Consumer Advertising Law Blog

FTC Calls Time Out for Red Flag Rules

In a highly significant move for entities subject to FTC jurisdiction, the FTC has decided to delay for six months its enforcement of the "Red Flags" rule issued last year under the Fair and Accurate Transactions Act of 2003 ("FACTA").  In an announcement on October 22, 2008, the Commission said it had learned that many entities only recently became aware of the rule and its possible application to them, and therefore would not be able to meet the compliance deadline of November 1, 2008. So the Commission is going to give entities subject to its jurisdiction until May 1, 2009 to comply.

Why the confusion?  Because the Red Flags rule, which the FTC promulgated jointly with the federal banking regulators and the National Credit Union Administration (NCUA), applies to "financial institutions" and "creditors," many non-banking entities apparently thought they were not covered.  But under the FACTA, a “creditor” includes “any person or entity who regularly extends, renews, or continues credit," and “credit” means “the right granted by a creditor to a debtor to defer payment of debt . . . .”  So, a person can be a "creditor" simply by providing goods or services without obtaining advance or simultaneous payment. 

What's the consequence for entities that are covered?  The Red Flags requires all "financial institutions" and "creditors" to establish and implement an Identity Theft Prevention Program.  That involves:

• Identifying relevant "red flags" that are signs of a risk of identity theft in their operations;
• Detect any red flags that may show up;
• Respond appropriately to any red flags that are detected; and
• Ensure the Program (including the red flags determined to be relevant) is updated periodically, to reflect changes in risks to customers and the financial institution or creditor.

Organizations that have not yet determined whether or not they are covered by the FACTA identity theft regulations should immediately analyze their activities to reach such a determination. Those that are covered should move promptly to adopt the policies and procedures required to comply.  Input from legal counsel should guide both the analysis of the applicability of the rules and the design and evaluation of particular compliance measures.  The FTC takes identity theft very seriously, and its authority to impose penalties under the regulations will likely be exercised vigorously once the enforcement date is reached.

- Nancy Perkins

Advertisers Should Expect Renewal of Green Advertising Enforcement in 2009

As regular readers know, we’ve been closely following the FTC’s review of its Green Guides.  (See here, here, and here.)  As 2008 winds down, advertisers should expect the revised Green Guides to come out in 2009.  A recent Marketing Daily article suggests that the revised Guides may be issued in early 2009, but at last month’s NAD Annual Conference in NYC, the FTC would not comment on a time line. 

In conjunction with issuing the revised Guides, the FTC is also likely to bring enforcement actions against green advertisers in order to establish precedents under the revised Guides that advertisers and self-regulatory bodies can follow.  As noted by Commissioner Rosch in June, the FTC has not brought an action under the Green Guidessince 2000 because, in his view, advertisers have been abiding by them and self-regulatory and private enforcement under the Lanham Act have been effective.  However, Commissioner Rosch noted that several green claims are currently under investigation by FTC staff, so this no enforcement period is likely to end soon.  These precedents will be important because they will flesh out the revised Guides new requirements, thereby promoting compliance.

In his speech at last month’s NAD Annual Conference, Commissioner Rosch identified the First Amendment as a potential impediment to regulating certain green marketing claims.  Government restrictions on commercial advertising are analyzed under Central Hudson’s four-pronged commercial speech test, which provides less than full First Amendment protection to such speech.  “Image” advertising—for example, touting a companies overall environmental record—may not be considered commercial speech and would, therefore, enjoy the full range of First Amendment protection even though it has a commercial purpose.  In Commissioner Rosch’s view, however, the closer an advertisement comes to touting specific products, the closer it comes to being commercial speech subject to the less-restrictive protections of Central Hudson.

The Commission Shifts Into Overdrive: Proposed New FTC Adjudicative Rules

Earlier this month the FTC announced a request for public comment on proposed changes to the rules governing adjudicative proceedings before the Commission.  The goal of this proposed rulemaking is to expedite proceedings and better clarify the role of the Administrative Law Judge (“ALJ”) in trials held before the Commission.  The FTC adjudicates both antitrust, and consumer protection cases before ALJs.  

Proposed changes include expedited trial dates-  set eight months after a complaint is filed in non-merger cases.  Currently, the FTC’s internal litigation procedure takes on average three years from complaint to final order.  For example, in the Telebrands Corp. case, the FTC brought an administrative action based on false advertising.  The administrative complaint was filed in the fall of 2003.  The trial before the ALJ was held nearly a year later.  While speedy trials are sometimes a good thing, one concern in this case is the fact that the Commission will have the opportunity to conduct months, or even years of investigation prior to filing a complaint, including obtaining materials from third parties, while litigants will be much more limited in terms of time to conduct discovery prior to trial.

Additionally, the rules seek to bolster the ability of individual Commissioners to play the role of the ALJ, and to preside over discovery and other pretrial issues.  Although Commissioners have played these roles in the past, the practice has raised questions regarding the ability of an individual who voted for a given complaint to be filed, to transform into a neutral arbitrator.  If the practice becomes more prevalent under the proposed new rules, such concerns may be heightened.

Interestingly, in the midst of all of these changes to more quickly move the FTC adjudication process forward, one provision appears to be conspicuously lacking.  The Commission has not proposed any deadline on themselves for issuing decisions in a given case.

How Many Lawyers Does It Take to Write a Clear Privacy Policy?

How many just click “I agree” without reading the privacy policy that pops up on favorite websites?  Well it turns out that the answer is: most of us.  While some may argue that it is an individual’s responsibility to know what they’re agreeing to by clicking, some researchers suggest that the length, print, and overly intimidating policies need a make-over.  And, perhaps, a little intervention from the Federal Government.

A new report out of Carnegie Mellon University states that it takes on average 10 minutes to read a website privacy policy.  That adds up to billions of hours per year if the average internet surfer were to read the policy on every site they enter.  In addition to the sheer time it would take to make sure we’re protecting our privacy, the researchers note that the policies are not only lengthy, but also fairly difficult to read and understand. 

So what next?  The researchers propose that it might be time for the FTC to intercede in order to “provide basic privacy protections.”  One of the concerns they note is that many websites utilize behavioral targeting that tracks user preferences on the web, but bury instructions on how to opt out of having your clicks monitored in the privacy policies. 

So, is government intervention really the best mechanism for ensuring our privacy is protected?  Some point out that regardless of how simple the policies become, most of us still won’t take the time to read them.  And if we do, and we don’t agree, does that mean we’ll forever stop clicking on our favorite sites?  Will we forgo some measure of privacy in order to continue to take advantage of the convenience and efficiency the internet brings? 

Regardless of how diligent some internet users are about reading the fine print, the proposed role of the FTC would be to ensure that those of us who want to read them, should also be able to understand them.  The FTC has accepted this role in the past, issuing a rule related to the privacy of consumer financial information in an effort to ensure clarity in policies issued by financial institutions.  We suspect if the FTC steps in here, it will be to provide industry guidance and best practices and to support self-regulatory efforts, saving its enforcement resources for cases where companies are not upholding its privacy promises to its customers.

FTC View on False Ads Is an Open Book

The FTC’s case against Kevin Trudeau began in 1998 when it charged him with making false and misleading claims in infomercials.  Mr. Trudeau had claimed, among other things, that various products he was selling could cause significant weight loss and cure addictions to heroin, alcohol, and cigarettes.  This original case resulted in a stipulated court order that required, along with $500,000 in consumer redress and a $500,000 performance bond, that Mr. Trudeau could not make false claims regarding products in the future.

In 2003, Mr. Trudeau was again before the FTC on charges that he violated the 1998 order by stating in infomercials that a product called Coral Calcium Supreme could cure cancer.  That case resulted in a court order entering a preliminary injunction that barred Mr. Trudeau from making these types of claims.  Mr. Trudeau was found in contempt of that injunction when he continued to make the cancer cure claims.  In 2004, a court order resolving the Coral Calcium matter required, among other things, that he “must not misrepresent” the content of his books.  The Order presumably only applies to misrepresentations of books and not to the content of the book itself because of the FTC’s mirror image doctrine which allows advertisers to promote claims made in books without substantiation of those claims so long as the advertising only purports to express the opinion of the author or to quote the contents of the publication; the advertising discloses the source of the statements quoted or derived from the contents of the publication; and the advertising discloses the author to be the source of the opinions expressed about the publication.

 In 2007, the United States District Court for the Northern District of Illinois, found Mr. Trudeau in contempt of the earlier issued injunction because of infomercials that misrepresented the contents of his book The Weight Loss Cure “They” Don’t Want You to Know About.  The court found that the infomercials contained a number of misrepresentations, among them were that it stated that a dieter could finish the program when the book states that “Phase 4 is for the rest of your life” and that dieters could eat “anything” they want when the book prescribes that the dieter should eat “only 100% organic food,” no “fast food,” and so on. 

In an August 2008 ruling (FTC v. Trudeau, Memorandum Opinion and Order, Case No. 03 C 3904 (August 7, 2008)), Judge Robert W. Gettleman denied Mr. Trudeau’s motion to reconsider its earlier contempt finding, enjoined Mr. Trudeau (or any person or entity acting in concert with him) from participating in the production or publication of any infomercial in which Mr. Trudeau (or any related entity) has an interest for three years, and entered a judgment in favor of the FTC and against Mr. Trudeau for the sum of $5.173 million dollars.

FTC Cares Not About How Crazy Your Chicken Is But How “Healthy”

The FTC recently investigated El Pollo Loco’s use of the term “healthy” in certain television advertising and website materials under Sections 5 and 12 of the FTC Act.  El Pollo Loco is a fast food restaurant chain that specializes in flame-grilled chicken.  Clicking on the link on the El Pollo Loco website for healthy dining finder.com takes one to a page where it is stated that “El Pollo Loco offers a fresh, wholesome alternative to traditional fast food with real food you can feel good eating.” 

The FTC’s investigation looked into whether the use of the term “healthy” by El Pollo Loco was consistent with the FDA requirements for use of this term.  According to the FDA, “To be labeled as ‘Healthy,’ a food must meet the definition of ‘low’ for fat and saturated fat, and neither cholesterol nor sodium may be present at a level exceeding the disclosure levels in 21 CFR 101.13(h).  In addition, the food must comply with definitions and declaration requirements for any specific nutrient content claims.”

Even though the FDA regulation that defines the term “healthy” is directed at food labeling, hearkening back to a 1994 FTC policy statement on food advertising, the FTC has taken the position that the use of FDA-defined terms in food advertising should be consistent with the FDA food labeling definition. 

Based on the fact that El Pollo Loco took swift action to revise its television advertising and to modify its web site materials, the FTC decided to officially close this investigation on August 19, 2008.