Consumer Advertising Law Blog

FTC Childhood Obesity Forum (1): Working Group Announces Tentative Proposed Nutritional Guidelines for Foods Marketed to Children

In the final presentation of the FTC’s forum, “Sizing Up Food Marketing and Childhood Obesity,” the Interagency Working Group on Food Marketed to Children presented tentative proposed nutritional standards for the advertisement of food products to children (defined as ages 2-17). The Working Group was commissioned by Congress in the Spring of 2008 and is made up of representatives from the FTC, FDA, CDC and USDA.

The Working Group created three “Standards” to determine what food products should and should not be marketed to children. “Standard I” is meant to encourage the promotion of nutritious foods in children’s diets. Standard I foods, such as 100% fruit juice, 100% nonfat and low fat milk and yogurt or 100% whole grains, will have no recommended marketing restrictions.

For foods not falling into Standard I, the Working Group created “Standards II & III.” If a product meets both Standards II and III, the Working Group recommends permitting marketing of the product to children. Standard II foods must meaningfully contribute to a healthful diet and are defined as foods that either contain 50% by weight of certain nutritional items (such as extra lean meat, fruits or vegetables) or foods that contain sufficiently high levels of the daily recommended serving of certain nutritional items (such as whole grains, fruit, nuts or seeds). Even if a product satisfies Standard II, it must still satisfy Standard III to receive the recommendation of permissible marketing to children. Standard III places a limit on unfavorable nutrients such as saturated fat, trans fat, sugar and sodium.

The Working Group is seeking further input on a number of questions such as whether there should be separate standards for differing age groups and whether other ingredients such as caffeine and nonsugar sweeteners should be included as well as the treatment of food served in chain restaurants. The proposed guidelines, however, make an aggressive attempt at pushing the food industry farther than it has ever been to meet uniform heightened nutritional standards before advertising products to children.

The Working Group’s report is due to Congress in July 2010 and its recommendations will be published early next year for comment in the Federal Register. The panel stressed that the presented recommendations will not constitute a regulatory proposal or serve as a substitute for existing policy, laws or dietary guidelines. Rather, the standards will serve as a guide for the food industry for appropriate marketing of food products to children.

For a more detailed breakdown of the working group’s recommended standards, please click here.

- Randy Shaheen and Jessica Halbert

Ready or Not for the New Year -- Illinois Lead Labeling Law Effective 1/1/2010

Effective January 1, 2010, an onerous labeling requirement goes into effect in Illinois for toys with surface coating, children’s jewelry, and child care articles that contain between 40 and 300 ppm lead. The 40 ppm limit is well below the federal standard, and Illinois has not yet adopted implementing regulations. Yet, the effective date is upon us. A summary of the requirement follows.

Warning Requirement for Specified Children’s Products

An amendment to Illinois’ Lead Poisoning Prevention Act (“ILPPA”) adds a warning requirement for certain children’s products that contain more than 40 ppm lead. Specifically, “[e]ffective January 1, 2010, no person, firm, or corporation shall sell, have, offer for sale, or transfer [‘children's jewelry,’ ‘child care articles,’ or ‘toys containing paint’] that contain a total lead in any component part of the item that is more than 0.004% (40 parts per million) but less than [300 ppm].”

ILPPA Definitions

“Children's jewelry” means jewelry that is made for, marketed for use by, or marketed to children under the age of 12 and includes jewelry that meets any of the following conditions:

(a) represented in its packaging, display, or advertising as appropriate for use by children under the age of 12;

(b) sold in conjunction with, attached to, or packaged together with other products that are packaged, displayed, or advertised as appropriate for use by children under 12;

(c) sized for children and not intended for use by adults; or

(d) sold in any of the following places: a vending machine; a retail store, catalogue, or online Web site in which a person exclusively offers for sale products that are packaged, displayed, or advertised as appropriate for use by children; or a discrete portion of a retail store, catalogue, or online Web site in which a person offers for sale products that are packaged, displayed or advertised as appropriate for use by children.

“Child care article” means an item that is designed or intended by the manufacturer to facilitate the sleep, relaxation, or feeding of children under the age of 6 or to help with children under the age of 6 who are sucking or teething. The definition of “child care article” is broader under the ILPPA than under the CPSIA in that the ILPPA (1) includes facilitation of “relaxation” and (2) covers children up to 6 years old rather than 3 years old.

“Toy containing paint” means a painted toy designed for or intended for use by children under the age of 12 at play. In determining whether a toy containing paint is designed for or intended for use by children under the age of 12, the following factors shall be considered:

(a) a statement by a manufacturer about the intended use of the product, including a label on the product, if such statement is reasonable;

(b) whether the product is represented in its packaging, display, promotion, or advertising as appropriate for children under the age of 12; and

(c) whether the product is commonly recognized by consumers as being intended for use by a child under the age of 12.

Thus, while the labeling requirement applies only to toys that have lead in surface coating, the requirement applies to both the surface coating and substrate of children’s jewelry and child care articles.

Content and Placement of the Warning Statement

The ILPPA specifies the content, appearance and placement of the warning statement, requiring that it “contain at least the following: ‘WARNING: CONTAINS LEAD. MAY BE HARMFUL IF EATEN OR CHEWED. MAY GENERATE DUST CONTAINING LEAD.’” The ILPPA makes the manufacturer or importer of record responsible for compliance with the warning requirements. The law requires that the warning statement must be “provided on the children's product or on the label on the immediate container of the children's product.” The law further specifies that “ the statement shall be located in a prominent place on the item or package such that consumers are likely to see the statement when it is examined under retail conditions.”

- Eric Rubel and Jennifer Karmonick

Lacey Act's Power Chord Rocks Guitar Manufacturer

We recently reported on the amended Lacey Act’s potential for causing upheaval for U.S. businesses through its expansion to cover all plant products, such as paper and wood. This potential recently became a reality for Gibson Guitars when the U.S. Fish & Wildlife Service raided a guitar manufacturing plant in Nashville, Tennessee. Reports state that the factory allegedly contained illegal Madagascan rosewood that was imported via wood sources in Germany. To preserve its lemur population that lives in these trees, the Madagascan government has banned the export of all rosewood. Therefore, any Madagascan rosewood logged since the ban would violate the Lacey Act were it to be imported into the United States.

This is first reported major enforcement action of the new provisions of the Lacey Act, and consequently it is being watched with great interest. Circumstances of the raid should raise concerns for U.S. businesses. To exercise the required “due care” standard, many companies have placed faith in the chain-of-custody certification that organizations such as the Rainforest Alliance offer. But only a small percentage of woods and forests are certified, and although some Gibson wood was certified to Rainforest Alliance standards, this wood came from uncertified products. Therefore, although these programs are extremely useful in encouraging responsible logging practices and may constitute “due care,” the Gibson example teaches us that because so much of our wood does not come from certified forests and producers, more needs to be done to ensure the wood and paper products that U.S. companies use is legally obtained.

For more information, here is an extended advisory on the amended Lacey Act.

- Marcus Asner and Grace Pickering

House Vote Pushes Consumer Financial Protection Agency One Step Closer to Reality

The U.S. House of Representatives on Friday afternoon passed its comprehensive financial regulatory reform legislation. The vote for H.R. 4173, called the “Wall Street Reform and Consumer Protection Act of 2009, was fairly close, 223-202, with twenty seven Democratic congressman voting against it along with all of the Republican members.

One of the central planks of the legislation is the creation of the Consumer Financial Protection Agency, or CFPA which will have rulemaking and regulatory authority over consumer financial products and services, including mortgages, home equity lines, credit and debit cards, pay day loans, installment loans, auto loans and leases and other consumer financial products. This plank has been controversial from the start, but it survived an amendment offered during the debate that would have substituted the CFPA for a 12 member council of regulators (similar to the FFIEC) that would have had rulemaking authority over financial products as well as safety and soundness concerns. That amendment failed by 223-208, with 33 Democrats voting for it.

Thus, as passed, the legislation requires that the rulemaking functions for the laws governing these products and services, which have been generally housed in the Federal Reserve, to be moved to this new agency. These laws would be supervised and enforced for nonbank companies by the CFPA, but the federal banking agencies would continue to have examination and enforcement authority over an estimated 98% of all financial institutions, as any bank or credit union that has less than $10 billion in assets are exempt from CFPA enforcement authority. The FTC also would lose rulemaking authority over nonbank institutions for unfair and deceptive practices but would retain back up enforcement authority.

The legislation mandates that the CFPA issue minimum standards for unfair and deceptive practices in the sale and provision of consumer financial products and services, as well as enhanced disclosures. The legislation also mandates that the agency impose certain fair dealing standards. However, there is no longer any requirement that the agency require lenders to offer “plain vanilla” products along with any nonstandard offerings. There also is no restrictions on interest rates, which are mostly governed by state law.

The final legislation also continues to allow national banks and federal savings banks to preempt certain state consumer protection laws, but only the state law "prevents, significantly interferes with, or materially interferes" the business of banking.” This is what is called the “Barnett Bank” standard, which is named after the 1996 Supreme Court case that articulated this standard.

The legislation now faces a somewhat uncertain outlook. Senator Chris Dodd (D-CT), head of the Senate Financial Services Committee, issued a discussion draft of his counterpart legislation in November, but Committee members on both the Democrat and Republican urged him to seek a more bi-partisan bill. Thus, the draft is currently being rewritten by different Committee groups, with Sen. Dodd and Sen. Richard Shelby (R.-AL) taking the lead on the CFPA title. The content of the revised draft, as well as timing, will become clearer in the coming weeks. However, if provisions creating a CFPA survive, its creation will be historic, as it will transfer major consumer responsibilities now divided among several federal agencies into one agency whose sole purpose will be consumer financial protection.

- Beth DeSimone & Brian Larkin

Breakfast Cereals Go On a Diet Prior To FTC Workshop On the Links Between Food Marketing and Childhood Obesity

General Mills announced on Wednesday that it would be gradually lowering the sugar content of breakfast cereals that are marketed to children, including Trix, Cocoa Puffs, and Lucky Charms. Although General Mills began to lower the sugar content of such cereals in 2007, it has pledged to reduce further the sugar content to less than 10 grams per serving. It did not set a deadline, however, in which to reach the goal. Nutrition groups lauded the announcement saying it would make a significant difference in cereals such as Trix which had 13 grams of sugar per serving. Kellogg Co., the manufacturer of Froot Loops and Apple Jacks, as well as Post Foods, which manufactures Fruity Pebbles, have also taken steps to reduce the sugar content in their cereals.

This announcement comes on the eve of an FTC public forum entitled “Sizing Up: Food Marketing and Childhood Obesity.” The December 15 forum will discuss new research on the impact that today’s pervasive food marketing has on children and the statutory and constitutional issues that surround government regulation of that marketing. The forum is free and open to the public and includes panels on the legal ramifications of regulating advertising to children as well as on the food and entertainment industries’ progress in implementing the FTC’s 2008 recommendations (previously described here) for self-regulatory changes.  Yours truly will be attending and blogging on what we learn, so stay tuned.

- Candida Harty and Danielle Garten

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

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

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

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

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

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

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

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

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

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

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

- Beth DeSimone and Brian Larkin

The FTC Tackles Online Privacy - Vladeck Speaks

In sessions filled with healthy doses of Louis Brandeis references, the FTC hosted on December 7 the first of its day-long roundtable discussions designed to explore online privacy issues. FTC Chairman Jon Leibowitz kicked off the day by referring to this as a watershed time for online privacy policy. Panelists representing industry, consumer groups, technology, and government then debated the benefits and risks of collection and use of consumer data over the Internet.

The final session addressed whether additional regulation is needed, which unsurprisingly drew a sharp split of opinion. This, of course, comes as we await anticipated draft privacy legislation being overseen by Congressman Rick Boucher, D-Va.

In summing up the day, David Vladeck, the FTC Director for the Bureau of Consumer Protection, noted that the last panel in particular “exemplified just how difficult the questions we have to confront are,” and offered these additional overarching conclusions and “questions [that] face us in the future”:

• The panelists “pointed out that the benefits [of online information tracking] include[e] free content, better search results and more relevant advertising,” but also “mentioned real risk including the disclosure of information consumers believe is private,” and the "chilling effect” for those who might “modify their online behavior for fear of being tracked.” “These are real risks as well and we need to confront them.”
• Panelists also questioned whether “the traditional distinction that has been drawn in privacy law between personal identifiable information and anonymous information may be a thing of the past.” “These observations raise questions about how to build in transparency, consumer control and accountability into the process without sacrificing the benefit.”
• Researchers seem to “confirm our intuition that consumers do not really understand the data collection process.”
• “Many consumers believe that if a company has a privacy policy it means the company does not share data with third parties,” which is not necessarily correct. “There is also general agreement that consumer disclosure as we know it simply does not work.” But, “just because it's broken, doesn't mean we should scrap it or discharge it. Transparency is challenging but we need to think more creatively and innovatively about how to deliver important information for consumers when they need it and in clear and in simple terms.”
• “The economists also pointed out the limits of disclosure. They noted that consumers engage in bounded rationality when they tend to discount long-term negative effects [] of giving up their privacy. I also have questions about timing, is the type of collection adequate or should we think about notice at the time of use?”
• The industry has implemented “a number of initiatives, including efforts to improve consumer notice about these ads and to provide more effective choice to consumers,” but there are “concerns, particularly about how some in the industry frustrate consumer choice by using technologies other than cookies to gather information online and by collecting and using sensitive data for behavioral advertising. “
• “The broker industry is largely unknown and invisible to the consumers and there's a lot of diversity in the types of information, uses of information and even the rules that apply to how such information” is managed. “This is an issue that may warrant our attention.”

There is a second roundtable discussion scheduled for January 28 in Berkeley, California.

- Sean Morris

How Should Courts Treat the NAD Process? The Debate Continues

We recently blogged on a decision from the S.D.N.Y granting a stay of a declaratory judgment action to allow the NAD to issue its decision in the same dispute. Another court has now weighed in with a different view.

NAD was in the process of deciding whether Priceline’s claim that customers could save “half off” or “up to half off” of hotel prices compared to Expedia and Hotels.com was misleading, when Expedia filed a Lanham Act false advertising suit. (NAD had previously resolved a different dispute involving the same parties.) NAD closed the case because the dispute at issue was now the subject of pending litigation, but expressed its willingness to reopen the case and render a decision should the court remand the case to NAD. Priceline filed a motion to stay and submitted a declaration from NAD noting it “believed it would be beneficial to share with the parties the analysis it would have conducted had procedural considerations not required an administrative closing.”

While the Court (Western District of Washington) concluded it had the power to order the requested stay, it would only do so if there would be “some advantage in terms of efficiency or fairness.” The Court concluded there would be neither in this case finding:

“nor is it this Court’s role to safeguard the relevance and effectiveness of an industry self-regulatory body. If NAD’s rules allow a challenger to ‘opt out’ of the NAD process by filing a duplicative court action, the obvious remedy would be to amend the rules if the industry agrees that this is not an optimal use of the parties’ or the organization’s time and resources. This Court will not provide a ‘fix’ or attempt to send any sort of ‘message’ to other participants in the NAD process based on the limited information before it.”

Will we see a rule change from the NARB? Stay tuned.

- Amy Mudge

Memory Boosting No Laughing Matter at NAD

First, you need to watch this ad:

All of us can appreciate a commercial that makes us laugh but sometimes the claims still strike a serious note. The ad you just saw was reviewed by NAD as part of its internal monitoring program rather than based on a challenge lodged by a competitor. The ad, for Minute Maid Enhanced Juice Blend shows a young woman approach a man and say “I think you are the father of one of my children”. Man looks confused for a moment and says “Cancun, Spring break ‘99?” The announcer declares “Opps, someone forgot to boost” and a close up shot appears of the juice with the label that reads “5 nutrients to support brain and body.” The scene plays again, after the man takes a big gulp, but this time in response to the woman’s question, the man remembers she is the art teacher of one of his children.

The advertiser asserted that this was a classic structure/function claim in which the juice is fortified with nutrients to “help nourish your brain” and “with 5 ingredients to support brain and body”. Such claims, the advertiser asserts, are permitted by the FDA for dietary supplements and functional foods when the claims are supported by studies and limited to promoting the role the nutrients play in the structure and function of the body as opposed to any claims of curing disease. The advertiser points to numerous ingredient studies showing that the nutrients added to its juice, DHA, choline, Vitamins B12, C and E and glucose, all support the brain and body.

So far so good but NAD’s analysis did not end there. NAD found the ad included an implied claim that drinking the juice will result in substantially and immediate improved memory capabilities based on the fact that the man in the ad took a sip of his juice, got a boost and then was able to correctly recall the identity of the woman. While NAD agreed with the advertiser that the depiction was not a literal product demonstration, NAD concluded that the use of humor still can convey messages that require substantiation. NAD concluded that the proffered studies did not support the claim of improved memory in healthy adults but were generally limited to studies of elderly subjects with mild age-related cognitive decline and to effects in infants and children. NAD recommended that the advertiser discontinue the ad.

As this case demonstrates it is often difficult to draw the line between making a point with humor that is so exaggerated that no consumer would literally believe it (think Holiday Inn Express commercial where guest who sleeps there overnight can do amazing things the next morning) versus using humor to make your claim to consumers in a way they will find appealing. And, in today’s regulatory environment, claims relating to health and nutrition may be no laughing matter.

And just to prove there is nothing wrong with our memory, here’s another funny ad relating to memory that’s one of our favorites.

Advertising legend has it that while this ad met with industry approval, it was pulled after its showing during the 1997 Superbowl -- not because the claims weren’t true but due to protests from franchisees and a call in campaign from offended viewers.

- Amy Mudge

CPSC Recommends Much Needed Guidance, But Will it Stick?

On November 5, 2009, the U.S. Consumer Product Safety Commission (CPSC) published a draft statement of policy providing guidance on the testing and certification requirements of section 102 of the Consumer Product Safety Improvement Act of 2008 (CPSIA). The draft has been presented to the commissioners for ballot vote, and if approved will be published as a formal statement of policy.

Manufacturers and importers -- who have been struggling to comply with CPSIA requirements in the absence of regulations or sufficient guidance from CPSC -- will likely welcome this interim guidance if approved by the Commission.

Menu Labeling - Too Much Information Just Before Thanksgiving?

We’ve probably all had the experience of tasting something really good at a restaurant but not really wanting to know how much butter and cream it has in it. Well, on the eve of the Great Feast, Congress may be preparing to change all that through nationwide menu labeling. Restaurants operating more than 20 locations would be required to list the amount of calories and other nutritional values for standard menu items. The provision, which is buried inside the massive healthcare bills passed by the House and being considered by the Senate, would also set uniform, national standards for menu labeling, preempting state and local laws whose differences have reportedly burdened restaurants and confused consumers. 

Specifically, the bills would require restaurants to have a “reasonable basis” for the nutrition information provided. This standard -- currently applicable to voluntary nutrient content claims made by restaurants -- is set forth in regulations under the Nutrition Labeling and Education Act (NLEA) and will allow restaurants to obtain nutrient information for menu items from sources such as recipes, nutrient databases, and analytical testing.

The theory, of course, is that spurred on by menu labeling, restaurants will offer healthier menu items and that consumers will make healthier menu choices. Time will tell. Meanwhile, menu labeling is only one of many provisions in the health care bills that go beyond health insurance to address consumer behavior. Consumer protection lawyers may want to keep an eye out for such provisions as the health care bills move forward.

For a more detailed write-up on this issue, click here.

- George Langendorf and Randy Shaheen

“No Surprises” Gift Cards

The holidays are approaching, and once again gift card season is upon us. Gift cards bring the joy of freedom for those who like to choose their own presents, but, for some financial institutions, these cards may bring legal troubles under unfair and deceptive practices laws. Last week, two United States District Court cases within the Third Circuit, Mwantembe v. TD Bank, and Mann v. TD Bank held that plaintiffs could pursue their state claims against banks that the sale of gift cards containing dormancy fees were deceptive and misleading practices. Plaintiffs in both cases were unable to successfully claim that the existence of gift card dormancy fees were illegal, but their claims that the banks’ marketing of these fees is deceptive survived.

Dormancy fees are charges against the value of a gift card, that accrue if a card is not used within a certain period of time. The court in Mwantembe analogized the payment of a dormancy fee to a shopper entering a store, paying for a product, and then exiting the store without the product. Plaintiffs in both cases were represented by the same counsel, and made very similar allegations with regard to the disclosure of dormancy fees. They believe that the following characteristics of gift cards related to advertising, term disclosure, fee conditions, and card design were all deceptive:

Advertising: Representing gift cards containing dormancy fees as “free” or having “no fees” in marketing materials and advertisements.

Term Disclosure: Packaging the terms of the gift cards related to dormancy fees in such a manner that a consumer will not be aware of the terms before purchasing the card, and an ultimate recipient of the gift card would not be aware of the terms either.

Fee Conditions: Conditioning dormancy fees on a length of time following the issue date of the card, but not disclosing the issue date on the gift card.

Card Design: Displaying a “Good Thru” date on the front of the gift card, while the dormancy fees could potentially diminish nearly all of the card’s value before the “Good Thru” date.

Although these gift card cases still remain in litigation, financial institutions should be very cautious about marketing gift cards with the above listed characteristics. Courts, as well as regulatory agencies, are trending towards closer scrutiny and enforcement of laws related to gift cards and unfair and deceptive practices. Banks should review their gift card terms and conditions for compliance not just with the disclosure laws, but also to make sure that the disclosures are clear and not deceptive. A stocking full of coal will be the least of a bank’s holiday worries if the marketing of its gift cards are ruled unfair and deceptive.

- Beth DeSimone and Brian Larkin

“Free!”, “Money Back Guarantee!” Claims Cost VOIP Provider

Last week, Vonage reached a global settlement with the Attorneys General of 32 states over allegations that the Delaware-based voice over internet protocol (VOIP) service failed to clearly disclose to customers the material terms and conditions of subscriber agreements. Led by Montana, the coordinated AGs claimed, among other things, that Vonage did not give adequate notice that the company required its subscribers to purchase certain equipment in order to utilize promotional services advertised as “free” and that Vonage misled consumers by representing that it was possible to cancel the service but then failing to accept cancellations (and in some cases, allegedly continuing to charge customers for service even after they had attempted to cancel) through a tactic called “saving” the customer.

Under the broad terms of the settlement, Vonage will pay $3 million in fines to the 32 states, provide refunds to certain customers and will amend its consumer advertising and marketing materials, so as to “clearly and conspicuously” disclose certain terms and conditions regarding its equipment and services. In addition to requiring Vonage to reimburse eligible consumers who complain of certain unauthorized charges, the settlement also requires that Vonage retrain its customer service and telemarketing representatives, and that the company modify all of its training and call center “script” materials to comply with the terms of the settlement.

Of particular interest to business is the breadth of the settlement and the detailed and specific requirements contained in the consent order related, for example, to the extent and timing of disclosures and that any representation of “award winning service” must be based on a genuine award from an independent third-party received no more than a year from the date of the representation. While there can be some comfort to companies in deciding to end an investigation by signing a consent order to have a clear statement of the enforcer’s expectations on a going forward basis, such specific injunctive relief, even if by agreement, can make it difficult for settling companies to keep up with the changing competitive tide particularly in dynamic markets. By no means a new issue, how companies advertise free offers and money back guarantees has received considerable focus from both federal and state enforcers in recent years and any company offering such enticements to potential customers to sample a product or service should take great care at looking at how such a program is advertised from top to bottom, including in traditional advertising and also as communicated by third-party marketing on the Internet and by customer service representatives.

- Taja-Nia Henderson and Amy Mudge

FDA Public Hearing on Promotion of FDA-Regulated Products Using the Internet/Social Media Tools

Companies that make or market FDA-regulated products are increasingly using Internet and social media tools such as Google searches, Twitter, Facebook and Wikipedia to promote their products and to provide other important information to consumers and health care professionals. While the Internet and social media provide significant benefits to consumers, industry, healthcare professionals and the public as a whole, these forms of media present new legal and regulatory challenges with respect to promotional labeling and advertising, third-party communications about a company’s products, and potential adverse events identified in blogs, chat rooms, and other forms of social media.

On November 12-13, 2009, FDA held a public hearing on the promotion of FDA-regulated medical products using the Internet and social media tools to hear from industry leaders, consumers, public interest groups, and media professionals. The hearing followed a panel-style format in which pre-selected speakers gave prepared remarks with accompanying slide presentations. FDA panel members asked questions of the speakers, but did not otherwise provide prepared remarks or invite participation from the audience.

Internet companies and regulated industry representatives discussed the need to differentiate Internet and social media from other forms of labeling or advertising because, unlike traditional promotional labeling and print or broadcast advertisements, Internet and social media users have a greater ability to control, alter and respond to the promotional messages and other product information they receive. Speakers such as Eli Lilly, sanofi-aventis, and Pharmaceutical Research and Manufacturers of America (PhRMA) agreed that manufacturers should be accountable for online content they control, but noted that manufacturers should not have a broad obligation to police or remove all forms of third-party content about their products.

FTC Releases Resource for Parents on Kids and the Internet

Many of us are parents and we know many of you are as well. So we decided to take just a quick departure from our normal focus on good business consumer marketing practices to let you know that the FTC has just published an excellent internet safety resource called “Net Cetera: Chatting with Kids About Being Online.” Net Cetera is a guide for parents, particularly the many of us who have kids who are more internet savvy than we are, that gives practical advice on things like social networking to file sharing, from cyberbullying to “sexting.” Net Cetera is available at OnGuardOnline.gov. If you’re interested in ordering free printed copies in bulk you can go here. 

Obama Fills Up FTC’s Dance Card: Nominates NC Consumer Protection Cop and LA Lawyer

President Obama has beefed up consumer protection enforcement at the FTC with the nomination of Julie Brill, the Senior Deputy Attorney General and Chief of Consumer Protection and Antitrust for North Carolina. Brill has an impressive consumer protection resume, with an emphasis on credit reporting and privacy issues.

For 20 years Brill was an Assistant Attorney General for Consumer Protection and Antitrust for the state of Vermont. There she brought enforcement actions against tobacco and pharmaceutical companies, and focused much of her time on the reform and enforcement of privacy laws affecting consumers. She was responsible for strengthening Vermont’s controversial law preventing companies from collecting, and selling, information on which drugs doctors most frequently prescribe. Brill has also testified before Congress regarding the Fair Credit Reporting Act and the Financial Data Protection Act. She stated that identity theft is a “serious and rapidly growing crime” and argued that Congress should create a national baseline standard for credit reporting and financial data protection and allow states to enact laws that are more protective of consumers. Brill has also taken a strong stance on affiliate sharing, noting that “greater consumer protections to guard against such practices should be incorporated into both federal law and state law.” If confirmed she would likely be a strong backer of the Commission’s existing priorities.

President Obama’s second nominee, Edith Ramirez is a partner at Quinn Emanuel in Los Angeles, Ramirez focuses the majority of her practice on copyright and trademark infringement. Ramirez has worked for President Obama one other time. While at Harvard Law School, Ramirez was a member of The Harvard Law Review under Editor in Chief Obama. Ramirez does not appear to have much in the way of a consumer protection record. However, she is a member of the Board of Commissioners for the Los Angeles Department of Water and Power. The Mayor of Los Angeles appointed Ramirez to the Commission in 2005, calling for a commitment to a “cleaner and greener” Los Angeles, while providing “reliable and cost-efficient water and power to 3.8 million customers.” The Board of Commissioners has attempted to meet these goals, and have aggressively reviewed contracts, lobbying costs, and executive perks, while arguing for more transparency within the Department.

- Danielle Sims and Randy Shaheen

FTC Seeks Enhanced Powers

The possible creation of a new consumer financial protection agency has been the subject of significant media coverage and speculation. As the spirited debate continues as to whether the best way to protect consumers from financial fraud is to create a new agency or expand the resources of the FTC, the FTC has taken this opportunity to lobby for enhanced powers overall, regardless of whether enforcement power for consumer financial protection is ultimately ceded to a new agency.

The Consumer Financial Protection Agency Act of 2009 (H.R. 3126) was originally introduced on July 8, 2009. Although the primary purpose of the bill is to establish a Consumer Financial Protection Agency, it also contains provisions amending the Federal Trade Commission Act (FTC Act) to enhance the FTC’s current enforcement authority. The House Committee on Financial Services voted to approve the bill on October 22, 2009, and the House Committee on Energy and Commerce followed one week later. No similar bill has yet been introduced in the Senate, though Senate Banking Committee Chairman Chris Dodd released a draft proposal regarding financial reform on November 10, 2009. His draft proposal does not include similar provisions expanding FTC authority.

The Administration has urged a number of enhancements to the FTC’s authority in conjunction with legislation regarding financial reform including:

1. Expanding when the FTC is authorized to seek civil penalties;
2. Permitting the FTC to exercise enforcement authority over those who aid and abet in a violation; and
3. Streamlining the process by which the FTC promulgates rules.

FTC Chairman Leibowitz, testifying before the House Energy and Commerce Committee’s Subcommittee on Commerce, Trade and Consumer Protection on July 8, 2009, urged the Subcommittee to not only enhance the FTC’s enforcement authority, but also to give the FTC independent authority to bring litigation in which it seeks civil penalties. Under current law, the FTC must first present the case to the Department of Justice (DOJ), which has 45 days to determine whether to file the action itself. 15 U.S.C. § 56(a)(1). Additional enforcement authority, Leibowitz argued, “would allow the Commission - the agency with the greatest expertise in enforcing the FTC Act - to bring cases more efficiently while retaining the option of referring appropriate matters to the DOJ.” Commissioner Kovacic dissented from the portion of the testimony supporting changes to the FTC’s rule-making authority and the broad civil penalty authority, expressing concern that the routine availability of civil penalties would “risk constraining the development of doctrine[.]”

H.R. 3126 includes many of the requested enhancements to FTC authority. Specifically, it provides that the FTC may seek a civil penalty for any violation of the Federal Trade Commission Act, whereas currently the FTC Act provides only that the FTC may seek a civil penalty for violations of a “rule under this chapter respecting unfair or deceptive acts or practices…” H.R. 3126 also makes it unlawful for any person to provide “substantial assistance” to another in violating the FTC Act or any other act enforceable by the FTC. To do so would be considered an unfair or deceptive act under Section 5 of the FTC Act, and thus subject to FTC enforcement. H.R. 3126 finally streamlines the rulemaking proceedings under the FTC Act to dispose with numerous existing notice and comment requirements. This change essentially would give the FTC the authority to use the Administrative Procedure Act notice and comment procedures to promulgate rules rather than the more cumbersome and time-consuming procedures outlined in Section 18 of the FTC Act.

The further authority requested by Chairman Leibowitz to pursue civil penalty actions was not included in the version of H.R. 3126 approved by the House Committee on Financial Services. In anticipation of the markup of H.R. 3126 by the House Committee on Energy and Commerce, Chairman Leibowitz sent a letter to the Committee members urging that the FTC be provided with authority to independently litigate civil penalty cases. Chairman Leibowitz expressed his strong support for providing the FTC with additional tools stating that “[n]ew tools for the FTC are critical for the FTC to provide the strongest possible protection for consumers and President Obama has expressed his support.”

At the October 29, 2009 markup, the House Energy and Commerce Committee adopted an amendment proposed by Representative Waxman providing that, in addition to exclusive authority to commence civil actions relating to injunctive relief and consumer redress, the FTC has exclusive authority to commence actions to obtain civil penalties. Chairman Leibowitz issued a statement expressing appreciation, particularly for Waxman’s work.

No further action is scheduled for H.R. 3126 at this time, though differences between the approaches of the two House Committees with respect to various provisions have led both Barney Frank, Chairman of the Financial Services Committee, who characterized a Waxman amendment relating to the leadership of the proposed new agency as a “big mistake,” and Waxman, who indicated that he would have further changes during the floor debate, to suggest that resolving differences may have to wait until H.R. 3126 reaches the floor of the House.

- Sonia Pfaffenroth and Asim Varma

The Damage Caused by Bad Breadth

In a recent federal Florida decision, Smith v. W.R. Wrigley Jr. Co, the Court denied a motion to dismiss claims brought on behalf of a putative class alleging that Defendant Wrigley’s claims “that its Eclipse® gum brand is ‘scientifically proven to help kill the germs that cause bad breath’ as a result of the ‘natural ingredient,’ Magnolia Bark Extract (‘MBE’)” were false, deceptive, and likely to deceive. Plaintiff asserted two causes of action -- violation of Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”) and breach of express warranty.

As to the FDUTPA claim, Wrigley argued that Plaintiff only made “conclusory allegations” that the gum caused her to suffer “actual damages.” Critical to the Court’s decision was the fact that Florida courts have allowed diminished value to serve as “actual damages” under the FDUTPA, and that Plaintiff had alleged that Wrigley was able to “charge a price premium” for the Eclipse® gum based on the allegedly false statements.

The Court distinguished Prohias v. Pfizer which involved allegations that advertising Lipitor as reducing the risk of heart disease in women or elderly patients was deceptive. The Court distinguished the Lipitor case on the grounds that, in that case, the court found that “the fact that [the plaintiffs] currently take Lipitor, in light of the information they have, requires me to conclude that they take Lipitor for its cholesterol-reduction or other undisputed health benefits, and therefore cannot claim to have suffered any damage from the alleged misleading statements about Lipitor’s coronary benefits.” Likewise, the Court distinguished Frye v. L'Oreal USA, a case where plaintiff alleged that the defendants marketed lipstick as “safe for use” when it contained dangerous amounts of lead, on the grounds that, in that case, there was “no allegation that the presence of lead in lipstick ha[d] any observable economic consequences.” Thus, the Court’s Wrigley decision appears to hinge on Plaintiff’s allegation of a “price premium” associated with the deceptive advertising.

Whether Plaintiff’s claims of paying too much for gum that does not prevent bad breath will survive remains to be seen, as it is one thing to allege damages based on a premium price and quite another to prove such damages on a classwide basis (a blog for another day). But the case represents another court’s attempt to clarify the allegations of damages sufficient to survive judgment on the pleadings, here under a Florida consumer protection statute, in a consumer false advertising case.

Another point of interest is that the Complaint in support of the false advertising allegations is based on a decision earlier this year by the National Advertising Division of the Council of Better Business Bureaus, Inc. (“NAD”) recommending modification of Wrigley’s campaign, which is on appeal to the National Advertising Review Board. While not the subject of the motion to dismiss decision, it is an interesting question as to what weight, if any, NAD decisions can or should be given by a court in either a Lanham Act false advertising challenge or a consumer fraud case. NAD can be an excellent low-cost, fairly speedy forum for resolution of competitor’s disputes over the truthfulness of advertising claims. When NAD issues a decision, however, it is based on an incomplete record limited to party submissions and issued quickly, albeit by NAD staff lawyers who specialize exclusively in this area, but lawyers working under the tight time constraints of the self-regulatory process. The NAD decisions are thoughtful and comprehensive, but they are hearsay. Whether and how courts consider NAD decisions in litigation is an emerging question we are watching with great interest.

- Rachel Chanin and Amy Mudge

One if By Land, Two if By Electronic Storage or Transmission

Following in the finest traditions of legislative “punting”, Massachusetts' General Court (the less than obvious name for the state legislature), passed data security legislation in 2007 and charged the Massachusetts Office of Consumer Affairs and Business Regulation (“OCABR”) to “adopt regulations relative to any person that owns or licenses personal information about a resident of the commonwealth.” Two years, multiple drafts, and several public hearings later, OCABR recently released what it’s calling final data security regulations, which will take effect this coming March. Despite all the angst about a revolution in regulation from both businesses and privacy advocates over the past two years, the final regulations borrow concepts liberally from the FTC, some states’ data security or breach notification laws, and unsurprisingly, federal requirements for information systems security. The regulations mandate both general approaches and specific security practices.

So, what’s in the final regulations, in two sentences? Individuals or businesses, who own, license, store or maintain, personal information about Massachusetts’ residents, have to develop and follow written and comprehensive risk-based information security programs. These programs create a process, carried out by identified people, to evaluate the sensitivity of information and mandate appropriate protections. If this approach sounds familiar, it should be. Ask any IT security professional what the Federal Information Security Management Act (FISMA) requires of federal agencies, and compare the duties imposed by section 17.03 of the regulations to the National Institute of Standards and Technology ("NIST") risk-management framework for designing and implementing information systems security, and you should get the same picture -- implement a process rather than specific technologies, and recognize parties, protections, and the sensitivity of data all vary widely. It is no surprise that OCABR shifted to a risk-based, rather than the one-size-shoe-fits-all approach reflected in earlier drafts of the Massachusetts regulation, following a series of comments from businesses and other interested parties.

What is new, and potentially problematic for some, is that the regulations additionally require specific protections for personal information stored or transmitted electronically. Although many of the section 17.04 protections are fairly standard (for example, secure access controls and user authentication procedures), some go further, such as the requirement to encrypt personal information transmitted across public or wireless networks, or stored on laptops and other portable devices. In this, Massachusetts goes beyond other states which have passed laws requiring encryption of social security numbers before transmission over the Internet, and more recently encryption of any personal information before transmission outside a business’s own secure system. Any laptop or portable device containing personal information about Massachusetts residents will have to be encrypted, not just protected by a password.

The good news? Encryption and other specific computer security measures are only required “to the extent technically feasible” by the regulations. The bad? The regulations don’t define what “technically feasible” means. OCABR suggests in a FAQ something is technically feasible “if there is a reasonable means through technology to accomplish a required result.” The next question -- if something is technically possible but economically prohibitive under the circumstances is it a “reasonable means through technology” -- is somewhat of an open question. Although OCABR staff that drafted the regulation willingly admit they borrowed liberally from FTC concepts of reasonable security which look at many surrounding circumstances including the size of a company, the sensitivity of information involved, and possibly the cost of a particular practice, OCABR’s FAQ intimates economic considerations don’t factor into whether a practice is technically feasible. While it is probable that businesses may seek additional clarification, at least on this point, any person who has not already come into compliance now has one more chance to meet the compliance deadline. Again.

- Ronald Lee

Social Networking Site Gets Tag-Teamed by NY and TX AGs

Yesterday, the Attorneys General for the states of New York and Texas announced that settlements had been reached with social networking site Tagged.com over claims that Tagged misappropriated the identities and email address books of its members and sent millions of deceptive and unsolicited emails promoting use of its site. In New York, the company has agreed to pay $500,000 in penalties and costs and to adopt “industry-leading measures” to govern the use of its members’ personal information; in Texas, the company will pay $250,000 in penalties and costs and will implement new data privacy and security features.

With more than 80 million members worldwide, Tagged bills itself as the third-largest internet-based social networking site in the U.S., after Facebook and MySpace. Previously, Tagged requested that members provide the company access to their email address books during the enrollment process (through a process termed “import your friends”). Those contacts were then sent auto-messages purporting to be from the new member. Under its agreements with New York and Texas, Tagged will need to seek specific consent before accessing its members’ address books and will need to disclose specifically how that data will be used (including by whom and for how long). The Texas judgment also requires Tagged to designate a “corporate level compliance representative” to oversee its compliance with the terms of the agreed-upon judgment and that state’s data and privacy protection laws, as well as to respond to consumer complaints or inquiries regarding Tagged’s privacy guidelines.

While social networking sites and other web-based member communities face intense competition to reach and enroll new members, these companies must be careful to ensure that their recruiting efforts do not run afoul of the data security and privacy laws of the jurisdictions in which their members live.

- Taja-Nia Henderson and Amy Mudge