Advertising Law - June 2015 #2

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

  • NFL Scores Victory at Eighth Circuit, $42M Deal With Former Players Upheld
  • RadioShack to Destroy, Not Sell, PII in Bankruptcy Agreement
  • Court Spies a Class in Suit Alleging Yahoo Illegally Scanned E-mails
  • FTD, Classmates Pay $11M to State AGs for Deceptive Auto Renewals, Data Pass

NFL Scores Victory at Eighth Circuit, $42M Deal With Former Players Upheld

The Eighth Circuit Court of Appeals affirmed the $42 million settlement between the National Football League (NFL) and almost 25,000 former pro football players who were seeking compensation for the use of their likenesses.

Several named plaintiffs opted out of the agreement and appealed its approval arguing that the resolution was not fair, reasonable, or adequate because it did not provide a direct payment to each class member.

The dispute began in 2009, when a class of former players sought compensation from the NFL for the use of their names, images, likenesses, and identities in NFL Films videos. The videos helped enhance the NFL brand and added profits to the league’s bottom line, the class argued.

After several years of litigation, the parties reached an agreement. For a full release of the claims, the NFL agreed to create and fund the Common Good Entity, a non-profit organization, with up to $42 million over an eight-year period. The league also agreed to establish a licensing agency to assist former NFL players in marketing their publicity rights and pay $100,000 worth of media value until 2021.

A federal district court judge granted approval of the deal in October 2013.

Immediately, several named plaintiffs objected and others opted out of the deal. The challengers argued that the agreement did not provide any direct benefit to the class and that the financial payments were made to a third party and not the class members directly.

In reviewing the district court’s decision, a panel of the Eighth Circuit found it to be fair, reasonable, and adequate. “[T]he settlement agreement provides for two substantial and direct benefits to the class as a whole: the Licensing Agency and a payment of up to $42 million for the benefit of the class,” the court said.

“All class members receive a direct benefit from the settlement: the opportunity to license their publicity rights through the established Licensing Agency, as well as the payments made by the NFL to the Licensing Agency,” the panel wrote. “If the players’ publicity rights are as valuable as [the objectors] claim, the players should be able to realize the value of their publicity rights through the Licensing Agency. While the parties disagree on the value of the Licensing Agency to the different class members, the district court held that through the Licensing Agency class members ‘finally ha[d] an avenue to pursue commercial interests in their own images … [and] for the first time in conjunction with the NFL’s copyrights and trademarks.’”

Further, even though the $42 million will not be paid directly to the class members, “the money is clearly designated for the benefit of the class,” the panel said, adding that “the mere fact” that a financial payout for the benefit of a class is made through a third party does not render a settlement impermissible. “The relevant question is for whom the money will be used, not whose name appears on the check.”

The district court also correctly assessed the relevant factors in support of the settlement, particularly the complexity and expense of further litigation, the court added. The parties had already spent three years in litigation before reaching a deal, and the resolution of the case would have required a review of each player’s contract(s) and “tremendous efforts” on multiple complex legal issues that include an analysis of conflict of law and statutes of limitations, a survey of the various state publicity laws, and the availability of the affirmative constitutional defenses.

Certain objections from the named plaintiffs suggested to the panel that their frustration had more to do with their beliefs about the value of their personal publicity rights claims rather than that of the class as a whole.

“The district court refused to give credence to the vocal minority that focused on receiving a direct financial payout, which the district court believed was a ‘very mistaken belief that they could reap significant financial benefits from continuing this case,’” the court said. “The fact that less than ten percent of the entire class opted out of the settlement—despite conscious efforts by some class members to persuade the other members of the unfairness—suggests it was favorable to what most members believed their claims were worth.”

To read the opinion in Marshall v. NFL, click here.

Why it matters: The Eighth Circuit resoundingly backed the trial court judge’s approval of the “complex” settlement and agreed that the “vocal minority” of objectors were frustrated about what they perceived was a lack of compensation for the full value of their publicity rights. Emphasizing that the district court operated as the guardian of absent class members, the federal appellate panel said the “amount of opposition from the substantial absent minority”—i.e., almost none—“is better indicative of the opposition to the settlement as a whole” than the outspoken named plaintiffs.

RadioShack to Destroy, Not Sell, PII in Bankruptcy Agreement

Facing objections from the Federal Trade Commission and the Attorneys General of 23 states, RadioShack in its bankruptcy filing, has agreed to destroy the bulk of the personal customer information maintained in its files.

As part of its Chapter 11 petition, the company offered all of its assets for sale—including data on roughly 117 million customers, such as e-mail addresses, telephone numbers, and credit and debit card information.

But almost two dozen state AGs filed an objection, arguing that the sale constituted a violation of state consumer protection laws as well as the company’s own privacy policies. The policies assured consumers that RadioShack would “not sell or rent your personally identifiable information [PII] to anyone at any time.” By offering such data for sale, the company sought to do the opposite of what it promised and engaged in unfair and deceptive practices, the AGs told the bankruptcy court.

The FTC also weighed in and wrote a letter to the court-appointed consumer privacy ombudsman in the bankruptcy case to recommend that certain conditions be placed upon the sale of PII to protect RadioShack’s former customers. Possible considerations ranged from a sale of the information only to another entity in substantially the same line of business as RadioShack, to an agreement from the buyer to remain bound by the RadioShack privacy policies in place when the customers’ data was collected.

With a sale in the balance and state and federal regulators breathing down its neck, RadioShack and purchaser General Wireless Operations, Inc. entered into a mediation to resolve the objections.

Pursuant to the deal, General Wireless will only purchase two categories of PII: (1) customer e-mail addresses that were active within the two-year period before RadioShack filed for bankruptcy; and (2) transaction data for the prior five-year period limited to seven fields (store number, ticket date/time, SKU number, SKU description, SKU selling price, tender type, and tender amount).

Any other customer information—older e-mail addresses, telephone numbers, and 14 other transaction fields, for example—will be destroyed.

Before the transfer of the PII to General Wireless, RadioShack will send an e-mail to affected customers advising them of the purchase and providing them with an opportunity to opt out. Recipients will have seven days to exercise the option not to have their PII transferred.

General Wireless incorporated one of the FTC’s suggestions and “agrees that it is bound by existing RadioShack privacy policy with regard to customers listed in the purchased PII, and acknowledges that such privacy policy prohibits the further sale or transfer of such information to third parties.” According to the mediation term sheet, “The parties agree that customers may be bound by material changes to this privacy policy, but only on condition that the purchaser provides such customers with [an] opt-in option, and on the further condition that the customer affirmatively exercises this option.”

To read the settlement agreement in In re RadioShack Corp., click here.

Why it matters: Privacy is a top-of-mind concern for both state and federal regulators. The FTC has intervened in multiple bankruptcy cases in recent years, from high-profile cases involving Borders, the national bookstore, to the personal bankruptcy of the owner of a gay teens magazine. RadioShack’s bankruptcy problems provide an important reminder that companies must consider the implications of a future bankruptcy when drafting privacy policies or face complications down the road.

Court Spies a Class in Suit Alleging Yahoo Illegally Scanned E-mails

Consumers may move forward with their suit against Yahoo for scanning e-mail messages in order to display relevant ads, a federal court judge in California ruled when she certified two classes of plaintiffs in the case.

Individuals across the country filed multiple lawsuits against Yahoo after news reports revealed that the company intercepted and reviewed messages in order to provide targeted ads. While the company’s terms of service disclosed that the company scans e-mails, the plaintiffs state that they actually did not have Yahoo accounts themselves and therefore never consented to having their messages scanned.

The plaintiffs moved to certify a class seeking injunctive and declaratory relief for violations of the federal Stored Communications Act (SCA) and California’s Invasion of Privacy Act (CIPA).

Yahoo objected that certification was inappropriate because plaintiff consent must be viewed on a case-by-case basis.

But U.S. District Court Judge Lucy Koh disagreed and certified a nationwide SCA class as well as a subclass of California residents under CIPA.

The court rejected Yahoo’s contention that the plaintiffs lacked standing based on the fact that it continued to send e-mails to Yahoo subscribers, even after they learned about the spying program.

This “overly narrow” proposition in the consumer protection context “would have the functional effect of eliminat[ing] injunctive relief altogether for victims of alleged violations of the SCA and CIPA,” the court said. “Under Yahoo’s proposed rule, to be eligible for injunctive relief, Plaintiffs would then have to cease receiving and sending e-mails to Yahoo Mail subscribers in order to avoid consenting to Yahoo’s future conduct. However, Plaintiffs must also show ‘a real and immediate threat of repeated injury in the future.’ Yahoo does not explain how Plaintiffs could both avoid ‘consenting’ to Yahoo’s conduct while simultaneously establishing a ‘real and immediate threat’ that Plaintiffs’ e-mails would be subject to Yahoo’s interception and use.”

Once the court established that the plaintiffs had standing, it reviewed the Rule of Civil Procedure 23(a) factors—numerosity, commonality, typicality, and adequacy—and found the class had satisfied each element. An estimated class of “hundreds of thousands” was more than sufficient for numerosity, and the plaintiffs shared at least one question of fact or law with the prospective class, the court said.

Both of the plaintiff’s claims—violations of the SCA and CIPA—will require resolution of the same issue for all class members, Judge Koh said, and questions of consent will not overwhelm the inquiry as to whether Yahoo intercepts e-mails to and from non-Yahoo mail subscribers.

“Although Yahoo may be correct that consent could present legal and factual questions that are not common to the proposed class, that observation does not bear on whether plaintiffs have identified other common legal and factual questions that are significant to plaintiffs’ claims and capable of class-wide resolution,” the judge wrote.

Typicality and adequacy of class representation were also satisfied, the court said. Judge Koh was not persuaded by Yahoo’s position that the failure to seek monetary relief indicated that the class representatives were poor choices.

Reviewing the Rule 23(b)(2) requirements, the court again found the class passed muster. Yahoo’s insistence that consent could not be determined on a class-wide basis did not recognize the fact that even if some class members have not been injured by the challenged practice, a class may nevertheless be appropriate.

“Yahoo may have to, as a practical matter, adjust its scanning practices on an individual basis,” Judge Koh wrote. “That does not, however, change the fact that Plaintiffs seek uniform relief from a common policy that Yahoo applies to all class members.”

The court certified two classes in the suit: (1) a nationwide group of individuals who are not Yahoo Mail subscribers and who sent or received e-mails from a Yahoo mail subscriber dating back to October 2, 2011 (the SCA class); and (2) a CIPA class made up of California residents who are not Yahoo Mail subscribers and who sent or received e-mails from a Yahoo Mail subscriber since October 2, 2012.

Other states had an interest in applying their own wiretap laws to the claims at issue, Judge Koh noted, so a nationwide class for CIPA claims would be inappropriate.

To read the order in Holland v. Yahoo, click here.

Why it matters: Judge Koh’s decision came as somewhat of a surprise, since she reached a different conclusion last year in a similar suit against Google where users challenged the scanning of their e-mail messages. That case settled soon after the court’s denial of class certification. While Yahoo might also like to settle the class action, an agreement could be more expensive with class members estimated in the hundreds of thousands.

FTD, Classmates Pay $11M to State AGs for Deceptive Auto Renewals, Data Pass

For $11 million and a promise to change their practices, Florists Transworld Delivery (better known as FTD) and Classmates Inc. reached a deal with the Attorneys General from 22 states over charges that they deceived consumers with auto renewal memberships and engaged in false advertising by knowingly sharing information, including credit account numbers, with third party marketers who offered discount buying club memberships and buying club programs without adequately disclosing that consumers would be charged monthly unless they opted out.

When customers made an online purchase with FTD or Classmates, Webloyalty and others, using the information provided by FTD or Classmates, made offers to consumers for travel rewards and discount buying club programs. While the offers purported to be free, the state regulators alleged that adequate disclosures were not made to consumers that they were enrolled in negative option programs.

Classmates engaged in further deceptive and unfair conduct regarding its own renewal and cancellations practices, the AGs said, by not adequately informing Classmates.com users that their subscription would renew automatically unless cancelled and that the method of cancellation “was difficult.”

“This is a suspect sales practice that often goes unnoticed by customers who end up paying for something they never wanted,” Brian E. Frosh, the AG for Maryland, who led the investigation with Kansas AG Derek Schmidt, said in a statement. Frosh noted that at one point in time, up to 89 percent of Classmates’ users were unknowingly paying for their memberships. “Consumers have a right to know what services they are signing up for and to be clearly informed about the cost of those services,” Schmidt noted in his press release.

Pursuant to the deal, the 22 states will split the $11 million payout with FTD chipping in $2,822,400 while Classmates will provide $5,177,600. Classmates will refund an additional $3 million to consumers, with any unclaimed funds reverting to the states. The companies—which did not admit to any wrongdoing—will also modify their practices.

Specifically, the companies cannot misrepresent the reason for requesting a consumer’s account information and they must provide clear notice to customers when they are redirected to a third-party offer. Classmates, FTD and their marketing partners are prohibited from using the words “free” or “risk free” if the subscriptions will later convert to a paid subscription.

Marketing partners are no longer allowed to use FTD’s or Classmates’ names or logos in conjunction with their membership programs so that consumers will understand that they are receiving “a separate and distinct offer” from a different entity. Classmates agreed to make better disclosures about its automatic subscription renewal and said it would make the cancellation process easier for users.

In addition to Kansas and Maryland, the states involved in the action included Alabama, Alaska, Delaware, Florida, Idaho, Illinois, Maine, Michigan, Nebraska, New Jersey, New Mexico, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, Texas, Vermont, Washington, and Wisconsin.

To read the Maryland AG’s press release about the settlement, click here.

To read the Kansas AG’s press release, click here.

Why it matters: State regulators continue to take a close look at negative option marketing like that alleged by the 22 state AGs against FTD and Classmates. Be sure your disclosures and practices are in compliance with applicable laws.

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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