rudolph and did he really go down in history?
6. Do the candles shed a sweet light?
7. Was there magic in that old silk hat they found?
8. Is figgy pudding in demand right here right now?
9. Is it a bright time, the right time, to rock the night away with jingling feet?
10. Do we actually dream of a while Christmas with every Christmas card we write?

Good luck to all. If you don’t hear from us until the New Year (and you may not unless something big breaks), we want to wish you and your loved ones a wonderful holiday and happy New Year.

- The Consumer Advertising Law Blog Team

Will FTC Endorsement Guides Hit Celebrities Where it Hurts?

We all know that celebrities rarely do anything without getting paid for it or getting something for free. But are the FTC’s revisions to the endorsement guides about to put a crimp in celebrity style? Slate reports that Kim Kardashian earns $10,000 per corporate tweet. Similarly, another site reported that Gwyneth Paltrow was recently a celebrity VIP at the grand reopening of a luxury hotel in Morocco. Shortly thereafter Paltrow praised the hotel in her online newsletter. Although it’s not certain, it seems unlikely that the actress paid the $800+ per night room rate. Of course, celebrities such as these are not likely in danger of being hauled before the FTC as David Vladeck has consistently stated that the FTC does not plan to go after individual bloggers for violating its Revised Testimonial Guides. However, there is no such promise for companies which are compensating celebrity bloggers.

What can your company do if part of its marketing strategy is to pay one of the Kardashian sisters or other celebs (or even non-celeb bloggers) in cash or with free product? Proactive steps are suggested to avoid becoming part of the FTC’s initial sweep to enforce the revised Guides.

The Word of Mouth Advertising Association or WOMMA recommends educating bloggers regarding responsibilities, require disclosures from bloggers and monitor blogs to make sure the disclosure is happening. For Tweets, WOMMA recommends creating a link to “Disclosures and Relationships” section on the user’s profile and clearly state within the tweet with a hashtag (#spon or #paid) that there is a corporate sponsor relationship. Similar disclosures are recommended by WOMMA for user generated content on social networking sites, video or photo sharing sites, review sites and blogs to detail the disclosure in the editorial copy (“I was paid by [company X] to review” or “I received [X product or service] from [Company x] to review”) and in the user’s profile.

Will requiring such disclosures make this marketing strategy less attractive? Stay tuned.

- Amy Mudge and Randy Shaheen

FACTA Court Opinion: E-Mail Receipt Is Not “Electronically Printed”

It is apparent, especially during the holiday season, that Internet commerce has become an evolving substitute for traditional in-store shopping. In the area of federal identity theft protections, however, purchases over the Internet are not comparable to in-store transactions.

Under the Fair and Accurate Credit Transactions Act (“FACTA”), a person that accepts credit or debit card payments is prohibited from printing more than the last five digits of the card number or the expiration date on any receipt provided at the point of sale or transaction. The U.S. District Court for the Northern District of Illinois, however, recently determined that these FACTA prohibitions do not apply to email order confirmations related to Internet purchases. (Shlahtichman v. 1-800 CONTACTS (N.D. Ill. 2009) 

In Shlahtichman v. 1-800 CONTACTS, Inc., the plaintiff purchased contact lenses from the defendant through an Internet transaction with his credit card. The defendant sent the plaintiff a receipt through e-mail which contained the plaintiff’s credit card expiration date. The district court dismissed the plaintiff’s claim that the defendant’s actions were in violation of FACTA for two reasons: 1) an e-mail receipt is not an “electronically printed” receipt under FACTA; and 2) an e-mail receipt is not provided at a transaction’s point of sale.

(1) An e-mail receipt is not an electronically printed receipt under FACTA

The relevant FACTA prohibitions are limited to “receipts that are electronically printed.” The court examined the plain meaning of FACTA, as well prior case law analyzing FACTA’s language, and concluded, consistent with the majority of court opinions to date, that e-mail receipts are not “electronically printed” receipts. The judge noted that the word “print” means to transfer information onto paper and not to display on a computer screen. To emphasize the point that print could only refer to a tangible paper receipt, the judge quoted a prior case (Grabein v. Jupiterimages (S.D. Fla. 2008), noting that the definition of “print” only refers to a tangible, paper receipt. That is why a person “has to print a copy of his receipt to get it off of his computer; it is why the machine used to transfer text from a computer to paper is called a printer.” 

The Shlahtichman court also looked at Congress’ intent underlying the FACTA, noting that the statute was only meant to prevent low levels of identity theft, such as using information on a receipt obtained from the trash. If FACTA were aimed at protecting email privacy, the court opined, Congress would have explicitly referenced e-mail, as it has done in other statutes.

(2) An e-mail receipt is not provided at a transaction’s point of sale

FACTA also requires that the receipt covered by the statute be provided “at the point of the sale or transaction.” According to the Shlahtichman court, Internet commerce has no tangible point of sale or transaction, and thus FACTA cannot apply to an e-mail receipt resulting from an Internet purchase. E-mail receipts are directed to an account that could be accessed anywhere in the world, and not specifically to the place or computer where the consumer made the purchase. The court concluded that the a point of sale or transaction could only exist in the context of printed paper receipts.

As the Internet continues to drive retail shopping to the virtual realm, with search engines, one-click transactions, and cyber promotions, FACTA’s identity theft protections may become more and more limited. Shoppers eschewing the crowds at the mall should be aware that if they leave their e-mail on view to others, they may not have recourse to relief under FACTA in the event their receipts show too much of their personal data.

- Beth DeSimone, Nancy Perkins, and Brian Larkin

CPSC Modifies Stay of Enforcement on Testing and Certification

Earlier this year CPSC stayed enforcement of the CPSIA testing and certification requirements for most but not all standards. Today, CPSC announced decisions to lift the stay of enforcement on testing and certification requirements as to certain standards and to keep the stay in place as to other standards. (A link to CPSC’s press release can be found here.

Changes to the stay are identified below, grouped by when the stay will be lifted as to particular standards. However, remember that products must comply with all applicable standards, even if the testing and certification requirements have been stayed.

FTC Childhood Obesity Forum (3): Self-Regulation in Children’s Food Advertising- Too Hot, Too Cold, or Just Right?

During Tuesday’s FTC workshop on Food Marketing and Childhood Obesity (that we have previously blogged about here and here), a lively discussion took place between researchers, industry representatives, and regulators about the successes and failures of self-regulation.

First, three panelists, representing research teams from universities and consumer advocacy groups, presented findings from studies on food marketing to children conducted since the advent of self regulation. Here are a few of their findings:

• 70% of advertisements in 2009 were still for foods that are considered nutritionally poor for kids.
• Half of ads featuring licensed characters still promote nutritionally poor foods.
• Most self-regulation policies do not encompass all types of marketing, such as on-package advertising and marketing in schools.
• Companies do not maintain a set of common nutrition standards to which they all adhere.
• Many companies are still utilizing “advergames” targeted at children, and only 37% of them include healthy lifestyle messaging.

The overall message was that although self-regulation has made important strides, it is not sufficient to change overall marketing strategies, and not enough is being done to promote healthy and nutritious food choices for kids.

Next, three panelists spoke about the benefits of self-regulation, and the positive changes that are being made. A representative from Disney spoke about the company’s newly adopted nutritional guidelines, the development and increased distribution of Disney brand fresh fruits and vegetables, the availability of more healthy options in Disney parks and resorts, and increased healthy lifestyle messaging in Disney media.

A representative from the Grocery Manufacturers Association praised self-regulatory initiatives, noting a decrease in food, beverage, and restaurant ads viewed by children and shifts in the types of foods being advertised. The launch of the Healthy Weight Commitment Foundation was discussed, noting members’ goal of reducing obesity by 2015. Additionally, the representative announced the Creative Kids Campaign which encourages a balance between healthy diet and physical activity.

Finally, the Director of the Children’s Food and Beverage Advertising Initiative (CFBAI) discussed how the 16 members of the initiative have worked to change children’s food advertising. The Director noted that the CFBAI allows for flexibility in nutrition standards and praised the changes the industry has made thus far, noting in particular the reduction of sugar in ready-to-eat cereals, and the reduction of sodium in canned soups.

Clearly there are strong feelings on both sides as to whether self-regulation is up to the job. It remains to be seen whether the agencies and/or Congress will shift to a more regulated approach, although as noted in a previous blog posting, any effort at regulation may have to deal with First Amendment questions.

- Randy Shaheen and Danielle Garten

FTC Childhood Obesity Forum (2): Links Between Food Advertising and Childhood Obesity Alleged, But Food Marketers May Be Skinny Enough to Be Covered by the First Amendment

The first two panels at Tuesday’s FTC workshop Sizing Up: Food Marketing and Childhood Obesity considered first what evidence there is regarding the possible ill effects of food marketing on children and then, what, if anything, regulators might be able to do about it.

The first panel, “New Research on Food Marketing to Children” presented findings alleging that food marketing to children does indeed increase the consumption of unhealthy food and has a statistically significant link to childhood obesity. (See here for one source of more information.) Researchers said they were most surprised by how much food advertising affected all children, regardless of race, ethnicity, gender, age, or socio-economic class, although it does affect some groups to a greater extent.

One of the new concerns for the panelists is the alleged reach of what was labeled “Marketing 2.1.” According to the presenters, the aims of this emerging marketing practice is to surround children with an atmosphere of pervasive product placement in everything from social media to video games and rides in addition to classic television and print advertisements. This form of marketing, they claimed, is also tapping into neurological research to project desire for a product directly into a consumer’s subconscious that would circumvent factors such as education and general healthy eating habits that increase consumers’ resistance to food product placement.

A second panel, “Advertising to Children and the First Amendment,” then considered what, if any, restrictions might be placed on food advertising to children, if, in fact, it does contribute to childhood obesity.

One of the first hurdles that regulations must pass is the Central Hudson four-prong test that determines whether restrictions violate the First Amendment by impermissibly burdening commercial speech. Passing this test is no easy task. While the First Amendment panelists disagreed on almost everything, they did agree that the United States Supreme Court has steadily increased protection for commercial speech over the last 15 years, and that the status of commercial speech aimed at children is unclear. Panelists disagreed sharply over whether children even need protection from commercial speech. One panelist argued that children have the built-in protection factor of parents and guardians who should not be giving into the “nag” factor. Other panelists argued that the research is showing that food marketing is specifically geared to override a reasonable person’s rational decision-making process, which undermines the theory that reasonable people are able to rationally filter commercial speech without intrusive government protection.

Of course, there are no such First Amendment worries with respect to voluntary guidelines, which was another approach discussed at the conference. 

- Randy Shaheen and Candida Harty

FTC Childhood Obesity Forum (1): Working Group Announces Tentative Proposed Nutritional Guidelines for Foods Marketed to Children

In the final presentation of the FTC’s forum, “Sizing Up Food Marketing and Childhood Obesity,” the Interagency Working Group on Food Marketed to Children presented tentative proposed nutritional standards for the advertisement of food products to children (defined as ages 2-17). The Working Group was commissioned by Congress in the Spring of 2008 and is made up of representatives from the FTC, FDA, CDC and USDA.

The Working Group created three “Standards” to determine what food products should and should not be marketed to children. “Standard I” is meant to encourage the promotion of nutritious foods in children’s diets. Standard I foods, such as 100% fruit juice, 100% nonfat and low fat milk and yogurt or 100% whole grains, will have no recommended marketing restrictions.

For foods not falling into Standard I, the Working Group created “Standards II & III.” If a product meets both Standards II and III, the Working Group recommends permitting marketing of the product to children. Standard II foods must meaningfully contribute to a healthful diet and are defined as foods that either contain 50% by weight of certain nutritional items (such as extra lean meat, fruits or vegetables) or foods that contain sufficiently high levels of the daily recommended serving of certain nutritional items (such as whole grains, fruit, nuts or seeds). Even if a product satisfies Standard II, it must still satisfy Standard III to receive the recommendation of permissible marketing to children. Standard III places a limit on unfavorable nutrients such as saturated fat, trans fat, sugar and sodium.

The Working Group is seeking further input on a number of questions such as whether there should be separate standards for differing age groups and whether other ingredients such as caffeine and nonsugar sweeteners should be included as well as the treatment of food served in chain restaurants. The proposed guidelines, however, make an aggressive attempt at pushing the food industry farther than it has ever been to meet uniform heightened nutritional standards before advertising products to children.

The Working Group’s report is due to Congress in July 2010 and its recommendations will be published early next year for comment in the Federal Register. The panel stressed that the presented recommendations will not constitute a regulatory proposal or serve as a substitute for existing policy, laws or dietary guidelines. Rather, the standards will serve as a guide for the food industry for appropriate marketing of food products to children.

For a more detailed breakdown of the working group’s recommended standards, please click here.

- Randy Shaheen and Jessica Halbert

Ready or Not for the New Year -- Illinois Lead Labeling Law Effective 1/1/2010

Effective January 1, 2010, an onerous labeling requirement goes into effect in Illinois for toys with surface coating, children’s jewelry, and child care articles that contain between 40 and 300 ppm lead. The 40 ppm limit is well below the federal standard, and Illinois has not yet adopted implementing regulations. Yet, the effective date is upon us. A summary of the requirement follows.

Warning Requirement for Specified Children’s Products

An amendment to Illinois’ Lead Poisoning Prevention Act (“ILPPA”) adds a warning requirement for certain children’s products that contain more than 40 ppm lead. Specifically, “[e]ffective January 1, 2010, no person, firm, or corporation shall sell, have, offer for sale, or transfer [‘children's jewelry,’ ‘child care articles,’ or ‘toys containing paint’] that contain a total lead in any component part of the item that is more than 0.004% (40 parts per million) but less than [300 ppm].”

ILPPA Definitions

“Children's jewelry” means jewelry that is made for, marketed for use by, or marketed to children under the age of 12 and includes jewelry that meets any of the following conditions:

(a) represented in its packaging, display, or advertising as appropriate for use by children under the age of 12;

(b) sold in conjunction with, attached to, or packaged together with other products that are packaged, displayed, or advertised as appropriate for use by children under 12;

(c) sized for children and not intended for use by adults; or

(d) sold in any of the following places: a vending machine; a retail store, catalogue, or online Web site in which a person exclusively offers for sale products that are packaged, displayed, or advertised as appropriate for use by children; or a discrete portion of a retail store, catalogue, or online Web site in which a person offers for sale products that are packaged, displayed or advertised as appropriate for use by children.

“Child care article” means an item that is designed or intended by the manufacturer to facilitate the sleep, relaxation, or feeding of children under the age of 6 or to help with children under the age of 6 who are sucking or teething. The definition of “child care article” is broader under the ILPPA than under the CPSIA in that the ILPPA (1) includes facilitation of “relaxation” and (2) covers children up to 6 years old rather than 3 years old.

“Toy containing paint” means a painted toy designed for or intended for use by children under the age of 12 at play. In determining whether a toy containing paint is designed for or intended for use by children under the age of 12, the following factors shall be considered:

(a) a statement by a manufacturer about the intended use of the product, including a label on the product, if such statement is reasonable;

(b) whether the product is represented in its packaging, display, promotion, or advertising as appropriate for children under the age of 12; and

(c) whether the product is commonly recognized by consumers as being intended for use by a child under the age of 12.

Thus, while the labeling requirement applies only to toys that have lead in surface coating, the requirement applies to both the surface coating and substrate of children’s jewelry and child care articles.

Content and Placement of the Warning Statement

The ILPPA specifies the content, appearance and placement of the warning statement, requiring that it “contain at least the following: ‘WARNING: CONTAINS LEAD. MAY BE HARMFUL IF EATEN OR CHEWED. MAY GENERATE DUST CONTAINING LEAD.’” The ILPPA makes the manufacturer or importer of record responsible for compliance with the warning requirements. The law requires that the warning statement must be “provided on the children's product or on the label on the immediate container of the children's product.” The law further specifies that “ the statement shall be located in a prominent place on the item or package such that consumers are likely to see the statement when it is examined under retail conditions.”

- Eric Rubel and Jennifer Karmonick

Lacey Act's Power Chord Rocks Guitar Manufacturer

We recently reported on the amended Lacey Act’s potential for causing upheaval for U.S. businesses through its expansion to cover all plant products, such as paper and wood. This potential recently became a reality for Gibson Guitars when the U.S. Fish & Wildlife Service raided a guitar manufacturing plant in Nashville, Tennessee. Reports state that the factory allegedly contained illegal Madagascan rosewood that was imported via wood sources in Germany. To preserve its lemur population that lives in these trees, the Madagascan government has banned the export of all rosewood. Therefore, any Madagascan rosewood logged since the ban would violate the Lacey Act were it to be imported into the United States.

This is first reported major enforcement action of the new provisions of the Lacey Act, and consequently it is being watched with great interest. Circumstances of the raid should raise concerns for U.S. businesses. To exercise the required “due care” standard, many companies have placed faith in the chain-of-custody certification that organizations such as the Rainforest Alliance offer. But only a small percentage of woods and forests are certified, and although some Gibson wood was certified to Rainforest Alliance standards, this wood came from uncertified products. Therefore, although these programs are extremely useful in encouraging responsible logging practices and may constitute “due care,” the Gibson example teaches us that because so much of our wood does not come from certified forests and producers, more needs to be done to ensure the wood and paper products that U.S. companies use is legally obtained.

For more information, here is an extended advisory on the amended Lacey Act.

- Marcus Asner and Grace Pickering