In This Issue:
SPECIAL FOCUS: CFPB
Author: Chuck Washburn
The Dodd-Frank Act provides that the Consumer Financial Protection Bureau ("CFPB") may take action against certain persons who engage in unfair, deceptive or abusive acts or practices.
The unfair or deceptive act or practice ("UDAP") standard has been around for a long time under the FTC Act and similar state laws, and merchants (i.e., retailers and other nonbanking companies) and their legal advisors have a good understanding as to what may be a UDAP. The additional "abusive" standard in Dodd-Frank (resulting in the new term "UDAAP") has caused significant concern, because it is undefined beyond language in the Dodd-Frank Act, and so the scope of what may or may not be abusive is unclear.
The CFPB has said that it likely would define the term through enforcement actions rather than by issuing regulations or similar guidance. Until recently, the CFPB had only used the "deceptive" prong of UDAAP when taking enforcement actions.
However, on May 30 the CFPB took its first action alleging that a particular act or practice was "abusive." It filed a complaint in federal district court against a debt-relief company in Florida, in which the CFPB alleged that the company and its owner charged consumers substantial up-front fees for debt-relief services that were not provided. In addition to asserting that the company's conduct was deceptive, the CFPB said that the conduct was abusive because the company enrolled consumers "who the defendants knew had inadequate incomes to complete the debt-relief programs in which they were enrolled" and collected the up-front fees "from consumers who [the company] knew could not afford the monthly payments required by these debt-relief programs." Applying the definition of "abusive" in Dodd-Frank, the CFPB asserted in the complaint that the company's actions took unreasonable advantage of a consumer's lack of understanding of the debt relief process and that consumers reasonably relied on the company to act in the consumers' interests. At the same time, the CFPB filed a proposed consent order.
To read a copy of the complaint, click here.
To read a copy of the proposed consent order, click here.
Why it matters: The uncertainty regarding the scope of what activities may be deemed to be "abusive" has caused substantial anxiety among merchants, especially those involved in financial services. The CFPB complaint is a first step in clarifying how the CFPB interprets the standard. Merchants that offer a product or service that, by its nature, provides the merchant with information regarding the consumer's ability to pay and/or is one where the consumer may reasonably believe the merchant is looking out for the consumer's interests should pay particular attention to this development.
Social Media Guidance for the Alcohol Industry
The Alcohol and Tobacco Tax and Trade Bureau ("TTB") released updated advertising guidance for alcoholic beverage companies that address a variety of social media, such as video sharing sites, microblogs, and networking sites.
Industry members should recognize that advertising regulations promulgated by the TTB apply to all advertisements, including social media. So the required mandatory statements (like the advertiser's name and address and the class and type of alcohol), as well as prohibited statements (false health claims, for example), apply to all of those using Web 2.0. They include proprietors of bonded wineries, bonded wine cellars, taxpaid wine bottling houses, beverage distilled spirits plants, breweries, importers and wholesalers.
Six different forms of social media were addressed in the guidance. Under the category of social networking services, the agency said that where a company has several fan pages, for example on Facebook, they are cumulatively considered as one advertisement and the required statements need only appear once on the fan page, either on the "home" page or any sub-pages directly associated with the "home" page. TTB "strongly" recommends that mandatory statements appear in the "profile" or "about" section, where consumers will logically expect to find information about the brand or company.
Similar steps should be taken for other forms of social media, including video sharing sites (like YouTube) and microblogs (e.g., Twitter and Tumblr). Mandatory statements should appear in the profile section or its closest equivalent, although videos should each include the mandatory statements. However, given the space limitations of microblogs, "TTB has determined that it is impractical to require mandatory statements to appear in every microblog post made by the industry member."
A blog must also contain the mandatory statements and regulations regarding prohibited practices if it is maintained by an industry member about itself (the "ABC Winery blog") and "discusses issues related to the company, its products, or the industry in general," the TTB wrote. In addition, "anything posted by an industry member on the blog" is similarly subject to the regulations.
Turning to mobile applications, the TTB said members of the industry now offer apps that provide drink recipes and help guide users to a location where their products are served. Such apps will be treated as a consumer specialty advertisement, akin to a leaflet, shopping bag, or visor, that the consumer carries away. Therefore, under the regulations, "the only mandatory statement required to appear in the app is the company name or the brand name of the product."
Links to other Web sites or pages from a social media ad are often used by industry members. "In reviewing social media advertisements, TTB will consider the totality of the message presented by the advertisement and any links contained therein to determine if the content of the links will be considered part of the advertisement." The guidance added that the description of the linked site will be treated as part of the industry member's advertisement.
Similarly, quick response codes need also comply with the mandatory and prohibited statements of the regulations, depending on the type of media that is linked by QR code. "If, for example, the QR code links to a document, such as a drink recipe using an industry member's product, the recipe will be considered an advertisement because it is a written or verbal statement, illustration, or depiction that is in, or calculated to induce sales in interstate or foreign commerce," the TTB said. To read the guidance, click here.
Why it matters: The updated guidance puts alcoholic beverage advertisers on notice that their social media presence is ripe for review and that TTB is expanding the breadth of its advertising reviews. The agency also carefully noted that the scope of the TTB regulations "is very broad" and therefore applies with equal force to media not specifically addressed in the guidance or that may yet be developed in the future. And while advertisers should look to the guidance for direction, the TTB said that it evaluates specific advertisements on a case-by-case basis.
False Sale Price Basis for False Ad Suit, Says Ninth Circuit
Kohl's must face a consumer class action alleging false advertising for goods that the retailer said were on sale when they were routinely sold at the advertised "sale" price, according to a decision from the Ninth U.S. Circuit Court of Appeals.
Looking to take advantage of a bargain, Antonio Hinojos purchased a Samsonite suitcase at Kohl's advertised as 50 percent off the "original" price of $299.99 and shirts that were said to be marked down upwards of 30 percent from their "original" prices. He then sued the retailer for violations of California's Unfair Competition Law, Fair Advertising Law, and Consumer Legal Remedies Act, claiming that the items were not actually on sale and that Kohl's routinely sold them at the advertised "sale" price. Hinojos purchased the merchandise on the basis of false price information – and would not have done so but for the misrepresentation, he claimed.
In dismissing the suit, a federal district court concluded that Hinojos lost neither money nor property because he acquired the merchandise that he wanted, even assuming that the price was a false sale.
The Ninth Circuit disagreed and relied heavily upon a 2011 decision from the California Supreme Court, Kwikset Corp. v. Superior Court. In that case, the court said that the plaintiff had standing to sue over the defendant's false "Made in the USA" claims because processes and places of origin matter to some consumers and that to some, "labels matter."
In Hinojos, the Ninth Circuit took a broad interpretation of Kwikset, even in light of Proposition 64, which restricts standing for plaintiffs who allege violations of the unfair competition and fair advertising laws. A consumer has satisfactorily alleged "lost money or property" so long as "false advertisements induced him to buy a product he would not have purchased or to spend more than he otherwise would have spent," the court said.
"In fact, the deceived bargain hunter suffers a more obvious economic injury as a result of false advertising than the Kwikset consumer who was duped into buying foreign-made goods, because the bargain hunter's expectations about the product he just purchased is precisely that it has a higher perceived value and therefore has a higher resale value."
According to the Ninth Circuit, Hinojos did everything required by Kwikset to allege an economy injury: he alleged that the advertised discounts conveyed false information about the goods he purchased and that he would not have purchased the goods absent the misrepresentation. The plaintiff was not required to state at what price he would have purchased the merchandise in question had the "original" price not been misrepresented. Such an amount will be relevant to the calculation of restitution, the panel noted, but not required at the pleading stage.
An opposite holding would ignore the fact that, to consumers "a product's 'regular' or 'original' price matters," the Ninth Circuit said. "Misinformation about a product's 'normal' price is…significant to many consumers in the same way as a false product label would be. That, of course, is why retailers like Kohl's have an incentive to advertise false 'sales.' It is also why the California legislature has prohibited them from doing so."
Further, a plaintiff who has standing under the UCL and FAL's "lost money or property" requirement will presumptively have suffered damage for the CLRA, the court said.
To read the decision in Hinojos v. Kohl's Corp., click here.
Why it matters: "In sum, price advertisements matter," the panel determined. The Ninth Circuit's broad interpretation of the Kwikset holding provided a road map for consumers making false ad allegations: the defendant made a false representation about a product, the plaintiff purchased the product in reliance on the misrepresentation, and he or she would not have purchased it otherwise. The decision also offered other examples of marketing claims that could be actionable under a similar standard, like "not available in stores," "available for a limited time only," "50% of customers who purchased product X also purchased our product," and "the same model of shoe worn by LeBron James."
Build-A-Bear Site Must Lose Links to Twitter, Pinterest
Acting on a request from the Children's Advertising Review Unit, Build-A-Bear Inc. removed links on its home page to Pinterest and Twitter and updated what it called a "glitch" that allowed children under 13 to enter personal information without parental consent.
CARU viewed a commercial for the teddy bear retailer which directed viewers to its Web site, www.buildabear.com. The company said the site is intended for adults who can learn more about Build-A-Bear workshops, and where they can select a stuffed animal, assemble it, fill it with stuffing, and add clothing and accessories. CARU noted that visitors can play bear-themed games on a brightly colored Web site that contains various images of different stuffed animals.
To create an account on the site, users must enter a name, e-mail address, password, and date of birth. Those under 13 must also enter a parent's e-mail address. But when CARU visited the site, the self-regulatory group discovered that a registrant could simply click the "back" button and change the birth date to avoid having to enter a parental e-mail.
In addition, CARU noted that the center of the home page features a yellow blimp reading "Follow Us!" with hyperlinks to Facebook, Pinterest, Twitter, and YouTube.
CARU expressed concern with certain hyperlinks and the simplicity with which viewer could evade age-screening on the site, which violated CARU's Guidelines and the Children's Online Privacy Protection Act. Both prohibit the operators of Web sites from collecting personal information from children under the age of 13 absent parental consent.
Responding to the inquiry letter, Build-A-Bear informed CARU that the age-gate cookie was accidentally overwritten when the site ran an update. Build-A-Bear assured CARU that the session cookie had been restored and was working again.
As for the hyperlinks, CARU noted that the links were on the front page of the Web site. Therefore, users could take advantage of the links before being age-screened. While Facebook and YouTube conduct their own age-gating, neither "Pinterest nor Twitter does age-screening and children are able to input personally identifiable information," the decision noted. Accordingly, CARU determined that Build-A-Bear violated its Guidelines by posting hyperlinks to "inappropriate websites" like Pinterest and Twitter that do not include an age-screen.
Build-A-Bear said that it was "not aware" that Twitter and Pinterest did not use an age gate on the site and agreed to remove the links unless they were placed behind an age-screening mechanism in compliance with CARU's Guidelines.
To read the press release from CARU about the decision, click here.
Why it matters: "Where a Website has a reasonable expectation that a significant number of children under the age of 13 will be visiting the site, neutral age-screening mechanisms should be employed, including a tracking device to prevent underage visitors from circumventing the age screening," CARU recommended. In addition, operators should consider whether links to other sites – including social media networks – are available to users prior to age-screening and if so, whether those sites conduct their own age check. If not, such links should be removed or moved behind the age screen to avoid running afoul of CARU.
Get It While It's Hot! Papa John's Settles TCPA Suit for $16.5M
Facing a full plate of Telephone Consumer Protection Act litigation, Papa John's settled one of the class actions filed against it for $16.5 million.
In an unopposed motion for preliminary approval of the deal filed by the plaintiff, the parties estimated that the nationwide class consisted of roughly 220,000 consumers who received at least one unsolicited text message that advertised a branded Papa John's product from its marketing company, OnTime4U.
Pursuant to the proposed settlement, all class members provided with notice of the settlement would automatically receive a merchandise credit for a free Papa John's pizza, an estimated value of $13. In addition, class members who submit a valid claim form could receive a $50 payment.
Papa John's also agreed to pay the cost of claims administration and promised not to oppose a $25,000 incentive award for the named plaintiff and more than $2.4 million in attorneys' fees and costs.
In seeking the approval of U.S. District Court Judge John C. Coughenour, the parties emphasized their hard-fought battle before reaching an agreement. The plaintiffs filed six separate complaints, all of which received vigorous opposition from the defendant, and the parties engaged in extensive discovery. "The many hundred docket entries of the court's file reflect how diligently this case has been litigated for over three years," according to the motion.
Papa John's declined any and all liability in the settlement. The company raised several lines of defense in the suit, including an argument as to whether class members conferred sufficient consent to be subsequently texted a pizza coupon when they disclosed their telephone numbers during their purchase of a pizza.
To read the plaintiff's unopposed motion for settlement in Agne v. Papa John's, click here.
To register for Manatt's upcoming webinar, "Are You Ready for New TCPA Consent Requirements?" click here.
Why it matters: If the settlement is approved, one slice of Papa John's TCPA litigation pie will be removed from its plate. The pizza company still faces other suits, including a class action in Virginia federal court, where the company recently lost a summary judgment motion. At least the company saved some money on the Washington suit. After Judge Coughenour certified the class last November, class counsel issued a press release estimating damages at more than $250 million (based on the maximum statutory damages under the TCPA of $1,500 per text message).
Former QB Scores a Publicity Rights Win in the Third Circuit
In a tight game between First Amendment rights and the right of publicity for a former college quarterback before the Third U.S. Circuit Court of Appeals, the QB pulled off the W.
Ryan Hart sued video game maker Electronic Arts for violating his right of publicity in the "NCAA Football" game series for multiple years. Hart, a record-setting quarterback who played for Rutgers from 2002 to 2005, argued that his digital avatar appropriated his likeness by using his image, his vital and biographical information like his height and weight, the accessories he wore (a wristband and helmet visor) and his agility and passer rating.
A federal court sided with EA, but in a 62-page decision detailing the history of the right of publicity and the tension between the relevant interests underlying both the First Amendment right of free expression and the right of publicity, the Third Circuit reversed.
Identifying three balancing tests used in other jurisdictions, the panel declined to adopt the predominant use test (based on commercial interests) and the trademark-based Rogers test, from a Second Circuit decision in Rogers v. Grimaldi, 875 F.2d 994 (1989). Instead, it adopted a test first articulated by the California Supreme Court and derived from copyright law, the transformative use test.
The test focuses on the first fair use factor, "the purpose and character of the use," and requires the court to analyze "whether and to what extent the new work is transformative." After working its way through existing case law since the 2001 case that established the test (Comedy III Prods., Inc. v. Gary Saderup, Inc., 21 P.3d 797), the court determined that EA did not sufficiently transform Hart's identity to warrant First Amendment protection.
"In no small part, the 'NCAA Football' franchise's success owes to its focus on realism and detail," wrote Judge Joseph A. Greenaway for the 2-1 majority. Not only did the digital avatar "closely resemble the genuine article" in hair color and skin tone, but the accessories also match those worn by Hart as a Rutgers player.
"The digital Ryan Hart does what the actual Ryan Hart did while at Rutgers: he plays college football, in digital re-creations of college football stadiums, filled with all the trappings of a college football game," the court said. "This is not transformative; the various digitized sights and sounds in the video game do not alter or transform [Hart's] identity a significant way."
The decision noted that the game allowed users to alter the avatar's appearance, but the court said these "minor alterations – which substantially maintain the avatar's resemblance to [Hart]" were insufficient. "Indeed, the ability to modify the avatar counts for little where the appeal of the game lies in users' ability to play 'as, or alongside' their preferred players or team," the court said. And sweeping, major changes to the avatar – like a different skin tone or face – do not transform Hart's avatar, but instead cause it to cease being him entirely, as it no longer represents Hart.
Finally, the court said the other creative elements of the game did not tip the scales in EA's favor. "Wholly unrelated elements do not bear on this inquiry," the court said. To hold otherwise could lead to acts of blatant misappropriation as long as the larger work contained highly creative elements – an outcome with "deleterious consequences for the state of the law."
A dissenting opinion reached a different result when applying the transformative use test, arguing that the majority penalized EA for its realism and focused too narrowly on the plaintiff's likeness, rather than how that likeness is incorporated into and transformed by the work as a whole, with "myriad original graphics, videos, sound effects, and game scenarios."
To read the opinion in Hart v. Electronic Arts, click here.
Why it matters: Has the celebrity's image been so transformed that it has become primarily the defendant's own expression, rather than the celebrity's likeness? This is the central question of the transformative use test adopted by the Third Circuit when determining whether a plaintiff's right of publicity has been violated. The panel was careful to note that it recognized the First Amendment protections given to video games, and said that "nothing in our decision today should be read to diminish this fact. Rather, our inquiry looked to whether other interests may surmount the First Amendment protection – as they surmount protections for other modes of expression." The game itself did not lose protection, the Third Circuit explained, but the right of publicity played the better game.