Consumer Advertising Law Blog

Another Red Flag Against the FTC’s Application of Identity Theft Rules

The FTC is once again delaying the enforcement date of its Identity Theft “Red Flags” regulation. After first postponing enforcement from November 1, 2008 to May 1, 2009, and next to November 1, 2009, the agency now says it won’t enforce the rule until June 1, 2010. This time, however, the agency is not just trying to accommodate entities apparently subject to the rule: Members of Congress have requested the enforcement delay.

As noted in our previous blog post, the House recently approved an amendment to exclude certain businesses, including legal, health care, and accounting professionals, from the scope of Red Flags regulation. House Members want the FTC to let that amendment work its way through the Senate and reach the President’s desk before any enforcement action is taken under the regulation. Out of respect for these Members’ views, the FTC will hold off at least until next June.

Not only do Members of Congress think the FTC made errors in crafting the rule, but a federal judge just this past week found the same. On October 29, Judge Reggie Walton of the Federal District Court for the District of Columbia ruled that the Red Flags regulation does not apply to lawyers (court order here). In an order granting partial summary judgment for the American Bar Association (ABA), which had challenged the FTC’s characterization of lawyers as “creditors” under the rule, Judge Walton held that the FTC exceeded its statutory jurisdiction and authority by applying the rule to lawyers.

Adopted at the direction of Congress, the Red Flags rule is designed to prevent identity theft by requiring certain “financial institutions” and “creditors” to establish and implement written programs to detect and respond to warning signs of identity theft. According to the FTC, the term “creditors” means just about anyone who provides a good or service prior to being paid, including, generally, lawyers.

In its lawsuit, the ABA filed a complaint against the FTC for this inclusive interpretation of “creditor.” The ABA argued that the FTC’s interpretation was contrary to congressional intent, and Judge Walton agreed, reasoning that under the FTC’s broad interpretation, even a plumber who charges a customer  two days after service would count as a “creditor,” and that can’t be what Congress intended. The FTC may yet appeal Judge Walton’s ruling, but the agency can’t possibly ignore the “red flags” that its actions may have exceeded its authority.

- Nancy Perkins & Brian Larkin

Reckless Driving: Car Dealers Accused of Evading Consumer Protection Laws

In the past week, the attorney general’s offices in Florida and Washington have filed complaints accusing car dealers of making advertising and promotional claims that run afoul of consumer protection laws (Florida press release and Washington press release). 

On October 22, the Washington State Attorney General’s office filed a Complaint against RGH Marketing, Inc., and the general manager of Interstate Auto Liquidators, alleging that their claims of selling repossessed or bank-owned cars when, in fact, the cars were coming from their regular inventory or from auto auctions, violated Washington’s consumer protection laws. The Complaint also accuses defendants of misleading consumers by using the term “$0 Down Delivers!” in its advertising. The lawsuit seeks a permanent injunction against defendants as well as restitution for aggrieved consumers. 

Meanwhile, on Monday of this week, the State of Florida Attorney General’s office announced that it had filed a Complaint against Hollywood Auto Gallery, Inc., and related companies, accusing them of unfair trade practices by claiming the cars they were selling were under warranty when, in fact, the warranty was only good for a maximum of $500 in repairs. According to consumer complaints, the cars sold by defendants were in such bad condition that they would often break down shortly after they left the dealership. The lawsuit seeks injunctive relief prohibiting defendants from selling used cars; restitution on behalf of victimized consumers; and civil penalties. 

These actions are the latest chapter in what has been a long history of state attorney general’s cracking-down on car dealers who engage in deceptive trade practices. Since 2007, attorney general’s offices across the country, including those in New York, Illinois and Massachusetts, have filed actions against car dealerships for false and deceptive advertising practices. These actions have involved:

• a dealership in New York persistently using misleading sweepstakes promotions to lure consumers into its dealership;
• an Illinois dealership misleading consumers with false promises to repay loans on trade-in vehicles; and
• a Massachusetts dealership using misleading advertising by prominently advertising a price with an asterisk and, in small print at the bottom of the ad, indicating that the ad price presumes that the consumer will provide a certain amount of money in cash or trade.

This is another example of state attorney general’s offices stepping into areas where they see a need to protect consumers that likely is outside the FTC's focus.

- Alan Veronick

You Say Biodegradable, NAD Says Compostable

As many of you know, most trash ends up in landfills and landfills are typically designed to prevent biodegradation because of really nasty things that can happen involving gas.  Thus it is often difficult to make a biodegradable claim because the FTC requires that products with such a claim biodegrade within a reasonably short period of time following customary disposal. If it won't breakdown in a landfill, but it will degrade in a backyard or commercial compost facility, it can likely be labeled "compostable." 

 Yesterday, the NAD posted a press release summarizing its findings in a challenge brought by Method Products about advertising claims made by Clorox for its Green Works Natural Cleaning Wipes, whereby Clorox described the wipes as “biodegradable” but then added qualifying language on the back of the container that said "biodegradability validated in typical compost conditions.”

In other words, the question before the NAD was, can you make a broader (and presumably more consumer friendly) claim of "biodegradable" but then qualify it to clarify that what you really mean is that the product is essentially compostable.  Because Clorox stated that it was transitioning to new packaging that would use the term "compostable", NAD did not have to directly address the issue, but noted that it "appreciated" Clorox's decision to discontinue the biodegradable claim in favor of a compostable claim.

- Randy Shaheen and Danielle Garten

Don’t Mess With COPPA

While companies may often feel like the FTC may be less inclined to go after smaller, alleged Section 5 violations, that is not always the case, particularly when it comes to COPPA. The Children’s Online Privacy Protection Act commonly referred to as COPPA applies to the online collection of personal information from children under the age of 13, requires that website operators implement procedures to ensure that it not collect personal information from children without obtaining prior parental consent, and that it delete any such information about which it becomes aware.

In a Complaint filed in Federal District Court in New York on Tuesday, the Iconix Brand Group, Inc., the owner, licensee and/or marketer of such popular children and teenage apparel brands as Mudd, Candie’s, Bongo, and OP, was targeted by the FTC for COPPA violations. The Complaint alleged that since 2006, Iconix knowingly collected and stored personal information from approximately 1,000 children without first notifying their parents or obtaining parental consent. According to the Complaint, Iconix also enabled children to publicly share personal stories and photos online.

The Complaint underscores the need for companies not only to develop privacy policies that comply with COPPA guidelines, but to implement and comply with those policies. According to the Complaint, while Iconix posted privacy policies on its websites that contained COPPA guidelines ― it failed to implement or comply with those policies. As such, the FTC charged Iconix with falsely stating in its privacy policies that it would not seek to collect personal information from children without obtaining prior parental consent, and that it would delete any children’s personal information that it became aware of.

Rather than contest the FTC’s allegations, Iconix has agreed to pay a $250,000 civil penalty and enter into a Consent Order prohibiting the company from violating COPPA in the future; and requiring the company to delete all personal information collected and maintained in violation of COPPA and to distribute the Order and the FTC’s “How to Comply with the Children’s Online Privacy Protection Rule” to company personnel.

- Randy Shaheen and Alan Veronick

FTC Looking to Regain Ground after Recent Substantiation Setbacks

At yesterday’s Roundtable Breakfast Series program on false advertising disputes hosted by Arnold & Porter LLP, Mary Engle, the FTC’s Associate Director for Advertising Practices, outlined the FTC’s plan to tighten up the substantiation requirement the agency includes in consent orders related to health claims. This comes after the FTC has suffered setbacks in its attempts to enforce such consent orders because courts have found that the advertisers were meeting their obligations to have competent and reliable scientific evidence substantiating their claims. Our analysis of one of these cases, Lane Labs, can be found here.

Mary Engle noted that the current substantiation requirement was meant to be tough while at the same time providing defendants flexibility in how they met it. However, some courts have not interpreted the standard in the manner intended by the FTC. She set out three primary goals for the new, tighter substantiation requirement that the FTC will roll out in future consent orders:

• It will be easier to enforce as a result of its greater specificity, which will also provide defendants greater clarity on what substantiation they need to possess.
• It will better harmonize with the laws and regulations of other agencies, such as FDA.
• It will address situations where the results of a single study relied upon by the advertiser are inconsistent with the weight of scientific evidence in the field.

We will monitor the FTC’s implementation of this new substantiation requirement for health-related claims and keep you up to date on developments.

Also presenting at the Roundtable program were David Mallen, Associate Director of NAD, who talked about current advertising issues in NAD cases, Michael Mazis, Professor Emeritus of Marketing at American University’s Kogod School of Business, who talked about methodological issues in consumer advertising surveys, and Randy Miller, a partner at Arnold & Porter LLP, who talked about Lanham Act false advertising litigation.

Materials from the Roundtable program can be found here.  Audio from the program is available here. 

- Matthew Shultz

House Does Not Want FTC to Go “Where Everybody Knows Your Name”

Cheers, and other businesses where “everybody knows your name” may soon be relieved of the obligation to adopt identity theft prevention programs under the FTC’s “Red Flags” regulation. In a measure that passed 400-0, the House approved an amendment to the Fair Credit Reporting Act, 15 U.S.C. § 1681m(e), to exclude certain businesses from the FTC’s Red Flags implementing the Act. Those businesses, according to the amendment, include those who can show they know all of their customers or clients individually.

The Fair Credit Reporting Act was amended in 2003 to require the FTC and the Federal banking agencies to develop Red Flags regulations for banks and creditors in order to help prevent identity theft. The agencies’ respective rules mandate that written programs be created to detect and respond to warning signs of identity theft related to a customer account. The regulations apply to financial institutions and to “creditors,” which is generally defined as “a person who arranges for the extension, renewal, or continuation of credit.” This broad definition sweeps in virtually any businesses that provides consumers with goods or services in advance of payment. According to the FTC, even government and non-profit entities can be creditors under this definition. If the House bill becomes law, there will be far fewer businesses for the FTC to monitor.

The House bill responds to the concerns of small businesses, by categorically excluding some of them from the FTC regulation and providing a test by which others may also become exempt. H.R. 3763  provides that the term “creditor” does not include a health care, legal, or accounting practice with 20 or fewer employees. Additionally, the bill states that any other business can be excluded from the Red Flags rule if it can make one of three showings:

• that it knows all of its customers individually;
• that it only performs services near the residences of its customers; or
• that it has not experienced identity theft and the crime is rare for a business of that type.

The sponsor of the bill, John Adler, D-N.J., introduced the measure by noting that, “[d]uring these tough economic times, the Federal Government should not be placing burdensome regulations on small businesses.” The bill has been sent to the Senate, and referred to the Committee on Banking, Housing, and Urban Affairs.

Small businesses, and possibly some large businesses with good memories, may soon find relief from an apparently unwarranted regulatory burden.

- Nancy Perkins and Brian Larkin

FDA Plans to Get Involved in “Smart Choices” Healthy Food Product Labeling

On Tuesday, October 20, 2009, the commissioner of the FDA, Margaret A. Hamburg, announced the agency’s intention to adopt a new and more aggressive approach for regulating “Front-of-Package” (FOP) food labels designed to convey the nutritional benefit and quality of food products. Common examples of FOP labels include statements like “Heart Healthy, “Good for You”, and “A Better Choice.” At the center of its new and increased regulation, the FDA specifically announced it would begin immediately developing a set of “standardized, science-based criteria” that manufacturers must meet to make nutritional claims on the front of food products and would also create going forward a uniform system for FOP nutritional labeling. The FDA also announced that it was currently reviewing FOP labels that appeared to be misleading to determine if they complied with existing FDA regulations, including nutrient content claims.

To coincide with its announcement, the FDA sent an open letter to the food products industry explaining that its new approach to regulation of FOP labels was prompted by the potential for consumer deception. In particular, the FDA stated that the FOP labels currently found in the marketplace are not tied to a set of uniform nutritional criteria. Instead each FOP label is tied to its own unique nutritional standards, which may be determined and set by food manufacturers, grocery stores, trade organizations, or health organizations. Without uniformity or minimum standards, the FDA suggested, consumers cannot know exactly what a label means or that the product is nutritionally sound, which is particularly troublesome given that consumers do not verify FOP label claims by reviewing the required Nutrition Facts panel that can usually be found on the back or side of the product.

One of the specific FOP nutritional labels that Commissioner Hamburg mentioned during her announcement concerning the FDA’s new regulatory approach is the Smart Choices Program. Smart Choices is a voluntary “food rating” system that allows manufacturers to place two FOP labels (a green check mark and a calorie indicator) on their food products that meet a distinct set of nutritional criteria. The program is administered by the American Society for Nutrition and NSF International. In August, the FDA sent Smart Choices a letter indicating that it was aware that many food products were beginning to display the Smart Choices’ check mark and that it would need to “monitor” these products to ensure that the criteria used by Smart Choices was “stringent enough to protect consumers against misleading claims”. On Tuesday, although Commissioner Hamburg would not discuss any products specifically, she noted that some products with the “check mark” logo were almost “50 percent sugar”.

Supporters, users, and promoters of FOP nutritional labels, by contrast, assert that besides being accurate and tied to accepted nutritional guidelines, FOP labels are beneficial to customers in their everyday lives, a point even the FDA has recognized. In particular, FOP labels offer readily accessible information about a product’s nutritional profile, which can lead to better and more informed food choices. Furthermore, supporters assert that many manufacturers have in fact improved the overall healthfulness of their products in order to meet the criteria needed to qualify for use of a FOP like Smart Choices. In response to the FDA’s recent announcement, promoters of FOP nutritional labels, such as Smart Choices said they welcomed the opportunity to work with the FDA on any FOP labeling initiatives.

UPDATE (October 26, 2009): The Smart Choices program announced on Friday, October 23, 2009, that it would “postpone” active operations and not encourage broader use of its check mark logo while the FDA investigates food product labeling issues. A spokesperson for Smart Choices also stated that it continued to stand behind its nutritional standards and that food product manufactures currently using the check mark logo could continue to do so. (Click here for a press release)

- Suzy Wilson and Chris Tarbell

Lapsed US-EU Safe Harbor Certification is No Safe Harbor

Earlier this month, the FTC announced that it had reached settlements with six US companies over allegations that the businesses misrepresented their participation in, and certifications under, the Safe Harbor Framework, a voluntary program under the aegis of the Department of Commerce and in conjunction with the European Commission. According to the FTC, the companies -- World Innovators, Inc., ExpatEdge Partners LLC, Onyx Graphics, Inc., Directors Desk LLC, Collectify LLC, and Progressive Gaitways LLC – represented to customers that their certifications under the Safe Harbor program were current, even though those certifications had been allowed to lapse. In each case, the accused company had, after a number of years of annually recertifying its compliance with Safe Harbor, allowed its status to lapse while still publicly representing on its website that it remained a participant in the Safe Harbor program.

The US-EU Safe Harbor Framework allows US businesses under the jurisdiction of the FTC and the Department of Transportation to receive personal data from entities located in the EU member nations subject to strict safeguards consistent with the EU Data Protection Directive (Directive) adopted in 1995. The Directive, as implemented by the individual 27 EU member nations through their respective legislative bodies, comprehensively regulates the security, integrity, and privacy of all “personal data.” The Directive specifically prohibits the transfer of personal data to nonmember nations that fail to provide data security and privacy measures deemed “adequate” by the European Commission (EC), and allows the EC to block transfers of personal data to countries whose data privacy enforcement and regulatory regimes are not “adequate.” Following adoption of the Directive, the European Commission determined that US data privacy and security measures were not “adequate” and, therefore that special protections would be required for any transfers of personal data from the EU to the United States. One such form of special protection is the “Safe Harbor Framework” agreed to by the EU with the United States, which allows US entities that commit to the Directive’s basic privacy protection obligations to receive personal data from EU member nations without undertaking special contractual obligations.

The FTC’s recent action to enforce its deception authority under Section 5 of the FTC Act against the companies named in the World Innovator et al. complaints may have a chilling effect on US businesses’ election of the Safe Harbor as a method of compliance with the Directive. Since Safe Harbor certification is not the only way to obtain personal data from EU member nations for commercial purposes, companies seeking to limit potential liability or enforcement action by the FTC may wish to consider alternative methods for complying with the Directive.

At a minimum, companies that have already committed to the Safe Harbor should be careful to confirm that their certifications are current (i.e., recertified annually). The FTC’s recent enforcement interest in this area more generally serves as a cautionary tale against allowing stale and/or misleading information to remain (and be republished) on company websites. 

- Nancy Perkins & Taja-Nia Henderson

GUEST POST: Waving the flag in product promotions: Canadian Competition Bureau revamps meaning of “Made in Canada” and “Product of Canada” claims

Many Canadian businesses, both national and foreign-owned, are attempting to leverage the growing popularity of “buy local” movements in response to a variety of economic and environmental conditions by highlighting its connections to the local market.

However, new guidelines have been published by the Competition Bureau of Canada (the Canadian equivalent to the FTC), that will restrict the ability to “wave the flag” in making local product claims.

The Bureau is at the end of a public consultation phase on its draft Enforcement Guidelines Relating to “Product of Canada” and “Made in Canada” Claims, which propose to replace its existing guide. The Guidelines clarify how the Bureau will interpret certain “Canadian” claims in relation to prohibitions on the making of false or misleading representations pursuant to legislation enforced by the Bureau. While these Guidelines are distinct from international trade rules regarding Country of Origin Marking set out in NAFTA, they will serve useful for businesses that choose to “wave the flag” and make a “Made in Canada” claim with respect to their products. The Bureau will apply the approach described in the Guidelines to determine when it should investigate a claim for non-compliance or undertake enforcement action.

Businesses with Canadian operations should be aware of the Guideline’s potential implications. First, the Guidelines only apply to non-food products sold in Canada (however, other food-specific “Made in/Product of Canada” laws would apply, a summary of which can be found on the Canadian Food Inspection Agency website). Second, the Guidelines propose new definitions to distinguish between “Made in Canada” versus “Product of Canada” claims and provides guidance for other “Canadian” claims which do not fit into either category. Third, penalties for violating these provisions can be onerous. For instance, civil penalties for corporations can include fines into the millions of dollars, such as $10-15 million under the Competition Act and criminal penalties may include imprisonment of up to 14 years.

The new requirements for “Made in Canada” claims are three-fold. First, the products must undergo their last substantial transformation change in Canada. A substantial transformation will have occurred where a product undergoes a fundamental change, resulting in a new product that is different in nature from the previous product. Second, 51% or more of the total direct costs of the production or manufacturing of the product must be incurred in Canada. Such costs of production or manufacturing may include expenditures on materials or labour incurred in the manufacturing or production of the product, but typically do not include general overhead, unless it directly relates and can be reasonably allocated to the production or manufacturing of the product. Third, a qualifying statement must complement the claim, such as “Made in Canada with imported parts” or “Made in Canada with domestic and imported parts.”

The new requirements for “Product of Canada” claims are two-fold. The first mirrors the new “Made in Canada” requirements - that is, the product must undergo its last substantial transformation in Canada. The second requires 98% or more of the total direct costs of production or manufacturing of the product be incurred in Canada. This second condition sets the bar high for “Product of Canada” claims.

When a product falls short of “Made in Canada” and “Product of Canada” claim requirements, all isn’t lost. In fact, the Bureau encourages using specific qualified claims to provide additional accurate, relevant and clear information to the consumer, such as “Sewn in Canada with imported fabric” or “Designed in Canada.” However, the Bureau discourages the use of general qualifying terms like “produced” or “manufactured” by businesses, since customers will likely associate them with “Made in Canada” or “Product of Canada” claims.

The Bureau examines the “general impression” given by the representation to determine whether it is false or misleading. Since this impression is generated from a range of factors including any words, images, illustrations, implied claims, etc. of a product, the Bureau suggests using flag symbols (Canadian, Provincial or Maple Leafs) or claims such as “Shop Canadian,” “Think Canadian” or “Proudly Canadian” with caution.

The publication of the Guidelines is a likely signal that “Product of/Made in Canada” claims are one of the Bureau’s emerging enforcement priorities. It is imperative for businesses with Canadian operations to ensure compliance with the Guidelines if any product promotion or labeling claims highlight Canadian ties.

- Les Chaiet, Bill Hearn, and Sharon Groom (Advertising & Marketing Group, McMillan LLP)

The assistance of Stacey O'Neill, Student-At-Law at McMillan LLP, in writing this blog entry is acknowledged with thanks.

Guest Post Disclaimer: Use of the blog does not create an attorney-client relationship between you and Arnold & Porter LLP or McMillan LLP.

Vladeck: “My Vision of the FTC's Consumer Protection Mission"

Consumer protection junkies had the good fortune of hearing FTC BCP Director David Vladeck (we blogged on his background here) speak twice this week, once at an ABA Antitrust Section Federal Enforcement Committee brown bag program in Washington, DC and earlier this week at the annual NAD advertising conference in New York, where Vladeck gave the opening keynote address. We wrote in this space on an ABA address he gave after being on the job a few days (see here). His priorities, after "all of four months" have decidedly taken shape -- including food marketing to children and adults, internet marketing, endorsements, green marketing, ad literacy efforts aimed at children, privacy, better coordination with sister agencies, and efforts to grow the BCP’s resources. He began the NAD address by assuring the conference that "national advertising was a high priority for the Commission" and in particular, there will be "increased scrutiny for food ads," particularly those involving health claims. He said the agency is working to assess whether industry self-regulation in the food marketing to kids arena is working or whether additional safeguards are needed. The agency is not only concerned with marketing food to kids, but also with substantiation for functional food claims marketed to adults, saying "one outlier study should not be the basis that the product confers a benefit, particularly a health benefit."

During both presentations, Vladeck expressed his concern with abuses by affiliate network marketing, such practices as fake news stories, fabricated blogs touting endorsements without revealing sponsorship by a manufacturer and offers of free trials generated by misleading pre-checked boxes where consumers sign up for services they do not want that are impossible to cancel. Vladeck emphasized that eliminating financial fraud remains a top goal: "Many schemes prey on people pushed to the financial edge of the current economy. We focus on scams designed to take that last dollar in these times of recession." Vladeck stated that the BCP is focusing its most urgent efforts on what it considers to be “the worst types of these abuses” - high initial fees in debt repair and mortgage foreclosure schemes. The agency hopes to address these abuses by both continuing to bring enforcement actions and making changes to the applicable FTC regulations.

The Company Paid Me To Tell You How Lousy Their Product Is - FTC Publishes Final Endorsement, Testimonial Guides

Today the FTC announced approval of final revisions to the guidance it provides to advertisers on how to maintain compliance with the FTC Act in the area of endorsements and testimonials (See the Endorsement and Testimonial Guides here). The revised Guides appear to have mostly adopted the proposed guides (about which we have previously blogged here and here) with a few tweaks and many more explicit examples. Below is a summary of some of the major changes to the Guides:

• I Lost 23 pounds in 4 weeks - Maybe you did but if that result isn’t typical the advertiser will have to disclose the results that consumers can typically expect. Gone is the disclaimer “results not typical.” Interestingly, in some cases companies may not actually know the “typical” outcome. Someone promoting a method to make money by buying and reselling real estate may feature testimonials from individuals stating their earnings but the promoter may not actually know -- nor be able to readily find out -- what the average earnings are.
• I’m Going to Blog About the Great Brand New Ferrari That Just Showed Up on My Driveway - In one of the more hotly debated changes, the new Guides make clear that bloggers or other types of word-of-mouth marketers can under some circumstances be considered endorsers, meaning that any material connections must be disclosed and that companies could be held liable for any claims the endorsers may make about their products. The FTC states that it will consider a number of factors including (1) whether the speaker was compensated; (2) whether the product was provided for free; (3) the terms of any agreement; (4) the length of any relationship; (5) previous receipt of products or likelihood of future receipt from the same or similar advertisers; and (6) the value of any items received. The revised Guides further state that it may not matter that the advertiser does not control whether the speaker reviews the product positively.

Notwithstanding this lengthy list of factors, the examples provided in the revised Guides suggest that the Commission is likely going to define an “endorser” broadly and companies may be wise to begin inventorying to whom they are, directly or indirectly, providing free product. Bloggers who are contacted by a blog advertising service to try a new product; bloggers who participate in marketing programs where they can receive free products to review if they so choose; a blogger who routinely receives new copies of game software; and members of a street team program who receive prizes for talking to their friends about products are all provided as examples of endorsers. In the one instance the “free” product received is a bag of dog food, suggesting that even products of fairly nominal value may trigger the Guides.

A Fruit by any other Name…Is Probably Not a Fruit

Because my mother always refused my pleas for Froot Loops when I was a kid, I, unfortunately, will not be a member of a newly-proposed class attacking this tasty breakfast cereal.  On behalf of those consumers who have enjoyed Froot Loops, a California resident has filed suit in federal district court for the Northern District of California under Section 17200 of California’s Unfair Competition statute, claiming that Kellogg, the manufacturer of Froot Loops, deceives consumers into believing that the cereal contains real fruit by associating the product with a word that sounds like fruit.  In Werbel v. Kellogg USA, the plaintiff contends that he purchased Froot Loops cereal for years believing that it contained actual fruit and was, thus, healthier than other similar breakfast cereals.  See articles here and here.   

This is not the first such litigation of its kind. 

There have been a bevy of such fruity complaints, testing the reach of Section 17200, most of which were dismissed either voluntarily or by motion, including  McKinniss v. General Mills, Inc., 2007 WL 4762172 (C.D. Cal. Sept. 18, 2007) (Berry Berry Kix, Trix, Fruity Cheerios, Trix Yogurt, Yoplait Go-gurt); McKinniss v. Kellogg USA, 2007 WL 4766060 (C.D. Cal. Sept. 19, 2007) (Froot Loops) (dismissed on defendant’s motion). 

In fact, just a few months ago, on May 21, Judge Morrison England, Jr. of the U.S. District Court for the Eastern District of California dismissed an almost identical suit, Sugawara v. PepsiCo, Inc.  In Sugawara, the plaintiff claimed that she purchased the “Cap’n Crunch with Crunchberries” cereal with the belief that the “Crunchberries” either contained or were made with real berries.  Judge England’s dismissal was particularly blunt stating that “[t]his Court is not aware of, nor has Plaintiff alleged the existence of, any actual fruit referred to as a ‘crunchberry,’” and that “it is simply impossible for Plaintiff to file an amended complaint stating a claim based upon these facts.  The survival of the instant claim would require this Court to ignore all concepts of personal responsibility and common sense.  The Court has no intention of allowing that to happen.” 

Some may wonder how the Sugawara and other fruity cereal decisions co-exist with the Ninth Circuit’s decision earlier this year permitting a plaintiff to proceed with a misleading advertising claim against Gerber’s “Fruit Juice Snacks” (decision previously described here.)  The Sugawara court expressly distinguished Williams by noting that 1) the defendant’s use of berries on the Cap’n Crunch packaging was part of the larger term “crunchberries;” 2) there were no pictures of fruit on the box, but only bright purple, red, and teal cereal puffs, and 3) there were no claims that the product was nutritious or otherwise supported healthy development.

Mr. Werbel will most likely face a motion to dismiss in his case against Froot Loop.  To avoid dismissal, he will have to argue that his facts are close to those alleged in Gerber.  In Williams v. Gerber Products Co., the Ninth Circuit did not opine on the merits of the case but determined the plaintiff’s allegations were sufficient to state a claim noting that 1) the product was actually named “Fruit Juice Snacks,” 2) the package contained pictures of a variety of real fruit, 3) the package stated that the Snacks were made from “fruit juice and other all natural ingredients,” and 4) the package stated that Snacks is “just one of a variety of nutritious Gerber Graduate foods and juices that have been specifically designed to help toddlers grow up strong and healthy.”  While the Williams court acknowledged that a “nutritious” claim on a package may be considered non-actionable puffery because nutrition is difficult to measure, the claim, when considered with the other packaging statements and pictures, could potentially mislead the average consumer. 

We will see if the latest Froot Loops litigation goes the way of the Crunchberries, but the smart
manufacturer should be cautious about inadvertently creating misleading packaging based on the impressions conveyed by the box and the ads.  Unless a product is truly a significant source of fruit, statements about a product’s nutritional and health value in conjunction with pictures of real fruit should be avoided to minimize litigation risk.  However, manufacturers probably don’t need to worry if they use fanciful fruit-like words, such as “froot” and “crunchberries” in their packaging and advertisements, at least outside the litigious state of California.  So get those creative (fruit) juices flowing.

-Suzy Wilson and Candida Harty

NAD’s Role in Evaluating Claims Underscored by District Court Stay

The U.S. District Court for the Southern District of New York made an interesting statement by granting a stay in furtherance of NAD’s jurisdiction in the case of Cellco Partnership (d/b/a Verizon Wireless) v. AT&T Mobility LLC. The case was initiated by AT&T filing an NAD challenge against Verizon regarding Verizon’s “most reliable network” claim. In response, Verizon filed a lawsuit in the Southern District of New York asking for declaratory judgment under the Lanham Act that the claims were not misleading. Following Verizon’s filing, NAD closed its investigation of the matter in accordance with its procedures that require it to close any case that is the subject of a pending litigation.

AT&T requested a stay in the litigation, arguing that NAD should be able to re-open the case and continue its investigation in furtherance of judicial economy. The court did not write an opinion, but “So Ordered” the stay, allowing NAD to re-open its investigation and continue in its evaluation of the claims.

The Southern District granted a similar request in the case of Russian Std. Vodka, Inc. v. Allied Domecq Spirits & Wine USA, Inc. in 2007. In that case, the court stayed a false advertising litigation to permit the NAD process to continue. These cases underscore the importance the courts are placing on NAD’s role in the investigation and evaluation of advertising claims, as well as the level of regard the courts have for NAD’s level of expertise.