Consumer Advertising Law Blog

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

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

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

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

- Danielle Sims and Nancy Perkins

Warning to Internet Retailers: Careful with Online Discount Club Partnerships

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

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

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

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

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

- Victoria Shapiro

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

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

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

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

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

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

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

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

- Amy Mudge and Tiana Russell

Cuomo to Citi: Extend Free Checking Promo

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

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

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

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

- Beth DeSimone

FCC Proposes Revised Telemarketing “Robocall” Rules

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

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

How Long Can Your Product Be New and Improved?

I am fascinated along with the rest of the marketing community with the new Dominos “Oh Yes We Did” ads. This is another one where before you read further, you must watch this if you have not seen it already: www.pizzaturnaround.com.

In a nutshell, Dominos showed a focus group opining on its pizza in which it got comments like the crust “is like cardboard” and “the sauce tastes like ketsup [sic]”. It claims to have changed its recipe and sent its chefs out to the homes of the focus group participants to try the new offering who pronounce it delicious. The Dominos offers a promotional discount rate of $5.99 each for two mediums to give it a try. Slate provided its always interesting commentary on the ad itself and the ad agency behind the provocative offering.

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

We can’t help wondering as well whether Domino’s has just admitted that claims it may have previously made about the quality and taste of its pizza were unsubstantiated. Oh well, at least they’re not saying that the pizza really didn’t used to get there in 30 minutes or less.

- Amy Mudge

Claims of Alleged “Greenwashing” Squeak Past Motion to Dismiss

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

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

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

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

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

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

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

- Vicki Shapiro and Amy Mudge

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

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

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

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

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

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

- Sean Morris

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

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

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

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

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

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

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

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

- Beth DeSimone and Brian Larkin

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

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

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

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

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

- James Speyer and Rachel Chanin

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

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

A Brief History

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

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

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

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

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

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

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

- Daniel Kracov and Mahnu Davar

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

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

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

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

- Randy Shaheen

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

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

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

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

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

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

- Trent Norris

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

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

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

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

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

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

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

We welcome your reactions to our iPhone application.

- The Consumer Advertising Law Blog Team

Illinois Court Decides iTunes Must Face the Music

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

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

Announcing the Consumer Advertising Law Blog - The Kindle Edition

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

Holiday Jingles: Claims or Puffs?

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

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

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

- The Consumer Advertising Law Blog Team

Will FTC Endorsement Guides Hit Celebrities Where it Hurts?

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

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

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

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

- Amy Mudge and Randy Shaheen

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

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

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

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

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

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

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

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

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

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

- Beth DeSimone, Nancy Perkins, and Brian Larkin

CPSC Modifies Stay of Enforcement on Testing and Certification

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

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

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

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

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

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

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

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

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

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

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

- Randy Shaheen and Danielle Garten

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

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

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

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

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

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

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

- Randy Shaheen and Candida Harty

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

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

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

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

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

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

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

- Randy Shaheen and Jessica Halbert

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

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

Warning Requirement for Specified Children’s Products

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

ILPPA Definitions

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

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

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

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

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

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

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

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

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

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

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

Content and Placement of the Warning Statement

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

- Eric Rubel and Jennifer Karmonick

Lacey Act's Power Chord Rocks Guitar Manufacturer

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

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

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

- Marcus Asner and Grace Pickering

House Vote Pushes Consumer Financial Protection Agency One Step Closer to Reality

The U.S. House of Representatives on Friday afternoon passed its comprehensive financial regulatory reform legislation. The vote for H.R. 4173, called the “Wall Street Reform and Consumer Protection Act of 2009, was fairly close, 223-202, with twenty seven Democratic congressman voting against it along with all of the Republican members.

One of the central planks of the legislation is the creation of the Consumer Financial Protection Agency, or CFPA which will have rulemaking and regulatory authority over consumer financial products and services, including mortgages, home equity lines, credit and debit cards, pay day loans, installment loans, auto loans and leases and other consumer financial products. This plank has been controversial from the start, but it survived an amendment offered during the debate that would have substituted the CFPA for a 12 member council of regulators (similar to the FFIEC) that would have had rulemaking authority over financial products as well as safety and soundness concerns. That amendment failed by 223-208, with 33 Democrats voting for it.

Thus, as passed, the legislation requires that the rulemaking functions for the laws governing these products and services, which have been generally housed in the Federal Reserve, to be moved to this new agency. These laws would be supervised and enforced for nonbank companies by the CFPA, but the federal banking agencies would continue to have examination and enforcement authority over an estimated 98% of all financial institutions, as any bank or credit union that has less than $10 billion in assets are exempt from CFPA enforcement authority. The FTC also would lose rulemaking authority over nonbank institutions for unfair and deceptive practices but would retain back up enforcement authority.

The legislation mandates that the CFPA issue minimum standards for unfair and deceptive practices in the sale and provision of consumer financial products and services, as well as enhanced disclosures. The legislation also mandates that the agency impose certain fair dealing standards. However, there is no longer any requirement that the agency require lenders to offer “plain vanilla” products along with any nonstandard offerings. There also is no restrictions on interest rates, which are mostly governed by state law.

The final legislation also continues to allow national banks and federal savings banks to preempt certain state consumer protection laws, but only the state law "prevents, significantly interferes with, or materially interferes" the business of banking.” This is what is called the “Barnett Bank” standard, which is named after the 1996 Supreme Court case that articulated this standard.

The legislation now faces a somewhat uncertain outlook. Senator Chris Dodd (D-CT), head of the Senate Financial Services Committee, issued a discussion draft of his counterpart legislation in November, but Committee members on both the Democrat and Republican urged him to seek a more bi-partisan bill. Thus, the draft is currently being rewritten by different Committee groups, with Sen. Dodd and Sen. Richard Shelby (R.-AL) taking the lead on the CFPA title. The content of the revised draft, as well as timing, will become clearer in the coming weeks. However, if provisions creating a CFPA survive, its creation will be historic, as it will transfer major consumer responsibilities now divided among several federal agencies into one agency whose sole purpose will be consumer financial protection.

- Beth DeSimone & Brian Larkin

Breakfast Cereals Go On a Diet Prior To FTC Workshop On the Links Between Food Marketing and Childhood Obesity

General Mills announced on Wednesday that it would be gradually lowering the sugar content of breakfast cereals that are marketed to children, including Trix, Cocoa Puffs, and Lucky Charms. Although General Mills began to lower the sugar content of such cereals in 2007, it has pledged to reduce further the sugar content to less than 10 grams per serving. It did not set a deadline, however, in which to reach the goal. Nutrition groups lauded the announcement saying it would make a significant difference in cereals such as Trix which had 13 grams of sugar per serving. Kellogg Co., the manufacturer of Froot Loops and Apple Jacks, as well as Post Foods, which manufactures Fruity Pebbles, have also taken steps to reduce the sugar content in their cereals.

This announcement comes on the eve of an FTC public forum entitled “Sizing Up: Food Marketing and Childhood Obesity.” The December 15 forum will discuss new research on the impact that today’s pervasive food marketing has on children and the statutory and constitutional issues that surround government regulation of that marketing. The forum is free and open to the public and includes panels on the legal ramifications of regulating advertising to children as well as on the food and entertainment industries’ progress in implementing the FTC’s 2008 recommendations (previously described here) for self-regulatory changes.  Yours truly will be attending and blogging on what we learn, so stay tuned.

- Candida Harty and Danielle Garten

Disclosure-Patterned Wrapping Paper: Federal Reserve Proposes Gift Card Restrictions and Disclosures

Recently, this blog reported on federal district court cases that signaled the dangers of issuing potentially deceptive gift cards.

The Federal Reserve Board also has weighed in on gift cards with proposed rules that would restrict gift card fees and expiration dates, and require clear and conspicuous disclosures. The proposed rules implement section 401 of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act), which was enacted in May 2009. The Credit Card Act, amended the Electronic Funds Transfer Act (EFTA), by adding gift card restrictions and requiring the Federal Reserve Board to prescribe rules implementing the EFTA amendments. (See a related blog post, here)

The proposed rules prohibit gift card fees related to dormancy, inactivity, maintenance, card reloads, or balance inquiries unless the following three conditions are met:

1. There has been at least one year of inactivity on the card;
2. No more than one such fee is charged per month; and
3. The consumer is given clear and conspicuous disclosures about the fees

The proposed rules also prohibit gift card expiration dates that are less than five years after the date that the card is issued, or the date that funds were last loaded onto the card. The terms and conditions of any fees or expiration dates must be disclosed both prior to the purchase of the gift card, and on the surface of the actual gift card. Thus, if a gift card is sold within covered packaging, the disclosures must be noticeably written on the outside of the packaging. Gift card issuers are also required to provide a toll-free telephone number for consumers to obtain information on fees, card replacement, and underlying funds that may still be available on a gift card that has expired.

The proposed rules would only apply to gift certificates, store gift cards, and general-use prepaid cards that are marketed as gift cards. Several types of fund transfer devices are specifically excluded from the rules, including:

• Calling cards;
• Reloadable cards not marketed as gift cards;
• Cards not marketed to the general public (like a returned-item store credit, or a tax refund card from a tax preparation company); and
• Cards that solely grant admission to an event or venue.

Gift cards that are given to a consumer as part of a loyalty or awards program are also excluded from the proposed rules, but these cards are still required to provide disclosures related to fees, an expiration date, and a toll-free telephone service number.

The Federal Reserve Board is seeking comments on several aspects of the proposed rules until December 20, 2009, so there are opportunities for the rules to evolve before their final enactment. Yet it is clear that this holiday season will be the last for gift cards lacking disclosures.

UPDATE: A more extensive write-up on the proposed rules can be found here.

- Beth DeSimone and Brian Larkin

The FTC Tackles Online Privacy - Vladeck Speaks

In sessions filled with healthy doses of Louis Brandeis references, the FTC hosted on December 7 the first of its day-long roundtable discussions designed to explore online privacy issues. FTC Chairman Jon Leibowitz kicked off the day by referring to this as a watershed time for online privacy policy. Panelists representing industry, consumer groups, technology, and government then debated the benefits and risks of collection and use of consumer data over the Internet.

The final session addressed whether additional regulation is needed, which unsurprisingly drew a sharp split of opinion. This, of course, comes as we await anticipated draft privacy legislation being overseen by Congressman Rick Boucher, D-Va.

In summing up the day, David Vladeck, the FTC Director for the Bureau of Consumer Protection, noted that the last panel in particular “exemplified just how difficult the questions we have to confront are,” and offered these additional overarching conclusions and “questions [that] face us in the future”:

• The panelists “pointed out that the benefits [of online information tracking] include[e] free content, better search results and more relevant advertising,” but also “mentioned real risk including the disclosure of information consumers believe is private,” and the "chilling effect” for those who might “modify their online behavior for fear of being tracked.” “These are real risks as well and we need to confront them.”
• Panelists also questioned whether “the traditional distinction that has been drawn in privacy law between personal identifiable information and anonymous information may be a thing of the past.” “These observations raise questions about how to build in transparency, consumer control and accountability into the process without sacrificing the benefit.”
• Researchers seem to “confirm our intuition that consumers do not really understand the data collection process.”
• “Many consumers believe that if a company has a privacy policy it means the company does not share data with third parties,” which is not necessarily correct. “There is also general agreement that consumer disclosure as we know it simply does not work.” But, “just because it's broken, doesn't mean we should scrap it or discharge it. Transparency is challenging but we need to think more creatively and innovatively about how to deliver important information for consumers when they need it and in clear and in simple terms.”
• “The economists also pointed out the limits of disclosure. They noted that consumers engage in bounded rationality when they tend to discount long-term negative effects [] of giving up their privacy. I also have questions about timing, is the type of collection adequate or should we think about notice at the time of use?”
• The industry has implemented “a number of initiatives, including efforts to improve consumer notice about these ads and to provide more effective choice to consumers,” but there are “concerns, particularly about how some in the industry frustrate consumer choice by using technologies other than cookies to gather information online and by collecting and using sensitive data for behavioral advertising. “
• “The broker industry is largely unknown and invisible to the consumers and there's a lot of diversity in the types of information, uses of information and even the rules that apply to how such information” is managed. “This is an issue that may warrant our attention.”

There is a second roundtable discussion scheduled for January 28 in Berkeley, California.

- Sean Morris

How Should Courts Treat the NAD Process? The Debate Continues

We recently blogged on a decision from the S.D.N.Y granting a stay of a declaratory judgment action to allow the NAD to issue its decision in the same dispute. Another court has now weighed in with a different view.

NAD was in the process of deciding whether Priceline’s claim that customers could save “half off” or “up to half off” of hotel prices compared to Expedia and Hotels.com was misleading, when Expedia filed a Lanham Act false advertising suit. (NAD had previously resolved a different dispute involving the same parties.) NAD closed the case because the dispute at issue was now the subject of pending litigation, but expressed its willingness to reopen the case and render a decision should the court remand the case to NAD. Priceline filed a motion to stay and submitted a declaration from NAD noting it “believed it would be beneficial to share with the parties the analysis it would have conducted had procedural considerations not required an administrative closing.”

While the Court (Western District of Washington) concluded it had the power to order the requested stay, it would only do so if there would be “some advantage in terms of efficiency or fairness.” The Court concluded there would be neither in this case finding:

“nor is it this Court’s role to safeguard the relevance and effectiveness of an industry self-regulatory body. If NAD’s rules allow a challenger to ‘opt out’ of the NAD process by filing a duplicative court action, the obvious remedy would be to amend the rules if the industry agrees that this is not an optimal use of the parties’ or the organization’s time and resources. This Court will not provide a ‘fix’ or attempt to send any sort of ‘message’ to other participants in the NAD process based on the limited information before it.”

Will we see a rule change from the NARB? Stay tuned.

- Amy Mudge

Memory Boosting No Laughing Matter at NAD

First, you need to watch this ad:

All of us can appreciate a commercial that makes us laugh but sometimes the claims still strike a serious note. The ad you just saw was reviewed by NAD as part of its internal monitoring program rather than based on a challenge lodged by a competitor. The ad, for Minute Maid Enhanced Juice Blend shows a young woman approach a man and say “I think you are the father of one of my children”. Man looks confused for a moment and says “Cancun, Spring break ‘99?” The announcer declares “Opps, someone forgot to boost” and a close up shot appears of the juice with the label that reads “5 nutrients to support brain and body.” The scene plays again, after the man takes a big gulp, but this time in response to the woman’s question, the man remembers she is the art teacher of one of his children.

The advertiser asserted that this was a classic structure/function claim in which the juice is fortified with nutrients to “help nourish your brain” and “with 5 ingredients to support brain and body”. Such claims, the advertiser asserts, are permitted by the FDA for dietary supplements and functional foods when the claims are supported by studies and limited to promoting the role the nutrients play in the structure and function of the body as opposed to any claims of curing disease. The advertiser points to numerous ingredient studies showing that the nutrients added to its juice, DHA, choline, Vitamins B12, C and E and glucose, all support the brain and body.

So far so good but NAD’s analysis did not end there. NAD found the ad included an implied claim that drinking the juice will result in substantially and immediate improved memory capabilities based on the fact that the man in the ad took a sip of his juice, got a boost and then was able to correctly recall the identity of the woman. While NAD agreed with the advertiser that the depiction was not a literal product demonstration, NAD concluded that the use of humor still can convey messages that require substantiation. NAD concluded that the proffered studies did not support the claim of improved memory in healthy adults but were generally limited to studies of elderly subjects with mild age-related cognitive decline and to effects in infants and children. NAD recommended that the advertiser discontinue the ad.

As this case demonstrates it is often difficult to draw the line between making a point with humor that is so exaggerated that no consumer would literally believe it (think Holiday Inn Express commercial where guest who sleeps there overnight can do amazing things the next morning) versus using humor to make your claim to consumers in a way they will find appealing. And, in today’s regulatory environment, claims relating to health and nutrition may be no laughing matter.

And just to prove there is nothing wrong with our memory, here’s another funny ad relating to memory that’s one of our favorites.

Advertising legend has it that while this ad met with industry approval, it was pulled after its showing during the 1997 Superbowl -- not because the claims weren’t true but due to protests from franchisees and a call in campaign from offended viewers.

- Amy Mudge

CPSC Recommends Much Needed Guidance, But Will it Stick?

On November 5, 2009, the U.S. Consumer Product Safety Commission (CPSC) published a draft statement of policy providing guidance on the testing and certification requirements of section 102 of the Consumer Product Safety Improvement Act of 2008 (CPSIA). The draft has been presented to the commissioners for ballot vote, and if approved will be published as a formal statement of policy.

Manufacturers and importers -- who have been struggling to comply with CPSIA requirements in the absence of regulations or sufficient guidance from CPSC -- will likely welcome this interim guidance if approved by the Commission.

Menu Labeling - Too Much Information Just Before Thanksgiving?

We’ve probably all had the experience of tasting something really good at a restaurant but not really wanting to know how much butter and cream it has in it. Well, on the eve of the Great Feast, Congress may be preparing to change all that through nationwide menu labeling. Restaurants operating more than 20 locations would be required to list the amount of calories and other nutritional values for standard menu items. The provision, which is buried inside the massive healthcare bills passed by the House and being considered by the Senate, would also set uniform, national standards for menu labeling, preempting state and local laws whose differences have reportedly burdened restaurants and confused consumers. 

Specifically, the bills would require restaurants to have a “reasonable basis” for the nutrition information provided. This standard -- currently applicable to voluntary nutrient content claims made by restaurants -- is set forth in regulations under the Nutrition Labeling and Education Act (NLEA) and will allow restaurants to obtain nutrient information for menu items from sources such as recipes, nutrient databases, and analytical testing.

The theory, of course, is that spurred on by menu labeling, restaurants will offer healthier menu items and that consumers will make healthier menu choices. Time will tell. Meanwhile, menu labeling is only one of many provisions in the health care bills that go beyond health insurance to address consumer behavior. Consumer protection lawyers may want to keep an eye out for such provisions as the health care bills move forward.

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

- George Langendorf and Randy Shaheen

“No Surprises” Gift Cards

The holidays are approaching, and once again gift card season is upon us. Gift cards bring the joy of freedom for those who like to choose their own presents, but, for some financial institutions, these cards may bring legal troubles under unfair and deceptive practices laws. Last week, two United States District Court cases within the Third Circuit, Mwantembe v. TD Bank, and Mann v. TD Bank held that plaintiffs could pursue their state claims against banks that the sale of gift cards containing dormancy fees were deceptive and misleading practices. Plaintiffs in both cases were unable to successfully claim that the existence of gift card dormancy fees were illegal, but their claims that the banks’ marketing of these fees is deceptive survived.

Dormancy fees are charges against the value of a gift card, that accrue if a card is not used within a certain period of time. The court in Mwantembe analogized the payment of a dormancy fee to a shopper entering a store, paying for a product, and then exiting the store without the product. Plaintiffs in both cases were represented by the same counsel, and made very similar allegations with regard to the disclosure of dormancy fees. They believe that the following characteristics of gift cards related to advertising, term disclosure, fee conditions, and card design were all deceptive:

Advertising: Representing gift cards containing dormancy fees as “free” or having “no fees” in marketing materials and advertisements.

Term Disclosure: Packaging the terms of the gift cards related to dormancy fees in such a manner that a consumer will not be aware of the terms before purchasing the card, and an ultimate recipient of the gift card would not be aware of the terms either.

Fee Conditions: Conditioning dormancy fees on a length of time following the issue date of the card, but not disclosing the issue date on the gift card.

Card Design: Displaying a “Good Thru” date on the front of the gift card, while the dormancy fees could potentially diminish nearly all of the card’s value before the “Good Thru” date.

Although these gift card cases still remain in litigation, financial institutions should be very cautious about marketing gift cards with the above listed characteristics. Courts, as well as regulatory agencies, are trending towards closer scrutiny and enforcement of laws related to gift cards and unfair and deceptive practices. Banks should review their gift card terms and conditions for compliance not just with the disclosure laws, but also to make sure that the disclosures are clear and not deceptive. A stocking full of coal will be the least of a bank’s holiday worries if the marketing of its gift cards are ruled unfair and deceptive.

- Beth DeSimone and Brian Larkin

“Free!”, “Money Back Guarantee!” Claims Cost VOIP Provider

Last week, Vonage reached a global settlement with the Attorneys General of 32 states over allegations that the Delaware-based voice over internet protocol (VOIP) service failed to clearly disclose to customers the material terms and conditions of subscriber agreements. Led by Montana, the coordinated AGs claimed, among other things, that Vonage did not give adequate notice that the company required its subscribers to purchase certain equipment in order to utilize promotional services advertised as “free” and that Vonage misled consumers by representing that it was possible to cancel the service but then failing to accept cancellations (and in some cases, allegedly continuing to charge customers for service even after they had attempted to cancel) through a tactic called “saving” the customer.

Under the broad terms of the settlement, Vonage will pay $3 million in fines to the 32 states, provide refunds to certain customers and will amend its consumer advertising and marketing materials, so as to “clearly and conspicuously” disclose certain terms and conditions regarding its equipment and services. In addition to requiring Vonage to reimburse eligible consumers who complain of certain unauthorized charges, the settlement also requires that Vonage retrain its customer service and telemarketing representatives, and that the company modify all of its training and call center “script” materials to comply with the terms of the settlement.

Of particular interest to business is the breadth of the settlement and the detailed and specific requirements contained in the consent order related, for example, to the extent and timing of disclosures and that any representation of “award winning service” must be based on a genuine award from an independent third-party received no more than a year from the date of the representation. While there can be some comfort to companies in deciding to end an investigation by signing a consent order to have a clear statement of the enforcer’s expectations on a going forward basis, such specific injunctive relief, even if by agreement, can make it difficult for settling companies to keep up with the changing competitive tide particularly in dynamic markets. By no means a new issue, how companies advertise free offers and money back guarantees has received considerable focus from both federal and state enforcers in recent years and any company offering such enticements to potential customers to sample a product or service should take great care at looking at how such a program is advertised from top to bottom, including in traditional advertising and also as communicated by third-party marketing on the Internet and by customer service representatives.

- Taja-Nia Henderson and Amy Mudge

FDA Public Hearing on Promotion of FDA-Regulated Products Using the Internet/Social Media Tools

Companies that make or market FDA-regulated products are increasingly using Internet and social media tools such as Google searches, Twitter, Facebook and Wikipedia to promote their products and to provide other important information to consumers and health care professionals. While the Internet and social media provide significant benefits to consumers, industry, healthcare professionals and the public as a whole, these forms of media present new legal and regulatory challenges with respect to promotional labeling and advertising, third-party communications about a company’s products, and potential adverse events identified in blogs, chat rooms, and other forms of social media.

On November 12-13, 2009, FDA held a public hearing on the promotion of FDA-regulated medical products using the Internet and social media tools to hear from industry leaders, consumers, public interest groups, and media professionals. The hearing followed a panel-style format in which pre-selected speakers gave prepared remarks with accompanying slide presentations. FDA panel members asked questions of the speakers, but did not otherwise provide prepared remarks or invite participation from the audience.

Internet companies and regulated industry representatives discussed the need to differentiate Internet and social media from other forms of labeling or advertising because, unlike traditional promotional labeling and print or broadcast advertisements, Internet and social media users have a greater ability to control, alter and respond to the promotional messages and other product information they receive. Speakers such as Eli Lilly, sanofi-aventis, and Pharmaceutical Research and Manufacturers of America (PhRMA) agreed that manufacturers should be accountable for online content they control, but noted that manufacturers should not have a broad obligation to police or remove all forms of third-party content about their products.

FTC Releases Resource for Parents on Kids and the Internet

Many of us are parents and we know many of you are as well. So we decided to take just a quick departure from our normal focus on good business consumer marketing practices to let you know that the FTC has just published an excellent internet safety resource called “Net Cetera: Chatting with Kids About Being Online.” Net Cetera is a guide for parents, particularly the many of us who have kids who are more internet savvy than we are, that gives practical advice on things like social networking to file sharing, from cyberbullying to “sexting.” Net Cetera is available at OnGuardOnline.gov. If you’re interested in ordering free printed copies in bulk you can go here. 

Obama Fills Up FTC’s Dance Card: Nominates NC Consumer Protection Cop and LA Lawyer

President Obama has beefed up consumer protection enforcement at the FTC with the nomination of Julie Brill, the Senior Deputy Attorney General and Chief of Consumer Protection and Antitrust for North Carolina. Brill has an impressive consumer protection resume, with an emphasis on credit reporting and privacy issues.

For 20 years Brill was an Assistant Attorney General for Consumer Protection and Antitrust for the state of Vermont. There she brought enforcement actions against tobacco and pharmaceutical companies, and focused much of her time on the reform and enforcement of privacy laws affecting consumers. She was responsible for strengthening Vermont’s controversial law preventing companies from collecting, and selling, information on which drugs doctors most frequently prescribe. Brill has also testified before Congress regarding the Fair Credit Reporting Act and the Financial Data Protection Act. She stated that identity theft is a “serious and rapidly growing crime” and argued that Congress should create a national baseline standard for credit reporting and financial data protection and allow states to enact laws that are more protective of consumers. Brill has also taken a strong stance on affiliate sharing, noting that “greater consumer protections to guard against such practices should be incorporated into both federal law and state law.” If confirmed she would likely be a strong backer of the Commission’s existing priorities.

President Obama’s second nominee, Edith Ramirez is a partner at Quinn Emanuel in Los Angeles, Ramirez focuses the majority of her practice on copyright and trademark infringement. Ramirez has worked for President Obama one other time. While at Harvard Law School, Ramirez was a member of The Harvard Law Review under Editor in Chief Obama. Ramirez does not appear to have much in the way of a consumer protection record. However, she is a member of the Board of Commissioners for the Los Angeles Department of Water and Power. The Mayor of Los Angeles appointed Ramirez to the Commission in 2005, calling for a commitment to a “cleaner and greener” Los Angeles, while providing “reliable and cost-efficient water and power to 3.8 million customers.” The Board of Commissioners has attempted to meet these goals, and have aggressively reviewed contracts, lobbying costs, and executive perks, while arguing for more transparency within the Department.

- Danielle Sims and Randy Shaheen