In This Issue:

FTC Shoots Down COPPA Compliance Request Based on Social Networking

The Federal Trade Commission has denied an application from AssertID seeking the agency's approval of a proposed method of verifiable parental consent pursuant to the Children's Online Privacy Protection Act.

AssertID proposed a "social-graph verification" method that would essentially rely upon social networking. Specifically, a company would ask a parent's "friends" on a social network like Facebook to verify the person's identity and the existence of the parent-child relationship.

The agency's COPPA Rule mandates that parental consent must be obtained before a covered entity can collect personal information from children under the age of 13. While the Rule permits different methods of obtaining parental consent, the FTC also has the power to grant approval of new methods that it deems compliant.

Unfortunately for AssertID, the commissioners unanimously determined that the proposal did not meet the criteria for approval. The company failed to provide sufficient evidence that its social-graph method is "reasonably calculated, in light of available technology, to ensure that the person providing consent is the child's parent" as required by the Rule.

"Without relevant research or marketplace evidence demonstrating the efficacy of social-graph verification and that such a method is reasonably calculated to ensure the person providing consent is the child's parent, the Commission believes approval of such a [verifiable parental consent] method under the Rule would be premature," Commission Secretary Donald S. Clark wrote in a letter to AssertID.

AssertID pointed to research demonstrating that social networks are built on trust among members, but the articles were insufficient, the FTC said. "Moreover, while AssertID's method is premised on verification by a minimum number of verifiers and requires that a minimum 'trust score' be met, the cited studies do not establish that a particular 'trust score' or a particular number of verifiers is adequate to verify an individual's identity."

Limited beta testing conducted by AssertID did not demonstrate that the verification method would work in an open marketplace, Clark wrote. Additional market research might also help assuage concerns that users can easily fabricate Facebook profiles. Commenters on AssertID's proposal cautioned that children under age 13 can falsify their age information to establish a social media account and that Facebook itself estimates 8.7 percent of its users have fake profiles.

"In short, identity verification via social-graph is an emerging technology and further research, development, and implementation is necessary to demonstrate that it is sufficiently reliable to verify that individuals are parents authorized to consent to the collection of children's personal information," the commissioners concluded.

To read the FTC's letter to AssertID, click here.

Why it matters: Entities are still struggling with the updated COPPA Rules, which took effect July 1. While AssertID attempted to establish a new method of verifiable parental compliance, some companies have tried to adjust their policies accordingly; others have changed course completely, trying to avoid coverage of the statute because of compliance concerns.

Jury Finds Trudeau Guilty; Prison Term Possible for Violating FTC Consent Decree

In the latest chapter of legal drama for Kevin Trudeau, a federal jury in Chicago found him guilty of criminal contempt for violating a 2004 consent decree with the Federal Trade Commission.

Under the 2004 agreement, Trudeau promised not to directly or indirectly produce and broadcast any deceptive infomercials that misrepresented the contents of any book. But in December 2006, Trudeau began airing infomercials to promote his new book The Weight Loss Cure "They" Don't Want You to Know About.

According to the FTC, the infomercials made multiple deceptive claims about how the weight loss plan is "easy to do, can be done at home, and ultimately allows readers to eat whatever they want." In three half-hour infomercials, Trudeau claimed he had discovered a secret and permanent weight loss plan that was suppressed by food companies and the government in an effort to keep people fat. The program did not require any exercise or dieting, he said, and users could eat as much of whatever food as they wanted.

But the diet was actually a grueling regimen, the government said, featuring a limited 500-calorie-per-day diet and the use of prescription hormones. "He made the book sound way better than it actually was," prosecutor Marc Krickbaum told the jury during his closing argument. "If he told the truth, that book wasn't going to sell nearly as well than if he lied."

Trudeau's attorney Thomas Kirsch countered that the government, by calling only two witnesses and failing to establish that Trudeau's misstatements were intentional, had failed to prove its case. "Watch any television commercial for any product – it's the views and opinions of the persons who are making and selling the product," Kirsch said to jurors. "That's what advertising is."

After deliberating for less than one hour, the jury found the 50-year-old Trudeau guilty. He was taken into custody and now faces a potential prison term.

The FTC has also pursued a civil suit against Trudeau. Six years ago, he was fined $37 million in that case; since then, prosecutors have failed to recover any of the money. Trudeau says that he has no money, while the government contends he has hidden assets.

Why it matters: A sentencing date has not been set for Trudeau, who faces an uncertain prison term. Criminal contempt does not carry a maximum sentence, so his prison stay will be within the discretion of the federal judge overseeing his case, U.S. District Court Judge Ronald Guzman. Trudeau has not endeared himself to the judiciary throughout the litigation process. He was jailed on two separate occasions for lying about his assets. And after his fine was imposed, Trudeau urged his supporters to e-mail the judge in protest. As a result, the judge's e-mail account crashed.

Will the Possible Ban on Trans Fat Impact Advertisers?

As the Food and Drug Administration moves to ban trans fat, advertisers are speculating about the possible impact.

The agency released a preliminary ruling that would classify partially hydrogenated oils – the source of trans fat – as not "generally recognized as safe" for use in food. The proposed rule would not affect trans fat that "naturally occurs in small amounts of certain meat and dairy products," and brands would be allowed to petition the FDA for approval to continue using trans fat.

Many food manufacturers had already decreased or cut out the use of trans fat after the FDA mandated in 2006 that the trans fat content of foods be displayed on packaging labels. While the nation's intake of trans fat has since decreased, the FDA noted that many processed foods – such as microwave popcorn, frostings, margarine, frozen pizzas, coffee creamers, and packaged pies – still include trans fat.

"While consumption of potentially harmful artificial trans fat has declined over the last two decades in the United States, current intake remains a significant public health concern," FDA Commissioner Margaret A. Hamburg said in a statement. "Further reduction in the amount of trans fat in the American diet could prevent an additional 20,000 heart attacks and 7,000 deaths from heart disease each year – a critical step in the protection of Americans' health."

If the rule is finalized, the agency would establish a phase-out schedule for various foods. "We want to do it in a way that doesn't unduly disrupt markets," said Michael Taylor, the deputy commissioner for foods.

The FDA's proposal is open for public comment. To preclude the rule from becoming permanent, food manufacturers would have to provide sufficient evidence that partially hydrogenated oils are safe to eat. Given the scientific evidence noted by the agency (like a study by the Institute of Medicine concluding that no safe level of consumption exists for trans fat), any challenge faces significant obstacles.

Local jurisdictions have already instituted similar rules. New York City Mayor Michael Bloomberg established a ban on artificial trans fat in restaurants in 2008; similar rules followed in California, Cleveland, and Philadelphia.

If finalized, the ruling would require changes in product ingredients and labeling, but for advertisers, the impact could be failure-to-warn class actions from consumers. A plaintiff's attorney could argue that brands had knowledge that trans fat was not safe for consumers and sold it anyway, similar to allegations made in tobacco litigation. While many serious obstacles would make the cases a challenge – like establishing the knowledge of food manufacturers – the theory could tempt class action lawyers looking for the next big thing.

To read the FDA's preliminary ruling or comment on the proposal, click here.

Why it matters: While the announcement of the proposal has generated limited controversy in food manufacturing circles, some in the advertising industry have expressed concern that the change could result in class action litigation. Failure-to-warn suits could be based on the theory that companies were aware of the dangers of trans fats prior to the ban and yet continued to manufacture and sell them to the detriment of those that consumed the products.

Bill Would Limit Tax Deduction for Advertising

Benjamin Franklin famously said that nothing in life is certain except for death and taxes – and the advertising industry might soon agree.

A proposal in the House of Representatives would significantly limit the advertising tax deduction to just 50 percent of advertising expenses in the first year, with the remaining 50 percent amortized over the next 10 years. Currently, businesses may deduct 100 percent of their advertising.

Rep. Dave Camp (R-Mich.), Chairman of the House Ways and Means Committee, added the clause to a working draft of a tax reform bill and set off a firestorm of concern from the advertising industry.

"We take this more seriously than any other threat we've seen in many years," Dan Jaffe of the Association of National Advertisers told AdWeek. "It's a sweeping proposal." He added that "no economic or tax policy justification" exists for the proposed changes, particularly the amortization plan. He cites Nobel prize-winning economic experts like George Stigler and Ken Arrow for support.

Clark Rector, the executive vice president of government affairs for the American Advertising Federation, characterized the proposal as "draconian." For 100 years the federal tax code has allowed businesses to deduct the full cost of advertising and the proposed change could reduce ad sales by an estimated $446 billion per year, he told Ad Age. "It's a crazy proposal; it's unhinged from any economic reality."

One industry particularly worried about the impact: newspapers and related media. "This would come at the wrong time when we're beginning to get our sea legs in the digital world. Media companies are going to get hit twice," Paul Boyle, senior vice president of public policy for the Newspaper Association of America, said to AdWeek. "Potentially, it could mean staggering job losses," he added, estimating that 1.6 million jobs would be at risk.

Rep. Camp has yet to formally introduce the legislation or release it for public review.

Why it matters: Lobbyists and members of the advertising industry are doing their best to combat the proposal before it goes any further. The proposal could have a significant impact not just on advertising but on the economy at large. According to the ANA, advertising sales help support 20 million jobs, or 15 percent of all jobs in the country, and every $1 spent on advertising leads to $20 in economic activity.