Consumer Advertising Law Blog

Second Time’s The Charm? Kellogg Agrees to Stronger Consent Order as a Result of FTC Investigation

On June 3, 2010, the Federal Trade Commission (FTC) announced the modification of a 2009 Consent Order entered into with the Kellogg Company related to health benefit claims for its food products. The original 2009 Consent Order related to Kellogg’s® Frosted Mini-Wheats® and the company’s claims that the bite size cereal improved children’s attentiveness. The 2009 Order barred Kellogg from “mak[ing] any representation, in any manner, expressly or by implication. . . about the benefits, performance, or efficacy of [Kellogg’s® Frosted Mini-Wheats® cereal or any other morning food or snack food] for cognitive function, cognitive process, or cognitive health, unless the representation is true, non-misleading, and, at the time made, [Kellogg] possesses and relies upon competent and reliable scientific evidence that substantiates the representation.”

This time, Rice Krispies® cereal brought the parties back to the table. In July of 2009, Kellogg unveiled a new advertising campaign for Rice Krispies® cereal claiming that the product boosts children’s immunity. The timing of the Rice Krispies® campaign and its planning was not lost on the Commission. In a Concurring Statement, Commissioner Julie Brill and Chairman Jon Leibowitz noted, “[w]hat is particularly disconcerting to us is that at the same time that Kellogg was making promises to the Commission regarding Frosted Mini-Wheats, the company was preparing to make problematic claims about Rice Krispies.”

The FTC was not the only one that had a problem with Kellogg’s immunity boosting claims. San Francisco city attorney Dennis Herrera demanded Kellogg remove the immunity claims from the Rice Krispies box, which the company agreed to do in November of 2009. In December of 2009, Kellogg settled with the Oregon Department of Justice and Attorney General John Kroger, destroying two million units of packaging and donating hundreds of thousands of boxes of cereal to Oregon Food Bank and Feeding America.

The new FTC Order entered by the parties expands Kellogg’s agreement to “all foods” and unveils some, but not all, of the new, more specific definitions of “competent and reliable scientific evidence” that the Bureau has been talking about. Specifically, the order requires that evidence relied upon, “is sufficient in quality and quantity based on standards generally accepted in the relevant scientific field when considered in light of the entire body of relevant and reliable scientific evidence, to substantiate that the representation is true.”

For comparison, the FTC’s traditional definition of “competent and reliable scientific evidence” is:

...tests, analyses, research, studies, or other evidence based on the expertise of professionals in the relevant area, that has been conducted and evaluated in an objective manner by persons qualified to do so, using procedures generally accepted in the profession to yield accurate and reliable results.

Probably the most notable difference between the two definitions is the express requirement that the “entire body” of relevant evidence be considered. 

- Randy Shaheen and Jessica Halbert

Leibowitz Addresses FTC Efforts to Protect Consumer Privacy

FTC Chairman Jon Leibowitz spoke earlier this month at the National Cable & Telecommunications Association’s Cable Show 2010. He also recently testified before the U.S. Senate Subcommittee on Financial Services and General Government of the Committee on Appropriations concerning the FTC’s FY 2011 budget request. Both his remarks and testimony reflected the FTC’s commitment to protecting consumer privacy while promoting competition. At the Cable Show, Leibowitz discussed behavioral advertising as it intersects with “consumer choice” and “consumer control” -- the choice consumers have to allow advertisers to chart their personal information, and the control they have to say how or where it is stored. In the cyberspace context, Leibowitz commented, “ ‘notice and consent’ rarely reflect[] a consumers’ conscious informed choice.” So what is being done to address this situation?

First, as Leibowitz discussed, a coalition including the Direct Marketing Association, the Interactive Advertising Bureau, and the Better Business Bureau have proposed behavioral advertising guidelines, encouraging companies to explain their information collection practices for advertising outside their privacy policies.

Second, Congress may end up regulating online data collection, as is reflected by Representative Boucher’s draft legislation, released earlier this month. And, last year the FTC issued a revised set of behavioral advertising self-regulatory principles, including the following: (1) websites need to give consumers the choice as to whether they want their personal information gathered for behavioral advertising, and, as Leibowitz warned, the disclosure should not be a “3-point font, ten-page document written by corporate lawyers and buried deep within the site;” (2) consumer data should be stored securely and only as long as necessary to fulfill a business need; (3) where a company changes its privacy policy, consumers should be informed and allowed to choose whether to continue allowing their data to be collected under the new terms; and (4) companies that use sensitive data in advertising should collect it only after receiving express affirmative consent.

Leibowitz’ testimony before the Senate Subcommittee concerning the FY 2011 budget also described the agency’s efforts and successes in protecting consumer privacy, including pursuing 29 actions against companies that failed to protect consumers’ personal information, obtaining $11 million as part of a settlement preventing false identity theft prevention claims, shutting down a rogue ISP that helped deliver child pornography among other illegal spam, and settling a lawsuit against Sears for not fully disclosing the scope of personal information collected. Efforts to protect consumer privacy are also being made in the areas of social networking, cloud computing, online behavioral advertising, and mobile marketing.

Outside the privacy area, Leibowitz also described the FTC’s continuing efforts to (1) protect financially-strapped consumers; (2) continue enforcement of the Do Not Call Registry; (3) protect children through litigation under the Children’s Privacy Protect Act; (4) promote competition by challenging anti-competitive health care mergers and stopping pay-for-delay drug patent settlements; and (5) protect competition in the technology, energy, and consumer goods services. The FTC requested $314 million to support 1,207 full time employees, up $22.3 million and 40 full time employees from last year.

- Amy Mudge and Marianne El Sonbaty

The Heartburn (Litigation) Is Gone...For Now

AstraZeneca, maker of the blockbuster acid reflux drug Nexium, may have finally ended its five-year class action litigation battle with the Pennsylvania Employee Benefit Trust Fund, other third party payors, and individual plaintiffs. On May 6, 2010, in Pennsylvania Employee Benefit Trust Fund v. Zeneca, Inc., the US District Court of Delaware granted AstraZeneca's motion to dismiss plaintiffs' amended complaint for failure to state claims of consumer fraud, unjust enrichment, and negligent misrepresentation. The court's opinion, written by Judge Eduardo Robreno, is enlightening in its canvassing of several state consumer protection statutes and, in the process, detailing some nuanced distinctions in consumer protection law, such as the difference between a causation and reliance requirement and between a product purchased for "personal, family or household purposes" and for commercial purposes. It also underscores the high threshold for pleading causation and reliance in consumer fraud actions.

The litigation has centered around whether AstraZeneca, after the patent for its highly successful "purple pill" Prilosec expired, merely "repackaged" Prilosec as Nexium, with marginal chemical modifications. The union third party payors and individual plaintiffs claim that the advertising campaign for Nexium was misleading and resulted in billions of dollars of needless drug expenditures, since consumers and third party payors were induced to buy Nexium, even though a less-costly, equally-effective generic option was available. The plaintiffs first filed the class action in 2005. It eventually landed in the US Supreme Court in 2009, only to be remanded all the way back again to Delaware, where the federal district court finally addressed plaintiffs' substantive claims of consumer fraud, unjust enrichment, and negligent misrepresentation (the prior appeals focused on preemption issues).

The court first decided that the law of each plaintiff's home state (Pennsylvania, New York, Michigan) applied. As a result the court wrestled with significant differences between the consumer protections laws of Delaware (no reliance requirement), Pennsylvania (reliance requirement), New York (no reliance, but causation requirement), and Michigan (no reliance, but must involve product purchased for "personal, family, or household purposes").

In relating the reliance and causation requirements of Pennsylvania and New York law, respectively, the court said plaintiff's reliance on a defendant's misrepresentations is not "wholly irrelevant" to the analysis of causation. The plaintiff does not have to prove justifiable reliance or that the defendant's misrepresentation was the lone motivation behind a product purchase, but the plaintiff "must allege some awareness of a defendant's misrepresentation prior to purchasing the product in order to establish the element of causation." Since neither the Pennsylvania nor New York plaintiffs alleged to even be aware of the physician-directed marketing or direct-to-consumer advertising of Nexium, their consumer fraud claims were dismissed. Without any awareness of defendants' representations, Plaintiffs' own opinions as to the quality of a product add nothing to the causation and reliance analysis.

Michigan consumer protection law, on the other hand, lacking a reliance requirement, only regulates "the conduct of a business providing goods, property, or service primarily for personal, family, or household purposes..." The "ultimate purpose for which the product is purchased is determinative," not the "characterization of the purchaser." The question then for the court was whether the Michigan plaintiff - a third party payor - was a "'mere conduit or intermediary' for its participants' use of Nexium or whether it purchased Nexium principally to engage in its own commercial enterprise." Since the plaintiff's complaint offered no explanation for how it purchased Nexium (directly or via a partial reimbursement to its members), the court dismissed it.

Though this case has been pending for five years, the majority of time has been consumed with issues outside the sufficiency of the pleadings. Therefore, Judge Robreno left the door open for the plaintiffs to refile, as he dismissed the complaint without prejudice. Through his opinion, he also provided them with a roadmap for amending their complaints to avoid dismissal. Stay tuned to see if AstraZeneca's heartburn (litigation) fully subsides after all. 

- Randy Shaheen and John Eason

FTC Delays Enforcement of "Red Flags" Rule a Fourth Time

The FTC announced on Friday that it would, for the fourth time, delay enforcement of the “Red Flags” Rule.  The deadline--previously set as today, June 1--has been extended to December 31, 2010, in order to allow for further congressional consideration of pending legislation that would limit the scope of covered entities. 

The rule requires “creditors,” as defined in the Fair Credit Reporting Act, to develop identity theft prevention programs that recognize and respond to “red flags.”  The FTC has adopted the position that “creditors” include “professionals, such as lawyers or health care providers, who bill their clients after services are rendered.”  FTC Extended Enforcement Policy (see note 2).  Accordingly, and unexpectedly, the rule currently requires legal, health care, and accounting practices to develop identity theft prevention programs and subjects them to penalties in the event of noncompliance.  Previous enforcement delays responded in part to a lack of awareness on the part of these professions, heavily regulated by other agencies, that they might be subject to the “Red Flags” Rule.

Recently, the American Bar Association (ABA) successfully challenged the FTC’s characterization of lawyers as “creditors” in the US District Court of the District of Columbia, where Judge Reggie Walton held that Congress unambiguously did not intend to grant the FTC authority over attorneys pursuant to FACTA.  See American Bar Association v. FTC.  On appeal to the D.C. Court of Appeals, that decision will likely implicate separate lawsuits brought by the American Medical Association (AMA) and American Institute of Certified Public Accountants (AICPA) seeking to invalidate the FTC’s characterization of physicians and accountants, respectively, as “creditors” on similar grounds.

The House of Representatives has already passed legislation that would narrow the definition of “creditors” to exclude, among certain other businesses, legal, health care, and accounting practices with fewer than twenty employees (H.R. 3763). Similar legislation was recently introduced with bipartisan support in the Senate (S. 3416).  The legislation’s exclusion of small practices might, however, imply the inclusion of larger practices, thereby undermining the ABA, AMA, and AICPA claims. 

FTC Chairman Jon Leibowitz implores Congress to act quickly, complaining that, “as an agency we’re charged with enforcing the law, and endless extensions delay enforcement.”  In the meantime, though, the FTC might avoid such “endless extensions” by responding to initial indications from both courts and Congress that it has overextended application of the “Red Flags” Rule.

For more perspective on this development, click here for an interview conducted a few days before the FTC announcement by Bloomberg Law's legal analyst Spencer Mazyck with Arnold & Porter attorney, Nancy Perkins.

- Nancy Perkins and Caroline DeCell

Culling the Herd of Abusive Class Action Litigation

The pressure to settle a class action that has made it past the certification stage is usually overwhelming. Regardless of the merits of the underlying claims, most companies will refuse to bet the company on a favorable jury verdict. In recent years, three independent legal developments, from three separate sources, have converged to alleviate this pressure for consumer sector companies facing unfair and deceptive practices and other class action litigation related to their marketing and advertising practices (as well as other types of consumer class actions such as antitrust and product liability cases):

• Congress diverting large class actions from state court to federal court
• The Supreme Court tightening federal pleading requirements
• Circuit Courts of Appeals tightening federal class certification standards

While far from a perfect fix, these changes in the law have made it tougher for plaintiffs’ lawyers to shake down American businesses via meritless class actions.

The Class Action Fairness Act (CAFA) funnels large class actions to federal courts. Once in federal court, the Supreme Court decisions in Twombly and Iqbal impose a finer filter at the motion-to-dismiss stage. And if a lawsuit proceeds beyond the pleading stage, the federal circuit court decisions in In re IPO and In re Hydrogen Peroxide and their brethren impose stricter standards for class certification. Taken together, these three independent developments will operate to limit the number of class actions that proceed to the expensive stage of discovery and that are ultimately certified.

Notably, these developments will cull the herd only of its weakest members. A lawsuit based on facts that plausibly suggest wrongdoing will, as always, survive a motion to dismiss. And a class action supported by a factual record showing that it is legitimately appropriate for class treatment will also survive this increased scrutiny. The cases that will not survive are those that are facially meritless or inappropriate for class treatment, and they will be weeded out at an earlier stage of the litigation, thus “secur[ing] the just, speedy, and inexpensive determination” of purported class actions. (Fed. R. Civ. P. 1).

For a more in-depth discussion on these developments, click here.

- James Speyer and Trent Norris

Provisions In Proposed Financial Reform Legislation Will Alter The Preemption Landscape

Passage by the US Senate last week of the Restoring American Financial Stability Act of 2010 containing new standards for consumer protection sets the stage for a significant change in the standards for federal preemption of state law governing the offering of financial services to consumers. With limited exceptions for “inconsistent” state laws, the new federal consumer protection requirements would not preempt state law.

But at least as importantly for national banks and federal savings bank and their respective subsidiaries, both the House and Senate versions of this legislation would alter existing preemption standards by specifically outlining new “clarifying” standards for preemption of state law by the National Bank Act, and the Home Owners’ Loan Act. As is detailed in this advisory, these new standards would narrow the circumstances under which the NBA and HOLA could be deemed to preempt state law as applied to national banks, federal savings banks, and operating subsidiaries of those federally chartered banking institutions, thereby altering the regulatory and litigation landscape under which these institutions operate. If these new standards are included in the final legislation − which they almost certainly will − the circumstances under which national banks and federal savings banks may offer consumer products and services on a uniform, nationwide platform will be more limited and the costs of providing such services likely will increase. 

For national banks, the new standards will codify existing precedent (i.e., the standards that were articulated by Barnett Bank v. Nelson, 517 U.S. 25 (1996)), but significantly limit the possible interpretation and application of that precedent. For federal savings banks, the standards will be new to them, as federal savings banks have always operated pursuant to a broad federal mandate under HOLA and its implementing regulations “occupying the field” of regulation with respect to deposit-taking and lending activities. To adapt to these changes, federal savings banks as well as national banks will likely need to undertake a probing review of their policies and procedures in relation to state laws in the consumer area. In any event, regulatory and compliance costs will increase.

On the litigation front, all financial institutions subject to the legislation’s new consumer protection provisions, including but not limited to national banks and federal savings banks, likely will see an increase in plaintiffs’ activities and the advent of broader actions by state Attorneys General. Defending against these actions on grounds of federal preemption will be a new challenge and will require both a solid understanding of preexisting precedent and the analytical skill to demonstrate that the new tests for preemption can be met under these standards.

- Beth DeSimone and Nancy Perkins

Digital Marketing of Alcohol Products Placed Under Microscope

Gone are the days when alcohol marketing consisted only of catchy slogans, like "Guinness is Good for You" and "This Bud's for You." Today, alcohol advertising often comes in the form of online games, quizzes, videos, screensavers, discussion boards, customized music - even "interactive residences." This content advertising is found not only on a supplier's website, but also on social networking sites, such as Facebook. Concern over how much youth are exposed to these marketing items, and their subsequent effects, is what sparked a recent report by the Center for Digital Democracy ("Alcohol Marketing in the Digital Age") calling for investigative action by the FTC and state attorneys general into the adequacy of self-regulatory measures taken by alcohol companies in online advertising.

Alcohol companies are utilizing social networks to market their brands in various methods. On Facebook, for example, a company can sponsor social games, blogs, groups, fan pages, videos, widgets (applications), events, and polls (see the report for numerous specific examples). The marketing then typically goes "viral," as users pass along the video, information, or applications to others.

The report raises at least two interesting questions.  First, what constitutes a sufficient age verification mechanism. Initially recommended by the FTC in a 1999 report, age verification mechanisms are now found on most alcohol company web sites and typically require entry of a user's birthdate.  To combat fraud, the FTC has urged companies to utilize "tools to prevent minors from back-clicking to change their birth date" (2008 report) and ensure their "web site content is not likely to appeal to minors" (2003 report).

Age verification is also an issue for alcohol related pages on social networking sites, since such sites are very popular with the teenage demographic (a third of Facebook users are twenty years old or younger). In a 2008 report, the FTC did not need to address the issue (except in a footnote), since Facebook did not yet accept advertising from alcohol companies. Facebook now permits alcohol advertising if it meets its prescribed guidelines, requiring that ads be "targeted to people 21 years or older" (in the US) and that "Facebook Pages" possess "viewer restrictions" set at 21 years of age. (it appears that Facebook provides access depending upon the age profile of the user) 

However, the CDD report suggests that content from age restricted sites is "rebroadcast" by visitors to these sites in a manner that results in little if any age restrictions.  (We note that the Bud Light Facebook page asks visitors to only share the content "with friends 21 and older.)  A 2009 study by the Marin Institute tested this issue.  Its authors created two Facebook user profiles, one under-21 and one over-21. To attract alcohol advertising, they placed terms like "drinking," "partying," and "bars" in the "Interests" and Activities" sections of their profiles. They found that the number of paid alcohol ads is minor "compared to the tens of thousands of alcohol-related Pages, Applications, Events, and Groups" subject to few guidelines. Much of that content is "accessible to users of every age."  Of course, the fact that such "rebroadcasting" occurs does not necessarily mean that the advertiser is legally responsible for any dissemination of its advertising materials other than its own. 

So what actions is the CDD calling for?  It is recommending that the industry set stronger self-regulatory codes and that the FTC investigate the effectiveness of age-verification systems, among other things. The Center thinks Congress and the FTC's relatively recent foray into interactive consumer advertising has been mostly focused on "the impact on personal privacy of commercial data collection policies"; therefore, the time may be ripe for the FTC to address alcohol marketing on social networking sites (the issue has even spread beyond the U.S.). Stay tuned to see if the FTC decides to address these issues, which have potential ramifications that reach beyond simply alcohol marketing. 

Randy Shaheen and John Eason

FDA’s New Internet Research: Connecting “Unbranded” Websites to Drug Manufacturers and Faulting Manufacturers for the Content

FDA has again made clear its interest in ensuring that “less traditional” forms of marketing of FDA-regulated products do not mislead consumers or otherwise pose a potential risk to public health. Back in November 2009, FDA held a public hearing and opened a docket on promotion of medical products using the Internet and social media tools, such as Google searches, Twitter, Facebook, and Wikipedia. This hearing alerted companies to increased FDA scrutiny of, among other things, company-sponsored websites and third-party websites that may be receiving manufacturer grants or other funding.

On April 21, 2010, FDA’s Division of Drug marketing, Advertising, and Communications (DDMAC) issued a Warning Letter to Novartis Pharmaceuticals Corporation concerning two disease awareness sites sponsored by Novartis, www.gistalliance.com and www.cmlalliance.com -- even though these websites nowhere mentioned the Novartis cancer drug by name, Gleevec®. FDA nonetheless considered these websites to be “branded promotional materials for Gleevec” that promoted the drug for an unapproved use, failed to disclose risk information, and made unsubstantiated dosing claims that could “put patients at higher risk of experiencing serious adverse events.”

FDA did some detective work in linking the two disease awareness sites to Gleevec. Among other alleged connections, FDA found that the two websites were:

• “perceptually similar” to the Novartis Gleevec product site” in that both included a “distinct orange” color scheme and similar design layouts, for example;
• registered to Novartis;
• contained numerous specific references to a set of clinical guidelines that recommend Gleevec exclusively for first-line treatment of the two cancers discussed in the websites, chronic myeloid leukemia (CML) and gastrointestinal stromal tumors (GIST);
• discussed the use of a certain class of anti-cancer drugs for first-line treatment of CML and GIST, often in conjunction with the Novartis name -- yet Gleevec is the only product in this drug class indicated for these uses and the only one made by Novartis for these uses, details that are “well known in the oncology community”; and
• presented data and corresponding literature references with titles that included the established name of the drug (imatinib), and at least one of these literature references described the pivotal clinical study submitted to FDA in support of the Gleevec approval.

These and other factors made FDA consider the websites “Gleevec-specific promotions” and thus subject to FDA regulation. FDA identified in these promotional sites a number of alleged violations, including promotion of an unapproved use for Gleevec and omission or minimization of risks associated with the drug.

FDA did further detective work in tracing back to Novartis a third website, www.bloodleveltesting.com, which was prominently displayed on the two main “Gleevec-branded” websites above and which included allegedly unsubstantiated dosing claims for Gleevec. A pop-up disclaimer for this third website -- you are “moving to an external website independently operated and not managed by the Novartis Pharmaceuticals Corporation” -- did nothing to dispel FDA’s belief that Novartis was responsible for its content. Among other links to Novartis, FDA found that the website was registered to Novartis, included repeated references to Novartis and hyperlinks to the two “Gleevec-branded” websites above, and identified no other pharmaceutical manufacturers or drugs in Gleevec’s drug class except Novartis and imatinib (Gleevec’s established drug name), respectively. That Novartis offered a Blood Level Testing Program at no cost to healthcare providers further suggested a link between the company and the site www.bloodleveltesting.com. Finding Novartis “at least partly responsible for the content of this website,” FDA faulted Novartis for the website’s unsubstantiated dosing claims, which FDA found “deeply troubl[ing]” from a public health perspective.

This Warning Letter confirms what the November 2009 public hearing, and an earlier batch of Untitled Letters concerning “sponsored-links” (issued on March 26, 2009 and posted in April 2009 here), already indicated: websites, even apparently “unbranded” websites, are under increasing FDA scrutiny. Companies should be careful about how connected they are to disease awareness and other informational sites. Too many connections -- even despite pop-up disclaimers and the like -- may cause FDA to consider the websites promotional materials and fault the company for any information therein that may be misleading or otherwise in violation of the Federal Food, Drug, and Cosmetic Act.

- Margaret Renner and Daniel Kracov

FDA Proposes New Requirements For TV & Radio Prescription Drug Ads

The Food and Drug Administration (FDA) has proposed to amend its regulations concerning direct-to-consumer (DTC) advertisements of prescription drugs. Currently, the Federal Food, Drug, and Cosmetic Act (the Act) requires DTC advertisements of prescription drugs to contain a “true statement” of certain information including a brief summary of side effects, contraindications and effectiveness. This statement is referred to as the “major statement” and if omitted or insufficient could render the drug misbranded in violation of the Act. (See 21 C.F.R. 202.1 and 21 U.S.C. 352(n).) The new rule would implement a requirement for television or radio advertisements that the “major statement” be presented in a “clear, conspicuous, and neutral manner, regardless of the manner in which effectiveness information is presented in the advertisement.”

The requirement for a “clear, conspicuous, and neutral” major statement was created by the Food and Drug Administration Amendments Act of 2007, with a command that standards for the major statement being “clear, conspicuous, and neutral” be put in place within thirty (30) months. The proposal would implement this requirement. Under the proposed amendment, a major statement will be considered clear, conspicuous, and neutral, provided that:

1. the information is presented in language that is readily understandable by consumers;
2. audio information is understandable in terms of volume, articulation, and pacing used;
3. text information is placed appropriately and is presented against a contrasting background for sufficient duration and in a size and font that allows the information to be read easily; and
4. the advertisement does not include distracting representations that detract from communication of the major statement.

The proposal goes on to provide further details and explanations for the presented standards, such as specifically addressing the different levels of language that may be employed for advertisements directed at the medical community versus lay persons. For complete text of the proposal, see here.

Written or electric comments on the proposed rule are being accepted until June 28, 2010. For more information on the submission of comments, see here.

- Daniel Kracov and Jessica Halbert

Bitter Juice To Swallow - Court Strikes Claims In Pom False Advertising Suit Against Coca Cola

Pom Wonderful LLC (“Pom”), makes, markets, and sells POM WONDERFUL® an upscale pomegranate juice. Pom brought suit against Coca-Cola in 2008 stemming from its Minute Maid product -- Enhanced Pomegranate Blueberry Flavored 100% Juice Blend -- a mix of five juices. Pomegranate and blueberry, however, comprise less than .5% each of the overall blend of juices in this Minute Maid Product. In the lawsuit, Pom claimed false advertising under the Lanham Act, 15 U.S.C. §1125(a) as well as false advertising and unfair competition under California’s Business and Professions Code §§17200 and 17500.We have blogged about previous developments in this case, here and here.

To support its claims, Pom has provided consumer complaint evidence bemoaning the product as “nothing but fancy apple grape juice” and a waste of customers’ “time and money.” Pom also presented evidence from a Coca-Cola employee who stated that in her experience, the Juice has received “more complaints than any other Minute Maid Product.” Pom further produced a consumer survey which illustrated that more than a third of participants thought the juice contained only pomegranate and blueberry juices, with nearly all of those participants forming that belief from Minute Maid’s use of ‘pomegranate blueberry’ on the label.

Coke’s counterargument centered on its compliance with FDA labeling requirements, which permit companies to name a multiple-juice beverage with names that do not include all the juices contained in the drink, provided that the represented juice used for labeling the product is used as a flavor (e.g. raspberry-flavored apple and pear juice drink). “Blend” is also contemplated in the labeling requirements as a way to indicate non-represented juices are present (e.g., apple blend; apple juice in a blend of two other fruit juices). See 21 C.F.R § 102.33. Coke asserted that its compliance with the FDA labeling laws preempts any Lanham Act Claim.

Based on this defense, the Court sided with Coca-Cola and determined that Pom may not challenge the naming of the Minute Maid beverage or Minute Maid’s use of a fruit vignette (image of fruits contained in the juice blend product) on its label, both of which comply with FDA labeling requirements. The Court found both items to be clearly within the purview of the FDA and held that, “[a]s a private litigant, Pom cannot seek to have this Court indirectly attack FDA regulations as courts may not be used to second-guess the considered judgments of the FDA.”

Pom remains free to pursue its false advertising claim insofar as it alleges that Minute Maid’s advertising of the juice blend product deceived customers, but how much weight will be afforded to the survey demonstrating such confusion remains in question. Regardless of the survey, if Pom can produce evidence showing that Coca Cola willingly deceived its customers, the court suggested that the burden may then shift to Coca-Cola to prove otherwise.

- Randy Shaheen and Jessica Halbert

UK: Advertising Standards Authority Crackdown on Unclear Legal Disclaimers

A very recent decision by the UK’s Advertising Standards Authority (ASA) regarding an advertisement by Renault, the French car manufacturer, regarding the efficiency of one of its latest electric powered car models has reiterated the ASA’s position regarding clear use of legal disclaimers. The ASA was concerned that the legal disclaimer that Renault used to qualify the claims within one of its recent adverts was insufficiently clear simply because readers of the disclaimer were “unlikely to understand” the qualification.

The Advertisement

The claim by Renault was that the “well-to-wheel efficiency of a Renault Fluence Z.E. will help reduce CO2 emissions by at least 90% compared to a current diesel model”, the small print stated that the comparison was made on the basis of a “French average electric mix”. Renault’s alleged intention was that this should mean that the efficiency saving should be compared, by reference to the “electric mix” in France, where because nuclear power is prevalent, electricity and its use results in relatively little CO2 emissions. Had Renault compared it to the UK’s “average electric mix”, the well-to-wheel reduction (how much fuel it takes to drive a car a given distance) would have been considerably less because the creation of electricity uses more fossil fuels in the UK.

In Renault’s defense, Renault claimed that the advert was part of an European wide campaign, and it made sense that a European wide campaign made reference to the French average electricity generation mix. Renault claims that because the sale of Renault vehicles in France was likely to be far greater than in the UK, it was not misleading to make reference to the French source of electricity being the average mix. Furthermore, they said that they had qualified the claim in the footnote, ensuring that anyone reading the advert and reading the disclaimer should not be mislead.

ASA’s Conclusion

The ASA concluded, however, that although there were differences between the French and UK average electricity generation mixes, this fact was not something that was going to be immediately obvious to the average UK consumer. Furthermore, a reference to this would be insufficiently clear, because UK viewers of that disclaimer were unlikely to understand “the difference between electricity generating mixes in France and the UK and how that would affect CO2 savings in different countries”. This meant that it was likely they would assume that the disclaimer was representative of the typical savings possible in the UK. The ASA concluded that the ad breached Cap Code Clauses 3.1 (substantiation) and 7.1 (truthfulness). Renault was informed that the advert must not appear again in its current form.

The Moral

This decision underlines the importance of ensuring that, when relying on disclaimers in order to qualify an adverts claims, those disclaimers are clear and that the circumstances that those disclaimers rely upon are immediately obvious to the average UK reader. Failure to do this, will mean that advertisers are put in breach of the CAP Code, and may have their adverts banned from appearing. Obviously, this could be a very expensive consequence.

- Richard Dickinson and Alex Watt

Retailer’s Close Encounter With New FTC Endorsement Guides

We have previously blogged here about the FTC’s revised guidelines governing endorsements and testimonials. Among other things the guidelines state that bloggers who receive cash or in-kind payment to review a product may be considered an endorser of that product. As a result, any material connections between the company and the blogger must be disclosed and companies could be held liable for any claims the bloggers may make about their products.

The new guidelines caused quite a stir in the blogosphere, along with apocalyptical predictions, but in one of its first investigations under the new guidelines the FTC decided to be merciful. On April 20, 2010, the FTC notified Ann Taylor through a letter that it was closing its investigation of content posted by bloggers who attended a January 2010 preview of Ann Taylor LOFT’s Summer 2010 collection. LOFT invited bloggers to attend the preview, offering a “special gift,” and promising those that wrote about the event that they would be entered into a “mystery gift-card drawing” worth $50 to $500. Ann Taylor posted a sign at the preview that told bloggers that they should disclose the gifts they received in their coverage of the event, but according to the FTC it was not clear how many bloggers actually saw the sign.

The FTC decided not to recommend an enforcement action against LOFT based on three factors. First, the January 26, 2010 preview was the first and only event LOFT had held up to the date of the closing letter. Second, only a small number of bloggers actually posted content about the preview, and several of the bloggers disclosed that the company had provided them gifts at the preview. Third, LOFT adopted a written policy in February 2010 stating that it would not issue any gift to any blogger without first telling the blogger that the blogger must disclose the gift in their blog. The FTC did state that it expects LOFT to honor its written policy and that LOFT must take reasonable steps to monitor bloggers’ compliance with the obligation to disclose gifts they receive from LOFT.

- Randy Shaheen and Chester Choi

Can the FTC Use the Green Guides to Challenge Corporate Environmental Image Advertising?

A recent law review article in the Penn State Environmental Law Review, "Thinking Green or Scheming Green? How and Why the FTC Green Guide Revisions Should Address Corporate Claims of Environmental Sustainability," (permission to post received from the Author, the Law Review, and Westlaw) focuses renewed attention on whether the FTC has jurisdiction over corporate imaging advertising. The article assumes that the FTC’s green guides do not currently encompass general claims by corporations that their business practices are “environmentally friendly, socially responsible, and sustainable” and calls upon the agency to expand the reach of its Green Guides to cover such practices. As the law review article points out, many corporations want to be considered “green” not only to bolster their image, but also to remain competitive in their respective industries.

One of the key issues here is whether the First Amendment permits the FTC to pursue Section 5 cases against allegedly misleading corporate image advertising. Opinions on this issue are divided. FTC Commissioner Rosch, in a speech at the National Advertising Division’s annual law conference. expressed the view that whether the First Amendment protects corporate environmental image advertising poses “difficult constitutional issues.” He concluded that the first amendment “shield” is likely available to many corporate image environmental ads regardless of whether the “message” is true or false. However, he went on to say that he does not believe that all such ads are shielded, particularly those that may be “predominantly commercial in their purpose and effect.” He concluded that “the closer the image claims are associated with specific branded products…the less likely it is that the First Amendment provides absolute protection.”

The California Supreme Court in a 2002 case reached an arguably narrower conclusion about the scope of the First Amendment. In a challenge to an advertisement by Nike relating to working conditions in its overseas factories the California Supreme Court reversed the lower court and concluded that “because the messages in question were directed by a commercial speaker to a commercial audience, and because they made representations of fact about the speaker’s own business operations for the purpose of promoting sales of its products, . . . [the] messages are commercial speech.” [Nike v. Kasky 45 P.3d 243] The U.S. Supreme Court had an opportunity to review the Nike case and perhaps offer some more concrete guidance in this area but determined instead that certiorari had been improvidently granted.

So, making sure that your corporate image environmental advertising is accurate may just be a good business practice or it may be a smart legal practice as well.

- Randy Shaheen and Danielle Sims

Long-Awaited Consumer Privacy Bill Announced by House Committee

Today, the House Energy and Commerce Committee released a bipartisan, draft proposal of new legislation to protect consumer privacy both on and off the Internet. The proposed legislation would require entities that collect “covered information” from at least 5,000 individuals in any 12-month period to give individual notice of the entity’s privacy policy and request consent before collecting, using, or disclosing their “covered information.” 

The bill defines “covered information” broadly to include personal data such as a consumer’s name, address, social security number, medical records, and financial information. However, the bill’s restrictions and requirements are principally focused on the use and disclosure of such information for advertising or marketing purposes, and generally would not apply to uses and disclosures of information collected for conducting a “transaction” or “operation” at the request of or under an agreement with the individual.

Before collecting any of the covered personal information other than for “transaction” or “operations” purposes, companies would generally be required under the bill to provide notice of the company’s privacy policy and the intended uses of the data. If the information is being collected over the internet, the notice must be posted conspicuously on the web site. Otherwise, the company must provide the consumer with a written copy of the notice. The notice must, among a number of requirements, describe who the company is that is collecting the information, how they will collect it, what it will be used for, how long the company will keep it, and under what circumstances the company will disclose it to others.

Although the bill requires the consumer’s consent before a company can collect, use, or disclose the consumer’s information, it generally assumes consent unless the consumer opts out. This means that if the individual consumer either affirmatively agrees to the use of their information or does not respond either way, then the company may use their information. Companies will only be prevented from using an individual consumer’s information if the consumer actively denies consent. This “opt out” consent does not apply in three situations. First, a company must get affirmative consent before collecting or disclosing sensitive information about the consumer. Sensitive information includes a consumer’s medical records, financial information, location, race, religion, or sexual orientation. Second, a company may not release any of the consumer’s data to another company without express consent. Third, and finally, a company cannot collect or disclose all or substantially all of a consumer’s online activity without express consent.

Under the proposed legislation, the Federal Trade Commission (FTC) would be responsible for enforcing the bill. The FTC would have the same jurisdiction, powers, and duties as though all applicable terms and provisions of the Federal Trade Commission Act (15 U.S.C. § 41 et seq.) were incorporated into the bill. The FTC would also be able to make rules as needed to carry out the bill. State attorneys general would also be able to enforce the bill through civil actions in federal court, subject to the intervention of the FTC. However, there would be no private right of action to enforce the bill.

- Nancy Perkins and Peter Roman

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

Biggest Circuit Adopts Strict Class Cert Standard but Certifies Wal-Mart-Sized Class

What do you get when the nation's largest circuit court of appeals reviews en banc a super-sized class certified against the country's largest discounter? One hundred thirty-eight pages of opinions that reach a conclusion by the narrowest of margins. Never shy about dancing to the beat of its own drum, in a sharply split 6-5 en banc decision, the United States Court of Appeals for the Ninth Circuit affirmed the certification of one of the largest classes in history. This opinion is important for any company defending a class action in the wild west, including consumer fraud cases and those brought under California’s UCL.

The case is Dukes v. Wal-Mart Stores, Inc. The claim is sex discrimination in violation of Title VII of the Civil Rights Act of 1964. The class the court approved is breathtaking and unprecedented: it consists of every woman working in Wal-Mart’s retail stores, encompassing up to 1.5 million employees at 3,400 stores spread over all 50 states, ranging from hourly workers all the way up the ladder to store managers. Although the class was certified under Rule 23(b)(2) (the section intended to address injunctive relief classes), the plaintiffs also seek monetary awards of back pay and punitive damages -- awards that could easily climb into the billions of dollars. (In one of Wal-Mart’s few victories, the court remanded the certification of the punitive damages claims with instructions to reconsider the certification -- but hinted that certification of these claims might well be appropriate).

This gargantuan class engendered an equivalent set of opinions. A thorough evaluation of the opinions is beyond the scope of this blog (and, in any event, there will be no shortage of such discussions in other media outlets). Suffice it to say that from an employment law perspective it was not a good day for business. As the scathing dissent, authored by Judge Sandra Ikuta (and joined by Chief Judge Alex Kozinski), put it, “the door is now open to Title VII lawsuits targeting national and international companies, regardless of size and diversity, based on nothing more than general and conclusory allegations, a handful of anecdotes, and statistical disparities that bear little relation to the alleged discriminatory decisions.”

Whether the court was correct in certifying this sprawling leviathan of a class is already being hotly debated, and may well be decided by the Supreme Court (Wal-Mart has already announced it will seek Supreme Court review). But for advertising and consumer protection lawyers, the key take-away is this: in Dukes, the Ninth Circuit expressly instructs district courts to apply a class certification standard that conforms to the rigorous standards applied in the Second Circuit (via the landmark decision, In re IPO), as well as most other Circuits. The Dukes court described IPO as “now the leading case on the extent to which a district court must resolve Rule 23 issues that overlap with the merits of the case. IPO held that factual disputes concerning each of the Rule 23 factors must be analyzed and resolved,” a holding that Dukes repeatedly embraced as its own. As the majority opinion stated, “the IPO court explained, and we agree, that . . . [t]he district court must analyze underlying facts and legal issues going to certification questions regardless of any overlap with the merits.” In so holding the court slammed the door on the argument that courts may not consider facts relevant to whether the requirements of Rule 23 have been satisfied simply because these same facts are also relevant to the merits inquiry -- an argument, the court noted, that is based on a misreading of the Supreme Court’s 1974 decision in Eisen v. Carlisle.

The court’s opinion represents a complete about-face from the Ninth Circuit’s original panel opinion in Dukes, which had held that district courts may not weigh conflicting evidence in determining whether the Rule 23 requirements have been satisfied. It is now clear that in the Ninth Circuit, as in most of the other circuits, plaintiffs must prove that they satisfy all of the Rule 23 requirements, and can no longer rely on their pleadings or a perfunctory evidentiary showing. And, courts must examine all of the evidence bearing on certification, and must resolve factual disputes to the extent they are relevant to the certification decision.

The court’s adoption of the more rigorous standard is, from the defense perspective, a welcome development. It is no secret that certification of a class can create tremendous pressure to settle anemic or even meritless lawsuits for large sums of money. The standard announced this week in Dukes provides district courts in the Ninth Circuit with the tools they need to relieve some of this pressure. To be sure, this development provides little comfort to Wal-Mart right now. But for businesses generally, the new standard beats the old one hands down.

-James Speyer, Trent Norris, & Gabe Padilla

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

Hey, Who Put the Hard Drive in My Photocopier?

A recent CBS News investigative report revealed that most copiers made since 2002 contain a hard drive that stores up to 20,000 of the documents copied, faxed, or scanned on the copier. That likely came as a surprise to many folks, and particularly copy machine owners and lessees. As a result, subsequent owners or lessees of the copier may gain access to a company’s confidential intellectual property, business and legal strategy, or individuals’ confidential personal information. A CBS News team bought four machines from a used copier retailer and found confidential documents from the sex crimes unit of a city police force, including incident data and lists of sex offenders, and 300 pages of medical records and health care information from a New York insurance company. Compounding the issue, many copiers are now networked so that the hard drive on the copier may also contain internal information about a company’s network, and its security, making breaches easier.

In a world of data storage, networked desktop computers, laptops, and internet access, none of these issues are new to businesses, what is different about the storage of private information on photocopiers is that many businesses may not have known that it was happening. At least 60% of Americans did not know that copiers stored images of everything that they copied on their hard drives, according to a survey conducted by Sharp Imaging and cited in the same CBS report.

So, perhaps add copiers to the list of office equipment for which data protection steps need to be taken. Companies may need to review policies for access to copiers and wipe hard drives before copiers are removed from their offices. Copiers could also become yet another battleground in the area of electronic discovery. On the other hand, maybe copiers could be designed to delete the stored images as soon as they are used and encrypt the images until then. Clearly many users weren’t aware that copiers were storing this information on a long-term basis or using this feature. So, is it really necessary in most cases?

- Ronald Lee, Suzanne Wilson, and Peter Roman

Is Congress putting the FTC on Steroids?

As reported in February on this blog, the Federal Trade Commission (FTC) has been urging Congress to grant the FTC increased powers to safeguard consumers from unscrupulous providers of financial products and services. The US House of Representatives included provisions that expanded the FTC’s rulemaking authority in the version of financial reform legislation that passed in that Chamber in December. Specifically, the House-passed bill included provisions that gave the FTC powers similar to the “notice and comment” rulemaking authority given to other federal agencies under the Administrative Procedures Act.

Right now, the FTC is constrained in its rulemaking by the so-called “Magnuson-Moss” rules. These rules require the FTC Staff to engage in an industry-wide investigation, prepare draft staff reports, propose a rule, and engage in a series of public hearings, including cross-examination opportunities prior to issuing a final rule in any area. These processes are so burdensome that the FTC has not engaged in a Magnuson-Moss rule-making in 32 years. The bill would also give the FTC authority to go after parties for aiding and abetting an unfair or deceptive practice.

The Senate is poised to consider its version of the financial reform legislation starting this week. It is expected that this bill will give this broader authority to the FTC as well as to the new proposed Consumer Financial Protection Bureau. However, if the legislation is enacted as proposed, it is the Bureau that will have primary rulemaking, enforcement and regulatory authority over providers of consumer financial products and services (including non-banks), including over whether these providers offer these products and services in an unfair and deceptive or abusive manner. The FTC is only proposed to have backup authority in this area.

It would appear therefore that the more important implication of this proposal is the effect any broader FTC rulemaking authority would have on entities that offer consumer products and services outside of the financial services area. Chairman Leibowitz spoke at the conference of the Association of National Advertisers (ANA) last month in an effort to assure businesses that the FTC had no intent to run amok with APA authority. He described the FTC’s use of APA procedures when the agency has been specifically authorized by Congress to use them (such as in the Do Not Call Act) as judicious. There, the Staff spent considerable time gathering information and engaging with industry before proposing rules. In the Chairman’s own words “Put differently, we’d be stupid if we tried to solve every problem with a rule; we’d be smart to use our authority very judiciously.”

But businesses and the FTC may have different views of “judicious.” In his speech, Chairman Leibowitz noted areas ripe for rule-making, such as negative option or free offers in online sales. Areas not ripe for rulemaking would be in industries where self-regulation was robust and showing promise and in and new areas where business and consumer expectations are evolving. Nevertheless, business groups overall are opposed to the expansion of FTC authority, and expressed as much in a letter to Congress late last week. Indeed, some advertisers are particularly worried about the proposal on the ground that the FTC will use this power to crack down on such practices as online behavioral advertising, which involves tracking Internet users on-line usage to target ads at them. National advertising groups have urged that if passed, the result would be an “FTC on steroids” with the power to make rules in general areas such as children’s advertising or green marketing even in cases where the Commission has not identified an prevalence of bad actors. Arguments also are being advanced of potential fall out from these provisions, including potentially less innovation and financial growth in industry sectors that had nothing to do with the financial crisis. For that reason, businesses are urging that any change in FTC powers be considered not as a political compromise in the CFPA debate but as part of a separate FTC reauthorization act.

Nevertheless, the Senate bill appears to be on a fast track to passage. While the bill’s primary architect, Senator Christopher Dodd, D-CN, continues to try to work out a compromise with leading Republicans, all reports are that the majority of amendments will be limited to issues outside of the consumer area. Thus, those involved in the consumer area even outside of financial services may wake up soon to find themselves subject to new regulatory requirements.

- Beth DeSimone & Amy Mudge

New Internet Policy Task Force Seeks Comments on Information Privacy, Innovation, Internet, and Economy

The Department of Commerce has put together four terms important to our readers and to all consumers -- Information Privacy, Innovation, Internet, and Economy -- as the topic of a newly launched review of the nexus between privacy policy and innovation. Commerce’s newly-formed Internet Policy Task Force, announced coincident with the issuance of their Notice of Inquiry, is chartered with identifying and evaluating a wide range of public policy issues associated with the “U.S. private sector's ability to realize the potential for economic growth and job creation through the Internet,” and has already suggested it will address privacy, innovation, cyber security, online copyright protection, and barriers to international data exchanges supporting commerce. Commerce’s Internet Policy Task Force will consider comments before issuing a report as part of the Administration’s domestic policy and international engagement in Internet privacy.

Commerce’s Notice of Inquiry suggests some areas in which commentators may wish to weigh in, including whether the US privacy law regime should be modified better to support innovation, fundamental privacy principles, and evolving consumer expectations; the impact of the laws of the 50 states on companies’ compliance costs and product development costs; difficulties in complying with the multiplicity of privacy laws across borders; alternatives to sector-specific privacy laws and regulations; and the role and promise of privacy-enhancing technologies.

While these topics are highly thematic, general, and timeless, the Notice of Inquiry (“NOI”) specifically requests comment on how data privacy laws of different countries cause difficulties for organizations using cloud computing models in which they collect, store, access and process data in various locations around the world. And, as mentioned in the NOI, these issues are also being addressed in other venues, most notably through a series of online privacy roundtables just held by the FTC. While some details may still be developing about the work of Commerce’s task force, and what may emerge from this NOI, the organizations under the Department of Commerce that are leading this task force (NTIA, NIST, ITA and the PTO), suggest that technical standards and initiatives to support businesses’ use of technology and data will receive much attention.

While individuals and organizations will have other opportunities to comment on these issues in the future, providing practical experience-based perspectives and suggestions now might focus deliberations and trigger action down the road.

Comments are due 45 days after publication of the notice in the Federal Register. Commerce’s Notice of Inquiry here.

- Ronald Lee and Tiana Russell