Consumer Advertising Law Blog

California Requires Human Trafficking Signs for Certain Businesses

Continuing its efforts to lead the country both in establishing new requirements to help combat human trafficking and requiring signs in businesses across the state, California now requires certain businesses to post a special notice providing information to potential and actual victims of human trafficking.  The new law, S.B. 1193, went into effect on April 1, 2013.

This posting requirement applies to bars, truck stops, massage parlors, job recruitment centers, emergency rooms, and various other establishments that trafficking victims might frequent.  It is intended to raise public awareness of the issue and to inform victims or potential victims of trafficking about their rights and about resources available to help them.

There are specific requirements for the notice, which must be 8 1/2 by 11 inches with 16-point font.  It must be posted near the public entrance or in some other conspicuous place.  It must be posted in both English and Spanish throughout California, but in certain counties, it must be posted in a third widely spoken language (e.g., Chinese in San Francisco).  The language requirement and model notices can be found here, and the model notices are here (English) and here (Spanish). 

Failure to comply with notice requirements results in a $500 penalty for the first offense and $1000 for subsequent offenses.  The Attorney General and certain local prosecutors are authorized to bring an action to impose the penalty, but there is a 30-day cure period following notice of a violation.

Meanwhile, speculation continues about possible enforcement of California’s original groundbreaking requirement on human trafficking, the Transparency in Supply Chains Act (S.B. 657), which went into effect on January 1, 2012.  As noted previously in this space, many large manufacturers and retailers selling goods into California are required to post on their websites information concerning their efforts to combat human trafficking and other issues in their global supply chains.  The threshold for the reporting requirement is low, and covered companies should take steps now to meet the law’s requirements if they haven’t already done so.  California Attorney General Kamala Harris has made the issue of human trafficking a priority, as evidenced by this webpage, which collects information related to efforts on human trafficking and includes her commitment to “a sophisticated response from law enforcement and its partners to disrupt and dismantle” trafficking networks.

- Trent Norris, Samuel Witten, and Ginamarie Caya

Oops! Pricing Mistakes By Online Retailers

An online retailer of video game hardware peripherals, software, and systems, Razer, recently suffered an apparently costly glitch on its UK website.  A coupon code offering 90% off many products, intended for use only in a behind-the-scenes test of the company’s website shopping cart, was accidentally released to the public.  Customers naturally jumped at the opportunity.

Razer is hardly the first online retailer to suffer such an advertising glitch. Zappos and others have found themselves in a similar predicament.  Generally, companies in that situation have wasted no time repudiating any obligation to honor purchases made at the erroneous price.  But Razer took a different tack. It quickly announced that it would honor those coupons tendered by customers who bought “single products for their own use,” as distinguished from those who bought multiple items (presumptively for the purpose of turning a quick buck).  It isn’t clear just how much this cost the company, but it cannot have been inconsequential.  On the other hand, for “doing right” by its customers, the company was lionized in the media and may well have made back that much and more in increased traffic, publicity and goodwill.

Putting aside the possible marketing advantages of acquiescing in such an error, what are the rules when a merchant accidentally advertises a lower price than intended?  What right, if any, does the online retailer have to repudiate the apparent deal?  After all, didn’t it make an offer to sell at a particular price that became a binding obligation when the buyer accepted the offer by tendering the purchase price?  Was Razer being benevolent, or just putting lipstick on the pig?

Well, it depends. 

In the first instance, there may or may not have been a binding offer and acceptance.  Contracts 101 teaches that whether a communication from one party to another constitutes an actionable offer, as distinguished from mere preliminary communications or an invitation to make an offer, is a fact-intensive inquiry, looking at all the circumstances.  Even generalizations aren’t particularly helpful.  For example, print advertisements such as those in newspapers and mail order catalogs are less frequently held to be offers than the prices posted in bricks-and-mortar stores.  To the extent this is a meaningful distinction, which is the appropriate analogy for an online retailer?  Is Amazon’s website more like a virtual catalogue or a virtual store? 

Some online retailers have adopted website terms and conditions that attempt to overcome such uncertainties by explicitly characterizing the customer’s order as the offer, thereby leaving the retailer free to reject it for any reason, including because the advertised price was erroneous.  Others simply reserve the right to cancel orders, either for any reason or specifically where the posted price was erroneous.  In addition, even absent such contractual hedges, under the common law doctrine of unilateral mistake of fact, a contract is voidable if its enforcement despite one party’s mistake regarding a material term such as price would be “unconscionable” or if the other party “had reason to know of the mistake . . . .”  Thus, at least where a posted price is so egregiously low—or, in Razor’s case, a coupon so dramatically over-generous—that a reasonable consumer would suspect it is a mistake, this doctrine would entitle the retailer to repudiate the contract. 

On the other hand, none of these safeguards is necessarily ironclad.  The unilateral mistake doctrine is so obviously fact-dependent that in all but the most egregious circumstances, its applicability is likely to be disputable.  Using agreed terms and conditions to avoid the otherwise-uncertain application of general contractual rules is a time-honored strategy.  But online terms and conditions are both adhesive in nature and subject to special FTC rules requiring that they be “clear and conspicuous.”  Thus, their enforceability is also inherently very fact-bound.  And whatever protection the common law and artful drafting might provide in other circumstances, some states impose particular obligations on retailers when it comes to honoring the prices they advertise, however egregious the error.

In short, quite apart from the resulting public relations bonanza, a retailer in Razer’s situation could hardly be faulted for concluding that the high road was also the prudent one.

Razer apparently managed to turn the sow’s ear of its pricing gaffe into a silk purse.  Mindful of this, some online marketing specialists are undoubtedly being tempted even as we speak to consider the deliberate use of such an “accidental” release scenario as a form of guerilla marketing: going viral, driving traffic to the site, and winning kudos for “voluntarily” honoring some part of the resulting uptake.  One word: badidea.  The saving grace of Razer’s gaffe was its inadvertence.  Deliberately posting a false discount to drive traffic, with the intent to honor only some of the resulting sales, would amount to a bait-and-switch, violate a plethora of state and federal laws prohibiting deceptive and misleading advertising, and likely leave the retailer in a world of hurt at the hands of regulators, prosecutors and the plaintiff’s class action bar.   

- Gabriel White and Dirk Schenkkan

Fishy Labeling

Customers buying seafood at restaurants and grocery stores frequently may not be getting what they order. A recent study conducted by the group Oceana, found that 27 percent of grocery stores, 52 percent of non-sushi restaurants, and 95 percent of sushi restaurants surveyed sold mislabeled seafood.  The group describes itself as the “largest international organization focused solely on ocean conservation.”

The Oceana study, conducted from 2010 to 2012, is one of the largest reported seafood fraud investigations to date. The group collected 1,247 samples from 674 retail outlets in 21 states. Genetic identity was determined for 1,215 of the samples, and of those, it was found that approximately one-third were mislabeled.  Mislabeling rates varied greatly among the types of seafood involved, with fish sold as “tuna” and “snapper” having the highest mislabeling rates.

In describing the methods used for the study, Oceana stated that it considered a fish sample to be mislabeled if “seafood substitution occurred or if retailers were not following the [FDA] Seafood list.”  The FDA’s Guide to Acceptable Market Names for Seafood Sold in Interstate Commerce provides guidance to the seafood industry on the labeling of different species. The FDA makes it clear that its Seafood List does not establish legally enforceable responsibilities per se in labeling. However, seafood mislabeling can be actionable under the Misbranding Section of the Federal Food, Drug, and Cosmetic Act, and under state statutory and regulatory provisions, as well as the common law.

Some critics of the study have suggested that Oceana overstates the mislabeling issue, noting that different vernacular names are used for the same type of fish in different regions of the country.  In fact, this illustrates the pitfalls that even well-meaning retailers may face in attempting to label their seafood so as not to mislead. Thus, the FDA itself comments that a vernacular name, even if common in a particular region, may not be acceptable as a market name for use in interstate commerce.  When it comes to seafood, it’s not only the quarry, but the name of the quarry that can be elusive. 

The obvious injury from seafood mislabeling is that customers will be duped into paying more than they should for what they are actually getting. But depending on the particular species involved, mislabeling can also defeat customer attempts to choose sustainable seafood options. Fishery sustainability is a growing concern of many conservation-minded consumers. In response, conservation organizations have published pocket guidelines for consumers to use in making their seafood choices; and some grocery stores and restaurant groups have taken to promoting  their seafood sourcing policies to attract environmentally-conscious customers.  In a prior post, we discussed how seafood sustainability certifications themselves may be misleading consumers in this regard.  Inasmuch as any certification process necessarily depends on accurate labeling of the product being sold, seafood mislabeling has the potential to exacerbate the problem.

There is potential legal exposure for seafood businesses at every step in the supply chain here-- from fishermen to brokers to retailers and restaurants. Certainly, those who intentionally mislabel seafood for sale are subject to liability for fraud and unfair business practices. Less clear is the degree of exposure for retailers and middlemen who inadvertently sell mislabeled fish. Following a similar seafood investigation conducted by the Boston Globe, several restaurants blamed suppliers for providing them with incorrectly labeled fish, which they in turn innocently served to customers. Given the apparent frequency and risks of such mislabeling, blind reliance on the integrity and competence of one’s suppliers may not be enough. Prudent retailers will consider measured steps to better ensure that they are serving what they claim and to demonstrate their own due diligence in that regard. Like chum in the water, Oceana’s study may begin drawing the interest of state attorneys general and the plaintiff’s bar.

- Christina Brenha and Dirk Schenkkan

FDA Proposes New Food Labeling Rule: Are Plumper Prices Going to Be the Cost of Whittled Waistlines?

There is no denying that the United States is facing a health crisis of obese proportions.  To combat the problem, the Food and Drug Administration (FDA) recently issued a proposed food labeling rule and is asking the American public to weigh in.  So what should the government do to help us make healthier choices at the supermarket, and what effect will this proposed rule have on businesses (and consumers) whose profit margins already toe the line between slim and emaciated?

The FDA’s proposed rule would require calorie labels on menus and menu boards in chain restaurants and retail food establishments − including grocery and convenience stores as well as coffee and pastry shops − with 20 or more locations nationwide. The FDA’s existing food labeling regulations already mandate that pre-packaged food include nutrition information labels, but this new rule would require grocery stores “clearly and prominently” to label the calorie content of prepared, unpackaged food such as soups, salad bar items, baked goods and other ready-made snacks.For such food on display, calories would have to be posted either per item or per serving on a sign next to the food. I know what you’re thinking: now I’m going to be forced to confront the waistline implications of that gooey chocolate donut with cream filling before I enjoy it, or feed it to my kids as a weekend treat?  Unfortunately, that’s the point. 

To help consumers understand the significance of this information, a statement concerning daily recommended calorie intake would also be on display.  Additionally, supplemental written nutrition information −  such as calories from fat, total fat, saturated fat, trans fat, cholesterol, sodium, total carbohydrates, sugars, dietary fiber, and protein − would be available upon request for standard menu items. 

The proposed rule stems from a provision of the Patient Protection and Affordable Care Act requiring restaurants and vending machines with 20 or more locations nationwide to post nutrition content for standard menu items. The FDA’s rule extends that mandate to cover establishments that sell restaurant-type food and whose primary business activity is the sale of food to consumers. Under the rule, an establishment’s “primary business activity” is the sale of food to consumers if greater than 50 percent of the establishment’s total floor area is used for the sale of food. This includes grocery and convenience stores, but excludes establishments such as movie theatres, bowling alleys, and airplanes. 

The FDA reasons that this rule is aimed at helping Americans live healthier lives by informing them about how prepared foods they purchase fit in to their overall nutrition needs. Seeing calorie content may incentivize some shoppers to choose the three-bean salad over the higher-calorie mac and cheese.  Critics of the rule claim that it would overburden thousands of grocers and convenience store owners by requiring investment in either expensive software or off-site laboratory testing to determine the nutrition content of food. The FDA estimates an initial cost of $315 million to comply with the proposed regulation, while critics of the rule warn that compliance could weigh in at a hefty $1 billion in the first year alone. That cost, some argue, will inevitably be passed on to consumers in the form of plumper prices at the checkout. 

Let the FDA know where you fall on the scale. The FDA invites public comments to the proposed rule, which it says will be taken into account when drafting the final rule to be issued this spring.  Until then, grocers and other store owners that may be affected by this rule should plan for a possible new expense. 

- Brittany McClure

The FTC Continues to Cut Down Allegedly Deceptive Bamboo Labeling

Four retailers have agreed to pay a combined $1.26 million to settle Federal Trade Commission charges that they violated the Textile Products Identification Act and the FTC’s Textile Rules by marketing and advertising rayon products as made of bamboo. According to the FTC, the companies’ textile product labels and advertisements − such as “bamboo,” “100% bamboo fiber,” or “55% Bamboo/45% Cotton” − constituted unfair or deceptive advertising because the products were made of rayon and not actual bamboo fibers woven into fabric. (Long-term readers of this blog will recall that similar FTC enforcement actions were a topic of interest in August 2009 and February 2010.)  The settlement does not constitute an admission of wrongdoing by any of the retailers. 

The recent trend of marketing products as made of bamboo is an attempt to appeal to the growing market of consumers that consider “green” the new black.  However, the process for manufacturing rayon is hardly eco-chic -- rayon is a man-made fiber that is created from the regenerated cellulose of many plants and trees, including bamboo.    

In August 2009, after settling similar claims with other companies, the FTC distributed a business alert, How to Avoid Bamboozling Your Customers, cautioning textile manufacturers and sellers that if a product is not made directly with bamboo fiber, it may not be advertised as “bamboo,” even if bamboo was used somewhere in the production process.  Rather, textile products composed in whole or in part of regenerated cellulose fiber should be labeled using the generic fiber name: rayon.  The FTC also said that if bamboo is used as the raw material, the product can be labeled “rayon made from bamboo,” which accurately indicates that bamboo was used to make the rayon without implying that the product has the environmentally-friendly qualities of pure bamboo fiber.   

Furthermore, in January 2010 the FTC sent a warning letter to more than 78 companies, including the four retailers in this case, informing them about potential civil liability for claiming that rayon products were made of bamboo, and urging them to correct any misleading claims.  The FTC alleges that despite the warning, these companies continued to improperly label and advertise rayon textiles as “bamboo” products.  The settlement amounts in these cases were determined in part by how long the companies allegedly continued to sell mislabeled products after receiving the January 2010 warning letter from the Commission. 

The settlement orders prohibit future advertising misrepresentations about “bamboo” textiles. 

And, consistent with current law, the settlement orders allow the companies to avoid future liability by obtaining a “good faith” guaranty from suppliers certifying that products are not mislabeled, falsely invoiced, or falsely advertised.  This “good faith” provision does not apply, however, if the company knew or should have known that products were mislabeled.  The orders make clear that if the Commission sends a warning letter about improper labeling (as it did in this case), that company is on notice and is thus precluded from relying on a supplier’s guaranty to avoid liability.  The orders also state − consistent with the FTC’s new Enforcement Policy Statement − that if the company cannot obtain a good faith guarantee from the supplier, as long as the company does not (i) embellish claims provided by the supplier, or (ii) sell the product as a private label product, the company will not be liable for a Textile Act violation unless it knew or should have known that the product was improperly labeled. 

It is clear that the FTC is intent on cutting down all misleading bamboo claims.  It is important that retailers of textile products assess their labeling and advertising claims to ensure that the fiber content and environmental benefits of such products are not being misrepresented, especially after receiving a warning letter from the Commission.

- Brittany McClure and Matthew Shultz 

Releasing Corporate Information Via Social Media: SEC Investigates Netflix For Facebook Post

As social media becomes more pervasive in today’s society, it has become a dominant part of many companies’ marketing and public relations strategies. With companies and their executives incorporating Facebook, Twitter and the like into their communications strategies, they often step into grey areas of securities laws.  The law that seems to cause the most trouble is Regulation Fair Disclosure (RegFD).  Promulgated by the Securities and Exchange Commission (SEC) in 2000, RegFD requires that whenever a company, or a person acting on its behalf, discloses material, nonpublic information to analysts or company stockholders, the company must make that information simultaneously available through broadly disseminated public disclosure.  Traditionally, corporations have complied with RegFD by issuing a press release or filing or furnishing a Form 8-K with the SEC.

In recent weeks, a story has come to light that illustrates the growing tension between securities laws and social media communications.  On July 3, 2012, Netflix CEO Reed Hastings posted the following message on the company’s public Facebook page:  “Netflix monthly viewing exceeded 1 billion hours for the first time ever in June [2012].”  After this post was broadcast to the company’s more than 200,000 Facebook followers, Netflix stock jumped from $67.85 a share on July 2, 2012 -- the day before the post -- to $81.72 on July 5, 2012.  As a result, the SEC sent both Netflix and Hastings a letter (known as a “Wells Notice”) informing them of the staff’s intent to recommend enforcement proceedings for violation of RegFD.

In 2008, the SEC issued guidance that provides clues to how it will likely address Hastings’ Facebook post. Whether the SEC will bring an action against Hastings and Netflix will probably depend on: (i) whether the post by Hastings discloses material information; (ii) whether such information was nonpublic; and (iii) if the answer to both (i) and (ii) is “yes,” whether the Facebook post constitutes broad, nonselective distribution of such material, nonpublic information.

Is the post by Hastings “material”? 

In a public response to the SEC’s investigation, Hastings stated:  “We think the fact of 1 billion hours of viewing in June was not 'material' to investors."  The SEC will likely argue that a 17% jump in stock price in only three days suggests otherwise.  Additionally, the SEC will likely point out that Netflix, on recent earnings calls and in prior press releases, has highlighted hours viewed as a key metric.  Because Netflix has consistently pointed to this metric in the past, it may now face an uphill battle in arguing the statistic is immaterial.   

Did the post by Hastings disclose non-public information?

Netflix stated in a blog entry, posted on its corporate website nearly a month prior to the Hastings Facebook post, that the company was approaching the 1 billion hours viewed milestone.  Additionally, Netflix General Counsel, David Hyman, testified before a U.S. House of Representatives committee on June 27, 2012 and said during such testimony that Netflix "delivers close to a billion hours of streaming movies and TV shows to its consumers every month.”  Because of these prior statements, the SEC may have to concede that it was public knowledge that Netflix was close to reaching the 1 billion hours milestone and may be faced with having to prove that there is a material difference between being close to the 1 billion hours milestone and reaching or surpassing such milestone.

Does a Facebook post result in broad distribution of material corporate information? 

In other words, and specific to Netflix and Hastings, does a Facebook post broadcast to more than 200,000 individuals provide at least as broad of a disclosure as a press release or an SEC filing?  In its 2008 guidance, the SEC stated that when corporations make disclosures via their corporate websites the concern is whether such communications are (i) disseminated in a manner designed to reach the public in general and (ii) being made through a recognized channel of distribution.  The SEC likely has the same concerns with respect to corporate social media communications.

On the first point, Hastings and Netflix have stated they believe posting to over 200,000 followers is very public, especially because many of those who subscribe to the Netflix Facebook page are reporters.  Hastings and Netflix make a persuasive argument that a Facebook post, which automatically broadcasts to all those individuals that have subscribed to the page, provides a public and transparent means of communications that is more likely to reach the public in general than a filing with the SEC of which no one is automatically notified. 

On the second point, the SEC has suggested that corporations can establish recognized channels of distribution by consistently directing investors to such channels in SEC filings and investor relations communications.  Unfortunately for Hastings and Netflix, Netflix has not consistently directed investors to Hastings’ Facebook posts in its SEC filings and investor communications.  Moreover, Hastings stated in his public response to the SEC Wells Notice that "[w]hile we think my public Facebook post is public, we don't currently use Facebook and other social media to get material information to investors; we usually get that information out in our extensive investor letters, press releases and SEC filings . . . .”  Netflix and Hastings could face an uphill battle in arguing Hastings’ post disseminated such information via a recognized channel of disclosure.

Regardless of the outcome, corporations and their attorneys will certainly pay close attention to this investigation of Netflix and its CEO, as this could become a precedent setting case or, at a minimum, will provide clues to corporations with respect to the SEC’s likely treatment of social media communications going forward.

Update (4/4/2013): For more information on this issue, click here.

- Evan Pickering and Julia Vax

Hidden “Resort Fees”: No Day at the Beach

The Federal Trade Commission (FTC) has issued warning letters to 22 hotel operators, explaining that online reservation sites may violate the law by failing adequately to disclose “resort fees,” mandatory fees hotels charge for amenities such as newspapers, exercise or pool facilities, and internet access that are charged even if the customer may not use those services.  The FTC letter describes practices it found on the operators’ sites, such as quoting only the room rate and taxes prominently and listing the additional resort fee separately, either somewhere else on the page or on another page, or in some cases, not at all, or stating only that additional fees may apply.

While acknowledging that a “hotel reservation site may breakdown the components of the reservation estimate (e.g., room rate, estimated taxes, and any mandatory, unavoidable fees),” the FTC letter explains that the “most prominent figure for consumers should be the total inclusive estimate” that includes all “unavoidable and mandatory fees.”  The warning letter concludes by “strongly encourag[ing]” the hotel operators to review their websites “to ensure you are not misrepresenting the total price consumers can expect to pay when making a reservation.” 

The hotel warning letters reflect the FTC’s increased focus on complaints regarding “drip pricing,” a pricing technique where a company advertises only part of a product’s price and reveals other charges as the customer completes the purchase.  In May 2012, the FTC held a conference on drip pricing, and encouraged consumers to share their drip pricing stories with the FTC.  The FTC noted that “drip pricing is used by many types of firms, including internet sellers, automobile dealers, financial institutions, and rental car companies.”  And the FTC noted that “drip pricing” includes not only mandatory charges (such as hotel resort fees), but also fees for optional upgrades and add-ons.  The lesson for sellers, particularly on-line sellers, is that the FTC is watching how prices and fees are being disclosed to consumers and expects sellers clearly and conspicuously to disclose all elements of the total cost up front so that consumers are not surprised by what they ultimately pay.

 - Rachel Chanin and Matthew Shultz

UK ASA: “Little Me Organics” Not So Organic

The UK’s Advertising Standards Authority (ASA) rapped UK retailer Boots UK Ltd over advertising for its “Little Me Organics” products on its website.  The text on the website read “Little Me Organics Oh So Gentle Hair and Body Wash has pear, mallow & organic aloe vera to clean and moisturise your baby's delicate hair and sensitive skin”.  A single complainant challenged whether Boots’ claim that the product was “organic” was misleading, because it implied that it met an independent organic standard.  In response, Boots argued that “Little Me Organics” was the brand name and that there is no legal definition of what constitutes “organic” for cosmetics in the UK. They also said that they had taken the challenged claims directly from the product label; they did not see how that differed to an in-store display. Boots supplied the ASA with certification for the organic ingredients in the product from four independent bodies (The Soil Association, US. Mayacert, Quality Certification Services and Eco Cert) and provided a percentage breakdown for the product’s organic content.

Assessing the claim, the ASA accepted that the product contained organically-certified ingredients and that there is no legal standard for organic cosmetics in the UK, but said that consumers would understand “Little Me Organics” to mean that the product either met an independently defined organic standard or used a high proportion of organic ingredients. As this was not the case, and the product contained less than 5% organic content, the ASA concluded that the advertising was misleading.  Banning the advert, the ASA told Boots not to promote the product in future marketing communications unless they included a prominent statement disclaiming the implied “organic” claim.

The popularity of organic cosmetics is growing amongst consumers, however this ruling highlights how much of a minefield organic claims can be. The take-away point here is that any “organic” products should meet an independently defined organic standard or should contain a high percentage of organic ingredients; otherwise the claims are likely to fall foul of the ASA. Further, brand names should be chosen carefully to avoid being accused of green washing.  The decision is also an important reminder that the ASA is able to investigate and adjudicate on claims that appear on advertisers’ own websites, as well as other types of printed and broadcast advertising.

- Richard Dickinson and Gemma Davies

UK: Disgruntled Competitors Shut Down Supermarket’s Pricing Comparison Campaign

The UK’s Advertising Standards Authority (ASA) has banned the supermarket Sainsbury’s television, internet, email and newspaper advertising for its “Brand Match” campaign over its misleading statements and comparisons with rival supermarkets. The Brand Match campaign uses independently verified price data to calculate the cost of a basket of branded goods compared with the cost of the same basket at competitor supermarkets, Asda and Tesco. If the branded goods would have been cheaper at either rival, the shopper would receive a voucher at checkout equal to the value of the difference and redeemable the next time they shop at Sainsbury’s.

Several complainants (including Tesco) challenged whether the claim that shoppers would not pay more for branded goods at Sainsbury’s than at Asda or Tesco was misleading, when the vouchers confirmed that they would, in some instances, have paid less for the same shop elsewhere. Other complaints challenged whether the adverts misleadingly implied that the brand match applied to all branded purchases, when it was only available to shoppers spending a minimum of £20, and that the claim “Save at Sainsbury’s with Brand Match” was misleading as the prices were matched only, not bettered. In response, Sainsbury’s argued that the Brand Match campaign was “genuine, clear and concise” and had been well received with nearly 100 million coupons issued, which they believed indicated that consumers had understood the offer.

The ASA disagreed, noting that the claims that shoppers would not pay more for brands at Sainsbury’s than at Tesco or Asda were likely to be interpreted as suggesting that they would not pay more at the time of their shop, which was not the case as they merely received a voucher indicating the difference in price, and which required them to make another purchase at Sainsbury’s within the next two weeks to make the saving. The ASA also said that the wording “Save at Sainsbury’s with Brand Match” was likely to be interpreted at suggesting that branded goods would be cheaper at Sainsbury’s. As prices were only matched, not bettered, and in some cases shoppers would pay more, the adverts were misleading. Further, the requirement to spend a minimum of £20 was not made clear in all adverts. Banning the adverts, the ASA told Sainsbury’s to “ensure future ads did not imply consumers would not pay more, or would save money, if that was not the case”.

The UK advertising codes require that advertising should be clear, honest and not misleading. Where, as here, the promotion has any significant conditions (e.g. a minimum £20 spend or the saving taking the form of a redeemable voucher on a future purchase) they should be made clear to consumers in the advertising, not buried in terms and conditions. The decision also serves to remind how complaints can be brought directly by disgruntled competitors, not only by members of the public.

- Richard Dickinson and Gemma Davies

Blood Cell Phones? Many Companies Must Disclose Source of “Conflict Minerals” under New SEC Rule

You’ve heard about ‘blood diamonds,’ but did you know that buying a smartphone, drill, or jacket could fund conflict in Africa?  A broad array of products, such as appliances, canned foods, cars, electronics, jewelry, medical devices, tools, and even apparel and footwear, often incorporate one or more so-called “conflict minerals” -- tantalum, tin, tungsten, and gold -- and may subject companies that manufacture such products and those that contract to have such products manufactured to onerous regulations recently issued by the Securities and Exchange Commission (SEC). 

In Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act,  Congress created a reporting requirement relating to these minerals that come from certain Central African countries and that may fund armed groups operating out of those countries.  In particular, the requirement pertains to the Democratic Republic of the Congo and its nine neighboring states: Angola, Burundi, Central African Republic, the Republic of Congo, Rwanda, South Sudan, Tanzania, Uganda, and Zambia (Covered Countries).  The provision was intended to stem the tide of violence, and especially gender-based and sexual violence, in the region.

It took the SEC, which is responsible for implementing Section 1502, over two years to develop a final rule implementing this unusual provision of the sweeping financial regulatory reform law.  As adopted, the final rule will require an estimated 6,000 companies that file annual reports with the SEC to review their supply chains and publicly disclose their use of tantalum, tin, tungsten, and gold, if any of those minerals are “necessary to the functionality or production of a product” that they manufacture or contract to manufacture. 

The SEC has created a new form for companies to use for their annual disclosures, known as Form SD.  The first Form SD will cover the 2013 calendar year, and will be due by May 31, 2014.  As explained in a prior Arnold & Porter Advisory, the SEC envisions compliance as a three-step process.

A Masterpiece . . . If I Do Say So Myself

Imagine that you’re an avid reader and look to the many book reviews posted on the Internet in selecting your next novel.  Can you trust those reviews?  Not always, because the reviewer may, in fact, be the author trumpeting his or her own horn.

In fact, this is exactly what happened recently when an award winning British writer R.J. Ellory posted glowing but fake reviews of his own work on amazon.com.  Not only did he praise his own work, but he made up negative reviews of other authors’ works. 

Ellory, writer of such well known works as A Simple Act of Violence and Winner of the “Crime Novel of the Year”, has written gushing reviews of his works under pseudonyms such as “Jelly Bean” and “Nicodemus Jones”, lauding his “magnificent genius”.  Ellory was first exposed on Twitter by an author living in Sweden, Jeremy Duns.  Other popular writers, including the well-known author of gothic novels, Anne Rice, have also roundly criticized Ellory for his practices.  And authors have claimed that his fake reviews have damaged the publishing industry.  He has now admitted on Facebook to writing fictional reviews for a decade:  “Over the last 10 years I have posted approximately 12 reviews of my own books….”

And he’s not the only one.  For example, American John Locke, the American bestselling author, has been accused of the same.  Bing Liu, a data mining expert at the University of Chicago, estimates that approximately one-third of all consumer reviews on the Internet are fabricated.  Moreover, there are variations on the theme of made-up reviews.  The New York Times recently revealed that a Mr. Todd Rutherford wrote glowing book reviews and charged for them.  Mr. Rutherford started GettingBookReviews.com, on which he eliminated the middlemen reviews and, for the right price, would create and post numerous favorable reviews for his well-heeled clients.  For example, he charged $499 for 20 online reviews; 50 online reviews would set an author back $999.  Mr. Rutherford’s business collapsed, however, after a public complaint from a would-be customer and a Google suspension of his advertising account.  He is now reputedly selling RV’s in Oklahoma City but is planning a comeback.

Is this illegal?  A deceptive practice?  False advertising?  They could be actionable under the FTC Act as violating the Endorsement Guides, which require endorsers to disclose any connection with advertisers that might affect the weight or credibility of the endorsements (i.e., that the reviewer is actually the author), or as a misrepresentation of the source of the review.  Recently, the FTC has been actively cracking down on fake endorsements and fake news sites touting product benefits.  In addition, the federal law governing false advertising, the Lanham Act, prohibits false or misleading representation, in commercial advertising, that is material to a purchasing decision and damaging to the plaintiff.  

Can we say that about Mr. Ellory’s enthusiastic reviews of his own works, if they prompt his sales to skyrocket and take away from others’ sales?  Hard to know.  If Mr. Ellory’s novels really are masterpieces, he would argue, there is no misrepresentation.  On the other hand, readers of the reviews are duped into believing that they are receiving independent opinions.

So, next time you see on unbroken string of ecstatic reviews online, take a “page” out of my advice instead:  ask someone you know for a candid assessment before picking up the book.  What a “novel” idea.

- Roberta Horton and Matthew Shultz

Beware of Commenters

The Advertising Standards Board of Australia’s advertising self-regulatory organization, the Advertising Standards Bureau, recently considered whether an advertiser could be liable for user-generated comments posted on its brand page on Facebook.  Although it ultimately found that the advertising at issue did not violate the advertising code, the Board concluded, as a threshold issue, that user-generated comments were advertising for which the advertiser could be liable.  Commentary following the Board’s ruling indicates that companies advertising in Australia now must consider how to monitor and police comments being made on their Facebook pages.

Comments by users on a US-directed Facebook page or other type of online site that is owned or operated by an advertiser could also land the advertiser in hot water in the US.  (Consumer comments on sites not affiliated with the advertiser would likely not result in false advertising liability unless there was a connection between the advertiser and the commenter, as discussed below.)  By providing consumers with a forum where they can make statements about the advertiser’s products, the advertiser is arguably disseminating consumer endorsements subject to the FTC’s Endorsement Guides.  As a general rule, if the advertiser cannot truthfully make a claim itself, it cannot disseminate a consumer endorsement making the same claim.  Usually, the FTC will assume that the endorser’s experience is typical of what all consumer’s will experience, and the advertiser must be able to substantiate it or disclose what the typical experience will in fact be.  However, the Endorsement Guides indicate that some statements may be interpreted as simply the subjective opinion of the consumer and not a claim about the typical consumer experience.  Unfortunately, the Endorsement Guide provides little explanation about how to distinguish between these types of statements.  Advertisers and endorsers must also disclose any material connection between them, such as compensation or free products.  This is just a brief (and incomplete) overview of possible endorsement issues, and while we are not aware of any Endorsement Guide actions based on user-generated comments, it is a risk that advertisers operating online sites should consider how they want to manage.

Beyond the endorsement context, statements by commenters could be used by government enforcers or private plaintiffs to support other legal claims.  For example, comments could be used as evidence of how reasonable consumers interpret advertising claims made directly by the advertiser, intended or typical product usage, or knowledge of product problems.  Advertisers need to consider all of the risks in allowing comments on sites they own or control and ways to mitigate these risks, such as monitoring comments or approving them before posting.

- Matthew Shultz

UK ASA: We Do Care About Whether You Have Milk With Your Cereal

The UK’s Advertising Standards Authority (ASA) has banned a TV advert for the cereal Weetabix, for misleading customers over its health claims. The advert in question, which was broadcast in July 2011, claimed that the cereal was “Packed with slow release energy to keep you going”. Several viewers challenged the claim as they understood Weetabix to have a high glycemic index (GI) rating. Weetabix produced statistics from 2005 from the Food and Agricultural Organization of the UN (FAO) to show that the cereal had a GI rating of 47 when eaten with semi-skimmed milk, which was lower than the British Nutrition Foundation’s level for a low GI food (55 and below). They also produced the results of a 2012 study which gave the cereal a GI rating of 41 when eaten with semi-skimmed milk. Clearcast (the UK body that pre-clears most TV ads) said that they had followed advice from a nutritional consultant who said that Weetabix had a low GI when eaten with milk and they took the view that as most consumers would eat the cereal with milk, as was shown in the advert, the claim was supported.

The ASA disagreed, holding that while Weetabix eaten with semi-skimmed milk had a low GI, some consumers might infer from that the claim “Packed with slow release energy” related to the Weetabix biscuit itself and not only when consumed with milk. The ASA said that the presentation of the claim was ambiguous therefore, and in the absence of further qualifying evidence, was likely to mislead.  

With the health foods market continuing to grow, this ruling sounds a caution to food manufacturers.  As with other advertising, health food claims must be accurate, true and capable of substantiation, but they must also be suitably qualified. Broad claims are unlikely to pass muster with the ASA or the EU’s toughened rules on health claims (see the recent EU Regulation No 432/2012 on health claims made on foods), which came into force on 14 June 2012. If a health claim relates to a food consumed in a certain way (e.g. only in accordance with manufacturers’ instructions, rather than as sold), this must be made clear on the face of the advertising.

- Richard Dickinson and Gemma Davies

EU Distance Selling Rules - How Not to Comply with the Information Provision Requirements

EU distance selling rules require businesses selling goods or services online to provide certain information (for example, the seller’s name and address, the price of the goods and the right to cancel the contract) to their customers before a contract is concluded.  Further, if that information has not been given to the customer in a “durable medium available and accessible to him” before the contact was concluded, the seller must make sure that it is provided (in a durable medium) to the customer in good time during the performance of the contract and, at the latest, at the time of delivery.

E-commerce businesses beware, making certain EU-required information available to your customers via hyperlinks to the relevant page on your site is, on its own, unlikely to satisfy the requirements of EU distance selling rules.  You need to make sure that such information is provided on time and in a way that enables customers to store it, ensure that its content is not altered, access it for an adequate period and reproduce it unchanged - for example, by setting it out in an email to the consumer.

In the recent case of Content Services Ltd v Bundesarbeitskammer (C‑49/11), an English company offered various subscription services via its website, including, for example, downloads of free software or trial versions of software.  Users had to subscribe in order to use the site and, when they did so, they had to tick a box to say that they accepted the company’s general terms and conditions and that they waived their right to cancel the subscription. The information required by EU distance selling rules (including, in particular, the right to cancel) was not shown to users at this point - they could, however, view it by clicking on a hyperlink on the contract sign-up page.

This theme of providing users with a hyperlink to a page where they could access the relevant information rather than expressly providing the information to the users continued through the order confirmation email and invoice stages of the contracting process.

The Bundesarbeitskammer, an Austrian consumer protection body, challenged Content Services’ business practices on the basis that they infringed EU distance selling rules.  Several questions were referred to the Court of Justice of the European Union (CJEU) for a preliminary ruling including, in particular, whether making the requisite information accessible to consumers only via a hyperlink on a website meets the requirements of European distance selling rules.

The CJEU held as follows:

• Making information available on a seller’s website accessible to consumers by sending them a hyperlink to that content does not constitute “giving” that information to consumers, or consumers “receiving” that information - this is primarily because action is required by the consumer to click on the link in order to see the information.
• Placing information on a website and making that website accessible to consumers does not constitute providing that information to consumers in a “durable medium”.  To be “durable” the medium must allow the consumer to store the information which has been addressed to him personally, ensure that its content is not altered and that the information is accessible for an adequate period, and give consumers the possibility to reproduce it unchanged.  This was not the case in respect of Content Services’ website.

- Richard Dickinson and Jake Marshall

To Tweet Or Not To #Tweet - A Second UK Ban On Marketing Tweets

We reported a few weeks ago that Nike had become the first company to have its marketing tweets banned by the UK’s Advertising Standards Authority (ASA). The messages, which were tweeted by Nike-sponsored football stars Wayne Rooney and Jack Wilshere, failed to make clear on their face that they were sponsored marketing messages.

Continuing its crackdown, the ASA has handed out a second ban to Toni & Guy, a chain of UK hair salons, for breaching the CAP Code. The decision concerned two tweets from Gemma Collins, one of the stars of popular UK reality series ‘The Only Way is Essex’. One tweet read “In @toniandguylside having such a wonderful time defo got my hair back to good condition 10% off call today and quote #gemma x” the other read “10% off @toniandguylside I have the most amazeballs hair colour and condition best salon ever call and say #gemma for discount xx”. A complainant challenged whether the tweets were marketing communications and should be identified as such. In response, Toni & Guy said that the tweets had been drafted by Gemma on the spur of the moment after she visited the salon and were not part of a formal marketing campaign. As Gemma had had a good experience, they had suggested that she tweet about it and a 10% discount could be offered. Toni & Guy also said that the mention of a 10% discount made it clear that the tweets were marketing communications.

Upholding the complaint, the ASA said that users could have interpreted the tweets as referring to a pre-existing 10% off sales promotion. The tweets mentioned “#gemma” but given the context of the whole tweets, users may have overlooked that or not understood that the offer related to Gemma Collins. The ASA considered that without using identifiers such as “#ad”, the tweets were not obviously identifiable as Toni & Guy marketing communications and therefore breached the CAP Code.

A pattern is starting to emerge. Marketers should be extra careful to ensure that any marketing tweets are clearly identified as such in the body of the message, for example by using the hashtags #ad, #spon or #promo.

- Richard Dickinson and Gemma Davies

Closing the Window on Deceptive Claims

Last week, the Federal Trade Commission (FTC) touted settlements with five replacement window sellers over energy efficiency and heating and cooling cost savings claims as “part of a broad FTC effort to ensure that environmental marketing is truthful and based on solid scientific evidence.”  This is further evidence that even though the revised Green Guides have yet to be finalized, green claims are still an FTC enforcement priority because of their popularity with advertisers.

The consent orders prohibit the sellers from making any claims that consumers will achieve a specific (or up to a specific) energy or costs savings unless the seller “possesses and relies upon competent and reliable scientific evidence to substantiate that all or almost all consumers are likely to receive the maximum represented savings or reduction.”  The analyses accompanying the proposed orders explain that the “all or substantially all” standard represents “fencing-in” relief--relief that reaches beyond the conduct complained of to related conduct, which may not violate the FTC Act, to help ensure compliance with the order.  The FTC typically tries to include fencing-in relief in its consent orders.

The “all or substantially all” standard in the consent orders applies to claims that consumers will achieve savings “up to” a specified amount.  Some of the analyses accompanying the proposed orders explain that in the context of the sellers’ advertisements, “up to” did not effectively qualify the claims about what energy or cost savings consumers should expect, and that the proposed orders should not be read as a statement as to how the FTC will interpret “up to” claims for other products or services.  In other words, the FTC apparently concluded that the sellers’ advertisements represented that consumers should expect to receive the maximum specified savings.  For example, one seller ran a newspaper ad claiming “Up to 40% FUEL SAVINGS” and another ad claiming “40% Fuel Savings.”  Other marketing materials also claimed a 40% savings without the “up to” qualification.

The proposed consent orders also highlight that specificity counts when making environmental claims. The Green Guides advise that specific environmental claims are easier to substantiate and are less likely to be deceptive.  The Green Guides also caution that the basis of a comparative environmental claim needs to be clear in order to avoid confusion about what comparison is being made.  As discussed in the analyses accompanying the proposed orders, a house’s energy efficiency depends on several factors, including its geographic location, its insulation, as well as the existing windows.  Because each consumer’s circumstances are different, it could be difficult to substantiate general claims about energy or cost savings.  Thus, the consent orders allow claims of specific energy or cost savings under specified circumstances if those circumstances are clearly and prominently disclosed in close proximity to the claim.

- Matthew Shultz

UK ASA Tripping About Travel Review Website

The UK’s advertising regulator, the Advertising Standards Authority (ASA), has told travel review website TripAdvisor LLC to stop making claims that its content is honest, real and trusted amidst findings that the site may host fake reviews. The website claims that it “offers trusted advice from real travelers…More than 50 million honest travel reviews and opinions from real travelers around the world” and “Reviews you can trust”. However, several complainants challenged whether those claims can be substantiated. TripAdvisor responded to the complaints by saying that while they could not guarantee that reviews were 100% free from fraudulent content, they use fraud detection systems to identify and minimise non-genuine content; therefore the practical impact of small numbers of fraudulent reviews slipping through the net is negligible. TripAdvisor also explained that it requires reviewers to give a declaration that their review is genuine and honest and makes clear that fake reviews are both illegal and prohibited by their T&Cs.

Assessing the claims, the ASA acknowledged that TripAdvisor takes steps to monitor suspicious content and asks reviewers to declare that their review is genuine. However it found that reviews could be placed on the site without verification and that non-genuine content could appear on the site undetected. On that basis, it concluded that the claims which implied consumers could be assured that TripAdvisor reviews were honest and trusted were misleading.

Claims made by advertisers and marketers must be capable of substantiation and must not mislead consumers. While TripAdvisor had taken steps to monitor and catch fake content, it had not done enough to make out its claims that travellers’ reviews are genuine and honest.

- Richard Dickinson and Gemma Davies

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

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

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

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

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

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

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

- Randy Shaheen and Anita Kalra

 

 

 

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

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

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

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

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

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

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

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

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

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

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

- Amy Mudge