Consumer Advertising Law Blog

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

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

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

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

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

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

- Matt Shultz

Europe Announces Plans To Reform Outdated Data Protection Rules

The European Commission has announced plans to reform comprehensively the existing EU data protection regime. The proposals, in the form of a new Regulation and Directive, aim to modernise, strengthen and future-proof the principles set out in the 1995 Directive, which was designed to safeguard a pre-internet society. The new Regulation will sweep away the current patchwork of national laws in favour of a single EU law, valid across all 27 Member States. This will, it is hoped, end some of the legal uncertainty and fragmentation that companies of all sizes face when doing business in Europe.

The proposals include some significant amendments to the existing rules including:

• the strengthening of individuals’ rights to include easier access to personal data, a right to request that all personal data be deleted if no longer necessary, and new rules on obtaining explicit consent;
• increased obligations for data controllers, such as the mandatory requirement to notify security breaches and the obligation for large organisations to appoint a data protection officer;
• the extension of EU rules to companies located outside the EU but which are active in the EU market and offer goods and services to consumers in the EU;
• the reduction of red tape for businesses by removing the requirement to notify all data protection activities to data protection supervisors; and
• the strengthening of national data protection authorities’ powers, such as the ability to impose fines for serious breaches up to €1 million or up to 2% of a company’s annual worldwide turnover.

The proposals will now be passed to the European Parliament and the EU Member States for consultation. If agreed, the new Regulation will take effect two years from the date of adoption and will apply to all Member States automatically.

The proposed Regulation can be found here.

- Richard Dickinson and Gemma Davies

Expedited Appeal in Lanham Act Cat Litter Case Will Address Sensory Perception Testing and Key Ingredient Testing

On January 17, 2012, the Second Circuit granted Clorox’s motion for expedited appeal in the cat litter case (Church & Dwight Co., Inc. v. The Clorox Company), which centers on sensory perception testing and key ingredient testing (along with other issues, including necessary implication and presumption of irreparable harm).  Earlier this month, Judge Jed Rakoff of the Southern District of New York preliminarily enjoined Clorox from airing a commercial claiming that carbon used in its Fresh Step cat litter was more effective at absorbing odors than the baking soda (which happens to be the active ingredient in Church & Dwight’s cat litter, although C&D products are not mentioned in the ad).  The court found that Clorox’s sensory perception test that was cited in the ad, using human “sniffers”, was not sufficiently reliable to permit (a) the explicit claim that the key ingredient (carbon) is superior to baking soda in controlling odor; and (b) the necessarily-implied claim that the overall cat litter product is superior at odor control based on the test.  The decision has some vulnerabilities on important issues. 

The Parties & Products.  The case concerned Clorox’s “Fresh Step” cat litter and Church & Dwight’s Arm & Hammer cat litter products, Double Duty and Super Scoop.  The Clorox product uses carbon as the odor fighting ingredient whereas Church & Dwight’s products use baking soda.

The Commercial.  The Clorox commercial features two laboratory beakers (one represented as “Fresh Step” which is filled with a black substance labeled “carbon”; and the other unidentified by brand, but filled with a white substance labeled as “baking soda”).  Green gas then fills the beakers, and rapidly evaporates in the carbon beaker but barely changes in the baking soda beaker.  Small text appears during this display that says “dramatization” and “based on a sensory lab test.”

The Claim.  A voiceover in the commercial states:  “we make Fresh Step scoopable litter with carbon, which is more effective in absorbing odors than baking soda.”  The express claim is limited to carbon and baking soda, not the cat litter products.

The Sensory Test.  The sensory lab test relied upon by Clorox involved separate sealed jars of cat urine and of cat feces, which were kept: (a) uncovered; (b) covered with carbon; or (c) covered with baking soda.  Each jar was permitted to mellow for 24 hours, and was then placed in a “booth” that replicated a small room (where cat boxes are normally kept).  The smell of the booth was later evaluated by eleven human panelists trained by Clorox.  The panelists would open a portal to the booth, which was approximately 6 feet away from the stimulus.  The results reflected that carbon was 32% superior to baking soda in reducing odor.

FTC Proposes Changes to Agency’s Investigatory Procedures

As part of its periodic review of agency rules, the FTC recently announced proposed changes to its rules of practice concerning investigations. With the proposed revisions, the FTC seeks to keep pace with the prevalence of electronic discovery, to help expedite Commission investigations, and to minimize compliance burdens on both targets and third parties.

The proposed changes deal primarily with Part 2 proceedings – the FTC’s nonadjudicative or investigations phase. With the revised rules, the FTC aims to minimize the burden on entities that are tasked with responding to compulsory process like a Civil Investigative Demand or “CID.” Often, after the agency initiates an investigation and determines that no corrective action is required, the agency will likely close the investigation. Under the current rules, both targets and third parties are under a continuing obligation to preserve documents responsive to an FTC request unless and until they receive notification that the investigation has been closed. Although in some cases “closing letters” will be issued to the targets of an investigation notifying them of this fact, this is not always done. Further, where the recipient of the CID is a third party and the investigation is non-public, it is rare that such notification will be given at all. Thus, recipients of compulsory process often do not know when they are relieved of their obligations and will continue to preserve documents, often unnecessarily and at considerable expense. To address these concerns, the revised rules would do away with this requirement and relieve parties of their obligation to preserve documents after a year passes without any written communication from the agency. The revised rules would also require parties receiving compulsory process to “meet and confer” ten days after receipt to attempt to resolve any anticipated compliance issues.

Public comments on the revised rules will be accepted through March 23, 2012.   

- Allyson Himelfarb and Amy Mudge

Keeping an Eye on the Folks Marketing Your Brand -- Google Gets Tripped Up in Blogger Controversy

The FTC’s revised endorsement guides have raised the stakes for companies using social media to promote their brands or services.  This is particularly the case with respect to the relatively new disclosure requirements surrounding paid blogger endorsements. We previously discussed paid blogger endorsements in light of the FTC’s Revised Endorsement and Testimonial Guides here, here, and here.

Google has become the second company in recent months to allege that an agency hired to promote its services had gone “rogue” and used paid blogger endorsements without the company’s knowledge or consent. Which raises the question of whether advertisers should spend more time minding the store and whether agencies should spend more time educating their staff on the finer points of the FTC’s endorsement guides.

As the FTC made clear in the Hyundai case, it does not view ignorance as an excuse when it comes to compliance with its endorsement guidelines, though Hyundai did get a pass, in part because it had a policy against the use of paid endorsements without disclosures and quickly dealt with the issue once it learned of it. 

In Google’s case, they got lucky because the blogs, which attested to Google Chrome’s benefits and posted a promotional video bore the legend “This post is sponsored by Google.”  (though some allege that the blogs misinformed consumers about Chrome’s benefits to small businesses, which, if true, could also potentially be a possible violation of the guides.) 

Ultimately for Google, it ended up being more of a public relations embarrassment as Google has historically opposed paid endorsements. And Google quickly took down the blogs.

There is an old Russian proverb, at least according to Ensign Chekov of the Starship Enterprise, “Fool me once, shame on you; fool me twice shame on me.”  Will the FTC at some point insist that companies keep a sharper eye on the agencies they hire for social media promotions?

- Randy Shaheen and Anita Kalra

 

 

 

You Can’t Use This "Crane" To Build A Case Against An “Adjacent” Product Manufacturer

In recent years, some California appellate courts held that a product manufacturer or seller is obliged to warn consumers against foreseeable risks associated with dangerous products with which its product will necessarily be used. Where a manufacturer could plausibly be alleged to be aware of possible harms stemming from what are sometimes termed “adjacent” products, these cases created a potential basis for consumer fraud claims. In O’Neil v. Crane Co., the California Supreme Court unanimously rejected these opinions, and provided helpful guidance on whether, and in what circumstances, a business may be held liable for harms attributable to an “adjacent” product. 

“Adjacent” products include replacement components not manufactured by the original maker of the product or other, related products which are expected or required to be used in conjunction with another product. In Crane, the court of appeal followed earlier opinions holding that manufacturers of valves and pumps used in US Navy vessels could be liable for failure to warn servicemen who later handled replacement asbestos insulation not manufactured by the defendants. The Supreme Court reversed, notwithstanding that the harms suffered by the plaintiffs resulted from the foreseeable handling of asbestos products in connection with defendants’ equipment. 

Emphasizing that “foreseeability alone is not sufficient to create . . . a tort duty,” the court concluded that “requir[ing] manufacturers to investigate potential risks of all other products and replacement parts that might foreseeably be used with their own products and warn about all of these risks . . . would impose an excessive and unrealistic burden.”  The court further recognized that a contrary rule would have the “perverse[] [effect of] . . . inundating users with excessive warnings.”

The Supreme Court limited the breadth of its holding by identifying two circumstances in which claims based on adjacent products might nonetheless lie against a manufacturer.  These exceptions involve circumstances in which “the defendant bears some direct responsibility for the harm” because

1. the defendant’s own product “contributed substantially to the harm” or
2. the defendant “participated substantially in creating a harmful combined use of the products.”

Companies whose products may be used in conjunction with other products may wish to evaluate whether either exception might potentially come into play and, if so, take the Crane holding into consideration in fashioning disclosures and warnings directed to consumers.

- Matthew Heartney and Alex Beroukhim

Ninth Circuit Puts the Brakes on Nationwide Class of Auto Purchasers

A January 12, 2012 decision by the Ninth Circuit has established significant limits on the circumstances in which California’s consumer protection laws can apply to transactions in other states. At the same time, the decision establishes a useful precedent for defendants who seek to block certification of nationwide classes of consumers under state consumer protection laws in any jurisdiction. 

The Ninth Circuit case -- Mazza v. American Honda Motor Co. -- was brought by consumers from Florida and Maryland who purchased Acura RL cars equipped with the so-called Collision Mitigation Braking System (CMBS). The plaintiffs pointed to a product brochure, television commercials, magazine advertisements, Acura’s own website and magazine, and the owner’s manual, all of which, plaintiffs said, marketed CMBS’s functionality in a misleading way. Even though the plaintiffs bought their cars in Florida and Maryland, they argued that the advertising, which was created in California, violated California’s expansive and plaintiff-friendly consumer protection laws (the Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act). The district court certified a nationwide class of consumers who purchased or leased new or used Acura RL cars with CMBS, finding that the plaintiffs met their burden for class certification under Federal Rule of Civil Procedure 23. 

A panel of the Ninth Circuit vacated the class in a 2-1 decision (Senior Judge Dorothy Nelson dissented), finding that the lower court misapplied the “predominance” prong of Rule 23(b)(3), which requires that the questions of law or fact common to class members predominate over any questions affecting only the individual members. As to the questions of law, the court ruled that each class member’s consumer protection claim must be governed by the consumer protection laws of the jurisdiction in which the transaction took place, not only California. The court pointed to material conflicts between the consumer protection laws of California and other states (such as a scienter requirement of some state consumer protection laws but not others). Then, with sweeping language, the court explained why each state has an interest in having its own consumer protection laws apply to conduct within its borders:

More expansive consumer protection measures may mean more or greater commercial liability, which in turn may result in higher prices for consumers or a decrease in product availability. . . .  As it is the various states of our union that may feel the impact of such effects, it is the policy makers within those states, within their legislatures and, at least in exception or occasional cases where there are gaps in legislations, within their state supreme courts, who are entitled to set the proper balance and boundaries between maintaining consumer protection, on the one hand, and encouraging an attractive business climate, on the other hand.

The Ninth Circuit further drew upon the principles of federalism underlying the enactment of the 2005 Class Action Fairness Act, and noted that, if California law were applied to the entire class, foreign states would be impaired in their ability to calibrate liability to foster commerce. As the court concluded, “[t]he district court’s reasoning elevated all states’ interests in consumer protection to a superordinate level, while ignoring or giving too little attention to each state’s interest in promoting business.”  These words will no doubt be music to the ears of the defense bar. 

Having concluded that common questions of law did not predominate, the Court turned to whether common issues of fact predominated. In this analysis, the Court pointed to the “fairly limited” nature of the CMBS advertising. This fell short of an “extensive and long-term” advertising campaign needed to establish a common questions of fact. Thus, the court concluded, even if the class was restricted only to those who purchased or leased their car in California, common issues of fact would not predominate because the class includes members who were not exposed to, and therefore could not have relied on, Honda’s allegedly misleading advertisements.

There are two major takeaways from this decision. First, the conflict of law analysis represents a serious blow to the nationalization of California consumer protection laws. As this blog has noted before (e.g., here and here), California’s laws allowing private damages suits over even the most minor or technical omissions have made it a breeding ground for consumer class action litigation. And plaintiffs’ lawyers have worked hard to make those laws apply to consumer transactions in other states so long as the transaction has some arguable nexus to California. The Ninth Circuit’s decision should greatly curtail that trend, as it found that California’s consumer protection laws are not so far-reaching. Second, putative classes of consumers from multiple states will find it harder to have a single state’s consumer protection law cover all of their claims, which, in turn, will make it harder for the consumers to get nationwide classes certified in any jurisdiction. Undoubtedly, Mazza will be cited by product liability defendants in class certification proceedings throughout the country.

As a final observation, we find it interesting how little a role the Supreme Court’s  decision last June in Wal-Mart v. Dukes played in the decision. It seems pretty clear the panel would have viewed Mazza the same way even before Wal-Mart. Indeed, the only significant place Wal-Mart was cited was where the majority distinguished it by saying the Mazza plaintiffs, unlike the Wal-Mart plaintiffs, satisfied Rule 23(a)(2)’s “commonality” requirement, which leads one to wonder whether the Ninth Circuit fully absorbed what Wal-Mart said about commonality. When Wal-Mart came down last summer, the conventional wisdom was that it was front-loading a predominance-like inquiry into “commonality.” But Mazza -- just like another recent class action decision out of California that we recently wrote about -- seems to go on applying commonality in the same way that courts did before Wal-Mart. 

 - Matt Eisenstein and Rob Katerberg

Doing Business in California? You May Need to Start Disclosing Your Efforts To Eliminate Slavery from Your Supply Chain

The deadline has passed -- is your company in compliance with the California Transparency in Supply Chains Act? 

The law, which went into effect just days ago on January 1, 2012, is part of a growing effort to shine light on a huge commercial problem: human trafficking and slavery. California Attorney General Kamala Harris announced the launch of a new website last week focused on human trafficking in California.  This follows President Obama’s designation of January as National Slavery and Human Trafficking Prevention Month. Why all the sudden attention on slavery and human trafficking? According to the AG’s new website, human trafficking has become a $9 billion industry and is the world’s second largest criminal enterprise after the drug trade, and activist groups and policymakers have joined in an effort to increase awareness of this issue as the first step in addressing it.

The California Transparency in Supply Chains Act, also known as SB 657, requires many businesses to turn their attention to slavery and human trafficking and whether it exists in their supply chains. Specifically, retailers and manufacturers with over $100 million in worldwide gross receipts who "do business in California" are now required to disclose on their websites what steps, if any, they take to mitigate the risk that their products are sourced by forced labor. In the past few weeks, scores of disclosures have popped up all over the web discussing company efforts to mitigate the risks of slavery and trafficking, such as auditing suppliers and training employees and managers about the issue. Many companies, however, may not realize that under the law, they “do business in California” and therefore must comply with the law. Many more disclosures are sure to come in the following weeks as businesses that were caught off-guard by the new law rush to post disclosures on their website, regardless of whether they have yet been able to assess their supply chains and  implement internal programs. 

What is the penalty for failing to comply? While the bill does not limit remedies available for violations of other state or federal laws regarding slavery and trafficking, the exclusive remedy for a violation of the California Transparency in Supply Chains Act is an injunctive action brought by the attorney general. The AG’s website on trafficking and slavery does not yet discuss how she intends to enforce compliance with SB 657, but we will continue to monitor the AG’s actions in the coming year and keep you posted.

- Anne Marie Nicpon, Dawn Yamane Hewett, and Trent Norris

But, Upromised to Keep My Data Secure ….

In a significant action signaling the high risks involved in collecting personal information online, the FTC recently settled charges against the online membership program Upromise Inc. Upromise offers its members the opportunity to purchase products from certain partner merchants, receive cash rebates in return, then place those rebates into college savings accounts.  In order to use the program, consumers download a toolbar onto their computers that highlights partner merchants in consumers’ search results so they may easily find companies that are part of the Upromise program.

In addition to the standard toolbar, Upromise offered its members option of activating a “personalized offers” feature that collected and transmitted information through a member’s browser (this is referred to by the FTC as the “Targeting Tool”).  The information collected was subsequently used to provide targeted advertising to the member.

The FTC took issue with Upromise’s Targeting Tool, which it alleged collected scores of highly sensitive personal information from its members, including the websites they visited; their usernames and passwords; and, in some instances, information entered into forms on secure web pages such as credit card and account numbers, security codes and social security numbers.  The FTC alleged that this information was collected, and in some instances, transmitted to a third party, without proper protections and safeguards. 

Upromise’s privacy statement noted that the Toolbar might “infrequently” collect some personal information, but that any identifiable information would be removed.  The FTC alleged that the filter Upromise purportedly used to avoid collecting certain sensitive data was too narrow and improperly structured, and that data collected as part of the Targeting Tool and then transmitted to a third party provider for analysis was sent over the internet in clear text, rather than encrypted text.  Data transmitted in clear text is highly vulnerable to interception, particularly over unsecured networks such as those in coffee shops and other public spaces.  The FTC also alleged that Upromise failed to test its security measures to ensure they functioned properly and provided adequate protections.

In its recent settlement with the FTC, Upromise  agreed to take a variety of ongoing measures to ensure proper security of personal information and disclosures to consumers consistent with the level of security actually provided.

The FTC’s complaint and the Consent Order agreed to by Upromise highlight key lessons for companies that collect and utilize data entered by consumers over the Internet.  Sensitive personal information should always be encrypted before transmitted via the Internet.  Technology related to data collection and security should be tested and checked regularly and on an ongoing basis using a reliable, certified set of tools and measures.  Privacy and security policies should be displayed to consumers in a clear and prominent way, and inform consumers of the risks involved with the provision of personal information either actively or passively by use of an Internet tool.  And users should always be given an opportunity, clearly and affirmatively, to opt-out of the collection of their personal information or its transmission to  third parties.  The more sophisticated Internet technology becomes, the more important these lessons are.

- Danielle Garten and Nancy Perkins

Non-Bank Entities Providing Financial Services: Get Ready to be Examined

The Consumer Financial Protection Bureau (CFPB) announced in a press release last Thursday the launching of its nonbank supervision program. Following the recess appointment of Richard Cordray as its Director, the CFPB announced that, effective immediately, it has authority to oversee, regardless of size, nonbank mortgage companies, private education lenders, and payday lenders.  Cordray has indicated that the CFPB will be aggressive despite the fact that he is a recess appointment.

Nondepository providers of consumer financial products and services are subject to federal supervision for the first time under the Dodd-Frank Wall Street Reform and Consumer Protection Act.  While the Dodd-Frank Act grants the CFPB authority to supervise nonbank mortgage companies, private education lenders, and payday lenders, regardless of size, the CFPB can generally only supervise entities in other markets for consumer financial products or services if the entity is deemed to be a “larger participant” of such market.  Examples of other markets that could be subject to a “larger participant” rule include debt collection, consumer reporting, auto financing, and money service businesses.

Last June, the CFPB issued a notice seeking comment on how “larger participants” are to be identified.  For a discussion of that notice click here. The CFPB stated on Thursday that it will issue an initial “larger participant” rule in the near future. The Dodd-Frank Act provides that the CFPB may also supervise any nonbank that it has a reason to determine “is engaging, or has engaged, in conduct that poses risks to consumers with regard to the offering or provision of consumer financial products or services.” The CFPB also stated that it plans to publish rules regarding the implementation of this provision.

The CFPB’s nonbank supervision program will be a risk-based program. The CFPB will assess whether nonbanks are conducting their business in compliance with federal consumer financial laws, such as the Truth in Lending Act, the Real Estate Settlement Procedures Act, and the Equal Credit Opportunity Act.  An examination may include, among other things, a review of marketing materials, products, and lines of business, and a requirement that nonbanks file certain reports.  According to the CFPB, the agency will apply the same approach to nonbank examination as it does to bank examination, including notifying nonbanks in advance of examinations.  Nonbanks should familiarize themselves with the CFPB’s Supervision and Examination Manual, published on its website, to prepare themselves for eventual examinations.

- Michael Mierzewski and Jeremy Hochberg

New Domain Names: From “Dot.com” to “Not Com” [Part 3 of 3]

In this third and final segment of our series, we suggest strategies that trademark owners may want to adopt and report on a recent development in the new top level domain scheme.

The launch of new top level domain names is right around the corner, on January 12, 2012. Trademark owners, particularly those that have developed significant goodwill in their brands, will be faced with several decisions. This blog briefly surveys those decision points. It also reports on an important letter published by the Department of Commerce (DOC) that may mirror some trademark owners’ concerns.    

Do You Want to Register a New Top Level Domain in the System? 

These are some of the factors that a company otherwise in a position to register a new gTLD (i.e., because it has the financial resources to do so) might consider:

• Is the company’s brand name strong, and arbitrary or fanciful? If the company has a brand that it can protect under the trademark laws, it might simply object to any third party attempt to register its mark as a new gTLD, with some assurance that its objection will succeed.

• Is the company’s name merely descriptive, or at most suggestive, so that the company should register the name as a new gTLD to keep others from doing so, if it wants to use the name in this capacity?

• Does the company want to use the use its mark as a new gTLD for marketing purposes?  Canon, for example, has announced its intent to register .canon and to issue second level domains to Canon customers who purchase cameras with unique chips so photos could be automatically uploaded to personal websites at [customer’s name].canon.

Apart from these issues, DOC’s letter raises a concern that may become widespread as the Internet opens up to new top level domains: Many trademark owners may feel compelled to file defensively at the top level, even if they are not going to use their top level domains, to prevent others from doing so. Of course, they will have an opportunity to object to third party attempts to register the same or confusingly similar letter strings as gTLDs. This, however, requires a trademark owner to be alert to the period for filing an objection, i.e., the period beginning approximately two weeks after the close of the application window on April 12, when ICANN posts the public portions of all applications that have been received on its website, and lasting for approximately seven months.   

Should You Register Any Marks or Names as Second Level Domains? 

Deciding whether you should register any marks or names as second level domains requires an in-depth familiarity with your organization’s portfolio. Some companies have dozens or even hundreds of trademarks, and will not wish to register all of them for cost and organizational reasons. A company may want to select (1) those marks that are its most valuable, and that it plans to continue using into the indefinite future or (2) any marks that it believes third parties will try to misappropriate.  

Trademark owners must then submit evidence of their rights, of the sort we described in the second blog in this series, to the Trademark Clearinghouse. In addition, a rightful trademark owner may reserve its marks as second level domains with the new gTLD during the Sunrise Period, which will open at least 30 days before the launch of a new gTLD, ahead of others who might try to reserve the same names.

- Roberta Horton

Google Defeats AdWords Class, But Has Wal-Mart Really Sunk In?

Last week, in In re Google Adwords Litigation, a federal judge in California issued a decision on class certification in a lawsuit brought by businesses that had placed ads through Google.  The plaintiffs alleged that Google acted unfairly and deceptively by charging them for ads appearing on low-quality, low-traffic websites where not many people would see them. Last week’s decision provides a window into how the standards announced by the Supreme Court in last summer’s keynote Wal-Mart v. Dukes decision are being carried out in the lower courts.

The Google court denied certification because plaintiffs failed to clear Rule 23(b)(3)’s “predominance” hurdle (the requirement that common issues of law or fact predominate over those that would have to be resolved on an individual basis). The court acknowledged that whether Google made misleading omissions was a common question. But the issue of damages to class members was another matter entirely.

Even the threshold question of “which advertisers among the hundreds of thousands of proposed class members are even entitled to restitution would require individual inquiries” because some class members did benefit economically from the ads.  For those who were entitled to restitution, calculation of the appropriate amount would be a quintessentially individual inquiry because the prices advertisers paid were determined through a dynamic auction process that priced each ad and viewer’s click uniquely. A number of courts have previously held that individual issues solely as to the amount of damages do not preclude certification, so the California court’s focus on this issue should be helpful to the defense in future consumer fraud and antitrust cases involving industries and products where pricing is individualized.

So this decision shows Wal-Mart is having an impact, right? Well, maybe, maybe not. The court’s “predominance” analysis relied mostly on pre-Wal-Mart jurisprudence and concepts (not surprisingly, as Wal-Mart was a (b)(2) class action where predominance was not required). Ironically, on the precise legal point where Wal-Mart really moved the needle – the rigor of the “commonality” requirement of Rule 23(a) – the Google court seemed largely unmoved by Wal-Mart’s teachings. The Google court held the plaintiffs to a rather low bar of simply articulating a common question: “whether Google’s alleged omissions were misleading to a reasonable AdWords customer.” That part of the opinion reads a lot like the check-the-box approach to commonality that lower courts routinely took before Wal-Mart’s admonition that while “any competently crafted class complaint literally raises common questions,” the real question is the “capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.”

Even so, the ultimate result the court reached is certainly consistent with Wal-Mart’s tenor.  No doubt we will have many more opportunities in the months ahead to see how Wal-Mart is playing into lower court class certification decisions.    

- Robert Katerberg

UK Invasion of NAD: Challenge to Photo Enhanced Cover Girl Ad

I think we can agree that photo shopping in print ads does not help boost the self esteem of women of all ages.  But is it misleading? 

The National Advertising Division brought a monitoring case against P&G's Cover Girl mascara ads featuring Taylor Swift. (This is a challenge to ad substantiation not brought by the typical competitor challenger, but by the NAD itself as part of its own review of advertising.). The ad claimed the mascara would provide 2x more volume (than bare lashes) and was 20% lighter (than the most expensive mascara). The NAD's beef was not with these claims, but with the batting eye photo of the lovely young country cross over star. NAD requested substantiation for implied claims that consumers who use the product will get lashes like those depicted in the photo and that the lashes in the photo were achieved solely by using the mascara. It is well established that claims can be modified with appropriate, clear and conspicuous disclaimers. Product demonstrations on the other hand, have been challenged as far back as Rapid Shave and Campbell’s Soup when the demonstration has been enhanced. However, in this case, P&G presumably accurately stated the product’s benefits - 2x more volume and 20% lighter. If so, does it matter then that P&G also may have enhanced what those benefits looked like on a particular individual, in this case the lovely Ms. Swift?  And should it matter that they also fessed up to it in the form of a disclosure below the photo that "lashes enhanced post production"?  We’ll never know for sure because P&G, rather than plead its case, notified the NAD that it was discontinuing the ad and claims.  However, NAD’s “decision” certainly suggests that they would have taken issue with the post production “enhancements.”

This case follows closely on the heels of a recent UK decision involving Julia Roberts in a foundation ad in which the ASA was concerned that consumers may not appreciate that the model was touched up.  The ASA case is arguably distinguishable as the photograph possibly played a much larger role in conveying the claims, but clearly now in light of both decisions photographic “enhancements” even with disclaimers are likely risky.  What is perhaps more worrisome is the NAD’s suggestion that there may have been an implied claim that women using the product will look like Ms. Swift, or at least her lashes.  If the photograph had shown Ms. Swift’s lashes at 2x their volume, as claimed, should P&G have also been tagged with the additional claim that women’s lashes will look like Ms. Swift’s rather than simply being twice whatever their initial volume may have been?  After all, a Ferrari and a Ford Taurus may both run better on high test gasoline, but they’re not starting from an equal playing field.  The NAD’s decision emphasizes the “enhancement” rather than the “results” issue so perhaps that question will be more clearly answered another day. 

In any event, as regular readers of this blog know I sometimes am guilty of oversharing, but here goes again -- I sadly bid farewell to my thick twenty-something lashes long ago, so I suspect even an unretouched Taylor would have dramatically thicker lashes with her Cover Girl mascara than I would using the same product.  I do not feel deceived, and I think at least for now I will keep my day job rather than hope for a lucrative Cover Girl career, particularly since any “post production enhancements” now seem out of the question.

- Amy Mudge

 

2011: Consumer Protection and Advertising Year-in-Review

From celebrity misappropriation suits to blockbuster class action rulings in the Supreme Court, 2011 was another exciting year in consumer advertising law. As we look forward to 2012, here’s a look at eleven of the top stories from the year that was. If you have your own nominees for 2011’s top eleven, send an email (randal.shaheen@aporter.com) and we’ll try to post our readers' list later this month. 

11. Maybe It’s Maybelline … or Maybe It’s Airbrushed

Beauty enhancements should come from products, not post-production! So said the UK’s Advertising Standard Authority in 2011, when it banned advertisements [Aug. 2, 2011] depicting Julia Roberts and Christy Turlington on the basis that the images had been digitally altered.

10. 2011.xxx

Many a legitimate enterprise found itself registering a .xxx domain name in 2011, as a new top level domain was launched for adult content on the Internet. These companies blushingly took advantage of the Sunrise B [Oct. 11, 2011] time period during which non-adult-industry trademark owners could defensively register their marks, thereby eliminating them from the pool of available .xxx domains.

9. There’s No Such Thing as a Free Lunch

It seems like the battle against the bulge is never-ending and so is the FTC’s battle against companies advertising misleading weight loss remedies. In 2011 the FTC reached a $25 million settlement [Oct. 4, 2011] with Reebok over ads for toning shoes that promised “a better butt and better legs with every step.”

8. She Looks Like Kim Kardashian

It’s well known that misappropriation suits are de rigueur for any self-respecting celebrity du jour.  See e.g., Paris Hilton’s 2009 suit against Hallmark (for use of the phrase “that’s hot”); Lindsay Lohan’s 2010 suit against E*Trade (for portraying a baby named Lindsay as a “milkaholic”). 2011 was no exception, as Kim Kardashian sued Old Navy [Aug. 4, 2011] for allegedly using a model resembling her in a TV advertisement.   

7. Made in Havana, Puerto Rico

The rule that literally true statements can be challenged as impliedly false took a hit this year [Oct. 10, 2011] when the Third Circuit held that survey evidence showing that the name “Havana Rum” gave the impression the rum was made in Cuba could be excluded because the statement on the bottle that the rum was “made in Puerto Rico” was objectively verifiable.

6. The Meaning of “Natural” 

The trickle of cases alleging deceptive use of the term “natural” on labeling or in advertisements became a torrent in 2011, with new suits [Oct. 3, 2011] against Conagra, Kellogg, and Skinny Girl, to name just a few.

5.Protecting Children in the US -- Standards for Food Advertising

We have been following FTC efforts to establish principles for marketing food to children for some time. In 2011, these efforts culminated in initial recommendations [May 16, 2011] published by the Interagency Working Group on Food Marketed to Children. These recommendations met with heavy resistance in the form of an industry coalition, [Aug. 9, 2011] which is seeking legislative action on the basis that the proposed standards are overbroad and anti-business.     

4. Protecting Children in the UK -- Standards for Decency 

The UK advertising regulator, the Advertising Standards Authority, was also active in protecting children in 2011, finding ad campaigns directed at children [Oct. 24, 2011] or portraying children (here and here) [Aug. 18 and Dec. 19, 2011] to violate UK standards for responsible advertising.

3.COPPA 

The FTC proposed changes [Sept. 23, 2011] to rules implementing the Children’s Online Privacy Protection Act (COPPA), which provides parents control over what personal information web sites may collect from children under 13 years old. These proposals are significant, particularly because FTC enforcement has made COPPA compliance a serious consideration [Nov. 23, 2011] for all web site operators.

2. Concepcion

In AT&T Mobility LLC v. Concepcion [May 4, 2011], the Supreme Court held that arbitration provisions prohibiting class-wide arbitrations can be enforced, and that the California Supreme Court’s decision in Discover Bank finding such provisions unenforceable is preempted by the Federal Arbitration Act. The full ramifications of Concepcion have yet to play out, but at least one court has found that such clauses can still be unconscionable. [Nov. 14, 2011]

1. Wal-Mart v. Dukes

The top spot on our list goes to the Supreme Court’s watershed decision [June 28, 2011] on class certification, the first of its kind in many years. Wal-Mart embraces a rigorous analysis of the elements of class certification, and substantially raises the bar for showing that the commonality element of Rule 23 has been met. Commentators were quick to predict that Wal-Mart would shape class action law for years to come, and early indications [Aug. 24, 2011] suggest that might be an understatement. [Nov. 15, 2011]

- George Langendorf, Randy Shaheen, and Amy Mudge

Tis the Season To Lawfully Process Returns

We wish for our retail clients and friends a successful post-holiday sales season. As the bargain hunters hit the stores and the web, so do the shoppers seeking to return unwanted loot. We thought this a prudent time to remind readers about various laws related to refunds.

The FTC simply asks that a retailer not mislead consumers as to its refund policy. But this is one of those areas governed by different and sometimes conflicting state and even local laws where there may be affirmative requirements. Unless you have clearly and conspicuously told buyers otherwise, it is a best practice to provide cash refunds after purchase. New York requires all merchants to post their refund policies. If the refund policy is not posted, customers must be permitted to return any item for cash for 30 days after purchase as long as the customer has a receipt. California has a similar requirement that if a store does not post its refund policy that stores must provide a full return of the price paid within 30 days of purchase, but there are exceptions for perishable items, goods marked "as is" or "all sales final", and goods not returned in original packaging. Other states have similar requirements of posting of a refund policy and then if a refund policy is not posted, a requirement to accept the return of goods (at least non-custom, new durable goods) for cash for some period of time ranging from 7 days (see Florida) to 60 days (see Hawaii) or an undefined "reasonable" period of time (see Minnesota and Vermont). Again, we hope very much your customers who did not get the perfect gift this holiday season chose to exchange in your shop rather than return, but above all we hope you stay safe from the enforcement eye of the state regulators! 

- Amy Mudge

New Domain Names: From “dot.com” to “not com” [Part 2 of 3]

In this second segment of our series, we discuss options for trademark owners on how to act defensively if they do not become registries under the new top level domain system.

The first blog in this series explained how the opening up of the Internet to new registries -- and the potential explosion of new top level domains -- could change the Internet. Yet many, if not most, trademark owners will not become a registry with their own top level domains, for financial, technical or other reasons. These trademark owners, however, should know how to protect their trademark rights from the new form of cyberpirates that is likely to emerge. This blog briefly describes the more important mechanisms that ICANN plans to offer savvy trademark owners to protect their rights.     

Objecting to a Third Party’s New gTLD Application

Only four grounds may form the basis for a trademark owner’s objection to a new gTLD application: 

• String Confusion Objection: The applicant’s proposed gTLD “string” of letters, is confusingly similar to a pre-existing gTLD or another applied-for gTLD string in the same round of applications. 
• Legal Rights Objection: The applicant’s gTLD string infringes the legal rights of the objector, such as the objector’s trademark rights. Factors in deciding a legal rights objection are similar to those in the Uniform Domain-Name Dispute Resolution Policy under current practice.
• Limited Public Interest Objection: The applicant’s gTLD contravenes generally accepted standards of morality and public order under international law.
• Community Objection: A significant part of the community, such as a geographic community, objects to the gTLD application, e.g., New York City residents might object to a Miami company’s submission for a .nyc registry. 

To initiate a proceeding, the objector must file its complaint by a posted deadline with an appropriate Dispute Resolution Service Provider (DRSP), along with a specified fee. For many companies, the most relevant DRSPs are the World Intellectual Property Organization (for legal rights objections) and the International Centre for Dispute Resolution (for string confusion objections). 

Protecting Against Infringing Second Level Domains in the New Domain Name Space

ICANN’s  program contemplates important measures to protect trademark owners from the registration of second level domains, combined with the new gTLDs, by trademark infringers. Thus, a company owning the ABC^® mark could invoke the procedures described below to prevent a third party from registering “ABC.new TLD” or to learn of such registrations.

The Trademark Clearinghous. ICANN plans to create a Trademark Clearinghouse, i.e., a central database for information about trademark rights. Trademark owners who want to register their second level domains with the new registry ahead of the general public, and trademark owners who want to be notified if a would-be infringer registers their trademarks as second level domains, must submit evidence of their trademark rights to the Trademark Clearinghouse. This evidence may consist of: a trademark registration; a judicial decision recognizing the trademark; or other evidence showing that the mark “constitute[s] intellectual property”. This Clearinghouse will authenticate information about the trademarks it receives and store that information in its database. It will provide information about the authenticity of the trademarks in its database, as needed, to new gTLD registries for use in the Sunrise Service and Trademark Claims Services described below.

Sunrise Service. New gTLD registries must provide a Sunrise Service that protects trademark owners from a “race to registration” against domain name registrants who might infringe the trademark owners’ rights. The anticipated sunrise period will be at least 30 days before the launch of a new gTLD, during which time a rightful trademark owner may reserve its mark as a second level domain with the new gTLD, ahead of others who might try to reserve the same name. For example, if a major car manufacturer could register its MERCEDES^® mark as “mercedes.car” before Company S permits the public to register domain names in the .car gTLD.  

Trademark Claims Service. In addition, all new gTLD registries must provide a Trademark Claims Service for the first 60 days after the public launch of their new gTLDs, i.e., after the general public can begin registering domain names in the gTLDs. This service provides a warning notice, called the Trademarks Claim Notice, to prospective registrants of a pre-existing trademark owner’s rights when the domain name applicant attempts to register a domain name that is an “identical match” to the trademark that the trademark owner has listed with the Trademark Clearinghouse. This notice, however, is of limited utility, because it is only triggered when a third party tries to register a second level domain identical to a trademark that resides in the Trademark Clearinghouse. If the domain name registrant proceeds with the registration application, the trademark owner will receive a notice informing it that a domain name that is an identical match to the trademark owner’s mark has been registered.

Objections to Registrations. The Uniform Dispute Resolution Procedure that currently applies to disputes involving registration of second level domains with .com, .net, .org and certain other top level domains will apply to registration of second level domains with the new gTLDs. An entity that wants to challenge registration of a second level domain with a new gTLD may, assuming jurisdiction and venue lie, also file a lawsuit in the United States alleging infringement, cybersquatting and related causes of action.

- Roberta Horton

 

New Domain Names: From “Dot.Com” to “Not Com” [Part 1 of 3]

This is the first in a series of three blogs on the new gTLDs

Most of you are probably familiar with the common Internet domain name endings such as “.com”, “.net”, or “.org”, which, when combined with an organization’s or individual’s name, serve as addresses for websites in cyberspace (e.g., “microsoft.com”). The portion to the right of the dot is the Top-Level domain (“TLD”). One type of TLD is a “generic” TLD (gTLD), such as .com; another is a “cc TLD” or country code, such as “.jp.” . The portion to the left of the dot is called a “second-level domain name” and is the name of the organization or individual. To date, only 22 gTLDs exist. Beginning on January 12, 2012, however, the Internet will open up to a potentially infinite number of new top level domains or “gTLDs”. This Blog briefly explores how the launch of these new top level domains could change the Internet -- and affect your organization -- dramatically.  

What will the changes look like? The launch of new gTLDs means that anyone with the means can become a “registry” that creates and manages a database of domains ending with a particular top level domain that it selects. That new gTLD can be a generic term (e.g., “.bank”, “.wine”) or a brand name (e.g., “.canon”, “.nokia”). The registry should have a say in setting the rules for entities eligible to register under that gTLD. For example, if the gTLD is a generic term such as “.bank”, the registry may require that registrants actually offer banking services. If the registry is a car manufacturer using its brand name as the gTLD (e.g., “.mercedes”), it may require that only authorized dealers can register in its gTLD space (e.g., “manhattandealer.mercedes”). Still other registries might use the new gTLDs for creative promotional purposes. The camera company Canon was the first to express an interest in setting up a new registry, under .canon. The company may use “.canon” for marketing purposes, issuing second level domain names to Canon camera owners and embedding a unique chip in the buyers’ cameras so that they could upload photos onto [buyer’s name].canon.

The registry will set the rules for bodies called “registrars”, which are accredited by the Internet Corporation for Assigned Names and Numbers, the global body that governs the Internet. The registrars will, in turn, sell to individual registrants the right to combine their second level names with the top level domain for a limited period of time. 

How does one become a Registry?  The requirements are rigorous, and include a significant financial payment ($185,000), a demonstration of financial stability, and sophisticated technical support on a 24/7 basis. If a Registry elects to outsource its technical work, its financial commitment could run $1 million or more. Applicants must complete a 40+ page application and 10 detailed specifications demonstrating their financial and technical capability. ICANN is not planning to post the actual new GTLD application.  This link, here, will allow an Internet visitor to navigate through the application process. ICANN will evaluate the applications. Among other things, it will guard against the granting of multiple new gTLDs that are confusingly similar to a previous gTLD. The application window lasts for only four months, from January 12, 2012 to April 12, 2012.

What to watch out for if you are not a Registry: Becoming a Registry is not for everyone. Some organizations do not have the expertise or the financial wherewithal, or want to make the commitment required. Still others, such as non-commercial entities that do not sell products or services, might not stand to gain by carving out a space they can control to some degree on the Internet. 

If you are not in the “Registry Game”, you should be prepared to act defensively to: 

1. Object to a third party’s proposed gTLD that incorporates your trademark; or
2. Object to a third party’s  attempt to register second level domains incorporating your name or trademark within the new gTLD space. 

The next blog post in this series will describe these defensive mechanisms and explains how they work.  The third and final post will sum up the new gTLD process and suggests strategies for an organization to  adopt as the launch date approaches.   

- Roberta Horton

 

 

UK ASA: Protecting Children from Harm And… Potential Harm

The UK’s advertising regulator, the Advertising Standards Authority (ASA) has banned an advert from haute couture label Miu Miu which showed a child model in a “hazardous or dangerous situation”. The advert, which featured in Tatler Magazine, showed a 14-year old model wearing 1940s-inspired adult clothing and sitting on railway tracks. A complainant said that the model looked like she was or had been crying and challenged whether it was irresponsible as they believed it was suggestive of youth suicide and could be seen by impressionable young people. The ASA also challenged whether the advert was irresponsible for showing a child in an unsafe location. In response, Prada Retail UK Ltd (Prada), which is behind the Miu Miu brand, said that the advert was part of a serious, high-fashion campaign aimed at adult women and was only published in adult magazines such as Tatler. It said that the model was not crying, nor had she been asked to cry or to look upset. The advert was not created to give an impression of youth suicide, nor was it made with the intention of depicting a child in an unsafe location. The photograph had been taken on an abandoned railway, the model was not restrained in any way and it was clear from the extended viewpoint that there was no train in sight.

The ASA dismissed the complaint about youth suicide, holding that the model was not shown looking in distress or crying and that the advert would be seen by a predominantly adult readership. However it upheld the second complaint. The ASA concluded that, although the model was not restrained on the track or seen playing on it, and there was no train in sight, the advert was shot in a potentially hazardous location and was therefore “irresponsible”.

We are used to seeing the ASA taking a firm stance on adverts which sexualise children (e.g., see here how American Apparel learnt from its mistakes), or promote unhealthy behavior (e.g., see here our summary on the banned Kate Moss t-shirt slogan), however this decision takes the ASA’s protection of children significantly further. Advertisers should therefore be mindful of depicting children in situations which may suggest even the potential for danger or hazard.

- Richard Dickinson

UK Competition Appeal Tribunal Tosses Tobacco Pricing Decision

While we focus on advertising and marketing issues in this blog, we occasionally stray into competition law topics when we think they will be of interest to our readers, particularly when they relate to whether and how a manufacturer can dictate or influence the downstream pricing decisions of distributors or retailers. 

In the US, vertical pricing agreements are generally subject to the rule-of-reason after the Supreme Court’s decision in Leegin -- or in other words they will be examined to determine if the overall effects can be said to harm competition rather than forbid such arrangements outright as per se unlawful like horizontal price fixing between competitors.  In some states, minimum resale price maintenance (“You will charge no less than X”) is still per se unlawful and various bills have been introduced at the federal level to overturn the Leegin holding. Competition laws are not one size fits all from a worldwide perspective.  While most countries scratch their heads and refrain from me-tooing the US Robinson Patman, or price discrimination, law, many other countries still outright frown on vertical pricing restraints. 

In the EU, vertical price fixing is considered to be a “hardcore” restraint (essentially one that almost always raises significant competition issues) unless the parties to such an agreement can demonstrate that the provision will result in efficiencies that outweigh harm to competition. The European Commission has limited examples of this to situations where resale price maintenance is necessary for a short period of time to facilitate entry of a new product into a market or to prevent free riding, and a relaxing of the EU approach to resale price maintenance is not anticipated.

In 2003, the UK’s Office of Fair Trading (OFT) opened an investigation into retail tobacco product pricing practices as the result of a leniency application made under the OFT’s leniency program. The OFT issued its statement of objections in 2008, after which six companies entered into agreements settling the OFT’s allegations. In April 2010, the OFT adopted a decision finding that agreements Imperial Tobacco and Gallaher entered into with retailers had the object of preventing, restricting, or distorting competition for the supply of tobacco products and imposing £225 million in fines. The OFT found that these agreements restricted the retailers’ ability to set its own retail prices by mandating “parity and differential requirements” between the manufacturer’s brands and its competitor’s brands. For example, an agreement might provide that manufacturer’s Brand X must be “no more expensive than” or “not more than 3 pence more expensive than” competitor’s Brand Y. 

Imperial and five retailers appealed the OFT’s decision to the UK’s Competition Appeal Tribunal (CAT), which set aside the OFT’s decision as it relates to the appellants. During the proceedings before the CAT, which can hear testimony, the evidence did not support the OFT’s interpretation of the agreements.  As a result, the OFT attempted to change its theory of harm. In short, the OFT argued that no matter how a parity and differential pricing strategy was implemented, it restricted competition by restricting the retailer’s ability to set prices. In a December 12 opinion, the CAT concluded that the OFT’s new theory was not a part of its original decision and the CAT therefore did not have jurisdiction to consider it. The CAT went on to find that even if it had jurisdiction, it would exercise its discretion not to continue hearing the appeals. The decision of the CAT does not mean that the OFT’s original theory of harm would not have been valid had the evidence relied on by the OFT supported that theory.  However, it is yet another significant blow to the OFT’s enforcement activities which have been plagued by a series of high profile failures in the last few years. It is not anticipated that the OFT will seek to re-open the case based on the revised theory of harm.

- Sue Hinchliffe, Matthew Shultz, & Amy Mudge

We Thought People Just Liked to Talk About Superbowl Ads - FTC Closes Investigation of Alleged Payment to Bloggers for Mentioning Ads

When the FTC issued its revised Endorsement Guides, there was much anguish in the blogosphere about the newfound guidance on blogging and the FTC’s enforcement intentions in this regard. The Agency, however, was quick to offer some reassurance that it was not going to throw stay at home blogging mom’s or blogging teenage gamers in jail (see one of our previous postings here). A recent closing letter sent to Hyundai serves as both a reminder that the worst fears in the blogospheres have not come to pass and what steps a company can proactively take to stay out of trouble with the Agency if, despite all precautions, there is a potential Section 5 problem.

The FTC’s inquiry focused on whether bloggers had been given gift certificates as an inducement to include links to Hyundai videos or comment on upcoming Super Bowl ads and were specifically told not to disclose this information (in violation of the Endorsement Guides).

The FTC decided not to recommend an enforcement action. Their decision was influenced in part by steps Hyundai had taken that others might be wise to take as well. 

• First, the incentives were provided by a rogue individual working for a media firm hired to conduct the campaign. Although Hyundai could have been held responsible for the actions of those working for them, Hyundai had an established social media policy that called for bloggers to disclose the receipt of any compensation. (The media firm had one as well.) 

• Second, when the media firm learned of the misconduct, it took prompt action to address it.  We don’t know whether that was before or after the FTC initiated its investigation, but, based upon our prior experience, the FTC likely gave them credit for taking remedial action before the Commission came calling.

So, as this case demonstrates, a few simple steps can sometimes save you from a much bigger problem. 

And just to clear up any confusion, Hyundai did not offer us gift certificates, free cars or super bowl tickets (or anything else) to blog about their case.  

- Randy Shaheen

FDA Weighs in on Lap-Band Advertising by Surgery Centers

Yesterday, the US Food and Drug Administration (FDA) announced that it has issued Warning Letters (e.g., here and here) to eight California surgical centers and one marketing firm for misleading advertising of Allergan Inc.’s Lap-Band device. FDA stated that certain ads for Lap-Band surgery “misbrand” the device in violation of the Federal Food, Drug, and Cosmetic Act (FDCA). FDA advised the firms to immediately cease their marketing of the Lap-Band and advised them to take prompt action to correct the violations. The FDA made no allegations against manufacturer Allergan in any of the letters. 

The Lap-Band is an adjustable gastric banding device approved by FDA to help obese patients lose weight. The inflatable band is inserted surgically through a small incision and placed at the top of the stomach; it can be tightened or loosened to reduce or enlarge stomach capacity. Potential patients must meet certain medical and health requirements to qualify for the Lap-Band surgery. Healthcare providers who choose to promote the gastric banding procedure must educate patients about the risks involved.

The Warning Letters describe ads including photos of billboards and advertising inserts.

• One of the billboards reads: “LOSE WEIGHT WITH THE LAP-BAND! SAFE 1 HOUR, FDA APPROVED 1-800-GET-THIN; 1-800-953-5000; PPO INSURANCE; FREE INSURANCE VERIFICATION.”
• One of the inserts reads: “LET YOUR NEW LIFE BEGIN!” in large text, with a statement acknowledging certain risks of the procedure in smaller print. 

FDA stated that the ads are misleading and misbrand the device because they fail to reveal material facts, including relevant risk information regarding the use of the Lap-Band, age and other qualifying requirements for the Lap-Band procedure, and the need for ongoing modification of eating habits as provided in the approved Lap-Band labeling. It stated that some of the ads also misbrand the device because they do not adequately state the Lap-Band’s relevant warnings, precautions, side effects, and contraindications. Finally, FDA expressed concern that ads that include risk information provide the information in a font “that may be so small as to render the information illegible.” 

Although FDCA’s “practice of medicine” exception limits FDA’s authority to restrict healthcare providers from prescribing or using medical devices for off-label indications, the exception does not expressly place physician advertising and promotional activities beyond FDA’s reach. Consequently, FDA reviews physician advertising and labeling practices and brings enforcement actions against physicians and other healthcare providers based on such practices. The regulatory risks may be higher where ads for healthcare or medical services include alleged off-label statements about a medical device. The commercial and legal costs of such FDCA violations can be significant, as providers risk government inventory seizures, injunctions, and monetary penalties, as well as consumer protection actions from private litigants or state agencies.

The companies have 15 business days to respond to the agency and lay out plans to correct the violations addressed in the letters.

- Vernessa Pollard and Lauren Robbins

 

Groupon UK Under Investigation from the UK’s Office of Fair Trading

The UK’s consumer protection authority, the Office of Fair Trading (OFT), is investigating deal-of-the-day website Groupon for its persistent breaches of UK advertising regulations.

Groupon offers its members daily discounts on a range of deals from restaurant meals and theatre tickets to cosmetic treatment such as teeth whitening, hair removal and surgery. However the sales promoter has continually landed itself in hot water over its advertising practices and the UK’s advertising watchdog, the Advertising Standards Authority (ASA) has formally investigated and upheld complaints against the company 11 times this year and informally resolved another 37 cases.

Groupon most recently breached the Committee of Advertising Practice (CAP) Code for promoting cut-price cosmetic surgery. The ASA ruled (23 November 2011) that the promotion was likely to pressure consumers into making a rash decision to purchase physically invasive surgery and was therefore irresponsible (see our commentary here).

Due to the persistence of Groupon’s breaches and its apparent inability to adhere to the Code, the ASA has now said that it will refer any complaints it receives about its failure to conduct promotions fairly, failure to provide evidence that offers are available or its exaggeration of savings claims directly to the OFT. Referrals to the OFT are rare, however the ASA is able to make a reference to the OFT for investigation under the Consumer Protection from Unfair Trading Regulations 2008 if an advertiser persistently breaches the Code. It has since emerged that the OFT has been investigating Groupon’s trading practices since July 2011 amid concerns about its compliance with consumer protection legislation.

The OFT launched the investigation against Groupon confidentially and on its own initiative, but the latest move by the ASA lends weight to it. The ASA has also shown that it will not take persistent breaches by advertisers lightly and even though it may not have the weight of the law behind it, it is more than willing to escalate matters to the OFT as and when required.

- Richard Dickinson and Gemma Davies

UK ASA: Deal Sites Not Good A Vehicle for Surgery Discounts

The UK’s advertising regulator, the Advertising Standards Authority (ASA) has banned a sales promotion for “pressuring” customers into purchasing cosmetic surgery. The email advert, produced by deal-of-the-day discount provider Groupon, offered consumers “£1,999 instead of £5,000 for Cosmetic Surgery”. Highlights included “General Medical Council-registered plastic surgeon” and “private hospitals”. Customers clicking on the email were redirected to the Groupon website which featured additional fine print stating purchasers “Must be 18 or over. All treatments subject to initial consultation”. The Independent Healthcare Advisory Service and a viewer complained that the offer was irresponsible because it encouraged customers to hurry into a decision to purchase cosmetic surgery. In response, Groupon said that they did not believe the offer encouraged frivolous or rushed decisions. The offer was available for 24 hours, but that was their business model. Groupon also argued that the offer was only available to those over 18 years, treatments were subject to a consultation, and a refund was offered if customers were found to be unsuitable for treatment. Further, customers were able to speak with health professionals at the clinic and the email provided details of the surgeons and a link to their General Medical Council (GMC) accreditation.

Upholding the complaint, the ASA noted that while Groupon had taken reasonable steps to ensure customers had the opportunity to get post-purchase advice and were encouraged to seek independent medical advice, the British Association for Aesthetic Plastic Surgeons (BAAPS) code prohibits adverts which offer discounted surgery linked to a deadline. Adverts offering discounts also went against the GMC’s good practice guide. The ASA also considered that the decision to undergo physically invasive procedures required substantial consideration, and they understood from BAAPS that candidates normally required multiple consultations before proceeding with surgery. The 24-hour window therefore offered a very limited timeframe, which would pressure people into making a decision.

Accordingly, to the view of the ASA, certain “purchases” are simply not suitable for time-limited sales promotions which, by their very nature, encourage customers to make impulsive purchasing decisions. 

- Richard Dickinson

EU Bureaucrats Have Been Drinking Something, Not Water

The EU earlier this month banned companies that sell water from making claims that water “hydrates.”  Penalties for making such an outrageous claim can range up to two years in prison. What’s going on here you might wonder?  Is it not only the Euro that has become destabilized but also EU bureaucrats?  Apparently the thinking behind this decision is that there are certain medical conditions that can lead to dehydration. So although water can help hydrate someone who’s just engaged in vigorous physical activity or has been out in the hot sun all day, it’s not a “cure” for any disease that causes dehydration and shouldn’t be marketed as such. The EU was asked to consider this issue following an application by two German Professors, who were concerned to ensure that hydration claims wouldn’t be interpreted as meaning that water intake can reduce the risk of developing a human disease.

From the US perspective, it seems that the EU has lost sight of the basic principles that claims must be interpreted through the eyes of a reasonable consumer and in the context of an advertisement as a whole. If a company creates an advertisement showing a beach volleyball player drinking water during a break, surely no reasonable consumer will believe that the product is being marketed as a “cure” for diabetes or diarrhea or any other medical condition that causes excessive thirst or dehydration.  The claim that water helps you “hydrate” to a reasonable consumer is more likely a good reminder that they need to drink an adequate amount of fluids each day and that water can be an important and healthy choice.  Nor is there anything misleading, as some have suggested, about claiming your product helps with something if there are other products that help as well. If the EU truly intends to go down this path it has its work cut out for it. Is the slogan that Snickers is "the snack that satisfies" next -- it won’t satisfy if you’re suffering from a medical condition that causes hunger or malnutrition.  Let water be water and let’s move on to more important things.

- Randy Shaheen

Seventh Circuit Announces Heightened Scrutiny of Class Action Counsel’s Conduct

In a decision last week called Creative Montessori v. Ashford Gear, the Seventh Circuit vacated a district court order certifying a class in a “junk fax” case under the Telephone Consumer Protection Act.  The appellate court rested that action on the relatively rare basis that alleged misconduct by plaintiffs’ counsel made them inadequate representatives of the class. The decision, written by influential judge Richard Posner, may augur more rigorous scrutiny of class counsel’s litigation conduct in future cases, giving defense counsel a new weapon against certification.

At issue in the case was defendant Ashford Gear’s use of mass faxes to advertise its goods, which allegedly violated the Act with its $500-per-fax damages provision. It is usually relatively simple and routine to get these cases certified. But this time, there was a problem. According to the Seventh Circuit, the law firm bringing the case had engaged in some questionable practices in recruiting the named plaintiff, a private school. First, the law firm allegedly tricked a marketing agent into disclosing the defendant’s identity. Second, when the law firm contacted the named plaintiff, it said “you are likely to be a member of the class,” which the Seventh Circuit found misleadingly implied there was already a certified class.

The Seventh Circuit was very troubled by these practices, finding “a lack of integrity that casts serious doubt on [the lawyers’] trustworthiness as representatives of the class.” This concern is at its zenith, the court said, “when the class members are consumers, who ordinarily lack both the monetary stake and the sophistication in legal and commercial matters that would motivate and enable them to monitor the efforts of class counsel on their behalf.”

In the past, courts have often treated class action lawyers more leniently, as did the district court in this case, relying on a 1972 Seventh Circuit precedent that had said “only the most egregious misconduct” could justify denying certification. No longer. Last week’s decision jettisons that old standard and serves notice on the plaintiffs’ bar that their conduct -- particularly in connection with ginning up the class action in the first instance -- will be open to scrutiny and may preclude certification.

So here we have yet another federal decision tightening up standards for class certification in federal courts. Indeed, just as Wal-Mart v. Dukes breathed new life into the so-called “commonality” requirement of Rule 23(a)(2), Creative Montessori could be seen as reinvigorating the adequacy-of-counsel requirement of Rule 23(a)(4) and (g), which had seldom been a major battleground in previous class certification wars. Defense counsel may also have more leeway now to take discovery of the circumstances of plaintiffs’ counsel’s identification and recruitment of the named plaintiffs, an area that has sometimes been off limits to them in the past.

- Robert Katerberg

COPPA Compliance is No Day at the Beach

Skid-e-kids, a social networking site which advertises itself as the “Facebook and Myspace for kids,” recently entered into a consent decree with the Federal Trade Commission (FTC) regarding alleged violations of the Children’s Online Privacy Protection Act (COPPA). This latest social networking should send a strong warning to all website operators regarding the potential pitfalls of collecting site visitors’ information without strict screening.  In addition, because COPPA applies not just to website operators, but also to operators of mobile applications, many applications operators should be on notice of the implications of the Skid-e-kids Consent Decree.

COPPA requires that website operators notify parents and obtain their consent before collecting personal information from children under age 13. This is required not only for ostensibly “children’s sites”, but also for any website whose operators have actual knowledge the site is collecting information from children under age 13. A website operator may have actual knowledge of a user’s age, for example, if it asks for, and receives, information from which age can be determined, such as by asking “What grade are you in?”

Skid-e-kids allegedly violated COPPA by allowing children to register on its site without first obtaining parental permission. Such collection allegedly occurred despite the statement in the site’s privacy policy that it was mandatory for “child users to provide a parent’s valid email address in order to register on the website.” In practice, there apparently was no such requirement, as Skid-e-kids allegedly obtained information from approximately 5,600 children without parental consent.

Pursuant to the Consent Decree, Skid-e-kids must (i) delete all of the personal information it obtained from children without parental consent, (ii) provide a link to online privacy educational material and (iii) retain a privacy professional to oversee compliance for a period of time. Further, the Consent Decree imposes a $100,000 civil penalty on Skid-e-kids – although payment of all but $1,000 of that penalty will be suspended provided Skid-e-kids complies with the Consent Order’s oversight provisions and its operator provided truthful financial information.

The FTC is currently accepting comments on proposed changes to the COPPA rule. Among the potential changes are expanding the definition of “personal information;” allowing children to participate in some interactive communities without parental consent so long as certain conditions apply; developing new parental consent mechanisms; and strengthening the oversight of the “safe-harbor programs.” Written comments on the proposed revisions are due to the FTC by November 28, 2011.

 - Nancy Perkins and McCormick Conforti

Seventh Circuit Holds State AG Parens Patriae Actions Not Removable Under CAFA

To curb class action abuse, the Class Action Fairness Act of 2005 expanded the circumstances in which class actions filed in state court can be removed to federal court.  Over the past few years, a hotly debated issue has been whether certain “parens patriae” suits by state attorneys general -- in which the state seeks to recover damages on behalf of a large number of its citizens -- are removable as the functional equivalent “class actions” or “mass actions” under CAFA.  Last Friday, in LG Display v. Madigan, the Seventh Circuit added its voice to a growing chorus of appellate courts answering “no” to that question.

In LG Display, the Illinois Attorney General sued eight manufacturers of LCD panels for allegedly fixing prices of LCD panels.  Notably, the AG not only sought relief on behalf of the State of Illinois itself as a purchaser of the allegedly impacted products, but also pursued treble damages for all Illinois residents who had purchased the products.

In the latter respect, the parens patriae action seems the functional equivalent of a class action because a single entity gets to represent a massive class and try to win damages for them.  Yet parens patriae suits are not technically class actions.  They do not get “certified,” and do not have to meet the strictures of Federal Rule of Civil Procedure 23 or state equivalents. Courts have therefore puzzled over how exactly this unique animal should be treated under CAFA.

Before Friday,

• The Fifth Circuit had held that a suit by the Louisiana AG against the insurance industry seeking damages for insurance policyholders was removable under CAFA.
• A Pennsylvania district court followed the Fifth Circuit's logic in upholding removal of a suit by the West Virginia AG on behalf of individual cable subscribers against Comcast. 
• West Virginia’s home Circuit, the Fourth, disagreed earlier this year, holding that a different parens patriae suit by the West Virginia AG -- this time the target was the retail pharmacy industry -- was not removable under CAFA. 
• And just last month, in a different set of LCD panel antitrust cases (small world), the Ninth Circuit held that parens patriae suits by the AGs of Washington and California on behalf of indirect purchasers in those states should stay in state court.

So for those keeping score at home, the count is now 3-2 in favor of parens patriae actions being non-removable under CAFA, with all three of the most recent decisions having gone that way. Only time will tell whether the Seventh Circuit’s breaking the tie generates momentum for the rest of the Circuits to fall into line with what now seems the majority position, or is merely the latest ebb in a debate that may eventually have to be settled by the Supreme Court. 

- Robert Katerberg

 

Government Contractor Defeats Lanham Act False Advertising Claim

On October 27, 2011, a federal court in Virginia dismissed a Lanham Act claim seeking to hold a government contractor liable for statements contained in an environmental assessment report. US Demil v. ARA Group. Arnold & Porter LLP represented the Defendant.

Background:  Lanham Act applies to GoCo statements. The scope of “advertising” under the Lanham Act is broad and applies to non-traditional promotional statements such as those in emails and slide decks provided to government or business purchasers. In the government contracting sector, courts already have held that bid proposals even to government agencies can constitute Lanham Act false advertising. 

Plaintiff’s case. The plaintiff attempted to expand the reach of the Lanham Act to cover technical data, included in an environmental assessment report, prepared after the contractor was already working for the agency. The information in question was allegedly provided to the U.S. Army regarding a project to demilitarize munitions, and was provided pursuant environmental regulations. 

The court’s analysis. The court cited three reasons supporting the dismissal:  

1. Context. The court observed that “it is not just what is said but the context in which it is said, and given this context, I don't see how the Lanham Act can go forward as a matter of law.”  Here, the “purpose” of the statements was to provide data for an environmental assessment, which is distinguishable from a bid proposal, where the purpose is promotion / to induce a sale. 
2. Customer sophistication. The court considered the sophistication of the Army personnel requesting the data and the highly technical nature of the data. The court noted that the audience here was “not just your ordinary GSA person, but these are highly technical people, so you have also an audience much less likely to be duped.”
3. Policy considerations. The court commented on the need to limit the scope of the Lanham Act in the government contracting sector to prevent cases from being filed based on every communication sent to every government agency. The court sought to avoid a decision that would “open the floodgates,” noting that “the vigor with which competitors fight with each other in government contracting is well known.”

Significance. Although the defendant was able to dismiss the Lanham Act claim on the facts of the case, the case confirms that Lanham Act false advertising is a potential tool to police unfair competition in the government contracting sector. Before bringing a claim, however, plaintiffs should make sure that the Complaint contains detailed allegations to prove that the primary purpose of the communication is for promotion in a competitive context (and not for some other purpose such as to provide technical data for inclusion in an environmental assessment), and that the statements have the potential to mislead the target audience. 

- Randy Miller

NOTICE: ADVERTISING MATERIAL. Results depend upon a variety of factors unique to each matter. Prior results do not guarantee or predict a similar result in any future matter undertaken by the lawyer.  

Supreme Court Declines to Rule On Whether Disclaimers of Damages Above $5 Million Prevent CAFA Removal

Last week, the Supreme Court passed up an opportunity to weigh in on an issue of growing importance in consumer class actions:  whether plaintiffs can keep a class action in state court by purporting to disclaim damages above $5 million, the amount in controversy threshold for removal under the Class Action Fairness Act (CAFA).

CAFA, passed in 2005, was designed to curtail class action abuses by channeling more class actions into federal court. It allows defendants to remove many state court class actions to federal court if there is minimal diversity of citizenship and the amount in controversy exceeds $5 million. In the past few years, many plaintiffs’ counsel have tried to avoid CAFA removal, even where an objective estimate of the amount in controversy would surpass $5 million, by including language in the complaint saying that the class waives or disclaims any damages above that amount. After Wal-Mart v. Dukes, plaintiffs’ counsel now have more of an incentive than ever to use all possible means to keep their cases in state court, where Wal-Mart’s heightened standards for certification may not necessarily apply.

This tactic has been fraught with controversy. As Judge Easterbrook on the Seventh Circuit recently held, a class plaintiff “has a fiduciary duty to its fellow class members. A representative can’t throw away what could be a major component of the class’s recovery.” There are serious questions about whether such a waiver can bind a putative class, and whether a class plaintiff who would waive his fellow class members’ rights at the outset can possibly be an “adequate representative.” In any event, the practice smacks of the type of gamesmanship that led Congress to enact CAFA in the first place.

In the case the Supreme Court declined to take up last week, plaintiffs brought a class action against shoe company Skechers in Arkansas state court for alleged false and misleading claims about health benefits of wearing Skechers shoes. Although Skechers submitted proof that the potential damages could reach $38 million, its attempt to remove the case to federal court under CAFA failed because plaintiffs included language purporting to waive class damages above $5 million. The Eighth Circuit denied review.  Despite compelling amicus briefs by the US Chamber of Commerce and the Center for Class Action Fairness spelling out the profound ramifications, and what appears to be an emerging circuit split, so now has the US Supreme Court.

A denial of certiorari of course does not signal anything about the Court’s view of the merits. So the class action bar will have to wait another day for a definitive national resolution of this important question. With the circuits divided and the incentives for plaintiffs to keep their cases in state court mounting, it is a good bet that day may come sooner rather than later.

- Robert Katerberg

Sixth Circuit: Early Preemptive Strike Upheld in Dismissing Class Action

The Sixth Circuit Court of Appeals last week affirmed a denial of class certification in Pilgrim v. Universal Health Card, one of the first appellate opinions in the country relying on the Supreme Court’s watershed class certification opinion of Wal-Mart v. Dukes in a consumer class action. In the process, the Sixth Circuit may have also given new traction to a potent but rarely used tactic in the defense playbook, the early preemptive motion to deny class certification or strike class allegations.

The defendant company in Pilgrim marketed a healthcare discount program. Members were supposed to receive, in exchange for a membership fee, discounts at health care providers in the program’s network.  Two individuals found the program wanting because of a lack of participating providers in their area.  They sued claiming the companies’ advertising was deceptive, and sought certification of a nationwide class of about 30,000 people. Not long after answering, the defendant filed a motion to strike the class allegations. The district court granted that motion, and then dismissed for lack of subject matter jurisdiction because, stripped of class allegations, the named plaintiffs’ own claims fell short of amount-in-controversy requirements for federal jurisdiction.

The Sixth Circuit affirmed in last week’s decision, written by Judge Jeffrey Sutton, an influential jurist reputed to be on the short list for a Supreme Court nomination in a Republican administration, and whose views will carry weight with judges in other Circuits. The court first held that Rule 23(b)(3)’s requirement that common issues of law or fact predominate was not met because “each class member’s claim would be governed by the law of the State in which he made the challenged purchase, and the differences between the consumer-protection laws of the many affected States would cast a long shadow over any common issues of fact plaintiffs might establish.” In so holding, the Sixth Circuit echoes other courts (like In re Bridgestone/Firestone and Castano v. American Tobacco) that have been skeptical of nationwide class actions that try to join together claims under fifty different states’ laws, which often vary in material respects. How, after all, would the court possibly instruct a jury on all those different states’ laws?

Concepcion Not a Cure All for Avoiding Consumer Class Actions

Since the Supreme Court handed down AT&T Mobility LLC v. Concepcion, many consumer product and services companies have hoped to insulate themselves from consumer class actions by including a mandatory non-class arbitration provision in their sales and services contracts. Such companies expect that, if faced with a class action complaint, they can move to compel arbitration by relying on the takeaways from Concepcion, that state laws banning class waiver provisions as unconscionable are preempted by the FAA and that class waiver provisions in arbitration agreements must be enforced according to their terms.  If all goes according to plan, the court will dismiss the case and compel the consumer to arbitrate in an individual capacity, destroying the possibility of a class action swiftly and efficiently. 

A recent California Court of Appeal decision illustrates how this plan can go awry. In Sanchez v. Valencia Holding Company, LLC, a purchaser of a used Mercedes-Benz sued the dealership that sold him the car, asserting that the dealer made numerous false representations in connection with the purchase.  The consumer brought a purported class action and alleged various violations of state law.  The dealership moved to compel arbitration, pointing to Concepcion and a class action waiver in the arbitration agreement the consumer signed.  The Court of Appeal rejected the dealership’s argument.

As the Court of Appeal explained, Concepcion left open the possibility arbitration provisions could be invalid under the doctrine of unconscionability. In fact, the Court of Appeal stated, Concepcion is inapplicable where a court’s decision does not address a class action waiver or a judicially imposed procedure that conflicts with the purposes of the FAA. The Court went on to find that the dealership’s arbitration provision was unconscionable in numerous respects.  The provision was procedurally unconscionable because the dealership presented the provision on a take-it-or-leave-it basis, and it appeared on the back of the last page of the agreement in a small font with reduced line spacing.  The provision was substantively unconscionable because it imposed the following facially-neutral terms that in reality favored the dealership: (1) either party may appeal an award exceeding $100,000; (2) either party may appeal an award of injunctive relief; (3) the appealing party must advance the filing fee and any arbitration costs; and (4) self-help remedies, including the right to repossession, are excluded from arbitration.

It is unclear that other courts would have reached the same results. Indeed, some post-Concepcion decisions have upheld arbitration provisions with class action waivers, without considering much more than whether the consumer signed the contract. Other decisions have compelled arbitration, after lamenting how Concepcion rejected the idea that arbitration agreements are per se unconscionable when found in adhesion contracts. Yet, as the Sanchez decision shows, not all courts will shy away from a rigorous analysis of an arbitration provision under the unconscionability doctrine. Consumer product and services companies that intend to rely on Concepcion to defeat class actions by compelling arbitration should consider whether their arbitration agreements are sufficiently balanced to survive such an analysis.

- Matthew Eisenstein

UK ASA: So, You Say Got Connections?

The UK’s advertising regulator, the Advertising Standards Authority (ASA), has banned an advert run by the company Rising Models for the “VIP Model Club” on grounds that it is misleading and the claims unsubstantiated.

The advert, which was published on Rising Models’ own website, stated that the company had “connections with the most ELITE modelling agencies in the country” and invited readers to join “FOR A CHANCE TO SIGN WITH A MAJOR MODELLING AGENCY”. The ASA received one complaint which challenged whether the claim that the company had  “connections with the most ELITE modelling agencies” could be substantiated. In response, Rising Models said that they were not a modelling agency and did not claim to offer work opportunities; they merely had a list of eight contacts which they did not claim to know personally. They also pointed to their “Terms of Use” which they argued demonstrated that they were not a modelling agency. Upholding the complaint, the ASA concluded that the claims implied that some readers could find work opportunities by subscribing to the VIP Model Club, and it considered that readers would understand the claims to mean that Rising Models had working relationships with the UK’s leading modelling agencies. Although Rising Models provided eight e-mail addresses and names that seemed to refer to modelling agencies, that evidence was insufficient to demonstrate that the agencies had recent business connections with Rising Models, or indeed that they were considered, by industry standards, to be the “most elite”.

Moral:  In all instances, ensure that claims are clear and that they can be properly substantiated.

- Richard Dickinson

Truth and Consequences: SEC Cybersecurity Disclosure for Publicly-Traded Companies

While we don’t often venture into securities disclosure issues on this blog, privacy, security, and SEC compliance sometimes all converge. On October 13, 2011, prompted by recent high-profile data security breaches in the public and private sectors, the Securities and Exchange Commission’s (SEC) Division of Corporation Finance issued disclosure guidance on cybersecurity risks and cyber incidents. The  guidelines reflect the Division of Corporation Finance staff’s interpretation of how existing disclosure requirements apply to cybersecurity risks and likely foreshadow staff comments that will be issued on SEC filings. 

According to the guidelines, reporting companies are now expected to disclose risks related to cybersecurity, including past incidents, future risks, and any foreseeable effects that cybersecurity breaches might have on a company’s financial condition. These risks could, of course, include risks related to consumers’ personal information. The staff emphasized that the guidelines are consistent with the relevant disclosure considerations that arise in connection with any business risk, and highlighted several areas in which disclosure of cybersecurity risk may be appropriate, including a company’s Management Discussion & Analysis and Risk Factor disclosure as well as in relevant sections of Form 8-K. 

In the coming months, additional cybersecurity reporting requirements will likely be added to the disclosures set forth in the guidelines. Bills being debated in the Senate would create civil penalties for failure to disclose breaches in security to those whose personal information has been compromised and criminal penalties for willful concealment of security breaches.

While applicable to all reporting companies, the guidelines may have an unintended effect on publicly-traded corporations, including providers of consumer goods and services, that hold government contracts. Disclosures made pursuant to the guidelines offer the government timely, credible and accurate information regarding contractor security policies, protection and performance.  Agencies could potentially use this information to evaluate competing proposals, to assess contractor past performance and responsibility and to evaluate and pursue potential contract claims. 

- Ronald Lee and Alexandra Mitter

Trust But Substantiate - Were Sugary Drink Companies Really Targeting Minorities?

We like to enjoy an occasional nonadult sugary beverage. And some of our good friends are sugary drink manufacturers. So it was with some interest that we read news stories earlier this month about a new report that found that blacks and hispanics were major targets of soda and other sugary drink advertisements. However, also being advertising lawyers we couldn’t help but wonder about the substantiation for that claim. (Our kids really hate it when we ask them to put together a substantiation file to support claims like “it’s been at least a month since you let me have a sleepover.”) So we read the underlying report issued by the Yale Rudd Center For Food Policy & Obesity, and it raises a few questions. 

The report (at page 65) notes that black children and teens viewed 81% and 90% more TV ads for sugary drinks than their white counterparts in 2010. For the more narrow category of regular soda, the differences were 93% and 77% respectively. However, the report notes that black children watched 50% more TV than white children and black teens viewed 64% more TV than white teens. Thus, a significant portion of the difference in ad exposure was likely due to increased TV viewing, and not alleged targeting. Indeed, with respect to soda, almost all the difference between black and white teens might be explained that way. If other parts of the Center's methodology are similarly flawed, the differences between the populations might even lose any statistical difference. 

Oddly enough, the significance of making this type of adjustment is not completely lost on the Center.  In their fact sheets discussing targeting of various groups by sugary drink marketers, the Center notes that teens in general viewed more TV ads than adults. The Center notes that this difference is even more significant because teens in general watch less TV than adults. Despite that observation, the fact sheet on black youth uses the 81% and 90% figures without any mention of the fact that these numbers are less significant because black youth watch significantly more TV than white youth. In terms of adjusting for viewing habits, the Center seems happy to incorporate that item into its analysis when it comes to explaining that kids watch more ads than adults, but, when that same approach diminishes the impact of striking statistics, the Center neglects to incorporate the adjustment for viewing habits into the text of its report. I'm doubtful that the FTC would endorse such a strategy for any commercial advertiser. 

So caveat emptor and caveat lector (reader) as well.

- Randy Shaheen

 

 

Seller Beware: California says “Plastic is NOT Biodegradable!”

If you were thinking of tossing that supposedly “biodegradable” plastic bottle out your car window along with that banana peel -- first of all, shame on you! But second, California says labeling a plastic product as “biodegradable” is inherently misleading and is not allowed in that state.

On October 26, 2011, California Attorney General Kamala Harris sued two makers of plastic bottles and their plastic resin supplier for advertising the bottles as “biodegradable” in violation of California law.  She accused them of “greenwashing” their products, thereby misleading consumers into becoming litter bugs.

Kamala Harris doesn’t care if you say your plastic bottle is full of special microbes that will chew it up and spit it out. You still can’t call it “biodegradable.”  Furthermore, if these microbes contaminate the recycling stream, you also can’t call your bottle “recyclable.”

The three defendants -- two are based in other states -- now find themselves caught in a web of California and federal laws and regulations that require makers and sellers of plastic products to be very careful about the “green” claims they make.

California Law - For Now

In 2008, California enacted a law that prohibited labeling plastic bags and plastic food and beverage containers as “biodegradable,” “degradable,” or “decomposable” or otherwise implying that the item would break down in a landfill or other environment. 

The 2008 law also prohibited labeling plastic bags and plastic food and beverage containers as “compostable” or “marine degradable” unless the item met specific testing standards established by the American Society for Testing and Materials (ASTM).

Beginning in July of 2011, the 2008 law also required manufacturers of “compostable plastic bags” to comply with the Federal Trade Commission Guides for Use of Environmental Marketing Claims (affectionately known as the “Green Guides”). In particular, makers of plastic compost bin liners must make sure the bags have all sorts of visual cues for consumers, like dying the bag green, or labeling both sides as “COMPOSTABLE” in big letters next to a big green stripe.

After July 1, 2011, compostable plastic bag makers also were not allowed to market their bags as “recyclable” for fear that they will “contaminate” the recycling stream.

Violators could be on the hook for civil fines up to $2,000 per violation for repeat offenders, plus court costs if the state sues and wins. But the price tag for not playing by the rules could be even higher, since the law doesn’t rule out class action lawsuits under California’s Unfair Competition Law.  And potential plaintiffs’ lawyers get free discovery: California law contains provisions requiring companies to provide substantiation for certain “green” claims to any member of the public upon request (see here and here).

California Law - Coming Soon

Beginning on January 1, 2013, the California law will be expanded to include all “plastic products” (think packaging, straws, utensils, toys, desk accessories, and virtually any other plastic consumer product you can imagine).

The rules for labeling plastic products as “compostable” will change just a little. In addition to being allowed to use the terms “compostable” and “marine degradable” (so long as you meet the relevant ASTM standard), you can also start using the term “home compostable” if you meet the certification requirements of a Belgian group called Vinçotte.  (Oh-la-la.)

But if you’re hoping to start calling your plastic product “biodegradable” any time soon, don’t hold your breath. California is sticking to its view that calling a plastic product “biodegradable” is inherently misleading.

California vs. USA: Drumroll . . . California Wins!

California’s rules -- especially the ban on labeling plastic products “biodegradable” -- are tougher than the FTC’s Green Guides.  But you already guessed that, right?

-Trent Norris and Zack Allen

Consumer Financial Protection Bureau’s New Supervisory Manual Focuses on Risk to Consumers

On October 13, 2011, the Consumer Financial Protection Bureau (CFPB) released a supervisory manual.  The Manual provides the CFPB’s examiners with guidelines for determining whether entities providing consumer financial products and services are complying with the consumer protection laws subject to the CFPB’s jurisdiction. Consistent with the purpose of the agency, and not surprisingly, the Manual indicates that when the CFPB examines an institution, it will focus on the risk to consumers. 

The Manual incorporates exam procedures developed by the Federal Financial Institutions Examination Council for many of the federal consumer financial laws now enforced by the CFPB. The exam structure and approach presented in the Manual is generally similar to that of the other federal banking agencies (indeed, it was drafted based largely on guidance issued by the other agencies). There are, however, aspects that are new and significant.  For example, the Manual includes detailed exam procedures for mortgage servicing, which is an indication that the agency plans to devote a great deal of attention to that area.

Under the CFPB’s new procedures, mortgage servicers will be subject to nine exam “modules": (1) servicing and loan-ownership transfers; (2) payment processing and account maintenance; (3) customer inquiries and complaints; (4) maintenance of escrow accounts and insurance products; (5) credit reporting; (6) information sharing and privacy; (7) collections; (8) loss mitigation; and (9) foreclosures.

In addition, the Manual states that the CFPB expects each entity it regulates to have an effective compliance management system. An effective compliance management system commonly has the following four components: (1) board management and oversight; (2) a compliance program comprised of policies, procedures, training, and monitoring and corrective action; (3) a system for responding to consumer complaints; and (4) a compliance audit program.

The Manual specifies that every exam will include a review of the entity’s compliance management system, as well as a review for any potential unfair, deceptive, or abusive practice (UDAAP), and regulatory compliance matters presenting risks to consumers. The Manual also provides that every exam covering lending activities must include a review for discrimination and fair lending compliance.

Notably, the Manual’s provisions relating to UDAAP do not provide any insight as to how the term “abusive” will be interpreted and applied in practice. In a departure from the normal exam process of the other federal banking agencies, the Manual also instructs examiners to interview consumers, as necessary, if the examiner uncovers a potential UDAAP issue.

The CFPB has indicated that in the coming months it will release additional guidelines, like these mortgage servicing modules, organized by product and line of business.  If the mortgage servicing procedures are any guide, the forthcoming guidance will likely be more detailed than that currently used by the other federal banking agencies.  As the CFPB updates the Manual and shifts its regulatory focus to new products and business lines, regulated entities may wish to review and enhance corporate compliance policies to directly address the agency’s new priorities and areas of concern.

For a more detailed description on this topic, click here.

- Beth DeSimone, Nancy Perkins, and Jeremy Hochberg

Privacy Promises and Bankruptcy: Bordering on the Edge of Compliance

Almost all of us face this situation daily:  We enter into an agreement with a company to disclose  personal information, for example a home address and books purchased, and the company agrees to limit its use of such information. What happens to this personal information though when that company goes bankrupt? Does the agreement bind the buyer of the bankrupt company?

This precise question is currently playing out in the bankruptcy of Borders, the national bookseller which entered Ch. 11 in February. The bankruptcy court appointed a Consumer Privacy Ombudsman, whose report  stated any use of Borders consumer information would require consent.

In issuing his report, the Consumer Privacy Ombudsman sought a written description of the Federal Trade Commission’s concerns regarding the sale of the consumer personal information Borders possessed. David Vladeck, Bureau of Consumer Protection Director at the FTC, responded in a letter laying down the framework for how the consumer personal information possessed by Borders should be sold to and used by a buyer. The framework generally followed that of the Toysmart settlement. The FTC stated its concerns about the transfer of customer information inconsistent with privacy promises would be “greatly diminished” if:

• Borders were to sell the rights as part of a larger group of assets to a buyer engaged in the same line of business as Borders,
• The buyer were to agree to be bound by the terms of Borders’ privacy policy, and
• The buyer were to  obtain affirmative consent from consumers before enacting any significant changes to the policy.

The ultimate buyer of the consumer privacy information was in the same line of business and claimed the customer information was not sold as a standalone asset because trademarks and online content were also included in the sale. However, the buyer also claimed that the ombudsman’s consent requirement would render the value of the customer information worthless.

The bankruptcy court approved the sale of the customer information allowing the buyer to keep and use all the information. The court did not explicitly follow the Ombudsman’s report. The court required the buyer to send an email to affected consumers giving them 15 days to opt out of the transfer and prevent their information from being handed over. The buyer sent out the email on September 30. The Ombudsman took issue with the email, claiming it “omitted material information” by not disclosing the extent of the privacy information to be transferred and failing to state that the opt-out opportunity was required by the Court. Further, the FTC issued a reminder to consumers about the deadline to opt out.

While consumers faced an October 15 deadline to opt-out, this case and the fall out will surely extend far beyond that. With companies collecting more personal information on its customers while facing uncertain financial futures, bankruptcy courts are likely to see more cases involving the sale of consumer information.

- Ronald Lee and McCormick Conforti

UK ASA: Computer Generated Sexual Content = Sexual Content

The UK’s advertising regulator, the Advertising Standards Authority (ASA), banned a TV ad for Take Two’s computer game Duke Nukem Forever from being aired in peak time.  The ad, which had been cleared with a post-9pm timing restriction, featured animated scenes from the game including naked women dancing in a strip club, a full frontal view of a semi-naked woman with pixilation obscuring her nipples and bottom, and two school girls about to kiss.  The ad also featured quickly edited action scenes such as an aircraft firing weapons over a blazing city, a man being punched and a robot marching through a street.  The ASA received 34 complaints that the ad was offensive and irresponsible because it was sexist, violent, overly explicit and featured imagery which was likely to harm children and vulnerable people.  Defending the ad, Take Two said that Duke Nukem Forever was a cartoonish, over-the-top, humorous take on the first shooter video-game and was deliberately presented in an exaggerated and non-realistic way, in an attempt to send up the muscle-bound, ultra-macho protagonist, Duke Nukem.  Take Two pointed out that the imagery shown in the ad was computer generated and cartoonish in style (rather than photorealistic), and that the images in sequences of a sexually suggestive nature were pixilated or non-explicit; they believed the imagery was of a type commonly seen in TV, film or music videos and that it was not offensive.  The ASA was content that the violent imagery was representative of the game’s content and that it was not overly graphic, considering the post-9pm scheduling restriction.  However, it found that the ad’s strip club scenes, showing “the women’s naked bodies and their very sexual movements and gyrations”, were inappropriate even for a post-9pm advert; it also considered that the scene of the two schoolgirls about to kiss appeared to link teenage girls with sexually provocative behaviour.  It concluded that the ad was in breach of rules on responsible advertising and harm and offence, and that it could not be shown before 11pm.

The ad had shown actual scenes from the computer game, rated 18 in the UK.  Whilst the ASA was not surprised by the scenes of violence shown, and it did not consider the ad overtly sexist, it considered that the sexual content was overly explicit for prime time broadcast.  It did not matter that the women and girls featured were clearly fictional, computer generated characters; the titillating strip club sequences made the computer game advert a late night only affair.  

- Richard Dickinson

Lawyer Blogger Lands in Hot Water with Virginia Bar over “Testimonial”

A Richmond criminal defense lawyer who blogs at Richmond Criminal Defense News has been charged with misconduct by the Virginia State Bar because of a bar rule that requires lawyers who advertises case victories to include a disclaimer that every case is different and that prior results don’t guarantee future success.  The Bar Rule sounds a lot like the FTC’s testimonial guidelines but would the FTC treat this case the same way, and if not, is the Virginia Bar overreaching or perhaps even in contravention of the First Amendment?

The FTC’s endorsement guides require that a “testimonial” either be typical of what consumers will generally achieve or, if different, disclose what consumers should expect to generally achieve.  But, the guides only say that the experience will “likely” be interpreted as representative and actually give an example of an endorsement that is not interpreted in that way (people being interviewed leaving a movie.)  Would the FTC find that most consumers realize that the outcome of any legal case is heavily dependent upon its specific facts and that no lawyer (other than Perry Mason) “typically” wins all of his or her cases (Not even us).  No doubt the same analysis would hold true for the advertisements we have all seen where a patients touts some form of successful medical treatment at a hospital or other healthcare facility.  Consumers generally likely realize that medical outcomes, too, are very fact dependent and that such outcomes are not always positive.  Perhaps we’re being overly sensitive in rushing to the defense of a fellow blogger but if the regulators charged with protecting us all from false advertising don’t see any issues then perhaps it’s time for this rule to be amended as well. 

- Randy Shaheen

Do Your Products Contain Conflict Minerals? California Adds Some Bite to SEC’s Forthcoming Regulations

California has raced ahead of any other state government -- and even the Securities and Exchange Commission in Washington, DC -- in developing rules related to new reporting responsibilities on the use of four “conflict minerals” that might be used to help finance armed conflicts in and around the Democratic Republic of the Congo.  These minerals -- tin, tungsten, tantalum and gold -- are heavily utilized by electronics manufacturers, as well as by companies in the automotive, construction, medical equipment, and aerospace sectors.  On September 9, 2011, the California legislature passed Senate Bill 861, which will prohibit state agencies from contracting with any company that fails to comply with a requirement that the SEC itself has not yet completed.  California Governor Jerry Brown signed the bill into law on October 9, 2011.

Context for California’s law

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC, in consultation with the U.S. Department of State, to devise a reporting requirement by April 15, 2011, on the measures companies have taken to exercise due diligence on the source and chain of custody of the four “conflict minerals.”  The SEC estimates that over 5,000 companies will be subject to the new corporate social responsibility requirement.  It will impose unprecedented and burdensome responsibilities on these companies, which will for the first time be required by law to report to the SEC regarding their supply chain practices. 

The SEC has been struggling with the best way to shape its rules in implementation of the conflict minerals reporting requirement.  Dozens of companies have complained about the anticipated burdens of Section 1502 and the SEC has been dealing with these comments, the views of the State Department (here, here, and here), and comments from around the world, including from the Democratic Republic of the Congo itself.  The SEC missed the April 15 statutory deadline and has announced it will issue final rules by the end of December 2011. 

California’s contracting restriction will be triggered when the SEC brings a successful enforcement action against a covered company for violating the final conflict mineral rules.  Any such violator will be ineligible to submit a contract proposal to California state agencies for goods or services related to that company’s Section 1502 reporting requirement for three years, or until the company comes into compliance.  Because the California law’s penalty only applies after the SEC brings a successful enforcement action, the state’s move -- for the moment -- is chiefly symbolic.  That said, the new measure is a clear indication that the SEC’s regulations are being watched by state governments, with California ahead of the pack. 

California’s law is part of a complex regulatory environment

California will probably have lots of company in new laws relating to conflict minerals, since the SEC’s forthcoming conflict mineral rules are just part of an emerging regulatory landscape.  Massachusetts may become the first state to follow California’s lead:  Massachusetts State Representative Martin Walsh recently introduced HD 04065, a bill that resembles California’s law in seeking to make companies that fail to comply with the forthcoming SEC regulations ineligible to obtain contracts with state agencies.  In addition, municipalities like Pittsburgh and St. Petersburg have enacted measures calling on city administrators or the private sector to address the issue of conflict minerals in procurement decisions.  Much more significantly for covered companies, other nations, particularly in Europe, are watching the SEC rulemaking closely and could develop rules on their own, presenting the possibility of a complex new regulatory environment for thousands of companies that use any of the controversial minerals in their products.

- John Bellinger, Samuel Witten, Mara Senn, and Khalil Gharbieh