Advertising Law - August 2014 #3

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

  • FTC: Telemarketing Sales Rule Ripe For Review
  • FTC Studies Mobile Shopping Apps
  • Crumbs’ Privacy Policy Crumbles In Bankruptcy
  • FDA Needs To Build On Label Changes, Lawmakers Say

FTC: Telemarketing Sales Rule Ripe For Review

It’s time to review the Telemarketing Sales Rule, the Federal Trade Commission has announced.

Enacted in 1995, the Telemarketing Sales Rule (the Rule) has been frequently updated over the years, including the addition of the Do Not Call Registry in 2003 and the changes made in 2008 and 2010. Last year, the agency proposed amendments to the Rule that would ban certain payment methods that are commonly used by “con artists” and scammers. They include unsigned checks, “payment orders” that have been “remotely created,” “cash-to-cash” money transfers, and “cash reload” mechanisms.

The review is part of the agency’s ongoing check-up of its rules and regulations as the FTC considers whether the Rule should be amended or improved. The agency first asked for general comments on the Rule, whether there is a continuing need for the Rule, and what kind of impact it has on consumers, industry members, and small businesses.

The agency then requested public comment on three specific issues, including the use and sharing of pre-acquired account information in telemarketing and inbound calls from consumers responding to negative option and free trial offers in combination with media ads.

Specifically the Commission asked whether it should “consider a prohibition on any use of pre-acquired account information in external upsells? If so, why? If not, why not, and what costs and burdens would such a requirement impose on businesses and consumers?”

The agency also queried: “Should telemarketers and sellers who receive inbound calls from consumers in response to general media ads for a negative-option product or service receive the same disclosures currently required for outbound telemarketing calls? Why or why not?”

Comments on the possibility of adding a requirement that sellers and telemarketers retain records of all calls placed were also requested.

To read the Federal Register notice of the FTC’s request for comment, click here.

Why it matters: In addition to general lines of inquiry about the continuing need for and effectiveness of the Telemarketing Sales Rule, the FTC centered its questions on the use and sharing of pre-acquired information, required disclosures for inbound calls for negative option and free trial offers, and possibly requiring telemarketers to keep records of calls placed. Industry members have until October 14 to file a comment.

FTC Studies Mobile Shopping Apps

Are mobile shopping apps providing consumers with necessary information and clear details about their privacy policies?

Not necessarily, according to a new report from the Federal Trade Commission.

“What’s the Deal? An FTC Study On Mobile Shopping Apps” examined 121 retail mobile applications found in the Google Play and Apple App stores, including price comparison apps, “deal” apps offering coupons or discounts, and in-store purchase apps.

The agency found that many of the apps failed to explain key information prior to download and had “vague” privacy policies. Based on the findings, the report made three recommendations.

Of the 30 in-store purchase apps reviewed, 14 did not disclose any dispute resolution or liability limits information prior to download; of the 16 that did, seven disclaimed all liability. Accordingly, the agency recommended that developers of in-store purchase apps provide clear information on dispute resolution and liability limits for consumers prior to download, particularly if a stored value payment method is utilized.

They should also be provide consumers with a clear description of how the app collects, uses, and shares consumer data, the agency said. A majority of the shopping apps in all three categories disclosed “a wide array of information,” the FTC said, such as Social Security numbers, names and addresses, and detailed purchase information.

But the privacy policies “often used vague language” and reserved broad rights to collect, use, and share data, according to the report. Thirty-three percent of in-store purchase apps reserved the right to share data without restriction. By making information about data-sharing clear, consumers can better “evaluate and compare apps” based on their privacy policies, according to the FTC.

Finally, the FTC advised developers to ensure that “data security promises translate into sound data security practices,” and encouraged “all companies to provide strong protections for the data they collect.”

To read the report, click here.

Why it matters: The FTC said the report builds on the findings of a workshop held in 2012 and a subsequent report on mobile payments issued last year. While the FTC found that most of the apps it reviewed had a privacy policy, those privacy policies were vague and reserved broad rights to collect, use and share data without meaningful information about how the apps actually use and share data. The FTC is looking for less boilerplate and more real details to help consumers evaluate and compare data practices among apps before app installation.

Crumbs’ Privacy Policy Crumbles In Bankruptcy

Providing an important reminder about the intersection of privacy law and bankruptcy, a bankruptcy judge has ordered the appointment of a consumer privacy ombudsman in the Chapter 11 case filed by Crumbs Bake Shop.

Crumbs – a publicly held company selling cupcakes and other baked goods – filed for Chapter 11 protection in July in the face of severe liquidity problems. The company then filed a motion seeking permission from the U.S. Bankruptcy Court in New Jersey for an auction sale that would include Crumbs’ intellectual property, consisting of such data as names, phone numbers, and addresses.

The U.S. Trustee quickly responded by filing a motion requesting that the court appoint a privacy ombudsman.

Auctioning the customer lists would violate Crumbs’ privacy policy, the trustee said, which stated that the company “is highly sensitive to the privacy interests of consumers and believes that the protection of those interests is one of its most significant responsibilities.”

The policy contained just three exceptions, which stated that customer information would be shared “only if we are compelled to do so by order of a duly-empowered governmental authority, we have the express permission of the consumer, or it is necessary to process transactions or provide our services.”

None of these exceptions applied to a bankruptcy auction, the trustee argued. “Since the sale of the customer lists to a third party does not fall within one of the carved-out exceptions, the sale of the lists is prohibited,” the trustee wrote in her motion. “To read the policy differently would render the debtors’ privacy policy meaningless, leading consumers to believe their personal information is protected when in fact, it is not.”

To reconcile the inconsistency between the privacy policy and the proposed auction, the trustee advocated for the appointment of a consumer privacy ombudsman pursuant to the Bankruptcy Code, 11 U.S.C. Section 363(b)(1)(B).

Once the ombudsman has been appointed, that provision would allow the sale to go forward only with the court’s permission after a hearing “giving due consideration to the facts, circumstances, and conditions of such sale” and “finding that no showing was made that such sale…would violate applicable nonbankruptcy law.”

To help guide the court’s consideration, the ombudsman would provide information at the hearing regarding the potential losses or gains of privacy and possible costs or benefits to consumers in the event of the sale as well as alternatives that could mitigate privacy losses or costs to consumers.

Bankruptcy Court Judge Michael B. Kaplan agreed, granting the trustee’s order.

To read the U.S. Trustee’s motion for the appointment of a consumer privacy ombudsman, click here.

To read the court’s order granting the motion, click here.

Why it matters: While no company wants to plan for its own bankruptcy, the possibility should be a consideration when drafting a privacy policy. Including an exception in a privacy policy that allows for the sale or transfer of information collected in a bankruptcy or other sale or merger of the company is a must.

FDA Needs To Build On Label Changes, Lawmakers Say

The Food and Drug Administration should establish a standardized front-of-package labeling system and provide definitions for contentious terms like “natural,” two federal lawmakers have declared.

Sen. Richard Blumenthal and Rep. Rosa DeLauro (both D-Conn.) sent a letter to FDA Commissioner Margaret Hamburg in response to the agency’s request for comment on the first updates to the Nutrition Facts label in 20 years.

The FDA released proposed changes earlier this year that modernized the serving sizes to reflect the amounts people currently eat and emphasized certain elements like calorie content and servings per container.

But the legislators asked for more.

“While we are pleased that the Nutrition Facts label has been redesigned and updated to reflect the latest nutrition science, we are disappointed that the FDA has remained silent on many critical features that could help consumers make healthier choices to combat the dangerous obesity and diabetes epidemics our country faces,” the legislators wrote.

Sen. Blumenthal and Rep. DeLauro proposed some additional tweaks: defining a daily value for added sugars “so that consumers can understand added sugars in context,” revamping the ingredients list to make it more readable (like grouping sugars together), and adding a requirement for the total amount of caffeine be disclosed.

Conventional foods with added caffeine are on the rise and given “well-documented health concerns regarding excessive caffeine consumption by children and pregnant women, we recommend that FDA require that the amount of caffeine in products be disclosed,” the letter stated.

The FDA should also take advantage of the changes to the labeling system and institute a front-of-package (FOP) labeling system, as recommended by the Institute of Medicine, the lawmakers advised. Food manufacturers “use a plethora of marketing techniques on the FOP to attract consumers and convince them to buy a particular food product.” The establishment of a single, standard FOP labeling system to appear on all products “is necessary to protect consumers from the dizzying array of FOP labels, and the current industry-led voluntary FOP standardization effort that can easily be used to conceal the poor nutritional quality of many products.”

New definitions would also be beneficial to consumers, Sen. Blumenthal and Rep. DeLauro said. “Food packaging today also contains too many unregulated claims that serve to only further confuse consumers.” Terms such as “whole wheat,” “natural,” and “healthy” should all be defined by the FDA. For example, products that contain artificial or synthetic ingredients should not be allowed use the claim “natural.”

“We have high hopes that with these additional recommendations, the new Nutrition Facts label will help steer consumers towards a healthier diet, and will do much to increase the health and well-being of the American public,” they concluded.

To read the letter, click here.

Why it matters: Some of the alterations suggested by the lawmakers would pose significant burdens to food manufacturers. The switch to a FOP labeling system would require major changes in how products are packaged and labeled. As for the new definitions, given the FDA’s reluctance to wade into the quagmire of “natural” claims, it seems unlikely the agency will change its mind now.

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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