Advertising Law

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

  • FTC Settles With ADT Over Deceptive Endorsements

  • New on the Hill: Ad Tax Deduction Proposal Released, Ban on E-Cigarette Marketing to Minors

  • Pass or Fail? New Proposal Would Regulate Food Marketing in Schools

  • 4th Circuit Affirms $163M Judgment Against FTC Defendant

FTC Settles With ADT Over Deceptive Endorsements

Don’t believe everything you see on TV or read on the Internet – at least not from ADT Security Systems.

According to an administrative complaint filed by the Federal Trade Commission, the home security company paid three spokespeople – a child safety expert, a home security expert, and a technology expert – more than $300,000 to “demonstrate and review” the company’s ADT Pulse home security and monitoring system on various TV and radio talk shows and news programs.

One problem: ADT did not disclose that the speakers were paid by the company and received goods and services in kind – two of the individuals received a free ADT security system and no-charge monthly monitoring. The FTC said the experts appeared on more than 40 different programs and provided laudatory statements for online reviews and blogs.

ADT set up media interviews for the endorsers and provided suggested interview questions and background video to reporters and news anchors for the segment. When the endorsers appeared on a program, they were introduced as an expert on a specific topic such as home security, the FTC said, without mention of a connection to ADT. On some programs the endorsers also demonstrated other products, which the agency said added to the false impression they were providing an impartial perspective.

The proposed settlement set forth several requirements for ADT: the company cannot misrepresent that any discussion or demonstration is an independent review provided by an impartial expert and it must provide a clear and prominent disclosure when the endorser and the company have a material connection.

ADT must also remove the reviews and endorsements previously misrepresented as independent and impartial, provide each “endorser” with a clear statement of responsibility to disclose a material connection, and establish a system to monitor and review endorsers and their disclosures.

The settlement is open for public comment until April 7.

To read the complaint and proposed settlement agreement in In the Matter of ADT LLC, click here

Why it matters: The action is part of the agency’s “ongoing crackdown” on misleading endorsements, the FTC said. “It’s hard for consumers to make good buying decisions when they think they’re getting independent expert advice as part of an impartial news segment and have no way of knowing they are actually watching a sales pitch,” Jessica Rich, director of the FTC’s Bureau of Consumer Protection, said in a statement. “When a paid endorser appears in a news or talk show segment with the host of that program, the relationship with the advertiser must be clearly disclosed.” The case serves as an important reminder to advertisers that the FTC’s Endorsement Guides apply with equal force to traditional media such as television, not just social media.

New on the Hill: Ad Tax Deduction Proposal Released, Ban on E-Cigarette Marketing to Minors

Advertisers should be aware that two new pieces of legislation are under consideration in Washington, D.C.

First, the long-dreaded tax proposal that would reduce the advertising tax deduction has finally been released, much to the dismay of the industry. In his 1,000-page tax reform package, Rep. David Camp (R-Mich.) stuck with his earlier idea to cap the expensing of ad costs to 50 percent the first year, with the remaining 50 percent amortized over a 10-year period.

But in an apparent attempt to placate the industry, the Chairman of the House Ways and Means Committee said he would consider adding an exemption for the first $1 million in advertising expenses if the total advertising budget does not exceed $2 million.

His concession was not met with enthusiasm.

“That’s almost meaningless,” Dick O’Brien, a lobbyist for the American Association of Advertising Agencies told Ad Age, calling the proposal “a dreadful idea.” “What he’s doing will make advertising more expensive,” O’Brien told the publication. “Most big businesses spend tens of millions or hundreds of millions of dollars in advertising each year.”

In a statement, the Interactive Advertising Bureau agreed. “In a U.S. economy still struggling to grow, the last thing to consider is a change in the tax deductibility of advertising expenditures,” Randall Rothenberg, president and CEO of the IAB, said. “Advertising is the engine of consumer demand; it brings people into showrooms and stores, and generates the economic activity that creates new jobs.”

Clark Rector, executive vice president of government affairs for the American Advertising Federation, told Ad Week it was “crazy” to keep the change to the ad tax deduction – the first in more than a century. “It’s a sledge hammer to business, a disincentive to advertise, and counterproductive to stimulating the economy.”

In other legislative news, Sen. Barbara Boxer (D-Calif.) introduced the Protecting Children from Electronic Cigarette Advertising Act of 2014, which would empower the Federal Trade Commission to prohibit electronic cigarette companies from targeting children under 18 years of age.

The bill states that e-cigarette companies are currently marketing to youth by using cartoons and sponsoring events such as concerts. According to a study by the Centers for Disease Control and Prevention, the percentage of middle and high school students who have used electronic cigarettes more than doubled from 2011 to 2012.

“We cannot risk undoing decades of progress in reducing youth smoking by allowing e-cigarette makers to target our kids,” Sen. Boxer said in a statement. “This bill will help protect our children from an industry that profits from addiction.”

Pursuant to the bill, the FTC would prohibit “the advertising, promoting, and marketing in commerce” of e-cigarettes to children as an unfair or deceptive act or practice. The agency would also have enforcement powers, as would state attorneys general.

To read Rep. Camp’s proposal, click here

To read Sen. Boxer’s bill, click here

Why it matters: Although Rep. Camp’s proposal has drawn the ire of the ad industry, its chances of success this year are slim. However, he told Ad Age that lawmakers must discuss the updating of the tax code. “We need to have this debate,” he said. No matter when the debate occurs, industry will be ready. “We’ll be out in force,” Dan Jaffe, executive vice president of the Association of National Advertisers, told Ad Week. “We’re not against tax reform, but this provision would make the effort to sell more expensive.”

Pass or Fail? New Proposal Would Regulate Food Marketing in Schools

In conjunction with the Department of Agriculture, First Lady Michelle Obama announced a new proposal that would prohibit the marketing of specific products in public schools that fail to meet set nutritional criteria.

The proposal is part of the First Lady’s Let’s Move campaign and would track the criteria established by the Healthy, Hunger-Free Kids Act of 2010 and the USDA’s Smart Snacks in Schools program. Advertisements for junk food or soda would be eliminated from cafeterias and vending machines. The rule would also apply to in-school promotions, such as sponsored scoreboards.

“The idea here is simple – our classrooms should be healthy places where kids aren’t bombarded with ads for junk food,” the First Lady said in a statement. “Because when parents are working hard to teach their kids healthy habits at home, their work shouldn’t be undone by unhealthy messages at school.”

According to the proposal, the ban is necessary because research by the Federal Trade Commission revealed that more than 90 percent of the advertising found in schools is for soda, sports drinks, and other beverages.

Currently the Children’s Food and Beverage Advertising Initiative’s self-regulatory program places voluntary limits on food companies that advertise to children aged 12 and under. The proposal would apply to all food and beverage companies and extends to 18-year-olds in high school.

Industry reaction to the proposal was positive. Susan Neely, president and CEO of the American Beverage Association, told Ad Age it made “sense for the well-being of our school children,” and said her group looks forward to working with the USDA.

Similarly, the Grocery Manufacturers Association had only good things to say. “America’s food and beverage companies enthusiastically support the First Lady’s goal of solving childhood obesity within a generation, and are committed to providing consumers with the products, tools and information they need to build a healthy diet.”

To read the proposed rule, click here.

Why it matters: Some gray areas exist in the proposal, which is open for public comment until April 28. It applies only to advertising and marketing that occur during school hours and leaves uncertainty about night or weekend events held on school grounds. In some cases schools could make their own decisions about what constitutes marketing, such as how to handle a bake sale, but the USDA asked commenters to weigh in on how broadly “food marketing” should be defined. The agency also specifically sought feedback on another sticky area: sponsored events by companies, such as companies which work with schools to reward kids with food parties or coupons for reading a certain number of books.

4th Circuit Affirms $163M Judgment Against FTC Defendant

In a decision affirming the standard of individual liability under the Federal Trade Commission Act, the Fourth U.S. Circuit Court of Appeals upheld a $163 million verdict against the vice president of a company accused of deceptive “scareware” tactics.

The FTC sued Innovative Marketing, Inc., and six executives for violating Section 5 of the FTC Act by running an Internet scam. Innovative tricked consumers into purchasing computer security software by using ads that stated a computer scan found viruses and spyware that needed to be removed. No scans were ever conducted and consumers paid for unnecessary spyware programs.

All of the defendants settled or had a default judgment entered against them except for vice president Kristy Ross. After a bench trial, a federal court judge in Maryland found Ross liable and imposed the $163 million judgment in October 2012.

Ross appealed. She told the federal appellate panel that she was not a “control person” at the company and that the FTC failed to prove that she had authority for and knowledge of the deceptive acts committed by Innovative. She also contended that the federal court lacked the power to award consumer redress.

Neither contention swayed the Fourth Circuit.

Precedent – from the Second, Seventh, Eighth, Ninth, and Eleventh Circuits – supported the district court’s authority to award consumer redress as an equitable adjunct to its injunctive power, the panel wrote. Accordingly, it refused to “obliterate a significant part of the Commission’s remedial arsenal.”

As for Ross’s argument that she could not be held individually liable, she pushed to import a standard of proof from securities fraud cases that extended personal liability only when an individual had actual awareness of a specific deceptive practice and failed to act to stop the deception.

But the Fourth Circuit stuck with the standard relied upon by the district court. “We hold that one may be found individually liable under the Federal Trade Commission Act if she (1) participated directly in the deceptive practices or had authority to control those practices, and (2) had or should have had knowledge of the deceptive practices.

The second prong of the analysis “may be established by showing that the individual had actual knowledge of the deceptive conduct, was recklessly indifferent to its deceptiveness, or had an awareness of a high probability of deceptiveness and intentionally avoided learning the truth,” the panel added.

The court also disagreed with Ross’s challenges to the evidence supporting her liability. The individual liability standard did not require a specific link from Ross to a particular deceptive ad, the panel explained, but only evidence of whether she had authority to control the corporate entity’s practices.

Evidence was presented by the FTC that Ross served in a managerial role, directed the design of particular advertisements, and was a contact person for the purchase of advertising space on Innovative’s behalf.

“Given these facts, the district court could have reasonably inferred that Ross was actively and directly participating in multiple stages of the deceptive advertising scheme – she played a role in design, directed others to ‘add aggression’ to certain advertisements, was in a position of authority, had the power to discipline entire departments, and purchased substantial advertising space,” the panel wrote. “Ross made ‘countless decisions’ that demonstrated her authority to control [Innovative].”

To read the opinion in FTC v. Ross, click here

Why it matters: The standard used by the Fourth Circuit maintains uniformity among the federal appellate courts, the panel said, and comports with the analysis used by the First, Ninth, Tenth, and Eleventh Circuits. To avoid a similarly frightening verdict, executives should be aware of the potential for individual liability under the FTC Act and the standard for culpability that will apply

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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