Consumer Advertising Law Blog

CFPB and FTC Reach Agreement on Cooperation

On January 23, 2012, the Consumer Financial Protection Bureau (CFPB) and the FTC announced that they had signed a memorandum of understanding (MOU). In doing so, the two agencies fulfilled requirements of the Dodd-Frank Act that they negotiate an agreement to coordinate enforcement actions against entities subject to both agencies’ jurisdiction and to harmonize certain rulemakings.

Under section 1024 of the Dodd-Frank Act, the CFPB has enforcement authority over nonbank entities that offer or provide consumer financial products or services. Because the FTC retains enforcement authority over such entities under the Dodd-Frank Act, both agencies could bring separate, and perhaps inconsistent or duplicative, enforcement actions against the same entity over the same issue in the absence of coordination. Accordingly, the Dodd-Frank Act requires the CFPB and the FTC to negotiate an agreement to coordinate enforcement actions against nonbank entities subject to the enforcement authority of both agencies regarding the offering or provision of financial products or services. Under the MOU, each agency has agreed to give notice to the other before commencing an investigation, filing an action or commencing a proceeding, settling an action or proceeding, or intervening in an action against a supervised entity where the other agency also has the authority to bring an enforcement action against the supervised entity. They will coordinate to avoid duplicative or conflicting enforcement actions.

The Dodd-Frank Act also requires the two agencies to negotiate an agreement to coordinate CFPB rulemaking to prohibit “unfair, deceptive, or abusive acts or practices” under section 1031 of the Dodd-Frank Act and FTC rulemaking to prohibit “unfair or deceptive acts or practices” under section 18 of the Federal Trade Commission Act as applied to nonbank entities that are subject to the jurisdiction of both the CFPB and the FTC. Under the MOU, each agency has agreed to provide the other agency with notice before proposing or issuing any rules or formal comprehensive guidance documents under these statutory provisions. They will consult on such rules or guidance documents.

As with other MOUs the FTC has entered into in the past, for example, its MOU with the FDA over review of labeling and advertising of food, cosmetics, medical devices and dietary supplements), the devil is often in the details, and a plan for coordination does not mean that there will be perfect efficiency or consistency. Given that many of the attorneys working at the CFPB came from the FTC, we expect the communication between the two agencies to be open and frequent. It is clear from the detail in this MOU that the agencies have given considerable thought on how to manage the overlapping jurisdiction to maximize agency resources.  Whether this results in more or less aggressive rulemaking, supervisory and/or enforcement actions overall remains to be seen.

UPDATE: For a more detailed discussion of this issue, click here.

- Nancy Perkins and Harry Wu

After Bump in the Road, FTC Puts the Brakes on Gas Mileage Device

Although the FTC has yet to finalize the revised Green Guides over a year since the comment period ended without final action, green claims, particularly ones that stretch credulity, are still an enforcement priority.  The FTC recently settled with the marketers of the “Hydro-Assist Fuel Cell.”  The settlement brings to a close an almost three-year long litigation in the District of New Jersey over the veracity of the marketers’ claims, including that the device would “Turn Any Vehicle into a Hybrid.”  In its January 2009 complaint and TRO brief, the FTC alleged that the marketers--Dennis Lee, Dutchman Enterprises LLC, and United Community Services of America Inc. (d/b/a UCSA Dealers Group LLC)--misrepresented that the device could improve fuel economy.  The marketers claimed that the device could improve fuel mileage by 50% to 261% through a combination of mixing hydrogen produced by electrolysis with the car’s gasoline and pre-treating the gasoline so that it burned more completely.  The FTC argued that the marketers’ claims violate the laws of thermodynamics--the device has to consume more energy than it can produce. 

The court granted the TRO and set a date for a preliminary injunction hearing.  After the first preliminary injunction hearing in February 2009, the magistrate judge issued a report recommending that the preliminary injunction be denied.  The magistrate judge concluded that the FTC failed to establish that there was probable cause that the FTC Act had been violated for the following reasons:  (1) the FTC didn’t rebut the marketers’ proffered scientific evidence with specificity; (2) while the FTC’s expert was an expert in physics, he was not an expert in automotive engines; (3) the FTC’s expert had not examined or tested the device; and (4) the FTC’s expert acknowledged that adding hydrogen to gasoline could increase fuel efficiency and that a similar device being developed at MIT had potential.

In a lucky twist of fate for the FTC, the recording of the first preliminary hearing was inaudible, preventing a true transcript of the proceeding, and the court ordered a new hearing. Taking advantage of the do-over, the FTC submitted supplemental expert reports and briefing to address the magistrate judge’s concerns while maintaining that the magistrate judge had improperly interpreted the FTC’s burden.  The parties eventually entered into a stipulated preliminary injunction and ultimately a settlement agreement.

The settlement includes a $2,738,950 monetary judgment, all but $230,356 of which will be suspended upon the transfer of the assets of certain bank accounts to the FTC for consumer redress. The settlement order prohibits the defendants from marketing any product purporting to generate energy, reduce energy consumption, or improve energy efficiency. Defendants are permitted to sell their remaining stock of “Hydro-Assist Fuel Cells” as long as they don’t represent that the device generates energy, reduces energy consumption, or improves fuel efficiency and they prohibit by contract their dealers from making such claims.  Defendants are obligated to monitor their dealer’s advertising and report violations to the FTC.  With respect to other products, defendants are prohibited from making any false or misleading representations and from making representations without competent and reliable evidence.  Defendants are further prohibited from using customer information obtained in connection with the marketing and sale of the “Hydro-Assist Fuel Cell” device. 

We suspect it unlikely that the FTC will pursue vigorously cases related to claims that are new subjects of the proposed revised Green Guides until this new guidance is final.  After that time, we expect to see a flurry of enforcement activity.  In the meantime, take a hard look at any green claims and make sure they are substantiated and properly explained so consumers understand the breadth and limits to the environmental benefits your product offers.  If it looks too good to be true, know the FTC may well come knocking. 

- Matt Shultz

FTC Proposes Changes to Agency’s Investigatory Procedures

As part of its periodic review of agency rules, the FTC recently announced proposed changes to its rules of practice concerning investigations. With the proposed revisions, the FTC seeks to keep pace with the prevalence of electronic discovery, to help expedite Commission investigations, and to minimize compliance burdens on both targets and third parties.

The proposed changes deal primarily with Part 2 proceedings – the FTC’s nonadjudicative or investigations phase. With the revised rules, the FTC aims to minimize the burden on entities that are tasked with responding to compulsory process like a Civil Investigative Demand or “CID.” Often, after the agency initiates an investigation and determines that no corrective action is required, the agency will likely close the investigation. Under the current rules, both targets and third parties are under a continuing obligation to preserve documents responsive to an FTC request unless and until they receive notification that the investigation has been closed. Although in some cases “closing letters” will be issued to the targets of an investigation notifying them of this fact, this is not always done. Further, where the recipient of the CID is a third party and the investigation is non-public, it is rare that such notification will be given at all. Thus, recipients of compulsory process often do not know when they are relieved of their obligations and will continue to preserve documents, often unnecessarily and at considerable expense. To address these concerns, the revised rules would do away with this requirement and relieve parties of their obligation to preserve documents after a year passes without any written communication from the agency. The revised rules would also require parties receiving compulsory process to “meet and confer” ten days after receipt to attempt to resolve any anticipated compliance issues.

Public comments on the revised rules will be accepted through March 23, 2012.   

- Allyson Himelfarb and Amy Mudge

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

 

 

 

But, Upromised to Keep My Data Secure ….

In a significant action signaling the high risks involved in collecting personal information online, the FTC recently settled charges against the online membership program Upromise Inc. Upromise offers its members the opportunity to purchase products from certain partner merchants, receive cash rebates in return, then place those rebates into college savings accounts.  In order to use the program, consumers download a toolbar onto their computers that highlights partner merchants in consumers’ search results so they may easily find companies that are part of the Upromise program.

In addition to the standard toolbar, Upromise offered its members option of activating a “personalized offers” feature that collected and transmitted information through a member’s browser (this is referred to by the FTC as the “Targeting Tool”).  The information collected was subsequently used to provide targeted advertising to the member.

The FTC took issue with Upromise’s Targeting Tool, which it alleged collected scores of highly sensitive personal information from its members, including the websites they visited; their usernames and passwords; and, in some instances, information entered into forms on secure web pages such as credit card and account numbers, security codes and social security numbers.  The FTC alleged that this information was collected, and in some instances, transmitted to a third party, without proper protections and safeguards. 

Upromise’s privacy statement noted that the Toolbar might “infrequently” collect some personal information, but that any identifiable information would be removed.  The FTC alleged that the filter Upromise purportedly used to avoid collecting certain sensitive data was too narrow and improperly structured, and that data collected as part of the Targeting Tool and then transmitted to a third party provider for analysis was sent over the internet in clear text, rather than encrypted text.  Data transmitted in clear text is highly vulnerable to interception, particularly over unsecured networks such as those in coffee shops and other public spaces.  The FTC also alleged that Upromise failed to test its security measures to ensure they functioned properly and provided adequate protections.

In its recent settlement with the FTC, Upromise  agreed to take a variety of ongoing measures to ensure proper security of personal information and disclosures to consumers consistent with the level of security actually provided.

The FTC’s complaint and the Consent Order agreed to by Upromise highlight key lessons for companies that collect and utilize data entered by consumers over the Internet.  Sensitive personal information should always be encrypted before transmitted via the Internet.  Technology related to data collection and security should be tested and checked regularly and on an ongoing basis using a reliable, certified set of tools and measures.  Privacy and security policies should be displayed to consumers in a clear and prominent way, and inform consumers of the risks involved with the provision of personal information either actively or passively by use of an Internet tool.  And users should always be given an opportunity, clearly and affirmatively, to opt-out of the collection of their personal information or its transmission to  third parties.  The more sophisticated Internet technology becomes, the more important these lessons are.

- Danielle Garten and Nancy Perkins

2011: Consumer Protection and Advertising Year-in-Review

From celebrity misappropriation suits to blockbuster class action rulings in the Supreme Court, 2011 was another exciting year in consumer advertising law. As we look forward to 2012, here’s a look at eleven of the top stories from the year that was. If you have your own nominees for 2011’s top eleven, send an email (randal.shaheen@aporter.com) and we’ll try to post our readers' list later this month. 

11. Maybe It’s Maybelline … or Maybe It’s Airbrushed

Beauty enhancements should come from products, not post-production! So said the UK’s Advertising Standard Authority in 2011, when it banned advertisements [Aug. 2, 2011] depicting Julia Roberts and Christy Turlington on the basis that the images had been digitally altered.

10. 2011.xxx

Many a legitimate enterprise found itself registering a .xxx domain name in 2011, as a new top level domain was launched for adult content on the Internet. These companies blushingly took advantage of the Sunrise B [Oct. 11, 2011] time period during which non-adult-industry trademark owners could defensively register their marks, thereby eliminating them from the pool of available .xxx domains.

9. There’s No Such Thing as a Free Lunch

It seems like the battle against the bulge is never-ending and so is the FTC’s battle against companies advertising misleading weight loss remedies. In 2011 the FTC reached a $25 million settlement [Oct. 4, 2011] with Reebok over ads for toning shoes that promised “a better butt and better legs with every step.”

8. She Looks Like Kim Kardashian

It’s well known that misappropriation suits are de rigueur for any self-respecting celebrity du jour.  See e.g., Paris Hilton’s 2009 suit against Hallmark (for use of the phrase “that’s hot”); Lindsay Lohan’s 2010 suit against E*Trade (for portraying a baby named Lindsay as a “milkaholic”). 2011 was no exception, as Kim Kardashian sued Old Navy [Aug. 4, 2011] for allegedly using a model resembling her in a TV advertisement.   

7. Made in Havana, Puerto Rico

The rule that literally true statements can be challenged as impliedly false took a hit this year [Oct. 10, 2011] when the Third Circuit held that survey evidence showing that the name “Havana Rum” gave the impression the rum was made in Cuba could be excluded because the statement on the bottle that the rum was “made in Puerto Rico” was objectively verifiable.

6. The Meaning of “Natural” 

The trickle of cases alleging deceptive use of the term “natural” on labeling or in advertisements became a torrent in 2011, with new suits [Oct. 3, 2011] against Conagra, Kellogg, and Skinny Girl, to name just a few.

5.Protecting Children in the US -- Standards for Food Advertising

We have been following FTC efforts to establish principles for marketing food to children for some time. In 2011, these efforts culminated in initial recommendations [May 16, 2011] published by the Interagency Working Group on Food Marketed to Children. These recommendations met with heavy resistance in the form of an industry coalition, [Aug. 9, 2011] which is seeking legislative action on the basis that the proposed standards are overbroad and anti-business.     

4. Protecting Children in the UK -- Standards for Decency 

The UK advertising regulator, the Advertising Standards Authority, was also active in protecting children in 2011, finding ad campaigns directed at children [Oct. 24, 2011] or portraying children (here and here) [Aug. 18 and Dec. 19, 2011] to violate UK standards for responsible advertising.

3.COPPA 

The FTC proposed changes [Sept. 23, 2011] to rules implementing the Children’s Online Privacy Protection Act (COPPA), which provides parents control over what personal information web sites may collect from children under 13 years old. These proposals are significant, particularly because FTC enforcement has made COPPA compliance a serious consideration [Nov. 23, 2011] for all web site operators.

2. Concepcion

In AT&T Mobility LLC v. Concepcion [May 4, 2011], the Supreme Court held that arbitration provisions prohibiting class-wide arbitrations can be enforced, and that the California Supreme Court’s decision in Discover Bank finding such provisions unenforceable is preempted by the Federal Arbitration Act. The full ramifications of Concepcion have yet to play out, but at least one court has found that such clauses can still be unconscionable. [Nov. 14, 2011]

1. Wal-Mart v. Dukes

The top spot on our list goes to the Supreme Court’s watershed decision [June 28, 2011] on class certification, the first of its kind in many years. Wal-Mart embraces a rigorous analysis of the elements of class certification, and substantially raises the bar for showing that the commonality element of Rule 23 has been met. Commentators were quick to predict that Wal-Mart would shape class action law for years to come, and early indications [Aug. 24, 2011] suggest that might be an understatement. [Nov. 15, 2011]

- George Langendorf, Randy Shaheen, and Amy Mudge

Tis the Season To Lawfully Process Returns

We wish for our retail clients and friends a successful post-holiday sales season. As the bargain hunters hit the stores and the web, so do the shoppers seeking to return unwanted loot. We thought this a prudent time to remind readers about various laws related to refunds.

The FTC simply asks that a retailer not mislead consumers as to its refund policy. But this is one of those areas governed by different and sometimes conflicting state and even local laws where there may be affirmative requirements. Unless you have clearly and conspicuously told buyers otherwise, it is a best practice to provide cash refunds after purchase. New York requires all merchants to post their refund policies. If the refund policy is not posted, customers must be permitted to return any item for cash for 30 days after purchase as long as the customer has a receipt. California has a similar requirement that if a store does not post its refund policy that stores must provide a full return of the price paid within 30 days of purchase, but there are exceptions for perishable items, goods marked "as is" or "all sales final", and goods not returned in original packaging. Other states have similar requirements of posting of a refund policy and then if a refund policy is not posted, a requirement to accept the return of goods (at least non-custom, new durable goods) for cash for some period of time ranging from 7 days (see Florida) to 60 days (see Hawaii) or an undefined "reasonable" period of time (see Minnesota and Vermont). Again, we hope very much your customers who did not get the perfect gift this holiday season chose to exchange in your shop rather than return, but above all we hope you stay safe from the enforcement eye of the state regulators! 

- Amy Mudge

We Thought People Just Liked to Talk About Superbowl Ads - FTC Closes Investigation of Alleged Payment to Bloggers for Mentioning Ads

When the FTC issued its revised Endorsement Guides, there was much anguish in the blogosphere about the newfound guidance on blogging and the FTC’s enforcement intentions in this regard. The Agency, however, was quick to offer some reassurance that it was not going to throw stay at home blogging mom’s or blogging teenage gamers in jail (see one of our previous postings here). A recent closing letter sent to Hyundai serves as both a reminder that the worst fears in the blogospheres have not come to pass and what steps a company can proactively take to stay out of trouble with the Agency if, despite all precautions, there is a potential Section 5 problem.

The FTC’s inquiry focused on whether bloggers had been given gift certificates as an inducement to include links to Hyundai videos or comment on upcoming Super Bowl ads and were specifically told not to disclose this information (in violation of the Endorsement Guides).

The FTC decided not to recommend an enforcement action. Their decision was influenced in part by steps Hyundai had taken that others might be wise to take as well. 

• First, the incentives were provided by a rogue individual working for a media firm hired to conduct the campaign. Although Hyundai could have been held responsible for the actions of those working for them, Hyundai had an established social media policy that called for bloggers to disclose the receipt of any compensation. (The media firm had one as well.) 

• Second, when the media firm learned of the misconduct, it took prompt action to address it.  We don’t know whether that was before or after the FTC initiated its investigation, but, based upon our prior experience, the FTC likely gave them credit for taking remedial action before the Commission came calling.

So, as this case demonstrates, a few simple steps can sometimes save you from a much bigger problem. 

And just to clear up any confusion, Hyundai did not offer us gift certificates, free cars or super bowl tickets (or anything else) to blog about their case.  

- Randy Shaheen

Lawyer Blogger Lands in Hot Water with Virginia Bar over “Testimonial”

A Richmond criminal defense lawyer who blogs at Richmond Criminal Defense News has been charged with misconduct by the Virginia State Bar because of a bar rule that requires lawyers who advertises case victories to include a disclaimer that every case is different and that prior results don’t guarantee future success.  The Bar Rule sounds a lot like the FTC’s testimonial guidelines but would the FTC treat this case the same way, and if not, is the Virginia Bar overreaching or perhaps even in contravention of the First Amendment?

The FTC’s endorsement guides require that a “testimonial” either be typical of what consumers will generally achieve or, if different, disclose what consumers should expect to generally achieve.  But, the guides only say that the experience will “likely” be interpreted as representative and actually give an example of an endorsement that is not interpreted in that way (people being interviewed leaving a movie.)  Would the FTC find that most consumers realize that the outcome of any legal case is heavily dependent upon its specific facts and that no lawyer (other than Perry Mason) “typically” wins all of his or her cases (Not even us).  No doubt the same analysis would hold true for the advertisements we have all seen where a patients touts some form of successful medical treatment at a hospital or other healthcare facility.  Consumers generally likely realize that medical outcomes, too, are very fact dependent and that such outcomes are not always positive.  Perhaps we’re being overly sensitive in rushing to the defense of a fellow blogger but if the regulators charged with protecting us all from false advertising don’t see any issues then perhaps it’s time for this rule to be amended as well. 

- Randy Shaheen

Do What We Say, Not What We Do? For Advertisers and Enforcers, Words Matter!

It was a big press day for the FTC announcing its $25 million settlement with Reebok last Wednesday over allegedly deceptive ads for its toning shoes promising “a better butt and better legs with every step.” The Commission's press release trumpeted that "[t]he FTC wants national advertisers to understand that they must exercise some responsibility." (Pun most certainly intended). David Vladeck, Director of the agency's Bureau of Consumer Protection, said, “Consumers expected to get a workout, not to get worked over." 

If we applied the FTC's own standards for advertising to its press release, would an average reasonable consumer believe that the company had "exercised" no responsibility?  In fact, a closer examination of the record suggests that Reebok had undertaken scientific testing, but that its testing was alleged to be inadequate. In other words, Reebok lacked adequate substantiation. A recent NAD case involved some of the same products and claims in the FTC action -- NAD examined Reebok’s testing to support claims for the EasyTone footwear and found Reebok had conducted an independent study by a qualified expert, but concluded the study was too small and the testing in a lab did not necessarily reflect real world conditions of women using the shoes in daily life. Reebok's own press release in connection with the settlement states that the company conducted sway tests, pressure tests, EMG tests, and wear tests, and that additional testing is underway (Which, since Reebok is paying consumer redress, raises the interesting question of whether, if the additional testing substantiates the claim, can they get their redress money back?).  Given these additional facts, as the company that pretty much put aerobics shoes on the map (who remembers these classics appropriately coupled with a gold headband and legwarmers for step class), surely Reebok exercised “some responsibility”.

Now, we're not suggesting that the FTC shouldn’t go after misleading claims, even if the advertiser's intentions were good or their studies are insufficient rather than nonexistent. But, in this electronic age, press releases live forever on Google and elsewhere.  And few, if any, people are likely to read the FTC's complaint or other materials to get "the rest of the story."  We're all for trying to make information entertaining, heck, we try to do that here, but we wonder whether the public, and advertisers, might not be better served by a bit more balance sometimes in the Commission's press releases. 

- Amy Mudge

It’s as Natural as…

What is natural?  That is a question that has generated much buzz in the courts and in the press.  We previously blogged about the Snapple suit here  and noted that after the suit was brought against Snapple, the company swapped out the contentious corn syrup ingredient for sugar.  The Corn Refiners Association is also under heat from a lawsuit brought by major sugar companies alleging that the Corn Refiners’ commercials and other attempts to rebrand corn syrup as “corn sugar”, “co-opt the goodwill of ‘sugar’ and… sidestep growing consumer sentiment” and are false and misleading. 

A new slew of cases have begun to address the issue of which ingredients would render the “All Natural” label false. It seems that for companies wanting to be accepted by the public as a natural brand, it’s not as easy as removing most or all of the artificial ingredients.  A lawsuit against SkinnyGirl Margarita alleges that its “All Natural” and “Contains No Preservatives” label was false and misleading due to the use of the preservative sodium benzoate.  Shortly before the complaint was filed, Whole Foods pulled the Margarita off its shelf claiming that it wasn’t “all natural.” The company claims on its website that “[t]he litigation filed in relation to the labeling of Skinnygirl Margarita is frivolous.”As Bethenny Frankel stated more provocatively, “I’m not making wheatgrass here. If I could put an agave plant and some limes on a shelf I would.  [The Skinnygirl Margarita] is as close to nature as possible, while still being a shelf stable product.” 

In addition, a class action was recently brought against Kashi, owned by Kellogg, in the Southern District court of California claiming that Kashi’s “All-Natural” GoLean bars, instant hot cereal, chewy cookies, crackers, pita crisps, waffles, and pizza are anything but that.  Plaintiffs name sodium molybdate, phytnadione, sodium selenite, magnesium phosphate, niacinamide, calcium carbonate, calcium phosphate, calcium pantothenate as ingredients that they claim have already been declared synthetic by federal regulations.  They cite the definition of synthetic under the National Organic Program as “[a]substance that is formulated or manufactured by a chemical process or by a process that chemically changes a substance extracted from naturally occurring plant, animal, or mineral sources, except that such term shall not apply to substances created by naturally occurring biological processes.”  

Finally, ConAgra, a large Canola Oil Producer, has been sued for its use of the “100% Natural” labeling because the oil is made from genetically modified plants. 

*    *    *

The cases seem to keep on coming.  Part of the problem is that the term ”natural” is not governed by a comprehensive set of requirements.  The FTC abandoned an attempt to define “natural” in the 1980s.  The FDA’s website asks the question “What is the difference between natural and artificial ingredients? Is a naturally produced ingredient safer than an artificially manufactured ingredient? It responds with the answer of “[n]atural ingredients are derived from natural sources (e.g., soybeans and corn provide lecithin to maintain product consistency; beets provide beet powder used as food coloring). Other ingredients are not found in nature and therefore must be synthetically produced as artificial ingredients. Also, some ingredients found in nature can be manufactured artificially and produced more economically, with greater purity and more consistent quality, than their natural counterparts.”  The USDA’s website states that Natural, as applied to meat and poultry, is “[a] product containing no artificial ingredient or added color and is only minimally processed. Minimal processing means that the product was processed in a manner that does not fundamentally alter the product. The label must include a statement explaining the meaning of the term natural (such as "no artificial ingredients; minimally processed").” At least one state and some retail chains have similar policies relating to the presence of natural ingredients and minimal processing.

Given the flood of recent litigation perhaps it is the courts, and not the regulators, who will end up providing sorely needed definition.  Though one wonders whether the regulators aren’t better fit for the job. 

- Randy Shaheen and Deborah Birnbaum

Not Everyone’s COPPA Tea?

Last week, the FTC announced release of a significant proposal for changes to rules implementing the Children’s Online Privacy Protection Act (COPPA). COPPA, passed in 2000, provides parents control over what personal information websites may collect from children under 13 years old, largely through rules issued by the FTC. These rules spell out what web site operators must include in privacy policies, when and how to seek verifiable consent from parents, and what operators have to do to protect children’s privacy and safety online.

The Proposal follows the FTC’s review of the existing rules over the past decade, including formal consideration of changes in 2005 that resulted in a decision to retain the rules intact. Since then, FTC staff have received a number of requests in related proceedings urging it to revisit the rules. After opening up the issue again last year, the Commission received 70 comments, and heard more during a public roundtable. In issuing the Proposal last week, staff now intend to act “on an accelerated schedule,” pointing to, among other things, the “explosion in children’s use of mobile devices, [and] proliferation of online social networking and interactive gaming” which suggest new vulnerability of children to the collection of their personal information without parental consent. Reflecting concerns about this increased vulnerability, new rules would impose restrictions on the use of geo-location information or behaviorally targeting children with advertising, as well as many changes briefly summarized below.

Made in USA: President Obama and the FTC Chairman Need to Have a Beer Summit

With all of the economic turmoil, there’s been a lot of talk lately about creating more American jobs.  Ford has attracted a lot of buzz with an ad featuring an impromptu “press conference” where a real Ford Truck owner was asked whether buying American was important to him which he  turns into a statement that he purchased a Ford because they didn’t accept bailout funds.

Last Friday, President Obama signed the America Invents Act which reforms and speeds up the patent process. During the President’s signing speech, he also pushed his jobs creation proposals, which he said would help guarantee that there were American jobs to build newly patented products. Specifically, the President said:

We need to continue to provide incentives and support to make sure the next generation of manufacturing takes root not in China or in Europe, but right here in the United States -- because it’s not enough to invent things here; our workers should also be building the products that are stamped with three proud words: Made in America.

It seems the President needs to invite his FTC Chairman over to the White House for a beer summit.  Although, in our experience, the President is not alone in making this mistake (the Ford commercial above may have made it as well), “Made in America” (or “Made in USA”) does not mean, as the President suggests, that a product was manufactured in the United States, but rather that “all or virtually all” of the product is made in the United States.  “All or virtually all” is in turn defined as "all significant parts and processing that go into the product must be of US origin. That is, the product should contain no — or negligible — foreign content.”  So it’s not enough that the product simply be manufactured in the United States, all or most of its parts and processing must have been made in the United States (and California has its own standard that is arguably even stricter). This is not always an easy standard to meet in today’s global economy, particularly given the fact that foreign parts are sometimes cheaper (or the only source available).  We’ve always wondered whether the FTC’s definition reflects more policy than consumer interpretation.  We’re not economists, but one has to wonder whether such a strict standard does more harm than good in terms of US jobs, especially when companies can’t apply the same exemption for natural resources not available domestically to parts that are no longer available from US suppliers.  And, from a consumer interpretation standpoint, if the POTUS doesn’t understand what the term should mean, it’s no wonder domestic manufacturers get confused as well. 

Of course, the FTC’s Made in USA guides allow companies to make qualified claims.  Let’s try that out in the President’s speech: "[B]ecause it’s not enough to invent things here; our workers should also be building the products that are stamped with eight proud words: Made in USA of US and imported parts."

Need we say more?  Maybe it’s time for some change we can believe in. 

- Randy Shaheen

Missoni, Me, and the Mail Order Rule

Yes, I was online at 5:57 am on Tuesday morning to place my order for the much anticipated Missoni for Target collection. While I have long enjoyed the luxury line for less concept (all time favorite being SimplyVera for Kohl’s), there has not been such a frenzied launch in recent memory. (The Stella McCartney for H&M was similar, selling out within hours, but the line was only available in stores not online.) The media uproar, over the Missoni launch was immediate -- the website was shut down due to volume; lines began forming outside retail stores before dawn, and celebrities tweeted of their intentions to score specific items. I read the press with a smirk on my face, secure in the knowledge that I beat the masses and will be one of the lucky few wearing my $79 raincoat currently selling on ebay for $160.00.

Or will I?

After receiving my order confirmation email at 6:17 am, I later received an email notification advising me that there were some delays with my order and kindly giving me the opportunity to cancel if I saw fit. Not likely. I will wait for my raincoat forever -- Missoni never goes out of style. But it got me thinking about an old friend, the Mail Order Rule, which has has been around since 1975. It is one of the FTC rules that has been enforced fairly consistently, but sporadically, over time (including a recent settlement involving an alleged violation and others in recent years here and here). This rule has even been enforced when the product at issue is free -- at least, if it is a rebate in the form of merchandise.

It is worth reminding ourselves about the Mail Order Rule on occasion, particularly for retailers who are so fortunate as to find themselves in a situation where a new line sells out within hours and they cannot fulfill the demand as quickly as reasonably anticipated. Target’s notice to me comported nicely with the requirements. The basic idea is when you sell a product and make a representation about the shipment, you must have a reasonable basis. If you are silent, you must have a reasonable basis to believe you can ship within 30 days.  There is a reasonableness standard at play, and so some assessment needs to be made of likely supply and demand (or face a civil penalty assessment like the sellers of Big Mouth Bass Billy, perhaps not as iconic as Missoni but also a runaway pop culture success.) The clock on the shipping obligation begins to run as soon as you have a properly completed order, regardless of when you post payment. If you cannot ship on time and realize you will never be able to ship, you need to cancel the order and make a full refund. If you reasonably believe you can ship later, you must seek the customer’s consent to the delay offering them an opportunity to cancel. The FTC’s Business Guides  are also helpful with lots of detail and examples including suggestions for a first and later delay option notices, circumstances when you must cancel an order and requirements for processing refunds (in a nutshell - it must be a full cash refund).

- Amy Mudge

FTC Apps-olutely Reviewing Claims Made by Apps Marketers for Potential Enforcement

The FTC has been making novel headlines in going after affiliate marketers and use of endorsements on blogs and yesterday adds a new first -- announcing consents involving allegedly deceptive health claims by mobile app marketers.  The AcneApp available at iTunes for $1.99 and Acne Pwner available at the Android Marketplace for $.99 claimed to treat acne. The buyer was to hold her smartphone screen to the affected area and blue or red light would eliminate certain acne causing bacteria and reduce blemishes. Ads for the Apps relied on satisfied customer testimonials.  Some AcneApp ads cited a study in the British Journal of Dermatology supporting it claims. The study did not test the efficacy of the mobil app. Readers of this blog know, the FTC has increasingly been requiring product testing to support health claims and not reliance on general studies for substantiation. Further, use of customer testimonials, even if truthful, do not provide the needed support that the product works. Such anecdotes must be supported by science showing typical results.  

In one of his customary cheeky comments, Chairman Leibowitz said in announcing the settlements, "unfortunately when it comes to curing acne, there's no app for that."

The consents [available here and here] include injunctive relief as well as consumer redress.  Before making any claims that apps or other devices cure acne, the respondents must have competent and reliable scientific evidence, defined to mean at least two adequate and controlled independent studies.  While the redress amounts are modest, as a percentage of total sales they are significant (e.g., $1,700 in the case of Acne Pwner, but total downloads at $0.99 only totaled 3,300). 

Why go after such small potatoes?  These cases are a reminder that health claims are a continued priority for the BCP. They should also stand as a warning to Apps makers to make sure the claims made for apps, even if not as life changing as a cure for acne, are substantiated. The disclaimer from AcneApp that "this app is for entertainment purposes only" did not deter the FTC from enforcement, presumably because a marketer can generally only use a disclaimer to add important clarifying information and not take away from the promises it makes it its ads. The FTC is clearly monitoring claims in the app space and we expect this will not be the last of such enforcement efforts.

- Amy Mudge

FTC To Review Rules on Warranties, Retail Food Advertising

As part of its periodic review of agency rules, the FTC recently announced plans to review its rules governing consumer product warranties and retail food advertising.

With respect to warranties, up for review are the three warranty rules, the FTC’s interpretations of those rules, and its guidance on the advertising of warranties and guarantees. The warranty rules govern warranty disclosures, require that warranties be made available to consumers prior to sale, and lay out the standards for any informal dispute process that consumers must utilize prior to filing a suit for breach of warranty. The rule review has potential implications for a wide variety of retailers and manufacturers as the warranty rules have broad application – covering warranties on automobiles, personal computers, mobile devices, appliances, and a host of other consumer products. One topic that may get some attention in the rule review is whether a manufacturer’s warranty must cover damage caused by the use of non-original manufacturer parts. Manufacturers’ warranties often refuse to cover damage resulting from the use of these “aftermarket” parts and questions arise as to whether this practice is permissible under the warranty rules, or, conversely, whether it operates as an illegal “tying arrangement.” Although the FTC has addressed such questions through advisory opinions, the current interpretations might benefit from some updating to provide additional guidance on this and other “tying” scenarios. The FTC’s request for comment has questions specifically tailored to this issue.

In addition, as with other FTC regulations, the increased use of e-commerce and electronic devices is likely to play a role in this review as well. One of the warranty rules up for review requires that retailers make warranties available to consumers before they purchase a product. The current rule does not contemplate whether making warranty documents available electronically is permitted. The rule was promulgated in 1975 and contemplates only brick and mortar, catalog, and door-to-door sales. It does not have rules specifically geared to online sales nor does it otherwise contemplate electronic compliance. Again, although the FTC staff has issued opinions on similar topics and has issued guidance about online disclosures in general, retailers and manufacturers would surely benefit from more direction within the confines of the rule itself. The agency’s request for comment specifically solicits input on this issue as well. Finally, it will be interesting to see whether the FTC will use the review as an opportunity to expand the rule to cover so-called “extended warranties,” or whether it will continue to use Section 5 as its primary enforcement tool. Comments on the warranty rules are due October 24, 2011.

Another rule up for review is the “Unavailability Rule,” which prohibits grocery stores and other food retailers from advertising products at a given price unless the products are in stock and available during the stated period of the advertisement. Otherwise, the ad must disclose that “supplies are limited” or similar language to that effect. Among other things, the FTC seeks comment on whether the rule, which was last updated in 1989, continues to be effective, whether it should be expanded to cover other types of retail stores, or whether it should be amended to account for changes in technology. Comments on this rule are due October 19, 2011.

After the close of the comment period, the agency will review the comments, and, based on the feedback, determine whether to modify or repeal the rule to address the concerns raised, to reflect changes in the marketplace, or to reduce undue regulatory burden. It may also hold public workshops or roundtables if it determines that further input is needed.

- Amy Mudge and Allyson Himelfarb

Food Fights Back - Industry Group May Challenge Food Advertising to Children Guidelines

We previously blogged about a draft interagency group proposal to establish principles for foods that are advertised to children. The interagency group includes representatives from the FTC and FDA. The draft proposal sets forth two principles for ten categories of food most heavily marketed to children (such as cereal, candy, dairy, and carbonated and noncarbonated beverages) and suggests that these principles be met by 2016:

• Principle A: Foods marketed to children should make a meaningful contribution to a healthful diet through inclusion of food groups such as juice, whole grains, low fat or fat free dairy, lean meat or fish, beans, nuts and eggs. There are two different suggested approaches to measure whether the contribution is meaningful. The first option looks to whether 50% by weight of the food or dish is comprised of the relevant groups, while the second sets specific goals for one or more of the relevant food groups.
• Principle B: Foods marketed to children should minimize consumption of foods with significant amounts of nutrients that could have a negative impact on health or weight -- specifically, sodium, saturated fat, trans fat, and added sugars. Specific targets are proposed for each of these.

Unlike other efforts to create voluntary food advertising guidelines, the current proposals appear to have generated significantly more opposition. An industry coalition has formed to fight against the guidelines, with the hope that Congress will act to kill the interagency effort. Dan Jaffe, spokesman for the Sensible Food Policy Coalition and executive vice president for the Association of National Advertisers has been quoted as saying that legislative activity is “likely.”

The coalition is putting forth two arguments. First, the coalition argues that the guidelines are overly strict and would potentially impact not only marketing to children but to adults as well. The coalition issued a report last week arguing that 88 of 100 most popular foods with the general public would not meet the standards for salt, sugar and fat set under the voluntary guidelines for advertising foods to children ages 2 to 17. Second, given the current economic climate, the coalition is arguing that the proposed guidelines will significantly impact spending on marketing and will be a job killer. Of course, the proposed guidelines are only voluntary and given the First Amendment are unlikely to ever have the force of law, but the industry is no doubt worried that these guidelines will in practice become industry standards much as other industries have fallen in line behind other FTC voluntary guidelines.

A provision in the report that accompanied the fiscal 2012 House Financial Services spending bill (HR 2434) warned the FTC not to “issue principles or guidelines governing food marketed to children unless a peer-reviewed scientific study conclusively demonstrates that regulating food marketing directed to children is the most effective way of changing long-term eating behavior and reducing obesity.” The provision also warns the FTC not to base any enforcement actions against companies on the guidelines. The House has not yet taken up the bill.

The fiscal 2012 Agriculture spending bill (HR 2112), which did pass, has report language directing the Agriculture Department to seek appropriators’ approval for any future involvement in the interagency working group.

The coalition claims the support of 25 senators and more than 100 House members who have written letters questioning the scope of the interagency group’s work. The majority of signers have been Republicans, but some Democrats also have joined in. So it looks like we may be headed for a full blown food fight.

- Randy Shaheen

Is it a Bird? Or a Plane? No, it is the FTC Spreading its Wings to Protect British Consumers

Recently, the FTC showed that its powers can even exceed those of Superman when it entered into a settlement with Balls of Kryptonite, and its owner, along with his related companies (collectively referred to as “BOK”). The settlement resolved allegations that Balls violated Section 5 of the FTC Act and the FTC’s Mail Order Rule. The FTC alleged that Balls violated Section 5 by marketing and selling electronic goods to British customers (you read that right British customers) who were falsely led to believe the companies were based in the UK because, among other things, the company’s websites ended in “.co.uk” and prices were quoted in pounds sterling. The FTC also charged BOK with misrepresenting that the products were protected under UK consumer protection regulations, such as cancellation rights and manufacturers’ warranties. BOK also allegedly misrepresented that they self-certified to the US Department of Commerce that they were complying with the EU’s Data Directive prohibiting the transfer of personal data outside the EU. Finally, the FTC accused BOK of committing “numerous” violations of the Mail Order Rule by failing to deliver products to consumers at less than the speed of light, or at least within the promised delivery date without attempting to obtain the consent of the customer, and by not deeming an order cancelled and making prompt refunds when the customer refused to consent to further delays. The consent order prevents BOK from: making misrepresentations regarding their location; using foreign website designations; “charging customers for goods until they are in hand and ready to be shipped;” and violating the Mail Order Rule.

The FTC’s investigation of BOK raises an interesting question as to whether foreign consumers will become the FTC’s new Lois Lane, leaving US consumers to be the former childhood sweetheart but still close friend, Lana Lang. While there is nothing in the FTC’s mandate that requires it to exclusively protect US consumers, one could question whether this investigation was the most efficient use of the FTC’s resources given that that the goods were sold into the UK market and only UK customers were targeted by the allegedly deceptive acts. In the same vein, it could also be argued that it would have been more appropriate to prosecute BOK under Metropolis’s—or rather, the UK’s consumer protection laws.

In the UK, BOK would have had an obligation to abide by, amongst other things, the Trade Descriptions Act 1968, the Sale of Goods Act 1979, the Supply of Goods and Services Act 1982, as well as the Distance Selling Regulations 2000, which are particularly relevant in the UK. The Distance Selling Regulations stipulate that a vendor must provide accurate information about their business, providing details of its location, and of the goods that are being sold. They state that BOK should have provided the customers with the clear opportunity to cancel any order within a week of having received the goods, without reason. BOK should also have given them an adequate opportunity to complain should the customer have wanted to.

The FTC made sure to note that they entered into an unprecedented Metropolis/Smallville alliance and received assistance from the UK’s Office of Fair Trade (OFT), which it described in an earlier press release as one of its principal international law enforcement partners. The FTC and OFT became aware of BOK’s conduct through numerous complaints from UK customers made through the website www.econsumer.gov. The website was created by consumer protection agencies from 25 countries, including the FTC, to help coordinate international enforcement efforts. The FTC also noted that it brought the case under provisions added to the FTC Act by the US SAFE WEB Act of 2006. The SAFE WEB provisions confirm that the FTC has kryptonite-immune powers to sue US-based companies, like BOK, who harm consumers abroad, as part of a strategy to prevent the United States from becoming a haven for fraud.

With increasingly more commerce being conducted over the Internet, it is likely that cross-border fraud similar to what occurred in this case will become more common. As a result, the FTC may have tough decisions as to where to direct their resources, especially given the current budget crisis. If it turns out that combating cross-border harm becomes more of a focus of the FTC enforcement efforts, let’s hope for the FTC staffers’ sake that the new Metropolis is somewhere with better weather and kinder, gentler tabloids.

- Amy Mudge, Chester Choi, and Alex Watts

Maureen Ohlhausen Is Nominee for FTC Commissioner, Says Obama Administration

Maureen Ohlhausen Is Nominee for FTC Commissioner, Says Obama Administration The Obama administration announced its intention today to nominate Maureen Ohlhausen as the next FTC Commissioner. Ohlhausen, currently a partner with Wilkinson Barker Knauer, LLP, would replace outgoing Commissioner Bill Kovacic, who finishes his term in September of this year. Ohlhausen is no stranger at 600 Pennsylvania Avenue; her prior tour of duty included serving as Director of the Office of Policy Planning (OPP) and as attorney advisor to former Commissioner Swindle. Her prior personal experience with how business is done at the commissioner and the staff level should be an asset. Also for those who track such things this would mark the first female majority at the Commission level since 1997.

While Kovacic is a strong antitrust academic, Ohlhausen is a practicing lawyer experienced in issues of privacy and consumer protection. During her tenure, the OPP repeatedly encouraged informative labeling  and advertising meant to better inform consumers, as well as clearer disclosure by mortgage lenders and pharmaceuticals. This reflects the growing focus by the FTC on consumer protection issues. With the Consumer Financial Protection Bureau launching as another agency watchdog on the consumer financial landscape, the consumer protection side of the Commission will clearly not be taking a vacation; instead, it is gearing up with a commissioner likely more interested in taking an active role in directing staff priorities rather than sitting back to see what staff puts on her desk.

Should she be appointed, Ohlhausen’s presence would also beef up the FTC’s growing technology focus. Through the FTC’s Internet Access Task Force, Ohlhausen was responsible for reports on competition in broadband connectivity, which touched on the issue of net neutrality, and on municipal provision of wireless Internet. Meanwhile, under her leadership the OPP weighed in on issues of technology ranging from protecting children from online advertising to auctioning wireless licenses. We would not be surprised given her background and interest in technology if Ohlhausen takes a leadership role in the recently announced antitrust investigation into Google’s search practices.

Ms. Ohlhausen previously served as a clerk to Judge David Sentelle (D. C. Cir.) and to Judge Robert Yock (Fed. Cl.). She received a B.A. from the University of Virginia and a J.D. from George Mason University School of Law, and has since taught Unfair Trade Practices as an adjunct professor at her alma mater.  Ms. Ohlhausen has also contributed academically to the analyses of the relationship between advertising and childhood obesity.

As this blog has discussed previously, the FTC is an independent agency led by five commissioners who each serve staggered seven-year terms. Although nominated by President Obama, Ohlhausen would fill one of the slots reserved for a Republican or independent-- no more than three sitting commissioners may belong to the same political party --as the FTC currently has three Democratic members in the form of Commissioners Julie Brill, Edith Ramirez, and Jon Leibowitz. J. Thomas Rosch rounds out the current roster of Commissioners.

- Amy Mudge and Will Thomas

If Exercising Enforcement Powers Led to Weight Loss, FTC Staff Would All Be Size X-Small

The FTC Staff has long had a focus on deceptive weight loss claims, including a consumer education mission to urge buyers to maintain a “healthy portion of skepticism” when considering the claims of weight loss products, and a call to action urging media outlets to police against deceptive slim down claims, as well. Its most potent weapon in the diet wars is using its enforcement powers aggressively in going after marketers for making allegedly false and deceptive weight loss claims. With a recent settlement, the FTC has again stepped up its game, and any marketer of diet or wellness products should take heed.

Weight loss claims, like other health claims, require competent and reliable scientific evidence as support, and as we have reported, the FTC recently settled a matter with Iovate Health Sciences. where it defined such evidence as two controlled human clinical studies or the product or essentially equivalent product conducted by different researchers.

Recently, the FTC reached a settlement with Beiersdorf, Inc., the maker of Nivea My Silhouette! Redefining Gel Cream over advertisements in which Nivea allegedly implied the gel would reduce body size. This settlement has the same requirements as the Iovate settlement with the heightened definition of the required substantiation for weight loss claims.

In the complaint, the FTC claimed that Beiersdorf spread false or misleading representations about My Silhouette in a television advertisement and via sponsored results for Google searches relating to body size, like “stomach fat,” or “thin waist.” The My Silhouette television ad showed a woman finding her skinny jeans and discovering that they now fit. The internet ads stated “Nivea My Silhouette Can Reduce the Appearance of Your Curves!” What is interesting is what is not claimed. There is no express claim that this product will cause weight loss, let alone a promise of a significant reduction.

The proposed settlement prohibits Beiersdorf from representing that My Silhouette or a similar product applied to the skin promotes significant weight loss or body size reduction. As fencing in it further prohibits the company from claiming any drug, supplement or cosmetic causes weight or fat loss or any reduction in body size “through the use of a product name, endorsement, depiction, or illustration,” absent verification by two clinical studies. More generally, any claim Beiersdorf makes about the health benefits of any drug, supplement or cosmetic must be supported by reliable scientific evidence. Finally, the proposed settlement requires that the company pay $900,000 to the FTC.

As FTC Chairman Jon Leibowitz counseled, “The real skinny on weight loss is that no cream is going to help you fit into your jeans. The tried and true formula for weight loss is diet and exercise.” The real skinny for advertising lawyers is to take a very conservative and careful view as to what claims may fairly be implied by your ads. Iovate redefined the competent and reliable scientific evidence standard; this case makes clear that even fairly subtle implied claims may not escape the enforcement radar.

- Amy Mudge and Ellen Mossman