Advertising Law - August 2015

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In This Issue:

  • Internet Cafes Lose a Bet With the California Supreme Court
  • State AGs Ask High Court to Prevent Return to “Bad Old Days” of Class Actions
  • Seventh Circuit Finds Standing In Neiman Marcus Data Breach Suit
  • Keep Waiting for Marijuana Ads on TV
  • Noted and Quoted . . . Reilly Comments on FCC’s Autiodialer Definition
  • Most Read Stories

Internet Cafes Lose a Bet With the California Supreme Court

In a unanimous decision, the California Supreme Court upheld an injunction against the operators of Internet cafes that offered “sweepstakes” games the Court said were in violation of state anti-gambling laws.

The dispute began when the District Attorney of Kern County filed civil actions against five operators of local Internet cafes. While the sweepstakes systems differed slightly among the defendants, each business sold a product—either Internet time or telephone cards—and provided along with it the opportunity to play sweepstakes games that offered substantial cash prizes.

Customers could obtain an instant win sweepstakes card or play games at a computer terminal to reveal the result. If they selected the computer terminal, they swiped a card or entered a number and then made a choice between playing various slot machine or casino-style games. The sweepstakes operated as an integrated whole, with a third party supplying the software. Connected to terminals at the businesses, the software predetermined the result of each game, with neither employees at the business nor customers exercising any control.

But did the games run afoul of California state law?

The District Attorney argued they violated the anti-gambling provision of Section 330b of the Penal Code. A trial court agreed and granted a preliminary injunction prohibiting the defendants from operating any type of sweepstakes, slot machine, or lottery game. An appellate panel affirmed and the defendants appealed to the state’s highest court.

Section 330b(a) makes it unlawful to possess “any slot machine or device,” while Section 330b(d) defines the term as “a machine, apparatus, or device that is adapted, or may readily be converted, for use in a way that, as a result of the insertion of any piece of money or coin or other object, or by any other means, the machine or device is caused to operate or may be operated, and by reason of any element of hazard or chance or of other outcome of operation unpredictable to him or her, the user may receive or become entitled to receive any piece of money, credit, allowance, or thing of value, or additional chance or right to use the slot machine or device, or any check, slug, token, or memorandum, whether of value or otherwise, which may be exchanged for any money, credit allowance, or thing of value, or which may be given in trade, irrespective of whether it may apart from any element of hazard or chance or unpredictable outcome of operation, also sell, deliver, or present some merchandise, indication of weight, entertainment, or other thing of value.”

The California Supreme Court found that the defendants’ machines met each element of the definition.

First, the court rejected the defendants’ argument that their machines did not require the insertion of a coin or similar object for the games to operate.

“[T]he insertion of a PIN … or the swiping of a magnetic card at the computer terminal in order to activate or access the sweepstakes games and thereby use points received upon paying money at the register (ostensibly to purchase a product) plainly came within the broad scope of the statute,” the court wrote. “The statute expressly includes the catchall phrase ‘by any other means.’ Even though a coin, money or object was not inserted into a slot, the games were commenced by other means analogous thereto which effectively accomplished the same result and, therefore, this element is satisfied.”

As for the so-called “chance element” found in the definition, the court explained that under California gambling law, “chance” means “that ‘winning and losing depend on luck and fortune rather than, or at least more than, judgment and skill.’” The defendants argued that because their machines did not generate the element of chance at the time the customer operated them—as the element of chance had already been generated by the software system—customers playing the games merely received the next result in a previously arranged, sequential order.

But the court disagreed. Each defendant’s system of software, servers, and computer terminals “plainly operated” together as a single apparatus. The Legislature could not have intended that a business could operate slot machines merely by inserting software created elsewhere that presets the result, the court opined.

The fact that consumers could obtain an immediate result without playing at the terminal did not negate the elements that made the computer games illegal slot machines, the court added.

“The fact that users need not swipe a card or enter a number into the computer terminal and then play a casino-style game in order to obtain a result, does not make the system any less of a slot machine when they do swipe the card or enter the number and do play the casino-style game,” the court wrote. “When the user, by some means (here swiping a card or entering a number), causes the machine to operate, and then plays a game to learn the outcome, which is governed by chance, the user is playing a slot machine.”

Two additional circumstances prompted the court’s conclusion. “[W]e think it significant that these systems are specifically designed to cultivate the impression that the user may receive a reward ‘by reason of any element of hazard or chance or of other outcome of operation unpredictable by him or her,’” the court said. In addition, it was clear the defendants’ customers were not just buying Internet or telephone time. “[C]ustomers who ostensibly bought Internet time seemed to spend more time playing the games than using the Internet.”

The court also dismissed concerns that a prohibition of the games would impact national sweepstakes promotions, an argument it called “beyond the scope of this case.”

To read the opinion in People v. Grewal, click here.

Why it Matters: Last year the Legislature amended California’s Business and Professions Code to prohibit sweepstakes like those at issue. The combination of the updated statute and the Grewal decision makes clear that such sweepstakes games are unlawful pursuant to California’s anti-gambling law.

State AGs Ask High Court to Prevent Return to “Bad Old Days” of Class Actions

A group of eight state attorneys general filed an amicus brief with the U.S. Supreme Court, weighing in on the high-profile dispute over standing in privacy lawsuits.

Next term the justices are set to hear Robins v. Spokeo, a case involving Thomas Robins, who sued Spokeo alleging that the people search engine and data aggregator violated the Fair Credit Reporting Act (FCRA) by featuring inaccurate information about him that negatively impacted his job search.

Spokeo moved to dismiss, arguing that Robins did not suffer an injury-in-fact to establish Article III standing, as he merely alleged a technical violation of the statute. A federal court judge agreed, but the Ninth Circuit Court of Appeals reversed. The U.S. Supreme Court granted certiorari to answer the question, “May Congress confer Article III standing upon a plaintiff who suffers no concrete harm, and who therefore could not otherwise invoke the jurisdiction of a federal court, by authorizing a private right of action based on a bare violation of a federal statute?”

The state AGs answered with a resounding “No.”

“A balance must be struck between robust enforcement of laws meant to protect consumers and costly, economically destructive windfall class actions. Fortunately, the Constitution has already struck that balance by requiring actual harm for Article III standing,” the Alabama Attorney General wrote. He was joined by his counterparts from Colorado, Michigan, Nebraska, Tennessee, West Virginia, Wisconsin, and Wyoming.

The states expressed concern that the Ninth Circuit’s decision would upset that balance and result in “abusive, no-harm lawsuits,” potentially “unleash[ing] a torrent of potentially firm-killing class actions for technical statutory violations that have caused no actual harm to plaintiffs.”

What makes the states think such a flood of class actions is likely? Past experience, the AGs explained, looking back to the 1990s when “class actions were out of control” and a veritable “Wild West” existed in the courtrooms. Many states, including Alabama, reacted with class-action reforms, the amicus brief said, and upholding the Ninth Circuit opinion would reverse those efforts.

Affirming the lower court’s opinion would also undermine the Rule 23(a) test, by collapsing the standing analysis, and it would “threaten to return us to the ‘bad old days’ of abusive class litigation,” the AGs wrote. And weakening the injury-in-fact requirement would effectively end the lawsuit, as defendants—facing significant verdicts—are pressured to settle, the states argued.

“Statutory damages serve an important purpose, but they can be abused, particularly when combined with class actions, according to the amicus brief. “This Court should reaffirm that actual harm is necessary to establish Article III standing and restore a balance that respects the interests of both consumers and businesses.”

To read the state attorneys general amicus brief, click here.

Why it Matters: With the potential for a huge impact on class actions generally and privacy lawsuits in particular, the Spokeo case has garnered a great deal of attention even before the justices have heard oral argument. In addition to the state AGs, several companies and trade organizations have filed amicus briefs in support of Spokeo, including the American Bankers Association, Google, National Public Radio, Netflix, the Retail Litigation Center and the U.S. Chamber of Commerce.

Seventh Circuit Finds Standing In Neiman Marcus Data Breach Suit

Reversing summary judgment, the Seventh Circuit Court of Appeals reinstated a data breach lawsuit against Neiman Marcus, and accepted the plaintiff’s contention that fear of future harm stemming from the breach was sufficient to establish standing in the case.

After the retailer revealed that a hacker gained access to the credit card information of roughly 350,000 cards in December 2013, several customers filed suit. Using the typical—and typically successful—defense in data breach lawsuits, Neiman Marcus moved to dismiss the consolidated class actions for lack of standing because the plaintiffs failed to state any actual injuries. A federal court judge agreed.

But the Seventh Circuit, explicitly distinguished Robins v. Spokeo, currently pending before the U.S. Supreme Court, and reversed, finding that the plaintiff pointed to multiple types of injury sufficient to establish standing.

The plaintiffs alleged four injuries: lost time and money resolving the fraudulent charges, lost time and money protecting themselves against future identity theft, the financial loss of buying items at Neiman Marcus that they would not have purchased had they known of the store’s lax approach to cybersecurity, and lost control over the value of their personal information. Two imminent injuries were also on the list: an increased risk of future fraudulent charges and greater susceptibility to identity theft.

Both of the imminent injuries alleged were “certainly impending” enough for the federal appellate panel to find standing. Approximately 9,200 consumers had already incurred fraudulent charges on cards implicated in the breach, the court noted, and while Neiman Marcus provided reimbursement, “there are identifiable costs associated with the process of sorting things out.” “What about the class members who contend that unreimbursed fraudulent charges and identity theft may happen in the future, and that these injuries are likely enough that immediate preventive measures are necessary?”

Although the defendant contended that such injury was too speculative, the court said a material factual dispute existed because the plaintiffs argued they would still have to spend time and money replacing cards and monitoring their credit score. The seminal case on Article III standing, Clapper v. Amnesty International, 133 S. Ct. 1138 (2013), does not “foreclose any use whatsoever of future injuries to support Article III standing,” the panel noted.

“[T]he Neiman Marcus customers should not have to wait until hackers commit identity theft or credit-card fraud in order to give the class standing, because there is an ‘objectively reasonable likelihood’ that such an injury will occur,” the court said. “At this stage in the litigation, it is plausible to infer that the plaintiffs have shown a substantial risk of harm from the Neiman Marcus data breach. Why else would hackers break into a store’s database and steal consumers’ private information?”

Considering the other alleged injuries, the court said the purported lost time and money protecting the plaintiffs against future identity theft and fraudulent charges also sufficed to establish standing. Neiman Marcus offered affected customers one year of credit monitoring and identity theft protection and it “is unlikely that it did so because the risk is so ephemeral that it can safely be disregarded,” the three-judge panel noted. The cost of credit monitoring “easily qualifies” as a concrete injury.

The other asserted injuries were more problematic, the court found. Extending the idea of product liability from a particular product to the operation of the entire store by accepting the argument that plaintiffs would have shunned Neiman Marcus had they known about its poor data security “is a step that we need not, and do not, take in this case.” And federal law does not recognize a property right in the loss of private information, the panel added.

After finding injury-in-fact, the court said the plaintiffs established the other two prerequisites for standing: causation and redressability. Given the other data breaches that occurred during the 2013 holiday season, Neiman Marcus countered that the plaintiffs could not trace their injuries to the breach of its servers, but the court said the argument should be raised later as a defense. And because mitigation expenses and future injuries remained, the panel also rejected the defendant’s position that the plaintiffs’ injuries could not be redressed by a judicial decision because they had already been reimbursed for the fraudulent charges.

To read the decision in Remijas v. Neiman Marcus, click here.

Why it Matters: The Remijas decision should be required reading for retailers. Although the Seventh Circuit did reject some of the alleged injuries as a basis for standing, the panel reinstated the lawsuit based on the class’s allegations of an increased risk of future fraudulent charges and greater susceptibility to identity theft. The holding will likely spur similar lawsuits in the wake of data breaches going forward.

Keep Waiting for Marijuana Ads on TV

Is it permissible to run an advertisement for a marijuana product on television in a state that has legalized both the medical and recreational use of the drug?

One Denver, Colo. TV station has decided not to find out after considering running a commercial for Neos, a vaporizer and cannabis oil company. The ABC affiliate initially approved a 15-second spot from the company to air prior to Jimmy Kimmel Live!

As required by Colorado law, more than 70 percent of the show’s audience must be at least 21 years old before the spot could be aired. Cannabrand, the agency that worked with Neos, ensured that the commercial did not feature any drug imagery (such as the vape pen or the marijuana oil used in it), instead it focused on young adults hiking, playing guitars, and hanging out at a club.

But concerned about federal oversight, the station declined to air the Neos “Adventurous Life” ad, and any commercials related to pot. Although the medicinal use of marijuana is legal in 23 states, with recreational use decriminalized in four states and Washington, D.C., marijuana remains illegal under federal law.

“The airways are federally regulated, and since cannabis is still considered an illegal substance federally, that was where the conflict came into play,” Jennifer DeFalco, creative director and founder of Cannabrand, an agency devoted entirely to cannabis, told AdAge.

A spokesperson for the KMGH affiliate said it now intends to wait for a clear signal from the feds before running a marijuana ad. “[I]f there are changes or more clarity provided to the media industry to let the industry know one way or another, rather than having uncertainty about it,” then the station would consider airing a marijuana ad, Valerie Miller said.

To watch the Neos “Adventurous Life” commercial, click here.

Why it Matters: The question of whether a station could air an ad in a state that has legalized marijuana remains unanswered—for now. As the number of jurisdictions decriminalizing the drug continues to increase, the issue will undoubtedly arise again. “We’re interested to see how this all unfolds, as this is unchartered territory for the industry,” Cannabrand said in a statement, adding that the agency hopes to work with Colorado’s Marijuana Enforcement Division to “try to find a way where we can get more distinct guidelines about what kind of television advertising we can and cannot do.”

Noted and Quoted . . . Reilly Comments on FCC’s Autiodialer Definition

Direct Marketing News interviewed Christine Reilly, co-chair of the firm’s TCPA Compliance and Class Action Defense practice, in an article on the Federal Communications Commission’s recent order interpreting the Telephone Consumer Protection Act.

Immediately following the ruling's release on July 10, petitions challenging the FCC's authority were filed in appeals court regarding the FCC's broad definition of what constitutes an “autodialer.” “If you have a software system with an autodialer option, that's now deemed an autodialer in the FCC's ruling. That contrasts with other courts that have said you can't make a case about something that may be done in the future. You have to look at how the calls are currently being made,” said Reilly. The article, “Autodialers on High Alert Over FCC Ruling,” was published on July 29. Read it here.

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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