Advertising Law - April 2016 #2

by Manatt, Phelps & Phillips, LLP
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In This Issue:

  • FTC Hits Volkswagen With Suit Over Emissions Ad Campaign
  • FCC Privacy Proposal Finds Critic in FTC Commissioner
  • Tea for One: California Court Denies Certification in False Ad Suit
  • California Court Orders ADA Compliance for Website

FTC Hits Volkswagen With Suit Over Emissions Ad Campaign

The Federal Trade Commission filed suit against Volkswagen Group of America, charging the automaker with deceiving consumers in violation of Section 5 of the Federal Trade Commission Act with the advertising campaign for its allegedly "Clean Diesel" cars.

Over a seven-year period, consumers spent an average of $28,000 for approximately 550,000 Volkswagens and Audis they believed were low-emission, environmentally friendly vehicles that met emissions standards, and would maintain a high resale value, the agency alleged. In reality, the car company used illegal emission defeat devices to mask high emissions during government tests, which constituted a separate charge of unfair practices in violation of Section 5, according to the Commission.

The ad campaign (featuring claims like: "Diesel. It's no longer a dirty word.") included Super Bowl ads, print advertising, and online social media advertisements that often targeted "environmentally conscious" consumers, the FTC said. Promotional materials touted the "Clean Diesel" vehicles as producing low emissions ("With the new Jetta TDI Clean Diesel, you get a great car that's low on emissions…") and reducing nitrogen oxides (NOx) emissions by 90 percent. The vehicles actually emit up to 4,000 percent more than the legal limit of NOx, according to the agency's complaint.

Volkswagen's other deceptive claims included that the vehicles were "50-state compliant" and met "stringent emission requirements," but absent the emission defeat devices, the vehicles would not have passed any emissions standards, the FTC said.

These failures also decreased the affected vehicles' resale value despite VW's promises to the contrary, the agency added. Prices for the affected vehicles ranged from a low of $22,000 for a Volkswagen model to roughly $125,000 for the most expensive Audi model. Vehicles included TDI diesel models of Jettas, Passats, and Touareg SUVs and Audi models.

A separate count of the complaint focused on Volkswagen providing the means and instrumentalities for others to deceive consumers, such as ads, brochures, and other items.

"For years Volkswagen's ads touted the company's 'Clean Diesel' cars even though it now appears Volkswagen rigged the cars with devices designed to defeat emissions tests," FTC Chairwoman Edith Ramirez said in a statement about the action. "Our lawsuit seeks compensation for the consumers who bought affected cars based on Volkswagen's deceptive and unfair practices."

In a California federal court complaint, the agency requested an injunction to prevent VW from engaging in future deceptive conduct as well as compensation for American consumers who bought or leased an affected vehicle between late 2008 and late 2015, estimating "billions" of dollars in consumer injury.

To read the complaint in FTC v. Volkswagen Group of America, click here.

Why it matters: The lawsuit is only the latest legal challenge to hit Volkswagen in response to the automaker's emissions scandal, joining consumer class actions and multiple suits filed by state attorneys general, as well as the Department of Justice's suit on behalf of the Environmental Protection Agency. The FTC action was filed "because VW made widespread, demonstrably untrue claims that were material to the sales of all of its TDI vehicles," James Kohm, the associate director for the enforcement division of the FTC's Bureau of Consumer Protection, told Adweek. "[T]his is a very large, significant case."

FCC Privacy Proposal Finds Critic in FTC Commissioner

Could a turf war be brewing? Federal Trade Commission Commissioner Maureen Ohlhausen spoke out against the Federal Communications Commission's proposal to regulate privacy and did not hold back.

In prepared remarks at the Free State Foundation's Eighth Annual Telecom Policy Conference, Ohlhausen told attendees that the FCC's proposed rules would "unavoidably reduce consumer choice" and did not reflect the will of the majority of consumers.

The Commissioner began by discussing the FTC's method of protecting consumer privacy, noting the agency has brought more than 150 privacy and data security enforcement actions using an approach that "respects the autonomy of all consumers" by enabling "consumers to match their privacy preferences with a company's privacy practices."

This strategy is reflected in enforcement actions alleging deceptive conduct where a company fails to live up to its privacy promises, Ohlhausen explained, with unfairness actions established at "a baseline prohibition on practices that the overwhelming majority of consumers would never knowingly approve."

Ohlhausen then compared one of the FTC's most sweeping consumer privacy efforts—the establishment of the national Do Not Call Registry—with the FCC's recently proposed privacy rules for broadband providers.

Pursuant to the FCC's proposal, consumers must provide consent before a broadband provider can make use of their Internet history for behavioral targeting unless the ads are related to other communications services, which requires opt-out consent.

Both the DNC rule and the FCC's proposal mandate specific behaviors by the companies subject to them and a framework for consumer choices, the Commissioner explained. However, the FCC's privacy proposal "differs significantly from the choice architecture the FTC has established under its deception authority." Under the FTC's approach, the agency enforces the promises made by companies to consumers. Alternatively, the FCC requires companies to make privacy promises by adopting a specific opt-in/opt-out regime, Ohlhausen said.

Although the FCC "repeatedly insists this is about consumer choice," Ohlhausen strongly disagreed, as "opt in mandates unavoidably reduce consumer choice." The default opt-in condition may not match the average consumer preference, she said. "If the FCC mandates opt in for a specific data collection, but a majority of consumers already prefer to share that information, the mandate unnecessarily raises the costs to company and consumers," she told conference attendees.

Opt-in mandates may also prevent unanticipated beneficial uses of data, she added. "[D]ata, including non-sensitive data, often yields significant consumer benefits from uses that could not be known at the time of collection," the Commissioner said. "This proposed opt in regime would prohibit unforeseeable future uses of collected data, regardless of what consumers would prefer. This approach is stricter and more limiting than the requirements that other Internet companies face."

If the FCC wished to be consistent with the FTC's strategy with regard to privacy, "it would take a different approach and simply require opt in for specific, sensitive uses," Ohlhausen suggested.

She also contrasted the popularity of the DNC rule—which reflected an overwhelming consensus among consumers, the FTC Commissioners, and strong support in Congress—with the controversy facing the FCC's privacy proposal, opposed by the minority FCC Commissioners and lacking congressional backing.

Finally, Ohlhausen reiterated the importance of the FTC's role in privacy and data security enforcement, calling the Commission "one of the most active and effective data protection agencies in the world."

"At its core, protecting consumer privacy ought to be about effectuating consumers' preferences," the Commissioner concluded. "If privacy rules impose the preferences of the few on the many, consumers will not be better off. Therefore, prescriptive baseline privacy mandates like the FCC's proposal should be reserved for practices that consumers overwhelmingly disfavor. Otherwise, consumers should remain free to exercise their privacy preferences in the marketplace, and companies should be held to the promises they make. This approach, which is a time-tested, emergent result of the FTC's case-by-case application of its statutory authority, offers a good template for the FCC."

To read Commissioner Ohlhausen's remarks, click here.

Why it matters: Commissioner Ohlhausen did not mince words about the FCC's privacy proposal (although she did add a disclaimer that the comments were based on her own thoughts and did not necessarily represent the views of the FTC or other Commissioners). Contrasting the proposal with the FTC's standard approach to privacy and data security, as well as one of its most successful consumer privacy endeavors, the federal Do Not Call registry, Ohlhausen found fault with the mandated opt-in regime, which she argued did not reflect true consumer preference. Since the Commissioner discussed the proposal, the FCC voted 3 to 2 to move forward with the rules, opening them up to public comment.

Tea for One: California Court Denies Certification in False Ad Suit

Rejecting all three of the plaintiff's proposed damages theories, a federal court judge in California denied class certification in a false advertising lawsuit against R.C. Bigelow Inc.

Alex Khasin claimed that the company deceived consumers about the amount of antioxidants in 12 varieties of its green tea products in a putative class action alleging violations of the state's false advertising law and the Consumer Legal Remedies Act. The products—which shared similar size and shape packaging—bore the statement "Healthy Antioxidants" on the front label with a statement on the back label that "Mother Nature gave us a wonderful gift when she packed powerful antioxidants into green tea…"

Khasin moved to certify a class of all persons in California who purchased one of the 12 green tea products, suggesting three methods for determining class damages: a restitution calculation, statutory damages, and nominal damages.

But U.S. District Court Judge William H. Orrick denied the certification motion, ruling that the damages models failed to satisfy either Federal Rule of Civil Procedure 23(b)(3) or Rule 23(b)(2).

"Khasin's restitution calculation essentially amounts to damages totaling the full retail price of the tea," the court wrote. The plaintiff referred to an order in a prior false advertising case where the court held that "the proper measure of restitution in a mislabeling case is the amount necessary to compensate the purchaser for the difference between a product as labeled and the product as received, not the full purchase price or all profits."

But the plaintiff was incorrect that the "product as labeled" is the retail purchase price and that the product was legally worthless, leaving the "product as received" with a value of $0. "The 'full refund' method of calculating restitution has been repeatedly rejected in this district," Judge Orrick wrote. "Attributing a value of $0 to the Green Tea Products assumes that consumers gain no benefit in the form of enjoyment, nutrition, caffeine intake, or hydration from consuming the teas. This is too implausible to accept."

In order to comply with Rule 23(b)(3), the damages calculation must contemplate the production of evidence that attaches a dollar value to the consumer impact or advantage caused by the unlawful business practices, the court said. "The proposed methodology does not do so."

Khasin's second proposed method, statutory damages under the CLRA, similarly failed to persuade the court that certification was appropriate. The statute "does not provide for an automatic award" as a plaintiff must still prove actual damages. "Khasin has failed to provide a viable theory for calculating damages under the CLRA that would be tied to his theory of liability," the judge wrote.

The final attempt at a damages model, nominal damages, lacked support in case law, Judge Orrick said, with the plaintiff unable to cite "a single case demonstrating that nominal damages are available under his causes of action."

One final path to certification existed for Khasin, as a class can be certified under Rule 23(b)(2) where "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole."

But the plaintiff was unable to satisfy the requirements of this alternative means of class certification because he was unable to demonstrate future harm, Judge Orrick found. Despite deposition testimony that he "would consider" drinking Bigelow tea again if the defendant was enjoined from mislabeling, the plaintiff did not plausibly allege an intent to purchase Bigelow products in the future, the court said.

"Khasin's testimony is unconvincing," the judge wrote. " '[A] plaintiff may not manufacture standing for injunctive relief simply by expressing an intent to purchase the challenged product in the future.' Pursuant to Article III's standing requirements, a plaintiff must present a 'sufficient likelihood' that he will be injured. The existence of an unsupported assertion in Khasin's declaration that he 'would consider' purchasing Bigelow tea in the future if he is assured it complies with California law does not satisfy this standard."

Further, the plaintiff had not established a likelihood of suffering the same harm he alleged in his complaint, the court said. "Plaintiffs like Khasin, who were previously misled by deceptive food labels and now claim to be better informed, lack standing for injunctive relief because there is no danger that they will be misled in the future," Judge Orrick said, denying the motion for certification.

To read the order in Khasin v. R.C. Bigelow, click here.

Why it matters: The court noted additional "serious" issues implicated by the class certification motion: "Is the proposed class sufficiently ascertainable? Has Khasin adequately demonstrated that there are questions of law or fact common to the entire class?" Because the problems with the plaintiff's damages theories precluded certification, Judge Orrick declined to address the other issues but made it clear class certification was an uphill battle.

California Court Orders ADA Compliance for Website

In the latest judicial decision applying the Americans with Disabilities Act to website accessibility—and reportedly the first entering judgment in favor of a plaintiff—a California state court judge ordered the defendant to update its site to make it accessible to the visually impaired and pay damages to the plaintiff.

Edward Davis sued Bag'N Baggage, a Colorado-based luggage company that owns, operates and maintains retail stores in California, alleging violations of the ADA and California's Unruh Civil Rights Act. As a permanently blind individual, he uses a screen reader in order to access the Internet and read website content, the plaintiff explained.

"The Internet has become a significant source of information, a portal and tool for conducting business, and a means for doing everyday activities such as shopping, banking, etc. for both the sighted and blind, and/or visually-impaired persons," Davis wrote in his complaint. "Unless websites are designed to be read by screen reading software, blind persons are unable to fully access websites and the information, products and services contained thereon."

Bag'N Baggage's website presents several barriers to use for the visually impaired, Davis alleged, from linked images missing alternative text to empty links that contain no text to missing form labels. "Due to the inaccessibility of ColoradoBaggage.com, blind and otherwise visually impaired customers who use screen readers cannot effectively browse or shop for Defendant's products online," the plaintiff claimed.

Because the defendant's retail stores are public accommodations within the definition of Title III of the ADA, the acts alleged in the complaint constitute intentional discrimination in violation of the ADA and the Unruh Civil Rights Act, Davis told the court.

The plaintiff moved for summary judgment and Judge Bryan F. Foster granted the motion.

"It is undisputed that plaintiff is disabled within the meaning of the ADA," the court wrote in a minute order. "Plaintiff also has presented sufficient evidence and legal argument to conclude Title III of the ADA applies to plaintiff's use of a website where plaintiff has demonstrated he sought goods and services from a place of public accommodation because he demonstrated a sufficient nexus exists between defendant's retail store and its website that directly affects plaintiff's ability to access goods and services. Plaintiff also presented sufficient evidence that he was denied full and equal enjoyment of the goods, services, privileges, and accommodations offered by defendant because of his disability."

Judge Foster granted Davis' request for injunctive relief, enjoining the defendant from violating both state and federal law and requiring "it to take steps necessary to make ColoradoBaggage.com readily accessible to and usable by visually impaired individuals or to terminate the website."

In addition, the plaintiff was entitled to damages under the Unruh Act of $4,000 because the "undisputed evidence is that Plaintiff's access to the website was prevented by the Defendant at the time the website was designed," the court said. "Repeated attempts at access to the website known by the Plaintiff to be unavailable to him does not constitute additional offenses" requiring additional damages, however.

To read the complaint in Davis v. BMI/BNB Travelware Company, click here.

To read the minute order, click here.

Why it matters: The minute order reflects the majority position of courts across the country that retail websites with a sufficient nexus to a brick and mortar location are covered by Title III of the ADA and therefore must be accessible to the visually impaired. Less clear, but moving in the same direction: whether or not a strictly online business lacking any physical premises is covered by the statute and can be liable for discrimination. At least one court has said the ADA applies to an e-tailer and the Department of Justice has taken the position that e-tailers fall under the purview of the ADA, physical location or not, and is currently promulgating regulations to that effect.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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