Consumer Advertising Law Blog

ALJ Finds POM Not So Wonderful, But Also Rules Against More Stringent FTC Substantiation Standard

A recent Initial Decision by Chief Administrative Law Judge D. Michael Chappell presents yet another mixed result for the Federal Trade Commission’s ongoing efforts to set more stringent substantiation levels for health claims.  The Initial Decision rejected the substantiation standard proffered by Complaint Counsel for the FTC, but still ruled that POM Wonderful made deceptive health claims regarding its “POM Wonderful 100% Pomegranate Juice” and POMx supplements.  The Judge found that the advertisements in question contained implied claims that the POM products would treat, prevent, or reduce the risk of heart disease, prostate cancer, and erectile dysfunction, but that there was insufficient competent and reliable scientific evidence to support those claims.

The parties agreed that substantiation of such claims required “competent and reliable scientific evidence,” but they disagreed on what that means. The FTC sought to require double-blind, randomized, placebo-controlled clinical trials (RCTs) to substantiate POM’s claims.  The Judge rejected this requirement, stating that RCTs were neither a legal requirement mandated by the FTC Act nor case law, nor appropriate in this case. Applying the so-called “Pfizer factors” to determine the appropriate level of substantiation, the judge’s analysis focused on the sixth factor: “the amount of substantiation experts in the field would agree is reasonable.”  He found that the weight of the expert testimony did not require RCTs where the product is a safe, food-derived product that is not being offered as a substitute for medical treatment. However, the Judge still concluded that “experts in the field” would agree that clinical trials were required, just not RCTs, because the claims were disease-related rather than general and highly qualified health claims. After reviewing POM’s substantiation, the Judge held that it failed to meet the “competent and reliable scientific evidence” standard.

The FTC also sought to prohibit POM from making any disease claim in the future unless the Food and Drug Administration pre-approved any such claim. The Judge rejected this requirement, stating

"no previous decision by the Commission or any court has required FDA pre-approval as the required level of substantiation for disease claims, including for purposes of a cease and desist order.”

Rather, the competent and reliable evidence standard is “established precedent, [] reasonably related to the violations found to exist, and [] sufficiently clear and precise to guide Respondents’ future advertising practices.”  As such, any FDA pre-approval requirement “would constitute unnecessary overreaching.”

As we have noted in previous posts (see here and here), the FTC’s efforts to require stronger substantiation for health claims have met some resistance by courts.  There may yet be further developments in this case as the Judge’s Initial Decision is subject to review by the full Federal Trade Commission on its own motion, or by motion of any party.

- Mac Conforti and Matthew Shultz

Skechers Pays Up for its Shape-Ups

Under a settlement agreement announced with the FTC and 44 state attorneys generals, Skechers has agreed to pay $40 million to resolve allegations that it made unfounded claims regarding the health and fitness benefits of its Shape-Up and Tone-Up shoes. Last fall, when the FTC announced a similar settlement with Reebok, maker of EasyTone and RunTone toning shoes, it warned national advertisers to “exercise some responsibility” in their message. Now, David Vladck, director of the agency’s consumer protection bureau, wants advertisers to know they must “shape up [their] substantiation or tone down [their] claims,” lest misled consumers give their wallets a workout with false hopes of an effortlessly transformed derriere. 

Citing a number of Skechers’ high profile ads, including one featuring Kim Kardashian that ran during the 2011 Super Bowl, the agency’s complaint against Skechers alleged that the market leader of the billion dollar toning shoe industry claimed its products would increase consumers’ weight loss and muscle tone and strength, and improve posture, but lacked adequate substantiation to back up these statements.  Perhaps the most salacious of allegations, that Skechers supported its claims, in part, with the results of an “independent clinical study,” conducted by the spouse of a Skechers marketing executive. The study had “numerous defects” – for instance, Shape-Ups wearers who gained weight during the study were incorrectly reported as having lost weight, and some of the study participants were employed by the executive’s spouse. Skechers is also alleged to have cherry-picked results from other studies and, in regards to its Tone-Up shoes, made claims that the shoes were “designed to help burn more calories,” without conducting any product-specific studies. 

Skechers has denied any wrongdoing, stating it settled the suit to avoid the costs and distraction of “defending multiple lawsuits in multiple courts across the country.” The settlement requires the company to refrain from making any claims regarding the health benefits of its toning shoes unless they are supported by competent and reliable scientific evidence, a requirement that varies under the agreement by claim type.  Weight loss claims must be supported by “at least two adequate and well controlled human clinical studies,” whereas strengthening claims require one such study, which must run for at least six weeks. The settlement defines “adequate and well controlled” studies as those that are randomized, blinded to the “maximum extent practicable,” and, if testing for weight-loss or fat reduction, controlled for “dietary intake.” All other health or fitness claims, including those of calorie burn or muscle tone, must be based on “tests, analyses, research or studies that have been conducted and evaluated in an objective manner by qualified persons.” 

With this suit, and several other recent settlements, the FTC has made clear that it is watching advertisers’ health and fitness-related claims, and is keen to ensure that such claims are properly supported. It is also clear -- as we have observed before -- that the agency is still intent on raising the bar as to what qualifies as competent and reliable scientific evidence by incorporating stringent requirements for the satisfaction of this standard into its settlement agreements. Advertisers in the health and fitness industries should be wary that claims of health or wellness benefits lacking strong support may have more than minor consequences.

- Joanna Persio, Angel Garganta, Trent Norris

How Many Reasonable Consumers Does it Take to Change a Light Bulb?

In a recent decision on cross-motions for summary judgment, a California federal court ruled on FTC allegations that Lights of America, Inc. (LOA) deceptively marketed its LED lamps in violation of section 5(a) of the FTC Act.  The decision was a partial win for each party, with the Court granting summary judgment to FTC on one count and to LOA on a second and part of a third.

The FTC alleged that LOA falsely claimed that its LED lamps would “replace” incandescent bulbs of a given wattage; overstated the lamps’ output in lumens; and exaggerated the lifetime of the lamps.  On the first count, the Court ruled for the Commission, rejecting a variety of LOA arguments.  LOA argued, for instance, that a reasonable consumer would understand that packaging claims such as “replaces 45 watts” meant only that the LED lamps would fit into the same sockets as a conventional bulb.  It also argued that undocumented observations by LOA’s Vice President of Sales and Marketing, as well as by Wal-Mart employees who looked at prototype products, were enough to substantiate claims of equivalent wattage.  The Court also ruled that subsequent brightness testing, even if it proved the claims true, could not serve as a defense because the tests were done after the claims were made.  Under section 5, it is a deceptive practice not to have substantiation for a claim before it is made.

The Court summarily ruled for LOA on the second count, which alleged that LOA made false or unsubstantiated statement regarding the lamps’ light output in lumens, on the grounds that LOA based these claims on documented independent testing, the reliability of which FTC did not dispute. 

On the third count, which concerned LOA’s claims that the LED lamps had a lifetime of 15,000 hours or more, the Court held that there were genuine issues of material fact — namely, whether LOA had adequate substantiation for these claims.  LOA alleged that the manufacturer of the individual LEDs used in the lamps told LOA that the estimated life of the LEDs was 30,000 hours, but there was also evidence that LOA knew that testing revealed a rapid decline in brightness after less than 1,000 hours.  Moreover, the Court held, there was a question of fact whether the incorporation of the individual LEDs into the final LED lamp product may have compromised the LED lifetime.  Finally, the meaning of “lifetime” in this context — specifically, whether the life of an LED expires when it loses half of its brightness, or when it goes out completely — was disputed.  However, the Court granted summary judgment for LOA on its claims that “you’ll never change your light bulbs again,” reasoning that this was obvious puffery, and consumers would not rely on it. 

LOA also faces a series of consumer class actions in California arising from similar facts (see here and here). 

- Katherine Ross

 

Myspace Settlement With FTC: Another Lesson on Risks in Privacy Policy Promises

The latest in a line of FTC enforcement actions challenging company privacy policies, Myspace LLC (Myspace) has reached a settlement agreement to resolve the FTC’s claims that the company’s privacy policy made false promises to consumers.

According to the FTC’s complaint, the policy indicated that Myspace would not share personal information except as described in the policy without first giving notice and receiving permission from the user. The policy also said that information used by third parties to customize ads would not identify to those third parties the identity of the user and that non-anonymized browsing activity would not be shared. But, charged the FTC, these promises didn’t square with reality.

The FTC alleged that Myspace provided advertisers with the “Friend ID” of users who were viewing particular pages on the site. Although a Friend ID itself does not provide a user’s name, the complaint alleged that, because of a default setting on the site, an advertiser could use the Friend ID to access a user’s full profile, which often contains a user’s full name.  Advertisers could also combine a user’s real name and other information to link web browsing activity to specific individuals.  A user had to override the default setting if she wanted to hide her full name.

In addition, Myspace had publicly certified with the Department of Commerce that its practices were in compliance with the U.S.-EU Safe Harbor Framework, which requires adherence to specific data privacy and security principles and practices as a means for a US company to obtain personal data from entities in the European Union in accordance with the EU Data Protection Directive. The FTC complaint alleged that Myspace failed to adhere to those principles and, thus, that its Safe Harbor certification was a false representation in violation of section 5 of the FTC Act.

The settlement agreement has many parts. Myspace is prohibited from misrepresenting how it maintains and protects the privacy and confidentiality of users’ personal information and from misrepresenting compliance with any privacy or security program, such as the Safe Harbor Framework.  Myspace is also required to implement a comprehensive privacy program to address privacy risks associated with users’ information. As part of the program, Myspace must designate an employee or employees to coordinate the program, identify reasonably-foreseeable material risks relating to disclosure and assess the sufficiency of safeguards to protect against those risks, and regularly test the effectiveness of those safeguards. Finally, every other year for the next 20 years, Myspace must have its privacy program evaluated by an objective, independent professional who will have to certify that the program’s protections meet or exceed the settlement’s conditions.

The settlement is an important warning of the risk of “over-promising” in a privacy policy and a reminder for businesses to review on a regular basis the statements in their privacy policies – and to consider the implicit implications of those statements – to ensure that all messages to the public about company policy are consistent with actual practice.   

- Nancy Perkins and Jeremy McLaughlin

FTC Workshop: Security and Privacy Concerns with Mobile Payment Systems, Both Perceived and Real (Part 2 of 2)

The Federal Trade Commission (FTC) recently conducted two half-day sessions on mobile payment systems (technology that enables consumers to make payments using their mobile phones; e.g., pay for parking meters) -- Paper, Plastic… or Mobile?.  The second session featured panels on data security and consumer privacy issues surrounding this emerging capability.  We previously summarized the morning session.  Because, as the panel discussions made clear, both concerns can be addressed by technology, the real problem for mobile payment systems is likely consumer perception.  Providers face the challenges of both convincing consumers of the technology’s security and earning consumers’ trust that providers and merchants will not violate their privacy.    

Creating consumer confidence in security protections is a significant hurdle to mobile payment systems’ acceptance.  According to a recent Federal Reserve survey, 42% of mobile phone users who have the opportunity to use mobile payments but choose not to cite fear of fraud as the reason for their hesitance.  Although the mobile payment space currently lacks uniform security standards, providers have strong incentives to make the payment systems as secure as possible.  

In fact, according to the industry, mobile payment systems may be more secure than traditional credit or debit cards.  For example, in the event that a user’s phone is stolen or lost, the victim may make a single phone call to shut down all the cards stored in his or her mobile wallet, as opposed to a phone call for each individual card in a misplaced leather wallet.  Mobile payment systems can also incorporate other security technologies, such as dynamic authentication (which renders stolen payment credentials useless for making future purchases), that may make mobile systems more secure than traditional payment methods.  As mobile payment systems evolve, one of the regulators’ goals will be to educate consumers to be able to distinguish between mobile payment platforms that utilize more secure technologies from those that do not. 

Mobile payment system providers may have more difficulty earning consumer trust about privacy.  As one might expect, the panel discussion highlighted a sharp contrast in perspectives between industry representatives, on the one hand, and consumer advocates, on the other.   

Industry representatives emphasized that in any attempts to protect privacy, regulators should avoid discouraging innovation.  It is often data collection that allows smartphones (and other technologies) to provide immediately and conveniently the information, such as location data, that their users desire.  Further, if regulators place significant limits on secondary data usage, currently free services such as Google and Facebook, for example, may begin charging subscription fees. 

Consumer advocates desire that consumers be afforded a choice about participation in data collection and sharing. We have previously blogged on this issue, citing a recent FTC consumer privacy report.  Unlike security, where companies and users may have an aligned goal (i.e., to maximize security), with respect to privacy, merchants have incentives to collect as much data as possible. As with traditional payment systems, mobile payment providers and merchants want to use and share this data to implement more targeted marketing strategies. Potential for abuse is heightened in the mobile space because of the increased amount of data mobile payment systems can collect, including transaction locations and aggregated purchases over time. Consumer advocates worry that data collection practices in the mobile payment space could lead to a bombardment of advertisements that will only be limited by a legal regime analogous to the National Do Not Call Registry, which was designed to prevent telemarketing abuses.       

Regardless of what regulatory scheme is implemented to protect privacy, whether consumers trust that their information is not being used inappropriately could, to a large extent, determine mobile payment systems’ acceptance.        

- Andrew Macurdy and Roberta Horton        

FTC Workshop: Introduction to Mobile Payment Systems (Part 1 of 2)

This is the first of a two-part series on the FTC’s April 26 workshop on mobile payments, Paper, Plastic… or Mobile?  Mobile payments is an umbrella term which includes alternative payment technologies that enable consumers to pay for products using their mobile phones. The morning session involved a panel discussion of industry participants with representatives from Google, MasterCard, Intuit, LevelUp, the National Consumer Law Center, and academia.  An overarching theme of the morning session was that mobile payment systems are in a nascent stage and while they will have a significant effect on the payment services and retail industries, it is still too early to tell precisely what the effects will be.

According to mobile payment system providers, the potential benefits to consumers of mobile payments are widespread. Consumers will benefit from the increased convenience mobile payments offer as they are less likely to forget their phone than their wallet, they will receive savings and other benefits from loyalty programs, and they will have access to digital receipts.  Mobile payments also allow for a merging of the customer shopping and paying experience, thereby improving customers’ overall retail experience.  Finally, mobile payments allow for micro-accounts which will give underbanked consumers access to convenient payment systems.  These consumers will also benefit from the ability to have real time balance checks, enabling them to make more informed decisions while shopping.

The mobile payment system providers also agreed that merchants also stand to benefit from mobile payments.  First and foremost is the information that mobile payments can provide.  This information on sales and customers will allow merchants to develop more successful loyalty programs and offer targeted discounts to increase customer loyalty. Smaller merchants will have access to detailed analytics which were previously only available to large merchants willing to pay. The ease of convenience of mobile payments will allow for quicker check-out times, mobile cashiers that are untethered from the cash register, and a better overall shopping experience for the customer. Mobile payments may help merchants cut costs by reducing printed coupons. 

While mobile payments will provide ample benefits to consumers and merchants, the overall net effect is not quite so clear. Consumer rights groups are concerned that the increased convenience may actually be a detriment to consumers as it could encourage over-spending, although the industry countered that mobile payments just eliminate transactions costs and facilitate consumer choice. Mobile payments also bring privacy concerns (which were discussed in more detail later in the workshop and will be covered in part two) and questions relating to translating the traditional consumer protections of cards to this new form of payment. While disclosure and consumer education may help alleviate these concerns, consumer rights groups are skeptical that those tools will be effective in the mobile payment context because of the small screens on mobile devices.  Mobile payments also bring many more parties to the  payment processing table - mobile phone device manufacturers, operating software developers, app creators, telecom providers just to name a few. These additional parties are obviously seeking to make money, but, according to industry participants, the additional parties also bring additional opportunities to innovate which can only help drive down prices. 

While there are significant hurdles for mobile payments to overcome, whether financial, legal, regulatory, or technological, mobile payments are causing significant change to both the payment services industry and the overall shopping experience. 

- McCormick Conforti and Angel Garganta

Green Millionaire to Pay Millions: FTC Settles With Marketer Over Negative Option Program

“FREE!” shouted advertisements for the Green Millionaire Book.  “This free offer won’t last,” so you’d better “GET YOUR FREE BOOK TODAY!” 

Reasonable people might conclude that the book in question was free.  Not so free, according to the FTC, which charged Green Millionaire, LLC and its co-defendants with failing to disclose adequately the true cost of the offer before enrolling consumers who accepted the offer in a negative option program.  In a negative option, sellers interpret consumers' silence or inaction as permission to continue charging them for goods or services. In this case, the FTC alleged that consumers who ordered the “free” book were enrolled in a paid subscription to Green Wealth e-Magazine unless they cancelled during the trial period. According to the FTC, this fact was not disclosed adequately, but was buried in fine print on the Green Millionaire website. In addition, the FTC alleged that the defendants induced consumers to order the book by falsely claiming that the book would show them “how to get free gas for life,” “how to put solar panels on your roof for free,” and “how to make your electricity meter go backwards paying you.”  As a result, the FTC filed a Complaint earlier this month against Green Millionaire and affiliated entities and individuals for violations of the Federal Trade Commission Act.   

Under the proposed consent order, prior to using a consumer’s billing information for a negative option purchase, sellers must acquire the express informed consent of the consumer. They must disclose all fees and costs, the amount and frequency of any subsequent charges, the material terms of any refund or cancellation policy, and how to cancel or obtain a refund. To complete a purchase, consumers must sign, check a box, or otherwise affirmatively accept the negative option feature, and all costs associated with the negative option must be disclosed immediately adjacent to the signature line or check box.  Following any transaction, prior to any renewal of six months or more, and with any shipment, the defendants must send written confirmation, including procedures for canceling the order or obtaining a refund. These procedures must be cost-free and “as simple to use and effective” as the mechanism for purchase. The order also imposes a judgment totaling nearly $6 million for consumer redress, all but $2 million of which is suspended unless a defendant is found to have misrepresented its financial condition.

In 2010, Congress passed and the President signed the Restore Online Shopper’s Confidence Act (ROSCA). Section 4 (15 U.S.C. § 8403) requires that a seller marketing a negative option over the Internet:

1. Clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information;
2. Obtain a consumer’s express informed consent before charging the consumer’s credit card, debit card, bank account, or other financial account; and
3. Provide simple mechanisms to stop recurring charges.

The FTC has enforcement authority under ROSCA, but we are not aware of any enforcement activity so far. The Green Millionaire case wasn’t brought under ROSCA either (presumably because the conduct at issue occurred before enactment), but it may provide guidance as to how the FTC will interpret and apply the Act in the future.

- Katherine Ross and Matt Shultz

Whaddaya Think About Arbitration? The CFPB Wants to Know

Acting on powers it received in the Dodd-Frank Act, the Consumer Financial Protection Bureau has opened the public comment period to gather views regarding the use of arbitration agreements “in connection with the offering or providing of consumer financial products or services.” 

The CFPB seeks comments by June 23, 2012, regarding

1. the prevalence of arbitration clauses in consumer financial products and services;
2. the types of claims brought by and against consumers in the financial services context;
3. the effects on consumers and financial services companies of actual arbitrations; and
4. how arbitration clauses affect consumers and financial services companies outside of arbitration.

The timing of this comment and rulemaking process is particularly interesting in light of recent Supreme Court decisions reaffirming the scope of the Federal Arbitration Act and the enforceability of arbitration agreements in business transactions. As widely reported last year, in ATT Mobility LLC v. Concepcion, the Supreme Court held that arbitration clauses are enforceable in consumer contracts even when prohibiting class actions. (For more on Concepcion, see here and here). And earlier this year, in Greenwood, the Supreme Court held that because the law at issue (the Credit Repair Organizations Act) was silent on whether claims can proceed in arbitration, the Federal Arbitration Act required that the arbitration clauses in the challenged consumer contracts be enforced according to their terms.

The call for comments by the CFPB is an early step in a long process of reviewing the issue of arbitration clauses in financial services contracts, but those interested should be sure to let their views be known.  Stay tuned and watch this space for updates on the public comment process, as well as the resulting reports and rules issued by the CFPB.

- Nicholas Kennedy, Gil Serota, and Sean Morris

 

GE Foods: To Label or Not to Label - That is the Question (Again)

Right or wrong, scientifically-based or not, the labeling of genetically engineered foods (GE foods) - often, and erroneously, referred to as GMO foods - remains a topic on the mind of activists and legislatures across the country.   

In October 2011, the Center for Food Safety (not to be confused with FDA’s Center for Food Safety and Applied Nutrition), and other nonprofit organizations, filed a citizens’ petition with the US Food and Drug Administration seeking mandatory labeling for foods made from genetically engineered crops. Similar groups launched a “Just Label It” campaign to garner support for the petition, and many nonprofit organizations asked their members to submit comments to FDA in support. Comments closed last month, and FDA recently stated that it hopes to complete its review and respond to the petition in the near future.

For nearly twenty years, FDA has repeatedly asserted that there is “no basis for concluding that bioengineered foods differ from other foods in any meaningful or uniform way, or that, as a class, foods developed by the new techniques present any different or greater safety concern than foods developed by traditional plant breeding.” The petition, yet again, seeks a new policy and labeling requirements. The FDA’s long-held position is that GE foods are not materially different from their conventional counterparts. 

Rosetta Stone v. Google: Possible Implications for Internet Retailers

The Fourth Circuit (Traxler, C.J.) has issued a unanimous decision in Rosetta Stone Ltd. v. Google Inc., No. 10-2007 (4th Cir. Apr. 9, 2012), overturning the Eastern District of Virginia’s opinion on several key grounds.  The Fourth Circuit vacated the district court’s ruling of summary judgment against Rosetta Stone on several key points, remanding on each of these claims.  The impact of the case upon retailers and consumers is yet to be seen, but the decision may result in decreased use of others’ trademarks in an advertiser’s Sponsored Links on Google and other search engine results (those shaded boxes, set off from the rest of the advertising, in search engine results).    

Rosetta Stone is this country’s leading language software company.  It sued Google in the Eastern District of Virginia, alleging among other things, direct and contributory trademark infringement, as well as trademark dilution.  These claims arose out of Google’s sale of Rosetta Stone’s marks as “keywords” that third parties could purchase, triggering their advertisements when Internet users input Rosetta Stone’s marks into the Google search engine.  With Google’s adoption of new policies in 2009, third parties were also allowed to use the keywords in their advertising text on Google in certain situations.  According to Rosetta Stone, an increase in counterfeited software sales ensued.  The district court granted Google’s motion for summary judgment on the claims we discuss here; the Fourth Circuit remanded.

Direct Infringement.  The appellate court concluded that the district court erred in granting summary judgment on direct infringement.  First, the Fourth Circuit stated that intent to cause consumer confusion could be found because Google knew that confusion was likely to result from the ways in which it was allowing keyword purchasers to use others’ trademarks in their ad text.  Second, the Court accorded Rosetta Stone’s evidence of actual confusion -- in the form of both a survey finding 17% confusion and anecdotal evidence of purchasers buying counterfeit, faulty software sold by third parties via the Google search engine results  -- great weight.  And while few individuals testified as to their confusion, Rosetta Stone presented evidence of hundreds of customer complaints regarding pirated software they had purchased.  The Court’s endorsement of this evidence is likely to be cited by future plaintiffs who can show many customer complaints, but only few witnesses willing or able to testify about confusion.        

The Fourth Circuit also addressed, and refuted, the district court’s holding that Google’s activities were shielded by the “functionality” defense.  The Fourth Circuit explained that the functionality doctrine prohibits acquisition of trade dress or trademark rights in functional features of a product or its packaging that are essential to the use or purpose of an item or affect its cost or quality.  Focusing on their use in Google’s search engine, the district court concluded that the ROSETTA STONE® marks were functional because they had both “indexing” and “advertising” functions.  Rejecting functionality as an affirmative defense here, the Fourth Circuit stated emphatically that the functionality doctrine did not apply because the district court erred in focusing “on whether Rosetta Stone’s mark made Google’s product more useful, neglecting to consider whether the mark was functional as Rosetta Stone used it.”  Id. at 28.  (Emphasis in the original.)    

Dilution.  The lower court had found no trademark dilution, a protection reserved for famous marks such as the COCA-COLAs or KODAKs of the world.  The Fourth Circuit vacated and remanded on the dilution issue, finding a faux pas in the lower court’s reliance on Rosetta Stone’s increased brand awareness as a reason for rejecting its dilution claims.  What this means is that a defendant trying to show that the plaintiff’s mark is “diluted” and therefore not famous cannot establish this simply by showing that the brand has increased in recognition.

- Roberta Horton

Google Privacy Policy Change Spawns Swath of New Lawsuits

Google implemented a new privacy policy on March 1, 2012.  It is safe to say that Google’s legal department has not had a rest since. 

A barrage of class action lawsuits filed across the country are challenging the policy generally on one of three theories:  (1) Google violated its own privacy policy and made deceptive claims regarding consolidation of user data across Google’s products (e.g., Google search, Gmail, Google +, YouTube, etc.) in violation of various statutory and common laws; (2) Google inserted code, without disclosure, into its web content that deactivated security protections built into the Safari web browser; and (3) Google unlawfully intercepted information from Google + users in order to sell to third parties. 

Within each of these three categories, most of the lawsuits are virtually identical, and the same Plaintiff’s counsel is involved.  The lawsuits mostly allege violations of the Federal Wiretap Act, 18 U.S.C. § 2511, the Stored Electronic Communications Act, 18 U.S.C. § 2701, the Computer Fraud Abuse Act, 18 U.S.C. § 1030, state consumer protection laws, and common law violations for intrusion upon seclusion, trespass to chattels, commercial misappropriation, and unjust enrichment.  The lawsuits seek to represent classes of people who have had Google accounts or cell phones running Google’s Android operating system.  Last week, counsel began efforts to have the various groups of cases coordinated.

The most recently filed case – Anderson v. Google Inc., Case No. 12-cv-1565 (N.D. Cal., filed Mar. 29, 2012) – is illustrative of the typical allegations about the privacy policy, particularly for the first category of cases listed above.  According to that complaint, prior to March 1, 2012, each of Google’s separate products had its own privacy policy, and that policy precluded sharing of user information with other Google products absent user consent.  The complaint alleges that the new privacy policy, however, permits consolidation of this information across all of Google’s products.  So, for example, if a user types “Chelsea restaurants” into Google search, under the new policy information can be pooled from that user’s Gmail, Google Maps’s usage, etc, to help determine whether the user is looking for restaurants in Manhattan or London.  Plaintiff alleges that, despite Google’s claim that the new policy will provide a more intuitive user experience, this violates a user’s reasonable expectation of privacy when using one particular product.  Plaintiff also alleges that the primary purpose for this new policy is to maximize advertising revenues. 

Lawsuits aren’t the only headache to Google’s legal department.  Regulatory bodies in the U.S. and abroad have scrutinized the new policy.  In February 2012, 35 Attorneys General sent a letter to Google complaining about aspects of the policy.  And just last week, Google responded formally to questions posed to it by France’s National Commission for Data Protection (*insert link).  Google has stood its ground, claiming that its new privacy policy is transparent, respects all applicable laws and principles, and will provide its users with a better experience.

- Jeremy McLaughlin & Angel Garganta

Protecting Your Brand in the Expanding Internet

As we previously described, the Internet is set to expand with the launch of a yet unknown number of new top level domain names (“gTLDs”), some of which may be operational by the year’s end.  Although the March 29 deadline to register to apply for your company’s own gTLD has now passed, brand owners -- including those who decided to forgo the opportunity for their own Internet space via a gTLD -- should remain vigilant throughout the gTLD launch process to protect their trademark rights.  Specifically, your company should keep the following in mind:

Objectionable gTLDs.  On May 1, 2012 ICANN will publish a list of applied-for gTLDs on its website.  Although ICANN has estimated that it will receive between 500 -1,000 applications, some commentators have speculated that this estimate is low.  Be ready to review the list for potentially problematic applications.  If any applications appear to violate your company’s marks, keep in mind that the May 1 publication also triggers a formal objection period, during which brand owners can object to, and potential block, gTLD applications.  Formal objections may be founded on four bases, but a “legal rights” objection is most likely to apply if your company did not seek its own gTLD.  Legal rights objections must be filed with WIPO before December 1, 2012, and may be granted if the proposed gTLD “takes unfair advantage of” or creates a likelihood of confusion with your mark.  WIPO’s rules for legal rights objections can be found here.

Infringing Second Level Domains.  Even if no gTLD appears to threaten your brand, each new Internet space brings with it the potential for infringing second level domain names.  For instance, there are already three competing applications for a .music gTLD, a top level domain that may be a concern to any number of brands in the music industry.  By way of example, aside from any objections that Def Jam Records may have to the .music gTLD, it would likely also be concerned if a third-party attempted to register “.DefJam” as a second-level domain within the .music space.  ICANN has set up procedures, described below, to mitigate such potential infringements.  These procedures are not the ultimate solution to protecting your brand in the expanded Internet space, but do offer some advantages to consider.  

 

·         Trademark Clearinghouse.  In October 2012, ICANN expects to launch a “Trademark Clearinghouse” to assist rightful trademark owners, who provide evidence of their rights, in protecting their marks.  ICANN has not yet selected providers to manage the Clearinghouse, nor finalized all of the procedures for inclusion -- be on the lookout for more details in the coming months.  By including your company’s marks in the Clearinghouse, you will be notified if a would-be infringer seeks to register your trademark as a second level domain name within a new gTLD.

 

·         Trademark Claims Services.  Notifications will be given during the “Trademark Claims Services” period, which will run for the first 60 days after each gTLD’s public launch.  However, notification will only be given if the second level domain is an exact match to your trademark, and it appears that notification alone will not block the potentially infringing registration.    

 

·         Sunrise Services.  To protect against infringing second level domains more proactively, ICANN will also require the new gTLD registries to offer a “Sunrise Services” period, which is expected to begin at least 30 days before each gTLD’s launch.  During this time, rightful trademark owners may reserve their mark as a second level domain within the gTLD -- ahead of others who might seek the same name.  The Sunrise Services thus effectively offer a “head start” to rightful trademark owners who avail themselves of the services.  The new gTLD registries must honor marks included in the Trademark Clearinghouse during the Sunrise Services period, providing an additional advantage to inclusion in the Clearinghouse. 

 

 - Roberta Horton and Joanna Persio

 

FTC Rolls Out Consumer Privacy Protection Framework

The Federal Trade Commission (“FTC”) released this week its long-awaited consumer privacy report, Protecting Consumer Privacy in an Era of Rapid Change (the “Report”).  The Report builds upon a preliminary staff report the FTC released in December 2010.  The Report sets forth a privacy framework (the “Framework”) that is intended to identify the “best practices for companies that collect and use consumer data” and to “assist Congress as it considers privacy legislation.”  The Report cautions, however, that to “the extent the framework goes beyond existing legal requirements, the framework is not intended to serve as a template for law enforcement actions or regulations under laws currently enforced by the FTC.”  The Report also states that the Framework is “not intended to conflict with requirements of existing laws and regulations.”

The Framework covers all commercial entities that collect or use consumer data that can be reasonably linked to a specific consumer, computer or other device.  Data will not be deemed “reasonably linkable” if a company (1) takes reasonable measures to de-identify the data (i.e., ensure that  the data is not linkable to a specific consumer, computer or device); (2) publicly commits that it will not try to re-identify the data (i.e., link the data to a specific consumer, computer or device); and (3) contractually prohibits downstream recipients from trying to re-identify the data.  The Framework does not apply to entities that collect “non-sensitive” consumer data (e.g., “data that is not a Social Security number or financial, health, children’s, or geolocation information”) from fewer than 5,000 consumers per year and do not share any of that data with third parties. 

The Framework is based on three baseline principles:  privacy by design, simplified consumer choice, and transparency.

Privacy by Design:  Under the Framework, companies “should promote consumer privacy throughout their organizations and at every stage of the development of their products and services.”  Companies should, among other things, establish reasonable data security, reasonable limits on the collection of data, sound retention and disposal practices, and procedures to ensure data accuracy.  The Report also states that companies should implement comprehensive data management procedures throughout the life cycle of their products and services, such as, for example, the designation of personnel responsible for employee privacy training and the regular assessment of the privacy impact of specific practices, products, and services.

Consumer Choice:  Companies should provide mechanisms that allow consumers to choose how their personal information is handled, and should simplify the means for consumers to do that.  For practices requiring choice, the Report states that companies should offer choice when a consumer is making a decision about personal data, and that companies should obtain “affirmative express consent” before (1) “using consumer data in a materially different manner than claimed when the data was collected” (e.g., “sharing consumer information with third parties after committing at the time of collection not to share the data”) or (2) “collecting sensitive data for certain purposes.”  The Report, however, states that companies do not need to provide a choice “before collecting and using consumer data for practices that are consistent with the context of the transaction or the company’s relationship with the consumer, or are required or specifically authorized by law.”  The Report also supports a Do-Not-Track regime based on five key principles:  (1) universal implementation to cover all parties who would track consumers, (2) a system that is easy to find, understand and use, (3) choices offered should be persistent and should not be overridden when, for example, “consumers clear their cookies or update their browsers,” (4) a comprehensive, effective and enforceable Do-Not-Track system, and (5) a consumer’s right to opt out of the collection of behavioral data for targeted advertising and all other purposes, except those that are consistent with the context of the interaction (e.g., “preventing click-fraud or collecting de-identified data for analytics purposes”).

 Transparency:  Companies should provide maximum transparency of their data practices.  To accomplish this, privacy notices should be clear, short, and standardized, and consumers should have reasonable access to their personal data.  Companies also should expand their efforts to educate consumers about commercial data privacy practices.  With regard to data brokers (i.e., companies that collect information from a wide variety of sources for the purpose of reselling such information), consumers should have access rights to information held by data brokers (this may require new legislation).  Data brokers should “explore creating a centralized website where data brokers could (1) identify themselves to consumers and describe how they collect and use consumer data and (2) detail the access rights and other choices they provide with respect to the consumer data they maintain.”

Finally, over the course of the next year, the Report states that the FTC will be active in the following five areas.

Do-Not-Track:  The FTC will work with browser vendors, the Digital Advertising Alliance, and the World Wide Web Consortium to implement an “easy to use, persistent, and effective Do Not Track system.”

Mobile:  The FTC urges mobile services companies to improve privacy protections, including the “development of short, meaningful disclosures.”  The FTC will hold a workshop on May 30, 2012 to address, among other issues, mobile privacy disclosures.

Data Brokers:  The FTC will support data broker legislation and will urge the data broker industry to create a centralized website.

Large Platform Providers:  The FTC plans to host a public workshop in the second half of 2012 to address comprehensive tracking of consumers’ online activities by providers of large platforms (e.g., “Internet Service Providers, operating systems, browsers, and social media”).

Promoting Enforceable Self-Regulatory Codes:  The Report notes that the White House recently issued a “white paper” that sets forth a Consumer Privacy Bill of Rights, and that the Department of Commerce (Commerce) issued a Request for Public Comments seeking public input on the process for convening stakeholders to determine how to apply the Consumer Privacy Bill of Rights in different business contexts.  The Report states that the FTC will participate in Commerce’s facilitation of the development of codes of conduct.  To the extent strong codes are developed, the FTC will “view adherence to such codes favorably in connection with its law enforcement work.”

- William E. Cook, Jr. & Michael Levin

Cause Marketing -- Cause for Concern?

“Cause marketing” enables commercial enterprises to do well by doing good: enhancing brand affinity by associating the enterprise with support for a worthy charitable cause,  such as finding a cure for breast cancer or eradicating illiteracy.  As virtuous as these alliances may be, however, recent activity of the New York Attorney General reminds that they are not without potential pitfalls.

The New York Attorney General has been particularly concerned with  preventing fraud in connection with breast cancer charities.  In 2011, the Attorney General sued one such purported charity and obtained guilty pleas from the founders of another, based on allegations that they were essentially phony charities that existed to benefit their founders.  More recently, the Attorney General has sent questionnaires to at least 40 charities and 130 companies asking for detailed information about activities where the sale of goods or services is advertised to benefit breast cancer causes.  The Attorney General has explained that the purpose of this effort is to “help ensure that cause marketing campaigns provide the benefit that’s expected.”

In short, with these initiatives, a consumer protection spotlight is beginning to shine in the direction of cause marketing.  How brightly remains to be seen, but certainly the elements are there from a legal standpoint to warrant careful attention. Charitable entities are special creatures of statute with particular obligations.  Under ordinary principles of derivative liability such as agency, joint venture, and aiding and abetting, commercial enterprises that associate with charitable entities to promote common objectives in a marketing campaign may have some exposure of their own.  In addition, many states, including California (here and here), New York, and Colorado have charitable solicitation laws that define at least some obligations of commercial co-venturers who affiliate with non-profits in cause-marketing campaigns.  Even absent such special provisions, cause-marketing, as a form of advertising, can be subject to any number of consumer protection statutes and common law duties more commonly associated with purely commercial activity.  Finally, where regulators and the law enforcement community begin to tread, the plaintiffs’ bar is often not far behind.  If there are torts or other forms of liability lurking, they are likely to be mass torts with arguably substantial aggregate financial stakes.  Thus, they may precipitate private class actions.

None of this is cause to abandon cause-marketing, any more than similar considerations are cause to abandon commercial advertising.  Rather, it is cause to take a careful look at the particulars of any campaign to be sure it can withstand the greater external scrutiny that may be coming, and to act in a prophylactic manner in that regard.  This includes ensuring compliance with applicable state and federal laws; doing due diligence as to the bona fides of the charitable partner; taking reasonable steps to ensure and be able to show that representations made in the course of the campaign, including but not limited to how donations will be spent, are truthful and fully performed; and insisting on appropriate accountability from the charitable partner.

- Dirk Schenkkan, Beth Parker & Kelly Welchans

FTC Loses Again on Substantiation Issue

The FTC’s efforts to enforce consent judgments were set back again, this time by a federal district court ruling in the Southern District of Florida.  The FTC again lost on the question of whether the advertiser possessed competent and reliable scientific evidence supporting its claims.

The court rejected what it apparently saw as an overly aggressive enforcement position regarding a 2006 consent judgment with Garden of Life, Inc. and its owner.  That consent judgment prohibited disease claims unless such claims were substantiated by competent and reliable scientific evidence and prohibited the misrepresentation of any test or study.  The FTC alleged that Garden of Life (i) falsely claimed that three products did not contain soy allergens; (ii) made unsubstantiated claims about the benefits of its Ocean Kids products; (iii) made unsubstantiated claims about the superiority of two products compared to competing products; and (iv) falsely claimed that the superiority claims were supported by human clinical studies.

In support of its no soy allergens claim, Garden of Life received an allergen statement from its supplier that the raw materials used did not contain soy, confirmation from one of the supplier’s executives that allergenic ingredients were not used, and a statement from the supplier that its fermentation process consumes or destroys any residual soy.  Although the FTC’s testing found soy in the affected products, it did not provide any evidence that the soy came from the supplier’s products.  Furthermore, the product at issue was voluntarily recalled prior to the FTC’s complaint, undercutting the FTC’s claims of harm.  Based on these facts, the court held that the FTC failed to prove by clear and convincing evidence that Garden of Life lacked competent and reliable scientific evidence substantiating the no soy allergens claim.

Garden of Life made various claims about the ability of its Ocean Kids soft gels to boost or support mental and cognitive functions, mood and behavior, and eye development.  The FTC’s expert opined that these claims were not substantiated by competent and reliable scientific evidence.  Garden of Life’s expert opined that they were.  With no detailed discussion of either expert’s opinion, the court refused to find that Garden of Life violated the consent judgment based on a disagreement between experts.

The court held that the prohibition on unsubstantiated claims concerning “absolute or comparative health benefits, efficacy, [or] performance” did not cover comparisons to competing products, but only claims about the product’s health benefits or health improvements compared to not using the product.  Even if the order did cover comparisons to competing products, the court concluded that the FTC “took several statements out of context and manipulated them in an attempt to substantiate its allegation that [Garden of Life] made unsubstantiated comparisons of the Grow Bone System to other products.”

Finally, the court rejected the FTC’s allegation that Garden of Life misrepresented “‘the results and validity of clinical studies of AlgeaCal when marketing RAW Calcium and the Grow Bone System.’”  The court concluded that under the consent judgment Garden of Life was not required to conduct studies of RAW Calcium and the Grow Bone System.  Furthermore, in a strict reading of the consent judgment, the court stated that it did not require that the studies “be reliable or performed in a certain manner” -- instead, all the consent judgment requires is that the statements about the studies (e.g., that study participants consumed the ingredients in the Grow Bone System) be literally true, which they were.  Perhaps influencing these conclusions, the court went on to note that Garden of Life’s expert had opined that the RAW Calcium and the Grow Bone System claims were supported by competent and reliable scientific evidence.

The Garden of Life decision is another example of a trend we have documented here over the past couple of years:  a court disagreeing with the FTC about the quantity and quality of evidence required to satisfy the competent and reliable scientific evidence standard.  These decisions have prompted the FTC to incorporate into consent orders more specific and stringent standards for what constitutes competent and reliable scientific evidence for certain claims, such as the requirements regarding two adequate and well-controlled human clinical studies and essentially equivalent products in the Iovate and Nestle cases.  What remains to be seen is whether courts will construe the new substantiation provisions in the way that the FTC intends.  Given recent history, that is hardly a sure thing.

- Matthew Shultz, Trent Norris, & Angel Garganta

FTC to Car Dealerships: Misleading Ads Must Be “Gone in 60 Seconds”

“We will pay off your balance no matter how much you owe” is a slogan that was used by a car dealership for years until the Federal Trade Commission, last week, reached settlement agreements with five car dealerships prohibiting this type of advertising regarding paying off loans on consumers’ trade-in cars and other advertising related to financing terms.  The FTC alleged that the advertising was false and misleading, in violation of the FTC Act, the Truth in Lending Act, Regulation Z, and the Consumer Leasing Act and Regulation M by implying that when the consumer trades in a used car to purchase another car, the consumer will have no remaining obligation for any amount on the used car.  However, according to the FTC, when a used car had a loan balance that exceeded the car’s value, called negative equity, the car dealerships involved in the settlement did not pay off the balance of the loan but rather included the amount of the negative equity in the loan for the new vehicle.  For example, according to the FTC’s Consumer Alert Publication on this topic, consumers who had a loan payoff of $18,000 on a car worth $15,000 would then have the negative equity amount of $3,000 added to the loan for the new car by the car dealerships, thus increasing the amount of monthly payments for the new car or down payments.

The five dealerships, from various cities in the U.S., have entered into proposed consent agreements with the FTC (here, here, here, and here). The consent agreements prohibit them from advertising that they will pay the remaining balance on a trade-in if the consumer is still responsible for the negative equity value and from misrepresenting other facts related to leasing or financing a vehicle.  These consent agreements reflect a broader FTC initiative to identify and address consumer fraud and deceptive practices targeting people who are financially distressed, which included a series of roundtable events last year soliciting information on potential consumer protection actions concerning the sale, financing, or lease of motor vehicles.  As the FTC’s website states, “Having access to a motor vehicle is essential for many consumers to fulfill their daily obligations.  It imposes a substantial expense, however, and accordingly most consumers seek to lease or finance the purchase of a new or used car.  As the nation's consumer protection agency, the Commission is committed to protecting consumers in connection with these financial transactions.”  As we have written in the past, it is important that advertising is clear and gives full information to consumers, otherwise -- as these five recent consent agreements show -- the FTC may well act fast and furiously.

- Deborah Birnbaum & Angel Garganta

It’s a FACTA, Identity Theft Victims Appear Satisfied, But There Is Room for Improvement

On Monday, March 12, the FTC released the results of a survey issued to identity theft victims to gauge their experiences with consumer reporting agencies (CRAs).  The survey also inquired as to consumers’ experiences exercising their rights to recover from identity theft under the Fair Credit Reporting Act (FCRA) as amended by the Fair and Accurate Credit Transactions Act (FACTA).  The results showed that for the most part, consumers have been satisfied with their experiences, but there is also room for improvement.

The FTC is one of the agencies tasked with enforcing the FCRA.  To do so, the agency brings law enforcement actions, manages an Identity Theft Clearinghouse and offers consumer educational materials on identity theft.  In 2007, an Identity Theft Task Force was created to develop a national strategy to help further combat identity theft.  The Task Force recommended that consumer surveys be used to assess the impact and effectiveness of the rights established by FACTA.  FACTA gives consumers, among other things, the right to place fraud alerts with CRAs and request free credit reports from each of the three national CRAs.

For this most recent survey, the FTC hired a contractor to conduct six focus groups of 52 identity theft victims across three cities to learn more about the consumers’ experiences exercising their rights under FACTA.  The results of these focus groups were used to craft the survey, which was then disseminated to 3000 consumers who had previously contacted the agency hotline to report that they were victims of identity theft.  Some of the highlights include:

• Of the 634 respondents, 87% contacted one or more of the three national CRAs (Equifax, Experian and TransUnion).  Of these consumers, 50% contacted all three of the major CRAs.
• The vast majority of respondents reported that they attempted to speak with a live representative.  While 81% were eventually able to do so, 36% found it either somewhat or very difficult to reach a live representative, and 13% found it very difficult.
• Most of the consumers who participated in the focus groups reported that they did not have a clear understanding of their FACTA rights and did not have a clear plan for remedying their identity theft upon contacting the CRAs.  In addition, most of the participants did not know they should contact the CRAs until it was recommended to them by the FTC, a creditor or law enforcement.
• One of the primary tools created by FACTA is the fraud alert.  FACTA allows consumers who believe they have, or are about to become, identity theft victims to place an initial fraud alert on their credit files.  The survey results show that 44% of participants who contacted a CRA were unaware of their right to place a fraud alert, although 85% ultimately did so.  Additionally, only 60% of consumers who contacted a CRA were aware of their right to dispute inaccurate information on their credit report.
• Both focus group and survey respondents reported concerns that upon contacting the CRAs, it was recommended that they purchase identity theft protection products, and some consumers even felt pressured to buy products or services their did not want.

The results of the survey show that while consumers that are the subject of identity theft are generally satisfied with the information and assistance they are receiving, there is certainly room for improvement.  The FTC recommends that the CRAs do more to educate the public about their rights, while the agency renewed its commitment to making consumer education about identity theft an important priority.  The FTC concluded that both the CRAs and the FTC should better target their outreach programs to address FACTA rights for consumers.  The FTC also concluded that both it and the Consumer Financial Protection Bureau should use their authority to address consumers’ concerns about CRAs selling identity theft products to victims that contact them for advice or reporting.

- Danielle Garten

A New Dawn: California’s “Shine the Light” Law Suddenly Illuminating California Courts

It’s time for companies to dust off their privacy and employee training policies.  In the last 3 months, the same plaintiff’s counsel has filed 10 nearly-identical class action lawsuits against various corporations alleging violations of California’s “Shine the Light” law, Cal. Civ. Code § 1798.83 (“Act”).  And there is no indication that this trend is abating:  the last case was filed only two weeks ago.  The decisions in these cases will make for particularly interesting studies, because since the Act became effective seven years ago, no court has issued an opinion interpreting any of its provisions.

The Act applies to companies with more than 20 employees that have, within the past year, disclosed the personal information of California customers to third parties for direct marking purposes.  The Act does not restrain this sharing, but instead requires companies to disclose certain information about it.  If a company fails to comply, and a customer is injured, the customer may recover a civil penalty of up to $500 per violation, and up to $3,000 per willful, intentional, or reckless violation.  The Act does not define what constitutes consumer injury, and this is a central point of disagreement in the suits that have been filed.  Finally, the Act contains a safe harbor provision shielding businesses from liability if they cure a non-willful violation within 90 days of notice.

A business has two ways of complying with the Act.  First, it can provide customers, upon their request, with a description  of the categories of personal information it has shared with third party marketers, along with the names of those third parties.  To facilitate requests for these disclosures, the business must provide customers a mailing address, email address, toll-free number, or fax number where a request for this information should be directed.  To convey this contact information to the customer, a business must do at least one of the following:  (1) train employees who “regularly have contact with customers” to provide the contact information if asked; (2) include the contact information in its web site’s privacy policy, subject to specific emphasis and wording requirements; or (3) make the contact information “readily available upon request of a customer” at the business’s physical locations.

A second, alternative way a business may comply is to provide, and to disclose in its privacy policy, a free method by which the customer may opt-in or opt-out of such information-sharing altogether.

The 10 class action complaints filed throughout California allege nearly-identical facts:  a customer purchased goods or signed up for a service through a company’s website, but the company did not include the appropriate information in its web site’s privacy policy or otherwise provide information about a customer’s rights under the Act.  In three of the actions, the defendant companies have filed motions to dismiss.  Among other things, the companies argue that plaintiffs misunderstand that there are alternative ways of complying with the statute (which the companies have done), that plaintiffs have not suffered damages, and/or that the plaintiffs lack standing.

In light of these recent suits, companies operating in California should consider reviewing their privacy and training policies.  The decisions on these cases will be the first decisions to interpret the Act and could set the stage for other actions, while hopefully providing meaningful guidance on how companies can avoid liability.

- Nancy Perkins, Angel Garganta, & Jeremy McLaughlin

International Sweepstakes and Contests (third in a series): Prize Fulfillment and Compliance Issues

This is part three of our series on Challenges in Running International Sweepstakes and Contests. Our prior post focused on local language requirements and taxation issues. In this post, we discuss limits in giving away the same prize across all jurisdictions and the challenges in complying with the range of often-conflicting promotions laws and regulations across different jurisdictions.

Issue #4: Many Prizes Cannot Be Made Available In All Countries

Popular prizes to give away in sweepstakes and contests include gift cards, mobile devices, and DVDs.  Gift cards may be for retailers that do not operate in the winner’s country or, if they do, the particular gift card being given away may not be usable in that country.  Many mobile devices built for the US market either do not work or cannot be imported into other countries without special licenses.  The same is true for DVDs, which are usually encoded for particular markets.  The US government also severely restricts trade with several countries, such as Cuba and North Korea, so it may be illegal to ship a prize to one of those countries, even if the prize would be useful in that country.   

Issue #5: Compliance With Promotions Laws In Many Countries Is Challenging

Even if a marketer jumps over all the other hurdles and believes there is a set of countries in which a particular sweepstakes or contest can be run, it may be very difficult for that marketer to comply with the specific laws regarding sweepstakes and contests in every one of those countries.  Many countries that permit sweepstakes and contests have strict laws regarding the specific disclosures that must be made to consumers, how and where those disclosures must be made (e.g., in Official Rules or in all promotional materials), and what choices the marketer must give to consumers who are entering (e.g., what types of personal information can be shared or what uses the marketer can make of the consumers’ entries).  Moreover, clauses that are common place in Official Rules in the US, such as publicity or liability releases, limitations on liability, and forum selection clauses, are often unenforceable in other countries.  In some countries, marketers could be held liable for the simple act of including such clauses in the Official Rules. 

This is the final post in this series.  By now, it should be clear that marketers should not lightly decide to open their sweepstakes and contests to residents of any country in the world.  While it may be possible to open certain types of promotions to residents of particular countries, it is critical to seek appropriate legal and tax guidance first.  With promotions, it is always a good idea to READ THE FINE PRINT! 

- Tom Magnani

 

Differences in State Consumer Protection Laws Making Nationwide Class Certification Less Likely

Last month we commented on a significant decision in the Ninth Circuit case Mazza v. American Honda Motor Co., which limited the circumstances in which California’s consumer protection laws can apply to transactions in other states.  Now, we’re beginning to see how the Mazza decision affects bids for nationwide class certification.

A February 27, 2012 decision out of the Central District of California aptly demonstrates the difficulty post-Mazza plaintiffs face when arguing that California consumer protection laws should apply to nationwide classes.  In this case -- Gianino, et al. v. Alacer Corp. -- plaintiffs allege that defendant Alacer Corp. ran afoul of California consumer protection law by falsely representing that its Emergen-C™ vitamin supplement drink mix benefits the immune system.  Relying heavily on Mazza, the court rejected the plaintiffs’ motion to certify a nationwide class.

The plaintiffs urged the court to adjudicate the claims of a nationwide class under California law.  Alacer argued that choice of law rules required the court to apply each of the fifty states’ laws, and further, that consumer protection laws of the fifty states are so divergent, that common questions of law would not predominate. 

Applying the conflicts of law analysis set out in Mazza, the court reached the conclusion that Alacer urged.  First, the court examined the differences between the consumer protection laws of the fifty states, and found them to be material.  For example, many states’ consumer protection laws have different injury, scienter, and reliance requirements from one another.  Second, the court considered the foreign states’ interests in applying their own laws.  The court found these interests to be significant, noting that consumer protection laws reflect each state’s balancing of the duty to protect consumers from injuries with the duty to shield businesses from unnecessary regulation or litigation. Finally, the court found that, while California has an interest in applying its own law to California transactions, it has little interest in applying its law to transactions in other states.  Other states, however, have a strong interest in applying their own law to the consumer transactions that occur within their borders.  Thus, the court held that the laws of each of the fifty states would have to apply to the case.

Given the differences in state consumer protection laws, the court found that common legal issues would not predominate, and thus class certification would be improper.  Further, class litigation would not be superior to other available methods of resolving the controversy because “[t]he trial would devolve quickly into an unmanageable morass of divergent legal issues.”

This decision demonstrates that Mazza has begun to take hold  and that while California’s consumer protection laws remain among the most plaintiff-friendly in the country, in the future, their application may often be limited to transactions within the Golden State.  In response to this change, many plaintiffs have proposed statewide sub-classes in addition to nationwide classes, while others have filed separate statewide class actions.  It remains to be seen whether such strategies will be an effective means of achieving class certification post-Mazza.

- Angel Garganta & Jonathan L. Koenig

International Sweepstakes and Contests (second in a series): Local Language and Taxation Issues

This is part two of our series on Challenges in Running International Sweepstakes and Contests. Our prior post focused on how some countries prohibit certain types of promotions. In this post, we discuss local language requirements that may be legally imposed on such promotions, as well as taxation issues that can arise when conducting such promotions. 

Issue #2: Many Countries Require Promotions To Be In A Local Language

Countries that otherwise permit sweepstakes and contests often require that they be conducted in a local language.  This is true, for example, in Argentina, France, Mexico, and Poland.  It may be true even for promotions conducted entirely online from the U.S.  The need to translate not only a promotion’s Official Rules but also all related advertisements, websites, and other collateral materials, can be cost-prohibitive and time-consuming.  It essentially defeats one of the main purposes of opening a promotion to other countries: to eliminate a need for country-specific messaging.

Issue #3: Prizes Are Often Highly Taxed In Foreign Countries

Those countries that permit sweepstakes and contests seem to have done so as a way to generate revenue through taxation.  Some countries, such as India and Norway, impose taxes on the winner of a prize (as does the United States, of course).  Although the marketer may not be legally required to pay those taxes, if the marketer doesn’t pay them on behalf of the winner, the winner may end up being one unhappy customer.  Other countries, including Brazil, Mexico, and Spain, impose taxes directly on the marketer and may even require pre-registration with local tax authorities.  Paying these taxes drives up the cost of promotions and inadvertently could cause other tax problems for the marketer in any country in which the taxes are paid.  

- Tom Magnani

Obama Administration to Add Teeth to Privacy Bill of Rights

The National Telecommunications and Information Administration (NTIA) is requesting public comments on consumer data privacy issues that should be included as part of a legally enforceable code of conduct, as well as procedures for the development of such a code (“Request”). Comments are due 20 days after publication of the Request in the Federal Register.

On February 23, 2012, the White House released Consumer Data Privacy in a Networked World: A Framework for Protecting Privacy and Promoting Innovation in the Global Digital Economy, which included a Consumer Privacy Bill of Rights setting forth the principles that should govern the handling of personal data in commercial sectors (“Framework”). Pursuant to that Framework, NTIA is tasked with convening a multistakeholder process for the development of legally enforceable codes of conduct addressing how the Consumer Privacy Bill of Rights will apply in specific business contexts. The Request is NTIA’s first step in that process.

NTIA is asking for comments on several topics:

First, NTIA seeks comment on what issues should be addressed through the multistakeholder process. Among other things, NTIA is considering an initial multistakeholder process to deal with issues of transparency in the privacy notices for mobile device applications (“mobile apps”). NTIA also seeks comments on other potential topics, including: (a) other issues associated with mobile apps in general; (b) mobile apps that provide location-based services; (c) cloud computing services; (d) accountability mechanisms; (e) online services directed towards teenagers and/or children; (f) trusted identity systems; and (g) the use of multiple technologies to collect personal data.

Second, NTIA seeks comment on how the multistakeholder process should be structured to ensure openness, transparency, and consensus-building. Possible areas for comment include, among others: How can NTIA promote participation by a broad range of stakeholders? How can NTIA ensure transparency in the process? How can NTIA build consensus, and how will NTIA determine when consensus has been reached?

NTIA stated that a company’s decision to adopt the code of conduct will be voluntary, but if a company affirmatively commits to follow it, the commitment will be legally enforceable, provided the company is subject to the jurisdiction of the Federal Trade Commission (“FTC”). NTIA stated that the FTC will likely have the authority to enforce the code under 15 U.S.C. § 45, which prohibits deceptive acts or practices.

NTIA’s Request states that enforceable codes of conduct based on the Framework will “provide consumers clear, understandable baseline protections and give business greater certainty about how agreed-upon privacy principles apply to them.”

--William E. Cook, Jr. and Michael Levin

Closing the Window on Deceptive Claims

Last week, the Federal Trade Commission (FTC) touted settlements with five replacement window sellers over energy efficiency and heating and cooling cost savings claims as “part of a broad FTC effort to ensure that environmental marketing is truthful and based on solid scientific evidence.”  This is further evidence that even though the revised Green Guides have yet to be finalized, green claims are still an FTC enforcement priority because of their popularity with advertisers.

The consent orders prohibit the sellers from making any claims that consumers will achieve a specific (or up to a specific) energy or costs savings unless the seller “possesses and relies upon competent and reliable scientific evidence to substantiate that all or almost all consumers are likely to receive the maximum represented savings or reduction.”  The analyses accompanying the proposed orders explain that the “all or substantially all” standard represents “fencing-in” relief--relief that reaches beyond the conduct complained of to related conduct, which may not violate the FTC Act, to help ensure compliance with the order.  The FTC typically tries to include fencing-in relief in its consent orders.

The “all or substantially all” standard in the consent orders applies to claims that consumers will achieve savings “up to” a specified amount.  Some of the analyses accompanying the proposed orders explain that in the context of the sellers’ advertisements, “up to” did not effectively qualify the claims about what energy or cost savings consumers should expect, and that the proposed orders should not be read as a statement as to how the FTC will interpret “up to” claims for other products or services.  In other words, the FTC apparently concluded that the sellers’ advertisements represented that consumers should expect to receive the maximum specified savings.  For example, one seller ran a newspaper ad claiming “Up to 40% FUEL SAVINGS” and another ad claiming “40% Fuel Savings.”  Other marketing materials also claimed a 40% savings without the “up to” qualification.

The proposed consent orders also highlight that specificity counts when making environmental claims. The Green Guides advise that specific environmental claims are easier to substantiate and are less likely to be deceptive.  The Green Guides also caution that the basis of a comparative environmental claim needs to be clear in order to avoid confusion about what comparison is being made.  As discussed in the analyses accompanying the proposed orders, a house’s energy efficiency depends on several factors, including its geographic location, its insulation, as well as the existing windows.  Because each consumer’s circumstances are different, it could be difficult to substantiate general claims about energy or cost savings.  Thus, the consent orders allow claims of specific energy or cost savings under specified circumstances if those circumstances are clearly and prominently disclosed in close proximity to the claim.

- Matthew Shultz

Consumers to Control Industry’s Cookie Appetite

The Digital Advertising Alliance (DAA) -- a coalition of media and marketing associations -- recently announced that it will implement a universally recognized icon that can be placed in the header of web browsers and that will permit consumers to control online behavioral advertising and “all other collection and use of web viewing data” pursuant to DAA principles (Browser Option). According to a White House press statement, companies that represent the delivery of nearly 90 percent of online behavioral advertisements, including Google, Yahoo!, Microsoft, and AOL, have agreed to comply when consumers choose to control data collection using the Browser Option. DAA expects that the Browser Option will be implemented within nine months. The White House stated that companies that commit to the Browser Option will be subject to FTC enforcement.

The DAA’s announcement comes amid growing public awareness of online privacy issues, following revelations that Facebook, Google and other websites were collecting customer data in unexpected ways -- e.g., the disclosure that Facebook transmits identifying information to advertising and tracking companies, and Google’s recently reported bypassing of the default privacy settings in the Safari browser in order to force the web browser into accepting tracking cookies. In December 2010, the U.S. Commerce Department published a green paper calling for stronger privacy protections, because the “misalignment” between consumer privacy expectations and commercial data practices can “undermine consumer trust and inhibit the adoption of new services,” as well as “create legal and practical uncertainty for companies.” The Federal Trade Commission (FTC) also called for consumer privacy protections in a December 2010 report, which recommended a “Do Not Track” option as the most practical way of permitting consumers to control the collection and use of their data. On February 23, 2012 -- the day after DAA announced its Browser Option -- the White House released a “Consumer Privacy Bill of Rights” as part of the Administration’s comprehensive framework for the protection of consumer data privacy.

While the White House and others have referred to the Browser Option as “Do-Not-Track” technology, critics of the option claim that it does not go far enough in protecting customers (see articles here and here). The DAA reportedly recently conceded that “‘Do Not Track’ is a misnomer” and is “not an accurate description of what’s going on.” The DAA stated that while the Browser Option will stop some data collection, it will not stop all data collection.

The Browser Option will be based on self-regulatory principles adopted by the DAA. The principles govern the collection and use of data for online behavioral advertising (OBA) and the collection and use of multi-site data for purposes other than OBA. DAA’s principles for multi-site data “extend beyond collection of data for OBA purposes and apply to all data collected from a particular computer or device regarding Web viewing over time and across non-Affiliate Web sites.” The principles also address consumer control over data. The DAA said that the Browser Option protections will be applied where “a consumer: (1) has been provided language that describes to consumers the effect of exercising such choice including that some data may still be collected and (2) has affirmatively chosen to exercise a uniform choice with the browser based tool.” The standard will not apply “where (1) and (2) do not occur or where any entity or software or technology provider other than the user exercises such a choice.”

The DAA’s current description of the Browser Option does not address a number of issues (e.g., implementation plans and applicability to mobile devices). We will continue to monitor DAA’s development and implementation of the Browser Option in future blog posts.

- William E. Cook, Jr, Nancy L. Perkins and Michael Levin

Tougher Restrictions on Telemarketing Calls

The Federal Communications Commission is changing its rules for telemarketing calls and messages under the Telephone Consumer Protection Act (TCPA), which governs the use of prerecorded calls or calls placed with an automated telephone dialing system.

The FCC’s Order changes its rules to align with the Telemarketing Sales Rule of the Federal Trade Commission.  Thus, companies already in compliance with the FTC’s more stringent rules will not need to change their practices to comply with this Order.  However, the FTC’s rules do not apply to banks, credit unions, savings and loans, insurance companies, airlines or common carriers.  The FCC’s rules do, so those entities need to address the additional restrictions.

Under the new rules:

1. the consent required to make a prerecorded or autodialed telemarketing call must now be in writing or may comply with the E-Sign Act, which provides that a signature “may not be denied legal effect, validity, or enforceability solely because it is in electronic form”;
2. the established business relationship exemption to the consent requirement is being eliminated;
3. prerecorded messages must have an automated opt out mechanism available during the call;
4. the abandoned call limit must be measured on a per-calling-campaign basis, rather than just a 30-day period; and
5. prerecorded heath care related calls to residential lines governed by the Health Insurance Portability and Accountability Act (HIPAA) are exempted from the consent, identification, time of day, opt-out and abandoned call requirements.

For details and effective dates of the new rules, click here.

- Richard Firestone & Michael Levin

Challenges in Running International Sweepstakes and Contests (first in a series)

Introduction 

Sweepstakes and skills contests have long been popular with product marketers as a means of engaging their customers.  Traditionally, these types of promotions have been open only to residents of the United States (and sometimes Canada), for a variety of reasons.  With the explosion in the use of social media and other Internet and mobile marketing platforms in recent years, marketers now have the ability to engage quickly and easily with their customers around the globe.  Naturally, this has led marketers to demand that their sweepstakes and promotions be opened up to residents of other countries.  The benefits of doing so are obvious – it increases the number of target consumers that can be reached by any particular promotion, eliminates one need for country-specific messaging, and increases the potential for co-sponsorship opportunities.  Nevertheless, even in the digital age, opening a sweepstakes or contest to residents outside of the United States continues to pose a number of tax, legal, and operational issues. We thought it was worth reminding you about a number of them in a series of blog posts to be published over the next several weeks. 

Issue #1: Sweepstakes Are Prohibited In Some Countries

In the US, we tend to think of sweepstakes as fairly benign.  By “sweepstakes,” we mean a promotion that offers the chance to win a prize in a random drawing without requiring the customer to purchase anything or pay any money in order to play.  The Publishers Clearing House sweepstakes is a classic example.  Sweepstakes can be distinguished from lotteries, which require payment, as well as from skills contests, in which the winner is determined by judges based on some skill (e.g., essay writing, photography) of the entrant.  Because sweepstakes don’t require the entrant to give up anything of value to play, they are not as heavily regulated in the US as lotteries and other forms of gambling.  In contrast, in other countries, such as India and Sweden, sweepstakes are often considered to be equivalent to lotteries and are strictly prohibited.  Even Canada, which often is included in US promotions, technically prohibits them.  The reason Canada is nevertheless included in many US sweepstakes is that the laws in Canada have been interpreted to permit promotions in which the winner is first chosen at random but then required to demonstrate a skill, such as correctly answering a math question.  That is why if you read Official Rules for sweepstakes that include Canadian residents, you often see an extra requirement that Canadian winners answer a math question.  Unfortunately, the laws of many other countries have not been interpreted as favorable as Canada’s.  Marketers can be fined, or possibly even imprisoned, for conducting sweepstakes in violation of local laws.   

- Tom Magnani

Time to Consider Overdraft Policies: It’s on the CFPB’s Radar

On Wednesday, the Consumer Financial Protection Bureau (CFPB) announced that it is beginning an inquiry into bank checking account overdraft policies.  As an initial step, the CFPB issued a Notice and Request for Information seeking information from the public.  Overdrafts have been the subject of increasing federal bank regulators’ scrutiny during the past few years and the CFPB’s interest in the issue is not surprising.

An “overdraft” occurs when an account does not contain sufficient funds to support a transaction.  The types of transactions that could cause an overdraft include ATM, point-of-sale debit card, preauthorized debit card, Automated Clearing House (ACH), and online banking transactions.  If a consumer did not have sufficient funds in his or her bank account to support a transaction, a bank may decline to pay the item and charge a non-sufficient funds (NSF) fee.  However, in recent years, many institutions have introduced automated overdraft systems under which overdraft items are paid for the convenience of the account holder and an overdraft fee is charged per item.

Not surprisingly, a 2008 FDIC study concluded that the most frequent overdrafters were low and moderate income individuals and young adults.  Since that study, the Federal Reserve amended its regulations (i) to require all depository institutions to provide periodic statement disclosures of overdraft fees and fees for returning unpaid items; and (ii) to prohibit an institution from charging fees for transactions that overdraw an account by use of a debit card at an ATM or point-of-sale unless the consumer opts in to permitting the institution to pay overdrafts.  Most recently, in 2010 the FDIC issued guidance on identifying, managing, and mitigating risks associated with overdraft programs.

The CFPB is seeking information from the public regarding:

1. lower cost alternatives to overdraft protection programs, such as linked savings accounts or overdraft lines of credit;
2. the extent to which institutions provide consumer alerts regarding balances and overdraft triggers;
3. the impact of the above-referenced regulatory changes made by the Federal Reserve, and demographics concerning overdraft opt-in rates;
4. the impact of recent changes in some institutions’ operating policies, including, for example, changes to the posting order of debit transactions;
5. the economics of the overdraft program, including the revenue generated from overdraft programs and the extent to which different consumer groups incur overdrafts and related fees disproportionately; and
6. the long term impact of overdraft programs on consumer behavior and options.

The CFPB has also released a model “penalty fee box” for possible disclosure of overdrafts and associated fees.

Overdrafts are plainly in the limelight again.  Financial institutions would be well advised to review carefully their overdraft policies and practices, including the disclosures to consumers regarding those policies and practices.  Consumers would be well advised to track their spending habits closely and review their accounts to determine whether they want to opt for overdraft coverage.

- Michael Mierzewski, Nancy Perkins, & Jeremy Hochberg

When a New Product Name is a Slam Dunk

Jeremy Lin’s surprising rise from the New York Knick’s bench to game winning starter has sparked “Linsanity” around the country, and spurred a race to the US Patent and Trademark Office (PTO) among entrepreneurs hoping to claim trademark rights in the catch phrase and cash in on the excitement.  This race provides a cautionary tale for companies that may be sleeping on their own trademark rights.  

Since the unexpected star was catapulted into the headlines, at least seven “Linsanity” trademark applications have been filed with the PTO, including one by Lin himself.  But, Lin wasn’t the first.  Prior to his application -- but only days after his rapid rise to fame began -- two individuals, apparently unrelated to Lin, applied to register “Linsanity” for use in connection with various items of athletic and other apparel.  So is Lin out of luck?  Possibly not.  Although one of the applicants claims to already be using “Linsanity” (Lin’s application is based on his intended use of his name on products), a trademark application may be rejected if it falsely suggests a connection with a living person, or if the mark includes the name of a living person who has not given his consent.  Just last month, the PTO cited both of these bases in an a letter requesting further information from an individual who had applied to register “Blue Ivy Carter NYC,” which the examining attorney determined the public would likely associate with Beyonce and Jay-Z’s famous baby of the same name.  That application has since been abandoned. 

As the Blue Ivy Carter letter shows, celebrities -- including those newly born or newly made -- have some arguments at their disposal to challenge another’s trademark application that are less likely to apply to the rest of us.  If your company is currently using a mark, you should consider promptly applying to register it with the PTO to secure maximum rights.  If you have developed a mark that you genuinely intend to use, even if you haven’t done so yet, you should also consider filing an intent-to-use application with the PTO.  If the process is successful, it may prevent a potential headache down the road if your idea later becomes a trendy one.

- Roberta Horton and Joanna Persio

FTC Report Finds Risks to Children’s Privacy From Use of Mobile Apps

Citing a lack of transparency about the data collection practices of mobile apps used by children, the FTC issued a report last week calling on industry to provide more meaningful disclosures to users prior to download. 

The FTC surveyed 400 applications for kids in the Apple App Store and the Android Market to determine what information, if any, about the app’s data access, collection, and sharing practices was disclosed prior to download. According to the report, the results were disappointing: in most instances, the application did not inform users if the app collected data, let alone the type of data collected.  “Providing clear and accessible information is especially important in the kids app space,” according to the report, because the data accessed and collected is likely from a mobile device used by a child, and as such, “could reveal information that a parent may not want shared with unknown third parties, such as a child’s precise geolocation or phone number.”

Indeed, the FTC’s survey revealed that mobile apps can automatically collect from a mobile device a broad range of user information in addition to geolocation and phone number, including the user’s list of contacts, call logs, unique device identifiers, and other stored information – and can share this information with a numerous recipients. Although these capabilities can be valuable in appropriate circumstances when consumers are aware of them, they pose serious risks to privacy when users – and parents of child users – cannot detect their full functionality. For example, an app can connect a user to other app users to play interactive games, which teens and younger children find compelling and entertaining, but in so doing, the app may collect detailed personal information in a manner parents cannot detect.

According to the report, more than half of the kids’ applications in the Android Market covered by the FTC’s survey had the ability to access and receive a wide variety of user content while the app was running, but did not adequately inform users of this fact. And while Apple claims to screen apps to safeguard children from inappropriate content and to reject any app that targets minors for data collection, according to the FTC, the details of this screening process are obscure. 

To ensure that users are fully informed of the types of data that a kids’ mobile app collects and uses, the FTC report calls on all members of the apps ecosystem – the app stores, app developers, and third parties servicing the apps – to provide clear, concise and timely disclosure of the apps’ data access and collection practices prior to download. Some recommendations included developing standardized icons to alert users to certain functions or displaying disclosures on icons that can be easily viewed on the small screen of a mobile device. 

Although the report does not focus on whether the apps covered by the FTC survey actually collected personal information from children, which may be a violation of the Children’s Online Privacy Protection Act (COPPA), the report indicates that that the FTC plans to conduct additional reviews to determine if enforcement action is warranted. Given that the FTC recently settled its first COPPA action against a mobile app developer, and is revisiting its COPPA Rules with an eye towards mobile apps, industry would be wise to heed this warning – particularly because children and teens, like many users, have a seemingly insatiable “app-etite” for mobile content.

- Allyson Himelfarb and Nancy Perkins

UK ASA: Continuing Limits On Sexuality in Advertising - This Time It Is Airline Tickets

The UK’s advertising regulator, the Advertising Standards Authority (ASA) has banned two adverts by the low-cost airline Ryanair for being too sexually suggestive. The adverts, which were published in national newspapers, showed two female cabin crew members in their underwear. The headline stated “RED HOT FARES & CREW!!!” and advertised the airline’s low fares and the 2012 cabin crew charity calendar. The adverts attracted complaints that they were sexist and objectified women, particularly female cabin crew, and were offensive and unsuitable for display in national newspapers. Defending the adverts, Ryanair said that the images of the women were taken directly from their 2012 calendar and, because the crew had volunteered to produce and promote the calendar, the images could not be said to be sexist or to objectify women. Ryanair also said that as similar images are often featured in the same media, the adverts could not be said to be unsuitable for public display. The ASA disagreed, finding that, though the adverts were not overtly sexual, the appearance, stance and gaze of the women were sexually suggestive. It also believed that most readers would interpret the images and the text “RED HOT…CREW!!!” as linking female cabin crew with sexually suggestive behaviour. As such, the adverts would be likely to cause widespread offence.

The ASA did not comment specifically on whether the images objectified women or were sexist, however it made clear that sexually suggestive adverts such as these are likely to cause offence and do not belong in the national newspapers. The trick of using a scantily-clad model to grab attention for (often unconnected) goods or services may be an old one, but beware that the ASA has been clamping down on them (see for example the recent adjudications on Marks & Spencer and Lynx).

- Richard Dickinson and Gemma Davies

From Jewelers’ Boxes to POST-IT® Notes: Making Your Brand A Horse of a Different Color

By selling a product in a color that buyers associate uniquely with your company, you can gain a distinct advantage in the marketplace. This principle is not new. From light blue jewelry boxes (Tiffany) to canary yellow POST-IT® notes (3M), to pink fiberglass installation (Owens Corning), manufacturers have been creating single color brands for decades. The recent hubbub over Christian Louboutin’s claim to have the sole right to sell red-soled high fashion shoes has sparked anew interest in this subject. See Christian Louboutin S.A. v. Yves Saint Laurent America, Inc.

Here are some practical tips for a company that has its eye on that particular, unique color as its next brand:       

• Do not be too ambitious. The issue of whether part (rather than all) of a product that is a single color may constitute a brand is unsettled (Christian Louboutin). Select a complete product, in one unique color, and claim that as your own.

• Make sure the color is consistent. If you sell a line of pink soaps, for example, make sure they are all the same shade of pink before claiming your pink brand.

• Be prepared to show that the public associates the color exclusively with you or your product.  Sales and advertising evidence emphasizing the color may be persuasive. If others are selling the same or closely similar products in the same color, this may doom your efforts. For instance, a “sea” of lemon yellow candy packages in the marketplace will not set you apart from other candy sellers.

• Be prepared, if challenged, to offer a survey showing that purchasers identify your color exclusively with you or your product. A comprehensive survey should measure consumer recognition of your color against consumer recognition of other colors for the same product, all without any other source markings (such as brand names). This type of survey could be expensive, however, so even consumer statements without the aid of a formal survey could be useful.

• Do not select a color that naturally results from the manufacturing process.

• Choose a color that is not functional and does not give you an actual competitive advantage over others. If your competitors need to use the same color because it is essential to the use or purpose of the product, or affects its cost or quality, you cannot co-opt it as yours. See Qualitex Co. v. Jacobson Co. For example, no single company can claim rights in black for outboard boat motors, because black is compatible with many boat colors and will be attractive to multiple skippers. See British Seagull Ltd. v. Brunswick Corp.

• Give your color a name. The “canary yellow” POST-IT® notes is a good example. Consumers will remember it and associate it with your company’s product.

- Roberta Horton and Joanna Persio

UK ASA Tripping About Travel Review Website

The UK’s advertising regulator, the Advertising Standards Authority (ASA), has told travel review website TripAdvisor LLC to stop making claims that its content is honest, real and trusted amidst findings that the site may host fake reviews. The website claims that it “offers trusted advice from real travelers…More than 50 million honest travel reviews and opinions from real travelers around the world” and “Reviews you can trust”. However, several complainants challenged whether those claims can be substantiated. TripAdvisor responded to the complaints by saying that while they could not guarantee that reviews were 100% free from fraudulent content, they use fraud detection systems to identify and minimise non-genuine content; therefore the practical impact of small numbers of fraudulent reviews slipping through the net is negligible. TripAdvisor also explained that it requires reviewers to give a declaration that their review is genuine and honest and makes clear that fake reviews are both illegal and prohibited by their T&Cs.

Assessing the claims, the ASA acknowledged that TripAdvisor takes steps to monitor suspicious content and asks reviewers to declare that their review is genuine. However it found that reviews could be placed on the site without verification and that non-genuine content could appear on the site undetected. On that basis, it concluded that the claims which implied consumers could be assured that TripAdvisor reviews were honest and trusted were misleading.

Claims made by advertisers and marketers must be capable of substantiation and must not mislead consumers. While TripAdvisor had taken steps to monitor and catch fake content, it had not done enough to make out its claims that travellers’ reviews are genuine and honest.

- Richard Dickinson and Gemma Davies

CFPB and FTC Reach Agreement on Cooperation

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

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

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

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

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

- Nancy Perkins and Harry Wu

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

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

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

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

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

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

- Matt Shultz

Europe Announces Plans To Reform Outdated Data Protection Rules

The European Commission has announced plans to reform comprehensively the existing EU data protection regime. The proposals, in the form of a new Regulation and Directive, aim to modernise, strengthen and future-proof the principles set out in the 1995 Directive, which was designed to safeguard a pre-internet society. The new Regulation will sweep away the current patchwork of national laws in favour of a single EU law, valid across all 27 Member States. This will, it is hoped, end some of the legal uncertainty and fragmentation that companies of all sizes face when doing business in Europe.

The proposals include some significant amendments to the existing rules including:

• the strengthening of individuals’ rights to include easier access to personal data, a right to request that all personal data be deleted if no longer necessary, and new rules on obtaining explicit consent;
• increased obligations for data controllers, such as the mandatory requirement to notify security breaches and the obligation for large organisations to appoint a data protection officer;
• the extension of EU rules to companies located outside the EU but which are active in the EU market and offer goods and services to consumers in the EU;
• the reduction of red tape for businesses by removing the requirement to notify all data protection activities to data protection supervisors; and
• the strengthening of national data protection authorities’ powers, such as the ability to impose fines for serious breaches up to €1 million or up to 2% of a company’s annual worldwide turnover.

The proposals will now be passed to the European Parliament and the EU Member States for consultation. If agreed, the new Regulation will take effect two years from the date of adoption and will apply to all Member States automatically.

The proposed Regulation can be found here.

UPDATE: A more detailed discussion of this development can be found here.

- Richard Dickinson and Gemma Davies

Expedited Appeal in Lanham Act Cat Litter Case Will Address Sensory Perception Testing and Key Ingredient Testing

On January 17, 2012, the Second Circuit granted Clorox’s motion for expedited appeal in the cat litter case (Church & Dwight Co., Inc. v. The Clorox Company), which centers on sensory perception testing and key ingredient testing (along with other issues, including necessary implication and presumption of irreparable harm).  Earlier this month, Judge Jed Rakoff of the Southern District of New York preliminarily enjoined Clorox from airing a commercial claiming that carbon used in its Fresh Step cat litter was more effective at absorbing odors than the baking soda (which happens to be the active ingredient in Church & Dwight’s cat litter, although C&D products are not mentioned in the ad).  The court found that Clorox’s sensory perception test that was cited in the ad, using human “sniffers”, was not sufficiently reliable to permit (a) the explicit claim that the key ingredient (carbon) is superior to baking soda in controlling odor; and (b) the necessarily-implied claim that the overall cat litter product is superior at odor control based on the test.  The decision has some vulnerabilities on important issues. 

The Parties & Products.  The case concerned Clorox’s “Fresh Step” cat litter and Church & Dwight’s Arm & Hammer cat litter products, Double Duty and Super Scoop.  The Clorox product uses carbon as the odor fighting ingredient whereas Church & Dwight’s products use baking soda.

The Commercial.  The Clorox commercial features two laboratory beakers (one represented as “Fresh Step” which is filled with a black substance labeled “carbon”; and the other unidentified by brand, but filled with a white substance labeled as “baking soda”).  Green gas then fills the beakers, and rapidly evaporates in the carbon beaker but barely changes in the baking soda beaker.  Small text appears during this display that says “dramatization” and “based on a sensory lab test.”

The Claim.  A voiceover in the commercial states:  “we make Fresh Step scoopable litter with carbon, which is more effective in absorbing odors than baking soda.”  The express claim is limited to carbon and baking soda, not the cat litter products.

The Sensory Test.  The sensory lab test relied upon by Clorox involved separate sealed jars of cat urine and of cat feces, which were kept: (a) uncovered; (b) covered with carbon; or (c) covered with baking soda.  Each jar was permitted to mellow for 24 hours, and was then placed in a “booth” that replicated a small room (where cat boxes are normally kept).  The smell of the booth was later evaluated by eleven human panelists trained by Clorox.  The panelists would open a portal to the booth, which was approximately 6 feet away from the stimulus.  The results reflected that carbon was 32% superior to baking soda in reducing odor.

FTC Proposes Changes to Agency’s Investigatory Procedures

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

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

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

- Allyson Himelfarb and Amy Mudge

Keeping an Eye on the Folks Marketing Your Brand -- Google Gets Tripped Up in Blogger Controversy

The FTC’s revised endorsement guides have raised the stakes for companies using social media to promote their brands or services.  This is particularly the case with respect to the relatively new disclosure requirements surrounding paid blogger endorsements. We previously discussed paid blogger endorsements in light of the FTC’s Revised Endorsement and Testimonial Guides here, here, and here.

Google has become the second company in recent months to allege that an agency hired to promote its services had gone “rogue” and used paid blogger endorsements without the company’s knowledge or consent. Which raises the question of whether advertisers should spend more time minding the store and whether agencies should spend more time educating their staff on the finer points of the FTC’s endorsement guides.

As the FTC made clear in the Hyundai case, it does not view ignorance as an excuse when it comes to compliance with its endorsement guidelines, though Hyundai did get a pass, in part because it had a policy against the use of paid endorsements without disclosures and quickly dealt with the issue once it learned of it. 

In Google’s case, they got lucky because the blogs, which attested to Google Chrome’s benefits and posted a promotional video bore the legend “This post is sponsored by Google.”  (though some allege that the blogs misinformed consumers about Chrome’s benefits to small businesses, which, if true, could also potentially be a possible violation of the guides.) 

Ultimately for Google, it ended up being more of a public relations embarrassment as Google has historically opposed paid endorsements. And Google quickly took down the blogs.

There is an old Russian proverb, at least according to Ensign Chekov of the Starship Enterprise, “Fool me once, shame on you; fool me twice shame on me.”  Will the FTC at some point insist that companies keep a sharper eye on the agencies they hire for social media promotions?

- Randy Shaheen and Anita Kalra

 

 

 

You Can’t Use This "Crane" To Build A Case Against An “Adjacent” Product Manufacturer

In recent years, some California appellate courts held that a product manufacturer or seller is obliged to warn consumers against foreseeable risks associated with dangerous products with which its product will necessarily be used. Where a manufacturer could plausibly be alleged to be aware of possible harms stemming from what are sometimes termed “adjacent” products, these cases created a potential basis for consumer fraud claims. In O’Neil v. Crane Co., the California Supreme Court unanimously rejected these opinions, and provided helpful guidance on whether, and in what circumstances, a business may be held liable for harms attributable to an “adjacent” product. 

“Adjacent” products include replacement components not manufactured by the original maker of the product or other, related products which are expected or required to be used in conjunction with another product. In Crane, the court of appeal followed earlier opinions holding that manufacturers of valves and pumps used in US Navy vessels could be liable for failure to warn servicemen who later handled replacement asbestos insulation not manufactured by the defendants. The Supreme Court reversed, notwithstanding that the harms suffered by the plaintiffs resulted from the foreseeable handling of asbestos products in connection with defendants’ equipment. 

Emphasizing that “foreseeability alone is not sufficient to create . . . a tort duty,” the court concluded that “requir[ing] manufacturers to investigate potential risks of all other products and replacement parts that might foreseeably be used with their own products and warn about all of these risks . . . would impose an excessive and unrealistic burden.”  The court further recognized that a contrary rule would have the “perverse[] [effect of] . . . inundating users with excessive warnings.”

The Supreme Court limited the breadth of its holding by identifying two circumstances in which claims based on adjacent products might nonetheless lie against a manufacturer.  These exceptions involve circumstances in which “the defendant bears some direct responsibility for the harm” because

1. the defendant’s own product “contributed substantially to the harm” or
2. the defendant “participated substantially in creating a harmful combined use of the products.”

Companies whose products may be used in conjunction with other products may wish to evaluate whether either exception might potentially come into play and, if so, take the Crane holding into consideration in fashioning disclosures and warnings directed to consumers.

- Matthew Heartney and Alex Beroukhim

Ninth Circuit Puts the Brakes on Nationwide Class of Auto Purchasers

A January 12, 2012 decision by the Ninth Circuit has established significant limits on the circumstances in which California’s consumer protection laws can apply to transactions in other states. At the same time, the decision establishes a useful precedent for defendants who seek to block certification of nationwide classes of consumers under state consumer protection laws in any jurisdiction. 

The Ninth Circuit case -- Mazza v. American Honda Motor Co. -- was brought by consumers from Florida and Maryland who purchased Acura RL cars equipped with the so-called Collision Mitigation Braking System (CMBS). The plaintiffs pointed to a product brochure, television commercials, magazine advertisements, Acura’s own website and magazine, and the owner’s manual, all of which, plaintiffs said, marketed CMBS’s functionality in a misleading way. Even though the plaintiffs bought their cars in Florida and Maryland, they argued that the advertising, which was created in California, violated California’s expansive and plaintiff-friendly consumer protection laws (the Unfair Competition Law, False Advertising Law, and Consumer Legal Remedies Act). The district court certified a nationwide class of consumers who purchased or leased new or used Acura RL cars with CMBS, finding that the plaintiffs met their burden for class certification under Federal Rule of Civil Procedure 23. 

A panel of the Ninth Circuit vacated the class in a 2-1 decision (Senior Judge Dorothy Nelson dissented), finding that the lower court misapplied the “predominance” prong of Rule 23(b)(3), which requires that the questions of law or fact common to class members predominate over any questions affecting only the individual members. As to the questions of law, the court ruled that each class member’s consumer protection claim must be governed by the consumer protection laws of the jurisdiction in which the transaction took place, not only California. The court pointed to material conflicts between the consumer protection laws of California and other states (such as a scienter requirement of some state consumer protection laws but not others). Then, with sweeping language, the court explained why each state has an interest in having its own consumer protection laws apply to conduct within its borders:

More expansive consumer protection measures may mean more or greater commercial liability, which in turn may result in higher prices for consumers or a decrease in product availability. . . .  As it is the various states of our union that may feel the impact of such effects, it is the policy makers within those states, within their legislatures and, at least in exception or occasional cases where there are gaps in legislations, within their state supreme courts, who are entitled to set the proper balance and boundaries between maintaining consumer protection, on the one hand, and encouraging an attractive business climate, on the other hand.

The Ninth Circuit further drew upon the principles of federalism underlying the enactment of the 2005 Class Action Fairness Act, and noted that, if California law were applied to the entire class, foreign states would be impaired in their ability to calibrate liability to foster commerce. As the court concluded, “[t]he district court’s reasoning elevated all states’ interests in consumer protection to a superordinate level, while ignoring or giving too little attention to each state’s interest in promoting business.”  These words will no doubt be music to the ears of the defense bar. 

Having concluded that common questions of law did not predominate, the Court turned to whether common issues of fact predominated. In this analysis, the Court pointed to the “fairly limited” nature of the CMBS advertising. This fell short of an “extensive and long-term” advertising campaign needed to establish a common questions of fact. Thus, the court concluded, even if the class was restricted only to those who purchased or leased their car in California, common issues of fact would not predominate because the class includes members who were not exposed to, and therefore could not have relied on, Honda’s allegedly misleading advertisements.

There are two major takeaways from this decision. First, the conflict of law analysis represents a serious blow to the nationalization of California consumer protection laws. As this blog has noted before (e.g., here and here), California’s laws allowing private damages suits over even the most minor or technical omissions have made it a breeding ground for consumer class action litigation. And plaintiffs’ lawyers have worked hard to make those laws apply to consumer transactions in other states so long as the transaction has some arguable nexus to California. The Ninth Circuit’s decision should greatly curtail that trend, as it found that California’s consumer protection laws are not so far-reaching. Second, putative classes of consumers from multiple states will find it harder to have a single state’s consumer protection law cover all of their claims, which, in turn, will make it harder for the consumers to get nationwide classes certified in any jurisdiction. Undoubtedly, Mazza will be cited by product liability defendants in class certification proceedings throughout the country.

As a final observation, we find it interesting how little a role the Supreme Court’s  decision last June in Wal-Mart v. Dukes played in the decision. It seems pretty clear the panel would have viewed Mazza the same way even before Wal-Mart. Indeed, the only significant place Wal-Mart was cited was where the majority distinguished it by saying the Mazza plaintiffs, unlike the Wal-Mart plaintiffs, satisfied Rule 23(a)(2)’s “commonality” requirement, which leads one to wonder whether the Ninth Circuit fully absorbed what Wal-Mart said about commonality. When Wal-Mart came down last summer, the conventional wisdom was that it was front-loading a predominance-like inquiry into “commonality.” But Mazza -- just like another recent class action decision out of California that we recently wrote about -- seems to go on applying commonality in the same way that courts did before Wal-Mart. 

 - Matt Eisenstein and Rob Katerberg