Consumer Advertising Law Blog

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 Your Products Contain Conflict Minerals? California Adds Some Bite to SEC’s Forthcoming Regulations

California has raced ahead of any other state government -- and even the Securities and Exchange Commission in Washington, DC -- in developing rules related to new reporting responsibilities on the use of four “conflict minerals” that might be used to help finance armed conflicts in and around the Democratic Republic of the Congo.  These minerals -- tin, tungsten, tantalum and gold -- are heavily utilized by electronics manufacturers, as well as by companies in the automotive, construction, medical equipment, and aerospace sectors.  On September 9, 2011, the California legislature passed Senate Bill 861, which will prohibit state agencies from contracting with any company that fails to comply with a requirement that the SEC itself has not yet completed.  California Governor Jerry Brown signed the bill into law on October 9, 2011.

Context for California’s law

Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC, in consultation with the U.S. Department of State, to devise a reporting requirement by April 15, 2011, on the measures companies have taken to exercise due diligence on the source and chain of custody of the four “conflict minerals.”  The SEC estimates that over 5,000 companies will be subject to the new corporate social responsibility requirement.  It will impose unprecedented and burdensome responsibilities on these companies, which will for the first time be required by law to report to the SEC regarding their supply chain practices. 

The SEC has been struggling with the best way to shape its rules in implementation of the conflict minerals reporting requirement.  Dozens of companies have complained about the anticipated burdens of Section 1502 and the SEC has been dealing with these comments, the views of the State Department (here, here, and here), and comments from around the world, including from the Democratic Republic of the Congo itself.  The SEC missed the April 15 statutory deadline and has announced it will issue final rules by the end of December 2011. 

California’s contracting restriction will be triggered when the SEC brings a successful enforcement action against a covered company for violating the final conflict mineral rules.  Any such violator will be ineligible to submit a contract proposal to California state agencies for goods or services related to that company’s Section 1502 reporting requirement for three years, or until the company comes into compliance.  Because the California law’s penalty only applies after the SEC brings a successful enforcement action, the state’s move -- for the moment -- is chiefly symbolic.  That said, the new measure is a clear indication that the SEC’s regulations are being watched by state governments, with California ahead of the pack. 

California’s law is part of a complex regulatory environment

California will probably have lots of company in new laws relating to conflict minerals, since the SEC’s forthcoming conflict mineral rules are just part of an emerging regulatory landscape.  Massachusetts may become the first state to follow California’s lead:  Massachusetts State Representative Martin Walsh recently introduced HD 04065, a bill that resembles California’s law in seeking to make companies that fail to comply with the forthcoming SEC regulations ineligible to obtain contracts with state agencies.  In addition, municipalities like Pittsburgh and St. Petersburg have enacted measures calling on city administrators or the private sector to address the issue of conflict minerals in procurement decisions.  Much more significantly for covered companies, other nations, particularly in Europe, are watching the SEC rulemaking closely and could develop rules on their own, presenting the possibility of a complex new regulatory environment for thousands of companies that use any of the controversial minerals in their products.

- John Bellinger, Samuel Witten, Mara Senn, and Khalil Gharbieh

 

Drive: Moviegoer Falls Asleep at the Wheel; Sues Over Misleading Trailer

Have you ever seen a preview for a comedy and then went to see the movie afterwards, turned to the person you went with and said, “You know, they put all the funny parts in the trailer". I have. Well a moviegoer in Michigan who went to see the movie “Drive” is now arguing (see the complaint here) that the trailer for the film was misleading in that there is very little driving in “Drive.” To paraphrase the line above, she argues that they put all the driving in the preview and led her to believe, falsely, that she would be seeing a movie in the genre of “Fast and Furious.” All of which raises some interesting questions.

There’s little doubt that movie trailers are advertisements. But until a few years ago the FTC, at least, would have likely exempted movie trailers from scrutiny under the mirror image doctrine, whereby advertisements for books (and presumably movies) were exempt from Section 5 as long as they simply quoted or “mirrored” the contents of the book. However, the Commission rescinded its Mirror Image policy in 2009, largely as a result of developments in the Supreme Court’s commercial speech jurisprudence.

And what about puffery? Challenging a trailer for a comedy because the movie wasn’t really all that funny seems like it should run smack into the puffery defense. Whether a movie is funny is a subjective question just like whether something “tastes great.” Same for the trailer of a horror movie that allegedly wasn’t very scary. But the allegation here is more akin to misrepresenting the genre of the movie rather than misrepresenting the quality. At least at the extremes one could imagine a claim that might steer clear of puffery - if most people watching a trailer thought the movie was a romantic comedy but it was really a teenage slasher film, it seems conceivable that a judge might allow such a claim to proceed. Though one has to wonder why any movie studio would want to engage in such a practice since it likely results in an audience for a film that is likely not to enjoy or recommend it. So keep your eyes and ears peeled. If movie trailers start to seem a little less exciting or a little less funny perhaps you have this Michigan plaintiff to thank (or blame).

- Randy Shaheen

Sex May Sell, but Not in the UK

This week the UK’s Advertising Standards Authority (ASA) banned a magazine ad from Aaduki Multimedia Insurance for breaching advertising rules on harm and offence. Headlined “Confused and don’t know where to look?”, the ad featured a woman wearing nothing but tight men’s underwear and holding a camera to each breast. A complainant challenged the ad as offensive, on the basis that it was sexist and degrading to women. Aaduki, a specialist insurer for photographers, video-makers and journalists, sought to defend the ad saying that it had previously run a series of ads featuring male models in their trademark blue shorts (“Aaduki Boys”), which were meant as an amusing, “tongue-in-cheek” innuendo much like the UK’s Carry On films from the 1970s. Aaduki reasoned that, viewed in that context, the ad was neither sexist nor degrading to women, and in fact addressed the inequalities of their previous advertising that had focused on male models. The ASA disagreed. The image of the semi-naked woman was provocative and bore no relation to the advertised product, that is, multimedia insurance. It considered that the linking of the woman’s physical attributes to that of the cameras was likely to be seen as degrading to women, and as such the ad had the potential to cause serious offence.

Aaduki’s “equal opportunity” argument fell flat. This adjudication joins other recent decisions (banning ads for scrap metal dealing, bicycle accessories, cement pumps, recycling services, and holiday competitions) that together indicate that the use of “provocative” images of women is likely to be in breach of rules where there is no connection between the image and the product or service being advertised. The age-old marketing strategy of placing a lurid picture of a woman next to an unconnected product advertised primarily to men may be on its last legs - at least in the UK.

- Richard Dickinson

Watching the Sun Rise: Protecting Your Brand in the New .XXX Domain Name Space Before It’s Too Late

The new .XXX top level domain was recently launched as the space for adult content on the Internet (e.g., PLAYBOY.XXX). But this is also an invitation for third party cybersquatters to register in the .XXX space. To guard against this danger, the registry managing the launch is allowing legitimate brand owners a limited window for “reserving” their brand names together with .XXX before these names become generally available. The reservation process, as described below, is quick and relatively easy, but trademark owners should capitalize on it soon to avoid an association between their brands and the adult entertainment industry.

The .XXX launch, which is managed by ICM Registry, LLC (“ICM”), includes three phases:  Sunrise, Land Rush, and General Availability. Sunrise, which began on September 7, 2011, is a limited period during which members of the adult entertainment industry may register .XXX domain names corresponding to their registered trademarks (Sunrise A), and non-industry trademark owners may defensively register their marks (Sunrise B), eliminating them from the pool of available .XXX domains.  The Sunrise period ends October 28, 2011, and when Land Rush begins on November 9, 2011, members of the adult entertainment industry may reserve .XXX domain names regardless of trademark ownership. 

To obtain a Sunrise B defensive registration, trademark owners must apply to ICM through an Accredited Registrar.  Each Registrar sets its own one-time fee for Sunrise B applications, with most charging between $200-$300. Importantly, only a registered trade or service mark of national effect may be the basis for Sunrise B defensive registration; Sunrise B is not available for unregistered marks, or those that are merely state registered. Further, only registrations issued before September 1, 2011 qualify for Sunrise B.

Attend a Mock Lanham Act Argument Focusing on the “Havana Club” Case

The recent Havana Club case is potentially a huge development in Lanham Act false advertising law, and it is the subject of an ABA Antitrust-Private Advertising Committee teleseminar, tomorrow (October 11) at 12:30 eastern. 

It’s hornbook law that a literally truthful advertising claim can be enjoined because it conveys a false implied claim as measured by a survey.  Previously, the only real exception to this rule was the 7th Circuit’s Mead Johnson case regarding the claim “1st Choice in Doctors,” which Judge Easterbrook said could not be attacked with a survey because the claim was “objectively verifiable.” 

Mead Johnson has not really been followed, and previously was thought to be an issue unique to the Seventh Circuit. That is, until Havana Club.  There, the Third Circuit joined the Seventh Circuit and adopted the Mead Johnson rule that a literally truthful and unambiguous claim is not subject to attack by a survey. The court said that plaintiff could not introduce a survey to show that “Havana Club” conveyed a false implied message that the rum was made in Cuba -- because the bottle disclosed that it was actually from Puerto Rico. 

Thus, when a court decides that an implied falsehood theory is too tenuous, it can exclude and not even consider a survey (regardless of how well the survey is designed).

The implications remain to be seen.

Dial in for the free ABA teleseminar where Lanham Act litigators will debate a mock hypothetical that features the Havana Club issue. 

- Randy Miller

Google Vows to Improve Privacy for Owners of Wi-Fi Routers

Google has announced plans to enable owners of Wi-Fi routers to opt out of a registry of location data used to provide the company’s location services. The move has been heralded as an attempt to ‘play nice’ with European regulators, which have warned that the unauthorised use of data collected from Wi-Fi networks violates European data protection laws. (We previously blogged here about investigations into Google's "Wi-Spy" activities)

Location services, such as Google Maps, enable mobile device users to pinpoint their location, find nearby services (restaurants, shops, businesses etc.) and navigate from A to B. To do this, the services use traditional geo-location methods such as GSM base stations and GPS, but also ‘access-point’ information captured from Wi-Fi routers. Wi-Fi routers offer a reliable supplement to GPS and towers, particularly in urban areas; they are also widely used in residential homes  and in businesses, and are sufficiently close together to provide precise location data.

Google is not alone in using Wi-Fi based geo-location data, but it is one of the most well-known, thanks largely to last year’s controversy over its location app ‘Street View’. In May and October 2010, Google announced that it had inadvertently collected payroll data, emails, complete URLs and passwords from unencrypted Wi-Fi networks. Google has since been under pressure from European regulators to tighten up its data protection, and has been the subject of investigations in Germany, the Netherlands, Spain, France and the UK. 

This latest move suggests that Google is attempting to avoid further scrutiny from European regulators, particularly as it has said that no personal data is collected whilst using the Wi-Fi access point information. However, European regulators are looking to tighten up the protection of personal data generally and, in particular, the Article 29 Working Party issued a non-binding opinion in May which said that all geo-location data taken from Wi-Fi routers should be treated as personal data. The premise for this is that although Wi-Fi access point data is anonymous, it can pinpoint individual houses/businesses (particularly in sparsely populated areas) and it may be possible to identify individuals when that data is combined with tools such as house ownership registries, search engine queries or electoral registrations. Whilst the Working Party recognises that companies have a legitimate interest in collecting access point information in order to offer location services to consumers, it has said that companies should “develop and implement guarantees, such as the right to permanently opt-out”. German regulators have also insisted that Wi-Fi geo-location databases should be treated as personal data. Therefore, Google’s actions, whilst taken voluntarily, may be pre-empting a step that all other geo-location providers will soon be required to take. 

The opt-out service will be launched later this year.  Whether the move will have knock-on effects for geo-location services, particularly where large numbers of Wi-Fi routers are removed from the registries and reliance is placed back onto GPS and GSM base stations, remains to be seen. The only sure thing is that the advance of mobile computing devices and infrastructures supporting them will give rise to new and challenging privacy and security issues.

- Gemma Davies and Ronald Lee

 

 

California Supply Chain Disclosure Law - Compliance Deadline is Approaching

Hard to believe, but Christmas decorations are already hitting the stores. That means not only are there fewer than 80 days ‘til Christmas, but there are only 86 more until January 1, 2012, the deadline for compliance with the new California Transparency in Supply Chains Act. So before you make out your holiday shopping list, you might want to review the requirements of this new law, California’s Senate Bill 657. We blogged previously when the law was enacted, but, given the significance to a large number of companies and the quickly approaching compliance date, we thought it was worth a reminder.

January 1 is fast approaching for companies directly covered by the law, which include any retailer or manufacturer doing business in California that has over US$100 million in annual worldwide gross receipts. To comply with the law, these companies will have to disclose on its website the steps it is (or is not) taking to eliminate slavery and human trafficking from its supply chains. And the law undoubtedly will affect countless companies.

First, the law’s threshold for “doing business in California” is quite low, so even companies with minimal contacts in California may come within its reach.  For example, just having sales of US$500,000 in California or paying US$50,000 in compensation in California is enough to subject a retailer or manufacturer with over US$100 million in annual worldwide gross receipts to the law’s requirements. 

Second, even companies that do not do business in California themselves may be affected, because businesses that furnish products to the covered companies will likely be asked by those covered companies to investigate their own supply chains. Even companies well outside of the law’s reach may be asked about their eradication efforts by customers and public interest groups who have a heightened awareness about human trafficking and forced labor since the law’s enactment. So it is worth it for all retailers and manufacturers doing business in California to take a moment to learn about the steps companies of any size can take to remove products associated with slavery and human trafficking from their supply chains. 

Just a reminder -- SB 657 does not actually require companies to make a single change to their supply chains.  The law mandates disclosure, not action. Nonetheless, the Legislature is counting on the “immense economic power of the purchasing decisions of California consumers” to prompt companies to monitor and possibly adjust their product supply lines and suppliers as needed. As much as you may dread the upcoming office holiday parties, they will be nothing compared to the intense scrutiny of public interest groups come January 1. 

The law suggests that companies should consider undertaking at least some the following measures:

• Review or develop company standards on human trafficking and slavery.
• Communicate company standards on human trafficking and slavery to suppliers on a regular basis.  Consider implementing a supplier code of conduct or updating purchase agreements to reflect company standards.
• Evaluate suppliers’ compliance with company standards on human trafficking and slavery with an internal or third-party audit.
• Map the company supply chain to develop a thorough understanding of where products are sourced; assess potential risks in each country. Develop an understanding of the laws addressing human trafficking and slavery of the country or countries where the company’s suppliers do business, so that the company can confirm whether suppliers comply with such laws.
• Review or develop accountability standards and procedures for company employees or contractors that do not meet company standards concerning human trafficking and slavery.
• Develop training programs on slavery and human trafficking.
• Evaluate and consider contracting with independent, third-party auditors/monitors to review supply chains and conduct supplier audits.

There are various resources available for undertaking these efforts, but they can’t be snatched up like a stocking stuffer on Christmas Eve. Smart companies are planning now to avoid the holiday rush so they can ring in a Happy New Year!

UPDATE (11/30/2011): More more detail on this issue, click here.

- Samuel Witten, Anne Marie Nicpon, and Dawn Yamane Hewett

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

A Change In The Wind For Google?

Google might not fare so well in the recent appeal before the US Court of Appeals for the Fourth Circuit brought by Rosetta Stone, the internationally-known language learning company. In Rosetta Stone Ltd. v. Google Inc., the Fourth Circuit considered a host of IP issues raised by the language learning company involving Google’s sale of Rosetta Stone’s trademarks as keywords. This case is made all the more interesting by the district court’s unusual and (in the authors’ view) misguided interpretation of the trademark and dilution laws. (In full disclosure, the authors represented more than a dozen major brand owners, among them Coach, The Professional Golfers’ Association of America, and Rolls Royce, as amici curiae who urged reversal of the lower court’s opinion on the issues of trademark functionality and dilution.)

Rosetta Stone initially brought suit against Google for selling its trademarks as keywords, including keywords to trigger paid advertisements (then known as “Sponsored Listings”). A panel comprised of Chief Judge William Traxler, Jr., Judge Clyde Hamilton, and Judge Barbara Keenan heard oral argument on September 22, 2011.

On summary judgment, the district court had ruled in favor of Google on all counts. But this ruling might well be overturned on appeal. The difficulty, from Google’s perspective, is that the district judge misapplied the law in some instances and went out on a limb in others, deciding issues in a novel and unsupported way. And this was not lost on the panel.

UK ASA: Are You Really “Free Range”?

The UK’s advertising watchdog, the Advertising Standards Authority (ASA), banned a TV advert by Tesco Stores Ltd promoting its own-brand “Butcher’s Choice” sausages.  The ad featured pigs roaming in a field, in a hay barn and walking with a farmer down a lane.  Members of the public complained that the pastoral-like depiction of the pigs was misleading because the sausages were sourced from pigs that were bred and reared indoors.  Tesco, the UK’s largest retailer, defended the ad saying that, although the meat used for the sausages came from pigs that were “finished” indoors, some of them were born outdoors; the farm shown in the ad was a supplier for the sausages, and both indoor and outdoor bred pigs were reared to proper standards of husbandry and animal welfare. The ASA was not persuaded. It noted that in all scenes in the ad the pigs were shown to be in a spacious and free environment, wandering around freely. This, it found, would mislead consumers into thinking Butcher’s Choice sausages were made from pigs allowed unrestricted movement and access to outdoor pastures, which was not the case.  

The ASA is clearly attuned to the fact that the rearing conditions of the animals from which meat, dairy and egg products come from is a factor in the purchasing decisions of many UK consumers. Though the sausages were not marketed as ‘free range’ products, the ad portrayed pigs in a traditional farming setting that belied the more confined conditions the pigs were actually reared in. Advertisers should take care not to suggest (even if only through background imagery) that animals are reared in better conditions than is the case, as this may be deemed to mislead consumers. 

- Richard Dickinson

Will Consumers Pay Higher Prices Due to NY AG Settlement?

Above all "do not harm" should be the mantra of all lawyers, particularly enforcers charged with protecting the public interest. Enforcement over practices of companies offering a sale is an area where there is real potential to raise consumer prices. 

A new settlement entered by the NY Attorney General with a craft retailer alleges the company offered custom framing services on a permanent sale, using ads or coupons or other means to offer 50% off of framing when this offer ran consistently in one form or another dating back to 2008.  Some of the ads specifically called out the price was for a limited time and encouraging consumers to act fast instigating a false sense of urgency in customers when the price was not going to change.  NY alleges this violates NY General Business Law 22-A Sections 349 (prohibiting deceptive acts and practices) and 350 (prohibiting false advertising).  These provisions are general, and the NY AG borrows from the FTC's Guides Against Deceptive Pricing and the Guide Concerning the Use of the Word Free, business guides that have been on the FTC's books for a number of years but not actively enforced.  Why?  Because low prices are good for consumers.  (And I have not been shy about admitting my love of a bargain before in this blog, see here and here)  Some states and local law enforcement continue to bring these cases regarding sales claims, and we do not believe in many cases that they are in the public interest. 

The current NY settlement includes an $800,000 cash payment to NY for the investigation costs and donation of $1 million in art supplies to schools.  We can certainly get behind the latter as a win/win way to settle this matter, but we question the propriety of the injunctive relief provided in the Assurance of Discontinuence. The Company is prohibited from using a fictitious or inflated regular price for the purposes of offering a subsequent price reduction.  But the regular price is

"deemed presumptively bona fide when the item was offered for sale at the regular price more than 55% of the time during the prior business year, and 30% of sales were made at the regular price during that time period." 

So 30% of customers need to pay full price before a company can offer a sale for others?  That does not sound like consumer protection to us.

- Amy Mudge

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.

Advertising Offer to Beat “Anyone’s Price by 15% or It’s Free” Survives False Advertising Attack

A federal court in Massachusetts recently affirmed a jury verdict in favor of an advertiser who proclaimed it could beat the competition’s price by 15% (“or it’s free”) because of inadequate proof at trial. 

The case involved competing carpet and flooring companies:  National Floors Direct and Empire Today.  NFD advertised, including in television commercials, that it would beat any competitor’s price by 15% or would give its products away for free. Empire alleged that NFD was not providing the discount that it advertised and brought claims for false advertising under Massachusetts state law (Chapter 93(a)), which is governed under the identical standard as Lanham Act false advertising cases.  Empire sought approximately $5 million in damages.

At trial, Empire introduced evidence that NFD’s sales representatives complied with the advertising offer by “dividing the competitor’s price by 1.15.”  This method proved that the advertised offer was not being honored – dividing the competitor’s price by 1.15 “results in only 13% off the competitor’s price, whereas multiplying by 0.85 would result in a 15% price reduction.”  Notwithstanding this smoking gun, the district court concluded that this was simply an innocent “miscalculation” or was evidence of “an internal disagreement at NFD over a mathematical calculation.”  The court concluded that this type of “negligence” does not support a claim of false advertising.  (This part of the ruling is interesting given that “intent” to deceive is not a required element of a Lanham Act false advertising claim).

The court also was skeptical of Empire’s damages claim. Although Empire was able to show a diminishment in sales, the district court concluded that there were “a bounty of reasons” for plaintiff’s suffering sales, including “management issues.” Even though Empire was able to show that an increase in NFD’s sales corresponded to a decrease in Empire sales, the district court concluded that this evidence “only proves a correlation, not a causation.” 

This case underscores the difficulty of prevailing in a false advertising case in the setting of a trial to obtain money damages. Although the facts of this case could have supported injunctive relief, it fell short of the kind of proof necessary to collect damages. Practitioners should manage their clients’ expectations to let them know that even a technical showing of false advertising will not guarantee a money damages award. In cases like this, where the evidence appears to be anecdotal, a strategy intended for injunctive relief may be more appropriate. 

- Deborah Birnbaum and Randy Miller

The Rats Be Dead, "The Cats Be Unemployed", But Illegal Pesticide May Send Smugglers to Jail

Twelve people were arrested on federal and state charges September 19, 2011, after an investigation into the sale of illegal, smuggled pesticides in New York’s Chinatown according to press reports, press releases from the US Attorney’s Office and New York District Attorney’s Office, and complaints filed in state and federal court (here and here).  According to reports, some of the pesticides contained brodifacoum, a chemical so dangerous, that it is illegal to use it at all in urban areas unless applied by licensed professionals wearing protective gear and using special equipment. Brodifacoum was present in an amount approximately 60 times greater than what federal regulations allow in the seized pesticides. At least it comes in a pretty package: a bright yellow and blue box with Chinese characters and a smiling cartoon cat proclaiming, “The cat be unemployed.” But don’t let the package fool you. The ingestion of a small vial could kill an adult male. Brodifacoum works as an anticoagulant which causes rodents, or anyone else who may ingest it, to bleed to death internally. In fact, the investigation was kicked off when a woman accidentally ingested a vial, mistaking it for medicine, and lost two-thirds of her blood volume.

Judith Enck, the EPA’s regional administrator, expressed her concern for how easily the brightly colored, mislabeled packages of deadly poison could be confused for toys or candy by children. District Attorney Cyrus R. Vance Jr. indicated that some of the products look and smell like cookie crumbs, making them especially tempting to children. US Attorney Preet Bharara stated, “[a]s alleged, these defendants were literally peddling poison to an unwitting public, putting the health and safety of their customers and their families in jeopardy…the people allegedly responsible for creating this public health risk will be punished.”

But does the punishment fit the crime? District Attorney Vance doesn’t think so, suggesting that legislation may be necessary to allow prosecutors to seek harsher penalties for such crimes, based on the concentrations and quantities sold. For instance, this investigation involved six federal and state agencies, fourteen search warrants, and a five-month long investigation which culminated in the seizure of over 6,000 packages of pesticides from fourteen shops around Chinatown. For all of the resources seemingly poured into this sting operation, and for the significant danger posed to the community from the illegal importation, false labeling, and sale of these pesticides, every single count charged is a misdemeanor (though some defendants were charged with hundreds of counts). The most serious charges, those for the wholesaler and a grocery store owner, were conspiracy to violate the federal laws regulating the distribution and sale of pesticides, and several counts each of selling unregistered pesticides and misbranding pesticides. If convicted they would face a year in prison and a $25,000 fine for each count. The other sales people were charged with selling unregistered pesticides.

There is obviously merit in sweeping these dangerous pesticides off the streets, and the punishments may be hefty enough - given the number of counts - to dissuade illegal importers in the future. However, considering the potential harm to consumers, is it possible that misdemeanor charges don’t cut it for such pesticide peddlers? If more severe penalties are enacted for such offenses, it is surely a positive for the producers of approved pesticides. In either case, importers and retailers need to exercise extreme caution in monitoring what goes on sale to the public in the face of increased scrutiny.

- Marcus Asner and Jacklyn DeMar

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

Foreign Holding Company Makes the Cut in California Class Action, Surviving Defendant’s Personal Jurisdiction Challenge

The federal judge presiding over multidistrict litigation of unfair competition and personal injury claims against the makers and distributors of a popular dietary supplement products has denied the defense motion to dismiss for lack of personal jurisdiction. In the order, Judge Moskowitz of the Southern District of California ruled that the parent company could be sued in all of the states in which its US subsidiary was selling products.

In In re Hydroxycut Marketing and Sales Practices Litigation, 20 named plaintiffs filed a class action complaint, and numerous individual plaintiffs filed personal injury claims, alleging that a holding company, its subsidiaries, and several retailers marketed and sold the Hydroxycut products as being safe and effective for weight loss, when the claims were not clinically proven and were associated with serious health risks.

Although the Court dismissed several claims earlier in the year, the plaintiffs scored a victory by making a prima facie showing that the parent exercised sufficient control over its subsidiary to impose personal jurisdiction on the parent company, based on theories of agency and alter ego. Taking the plaintiffs’ version of the facts as true and quoting from an extensive factual record, the Court found the parent, rather than acting as a mere holding company in the business of managing its investments, was instead “in the business of developing and selling diet and nutritional supplements” through its subsidiaries. Based on the sole owner’s extensive day-to-day involvement with the manufacturers, distributors, and retailers for Hydroxycut on pricing, sales, promotions, credit, formulations, labelling and other activities, the Court found the parent “exercised pervasive domination and control over the subsidiaries,” sufficient to impute their activities to the parent. The Court’s findings were bolstered by allegations that a parent-owned website promoted the Hydroxycut products, and the holding company structure had recently been changed following an FDA statement that the products presented health hazards.

The Court’s ruling allows plaintiffs to proceed with the multidistrict litigation against the parent company for the acts of its subsidiaries. Plaintiffs’ detailed allegations served them well at this stage of this litigation, and led the Court to find personal jurisdiction based on operational control, despite concluding that the companies had complied with corporate formalities, did not commingle funds, and were not undercapitalized -- the other traditional earmarks of alter ego liability.

- Brian Condon and Anita Kalra

“2011 Consumer Protection Law Developments ", A Resource For Every Bookshelf

My 2011 update of the ABA’s Consumer Protection Law Developments treatise just arrived, and I found myself putting aside George R.R. Martin’s “A Dance with Dragons.” (Okay well maybe I’m puffing just a bit.) However, even if I hadn’t received a free copy as one of the two editorial chairs, it’s still well worth the money as those of you who already have the initial treatise likely know. Many of your colleagues put in heroic efforts in researching and compiling nearly 500 pages of material. Along with the usual updates, there are extensive discussions on some more recent developments including data security cases, privacy policies, and financial practices. The summer beach reading season is officially over but hopefully there’s still plenty of nice weather left so grab your copy now.  

- Randy Shaheen