Consumer Advertising Law Blog

UK Power to Regulate Online Advertising Going Viral?

As a result of a “landmark” decision by the Committee of Advertising Practice (the UK body responsible for writing the advertising codes) the scope of the UK Advertising Standards Authority’s (the body responsible for regulating advertising in the UK) digital remit to regulate online advertising has been significantly extended.

The ASA’s current digital remit only applies to advertisements in e-mails and advertisements in paid-for space online (including, for example, banner and pop-up advertisement) and sales promotions in paid-for space and non-paid-for space online. However, as from 1 March 2011, the ASA will also regulate advertisers’ own marketing communications on their own websites and for other non-paid-for space online under their control (such as social networking sites used to target marketing communications at UK consumers).

The move is being justified on the basis of extending the ASA’s established principles of effective consumer protection and fair competition to the online world. According to ASA Chairman Lord Chris Smith “We have received over 4,500 complaints since 2008 about marketing communications on websites that we couldn’t deal with, but from 1 March anyone who has a concern about a marketing communication online will be able to turn to the ASA”.

Sanctions for breach of the new extended code will include the removal of paid-for search advertising and advertising paid for by the ASA to highlight an advertiser’s continued non-compliance. To fund the new remit, the industry has agreed to apply a 0.1% levy on paid-for advertising appearing on internet search engines through media and search agencies.

See here for full details of the decision. For the current versions of the UK broadcast and non-broadcast advertising codes.

- Richard Dickinson and Jake Marshall

No Cash? No Problem. Grab Your Phone and Charge It! Consumer Protections Included

Leave your ATM cards at home; forget the drive thru at the bank; heck, leave your whole wallet on the kitchen counter -- mobile banking is here and becoming all the rage. Well, maybe not all the rage just yet (like it is in Japan, but certainly, it is becoming easier, with the popularity of the I-Phone and similar devices with interactive capability.

For example, the office supply store, Staples, Inc. reported this month that more than one-fourth of small business owners report having a phone device capable of making mobile payments. About 24% use these devices to make purchases and 3% always do so. Those that do so shop on line frequently. In response to this trend, Staples has enhanced its mobile website.

Other press reports have noted that mobile banking is particularly popular with the young and the underbanked. Indeed, the market research firm Celent reported this month that the attraction of mobile banking lies in ease of access and portability. A lot of the underbanked may not have online access but do have a cell phone. As a result, prepaid card issuers, such as Green Dot are offering mobile account access and intend to upgrade their mobile device offerings.

Banks also are getting in the act, testing new technologies that will allow bank customers to access their accounts and make purchases through their smart phones.

In adopting new banking applications, however, it would be advisable for companies to understand consumers’ rights and the risks. Mobile payment applications are subject to the same banking rules as their technologically older counterparts. Thus, if a user links her phone to a credit card, the consumer protections afforded by federal law to credit cards would apply. These protections limit a consumer’s liability to $50 for unauthorized use (although many credit card issuers have a zero liability policy).

If a user links her phone to a debit card, the consumer protections afforded by federal law to debit cards would apply. These protections also limit a consumer liability for unauthorized use to $50 if the consumer notifies its institution of the unauthorized use within two business days. Otherwise, the liability can go as high as $500.

The protection afforded prepaid cards may differ, depending on the type of card. Payroll cards are given the same protection as debit cards, while other prepaid cards may not provide any protection against unauthorized use at all - they are the equivalent of cash and thus, if there is unauthorized use of the card, it is like your cash has been stolen.

A more insidious risk, however, is the risk that someone not just uses the phone for an unauthorized transaction, but actually hacks into the mobile applications or the merchant’s site, and access consumer account information - taking not just someone’s funds but also potentially their identity.

Consumers Union highlighted some of the these risks in a report issued on Tuesday. While the Consumers Union report focused on consumer risk, and called for possible changes in law, it would be wise for stores or other companies contemplating offering apps for mobile payments to consider data security and other risks, and plan accordingly. Users of mobile payments may want to carefully review the disclosures for the payment mechanism being linked to the phone to know what consumer protections apply to them.

- Beth DeSimone

P2P Users - Upgrade Your Software Before Sharing Your Latest Vacation Pics!

For many of us who did not learn to use a computer keyboard and mouse before we could walk, terms like downloading files using BitTorrent or talking to friends on the Gnutella network sounds like having some dental procedure. But others in this generation, and certainly our kids, use those protocols and networks daily to chat and share pictures and videos with their friends though peer to peer or P2P file-sharing networks.

But the same feature of P2P software that underpins its functionality -- its ability to access and share files on your computer across the Internet -- also creates potential security vulnerabilities. The Federal Trade Commission investigated the reportedly largest provider of these P2P services - Limewire. The FTC alleged that older versions of the Limewire software contained security vulnerabilities that put users at risk of inadvertently sharing personal information, including social security numbers, bank account numbers and other matters, stored on their computers.

Limewire upgraded its software, incorporating safeguards into its user interface to help users avoid the inadvertent sharing of sensitive information. The company also said it would tell consumers to upgrade their Limewire software and inform consumers on how to best avoid inadvertent sharing, even though the company could not force users to upgrade (one version is free and the other is a one-time download for $39.99). In large part for those reasons, and the fact that the FTC found that users tended to upgrade voluntarily at a high rate (undoubtedly wanting the fastest service possible to share their latest creations), the FTC closed the investigation without action.

While no computer connected to the Internet is invulnerable, using the most recent version of P2P software may help reduce the vulnerability of your personal information to unintended disclosure.

- Ronald Lee and Beth DeSimone

Is It Something in the Soil? “Not Biodegradable in California” Disclaimers Likely to Increase

Summer is ending, and the highly anticipated revisions to the FTC’s Green Guides have still not arrived. As regular readers will recall, the FTC issued its Green Guides in 1992, partly in response to manufacturers’ requests for a uniform standard for making environmental claims. (For additional background, see here.) The current Green Guides allow biodegradability claims if the claim is substantiated by competent and reliable scientific evidence and qualified to the extent necessary to avoid deceiving consumers about the product’s ability to degrade in the environment where it is customarily disposed (i.e., landfills) and the rate and extent of degradation.

California has taken a different approach to these labeling claims. On August 25, the California legislature passed a law that would prohibit labeling any plastic product sold in California as “biodegradable,” “degradable,” or “decomposable.” Senate Bill 1454 now awaits action by Governor Schwarzenegger, who must approve or veto all bills by September 30. SB 1454 includes strong findings that, because there is no American Society for Testing and Materials (ASTM) standard specification for the term “biodegradable” for plastic, the term is inherently misleading to consumers. The bill states that consumers are more likely to litter a plastic item labeled “biodegradable,” which results in harm to the state and its environment.

Current California law prohibits labeling plastic bags and food packaging with the terms “biodegradable,” “degradable,” or “decomposable.” An example of the results of the current California law is evident in the label on the package of a popular brand of doggy waste pick-up bags. S.B. 1454 expands the scope of products subject to these labeling restrictions to include all products made of plastic or plastic components. Marketers would still be permitted to label a product “compostable” or “marine degradable”  if and only if the product meets the applicable ASTM standard specification at the time of sale. The bill provides for civil penalties for the violation of the law and expressly states that the remedies in the bill do not preempt consumer protection laws such as California’s Unfair Competition Law.

National marketers will hold their collective breaths to see whether other state legislatures also seek to set standards for environmental marketing claims. If they do, it will be difficult to realize the goals of uniformity and predictability envisioned by the FTC Green Guides. Absent uniform standards, consumers are likely left more confused, not less, by a patchwork of labeling requirements. We hope a consistent nationwide approach to environmental marketing regulations is adopted, but stay tuned here for future developments.

- Suzy Wilson and Elizabeth Frank

TILT: FTC Alleges PR Firm Violated Endorsement Guides by Rating Clients’ Gaming Apps

We recently blogged about a column by the New York Times ethicist which addressed the ethics of an employer asking its employees to favorably rate iPhone apps it developed and noted that the practice likely violated the FTC’s revised Endorsement guides. Well, a similar practice has caught the FTC’s eye resulting in a public relations firm settling an FTC charge that it provided misleading online endorsements.

The agency was hired by video game developers, and the FTC alleges that its employees posted game reviews of the video game apps on the iTunes store site without disclosing that they were working for the app developers and, in some cases, received a percentage of sales. As we noted in our prior blog, failing to disclose such material connections runs afoul of the FTC’s guidelines. The proposed settlement has various standard provisions that one might expect but also includes a requirement that the firm remove any previously posted misleading endorsements.

The FTC issued its revised Testimonial and Endorsement Guides in the fall of last year. It is common when the FTC issues new or revised guidance in an area that a flurry of enforcement activity follows the release of the guidance. In this case, there has only been one closing letter associated with an investigation of a retailer, likely because the FTC has spent considerable time on its own PR efforts trying to clarify that it did not intend to go after individual bloggers. This case should provide comfort in that regard. However, is it "Game Over" for companies that do not have policies in place requiring sponsored bloggers to disclose their connection to the company? Stay tuned . . .

- Randy Shaheen

When Do I Need to Print Calorie Information on My Restaurant Menu? Yesterday, Says FDA.

On August, 24, 2010, the U.S. Food and Drug Administration published draft and final guidance documents for restaurants and States on how to interpret and implement the new restaurant menu labeling law. The new law, found in section 4205 of the Patient Protection and Affordable Care Act of 2010, requires all chain restaurants and “similar retail food establishments” with 20 or more locations to provide calorie information for “standard menu items” on menus, and to make other nutritional information available in writing on the premises.

FDA’s final guidance states that the law’s preemption provisions went into effect upon enactment with respect to non-identical state and local provisions, but the concurrently issued draft guidance takes the position that certain major provisions of the law also became effective -- and triggered industry labeling obligations -- when President Obama signed it on March 23, 2010, and provides other tips for compliance.

Although FDA’s position in the draft guidance is arguably contrary to the law, and the Agency has stated that it does not intend to enforce the law at this time, absent a change in position or legal challenge, affected chain restaurants and similar retail food establishments will need to consider implementation prior to the issuance of final regulations. Companies operating 20 or more vending machines are also covered.

States that were hoping to continue enforcing their own menu labeling requirements need to stop, unless those requirements are identical to the federal law.

Now that the draft guidance is out, chain restaurants and similar retail food establishments who thought section 4205 was missing important details have more to chew on, and should consider submitting comments on issues such as:

• Is This A Restaurant or “Similar Retail Food Establishment?” FDA tried to include everyone it could, including “coffee shops, delicatessens, food take out and/or delivery establishments (e.g., pizza take out and delivery establishments), convenience stores, movie theaters, cafeterias, bakeries/retail confectionery stores, food service vendors (e.g., lunch wagons, ice cream shops, mall cookie counters, and sidewalk carts), and transportation carriers (e.g., airlines and trains).” The law also covers “grocery stores [that] have cafes, food courts, or otherwise sell food that is for immediate consumption directly to consumers.” FDA is still mulling over how to regulate grocery stores selling dual-purpose foods (i.e., “that could be consumed immediately or could be purchased as traditional grocery items for future consumption, such as in-store bakeries, salad bars, pizza bars, or delicatessens”).

• There are calories in alcohol? Who knew! Yes, there are calories in alcohol. And according to FDA they have to be printed on the menu or menu board. Margaritaville, take note.

• But she said to hold the mayo? Does she need a new menu? No. Custom orders are not covered. But FDA will be coming up with regulations by springtime to cover what it calls “variable items” like pizzas with toppings chosen from a list.

• Do I need to print calorie information on every menu? It seems that way based on FDA’s interpretation. Although the law says it must be printed on the “primary writing” a customer uses to select an item, FDA has interpreted this to include menu boards, take-out menus, and internet menus. That suggests that, at least in FDA-speak, “primary” means “every.”

• Can I put the calories in the fine print under the coleslaw? FDA wants to see it in big print, right next to the menu item, just like you would list the name of the item and price, and at least as large as whichever is bigger.

• Can I at least omit the trans fat? FDA’s draft would require trans fat to be listed with the additional nutritional information (fat, cholesterol, sodium, carbs, sugars, fiber and protein) that must be provided in writing upon request.

For more information about this development, click here.

- Trent Norris and Zack Allen

FTC Complaint Includes at Least 3 Life Lessons That Should Make Any Advertiser’s “Best Life” List

Some of us are certain that the cure to all aging, memory loss and weight gain woes can be found in the Brazilian Amazon. According to the Federal Trade Commission, if so, it hasn’t been identified just yet. The FTC recently filed a complaint with the Northern District of Illinois, which granted a temporary restraining order against Central Coast Nutraceuticals and other related parties for false advertising and other deceptive practices related to its AcaiPure and Colopure products.

There are at least 3 life lessons from the complaint:

1) Free Cannot Come with Strings Attached: The FTC asserted the “free” and “risk free” trials were anything but. According to the FTC’s complaint, Central Coast failed to disclose adequately that consumers would automatically be charged for other products unless they opted out and would be enrolled in an automatic monthly membership for the products they ordered. The FTC has long been focused on negative option programs and what constitutes clear and conspicuous notice of material terms, including holding workshops and publishing a lengthy Staff Report last year. Any recurring charges must be expressly authorized and if future charges will vary, advance notice must be provide to customers. The FTC thanked Visa and the Better Business Bureau of Central, Northern & Western Arizona for their assistance in rooting out these practices. And Visa had this to say: "We have tightened enforcement of our rules against banks whose merchants generate excessive levels of cardholder disputes because of deceptive marketing. We also make it a priority to partner with law enforcement and agencies like the Federal Trade Commission and support their investigations such as this case."

2) Use Extra Caution with Health Claims: Central Coast claimed AcaiPure “Was Not Created For Those People Who Only Want to Lose A Few Measly Pounds” and that it would quickly reshape your body. The producer also claimed that its Colopure could eliminate “excess weight and toxic buildup,” thereby helping to prevent colon cancer. The FTC has longstanding guides detailing its views on what substantiation is required for dietary supplement makers and for weight loss products. As we have recently blogged, the FTC has been tightening its requirements for substantiation of health-related claims. Investigating health claims has long been a top enforcement priority for the FTC and we believe will continue to be so.

3) Endorsers Need to Endorse the Product and Do Not (Repeat DO NOT) Mess with Oprah: The FTC has also revised its Testimonial and Endorsement Guides. We have blogged before about what is new and what is old. One thing that is timeless is the requirement to actually have an endorsement from one you claim endorses your product. The FTC asserts Central Coast claimed implied phony endorsements from Oprah Winfrey and Rachael Ray, including posting a picture of Oprah on its website and claiming Rachael called Acai her “number one superfood”. Both (here and here) provided the FTC with declarations used in the TRO proceedings.

- Amy Mudge and Michael Thorpe

Redondo Beach Does Not Want to Be Friends

Citing a briar patch of potential legal issues, the City of Redondo Beach, California has for the moment called it quits on Facebook. As reported in the local paper, The Daily Breeze, City Attorney Mike Webb recommended deactivating the city’s Facebook page out of concerns arising from, inter alia:

• The City’s obligation to retain user comments under the California Public Records Act, Cal. Gov. Code § 6250-6270
• First Amendment protections afforded user comments and the potential liability of the City if it blocked or removed offensive comments
• Whether postings by three or more elected officials on a single topic would violate California’s Open Meetings Law, a.k.a. The Brown Act, Cal. Gov. Code § 54950-54963

A video of the city council’s August 17 meeting at which the decision was made, as well as a Power Point presentation outlining the city attorney’s legal analysis of the city’s use of social media, can be seen here starting at 2:26:12. Redondo Beach’s farewell Facebook post can be seen here.

Public and private sector entities face numerous legal pitfalls as they attempt to embrace new technologies, like social networking sites, that offer unprecedented access to constituents or consumers. The instantaneous and extraordinarily public nature of interactions on sites like Facebook requires companies and agencies with legal duties to the public to think twice about how they will manage those interactions. In the case of Redondo Beach, the city chose to take the cautious route and defer the use of Facebook until a day when the courts have provided more definitive answers and guidance regarding the above issues (or until Facebook changes its functionality such that the above issues become moot.) Notably, Redondo Beach continues to maintain a presence on Twitter, Youtube, and Nixle, a public safety social networking platform, because those platforms can be managed to limit the user comments. As noted in The Daily Breeze article, another California city has addressed these issues by providing a Social Media Policy, available to users through the city’s Facebook page, which addresses some of the issues that concerned Redondo Beach.

- Suzanne Wilson and Emilia Morris

How Reliable Is Your Claim Substantiation Process?

It’s only 100% reliable if you consider what claims can be reasonably implied by your marketing and take care to substantiate all reasonable interpretations or provide clear disclaimers detailing exactly what you are and are not promising. Easier said than done 100% of the time, but a recent NAD case reminds us of this basic tenant. DISH Network promised its satellite subscribers “99.9% signal reliability,” and Time Warner Cable  recently questioned the reliability of this claim before the National Advertising Division. This is the most recent installment of cable wars, where DISH has previously battled fellow satellite provider DirecTV and the collective body of cable companies (see commercial here).

The central assertion of Time Warner’s complaint was that through these claims, DISH was implying to customers that they would receive a satellite signal 99.9% of the time and be able to view uninterrupted television program viewing 99.9% of the time. The 99.9% claim instead referred to the percentage of time a signal was available from the DISH satellite network. DISH stated that “the most common-sense understanding” of its claims was that they referred to DISH’s delivery capabilities -- the percentage of time it successfully emitted a signal from the satellite. DISH argued that they should not be held accountable for the weather or other outages beyond its control. Time Warner countered that such a statistic is meaningless to consumers, who simply care about watching television, and not about the cause of service disruptions. While not producing any consumer survey evidence, Time Warner argued that the most common-sense interpretation of DISH’s claims was that of signal availability, and that even if NAD were not to find that to be the case, established advertising practice dictates that DISH be able to substantiate all reasonable interpretations of its claims.

NAD recommended the removal of the challenged commercials from the airwaves and discontinuance of the 99.9% signal reliability claim. NAD agreed with Time Warner’s position that it is “well-established” that an advertiser must support every reasonable interpretation of its statements, even if it did not intend to promote certain interpretations. In this case, NAD agreed that one reasonable interpretation of DISH’s claim was a promise to deliver television 99.9% of the time, and that this was not substantiated.

To make sure your claim substantiation process is reliable, always stop to consider not just want you mean to say but carefully considering what consumers could understand you to promise. Remember that you are responsible for substantiating all reasonable interpretations of your claims.

- Amy Mudge and Michael Thorpe

Commissioner Rosch on the FTC’s Dual Role as Prosecutor and Judge

At the recent ABA Annual, FTC Commissioner Rosch addressed the FTC’s role as both prosecutor and judge. He focused on three issues: the standard the FTC applies when voting out a complaint, the standard the FTC applies when it reviews decisions of administrative law judges, and whether it is unseemly to have the FTC occupy both these roles. His comments outlined below may help parties arguing matters before him and potentially other like-minded Commissioners.

First, Commissioner Rosch said the FTC applies the “reason to believe” standard when voting out complaints. If there is a “reason to believe” unlawful behavior is occurring, the FTC sues. While his remarks focused on filing antitrust complaints, the same “reason to believe” standard is applicable when the Commission determines whether to challenge an unfair or deceptive business practices under Section 5(b) of the FTC Act. Personally Commissioner Rosch said he first asks whether the Bureau has enough evidence such that he can form a “reason to believe” that further investigation may as a factual and legal matter demonstrate liability. Next, he asks if there is a sound legal basis for the FTC’s theory. Lastly, he asks if pursuing litigation is in the “public interest.” Commissioner Rosch advises parties to put more emphasis on the public interest question because the FTC will not pursue actions where the harm to consumers is minimal, where it would be a poor use of the FTC’s finite resources, or where the FTC will not be establishing an important proposition of law.

As to its appellate review role, Commissioner Rosch explained that the Administrative Procedures Act requires the FTC to conduct a de novo review of an administrative law judge’s (ALJ) findings of law and fact. Commissioner Rosch is less enamored of de novo review when the FTC reviews an ALJ’s finding of fact, particularly when the issue involves . witness credibility since the ALJ sees the witness live and the FTC does not. In addition, Commissioner Rosch believes that reversing an ALJ’s finding of fact only gives more ammunition for appellate courts. Rightly or wrongly, he believes that the appellate courts’ deference to the FTC’s finding of fact is “bound up” with their assessment of whether the FTC correctly analyzed the question of law. When the courts agree with the FTC’s legal analysis, they faithfully apply the substantial evidence standard. When they do not agree, the FTC’s finding of fact get very little deference. Thus, as a strategic matter, Commissioner Rosch does not think it is wise to reject an ALJ’s factual findings.

In discussing whether there may be something untoward about the FTC having both prosecutorial and judicial roles, Commissioner Rosch commented on the history of judicial challenges to the FTC’s authority. From the creation of the FTC in 1914 until the passage of the Administrative Procedures Act in 1946, no one questioned housing both roles within the FTC. The Act created independent administrative law judges and required agency employees conducting investigations to have no part in the ALJ’s decision-making process. Two recent due process challenges in which Commissioner Rosch was asked to serve as the ALJ, both involving FTC challenges to mergers (Whole Foods/Wild Oats and Inova/Prince William) were dropped before a decision on the claims was reached.

After the Act passed, however, parties have also challenged the structure on due process grounds. The Supreme Court has, up until recently, consistently upheld the constitutionality of Congress’s creating of independent agencies under separation-of-powers challenges, so long as the President nominates and the Senate confirms the principal officers, with the caveat that Congress may constitutionally limit the President to a good cause removal power. However, the tide may be turning with the Supreme Court’s recent decision in Free Enterprise Fund v. Public Company Accounting Oversight Board. In that case, the SEC Commissioners, under authority granted to it by the Sarbanes-Oxley Act, appointed members to the Public Company Accounting Oversight Board (PCAOB) who were only removable by the SEC Commissioners, not the President, for good cause. The Supreme Court held that the removal provisions were unconstitutional because it “added a layer of tenure protection” between the President and the PCAOB and the PCAOB was effectively insulated from the President’s authority. Whether the Supreme Court will revisit the independent agency structure is uncertain, but for now, Commissioner Rosch believes that the FTC’s roles as prosecutor and judge not only finds constitutional support, but is the optimal structure in prosecuting antitrust and consumer protection cases and that the FTC receives more than sufficient supervision from all three branches of the government.

- Randy Shaheen and Chester Choi

Failure to Show That Sugar is Sweeter at the Cash Register Sinks “All Natural” Class Action

Whether high fructose corn syrup is “natural” has attracted a lot of attention lately, both in the press and the courts. “All Natural” Snapple has been dragged twice to court over this issue. In New Jersey, a case against Snapple has been stayed (which we blogged about here) until a different NJ district judge determines whether high-fructose corn syrup can be characterized as a “natural ingredient” in a similar case against AriZona Iced Tea. 

Snapple has found a different path to victory in a Southern District of New York case by arguing against class certification on the ground that consumers failed to demonstrate that they paid a premium for the label “All Natural.” The Snapple case bears similarities to a case now pending before the California Supreme Court that we have previously blogged on here.

The New York consumers alleged that they were misled by the “All Natural” labeling on Snapple’s non-diet beverages because the beverages contained high fructose corn syrup, in violation of NY business law, Section 349 prohibiting deceptive practices in commerce. The opinion states that all of the named plaintiffs apparently admitted that “Snapple’s ‘All Natural’ label was not the ‘deciding factor’ in [their] purchasing decision” and that high fructose corn syrup was listed as an ingredient. The Judge also noted that Snapple “does not have any control over the prices that consumers ultimately pay,” because Snapple sells to distributors who set their own prices, who then sell to retailers, who set their own prices.

In order for plaintiffs to demonstrate that they paid a premium due to the labeling, they would have had to prove that Snapple’s alleged misrepresentation was likely to mislead a reasonable consumer and did mislead, and that the class suffered an injury warranting money damages. The judge found that the plaintiffs did not propose a suitable methodology for establishing causation and actual injury on a generalized, class-wide basis, and thus failed the predominance inquiry test for determining class certification.

The Judge also found that the plaintiffs did not prove that it would even be feasible to ascertain the members of the class that plaintiffs identified of “[a]ll persons and entities who, within the state of New York, purchased for personal consumption and not for resale or assignment, a Snapple beverage marketed and promoted as “All Natural” but that contained [high fructose corn syrup], from October 10, 2001 to January 1, 2009.” This definition apparently includes “foreign travelers passing through New York airports,” and “commuters from neighboring states.” As the Judge points out, “[h]owever beloved Snapple may be, there is no evidence to suggest that its consumers treat it like a fine wine and remove and save its labels.”

In the meantime Snapple has taken steps to protect itself against yet more litigation on this subject. In early January 2009, the high fructose corn syrup in Snapple’s “All Natural” beverages was replaced with sugar. And while sugar may not win any popularity contests these days, at least there’s no doubt that it’s “Natural.”

- Randy Shaheen & Deborah Birnbaum

Stop the Press! $16 Million Jury Verdict in Newspaper Ad Pricing Dispute Sets California Apart In Assessing Liability for Below-Cost Pricing

The California Court of Appeal recently issued a decision that plaintiffs’ lawyers are sure to argue establishes near-strict liability under California law for selling a product below cost. The potential for treble damages should make all discounters of goods and services take note.

The court affirmed the San Francisco Bay Guardian newspaper’s $15.9 million jury verdict against the owners of its competitor, the San Francisco Weekly. The decision punished the SF Weekly for luring away some of the Bay Guardian’s display advertisers through below-cost discounts, even though there was no proof that the SF Weekly could recoup its losses later through higher monopoly pricing.

In the court’s opinion, California law -- unlike federal antitrust law and the law of many sister states -- does not require such proof. In fact, harm to competition may not even be necessary. Instead, the court held that Business & Professions Code section 17043 requires only proof that the “purpose” of a below-cost sales scheme was to harm another competitor. In California, according to the Court of Appeal for the First District, it doesn’t matter that consumers benefit from lower prices, even in the long run: so long as one competitor sets out to harm another, treble damages may be available.

To make matters worse for discounters, the court also ruled that evidence of harm to a competitor triggers a presumption that a defendant’s purpose was to injure competitors or destroy competition. To escape liability, a defendant must affirmatively demonstrate that it had no such purpose.

Not all California courts have come to this same conclusion, but if the opinion stands (that is, if the California Supreme Court does not grant review and reverse), it has the potential to chill aggressive price competition and promotion throughout California. And that is an unfortunate and ironic result, given that cutting prices in order to increase business is conduct the antitrust and consumer laws are supposed to promote and protect, rather than inhibit.

- Jamie Speyer & Zack Allen

WEBINAR: Competitor False Advertising Litigation: A Mock TRO Hearing

The editors of the Consumer Advertising Law Blog want to let our readers know about an upcoming online event that may be of interest to you, entitled, "Competitor False Advertising Litigation: A Mock Temporary Restraining Order Hearing." [Full disclosure: Our firm, Arnold & Porter LLP, is sponsoring the event]

The participants in the event will include:

• The Honorable Liam O’Grady, District Judge, United States District Court for the Eastern District of Virginia
• Jerry Wind, The Lauder Professor and Professor of Marketing, The Wharton School, University of Pennsylvania
• Jeffrey A. Fiarman, Executive Vice President and General Counsel, Weight Watchers International, Inc.
• David Mallen, Assistant Director for Legal Affairs, National Advertising Division (NAD) of the Council of Better Business Bureaus
• Nicholas DePalma, Associate, Arnold & Porter LLP
• Randall Miller, Partner, Arnold & Porter LLP

These leading attorneys and professionals in false advertising disputes along with a sitting Federal District Court Judge will present a seminar containing:

• A mock temporary restraining order (TRO) hearing and a judge's viewpoint on successful Lanham Act advocacy
• Strategies for both the affirmative case and defenses in the TRO context
• Planning for the follow-on preliminary injunction hearing (e.g., witnesses, documents, experts, costs)
• How to approach expedited discovery
• Implementing a survey in a short time frame
• The NAD perspective

The event will take place on Tuesday, September 21, 2010 from 8:00–10:00 AM EDT.

If you interested in viewing the event, click here.

The Nuclear Option - NAD Declines to Recommend Product Name Change

ACT Total Care mouthwash recently dodged a big bullet at NAD. NAD reviewed and recommended that the company discontinue claims that its product kill bad breath germs (the advertiser had already voluntarily discontinued claims that its product fights unsightly plaque). However, without specific evidence of consumer confusion, NAD declined to recommend discontinuing use of "Total Care".

A requirement that an advertiser discontinue or tweak claims in advertising (or even labeling) is regrettable, but doable given sufficient time and money. Changing a product name, however, puts at risk a company’s considerable investment in brand equity. While brand names are sometimes found to convey unsubstantiated claims, the problem is often solved through disclosure. For example, the product Aspercreme was required to disclose that it did not contain aspirin.

However, there are a few instances where the advertiser has been required to change the name of its product. In a case prohibiting an aftermarket brake system from using “ABS” as part of a product name or logo, the FTC explained “brand name excision is a remedy that is available to the Commission when a less restrictive remedy, such as a required affirmative disclosure, is insufficient to eliminate the deception conveyed by the name.” The FTC also prohibited use of the trade name Dollar-a-Day by a rental car company when the cost to rent a car was more than a dollar per day. Courts also have broad equitable power to enjoin use of trade names if found to be inherently false and misleading. While the NAD has no power to enjoin advertising, it does make recommendations, including as to product names. For example, NAD once recommended one company discontinue reference to “All Day” in its One A Day All Day Energy supplement.

Major product repositioning can be a great thing -- when it is voluntary (although not always, see New Coke). Forced reinvention by trade name excision is perhaps the harshest of all remedies and is used, albeit sparingly, by enforcers, courts and in the self-regulatory process. To avoid this risk, particular care should be given to review and assessment of the product’s trade name to make sure it does not convey any unsubstantiated express or implied claims.

- Amy Mudge and Randy Shaheen

Preemption, Puffery Arguments Fail to Derail Case Against VitaminWater

A federal court in New York recently denied an effort to dismiss a consumer class action based on allegedly deceptive nutrient content and health claims made in relation to the highly popular VitaminWater beverage.(We have previously blogged about this case here).

The consumer advocacy group Center for Science in the Public Interest (CSPI), along with a plaintiff’s firm, claims that VitaminWater’s labeling and marketing mislead consumers by (1) drawing consumer attention away from a significant amount of sugar in the product; (2) portraying VitaminWater as a healthy snack food that provides nutritional benefits, when the nutrients in question are only available in the product through fortification; and (3) suggesting VitaminWater contains nothing but vitamins and water.

Defendants moved to dismiss the claims arguing the claims were preempted by the Federal Food, Drug, and Cosmetic Act (FDCA).

Plaintiffs countered, arguing a lack of preclusion of their state law claims because the claims are based on misleading statements that violate FDA regulations. The Complaint alleges violations in the form of (1) making health claims or implied nutrient-content claims despite the high amount of sugar in the product (up to 33 grams of sugar per 20 oz. bottle); (2) making health claims about the product despite the fact that VitaminWater has been fortified with vitamins in violation of FDA’s fortification policy; and (3) prominently featuring the name of some, but not all of the ingredients on the product and in its name.

The court pointed out that while the FDA has recognized some “disqualifying nutrient levels” (i.e., levels of a particular nutrient such as fat, saturated fat, cholesterol, or sodium that preclude promoting health claims in conjunction with such a product), sugar was not placed on that list and hence, “any claim under state law solely premised on the notion that vitaminwater’s high sugar content made its health or implied nutritent content claims misleading is preempted.

Defendants’ victory, however, was small and short-lived, as the Court’s opinion went on to find that the arguments that health claims were made in violation of the FDA’s fortification policy or "Jelly Bean Rule" and that the product name misleadingly references only two of vitaminwater’s ingredients, but omits the presence of a key, unnamed ingredient (sugar), were not preempted.

Further, the Court determined that most plaintiffs met the minimum pleading standards under each states’ laws in question. The Court was unpersuaded by Defendants’ position that placing the sugar content on the drink’s label made consumer confusion relating to the health of VitaminWater unreasonable: “a nutritional panel, though relevant, does not as a matter of law extinguish the possibility that reasonable consumers could be mislead. . . .” The Court was equally unpersuaded by Defendant’s position that slogans such as “vitamins + water = all you need” and sayings like “healthy as a horse” constituted puffery such that “no consumer could reasonably be misled into thinking VitaminWater was a healthy beverage. . . .” (It has also earned VitaminWater a bit of mocking in the popular press which can sometimes be a problem with a puffery defense.)

The outcome of the case remains to be seen. However, the Court’s decision clearly raises a warning flag in terms of relying solely upon the nutrition label to “qualify” any claims that might otherwise be made. However, CSPI’s Litigation director, Steve Gardner, appears to be optimistic and perhaps emboldened to take on new challenges. He said “. . . vitaminwater is no more than non-carbonated soda, providing unnecessary added sugar and contributing to weight gain, obesity, diabetes, and other diseases. We look forward to representing all Americans whom Coke has deceived.”

- Randy Shaheen and Jessica Halbert

Violating the FTC’s Endorsement Guides -- Ethicist Says There’s No App for That

I sometimes find myself telling my kids -- “Just because it’s legal doesn’t make it right.” Thankfully, right and legal do sometimes overlap. Over the weekend the New York Times Ethicist opined on a question about a company that creates iPhone apps and asks its employees to download the app and give it a five star rating. The ethicist objected on several grounds, including reviewing an app that you might have never used, conflict of interest and pressuring employees to do something outside the scope of their employment and about which they might have moral objections.

He might have added a fifth objection - violation of the FTC’s endorsement guides. Not only is the endorsement likely false in some instances, it also appears that the employees are not properly disclosing their affiliation with the app developer in their reviews. This does point out an interesting question, though, concerning the FTC’s revised guides. Many customers may only look at how many stars an app or other product receives from users and not necessarily look at all the individual reviews. So, if an employee properly discloses his or her affiliation with the company in the review but goes ahead and gives the product 5 stars, many potential customers may never even realize the extent to which the “star” rating is based on reviews by employees of the manufacturer. Maybe somebody can develop an app to figure all that out.

- Randy Shaheen

FTC Testimony On Efforts To Protect Consumer Privacy

Last week, FTC Chairman Jon Leibowitz testified before the U.S. Senate Committee on Commerce, Science, and Transportation about the FTC’s efforts to protect consumer privacy. The testimony detailed the FTC’s consumer privacy program over the past few decades, focusing on data security enforcement, identity theft, children’s privacy, and protecting consumers from unwarranted intrusions such as spam and spyware.

Liebowitz highlighted the FTC’s recent attempts to re-examine consumer privacy protection in light of rapidly evolving new technologies. Over the past two decades, the Commission has used two main policy approaches towards protecting consumer privacy: (1) promoting the fair information practices of notice, choice, access and security; and (2) protecting consumers from specific and tangible privacy harms. The testimony briefly discussed the limitations of these traditional models of enforcement in adequately protecting privacy in light of rapid developments in technology. The testimony noted that these policy approaches may place too heavy a burden on consumers to read and understand complex privacy policies. Liebowitz also noted that the they may place too strong an emphasis on financial and other tangible harms from exposure of private information.

This past winter, the FTC held a series of roundtables to explore the privacy challenges posed by emerging technology (see here and here).  A number of concerns were raised during the roundtables, notably that most consumers do not understand the extent to which companies are collecting and using their personal information as well as the limitations of the FTC Fair Information Practices model which places a heavy burden on consumers to read and understand lengthy privacy policies.

Moving forward, the FTC indicated that it will be focused on the following areas:

1. integrating privacy into business practices;
2. simplifying consumer choices about commercial data practices; and
3. improving transparency.

The Commission has indicated that they will release a report on this initiative later this year.

The Commission’s testimony coincided with Rite Aid Corporation’s agreement to settle with the FTC over charges that it failed to protect sensitive financial and medical information of its customers and employees.

- Nancy Perkins and Tiana Russell

Madness! Over Final Four Tickets

The Court of Appeals for the Seventh Circuit, in George v. National Collegiate Athletic Ass'n., No. 09-C-3667, 2010 WL 2788452 (7th Cir. July 16, 2010) , determined that a class action lawsuit against the NCAA over a contest involving the distribution of tickets to its wildly popular NCAA Basketball Tournament can proceed  — reversing the decision of Judge William T. Lawrence of the Southern District of Indiana dismissing the case.

The Complaint, filed in May 2008, alleged that the NCAA was operating an illegal lottery by giving applicants who submitted a $6-$10 handling fee along with the face value of the tickets the chance to win NCAA Basketball Tournament tickets.  If the applicant was selected, he or she would receive the tickets in the mail.  If the applicant was not selected, he or she would be reimbursed for the face value of the tickets, but the handling fee would not be refunded.

The NCAA moved to dismiss the suit claiming that the contest was not an illegal lottery and that, in any event, dismissal was appropriate because plaintiffs participated in any “illegal” conduct that took place.  The District Court agreed and dismissed the Complaint with prejudice.  The class action plaintiffs appealed to the Seventh Circuit.

In its decision, the Court of Appeals determined that the plaintiffs had sufficiently pled a cause of action for violation of Indiana’s illegal lottery law by claiming that the NCAA’s contest involved the distribution of a prize, by chance, among persons who were required to pay valuable consideration to enter.  In so holding, the Court noted that it was troubled by the fact that the NCAA retained the handling fee it received from individuals who were not selected to receive tickets.  The Court also found that the District Court had erred in ruling that the plaintiffs were equally at fault for their participation in the NCAA’s contest.

This case underscores the need for companies to proceed with caution when structuring their contests, especially when the contest involves any monetary payment to enter.  As the Court of Appeals noted in its decision, if the NCAA had simply set up its contest so that the handling fee was repaid to those participants who did not receive tickets, the contest would have been legal.

Alan Veronick

Offensive Forum Postings Raise Questions about User Anonymity

While there aren’t necessarily significant legal issues associated with this topic, we thought it worthy of comment given the interesting policy and business issues raised as companies continue to look for the most effective way to utilize social media. It is often difficult to find a comfortable balance between encouraging candor in online postings versus requiring users to take responsibility for their comments. Allow anonymous postings, and risk creating a climate for offensive and hateful comments. Require users to register with their real names, however, and risk discouraging posting altogether. As posts become more and more prolific, however, many websites have increasingly opted for the latter tradeoff, with mixed results.

For example, the Buffalo News recently implemented a policy requiring commenters to provide their real names and hometowns, in order to combat racist responses to news stories. This move follows that of the Attleboro, Massachusetts, Sun Chronicle, which requires commenters to register with names, addresses, phone numbers, and credit cards, and to pay a one-time fee of ninety-nine cents.

Blizzard Entertainment, the producer of the popular online games World of Warcraft and Starcraft II, has also struggled with policing its forums. Although originally scheduled to introduce on July 27 a “RealID” framework that would require forum posters to display their real names, Blizzard dropped the proposal when gamers revolted at the idea of foregoing anonymity. (A World of Warcraft forum thread discussing the change spanned over 2,000 pages with over 40,000 replies).

Well-advised online forum providers will search for a solution in between total anonymity and full disclosure of personal information. Too harsh a policy may totally hinder the online discussion: in the weeks following the Sun Chronicle’s move to its registration system, only twenty-two people have registered to comment. One promising, less extreme technique is to allow the forum to police itself, which may include promoting and demoting comments based on user voting. However, such a system risks demoting comments which are not offensive bur rather simply unpopular. Also, systems for ranking commenters can help create incentives for reputation-building. Some sites also reserve the right to block offensive postings. Ultimately, devising an effective comment-filtering mechanism is crucial to fostering a productive online community.

- Randy Shaheen and Andrew Macurdy

Is A Certified Electronics Recycler® a Trademark or a Type of Recycler?

If you’ve ever wondered what to do with your old cell phone or laptop, you’re not alone. According to the Basel Action Network (BAN), a Seattle-based non-profit, “e-waste” is the fastest growing toxic waste stream in the world, and too much of it is currently being dumped, burned, or exported to less developed countries that lack the technologies needed to manage toxic materials without harming human health and the environment. In April, BAN launched its e-Stewards® Certification program, which allows individuals and organizations to identify recyclers that comply with BAN’s standards for the handling, recycling, and reuse of electronic waste. In connection with the program, BAN wants to use the phrases “electronics recycler,” “certified recycler,” and “certified electronics recycler” to describe those recyclers who have obtained e-Stewards® status. The problem? The phrase “Certified Electronics Recycler” has been registered as a certification trademark by another non-profit that claims to certify recyclers. On June 7, BAN sued the International Association of Electronics Recyclers, Inc. (IAER) and its successor, the Institute of Scrap Recycling Industries, Inc. (ISRI), for cancellation of the Certified Electronics Recycler® certification mark and for a judicial declaration that BAN’s use of the phrase does not constitute trademark infringement. (BAN originally petitioned the U.S. Patent & Trademark Office to cancel the Certified Electronics Recycler® mark but recently opted to pursue a federal court complaint instead.)

In its Complaint, BAN alleges the phrase “electronics recycler” is a generic phrase which is a commonly used industry term to describe an entity that recycles electronic equipment or parts, and that “certified electronics recycler” is commonly used to describe an electronics recycler that has been certified or accredited by a private or public standards-setting organization. The continued use and registration of the Certified Electronics Recycler® certification mark, BAN argues, erroneously suggests that only ISRI can certify a genuine “certified electronics recycler,” which harms BAN, its e-Stewards program, and the public. Second, BAN alleges defendants have abandoned the IAER certification standards, which were originally associated with defendants’ certification mark, and are currently misusing the mark in connection with a different set of standards adopted by ISRI. BAN argues that because the certification mark “Certified Electronics Recycler” has not been used consistently with one set of consistent standards, the use of the phrase as a certification mark is inherently misleading and confusing to the consumer, and should be cancelled under the Lanham Act’s trademark cancellation provisions.

The amount of electronics waste expected to increase 8% per year (according to BAN). At the same time, there is an increased desire by all of us who want to upgrade our cell phones and laptops in an environmentally responsible way and the government that we dispose of this waste in an appropriate manner. If one company or organization can claim ownership and rights to the Certified Electronics Recycler® mark, will that organization have a competitive advantage over other standards-setting organizations in certifying electronics recycling companies? The federal court in Seattle, Washington is currently poised to answer this question. 

- Suzanne Wilson, Anna Manville, and Elizabeth Frank

Competent and Reliable Scientific Evidence Just Isn't What It Used to Be

The FTC has been promising for awhile to tighten the definition of its "competent and reliable scientific evidence" standard.  Last week, the agency made good on that promise in consent orders reached with a Nestle subsidiary and Iovate Health Sciences.

The orders provide that for certain claims "competent and reliable scientific evidence" is defined as

"at least two adequate and well-controlled human clinical studies of the product, or of an essentially equivalent product, conducted by different researchers, independently of each other, 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 that the representation is true."

"Essentially equivalent" is in turn defined as

"a product that contains the identical ingredients, except for inactive ingredients, (e.g., binders, colors, fillers, excipients), in the same form and dosage, and with the same route of administration (e.g., orally, sub lingually), as the covered product; provided that the Covered Product may contain additional ingredients if reliable scientific evidence generally accepted by experts in the field demonstrates that the amount and combination of additional ingredients is unlikely to impede or inhibit the effectiveness of the ingredients in the Essentially Equivalent Product." 

(There are other new provisions not discussed here, including a requirement that certain claims require FDA approval.)

These new definitions apply in the case of Nestle's Health Care Nutrition division to claims that any drink containing probiotics or any nutritionally complete drink, with certain exceptions, reduce the duration of diarrhea in children under the age of thirteen or reduce absences from daycare or school due to illness.  In the case of Iovate, the new definitions apply more broadly to claims that any dietary supplement, food or drug causes weight loss, including rapid weight loss.

We think the key points from these new definitions is that the FTC has now predetermined that certain claims must be substantiated by:

1. two human clinical studies;
2. that should be evaluated in light of the entire body of scientific evidence; and
3. are conducted on a product with identical active ingredients to the advertised product and in the same form, dosage and route of administration, unless there is sufficient reason to believe that the differences are unlikely to affect the efficacy of the advertised product.

Of course, the FTC has in the past required two clinical trials to substantiate certain claims so the requirement itself is not new.  What is new is determining that up front in a consent order.  Essentially, the FTC has taken the guesswork out of its definition of "clear and competent scientific evidence" and presumably minimized the risk of embarrassing court losses like Lane Labs.

However, for advertisers, the FTC's new definition has potentially significant ramifications.  Several questions, though, remain unanswered.  First, how broadly does the FTC intend to apply its new 2 clinical trial requirement?  Our guess is that the Commission may try to insert the language (or the FDA approval requirement if the claim is a disease claim) in many orders covering health related claims.  Second,the requirement that any supporting tests be conducted on an essentially equivalent product could have a significant impact on advertisers, depending upon how broadly or narrowly the FTC interprets the exception for differences that are unlikely to make a difference.  Advertisers that comes out with a low fat version of a product or makes some other relatively minor product change may now struggle with whether the relevant health claims for the modified product have to be resubstantiated.  Other companies that found it prohibitively expensive to conduct their own research for their product, but instead relied upon clinical studies of the principal ingredient may similarly face some difficult decisions. 

Our two cents worth is that determining in advance the necessary quantity and quality of substantiation for claims ahead of time is an exercise in trying to balance risk: setting too strict a standard that discourages innovation and consumer communications versus allowing advertisements prone to misleading claims because the substantiation bar is set too low (or that courts will interpret general substantiation requirements in a way to harm consumers). Perhaps the benefits outweigh the harm when the product and claims at issue are ones that are unlikely to be truthful in any circumstance (e.g. "lose weight while you watch TV").  In that situation, there is little risk of inadvertently suppressing innovation or consumer communication and significant risk that misleading claims might otherwise be made.  However, when the product and claims are ones that could in some circumstances be substantiated the risk/benefit analysis seems reversed.  In this scenario, product innovation and communication of truthful information to consumers might be overly discouraged while the heightened standard does little to further prevent the communication of misleading information.  In either event, if you know anyone pondering a career path, going into clinical research might not be such a bad idea. 

- Randy Shaheen and Diem-Mi Lu  

FTC: Consumer Debt Dispute Resolution System Broken

As we’ve noted previously on the blog, both the FTC and state attorneys general are stepping up their scrutiny of debt collection firms in this slow economy. Continuing that trend, the FTC recently released a report on the nation’s system for resolving consumer debt disputes, which concludes that the existing mechanisms for adjudicating and arbitrating debt claims are badly in need of reform.

Reflecting concerns expressed during a series of public roundtable discussions with industry, consumer groups, and other stakeholders, the report highlights two primary problems identified by the FTC: (1) the high percentage of default judgments in consumer debt cases (according to the report, between 60 and 95%, depending on the jurisdiction) and (2) the fairness and transparency of arbitration proceedings. The report contains a number of recommendations for debt collectors, arbitration forums, states, and Congress. The report also indicates that the FTC will focus enforcement efforts on debt collectors who attempt to recover time-barred debt without disclosing to the consumer that the statute of limitations has run. Debt collectors also may not accept partial payment on time-barred debt without informing the consumer that this may toll the statute of limitations on the whole debt owed. The report makes clear that both of these practices run afoul of the federal Fair Debt Collection Practices Act.

The report also noted that the National Arbitration Forum (NAF), the leading arbitration forum for consumer debt disputes, recently settled a suit filed by the Minnesota Attorney General. The complaint had accused the NAF of holding itself out as a neutral forum when in fact it had financial ties to the debt collection industry. In the settlement, the NAF agreed to stop conducting consumer debt arbitrations. After the settlement, the American Arbitration Forum also ceased such arbitrations, and a number of large banks removed mandatory pre-dispute arbitration clauses from their credit card contracts. This chain of events led Commissioner Julie Brill to issue a concurring statement urging Congress to ban mandatory arbitration of consumer debt disputes “until the arbitration process can be shown to be fair, transparent, and as affordable as traditional litigation, and until consumers have a meaningful opportunity to opt out of pre-dispute arbitration without losing access to the credit services they seek.”

Some of the reforms advocated by the FTC and Commissioner Brill are actually already in the pipeline. The newly enacted financial regulatory reform legislation empowers the SEC and the new Consumer Financial Protection Bureau to limit mandatory arbitration provisions (see sections 921 and 1028), and several states have recently passed their own reforms. The report states that the FTC will continue to closely monitor consumer debt collection, but the choice of whether and how to implement the report’s recommendations is almost entirely out of the FTC’s hands. Those decisions rest largely with other federal agencies, Congress, state legislatures, arbitration forums, and industry, and only time will tell how these groups will respond. Hopefully whatever reforms are ultimately put in place will not raise the costs of legitimate debt collection practices, preventing collection and settlement firms from lowering interest rates and benefiting businesses and consumers. 

- Nancy Perkins and William Perdue

Random and Nonsensical Domain Names Misrepresented Me! Not So, Says CA Supreme Court

While it often seems like there are very few things in life on which everyone can agree, there’s at least one sentiment that unites us - spam e-mail is annoying. It clutters up our inboxes and distracts us from identifying important messages. Many of us accept spam e-mail as a fact of life, but one plaintiff, George F. Kleffman, decided that he had received one too many spam emails from Vonage, a local and long distance phone service provider, and decided to try his luck in court.

In March 2007, Kleffman filed a class action alleging that Vonage violated California Business and Professions Code Section 17529.5(a)(2), which makes it unlawful to send commercial e-mail advertisements if the advertisement “contains or is accompanied by falsified, misrepresented, or forged header information.” Vonage had sent Kleffman 11 spam e-mail advertisements using 11 different domain names that did not include the word “Vonage” in the header. Kleffman did not allege that that there was any “falsified” or “forged” content in the header of any of the e-mails and acknowledged that all of the e-mails were fully traceable to Vonage’s marketing agent. The main thrust of Kleffman’s argument was that Vonage’s use of multiple “random” and “nonsensical” domain names -- some examples include “fromycompanysite.com” and “urgrtquirkz.com” -- was a deliberate strategy to conceal the single source of the spam e-mails in order to bypass spam filters. Thus, Kleffman argued that Vonage’s multiple domain strategy amounted to a “misrepresentation” under section 17529.5(a)(2) because the statute permits spam emails sent from multiple domain names only if “they are not deceptive by virtue of their utterly random and nonsensical nature.”

After the federal district court granted Vonage’s motion to dismiss, Kleffman appealed to the Ninth Circuit, which certified to the California Supreme Court the issue of whether Vonage’s sending spam e-mails using multiple domain names for the purpose of bypassing spam filters constitutes “misrepresented” header information under Section 175529.5(a)(2).

In unanimously affirming the district court decision to grant the motion to dismiss, the California Supreme Court concluded that an e-mail with an accurate and traceable domain name, even if it is “random” or “nonsensical,” does not “misrepresent” header information under section 17529.5(a)(2) because it makes no false representation of fact. The Court reasoned that, as a matter of law, “the use of an accurate and traceable domain name in an e-mail could not be reasonably understood to be an implied assertion that the source of that e-mail is different from the source of another e-mail containing a different domain name.” Therefore, there was no misrepresentation as defined by the statute in this case. The court also rejected Kleffman's attempt to expand the definition of “misrepresented” header information to include “deceptive” or “misleading” header information (by analogizing to California B&P Code Section 17200) because the legislative history did not support Kleffman's expansive statutory interpretation.

At bottom, the California Supreme Court conducted a detailed analysis of the specific word of the statute, and refused to go beyond their meaning -- even if it means more spam for our already cluttered inboxes.

- Sean Morris and Chester Choi

WEBINAR: Implications of the Consumer Financial Protection Bureau for Retailers and Other Nonbank Financial Services Providers

Does your company provide loans or some type of other financial service to the public? Have you been concerned that your products may be covered by the new Consumer Financial Protection Bureau (CFPB) contemplated by the financial reform legislation that is about to be passed by the Congress?

If so, you might want to tune into the event that our firm, Arnold & Porter LLP, is sponsoring on July 29, 2010, entitled, "Is This a Brave New World? Implications of the CFPB and the FTC for Nonbank Financial Services Providers".

This webinar will go over the proposed jurisdiction of the new CFPB, which is contemplated to be an independent bureau within the Federal Reserve. Importantly, the CFPB would be responsible for consumer protection over financial products and services offered by anyone (both banks and nonbanks) who offers to finance retail goods or services. While banks have been subject to comprehensive supervision for consumer compliance by their primary bank regulators for some time, nonbank entities have not. Thus, for those entities, the legislation will usher in a new supervisory regime that most likely will be different than that of the Federal Trade Commission (FTC), which now has jurisdiction over these entities

This event will highlight the FTC’s historical role over nonbank financial services providers, the expected changes for those entities that will be covered by the CFPB’s jurisdiction, and the anticipated cooperation between the FTC and the CFPB.

We are pleased to have at this event Joel Winston, the Associate Director of the Division of Financial Practices at the FTC’s Bureau of Consumer Protection. Also speaking are Beth DeSimone, Nancy Perkins, and Robert Clark, Arnold & Porter LLP attorneys who work in the consumer credit area.

The event will take place from 12:30 PM to 2:00 PM EDT on July 29, 2010. The event is being offered both in person at Arnold & Porter LLP's Washington DC office as well as via webinar. Lunch will be provided for those who come in person.

For a written analysis of this aspect of the legislation, click here.

UPDATE (8/3/2010): Click here for a link to audio and video recordings of the event.

NAD Process Too Brittle for Wedding Band Wars?

What’s the right metal for your wedding ring? In recent years some jewelers have been encouraging couples saying their “I-dos” to forgo traditional options like gold or platinum in favor of tungsten carbide. Also used in industrial machining and armor-piercing ammunition, this metal is especially popular with grooms--according to a consumer survey by The Knot, almost one in five men’s wedding rings sold in 2009 was made with tungsten carbide. Jeweler Scott Kay, however, recently challenged tungsten carbide’s suitability for use in wedding bands. After refusing to participate in an NAD proceeding brought by Frederick Goldman, Inc., Kay’s claims about tungsten carbide rings may now be under review by the FTC.

It all began last October when Scott Kay held a press conference for the jewelry industry trade press to contest some of the claims being made about tungsten carbide wedding bands. In order to show that these rings are not “hard" and “indestructible”, which he said some unnamed internet retailers have claimed, Kay literally bashed tungsten carbide, shattering a number of tungsten carbide rings by throwing them onto a piece of marble tile and hitting them with a pair of pliers. He later posted a video of his demonstration which declares, “It is the opinion of Scott Kay that carbide is not a practical metal for the use of bridal jewelry.” Kay’s website also depicts magnified images showing that tungsten carbide is porous, which he maintains puts it “at risk of cracking, chipping, or shattering.” Reasoning that a material subject to breaking is not appropriate to symbolize matrimonial commitment, Kay also advertised that “Brittle is NOT for Bridal Jewelry.” The ads urge knot-tiers to choose Kay’s own new line of cobalt alloy rings instead. (Apparently neither Kay nor its competitors think that couples should consider contemporary divorce rates when choosing a wedding band.)

Frederick Goldman, the leading manufacturer of tungsten carbide bands, was none too pleased with Kay’s public metallurgy seminar, and challenged Kay’s claims about the alleged weakness of tungsten carbide and the superiority of cobalt before the NAD. Characterizing Kay’s demonstrations as contrived parlor tricks, Frederick Goldman argued that both Kay’ express claims about tungsten carbide’s brittleness and his implied claim that tungsten carbide bands are not durable enough to withstand a lifetime of normal consumer use were false. Frederick Goldman also challenged Kay’s claims that cobalt rings are produced through a green process and that they can be easily and safely removed in an emergency.

Kay decided against participation in the NAD process, which, of course, is entirely voluntary. Kay maintained that the NAD was not the appropriate forum for this dispute because Kay’s claims “merely respond to” advertising by Frederick Goldman and other tungsten carbide manufacturers, and NAD procedures do not allow for counterclaims. Accordingly, Kay expressed its willingness to defend its advertising in a judicial forum, “where Goldman’s own advertising may be examined in the same light and simultaneously as Scott Kay’s.”

Under the NAD’s procedures, however, “[i]f the advertiser fails to file a substantive written response . . . [NAD] may refer the file to the appropriate government agency . . . .” Faced with Kay’s non-participation, the NAD did just that, sending the matter over to the FTC for further review. Most companies, even if they are confident their comparative claims are substantiated, do not want their file to land on the FTC’s desk. For this reason, among others, voluntary compliance with a NAD investigation is high -- over 90% of companies agree to participate in the process and most of those voluntarily comply with the NAD’s recommendations. The FTC is a public supporter of the NAD and self-regulation generally, and takes NAD referrals seriously. The FTC, however, also recognizes the value of truthful, nondisparaging comparative advertising. Other companies prefer to participate in the NAD process to avoid the more costly airing of the grievance in federal court in a Lanham Act false advertising case (including full blown discovery and in many cases the need to retain survey experts), something Kay apparently welcomes so the fact finder can consider simultaneously both sides of the story. It raises an interesting question of whether the NAD process would be improved or unduly hampered by allowing simultaneous counter challenges.

- Amy Mudge and William Perdue

Apples to Oranges: NAD Recommends Fruit2O Water Discontinue Certain Implied Nutrition Claims

During these hot summer months, nothing beats a cold, refreshing drink of water. Unless maybe that water was fortified with extra nutrients, similar to those found in healthy fruits? Sunny Delight created a water-based beverage, Fruit2O, that they claim does just that- provides refreshment, flavor, and the added benefit of fortified nutrients. Sunny D claims that Fruit2O contains “5 [or 4] nutrients equal to 2 servings of fruit” and touts the beverage as having “The wonders of fruit. The refreshment of water.” Campbell’s Soup Company found exception with the advertising, and asked NAD to examine the claims.

Campbell’s argued that while Fruit2O is fortified with certain nutrients, many are in significantly smaller amounts than in the relevant fruits. As a result, any implied claims that drinking Fruit2O gives consumers the same benefit as eating two servings of fruit are misleading. NAD concluded that Sunny D adequately established that the amount of certain highlighted nutrients present in Fruit2O are at least equal to the amounts found in two servings of fruit.

However, not all the news was sunny. NAD noted the importance of not exaggerating health and nutritional benefit claims for products and expressed concern that Sunny D’s claims drew direct comparisons between drinking Fruit2O and eating two servings of fruit- implied claims that it determined were inaccurate. Even if a product contains certain nutrients in amounts equal to that found in fruit, NAD stated, a consumer cannot be led to believe that drinking Fruit2O will provide the same overall nutritional benefit of consuming two servings of fruit. The implied message of nutritional equivalence was problematic to NAD and it recommended that the “equal to 2 servings of fruit” claims be discontinued. In addition, NAD also advised that the Fruit2O tag line “The wonders of fruit. The refreshment of water” be discontinued as well, because it contributes to the implied message that the beverage is nutritionally equivalent to two servings of fruit.

The takeaway message here is that advertisers should be wary of making apples-to-apples nutritional claims when adding discreet nutrients to foods and beverages. NAD was clear that this type of claim (i.e., that the enhanced product provides the same nutritional benefit as consuming actual fruit) can be problematic. Moreover, NAD noted that these types of claims may be reasonably interpreted by consumers as meaning that nutritionally enhanced products provide the same overall benefits as consuming whole products (like fruits and vegetables) simply because they contain some of the same nutrients. Because whole fruits and vegetables may provide other additional benefits that may not be present in the enhanced product, such advertising may be considered misleading. It is unclear what NAD’s view would be on the relatively common claim that a fruit or vegetable juice product provides the equivalent of a certain percentage of the recommended daily servings of fruit and vegetables.

- Randy Shaheen and Danielle Garten

Groups To FTC: Changes In Technology Warrant Changes To COPPA

The Children’s Online Privacy Protection Act (COPPA) governs online sharing by, and collection of information from, children under age 13. COPPA was initially scheduled for review in 2015, but this past spring the FTC announced that it would accelerate the review “in light of rapidly evolving technology and changes in the way children use and access the Internet.” The FTC invited comments on its review and the comment period closed today.

In response to the FTC’s request, a broad coalition of child advocacy, health, consumer, and privacy groups, the American Academy of Pediatrics, the Center for Digital Democracy, Consumer Federation of America, Consumers Union, the Privacy rights Clearinghouse, and the World Privacy Forum, is urging changes to COPPA designed to address the growth of mobile phones, interactive games, and more sophisticated tracking and targeting technologies.

In their formal comments, the groups asked the FTC to:

1. Extend COPPA’s privacy protections to mobile phones, online gaming consoles, interactive television, and other new digital platforms;
2. Update the definition of “personal information” to include information that permits targeting an individual without necessarily knowing the individual’s identity;
3. Use the criteria developed for the 2008 report to Congress on food marketing to clarify the definition of websites and online services “directed at children”;
4. Close loopholes on when and how a website can contact children multiple times without obtaining parental consent;
5. Require major websites, ad networks, social networks and other online service operators to periodically inform the FTC about their data collection practices; and
6. Investigate the efficacy of Safe Harbor programs and require operators to reapply for continued authorization.

The groups also strongly urged the FTC to develop a separate set of privacy protections for children over the age of 13. The formal comments are available here.

The ball is now in the FTC’s court. We expect to see at least some changes to COPPA as a result of the current review.

- Randy Shaheen and Tiana Russell

Made in the USA (We can’t say this in California)

Fireworks to the tune of “Stars and Stripes Forever,” American flags everywhere—the Fourth always generates a swell of patriotism. Patriotism, for some, extends to supporting US manufacturing operations. Indeed, companies often sacrifice cost savings from sourcing materials overseas (or moving manufacturing operations overseas) so that they can continue to market their products as “Made in USA."

We have previously blogged about both the FTC standard for a “Made in USA” label and the stricter California standard. Both require that final processing or assembly occur in the United States. But while the FTC requires that “all or virtually all” of the costs associated with a product be attributable to domestic parts and processing, California prohibits a “Made in USA” label if the product, “or any article, unit, or part thereof,” is “entirely or substantially” made overseas. California courts have interpreted this strictly, to prohibit the label if any part of a product—perhaps even a single screw—is “substantially” made abroad. (For more information on the two standards, see this article.)

However, the California law is so strict that it may well be self-defeating. Some companies, no matter how well-intentioned, may not be able to meet the California standard because, for example, a minor component is only available overseas. Failure to meet the standard means manufacturers must create special packaging for California—not always feasible—or drop the “Made in USA” label entirely. And once forced to drop the label, companies lose a big incentive to continue domestic sourcing and production, and US jobs may be lost, not gained.

A recent MSNBC.com article highlights this issue. Mag Instruments’ flashlights are almost entirely domestically sourced, satisfying the FTC standard. But two small components — a light bulb and an O-ring “not produced by anyone in the United States” — are imported, and so the Company believes it cannot satisfy the California standard. As a result, the company has had to drop the label entirely. Maglite has recently lost market share to cheaper foreign-sourced and imported products. It has now lost the “Made in USA” label that constituted “[o]ne of [its] advantages . . . in the U.S. market.” Founder Anthony Maglica, an ardent supporter of American-made products, refuses to shift Mag Instruments’ production overseas. But he laments the effects of the California law on US businesses, noting that just like “if you have a little dog, and you want him to do the tricks, you give him a bone,” businesses “need incentive too.”

Of course, one solution is to qualify the claim, for example, “Made in USA of US and foreign components”. Mag Instruments has done just that for its Maglite flashlights. However, this doesn’t solve the problem of many companies being unable to make a “Made in USA” claim under standards adopted by the FTC because of a stricter California law. But for now, as Mag has concluded, it may be better than nothing.

In case the Terminator is reading this, maybe it’s time for California to fall in line behind the FTC.

- Randy Shaheen, Amy Mudge, James Speyer, and Karen Otto

FTC’s Revised Endorsement Guides: No Plans to Monitor Bloggers, But Will Focus on Advertisers

The FTC recently issued “FTC Facts for Business,” answering frequently asked questions about the FTC’s revised endorsement guides, which we have previously blogged about here and here. The FTC Staff took considerable heat for its revised Guides, including critiques that it was targeting bloggers and misunderstood social media, and the FAQs try to eliminate some common misunderstandings -- including the fear that the FTC will be knocking on the doors of teen and mom bloggers and issuing fines.

The Q&As begin by summarizing three truth-in-advertising principles: (1) endorsements must be truthful and not misleading; (2) If the advertiser does not have proof that the endorser’s testimonial represents the typical experience, the ad must clearly and conspicuously disclose generally expected results; and (3) If there is a connection between the endorser and the marketer of the product that would affect how people view the endorsement, then that connection should be disclosed. The FAQ then addressed the following subjects:

About the Endorsement Guides: They are not new, but they are revised. They were revised because they were written in 1980, and needed to be updated to apply in today’s marketing world, which includes blogs and social networking sites. Disclosures are important because an act or practice is deceptive if it misleads “a significant minority.” Contrary to some press releases, there is no fine for not complying with the FTC guide. The FTC has no plans to monitor bloggers, but will continue to focus on advertisers. The guides do not hold online reviewers to a higher standard than reviewers for paper-and-ink publications. Finally, if you are acting on behalf of an advertiser, that is commercial speech which can be regulated under the FTC Act if it is deceptive.

When do the Guides apply to endorsements? They cover endorsements that are made on behalf of a sponsoring advertiser, e.g., where an advertiser pays a blogger or gives him or her something of value to discuss a product. Continuously getting free stuff from an advertiser creates an expectation of future benefits from positive reviews. The guide applies to videos just the same way it applies to websites or blogs. If readers understand that a person is being paid to endorse a product, then a disclosure is not necessary.

How should I make the disclosure? There is no special language, the point is simply to give readers the information. The following types of disclosures are typically not sufficient: a single disclosure on a home page, or a button that says “disclosure, legal.” On the other hand, a disclosure can be sufficient in as many as 8 characters in a tweet: “#paid ad”!

How do the Guides apply to affiliate or network marketing? Small network marketing businesses should tell participants that if they get products through the program, they should be clear they got them for free. With respect to affiliate marketers with links to online retailers who pay commissions, such relationships should be disclosed. Social media marketing networks should set up reasonable monitoring programs and should check up on questionable practices.

What do I need to know about the Guides? You can’t talk about your experience if you haven’t tried it. If you were paid to try something, and you thought it was terrible, you can’t say it was great. You can’t make statements about a product that would require proof you don’t actually have. With respect to testimonials, statements like “results not typical,” will not suffice. You must either have the proof to show the results are typical, or clearly and conspicuously disclose the generally expected performance.

- Amy Mudge and Marianne El Sonbaty

Congress: Labeling Fur and Protecting the Family’s Precious Metal

While jewelry and fur may not be top of mind to consumers in the middle of summer, the Federal Trade Commission has long had enforcement authority over the marketing and sale of these products and recently supported legislation that further strengthens consumer protections in these areas.

On June 30, the House Energy and Commerce Committee's Commerce, Trade, and Consumer Protection Subcommittee cleared two bills focusing on consumer protection: the Guarantee of a Legitimate Deal Act of 2010 (H.R. 4501) and the Truth in Fur Labeling Act (H.R. 2480). The Guarantee of a Legitimate Deal Act sets standards for businesses that exchange cash for precious metals through the mail. The Truth in Fur Labeling Act extends the current Fur Products Labeling Act to require even fur products containing less than $150 in fur to have labels detailing the type of fur incorporated in the item.

The market for mail-in gold, in particular, has grown rapidly due to the doubling in the price of gold over the past three years to $1,200 an ounce. A major player in this industry, Cash4Gold.com, has been able to multiply traffic to its website through extensive advertising, including a commercial during the Super Bowl.  Businesses like Cash4Gold generally operate by soliciting consumers to mail in jewelry, making the consumer an offer by sending back a check, and giving the consumer a limited amount of time to reject the offer before the assuming it is accepted. There have been widespread consumer complaints of under-compensation -- some reports indicate that these companies offer customers less than a third of the true value of the jewelry.In an attempt to protect financially-stressed consumers selling their jewelry to these businesses, the proposed Guarantee of a Legitimate Deal Act would require online purchasers of precious metals to wait for affirmative acceptance before melting the jewelry and to promptly return jewelry if the offer is rejected.

Currently, the FTC enforces the Fur Products Labeling Act, which entails producing the Fur Products Name Guide that articulates rules for the labeling of fur products. This law does not, however, require labels on products containing less than $150 in fur, which often leaves consumers uninformed as to whether they are purchasing faux or animal fur. The proposed Truth in Fur Labeling Act would aid consumers who prefer not to buy real fur by eliminating this loophole, which now allows 14% of fur products to go unlabelled. This Act would not preempt states from passing more stringent regulations concerning fur product labeling. Retailers who sell fur products stay tuned for further developments.

- Amy Mudge and Andrew Macurdy

NAD: In The Land Of The Free, Goods “Like Free” Better Mean Really Free

As we get ready in the USA to celebrate our July 4th Independence Day, we thought it appropriate before we head out of town for the long weekend to ponder being free in the commercial sense or how to substantiate “free” claims. Following a challenge by Office Depot to the advertising claims of Staples and OfficeMax, the National Advertising Division of the Council of Better Business Bureaus has recommended that both companies discontinue their claims of “free” supplies.

The challenged claims included print and Internet advertisements made in connection with the companies’ respective “rewards” programs. The Staples advertisements stated “Buy ANY of these office supplies, get 100% back in Staples Rewards” and “It’s like getting supplies for FREE.” The Staples Rewards program allowed customers who registered for the program to redeem Staples Rewards for future supplies if used within a limited time period.

OfficeMax was challenged for claims made in connection with a similar rewards program. The OfficeMax advertisements stated, "It's like getting one FREE," followed by the disclosure, "Pay $34.99 plus earn $35 in MaxPerks Bonus Rewards". However, OfficeMax’s Bonus Rewards were subject to certain restrictions and limitations: customer couldn't use the reward points for 30 days; the points were subject to cancellation at any time; and the points expired after 90 days. In its challenge to its competitors’ use of the word “free”, Office Depot cited the FTC Guide Concerning use of the Word “Free” and Similar Representations, which states that “when making ‘Free’ or similar offers … all of the terms, conditions and obligations should appear in close conjunction with the offer of ‘Free’ merchandise or service.” Office Depot argued that Staples’ and OfficeMax’s “free” claims violated both the spirit and letter of the FTC Guide because the advertising did not include the conditions and major limitations of its offer clearly and conspicuously.

In response, both Staples and OfficeMax argued that all of the conditions and limitations of their offers were made both clear and conspicuous. Additionally, OfficeMax argued that they had not claimed that the merchandise was “free”, just “like free”.

The National Advertising Division did not find Staple’s and OfficeMax’s arguments convincing, however, and in two June decisions, they emphasized that goods are not free when they come with too many strings attached. The NAD stated “Simply put merchandise is either free or its not”. The NAD added that the word “free” has “cachet with consumers and should be reserved for offers that are truly without cost…”. The NAD recommended that both companies discontinue its’ claims of “free” supplies.

Both Staples and OfficeMax, Inc. have stated that they respectfully disagree with the position taken by NAD and have indicated that they will appeal the decisions.

The Consumer Advertising Law Blog wishes you enjoy a happy holiday weekend, completely 100% with no disclaimers needed free from stress and distraction!

- Amy Mudge and Tiana Russell

Protecting Your Trademark Is No Laughing Matter

The online retailer ThinkGeek is known for having some pretty bizarre items, but none are wackier than the annual April Fool’s Day products. This year’s lineup included Canned Unicorn Meat, billed as “the new white meat.” Below a picture of a block of sparkly meat, the product page explains how a group of Irish nuns care for aging unicorns and “fatten them on a diet comprised entirely of candy corn.” A diagram of the cuts of unicorn, including “magic,” “giggles,” and “rainbows,” completes the page.

The product led the National Pork Board (NPB), owners of the trademark THE OTHER WHITE MEAT, to send a cease and desist letter warning ThinkGeek of possible infringement. The letter objected to the product’s slogan—“Pâté is passé. Unicorn - the new white meat.” It also noted that other websites, in linking to Canned Unicorn Meat, had used the phrase “The Other White Meat.”

THE OTHER WHITE MEAT has been in use for over twenty years, with over $550 million spent on advertisements using the slogan. A 2000 study found it to be the fifth most well-known advertising slogan in the United States. Based on this and other evidence, the Patent and Trademark Office recently found the slogan to be a famous mark and refused to allow a salmon distributor to register THE OTHER RED MEAT because it would cause dilution by blurring the distinctiveness of the NPB’s mark.

In a blog post, ThinkGeek asserted that it has “nothing to worry about--this kind of use is protected as a parody.” Confident in its legal position, ThinkGeek had a field day at the NPB’s expense, posting a portion of the letter—which it called the “best-ever cease and desist”—and implying that the NPB’s lawyers thought the product was real. ThinkGeek’s parent company even issued a Press Release, apologizing for “caus[ing] a national crisis and misguid[ing] American citizens regarding the differences between the pig and the unicorn.” Almost immediately, bloggers got in an the action, exclaiming that “the pork people had no sense of humor” and “weren’t in on the joke.”

However, parody is not a defense to infringement per se, but rather an argument that there is no likelihood of confusion—a necessary element of infringement—because consumers will know that the parody is a joke. A parody, though, must make fun of or criticize the trademark or its owner; using a trademark to make fun of something else is not a parody. Thus, to be a parody, Canned Unicorn Meat must be meant as commentary on THE OTHER WHITE MEAT or the NPB. If Canned Unicorn Meat does not qualify as a parody, ThinkGeek may face liability for infringement or possible dilution of the NPB’s famous mark. And there would be nothing magical about that.

- Suzanne Wilson and Karen Otto

Insecurity is No Tweet

Many people use Twitter to share their deepest feelings to the cyberworld (in 140 characters or less) about topics ranging from their dismay about the current unemployment rate to the joy of Landon Donovan’s dramatic goal in the World Cup. But sometimes Twitter users just want to send private messages to their friends and colleagues and of course, no one wants their private information to be shared with the public or to be misrepresented through phony tweets in such a public forum. However, according to the FTC, Twitter users’ private information may have been at more risk than they were led to believe through Twitter’s privacy disclosures.

Last week, the FTC voted 5-0 to settle charges against Twitter that it deceived consumers by failing to provide the necessary safeguards to protect their personal information. The FTC alleged that “serious lapses” in data security allowed hackers to obtain unauthorized administrative control of Twitter, including access to non-public user information, tweets that consumers designated as private, and the ability to send phony tweets from any user. This was the first case of this kind brought by the FTC against a social networking service.

In its complaint, the FTC alleged that Twitter made several misleading statements on its webpage about the protection of their users’ private information and the ability to make private, direct Twitter messages and to create private Twitter accounts. For example, the Twitter webpage states that users can “send followers private tweets, called direct messages” and that “only author and recipient can view direct messages.” With regard to protected accounts, the webpage states that users “have the option of … protecting the account to keep [their] updates private” and “only approved followers are able to see [their] profile page.”

“Ambush Marketing” and the World Cup: How Does an “Official Sponsor” Protect that Position?

What comes to mind when you see thirty women wearing orange mini-dresses? If you said ambush marketing, you may be correct. Companies spend substantial sums to sponsor high profile events, such as the FIFA World Cup. The benefits of sponsorship generally include exclusive advertising rights associated with the event. Occasionally non sponsors may use techniques known as “ambush marketing” to leverage their own marketing campaigns at high profile events. Ambush marketing is not always easy to police. Even if legal action is available, it is often only available after the ambush has occurred.

The World Cup is a prime target for ambush marketing given the worldwide attention it attracts. Recently, Bavaria NV, a Dutch beer brewery (which is not an official sponsor of the World Cup), sent more than thirty women wearing orange mini-dresses to a match in order to promote the brewery’s ongoing beer advertising campaign in the Netherlands. An equal opportunity ambusher, Bavaria enlisted a group of men to attend matches at the 2006 World Cup wearing orange lederhosen with a distinctive black tail that displayed the company’s name. A South African budget airline has also attempted to use the World Cup’s popularity to its advantage.

In response, FIFA (as well as other international sporting organizations) has developed a global rights protection program. The program entails close collaboration with local authorities in an effort to address ambush marketing strategies as soon as possible. Moreover, South Africa, in anticipation of the World Cup, passed anti-ambush marketing legislation that outlawed the misuse of registered marks and unfair competition. Although these rigorous action steps may help FIFA’s policing efforts, the challenge for an “official sponsor” remains how to effectively protect against ambush marketing before it occurs.

In the United States, the US Soccer Federation obtained a preliminary injunction against retailer The Sports Authority (TSA) over TSA’s use of advertisements during the World Cup that included official US Soccer trademarks. In its complaint, US Soccer alleged that TSA's advertising campaign infringed on Dick’s Sporting Goods’ official sponsorship relationship with US Soccer. While the ads had already appeared during the US-England match, the injunction was filed to prevent TSA from running the ad during the US-Slovenia match on Friday, June 18 -- the day after the order was obtained.

The Lanham Act provides potential remedies for ambush marketing that results in consumer confusion, or the likelihood of consumer confusion, regarding the relationship between the company being advertised and the targeted sporting event. However, US courts also recognize a company’s First Amendment right to engage in commercial speech if consumer confusion is not threatened. Accordingly, organizations such as FIFA, as well as its official sponsors, will no doubt continue to look for new and better methods of protecting their relationships and the benefits that sponsorship provide. The beginning of Wimbledon this week will undoubtedly give rise to a whole new array of ambush marketing opportunities and the corresponding policing challenges.

- Suzanne Wilson and Andrew Macurdy

Vladeck Discusses Policy and Enforcement Issues on Consumer Privacy

On June 3, 2010, FTC BCP Director David Vladeck spoke at the Privacy Law Scholars Conference in Washington, DC. His remarks focused on the issue of privacy and technology. In the 1890’s, Vladeck noted, Louis Brandeis and Samuel Warren wrote about their concerns with the invasiveness of a new technology, the camera. Since that time, we have grappled with the impacts of more and more invasive technology on privacy. Vladeck discussed new technological information practices and the privacy risks they pose. The FTC, he noted, is trying to “address these risks [through policy development and enforcement.] without stifling the dramatic benefits of technological innovation.”

With respect to policy development, Vladeck offered several key messages from roundtables and public discussions: (1) given the volume of information maintained about consumers, it “no longer makes sense to talk about ‘personal information’ and ‘non-personal information’”; (2) because it is now more expensive to destroy than to keep data, data will likely “hang around long enough that it is re-examined and re-purposed for uses that may not have been contemplated at the point of collection”; (3) consumers are still getting up to speed about how information is handled and with whom it is shared; (4) privacy policies, while useful to promote business accountability, are not useful to consumers because they are not located where “consumers need them and they’re too complicated, too vague, and too long.” Vladeck discussed the effort led by a non-profit think tank, the Future of Privacy Forum, along with marketing company WPP, to develop an icon to notify consumers how to make choices about use of their information in behavioral targeting.

With respect to enforcement, Vladeck indicated that a number of non-public investigations are ongoing, including efforts by the FTC to investigate companies in order to determine whether actions are necessary in new technology areas, such as P2P file sharing software. Finally, he discussed the contribution of academic research. As an example, he discussed the assistance academics from the University of Texas made to an investigation FTC conducted of Netflix’s release of “anonymized” movie queue information. The professors made the FTC aware that it was possible to re-identify individuals using the data set. As a result, Netflix agreed to modify its practice.

In the same vein, an FTC representative spoke at a Calgary, Alberta event put on by Canada’s privacy commissioner. The representative’s remarks, reflected frustration with current U.S. privacy laws, including an indictment that they “[aren’t] working,” in particular because “’[w]e’ve put too much burden on the consumers to understand [privacy] policies.’” No one should be surprised to see more FTC enforcement and regulation efforts in this area.

- Nancy Perkins and Marianne El Sonbaty

Establishing the Legal Position of Geographic Location Applications

With the ever-increasing availability and utilization of smartphones and GPS technology, location has become a vehicle through which marketing and social information can be transmitted. "Geo-location" technology has been in existence since 1999 and is well known from applications ("apps") like Google Maps, which enable a user to search for physical places (i.e. hotels, restaurants, stores, tourist attractions) relative to a computer or phone's location. These apps are now becoming more advanced and creative which has led both Congress and the FTC to examine how businesses and the government (should) regulate location-based information.

Geo-location apps, such as Foursquare and Loopt, allow friends to share their location and post comments about places they frequent or visit. The more places one visits and shares with friends, the more points and "badges" that person receives which can be redeemed for discounts and rewards. For example, on May 22nd, Pepsi released "Pepsi Loot" for the iPhone and iPad. This location-based app directs users to restaurants serving Pepsi products, known as "Pop Spots." As visits to these establishments accumulate, a user can obtain rewards, such as free downloads of exclusive music or free Pepsi with an entree purchase.

From a legal standpoint, the use of location-based information produces privacy and data security concerns. The FTC, after holding a town hall on the mobile marketplace in 2008, issued recommendations ("Self Regulatory Principles for Online Behavioral Advertising") for companies seeking to advertise based on a consumer's online activity over time. The FTC recommended that industry self-regulation consist of a requirement of "affirmative express consent" for "material retroactive changes to privacy promises" and for use of "sensitive" data, which should include "precise geographic location information." Companies need to be certain any notice they provide for location-based apps is consistent with their privacy policy; otherwise, they may be subject to privacy violations for "deceptive" notice under Section 5 of the FTC Act.

Location-based apps may trigger a string of laws concerned with protecting personal information, such as:

• the Children's Online Privacy Protection Rule (for online services aimed at children under 13),
• HIPAA and the FTC Health Breach Rule (for covered entities under HIPAA or their "business associates"), 
• FACTA and the FTC Red Flag Rules (for financial institutions with data subject to identity theft),and
• Section 222 of the Federal Communications Act (for telecom providers with customer proprietary network information), and various state data security laws.

In Congress, meanwhile, Representative Rick Boucher (D-Va) and Representative Cliff Stearns (R-Fla) have sponsored an online consumer privacy protection bill, released May 4th, which would require that consumers opt-in before companies collect, use, or disclose "sensitive" data, such as "precise geographical location." More generally, Apple is looking to control third-party targeted advertising, as the most recent iPhone Developer Agreement mandates that third parties get Apple's permission before collecting user data, which would include location-based data, to advertise. The FTC, however, is reported to be investigating potential antitrust issues with this policy.

The bottom line is this: regulators seem to be in agreement that companies should obtain affirmative consent from online consumers before collecting, using, and disclosing their precise geographic location data. How mandatory any requirements might be, how extensive their reach, and where they might come from is still uncertain. Anyone involved in this growing market should watch to see if the legal parameters are clarified in the near future.

Federal Reserve Limits Credit Card Fees in Final CARD Act Rules

On Tuesday, the Federal Reserve Board issued its final rules implementing the CARD Act. These rules, among other things, cover those portions of the CARD Act which require that any penalty fee or charge imposed in connection with a credit card agreement, including a late fee or a over-limit fee, be reasonable and proportional to the violation to which it relates.

Under these rules, a creditor cannot charge a cardholder more than $25 unless:

• One of the cardholder’s last six payment was late, in which case the fee can be up to $35; or
• The creditor can show that the costs it incurs as a result of late payments justify a higher fee.

These fee limits, which are described in the rule as a “safe harbor,” were not proposed in the initial rulemaking, and so came as somewhat of a surprise. Moreover, if these “safe harbor” fee limits are not used, the creditor must prove that the costs incurred as a result of the fee, such as costs of notifying customers of the late payment and resolving a delinquency, are proportional to the fee imposed. Higher loss rates and related costs (such as reserves) for particular violations cannot be included in these calculations. The cost analysis then must be updated annually.

In addition to these fee limits, the final rules stipulate that no late payment can be greater than a customer’s minimum payment. Thus, if a customer’s minimum payment is $20, the penalty cannot be more than $20 (despite the $25 fee limit described above). If a customer exceeds her or his credit limit by $5, the maximum fee that can be charged for that over-limit violation would be $5.

No inactivity fees can be charged to a customer if the customer does not continue to make purchases with the card. And only one fee can be charged per payment. Thus, if a cardholder is late, and also has an NSF, the creditor can only charge a late payment fee. A returned payment fee could not also be charged.

The rules also cover the CARD Act’s mandate that creditors must re-consider the APR charged on those credit card accounts where it previously increased a rate at least every six months for possible APR reductions. Creditors are required to both consider factors relating to the specific cardholder’s creditworthiness, as well as general market conditions.

These rules, which become effective on August 22, 2010, are the last of three rulemakings the Federal Reserve has made under the CARD Act. Earlier rulemakings dealt with credit and gift card disclosures. (See our previous blog posts here and here). These latest changes will almost certainly require yet another round of new disclosures and additional programming costs to implement. And the limits will almost certainly reduce issuer revenues further than previous rulemakings: the Federal Reserve noted in the preamble to the rules that late fees and over limit fees have been averaging about $39 - well more than the fee limits set in the rule.

Click here for a more extensive analysis of this development.

- Beth DeSimone

Patent False Marking Claims Require Evidence of Deceptive Intent

The Federal Circuit last week provided practical guidance on what qualifies as deceptive intent in a false patent marking case. This new decision follows on the court’s landmark decision last December in Forest Group v. Bon Tool Inc. that the penalty of up to $500 for false patent marking should be imposed for each article that is falsely marked. That decision sparked a wave of false patent marking lawsuits seeking to capitalize on the increased potential damages for false patent marking.

In Pequignot v. Solo Cup Company, the Federal Circuit held that, while marking items with expired patent numbers constitutes false patent marking, a plaintiff in a false marking case must still prove that the false marking was done with the intent to deceive the public. Proof of intent requires more than mere knowledge that the patent marking is false, and likely will require in most instances a fact-intensive inquiry regarding the defendant’s motivation for continuing to mark its products with the numbers of expired patents.

The court held that the combination of a false statement with knowledge of the statement’s falsity creates a presumption of deceptive intent but that presumption was rebuttable. In the case of expired patents, however, the presumption is weaker. The court also held that the bar for proving intent to deceive is “particularly high,” requiring not only knowledge but a “conscious desire” to deceive. A defendant can successfully rebut this admittedly weak presumption by showing, by a preponderance of the evidence, that it did not consciously desire to deceive the public. In Pequignot, Solo Cup met this burden by offering credible evidence that it relied in good faith on the advice of counsel and made its decisions based upon legitimate desires to reduce costs and avoid interruption of its manufacturing process.

While the Pequignot decision does not conclusively end liability for false patent marking claims based on expired patents, it does provide valuable guidance on steps a company can and should take to protect itself from liability for false marking. First and foremost, consider whether patent marking is the right course of action for your company. Patent marking protects a company’s right to seek damages from infringers prior to giving notice of a claim. If you do not intend to enforce your patents, or do not foresee significant competition, then patent marking may not provide any benefit and could expose your company to a false marking claim if done incorrectly. Moreover, defense of such a claim on the basis of advice of counsel could require waiver of the attorney-client privilege. If you decide to mark, you should consult with legal counsel regarding your patent marking policies, and adopt a policy to audit your patent markings for accuracy and to remove markings for expired patents from its products. Moreover, you should document your good faith business reasons for any phased or delayed approach to removal of expired patent marking to rebut any presumption that continued use of those markings was done for the purpose of deceiving the public.

Click here for a more extensive written analysis of this case. For a video about this development, click here.

- James Blackburn and Ryan McMonagle

Tilting at Windmills: Is the “Unfair and Deceptive” Standard in the FTC Act Really “Unfair”?

On Wednesday, Senator Orrin Hatch (R-Utah)--the ranking minority member on the Senate’s antitrust subcommittee--voiced concern that the standard in Section 5 of the Federal Trade Commission Act for identifying “unfair or deceptive practices” is too vague. Senator Hatch voiced these concerns during a congressional hearing on antitrust enforcement where FTC Chairman Jon Leibowitz testified, detailing the agency’s recent work to promote competition and benefit consumers, such as ending “pay-for-delay” pharmaceutical agreements, preventing anticompetitive mergers, revising the guidelines that the FTC and the Justice Department use to assess horizontal mergers, and using its authority under Section 5 of the FTC Act to combat unfair methods of competition and protect consumers.

Senator Hatch may be tilting at windmills in his quest for a more definitive “unfair and deceptive practices” standard. While the area has been cited as a broad and relatively untested province of antitrust law according to The National Law Journal’s January report, the FTC has long used the authority to rein in unfair trade practices, particularly those that affect consumers. Indeed, the FTC recently exercised its Section 5 authority in challenges involving the likes of Intel Inc., Voice Touch Inc., Ticketmaster Entertainment Inc., and U-Haul International Inc. The FTC has also used this authority recently to rein in pay day loan practices, debt rehabilitation and mortgage foreclosure prevention programs and other practices in the consumer financial area. (For those Supreme Court history buffs we note that way back in 1935 the Supreme Court struck down an attempt by Congress to set up “fair” codes for business competition as unconstitutional because the term was too undefined. It noted with approval, however, the use of the term “unfair” in the FTC Act.)

Furthermore, the FTC has issued policy statements on what is deemed to constitute unfairness and deception, yet Chairman Leibowitz correctly acknowledged that the courts ultimately say what the law is. Chairman Leibowitz attempted to further allay Senator Hatch’s concerns by insisting that he “ha[d] yet to meet a company that has been surprised” by FTC action against conduct it deemed in violation of the FTC Act. Despite the lack of a clear standard, he seemed to suggest, companies were effectively on notice

We note that these standards also are expected to be employed by the proposed Bureau of Consumer Financial Protection under the pending financial reform bill. The bill, as currently written, authorizes the new Bureau to not only prevent a provider from committing or engaging in an “unfair or deceptive act or practice” in connection with any transaction with a consumer for a financial product or service, but also abusive acts or practices. The bill also sets forth what appears to be the current standard used by the FTC for finding an act unfair or deceptive, namely, that (A) the act or practices causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers; and (B) such substantial injury is not outweighed by countervailing benefits to consumers or to competition.

The bill also articulates a standard for what constitutes “abusive” practices: in order to declare an act or practice abusive, the Bureau must find either that it “materially interferes with the ability of a consumer to understand” terms or conditions, or that it “takes unreasonable advantage” of consumers in specified ways.

Thus, it appear that despite Senator Hatch’s views, use of the “unfair and deceptive” standards to rein in what is perceived as egregious practices against consumers is here to stay.

- Beth DeSimone & Caroline DeCell

FTC Revisits COPPA: Time for A Change?

The FTC hosted a workshop last Wednesday aimed at determining whether the Child Online Privacy Protection Act of 1998 (COPPA) continues to remain effective in the ever-changing world of online privacy. COPPA generally prohibits the online collection of personal information from children under the age of thirteen--without notice and parental consent--where a website or online service is directed to children or the operator has actual knowledge of the collection of personal information from children. The FTC has frequently targeted companies for failing to develop or abide by privacy policies that adhere to COPPA guidelines.

Three out of the five panels in the FTC’s program poked and prodded the statutory text, testing its durability and flexibility in different contexts. The first panel examined the definitions of “internet,” “website,” and “online service,” finding that all three terms continue to adequately describe the kinds of media, changed though they may be, that COPPA intended to regulate. The panelists determined that the definition of “internet,” for example, not only continues to be technically accurate, but also encompasses such new developments as mobile browsing. “Online service” remains a capacious term, as Congress intended, that extends beyond the internet, having possible implications for text messaging and other emerging means of communication. (See a previous blog post on this topic here). Because many new services, such as interactive television, carry on the trend toward increased connectivity via the internet, COPPA continues to be widely applicable in new contexts. However, COPPA is still limited by an important caveat: where a website or online service is not operated for commercial purposes, COPPA doesn’t apply.

The second panel investigated the “actual knowledge” standard for operators of websites not otherwise directed to children. Described as an industry victory, Congress’s adoption of this standard in lieu of a more expansive “constructive knowledge” or “knowing” standard provided operators a greater degree of protection, requiring direct and clear knowledge of the collection of personal information from a child in order to trigger COPPA applicability. Panelists contested the adequacy of this standard in light of advertising developments such as behavioral targeting. Some panelists suggested that the term “actual knowledge” could stretch to cover effective knowledge of the age of targeted viewers from behavioral monitoring, potentially blurring the industry-protective line between actual and constructive knowledge embedded in the statute.

In a similar vein, the third panel addressed the question of whether “personal information” includes facts that separately fail to identify an individual (such as an IP address), but, when aggregated, may point to a specific person. The panelists arrived at no clear conclusions.

Whether any changes result from this discussion remains unclear. What does seem clear is that the FTC will continue its vigorous enforcement in this area.

- Randy Shaheen & Danielle Sims