Consumer Advertising Law Blog

Vladeck Reviews Enforcement Priorities for E-Marketing

FTC BCP Director David Vladeck spoke earlier this month at the Electronic Retailing Association’s Great Ideas Summit in New Orleans. His remarks give insight into where the BCP may focus its enforcement efforts as to e-marketing. Vladeck explained, “Internet commerce offers tremendous potential benefits for consumers, but it has also opened the door to new types of deceptive and unfair practices.” Today, it is not unusual that a marketer’s message will go through one or more third parties, including a “scientific expert, advertising agency, celebrity endorser, call center employee, or marketing affiliate -- before it finally reaches the consumer.” Given this climate, Vladeck stated, the FTC is focused on ensuring that “transparency and disclosure rule the day.”

Under this rubric, Vladeck discussed the following:

• Endorsement Guides - An important change to the Endorsement and Testimonial Guides has to do with the use of disclosures in testimonials. Specifically, Vladeck advised that “the use of a disclaimer such as ‘results not typical’” as, for example, commonly used in advertising for weight loss products, “is no longer a safe harbor for the claims made in testimonials.” While an advertiser may use best case testimonials, he or she “should clearly and conspicuously disclose the generally expected results consumers can expect in the depicted circumstances.” Better yet, an advertiser should “use testimonials that actually reflect what your product of services is likely to deliver.” Vladeck appreciates that there is confusion in the industry on disclosing generally expected results but in his view, as a practical matter noted “if you are selling a product to consumers . . . you are already required to have substantiation for all of your performance claims [and so] you should already know what results consumers can generally expect to achieve with your product.” That said, he highlighted that the Guides refer to disclosing expected results in the depicted circumstances and did concede that the Staff understands that “consumer behavior patterns can vary wildly” and the standard is not “to be able to calculate a precise mathematical average for the expected results among all potential product users in all situations.” Vladeck recognized this as a “period of adjustment for everyone” but warned there would be near future enforcement activity in this area.
• Social Media Marketing - Here, Vladeck emphasized that an existing need for disclosure of material connections between endorsers and advertisers now also applies to blogs and “word of mouth” marketing. Where a blogger turns its website into a “commercial venture” by promoting an advertiser’s product “in exchange for free products, payments or other significant perks,” he or she must disclose that connection. Who will the FTC target? Vladeck stated that “our focus will remain on the conduct of advertisers rather than on individual endorsers” and the focus will be on “practices that are the most egregious or the conduct that is likely to cause the greatest consumer injury.”
• Affiliate Marketing - Vladeck expressed a “growing concern” that marketing affiliates (who drive traffic to a website in exchange for payment of a commission for sales) use “false or deceptive claims about the product, fake blogs, and other content that is not clearly identified as advertising or fails to disclose the material connection to the seller.” Vladeck indicated that the FTC is bringing enforcement actions to stop such deceptive and unfair practices. He was clear that “legitimate marketers can and should play an important role in bringing more order and accountability to the affiliate marketing industry.” Vladeck advised companies using affiliate networks to (1) give detailed guidelines to affiliates as to what information should be contained in advertising, (2) do “quality control on the back end once consumers are directed to your website,” and (3) if “you start to hear things from consumers that seem not quite right,” then “follow up and investigate.”

- Marianne El Sonbaty and Amy Mudge

Targeting Grandfathered Drugs with Claims of Misrepresentation - Private Enforcement of the FDCA?

The Federal Food, Drug and Cosmetic Act (“FDCA”) imposes specific requirements governing the approval, labeling and promotion of prescription drugs. FDA has exclusive authority to enforce those requirements.

The FDCA grandfathers out of the approval requirements products that were on the market before the statute was enacted. This exception recently created a conundrum for the federal district court in New Jersey, which addressed whether a plaintiff can sue under the Lanham Act claiming that the mere marketing of a grandfathered product, as the FDCA allows, falsely implies FDA approval. In Mutual Pharmaceutical Co., Inc. v. Watson Pharmaceuticals, Inc., Watson was selling a gout medication, which, it argued, was grandfathered. Mutual, unlike Watson, sought FDA approval to manufacture and sell the drug for gout, as well as the exclusive right to market it for a different, rare disease. Upon receiving FDA approval, Mutual, along with two other companies, sued Watson. Mutual alleged that by disseminating advertisements and product information through various channels, Watson falsely implied its drug was FDA-approved.

Watson moved to dismiss the complaint as a disguised effort to enforce the FDCA. Mutual’s claim, Watson contended, required the Court to determine an issue only FDA could decide -- whether Watson needed FDA approval to sell the drug. The Court disagreed. The question under the Lanham Act, the Court found, was not whether Watson needed FDA approval, but whether it falsely implied that it had FDA approval. The Court cited survey evidence in the complaint reflecting the inaccurate perception by consumers that FDA had approved the product. Interestingly, though, the survey dealt not with any advertising claims by Watson but rather with the belief by consumers that pharmacy computers would only display FDA-approved drugs. Watson argued that if marketing its product through traditional channels was sufficient to create the false implication of FDA approval, it could not market the product even though the FDCA allowed it to do so. Nevertheless, the court found that the facts as pled were sufficient to defeat the motion to dismiss.

This result --treating the mere marketing of an allegedly grandfathered drug as inherently misleading and subject to injunction-- is troubling. Arguably, such an injunction either would conflict with the FDCA where the Act did not require FDA approval for marketing, and would enforce the Act through a private right of action where approval was required.

Just how troubling the case is -- and how much latitude it affords for private claims -- is unclear. In an earlier case a California District Court declined to be drawn into what it viewed as enforcement of the FDCA. The plaintiffs in In re Epogen and Aranesp Off-Label Marketing & Sales Practices Litigation brought a RICO claim based on the defendants’ alleged off-label marketing of a kidney drug, in violation of the FDCA. The Court found that the “existence of federal enactments-i.e., the FDCA and accompanying regulations-making off-label promotion illegal, is central to many of Plaintiffs' claims . . . . Allowing Plaintiffs to proceed on a theory that Defendants violated RICO by engaging in off-label promotion, without specific allegations that Defendants made false or misleading statements, would, in effect, permit Plaintiffs to use RICO as a vehicle to enforce the FDCA.” In dismissing the complaint, the Court noted that the plaintiffs were free to bring claims based on wholly separable private causes of action stemming from the same activity.

To be sure, the artful tailoring of the complaint in Mutual Pharmaceutical, while sufficient to skirt a motion to dismiss, may not suffice to sustain the case beyond that stage. If plaintiffs do succeed, it will doubtless require substantial legal debate, not to mention further litigation, to determine where, between Mutual Pharmaceutical and Epogen, the balance tips from a separate, cognizable cause of action to an impermissible private effort to enforce the FDCA.

- Robert Weiner and Jessica Halbert

UPCOMING WEBINAR: Consumer Products: Avoiding the Crossfire Between State and Federal Regulation

The editors of the Consumer Advertising Law Blog wanted to let our readers know about an upcoming webinar that may be of interest to you, entitled, "Consumer Products: Avoiding the Crossfire Between State and Federal Regulation". [Full disclosure: Our firm, Arnold & Porter LLP, is sponsoring the event]

In recent years, state legislatures and regulatory agencies have taken a more active role in regulating consumer products as varied as light fixtures, mattresses, candy, jewelry, auto parts, toys, and antiperspirants. At the same time, federal agencies, such as the Consumer Product Safety Commission (CPSC), are becoming more active. Manufacturers and retailers alike must attend to increasing differences among these requirements, with potentially expensive consequences. This seminar will review major new requirements, provide an update on California Proposition 65, and discuss practical approaches to compliance.

Panelists at the event will include: 

• Eric Rubel, Partner, Arnold & Porter LLP, Former General Counsel, CPSC
• Harrison Pollak, California Deputy Attorney General
• Robert Scofield, D.Env., MPH, Principal Scientist
• Trenton Norris, Partner, Arnold & Porter LLP

The event will take place from 8:30 AM to 10:30 AM PST on March 16, 2010. The event is being offered both in person at Arnold & Porter LLP's San Francisco office as well as via webinar. For more information, please click here for an RSVP link.

Mind Over Matter - Can a Placebo Trigger a Biological Response?

The medical journal The Lancet recently reported that placebos may sometimes have a biological effect on the body.  For example, when patients with Parkinson’s disease were given dummy pills their brains actually released dopamine, which resulted in the patients feeling better.  This finding might raise some intriguing advertising substantiation questions.  As you all know, the FTC’s view is that health related claims often should be supported by one or more clinical studies, which in turn, should be double-blind, placebo controlled, etc.  But suppose the placebo mimicked the biological effect of the tested product to such a degree that there was no statistically significant difference between the two.  Shouldn't the product be able to make the relevant claim?  Further, could an advertiser successfully defend a Section 5 case by arguing that even if the product doesn’t work, its advertising was so effective that consumers' belief that the product works created the promised benefit?  If so, should it matter that it was the advertising, and not the product, that really resulted in the product performing as claimed?  The 7th Circuit recently rejected a defense -- in the Q-Ray Bracelet case -- that a product truthfully claimed to reduce pain based upon a perceived placebo response.  In that case, though, there was no proof of an actual physical response, just that the user perceived less pain.  No doubt the medical community will be monitoring this topic with interest.  In the meantime for all of us naturally skeptical lawyers, maybe a little belief now and then isn’t such a bad thing.

- Randy Shaheen

States Target Debt Collectors' Deceptive Practices

As the FTC heightens its scrutiny of debt collection and debt settlement practices at the federal level, states throughout the country are also cracking down on debt settlement and collection firms.

With debt collection practices topping the list of consumer complaints to state attorneys general (AGs) in 2008 (the last year for which data is available), many state attorneys general have stepped up their fraud and deceptive business practices enforcement actions against debt collection and settlement companies, bringing lawsuits under state laws designed to safeguard consumers. Many of the suits allege that the targeted debt settlement firms have misled consumers, capitalizing on these consumers’ precarious economic positions while doing little or nothing to improve their financial standing.

For example, in Illinois, Attorney General Lisa Madigan recently filed suit against seven debt settlement firms and six of their executives under the Illinois Consumer Fraud and Deceptive Practices Business Act, contending that they had engaged in deceptive marketing and imposed excessive consumer fees for their services; the complaints seek to enjoin the accused from practicing in the state and impose restitution and associated fines on the parties. 

Last week, the office of the New York Attorney General secured $275,000 in restitution for victims of a debt collection agency that employed scare tactics - including the impersonation of law enforcement officials - to intimidate consumers into settling their debts, despite the fact some of them owed no money at all. 

State legislatures have also begun to take action to tighten the regulatory grip on such companies.  Lawmakers in North Carolina, Maryland, Idaho, Colorado, New York, and Arkansas have recently enacted laws that restrict the permissible activities of debt collectors. Among the provisions currently under consideration in states such as Minnesota, New Jersey, and Massachusetts are laws that would bar agencies from collecting on long-delinquent debts by convincing consumers to make payments that effectively renew the default date, increase the amount of property that consumers can exempt from collection, and expand penalties against those found guilty of abusive collection practices.

In these difficult economic times, it is not surprising that states are making concerted efforts to delineate acceptable versus unacceptable consumer debt collection practices.  Indeed, the fraudulent and deceptive behaviors targeted in these actions and proposed laws appear to address egregious cases.  These actions hopefully will not also deter legitimate debt collection and debt settlement agencies and the benefits they provide to businesses and consumers. 

- Beth DeSimone and Lindsey Carson

GUEST POST: Spain Media Bill Provides Opportunities and Limits for Advertisers

A bill has been introduced in the Spanish Parliament containing an in-depth reform of media law. Amongst the many points subject to reform are the rules on television advertising. Some of the reforms have been expected for a long time; some are a relative surprise. 

Among the most relevant are: the Media bill recognizes the right to create channels devoted to commercial communications and self-promotional programs. Media operators are also entitled to broadcast advertising, teleshopping, TV promotion, programmes containing product placement and sponsored programmes. These options may be taken for granted in the US, but product placement, for instance, was until recently not regulated and posed legal issues in Spain as well as in other European jurisdictions.

There are some special limitations to advertising and promotion: (i) news programmes cannot be sponsored; (ii) only films, short films, documentaries, series, sports and entertainment programmes may contain product placement; (iii) product placement within children’s programmes is banned; and (iv) neither sponsorship nor product placement can affect the programme content or its timing.

Beware! Growing Danger of False Patent Marking Suits

Marking a product with the number of its underlying patent is good practice––it provides notice of the patent and is a prerequisite for certain types of damages in infringement actions. Falsely marking a product, however, can create problems and recent developments in false marking law merit a closer look at marking practices. Recent cases have increased the potential bounty available in false marking suits. 

Section 292 of the Patent Act provides that: 

Whoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article, the word “patent” or any word or number importing that the same is patented, for the purpose of deceiving the public . . . Shall be fined not more than $500 for every such offense. 

35 U.S.C. § 292(a). Under § 292(b), half of the $500 fine is kept by the plaintiff, and the other half goes to the United States. According to the statute, “[a]ny person may sue for the penalty.” This provision is not new, but recently the Federal Circuit made clear that the $500 fine is awarded for each wrongly marked article. Previously, some courts had not interpreted “offense” to mean each wrongly marked article.  

In Forest Group, Inc. v. Bon Tool Company, 590 F.3d 1295 (Fed. Cir. Dec. 28, 2009) the lower court, and a court in a parallel proceeding, had issued claim constructions of the patent-in-suit that required elements not met by the plaintiff patentee’s own products. Despite these orders, the plaintiff continued to label its products with the patent number. The lower court then issued a single $500 fine to the plaintiff based on this continued marking in the face of the court orders. The Federal Circuit affirmed the lower court’s decision that the plaintiff had engaged in false marking, but announced that the marking statute “clearly requires that each article that is falsely marked with intent to deceive constitutes an offense . . . .” The court remanded the case for a determination of the total penalty based on each item sold with the false marking. 

The Federal Circuit did not provide clear guidance on what it takes to prove an intent to deceive, but it did make clear that its opinion was not meant “to suggest that multiple claim constructions or summary judgments are required before the requisite knowledge for false marking can be found.” Indeed, more frequently, false marking problems arise when marking continues even after the patent has expired. If false marking is proven, a company that sells thousands of units of product a year may quickly find itself on the receiving end of a large fine if it knowingly marks its products with inapplicable patent information.

The key lessons: (1) Implement a regular program to ensure that markings are removed when a patent expires. (2) Review markings after claims construction and summary judgment decisions. (3) Seek an independent counsel’s opinion when false marking is a potential problem. (4) Only use “patent pending” after filing for patent protection.

- Monty Agarwal and Aaron Schur

New Credit Card Rules Spare Retailers from Extra Check-Out Counter Approval Burdens

Consumer retailers can breathe a sigh of relief. The Credit Card Accountability, Responsibility and Disclosure Act (“CARD Act”) will not be a major impediment to point-of-sale consumer credit approvals when its regulations become effective on February 22, 2010. 

The CARD Act was signed into law in May 2009 to create new standards and disclosure requirements for open-end consumer credit plans. The CARD Act amends the Truth in Lending Act (“TILA”), and most of the CARD Act’s provisions become effective on February 22, 2010 - at the same time as new regulations issued by the Federal Reserve Board (“Board”) implementing these new requirements. 

One provision of the CARD Act requires that a card issuer consider a consumer’s ability to pay before opening a consumer credit account, or increasing that consumer’s credit limit. In October 2009, the Federal Reserve Board (“Board”) proposed regulations that would have required that a consideration of a consumer’s ability to pay include a review of the consumer’s income or assets as well as current obligations. In undertaking that review, the Board proposed to permit a card issuer to rely on information provided by the consumer or information in a consumer’s credit report.  

These proposed requirements were of serious concern to retailers that issued point-of-sale consumer credit, such as through store brand credit cards that often are offered by retailers at the check-out counter because the requirements would have potentially required retailers to verify a consumer’s income or assets while the customer waited at the check-out counter. There was even concern that the customer would need to provide documentation such as tax forms or pay stubs. These proposals in many retailers view would have impeded or prevented a consumer from instantly obtaining even a small line of credit at the point-of-sale. The requirement could have also discouraged the consumer from completing the sale that led that consumer to the check-out counter - something retailers do not want to see happen. Fortunately for the retailers, the Board provided some clarity to its proposal when it finalized the CARD Act regulations in anticipation of the February 22, 2010 effective date. Under the Board’s final rule, card issuers must still review information about a consumer’s income, assets, or current obligations before issuing credit or increasing a credit limit. However, in undertaking this review, a card issuer may “consider information obtained through any empirically derived, demonstrably and statistically sound model that reasonably estimates a consumer’s income or assets.” This clarification will allow retailers to continue to issue credit at the point-of-sale, without requiring the consumer to provide documentation of income, assets, or current obligations, as long as the retailer can verify a consumer’s ability to pay through a third party, such as a credit reporting agency. Assuming that checkout lanes have this capability, retailers can continue to offer credit cards at the point of sale without slowing those lines down -- welcome news to retailers and customers alike. 

 - Beth DeSimone and Brian Larkin

FTC Asks Once Nicely - Warning Letter to Retailers Seeks to Cut Down Deceptive Bamboo Labeling

After bringing recent enforcement actions against several companies for falsely advertising products as “100% bamboo fiber” when they were in fact made of rayon, the FTC sent out a warning to more than seventy-eight companies urging them to review their bamboo products and correct any misleading labeling. (Although rayon is created from the cellulose found in trees and plants, including bamboo, it is a man-made fiber that is processed with harsh chemicals and not considered to be environmentally friendly.) The FTC hopes that the warning letters will “serve as a wakeup call to all companies, regardless of their size.”, and the letters went to well known names as Bed, Bath & Beyond and Amazon.com. 

The warning letters contain a synopsis of FTC decisions regarding the use of proper fiber names in textile labeling and advertising, and are intended to give companies time to take curative steps by removing or correcting any false or misleading bamboo references. If any of the letter recipients is later found to have mislabeled rayon products, the FTC can seek civil penalties of up to $16,000 per violation. The warning letters, as well as the recent enforcement actions brought against companies selling rayon, highlight the FTC’s continuing commitment to prosecute misleading “green” advertising.

While the FTC is still working on revisions to its Green Guides, the Commission is struggling with the appropriate limits to place on marketers, so as not to allow them to convey to consumers a deceptive and overly broad message while touting benefits of a product for the environment. However, in its decisions regarding bamboo, the FTC made it clear it would be appropriate for companies to advertise “Rayon Made with Bamboo,” which truthfully conveys the fact that the manufacturers used bamboo to make the rayon but does not overstate the benefits of the product. Marketers should take a close look at any environmental claims being made about their products and make sure any limitations are clearly conveyed with appropriate disclaimers. 

- Danielle Sims and Randy Shaheen

FTC Chairman Calls for Expanded Consumer Protection Powers over the Financial Services Industry

Last Thursday, February 4, 2010, at a hearing before the Senate Committee on Commerce, Science, and Transportation, Federal Trade Commission (FTC) Chairman Jon Leibowitz urged Congress to grant the FTC increased powers to safeguard consumers from unscrupulous providers of financial services and products. He also described his vision for the relationship between the FTC and the proposed Consumer Financial Protection Agency (CFPA). Given the continued controversy surrounding the establishment of the CFPA as an independent agency, granting the FTC enhanced powers in the consumer financial arena as Chairman Leibowitz suggests might satisfy some of the CFPA’s critics.  

Specifically Leibowitz identified three key measures that he contended would allow the FTC to better protect consumers facing the economic crisis: 

1. Streamlining the FTC’s rulemaking procedures, 
2. Giving the FTC the power to bring charges directly against aiders and abettors of financial fraud, and
3. Expanding the FTC’s remedial powers. 

Currently, the FTC Act requires the FTC to promulgate rules under the Magnuson-Moss Act, a process which has more burdensome procedural requirements than the Administrative Procedures Act (APA) notice and comment procedures used by most federal agencies. These heightened requirements for FTC rulemaking were originally imposed because of the FTC’s perceived broad jurisdiction over the economy and were designed to restrain the FTC’s scope of regulation. Referring to the Magnuson-Moss process as “medieval” and “draconian,” Leibowitz argued that the process prevents it from responding nimbly and effectively to new challenges and threats to consumers. He noted that other agencies with extensive authority over the economy, such as the Securities and Exchange Commission (SEC) and the Federal Reserve Board enact rules under the APA notice and comment process, and emphasized that, when it has been allowed to use the APA notice and comment process in specific circumstances, the FTC has been thorough and circumspect in its rulemaking activity. 

Leibowitz also encouraged Congress to “provide explicit authority for the FTC to take law enforcement action against those who provide substantial assistance to another while knowing, or consciously avoiding knowing, that the person is engaged in unfair or deceptive practices.” While the FTC has been able to bring charges against such aiders and abettors under alternative legal theories of culpability, Leibowitz maintained that direct and express authority would facilitate such actions.

Thirdly, Leibowitz urged Congress to expand the FTC’s law enforcement powers to include independent litigating authority as well as the ability to seek civil penalties for FTC Act violations. Under current law, the FTC must refer to the Department of Justice (DOJ) all cases in which it seeks civil penalties, and Leibowitz contended that the 45 days that the DOJ then has to decide whether to take the case or refer it back to the FTC creates undue delay in bringing actions against alleged violators of the FTC Act. In addition, while the FTC is currently empowered to seek civil penalties for violations of specific laws, Leibowitz asked Congress to grant it the authority to bring such suits for unfair and deceptive practices in general, arguing that such power would deter more effectively financial and other types of fraud. 

Finally, Leibowitz addressed the Obama Administration’s proposal to establish the CFPA. Under the provisions of the financial reform bill that passed the U.S. House of Representatives, H.R. 4173, the CFPA would have authority to regulate and in certain circumstances examine and enforce standards in the offering of financial products and services to consumers. Leibowitz stressed that while the FTC supports the increased focus on consumer protection which has, in his words been treated as the “orphaned stepchild” by the federal banking authorities, he noted that Congress will need to define carefully and explicitly the jurisdictional boundaries between the CFPA and the FTC in enforcing consumer protection in this area in order to prevent confusion and inefficiency. 

As the Senate takes up financial reform in the next few months, including increasing consumer protection, Leibowitz has made his intentions clear that he would like the FTC to be at the forefront of these efforts. The Senate may give him his wish, especially if the establishment of a separate CFPA is abandoned in favor of increased protection at the existing agencies. 

 - Beth DeSimone

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

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

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

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

- Danielle Sims, Nancy Perkins, and Sean Morris

Warning to Internet Retailers: Careful with Online Discount Club Partnerships

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

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

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

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

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

- Victoria Shapiro

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

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

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

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

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

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

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

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

- Amy Mudge and Tiana Russell

Cuomo to Citi: Extend Free Checking Promo

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

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

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

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

- Beth DeSimone

FCC Proposes Revised Telemarketing “Robocall” Rules

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

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

How Long Can Your Product Be New and Improved?

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

- Amy Mudge

Claims of Alleged “Greenwashing” Squeak Past Motion to Dismiss

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

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

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

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

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

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

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

- Vicki Shapiro and Amy Mudge