Consumer Advertising Law Blog

FTC Complaint Includes at Least 3 Life Lessons That Should Make Any Advertiser’s “Best Life” List

Some of us are certain that the cure to all aging, memory loss and weight gain woes can be found in the Brazilian Amazon. According to the Federal Trade Commission, if so, it hasn’t been identified just yet. The FTC recently filed a complaint with the Northern District of Illinois, which granted a temporary restraining order against Central Coast Nutraceuticals and other related parties for false advertising and other deceptive practices related to its AcaiPure and Colopure products.

There are at least 3 life lessons from the complaint:

1) Free Cannot Come with Strings Attached: The FTC asserted the “free” and “risk free” trials were anything but. According to the FTC’s complaint, Central Coast failed to disclose adequately that consumers would automatically be charged for other products unless they opted out and would be enrolled in an automatic monthly membership for the products they ordered. The FTC has long been focused on negative option programs and what constitutes clear and conspicuous notice of material terms, including holding workshops and publishing a lengthy Staff Report last year. Any recurring charges must be expressly authorized and if future charges will vary, advance notice must be provide to customers. The FTC thanked Visa and the Better Business Bureau of Central, Northern & Western Arizona for their assistance in rooting out these practices. And Visa had this to say: "We have tightened enforcement of our rules against banks whose merchants generate excessive levels of cardholder disputes because of deceptive marketing. We also make it a priority to partner with law enforcement and agencies like the Federal Trade Commission and support their investigations such as this case."

2) Use Extra Caution with Health Claims: Central Coast claimed AcaiPure “Was Not Created For Those People Who Only Want to Lose A Few Measly Pounds” and that it would quickly reshape your body. The producer also claimed that its Colopure could eliminate “excess weight and toxic buildup,” thereby helping to prevent colon cancer. The FTC has longstanding guides detailing its views on what substantiation is required for dietary supplement makers and for weight loss products. As we have recently blogged, the FTC has been tightening its requirements for substantiation of health-related claims. Investigating health claims has long been a top enforcement priority for the FTC and we believe will continue to be so.

3) Endorsers Need to Endorse the Product and Do Not (Repeat DO NOT) Mess with Oprah: The FTC has also revised its Testimonial and Endorsement Guides. We have blogged before about what is new and what is old. One thing that is timeless is the requirement to actually have an endorsement from one you claim endorses your product. The FTC asserts Central Coast claimed implied phony endorsements from Oprah Winfrey and Rachael Ray, including posting a picture of Oprah on its website and claiming Rachael called Acai her “number one superfood”. Both (here and here) provided the FTC with declarations used in the TRO proceedings.

- Amy Mudge and Michael Thorpe

Stop the Press! $16 Million Jury Verdict in Newspaper Ad Pricing Dispute Sets California Apart In Assessing Liability for Below-Cost Pricing

The California Court of Appeal recently issued a decision that plaintiffs’ lawyers are sure to argue establishes near-strict liability under California law for selling a product below cost. The potential for treble damages should make all discounters of goods and services take note.

The court affirmed the San Francisco Bay Guardian newspaper’s $15.9 million jury verdict against the owners of its competitor, the San Francisco Weekly. The decision punished the SF Weekly for luring away some of the Bay Guardian’s display advertisers through below-cost discounts, even though there was no proof that the SF Weekly could recoup its losses later through higher monopoly pricing.

In the court’s opinion, California law -- unlike federal antitrust law and the law of many sister states -- does not require such proof. In fact, harm to competition may not even be necessary. Instead, the court held that Business & Professions Code section 17043 requires only proof that the “purpose” of a below-cost sales scheme was to harm another competitor. In California, according to the Court of Appeal for the First District, it doesn’t matter that consumers benefit from lower prices, even in the long run: so long as one competitor sets out to harm another, treble damages may be available.

To make matters worse for discounters, the court also ruled that evidence of harm to a competitor triggers a presumption that a defendant’s purpose was to injure competitors or destroy competition. To escape liability, a defendant must affirmatively demonstrate that it had no such purpose.

Not all California courts have come to this same conclusion, but if the opinion stands (that is, if the California Supreme Court does not grant review and reverse), it has the potential to chill aggressive price competition and promotion throughout California. And that is an unfortunate and ironic result, given that cutting prices in order to increase business is conduct the antitrust and consumer laws are supposed to promote and protect, rather than inhibit.

- Jamie Speyer & Zack Allen

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

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

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

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

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

- Amy Mudge and Andrew Macurdy

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

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

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

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

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

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

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

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

- Amy Mudge and Tiana Russell

Everyone Loves A Bargain, Except Some State Pricing Laws

The FTC and most states have long had Guides or laws on their books regulating pricing claims. While there are slight differences, they all share the basic principle that it can be misleading to claim that something is on sale if it’s on sale a lot or you sell a significant amount of the product over time at the sale and not the regular price. Recognizing that low prices are good for consumers and that these rules could be used to chill discounters, the FTC has not brought a deceptive pricing case in over 30 years. Further, these laws seem counterproductive to many, including us, as they can deter price competition and result in consumer harm rather than protection. In other words, most consumers have never seen a sale they did not love, love, love and would rather pay less for a product or service on any given day rather than more. That said, our view is not always in line with enforcement priorities. Some states occasionally bring sale pricing cases, for example, the NY AG has gone after several department stores and a men’s clothing retailer a few years back.

Private plaintiffs have tried to evoke these pricing laws occasionally, as well, but often find significant hurdles as their burdens are typically higher than those faced by a state AG. In Kim v. Carters, Inc., the Seventh Circuit recently provided guidance to private plaintiffs on what “actual damages” means under the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”), 815 ILCS 505. In the case, plaintiffs brought a claim under the Illinois consumer protection laws against a retailer selling kid’s clothing under price tags listing a “Suggested Price,” but at the same time, frequently displaying signs in its stores advertising percent discounts off these suggested prices. For example, a children’s T-shirt will have a suggested price of $16.00 with a “30% off” sign next to the item. The purchaser ultimately pays the sales price of $11.20 at the register. Through these advertised percent-off savings, plaintiffs alleged consumers were led to believe they were receiving a substantial savings. Plaintiffs claimed that these savings were a sham because the “Suggested Prices” are substantially higher than what the garments actually sell for on a regular basis and that this practice amounted to a breach of contract and a deceptive sales practice under 815 ILCS 505/2.

In affirming dismissal for failing to state a claim, the court stated that the plaintiffs sufficiently alleged an ICFA claim because the regulations promulgated under the Act “specifically identify this type of comparison between actual and fictitious ‘suggested retail price[s]’ as an ‘unfair or deceptive act.’” The issue that needed to be decided was whether the plaintiffs suffered actual damages to sustain a private action under the ICFA. When individual consumers bring a private action under the ICFA, actual damages may occur when the seller’s deception deprives the plaintiff of “the benefit of her bargain” by causing her to pay “more than the actual value of the property.” The court concluded that the plaintiffs received the benefit of the bargain in this transaction. The plaintiffs agreed to pay a certain price for kids clothing, which they did not allege to be defective or worth less than what they actually paid. Nor did the plaintiffs allege that , but for the alleged deception, they could have shopped around and obtained a better price. As a result, the plaintiffs did not suffer any actual pecuniary damage. The court further stated that it was not enough that the price comparisons deceived the plaintiffs and induced them to buy the sale clothing. To sustain their private ICFA action, the plaintiffs must sufficiently allege actual pecuniary damage, which the court concluded, the plaintiffs failed to do.

As we have reported earlier, the California courts are struggling with very similar issues and the Kwikset case is currently before the California Supreme Court. Which way the law trends on this critical damage issue bears close watching.

- Amy Mudge

Illinois Court Decides iTunes Must Face the Music

Apple previously sold iTunes gift cards with packaging that stated “Download $xx worth of entertainment to enjoy on your Mac or Windows PC. . . . Songs are 99¢ and videos start at $1.99.” In April 2009, Apple changed its pricing structure and raised the price of a limited number of songs on iTunes to $1.29. Plaintiffs, who alleged purchases of iTunes gift cards in March 2008 and May 2009, filed a class action alleging false advertising and breach of contract. Apple alleged that it stopped shipping the challenged gift cards to retailers “long before” the price restructuring in 2009, and it argued that price information appearing on old gift cards should not require Apple to sell all iTunes songs for 99¢ forever. A federal judge recently denied Apple’s motion to dismiss. (Owens v. Apple, Inc., No. 09-cv-0479-MJR (S.D. Ill. 2009)).

Apple’s motion to dismiss relied on several arguments. Of interest here is Apple’s claim that the complaint failed to satisfy the new pleading standard set forth in Bell Atlantic v. Twombly.

Consumer Protection Enforcement Takes Off in Europe

On 14 May, the European Commission published the results of an 18 month investigation into the sale of airline tickets online (found here and here).The Commission coordinated the pan-European exercise with 16 European national authorities, who together checked over 400 websites selling airline tickets for compliance with European consumer protection laws.

This is the first such “sweep” investigation to be carried out by the Commission which does not have direct enforcement powers in relation to consumer protection legislation. However, by coordinating the investigation with national enforcement authorities, and by threatening to “name and shame” defaulting airlines, the Commission has, for the first time, used its powers of persuasion to take indirect enforcement action on consumer protection issues. Judging by its success it likely will not be the last.

In September 2007, the Commission launched a “Sweep” or systemic checks of websites selling airline tickets by EU Member States.The Sweep focused on three key practices: clear pricing of tickets (i.e. any additional charges such as taxes should be displayed with the headline ticket price); availability of fare (i.e. any limitations to the availability of an offer should be clearly indicated); and fair contract terms. Of the 447 websites checked during the Sweep, over 50% were found to have “irregularities”. Following the Sweep, those websites that were found not to “fully respect” consumer protection laws were contacted by the relevant national authority and asked to provide clarification on their actions, or change their practices. The Commission issued a ‘mid-term’ report in April 2008 indicating that 50% of the websites that had been identified as having irregularities in September 2007 had corrected their practices. The final report explains that enforcement action - leading to the websites correcting their practices - has now been completed in 85% of cases, but there remains a hardcore group of about a dozen companies who are still giving the Commission “real cause for concern”.

This is undoubtedly an important step in European consumer protection. This investigation is the first time that the Commission has used the Sweep enforcement action to coordinate a consumer protection investigation. There are a number of European Regulations governing consumer protection for example, the Regulation on misleading advertising and the Regulation on unfair terms in consumer contracts. These pieces of European legislation are transposed into national laws and enforced at national level. It is therefore national authorities that impose sanctions against companies found to be in breach of consumer protection law, not the European Commission.

In June of this year, the Commission plans to publish an ‘Enforcement Communication’ aimed at strengthening pan-European enforcement of consumer protection laws. In addition, the Commission also hopes to put in place an industry wide agreement to uphold standards and conduct another Sweep later this year. It appears that the Commission is determined in its fight for consumer protection - and websites selling airline tickets are only the start of the Commission’s crusade.

- Sue Hinchliffe and Mark Gardner

“Going Out of Business!” “Once in a Lifetime!” “70% Off”: Endless Sales, Tourists, and Whether They’re Actually Bad (the Sales, not the Tourists)

We’ve all seen it before.  At the hot spot in any tourist location, there are dozens of little stores offering t-shirts, jewelry, and other trinkets.  And somehow or another, no matter what time of year you go, things always seem to be on sale.  And not that 10% off you see at stores at home, but a whopping 50% or 70% off, prices so low that they are often even called the lowest price ever. 

Juneau, Alaska, is one such tourist destination because the large numbers of cruises (and the even larger number of cruise ship passengers) that stop in the city, and it too has its share of discount retailers catering to tourists.  However, other store owners have begun complaining about this practice of constant sales and believe that “the price discounts were just a reduction from artificially marked up prices.” 

This practice, often called “deceptive pricing,” is illegal in Alaska, which requires seasonal sellers (like the stores at issue in Juneau) to only advertise their merchandise as being on sale for half of the season.  The state has yet to take any action, but has indicated that it would look into the issue if it began receiving a pattern of complaints.  The owners of the discount stores defend the practice by pointing out how competitive the market for things like jewelry is and that advertising large sales is necessary to attract customers because most stores are doing the same thing.

However, when discussing this issue, one must consider whether this type of pricing is actually a bad thing.  Several years ago, Robert, Randy, and Amy wrote an article arguing that states should abandon enforcing these types of laws because of several severe problems.  This would put the states in line with the FTC that, though still having guidelines restricting the practice, has seemingly abandoned enforcement, with the last case being brought in 1979.

The authors explained that there were practical difficulties in enforcing these laws because, in many cases, a business will operate in more than one state.  This is a major problem because laws here vary greatly from state to state, meaning that a business will either have to increase its advertising costs by pricing differently for each state or price at the least common denominator, which will deny consumers better discounts in states with less-restrictive or no pricing regulations.  Also, many of these laws are routinely ignored, which brings up problems with selective enforcement and selective compliance.

The authors also argued that there are policy problems with enforcing deceptive pricing laws.  First, enforcement may lead to a chilling of aggressive price discounting that would end up driving prices up and hurting consumers.  Also, some states, like Alaska, require a product be at the non-sale price for a given number of weeks, which will both hurt the consumers in town during the non-sale weeks and will also give competitors greater certainty in knowing what their rivals’ prices will be, allowing them to adjust their own prices accordingly.   Other states go one step further and require that a substantial amount of a product be sold at the non-sale price, a practice that in effect requires the retailer to “persuade some consumers to purchase the product at a higher price so that it can offer the product at a lower price to other consumers.”  Additionally, regardless of the advertised sale discount, consumers still can compare actual prices, a practice made even easier with the rise of the internet. 

It appears that many of these concerns are present here.  First, there is a chance that the laws are routinely ignored, since the practice is common in Juneau and, as an owner of a store that does not advertise gigantic sales put it, “[The state’s] got bigger fish to fry.”  Accordingly, it appears that businesses either comply and possibly lose money or run the unpredictable risk of state enforcement.  Next, the excessive discounting in this market keeps prices low because of the intense competition and because enforcement might raise the price.  The fact that it is competitors and not customers who are pursuing these claims makes this possibility even stronger.  Also, the current Alaska law, if enforced, harms the people who visit Juneau during the half of the season where a store is unable to offer a product on sale because that is likely the only time they will be in Juneau, leaving them with the choice of either buying silver moose earrings at the higher price or not buying them at all.  Moreover, though the internet does not really play a role here, customers are able to compare the products based on how much they are being sold for in competing stores.

Finally, though not explicit in the article, one wonders how “deceptive” these pricing schemes actually are.  There is a strong possibility that modern consumers have become so accustomed to these permanent sales to understand that they are little more than a gimmick and are not really once in a lifetime discounts.  As one Juneau customer put it, “You know, you go to Mexico and it’s the same thing . . . It’s worldwide, everyone wants a bargain.”  Perhaps more correctly, we like to think we’re getting one, even when we know we are not.