Consumer Advertising Law Blog

TILT: FTC Alleges PR Firm Violated Endorsement Guides by Rating Clients’ Gaming Apps

We recently blogged about a column by the New York Times ethicist which addressed the ethics of an employer asking its employees to favorably rate iPhone apps it developed and noted that the practice likely violated the FTC’s revised Endorsement guides. Well, a similar practice has caught the FTC’s eye resulting in a public relations firm settling an FTC charge that it provided misleading online endorsements.

The agency was hired by video game developers, and the FTC alleges that its employees posted game reviews of the video game apps on the iTunes store site without disclosing that they were working for the app developers and, in some cases, received a percentage of sales. As we noted in our prior blog, failing to disclose such material connections runs afoul of the FTC’s guidelines. The proposed settlement has various standard provisions that one might expect but also includes a requirement that the firm remove any previously posted misleading endorsements.

The FTC issued its revised Testimonial and Endorsement Guides in the fall of last year. It is common when the FTC issues new or revised guidance in an area that a flurry of enforcement activity follows the release of the guidance. In this case, there has only been one closing letter associated with an investigation of a retailer, likely because the FTC has spent considerable time on its own PR efforts trying to clarify that it did not intend to go after individual bloggers. This case should provide comfort in that regard. However, is it "Game Over" for companies that do not have policies in place requiring sponsored bloggers to disclose their connection to the company? Stay tuned . . .

- Randy Shaheen

When Do I Need to Print Calorie Information on My Restaurant Menu? Yesterday, Says FDA.

On August, 24, 2010, the U.S. Food and Drug Administration published draft and final guidance documents for restaurants and States on how to interpret and implement the new restaurant menu labeling law. The new law, found in section 4205 of the Patient Protection and Affordable Care Act of 2010, requires all chain restaurants and “similar retail food establishments” with 20 or more locations to provide calorie information for “standard menu items” on menus, and to make other nutritional information available in writing on the premises.

FDA’s final guidance states that the law’s preemption provisions went into effect upon enactment with respect to non-identical state and local provisions, but the concurrently issued draft guidance takes the position that certain major provisions of the law also became effective -- and triggered industry labeling obligations -- when President Obama signed it on March 23, 2010, and provides other tips for compliance.

Although FDA’s position in the draft guidance is arguably contrary to the law, and the Agency has stated that it does not intend to enforce the law at this time, absent a change in position or legal challenge, affected chain restaurants and similar retail food establishments will need to consider implementation prior to the issuance of final regulations. Companies operating 20 or more vending machines are also covered.

States that were hoping to continue enforcing their own menu labeling requirements need to stop, unless those requirements are identical to the federal law.

Now that the draft guidance is out, chain restaurants and similar retail food establishments who thought section 4205 was missing important details have more to chew on, and should consider submitting comments on issues such as:

• Is This A Restaurant or “Similar Retail Food Establishment?” FDA tried to include everyone it could, including “coffee shops, delicatessens, food take out and/or delivery establishments (e.g., pizza take out and delivery establishments), convenience stores, movie theaters, cafeterias, bakeries/retail confectionery stores, food service vendors (e.g., lunch wagons, ice cream shops, mall cookie counters, and sidewalk carts), and transportation carriers (e.g., airlines and trains).” The law also covers “grocery stores [that] have cafes, food courts, or otherwise sell food that is for immediate consumption directly to consumers.” FDA is still mulling over how to regulate grocery stores selling dual-purpose foods (i.e., “that could be consumed immediately or could be purchased as traditional grocery items for future consumption, such as in-store bakeries, salad bars, pizza bars, or delicatessens”).

• There are calories in alcohol? Who knew! Yes, there are calories in alcohol. And according to FDA they have to be printed on the menu or menu board. Margaritaville, take note.

• But she said to hold the mayo? Does she need a new menu? No. Custom orders are not covered. But FDA will be coming up with regulations by springtime to cover what it calls “variable items” like pizzas with toppings chosen from a list.

• Do I need to print calorie information on every menu? It seems that way based on FDA’s interpretation. Although the law says it must be printed on the “primary writing” a customer uses to select an item, FDA has interpreted this to include menu boards, take-out menus, and internet menus. That suggests that, at least in FDA-speak, “primary” means “every.”

• Can I put the calories in the fine print under the coleslaw? FDA wants to see it in big print, right next to the menu item, just like you would list the name of the item and price, and at least as large as whichever is bigger.

• Can I at least omit the trans fat? FDA’s draft would require trans fat to be listed with the additional nutritional information (fat, cholesterol, sodium, carbs, sugars, fiber and protein) that must be provided in writing upon request.

For more information about this development, click here.

- Trent Norris and Zack Allen

Made in the USA (We can’t say this in California)

Fireworks to the tune of “Stars and Stripes Forever,” American flags everywhere—the Fourth always generates a swell of patriotism. Patriotism, for some, extends to supporting US manufacturing operations. Indeed, companies often sacrifice cost savings from sourcing materials overseas (or moving manufacturing operations overseas) so that they can continue to market their products as “Made in USA."

We have previously blogged about both the FTC standard for a “Made in USA” label and the stricter California standard. Both require that final processing or assembly occur in the United States. But while the FTC requires that “all or virtually all” of the costs associated with a product be attributable to domestic parts and processing, California prohibits a “Made in USA” label if the product, “or any article, unit, or part thereof,” is “entirely or substantially” made overseas. California courts have interpreted this strictly, to prohibit the label if any part of a product—perhaps even a single screw—is “substantially” made abroad. (For more information on the two standards, see this article.)

However, the California law is so strict that it may well be self-defeating. Some companies, no matter how well-intentioned, may not be able to meet the California standard because, for example, a minor component is only available overseas. Failure to meet the standard means manufacturers must create special packaging for California—not always feasible—or drop the “Made in USA” label entirely. And once forced to drop the label, companies lose a big incentive to continue domestic sourcing and production, and US jobs may be lost, not gained.

A recent MSNBC.com article highlights this issue. Mag Instruments’ flashlights are almost entirely domestically sourced, satisfying the FTC standard. But two small components — a light bulb and an O-ring “not produced by anyone in the United States” — are imported, and so the Company believes it cannot satisfy the California standard. As a result, the company has had to drop the label entirely. Maglite has recently lost market share to cheaper foreign-sourced and imported products. It has now lost the “Made in USA” label that constituted “[o]ne of [its] advantages . . . in the U.S. market.” Founder Anthony Maglica, an ardent supporter of American-made products, refuses to shift Mag Instruments’ production overseas. But he laments the effects of the California law on US businesses, noting that just like “if you have a little dog, and you want him to do the tricks, you give him a bone,” businesses “need incentive too.”

Of course, one solution is to qualify the claim, for example, “Made in USA of US and foreign components”. Mag Instruments has done just that for its Maglite flashlights. However, this doesn’t solve the problem of many companies being unable to make a “Made in USA” claim under standards adopted by the FTC because of a stricter California law. But for now, as Mag has concluded, it may be better than nothing.

In case the Terminator is reading this, maybe it’s time for California to fall in line behind the FTC.

- Randy Shaheen, Amy Mudge, James Speyer, and Karen Otto

FTC’s Revised Endorsement Guides: No Plans to Monitor Bloggers, But Will Focus on Advertisers

The FTC recently issued “FTC Facts for Business,” answering frequently asked questions about the FTC’s revised endorsement guides, which we have previously blogged about here and here. The FTC Staff took considerable heat for its revised Guides, including critiques that it was targeting bloggers and misunderstood social media, and the FAQs try to eliminate some common misunderstandings -- including the fear that the FTC will be knocking on the doors of teen and mom bloggers and issuing fines.

The Q&As begin by summarizing three truth-in-advertising principles: (1) endorsements must be truthful and not misleading; (2) If the advertiser does not have proof that the endorser’s testimonial represents the typical experience, the ad must clearly and conspicuously disclose generally expected results; and (3) If there is a connection between the endorser and the marketer of the product that would affect how people view the endorsement, then that connection should be disclosed. The FAQ then addressed the following subjects:

About the Endorsement Guides: They are not new, but they are revised. They were revised because they were written in 1980, and needed to be updated to apply in today’s marketing world, which includes blogs and social networking sites. Disclosures are important because an act or practice is deceptive if it misleads “a significant minority.” Contrary to some press releases, there is no fine for not complying with the FTC guide. The FTC has no plans to monitor bloggers, but will continue to focus on advertisers. The guides do not hold online reviewers to a higher standard than reviewers for paper-and-ink publications. Finally, if you are acting on behalf of an advertiser, that is commercial speech which can be regulated under the FTC Act if it is deceptive.

When do the Guides apply to endorsements? They cover endorsements that are made on behalf of a sponsoring advertiser, e.g., where an advertiser pays a blogger or gives him or her something of value to discuss a product. Continuously getting free stuff from an advertiser creates an expectation of future benefits from positive reviews. The guide applies to videos just the same way it applies to websites or blogs. If readers understand that a person is being paid to endorse a product, then a disclosure is not necessary.

How should I make the disclosure? There is no special language, the point is simply to give readers the information. The following types of disclosures are typically not sufficient: a single disclosure on a home page, or a button that says “disclosure, legal.” On the other hand, a disclosure can be sufficient in as many as 8 characters in a tweet: “#paid ad”!

How do the Guides apply to affiliate or network marketing? Small network marketing businesses should tell participants that if they get products through the program, they should be clear they got them for free. With respect to affiliate marketers with links to online retailers who pay commissions, such relationships should be disclosed. Social media marketing networks should set up reasonable monitoring programs and should check up on questionable practices.

What do I need to know about the Guides? You can’t talk about your experience if you haven’t tried it. If you were paid to try something, and you thought it was terrible, you can’t say it was great. You can’t make statements about a product that would require proof you don’t actually have. With respect to testimonials, statements like “results not typical,” will not suffice. You must either have the proof to show the results are typical, or clearly and conspicuously disclose the generally expected performance.

- Amy Mudge and Marianne El Sonbaty

Congress: Labeling Fur and Protecting the Family’s Precious Metal

While jewelry and fur may not be top of mind to consumers in the middle of summer, the Federal Trade Commission has long had enforcement authority over the marketing and sale of these products and recently supported legislation that further strengthens consumer protections in these areas.

On June 30, the House Energy and Commerce Committee's Commerce, Trade, and Consumer Protection Subcommittee cleared two bills focusing on consumer protection: the Guarantee of a Legitimate Deal Act of 2010 (H.R. 4501) and the Truth in Fur Labeling Act (H.R. 2480). The Guarantee of a Legitimate Deal Act sets standards for businesses that exchange cash for precious metals through the mail. The Truth in Fur Labeling Act extends the current Fur Products Labeling Act to require even fur products containing less than $150 in fur to have labels detailing the type of fur incorporated in the item.

The market for mail-in gold, in particular, has grown rapidly due to the doubling in the price of gold over the past three years to $1,200 an ounce. A major player in this industry, Cash4Gold.com, has been able to multiply traffic to its website through extensive advertising, including a commercial during the Super Bowl.  Businesses like Cash4Gold generally operate by soliciting consumers to mail in jewelry, making the consumer an offer by sending back a check, and giving the consumer a limited amount of time to reject the offer before the assuming it is accepted. There have been widespread consumer complaints of under-compensation -- some reports indicate that these companies offer customers less than a third of the true value of the jewelry.In an attempt to protect financially-stressed consumers selling their jewelry to these businesses, the proposed Guarantee of a Legitimate Deal Act would require online purchasers of precious metals to wait for affirmative acceptance before melting the jewelry and to promptly return jewelry if the offer is rejected.

Currently, the FTC enforces the Fur Products Labeling Act, which entails producing the Fur Products Name Guide that articulates rules for the labeling of fur products. This law does not, however, require labels on products containing less than $150 in fur, which often leaves consumers uninformed as to whether they are purchasing faux or animal fur. The proposed Truth in Fur Labeling Act would aid consumers who prefer not to buy real fur by eliminating this loophole, which now allows 14% of fur products to go unlabelled. This Act would not preempt states from passing more stringent regulations concerning fur product labeling. Retailers who sell fur products stay tuned for further developments.

- Amy Mudge and Andrew Macurdy

NAD: In The Land Of The Free, Goods “Like Free” Better Mean Really Free

As we get ready in the USA to celebrate our July 4th Independence Day, we thought it appropriate before we head out of town for the long weekend to ponder being free in the commercial sense or how to substantiate “free” claims. Following a challenge by Office Depot to the advertising claims of Staples and OfficeMax, the National Advertising Division of the Council of Better Business Bureaus has recommended that both companies discontinue their claims of “free” supplies.

The challenged claims included print and Internet advertisements made in connection with the companies’ respective “rewards” programs. The Staples advertisements stated “Buy ANY of these office supplies, get 100% back in Staples Rewards” and “It’s like getting supplies for FREE.” The Staples Rewards program allowed customers who registered for the program to redeem Staples Rewards for future supplies if used within a limited time period.

OfficeMax was challenged for claims made in connection with a similar rewards program. The OfficeMax advertisements stated, "It's like getting one FREE," followed by the disclosure, "Pay $34.99 plus earn $35 in MaxPerks Bonus Rewards". However, OfficeMax’s Bonus Rewards were subject to certain restrictions and limitations: customer couldn't use the reward points for 30 days; the points were subject to cancellation at any time; and the points expired after 90 days. In its challenge to its competitors’ use of the word “free”, Office Depot cited the FTC Guide Concerning use of the Word “Free” and Similar Representations, which states that “when making ‘Free’ or similar offers … all of the terms, conditions and obligations should appear in close conjunction with the offer of ‘Free’ merchandise or service.” Office Depot argued that Staples’ and OfficeMax’s “free” claims violated both the spirit and letter of the FTC Guide because the advertising did not include the conditions and major limitations of its offer clearly and conspicuously.

In response, both Staples and OfficeMax argued that all of the conditions and limitations of their offers were made both clear and conspicuous. Additionally, OfficeMax argued that they had not claimed that the merchandise was “free”, just “like free”.

The National Advertising Division did not find Staple’s and OfficeMax’s arguments convincing, however, and in two June decisions, they emphasized that goods are not free when they come with too many strings attached. The NAD stated “Simply put merchandise is either free or its not”. The NAD added that the word “free” has “cachet with consumers and should be reserved for offers that are truly without cost…”. The NAD recommended that both companies discontinue its’ claims of “free” supplies.

Both Staples and OfficeMax, Inc. have stated that they respectfully disagree with the position taken by NAD and have indicated that they will appeal the decisions.

The Consumer Advertising Law Blog wishes you enjoy a happy holiday weekend, completely 100% with no disclaimers needed free from stress and distraction!

- Amy Mudge and Tiana Russell

FTC Privacy Form Wins ClearMark Award

As reported on our blog, last Thursday, the Center for Plain Language held its first ever awards ceremony for the best and worst use of plain language in government and business. One of the two federal government winners of the Center’s ClearMark award, which goes to best uses of plain language, was the Federal Trade Commission’s Model Privacy Form, linked here.

This form shows how a financial company may clearly disclose its use of consumer personal financial information. It presumably is designed to comply with the consumer privacy rules of the Gramm-Leach-Bliley Act.

We note that the form does not use the model language issued by the banking agencies regulations issued pursuant to the GLB Act. Under the current regulations, use of the model language, if accurate, is deemed compliance with the regulation. Thus, most financial companies use the model language (which is why so many privacy statements look and sound similar).

However, if financial companies could obtain some kind of informal clearance to use forms such as the FTC’s - and presumably the agencies would be open to that - we might see companies adopt these more easily to understand privacy and other forms.

- Beth DeSimone

Plain Language Consumer Financial Disclosures...Less Can Be More Clear

The Center for Plain Language, will hold its first ever awards ceremony on Thursday April 29 for the best and worst use of plain language in government and business. This nonprofit, which was reportedly started by a group of federal government employees who wanted the government to provide plain language forms to the public, is holding this ceremony at the most opportune time.

The last two years has seen a proliferation of new disclosure requirements being imposed on providers of financial products and services. Examples include:

• New mortgage loan disclosure requirements issued by the US Department of Housing and Urban Development (HUD) under the Real Estate Settlement Procedures Act (RESPA)
• New credit card and gift card disclosure requirements issued by the Federal Reserve under the CARD Act of 2009
• New overdraft program requirements on debit card and ATM transactions issued by the Federal Reserve under the Electronic Funds Transaction Act

Each of these new disclosure rules come with model forms. But some of these new rules and model forms are so complicated that pages of questions and answers have been released by the agencies to help providers set them up. (A good example is the new Good Faith Estimate form for mortgage loans, which is so complicated that HUD has had to even put on webinars to assist providers in filling out the form). 

The financial reform legislation being debated by Congress will undoubtedly engender more disclosure requirements. Indeed, one of the primary purposes of the proposed Consumer Financial Protection Bureau is to ensure that “consumers are provided with timely and understandable information to make responsible decisions about financial transactions.” [Senate Bill, Section 1021]. To that end, the Bill specifically gives the Bureau the authority to issue rules ensuring that “that the features of any consumer financial product or service both initially and over the term of the products or service are fully, accurately and effectively disclosed to consumers in a manner that permits consumers to understand the costs, benefits and risks associated with the product or service.’ [Senate Bill, Section 1032]

The Center’s director, Annetta Cheek, is certainly aware that most consumer financial disclosures are hopelessly complicated. In interviews with the press publicizing the event, she used credit card disclosures and other financial disclosures as examples of the worst use of plain language (other press links can be found here and here). Hopefully, future efforts can be spent on not just the amount but also the quality of the disclosure. For some times, less rather than more can be better - and certainly clearer.

- Beth DeSimone

Federal Reserve Releases Consumer Friendly Information On New Gift Card Rules

Yesterday, the Federal Reserve Board released information on its web site that explain in simple terms its new gift card rules which go into effect on August 22, 2010. Called "What You Need to Know: New Rules for Gift Cards," this on-line information is the third in a series designed to explain Fed regulations to consumers in an easy-to-understand format. The first issuance explained the Federal Reserve’s new credit card rules that became effective in February, and the second explained the new overdraft rules that will apply to debit card and ATM transactions effective in June 2010.

The latest issuance describes the types of gift cards that are covered under the Federal Reserve’s new gift card rules and those cards that are not covered. The issuance also highlights key consumer protections contained in the new rules, including limits on expiration dates, clear fee disclosure requirements, and certain fee restrictions.

The guidance makes clear that even if a card is not covered by these new gift card rules, consumers should be clearly informed of any expiration dates and fees that would apply to that card.

The Federal Reserve’s explanation of its new rules is very simple and clear. Hopefully, the issuance can be more widely disseminated beyond the Federal Reserve’s official web site, because it can be of real benefit to consumers - especially those that may not have access to computers or that do not regularly read government websites.

- Beth DeSimone

Social Networking Site Gets Tagged . . . Again

Earlier this week, the San Francisco District Attorney announced that the city had reached a $650,000 settlement with Tagged.com over allegations of unfair business practices. We previously blogged here about the settlements totaling $750,000 that Tagged reached in November 2009 with the states of New York and Texas over similar allegations.

The San Francisco settlement is especially noteworthy because it marks an expansion of the company’s legal obligations pursuant to the injunctions entered in New York and Texas. Under the San Francisco settlement, in addition to providing clear and conspicuous disclosures prior to accessing a customer’s email contacts, Tagged must also implement new procedures allowing customers to read and approve any message sent under that customer’s name to the people in the customer’s email contacts list.

As we previously noted, social networking sites and web-based member communities must remain abreast of the data security and privacy laws of the jurisdictions (local, state, and national) in which they and their members reside (Tagged.com is based in San Francisco). Failure to do so could lead to similar consequences, including interruptions in regular business operations and multiple sources of potential liability.

- Taja-Nia Y. Henderson

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

Will FTC Endorsement Guides Hit Celebrities Where it Hurts?

We all know that celebrities rarely do anything without getting paid for it or getting something for free. But are the FTC’s revisions to the endorsement guides about to put a crimp in celebrity style? Slate reports that Kim Kardashian earns $10,000 per corporate tweet. Similarly, another site reported that Gwyneth Paltrow was recently a celebrity VIP at the grand reopening of a luxury hotel in Morocco. Shortly thereafter Paltrow praised the hotel in her online newsletter. Although it’s not certain, it seems unlikely that the actress paid the $800+ per night room rate. Of course, celebrities such as these are not likely in danger of being hauled before the FTC as David Vladeck has consistently stated that the FTC does not plan to go after individual bloggers for violating its Revised Testimonial Guides. However, there is no such promise for companies which are compensating celebrity bloggers.

What can your company do if part of its marketing strategy is to pay one of the Kardashian sisters or other celebs (or even non-celeb bloggers) in cash or with free product? Proactive steps are suggested to avoid becoming part of the FTC’s initial sweep to enforce the revised Guides.

The Word of Mouth Advertising Association or WOMMA recommends educating bloggers regarding responsibilities, require disclosures from bloggers and monitor blogs to make sure the disclosure is happening. For Tweets, WOMMA recommends creating a link to “Disclosures and Relationships” section on the user’s profile and clearly state within the tweet with a hashtag (#spon or #paid) that there is a corporate sponsor relationship. Similar disclosures are recommended by WOMMA for user generated content on social networking sites, video or photo sharing sites, review sites and blogs to detail the disclosure in the editorial copy (“I was paid by [company X] to review” or “I received [X product or service] from [Company x] to review”) and in the user’s profile.

Will requiring such disclosures make this marketing strategy less attractive? Stay tuned.

- Amy Mudge and Randy Shaheen

Disclosure-Patterned Wrapping Paper: Federal Reserve Proposes Gift Card Restrictions and Disclosures

Recently, this blog reported on federal district court cases that signaled the dangers of issuing potentially deceptive gift cards.

The Federal Reserve Board also has weighed in on gift cards with proposed rules that would restrict gift card fees and expiration dates, and require clear and conspicuous disclosures. The proposed rules implement section 401 of the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act), which was enacted in May 2009. The Credit Card Act, amended the Electronic Funds Transfer Act (EFTA), by adding gift card restrictions and requiring the Federal Reserve Board to prescribe rules implementing the EFTA amendments. (See a related blog post, here)

The proposed rules prohibit gift card fees related to dormancy, inactivity, maintenance, card reloads, or balance inquiries unless the following three conditions are met:

1. There has been at least one year of inactivity on the card;
2. No more than one such fee is charged per month; and
3. The consumer is given clear and conspicuous disclosures about the fees

The proposed rules also prohibit gift card expiration dates that are less than five years after the date that the card is issued, or the date that funds were last loaded onto the card. The terms and conditions of any fees or expiration dates must be disclosed both prior to the purchase of the gift card, and on the surface of the actual gift card. Thus, if a gift card is sold within covered packaging, the disclosures must be noticeably written on the outside of the packaging. Gift card issuers are also required to provide a toll-free telephone number for consumers to obtain information on fees, card replacement, and underlying funds that may still be available on a gift card that has expired.

The proposed rules would only apply to gift certificates, store gift cards, and general-use prepaid cards that are marketed as gift cards. Several types of fund transfer devices are specifically excluded from the rules, including:

• Calling cards;
• Reloadable cards not marketed as gift cards;
• Cards not marketed to the general public (like a returned-item store credit, or a tax refund card from a tax preparation company); and
• Cards that solely grant admission to an event or venue.

Gift cards that are given to a consumer as part of a loyalty or awards program are also excluded from the proposed rules, but these cards are still required to provide disclosures related to fees, an expiration date, and a toll-free telephone service number.

The Federal Reserve Board is seeking comments on several aspects of the proposed rules until December 20, 2009, so there are opportunities for the rules to evolve before their final enactment. Yet it is clear that this holiday season will be the last for gift cards lacking disclosures.

UPDATE: A more extensive write-up on the proposed rules can be found here.

- Beth DeSimone and Brian Larkin

FTC + Fake Blogs = Advertisers Might Get a Flogging

Directly advertising to consumers through blogs is an ever increasing trend, tapping into the fact that consumers are turning to the internet before making almost any kind of purchase. Faced with ever increasing choices of products and services in conjunction with ever tightening belts, consumers are using any available tool to make smart purchasing decisions, from mascara and protein bars to cars and houses.

Once the financial power of the blog was recognized, the rise of the “fakosphere” replete with fake blogs (“flogs”) was a foregone conclusion.

Brad Sullivan who writes on consumer fraud and internet scam issues for MSNBC, chronicles the rise of the fakeosphere and how it operates. He states that many flogs are carefully crafted to look exactly like a real blog complete with user comments and lively chat. The flogs will even include a few somewhat negative or skeptical comments regarding the product or service for sale to increase credibility.

Mr. Sullivan’s article provides another example of how the point of the much-maligned new FTC guidelines (see our previous discussion of the guidelines here) are not about destroying enthusiastic bloggers, but protecting consumers from insidious internet scamming. Mary Engle, Director of the FTC’s Division of Advertising Practices says that the agency is targeting floggers, telling MSNBC that “‘[a]dvertising always has to be clear that it’s advertising’” and “[a]n ad disguised as a blog, or a blog where companies get people to pose as satisfied customers and write reviews, both are deceptive.’”

If flogs disclose that they are flogs, they may avoid running afoul of the new guidelines. While flogs can be used as a legitimate advertising technique, the FTC appears to be looking upon them with an especially beady eye due to the inherently deceptive nature of the idea of flogs. Thus, advertisers who are using flogs to market to consumers should err on the side of making the advertising nature of the flog extremely clear as it is as not yet clear and conspicuous what type of disclosures the FTC would consider to be adequate for this form of advertising. For the FTC’s views on what is clear and conspicuous as far as disclosures on websites, click here.

- Candida Harty and Amy Mudge

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

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

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

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

FCC Wants Consumers to Get the Truth, Nothing but the Whole Truth, So Help Them

It should come as no surprise to those in the blogosphere that consumers are relying on mobile broadband and innovative telecom services at an ever-increasing pace. The Federal Communication Commission (FCC) under the leadership of Chairman Julius Genachowski – who, in a short time at the helm, has the FCC blogging, tweeting and on YouTube – is looking at the FCC’s “truth-in-billing” and other consumer protection policies in light of the dynamic changes in communications services since the FCC last examined these issues. To update its record, the FCC recently released a Notice of Inquiry seeking comment on whether there are ways to protect and empower consumers by developing policies to ensure sufficient access to and disclosure of information by communications providers through billing and other practices.

The FCC’s existing truth-in-billing rules, which currently only apply to wireline and wireless voice service providers, require that customer bills:

• Be clearly organized, clearly identify the service provider, and highlight any new providers;
• Contain full and non-misleading descriptions of charges; and
• Contain clear and conspicuous disclosure of information needed for the consumer to contest charges or make inquiries related to the bill.

The FCC’s present inquiry suggests that the FCC could attempt to expand (through a formal rulemaking) the scope of these rules in two ways.

First, the FCC’s existing information disclosure policy has focused on the formatting of consumer bills. The FCC now seeks information available to consumers at all stages of the purchasing process (including selecting a service provider, selecting a service plan, managing use of the service plan, and switching an existing provider or plan).

Second, the FCC has solicited comment on whether any existing truth-in-billing rules or other rules that may develop out of the current inquiry should – for the first time – apply to providers of broadband Internet access, interconnected Voice over Internet Protocol (VoIP) and video subscription services.

The FCC is asking for public input in several key areas including:

• to which services any new and current truth-in-billing rules should apply;
• whether the FCC has jurisdictional authority to adopt truth-in-billing and other consumer protections;
• information that consumers need in all stages of the purchasing process;
• best practices for display of consumer information;
• technological tools that currently or will in the future help consumers compare services and receive information;
• processes for resolving complaints;
• additional consumer education initiatives; and
• relevant consumer disability issues.

Comments and reply comments in response to the Notice are due October 13, 2009 and October 28, 2009, respectively.

- Stephanie Phillipps, Maureen Jeffreys, and Stefanie Alfonso-Frank

Dare to Compare (Credit Cards) at NAD

We Americans love our freebies, and the competition for “what’s in your wallet” has never been more intense, with issuing banks focusing on wooing our loyalty with cash back, airline miles and points to get other free stuff as much or more often than focusing on credit terms. (I must confess I have no idea how the rate I am getting for my Disney Rewards Card compares but I reach for my “Mickey card” most often as I sure love my earned discounts when I go to the World!) NAD was asked to review a campaign for the US Bank FlexPerks Visa card, that gave side by side comparisons to American Express’ SkyMiles card, with claims such as “more value vs. less,” earn points “fast,” and “double points,” and recommended modifications to certain of the claims.

Because the parties did not submit any consumer perception evidence, NAD put on its consumer hat and made its own determinations as to how a reasonable buyer would interpret the advertising claims. Any company bringing or defending an action at the NAD has to make the difficult choice as to whether to conduct consumer surveys, almost always an expensive proposition if done right and still subject to critique, or roll the dice with NAD’s interpretations.

NAD found that the “more value vs. less” claim stating that 20,000 FlexPoints are worth up to $400 of airline travel whereas 20,000 SkyMiles are only worth $200 worth of airline travel, misled consumers to believe that SkyMiles could only be redeemed with American Express’ “Pay with Miles” program. However, SkyMiles may be redeemed in a variety of ways and 20,000 SkyMiles have potential values greater than $200.00. US Bank did provide a parenthetical disclosure that the “more value for less” claim applies only to comparisons between US Bank’s “Awards Tickets” program and the American Express “Pay with Miles” program. However, NAD found the disclosure to be inadequate for two reasons: 1) many ordinary consumers would not understand these terms and the fact that the programs are qualitatively different, and 2) the parenthetical was too small and inconspicuous.

In addition, NAD found that there was no evidence that FlexPerks consumers earned points “fast” as compared to SkyMiles consumers. Further, FlexPerks consumers do not “always” earn “double rewards” on either gas, groceries or airline purchases because the “double rewards” program does not apply to such expenditures exceeding $12,000 per year; and SkyMiles redemptions are not subject to “blackout dates” because consumers could choose to redeem more miles to obtain tickets for certain flights that are unavailable at the general miles requirement level.

FTC and NAD Cut Down Bamboo Claims

Last week the FTC announced its latest actions in the agency’s reinvigorated environmental enforcement efforts.  In complaints against four companies -- Sami Designs, LLC (d/b/a Jonäno); CSE, Inc. (d/b/a Mad Mod); Pure Bamboo, LLC (website); and The M Group, Inc. (d/b/a Bamboosa) -- the FTC alleged that these companies made false and misleading statements about their products being made from “bamboo fiber,” the environmentally friendly nature of the manufacturing process, and the products’ biodegradability, as well as violated the Textile Act and Rules.  (And they scooped us on the best play on words using bamboo in their press release:  “FTC Charges Companies with ‘Bamboo-zling’ Consumers with False Product Claims.”)

Bamboo is popular in environmentally conscious circles for its ability to grow quickly without the use of pesticides.  (Long-term readers of this blog will recall that bamboo was a topic of interest during the FTC’s workshop on green building and textile claims in July 2008.)  The companies charged by the FTC advertised that their textile products were made of bamboo or bamboo fiber.  The FTC did not contest that bamboo was used as the raw material for the manufacture of the textiles used.  The FTC alleged that despite this, the final product was not bamboo or bamboo fiber but rayon that happened to be produced from cellulose derived from bamboo.  Thus, under the consent orders agreed to by Sami Designs, CSE, and Pure Bamboo, these companies are allowed to state that the source of cellulose for their textile is bamboo as long as they also state the recognized generic name of the fiber, e.g., “rayon made from bamboo.”  In addition to the Textile Act issue, this also emphasizes the need to be as specific as possible when making statements that might implicitly convey claims of environmental benefits.

Sami Designs and The M Group both included descriptions of the manufacturing process on their websites a couple of clicks from the main pages.  The FTC declined to find that sufficiently qualified the companies’ claims, alleging that these disclosures were not clear and conspicuous or in close proximity to the claims made.

The FTC also objected to these three companies making claims that their manufacturing processes were environmentally friendly when the processes used toxic chemicals and released hazardous air pollutants.  As we’ve discussed in this space many times before, general claims of environmental benefit, such as “environmentally friendly” or “green,” standing alone, are likely to be considered deceptive.

Pure Bamboo and The M Group also made biodegradability claims about their products.  Consistent with its recent enforcement actions, the FTC alleged that these claims are deceptive because textile products are usually disposed of by recycling or in a landfill, neither of which present conditions that will allow textiles to break down completely as required in the Green Guides.

Can’t Buy Me Love?

…but for $1,800, Twentieth Century Fox hired a high school valedictorian to profess her love for a classmate during her valedictory address, as part of a viral ad campaign.

The Wall Street Journal Online recently reported that Fox paid a Hamilton High School student to plug its movie “I Love You, Beth Cooper” during a graduation speech last month. She told her audience that watching the film’s trailers had “inspired” her to confess her own passion, and then she proclaimed, “I love you, Jake Minor!” in front of the cheering crowd. According to the WSJ, Fox also paid a company to film the scene as a home video and to post it onto YouTube, in the hopes of starting a viral ad for the now widely panned film.

Advertisers increasingly use such tactics to generate buzz around new products, but companies should take heed: viral ads attract the attention of more than just customers. As other commentators have noted, such ads risk falling under the scrutiny of the FTC for deceptive advertising. Under Section 255.5 of the FTC's Guides Concerning Use of Endorsements and Testimonials in Advertising, advertisers must disclose material connections between the endorser and the seller of the advertised product. While the FTC has not recently brought enforcement actions involving viral advertisements, the agency has said that it has the power to regulate this area and that it is closely monitoring viral advertising activity. But the agency also spoke highly of the Word of Mouth Marketing Association’s attempts to self-regulate. WOMAA publishes a Code of Conduct in its “Ethics Toolkit,” which aims to help companies train their staffs and contractors to assess ethics issues in word-of-mouth campaigns. For example, the Code of Conduct requires “consumers involved in a word of mouth initiative to disclose the material aspects of their commercial relationship with a marketer, including the specific type of any remuneration received.” Of course, out and out fraud in this area has and will continue to be subject to endorsement efforts, the most recent being a NY AG settlement with a cosmetic surgery company for reportedly engaging is “astroturfing” or encouraging its employees to post fake glowing reviews and comments of their fabulous results on the web.

As we have mentioned before, we may see FTC enforcement against word-of-mouth advertising once its revised testimonial guides are approved (likely later this year). So companies should think twice before launching viral ads that mask the endorser’s relationship with the seller.

BCP Director on Guides Revisions, Advertising Enforcement

On Wednesday, the FTC’s BCP Director, David Vladeck, testified before a Senate subcommittee responsible for consumer protection issues about deceptive advertising and the FTC’s enforcement and education efforts. We think of particular interest to our readers, the Director’s oral testimony provided updates on the state of the FTC’s revisions of its Endorsements and Testimonials Guides and Green Guides. (Click here for video of the entire hearing.)

The Director addressed two controversial issues that have emerged from the Endorsements and Testimonials Guides revisions (which we have previously blogged about here, here, and here). First, he explained that eliminating the “results not typical” safeguard will simply place advertisers using testimonials on equal footing with other advertisers who currently cannot take advantage of the safe harbor. Thus, advertising using testimonials will have to meet the same substantiation standards as any other advertising. Second, the Director briefly addressed the proposal that consumer bloggers be required to disclose any compensation they receive from advertisers. Although he stated that he believed this was the right rule, he did not strongly commit, stating that the FTC will carefully consider comments before finalizing the new guides.

The Director also provided a brief update on the status of the Green Guides revisions. The FTC recently got clearance from OMB to conduct its proposed consumer perception study, the results of which are expected in the Fall. With this baseline data on how consumers interpret green claims, the proposed revised Guides may be out by the end of the year.

The Commission’s prepared written testimony provides a good overview of its advertising agenda, which will focus on a few areas of particular concern:

• Health and safety claims, such as weight loss, cold prevention, and cancer cure claims;

• Endorsements and testimonials;

• Green claims; and

• Scams exploiting the economic downturn.

 Of note, the testimony states that deceptive weight loss claims would continue to be a top priority and that the FTC would increase its scrutiny of health claims in food advertising.

The written testimony also laments that the FTC’s funding has not kept pace with the increasing complexity of advertising claims and media, but praised Staff for their ability “to do more with less.”

- Matt Shultz