Advertising Law -- Dec 06, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

FTC Settles With Mobile Crammers

In the Federal Trade Commission’s first lawsuit over mobile cramming, Wise Media and two individual defendants agreed to a permanent ban on placing unauthorized charges on telephone bills to settle allegations of cramming charges on consumers’ cell phone bills.

The Atlanta-based company’s actions resulted in more than $10 million in unauthorized billing for “premium services” such as text messages featuring horoscopes and love tips, the agency said. Wise Media signed up and repeatedly charged mobile phone users $9.99 per month for the texts without their knowledge or permission, according to the FTC’s complaint.

Cramming has long been recognized as a problem on landline phone bills (the FTC noted that it has brought more than two dozen such cases) and the scam is now being repeated in the mobile ecosystem. “This case involved a new delivery system for an old-fashioned scam,” Jessica Rich, Director of the FTC’s Bureau of Consumer Protection, said in a statement about the settlement. “Getting consumers’ consent before charging them is as basic a consumer protection as you’ll find, whether you’re dealing with a brick and mortar store or with a mobile payment provider.”

The defendants sent texts to consumers suggesting that they had already subscribed to the service. Those that didn’t ignore the texts and responded that they didn’t want the service continued to get charged, the agency alleged. Many consumers either didn’t notice the charges on their bills or – because of the abbreviated manner in which the charge was listed and the fact it did not designate Wise Media as the source of the charge – did not understand.

Mobile phone users who did manage to decipher the charges made by Wise Media faced a nearly impossible task to get the charges stopped and obtain a refund, the agency said.

In addition to the ban on cramming, the defendants are prohibited from using any other method to charge consumers for goods or services without express agreement to be charged or assisting others in placing unauthorized charges on telephone bills. The deal also included an almost $11 million judgment, most of which was suspended due to an inability to pay, with the exception of assets of the individuals and the remaining assets of Wise Media, estimated to be about $500,000.

To read the complaint and stipulated agreement in FTC v. Wise Media, click here

Why it matters: In addition to the FTC, state authorities also have their eye on cramming. A coalition of 45 state attorneys general recently reached an agreement with three of the biggest mobile phone carriers to stop allowing “premium SMS” charges on users’ phone bills. Several of the major national wireless carriers will no longer allow the third-party charges on their customers’ mobile bills, which the AGs said accounted for the “overwhelming majority” of cramming complaints.

The FTC and the Internet of Things

The Internet of Things was the focus of a Federal Trade Commission workshop on November 20, featuring panels on the Smart Home, Connected Health and Fitness, Connected Cars, and Privacy and Security in a Connected World.

Defined by the agency as the increasing “ability of everyday devices to communicate with each other and with people,” the Internet of Things presents benefits and challenges, speakers acknowledged.

In her opening remarks, FTC Chairwoman Edith Ramirez noted that the increasing collection of data will require greater transparency, simplified choice, and the use of privacy by design by companies. “With really big data comes really big responsibility,” she said. “It is up to the companies that take part in this ecosystem to embrace their role as stewards of the consumer data they collect and use.”

Connected devices that track sensitive personal information – such as fitness data or personal health – particularly need to focus on security risks, she noted. “I know that we can find a way to reap the rewards from our connected future while mitigating the privacy and security challenges that it brings,” she said. “The purpose of today’s program is to figure out how.”

During the Smart Home panel, the privacy and security implications of connected appliances, such as an oven that allows users to remotely set the temperature, were discussed. Many consumers may not understand the potential security implications from the collection of data stored in such products or realize how their information is shared, panelists said.

While larger companies are better equipped to build security protections into their technology, speakers expressed concern that smaller companies may not utilize Privacy by Design to protect consumers. Or, as Craig Heffner of Tactical Network Solutions put it, “They’ll make rookie mistakes because they’re rookies.”

The panel on Connected Health and Fitness addressed the challenge of providing notice and choice to consumers when many of the devices in this category – including ingestible and implantable devices – may not even have screens. University of Colorado School of Law professor Scott Peppet explained how he spent his summer analyzing the privacy policies of the top 30 fitness devices. Many either did not have a privacy policy at all or had a policy that did not accurately describe the company’s data collection and use, he said.

Connected Cars provide a multitude of benefits for consumers, panelists noted, particularly the ability to communicate with first responders in the event of an emergency. But technologically advanced cars present security issues if hackers gain access to the car’s control systems, such as the engine or brakes; and privacy issues are raised by the data stored in cars, which third parties such as insurers could be interested in.

The last panel, Privacy and Security in a Connected World, addressed the topic with hypotheticals about setting up connected devices in a home to be controlled by a smartphone and using a smart device to train for a marathon.

Why it matters: In her closing remarks at the workshop, Jessica Rich, Director of the FTC’s Bureau of Consumer Protection, said the agency does not intend to issue new regulations on the Internet of Things in the near future. However, the Commission will release a report on the subject in 2014 that includes recommended best practices for smart devices, and Rich encouraged comments to be submitted to the agency. Speakers from the FTC also noted that a lack of regulation does not mean the absence of enforcement actions, as the agency’s existing powers allow it to regulate deceptive conduct in the Internet of Things. Case in point: the complaint filed against TRENDnet, a company that claimed camera feeds for home security and baby monitoring were “secured viewing” but had faulty software that left the feeds vulnerable to hacking, resulting in users’ videos being posted online.

Google Books = Fair Use

After eight years of litigation, a federal court judge granted summary judgment to Google in its copyright fight with the Authors Guild over the company’s book scanning efforts, finding that fair use protected the project.

“In my view, Google Books provides significant public benefits,” U.S. District Court Judge Denny Chin wrote. “It advances the progress of the arts and sciences, while maintaining respectful consideration for the rights of authors and other creative individuals, and without adversely impacting the rights of copyright holders.”

In 2004, Google began digitally copying the books found in several major research libraries. More than 20 million books have been scanned to date, allowing users to search text “snippets” of the works. Because Google did not obtain permission from copyright holders for the use of their works, individual authors and the Authors Guild brought suit alleging copyright infringement.

Judge Chin found “many” benefits to Google’s project. “Google Books provides a new and efficient way for readers and researchers to find books. It makes tens of millions of books searchable by words and phrases,” he wrote, adding that it has become an essential research tool for librarians and researchers and is now taught as part of the information literacy curriculum to students at all levels.

Humanities scholars in particular have benefited, he added, as they can now analyze massive amounts of data and derive insight into “fields as diverse as lexicography, the evolution of grammar, collective memory, the adoption of technology, the pursuit of fame, censorship, and historical epidemiology.”

Access to books has also been expanded by the project, helping underfunded libraries by providing digitalized copies of books and increasing access to those with disabilities. The project also benefits authors and publishers, Judge Chin said. An “About the Book” page featuring links to booksellers and libraries offering the book will “generate new audiences and create new sources of income.”

After a lengthy procedural history – a settlement deal rejected by Judge Chin in 2011 and a certified class decertified by the Second U.S. Circuit Court of Appeals – the court said Google’s fair use defense was dispositive.

“Google’s use of the copyrighted works is highly transformative,” Judge Chin wrote. “Google Books digitizes books and transforms expressive text into a comprehensive word index that helps readers, scholars, researchers, and others find books. Google Books has become an important tool for libraries and librarians and cite-checkers as it helps to identify and find books. The use of book text to facilitate search through the display of snippets is transformative.”

In addition, the project has transformed book text into data for substantive research purposes, the court said, opening up new fields of research. “Words in books are being used in a way they have not been used before.” Because Google Books is not a tool to read books, it does not supersede or supplant books, and the company does not engage in the direct commercialization of copyrighted works, the court noted.

“Google does, of course, benefit commercially in the sense that users are drawn to the Google websites by the ability to search Google Books. While this is a consideration to be acknowledged in weighing all the factors, even assuming Google’s principal motivation is profit, the fact is that Google Books serves several important educational purposes,” Judge Chin wrote.

Finding that the first factor – the purpose and character of use – “strongly” favored a finding of fair use, given Google’s highly transformative use, the court said the second factor, the nature of the books, also weighed in favor of fair use. Weighing “slightly against” a finding of fair use was the amount and substantiality of the portion used, as the court recognized Google scans the full text of the books.

The fourth factor, the effect of Google’s use on the potential market or value for the books, also weighed strongly in favor of fair use, Judge Chin said. Users cannot obtain the entire book via Google Books, and the project actually “enhances the sales of books to the benefit of copyright holders,” he found. “Google Books provides a way for authors’ works to become noticed, much like traditional in-store book displays. . . . In this day and age of online shopping, there can be no doubt that Google Books improves books sales.”

With the factors tipping the scale in favor of fair use, Judge Chin granted summary judgment to Google.

To read the opinion in The Authors Guild v. Google, click here.

Why it matters: The ruling was an overwhelming victory for Google, with Judge Chin singing the praises of Google Books throughout the decision, even holding that the project actually benefits the plaintiffs by generating new audiences and creating new sources of income for authors and publishers. “Indeed, all society benefits,” he wrote. The Authors Guild disagreed, releasing a statement that it plans to appeal the decision. “Google made unauthorized digital editions of nearly all of the world’s valuable copyright-protected literature and profits from displaying those works,” Paul Aiken, executive director of the group, said. “In our view, such mass digitization and exploitation far exceeds the bounds of fair use.”

FTC’s Fingers Do the Walking to the Courthouse in Suit Against Yellow Pages Scam

Although the Federal Trade Commission is busy with twenty-first century issues such as the Internet of Things, the agency also announced an action against a more old-fashioned deceptive practice based on the Yellow Pages.

Three individuals and their 15 companies operated a Canadian-based scam targeting churches and small businesses in the United States, the agency said, raking in more than $14 million for listings in online business directories. The defendants made phone calls to potential targets to purportedly “verify” contact information or “confirm” existing directory listings; they then sent bills averaging $499.99 featuring a “walking fingers” image.

Some entities agreed to pay the bill after the defendants played a recorded phone conversation of the business verifying the contact information, the FTC said. Those that did not pay received collection calls and dunning notices (often with additional interest charges, late fees, and legal fees) from two debt collection agencies created by the defendants. The scam generated more than 13,000 complaints, the agency said.

According to the complaint, the defendants violated Section 5(a) of the Federal Trade Commission Act by making three different misrepresentations: that a preexisting business relationship existed with the entities they called, that the entities agreed to pay for the directory listings, and that the companies owed them money.

A federal court judge halted the defendants’ operations, froze their assets, and ordered a notice about the lawsuit posted on all of the defendants’ websites. The agency is seeking a permanent injunction and restitution.

To read the complaint and temporary restraining order in FTC v. Modern Technology, Inc. click here

Why it matters: While addressing burgeoning issues such as mobile cramming and the Internet of Things, more traditional deceptive practices have not escaped the FTC’s notice and enforcement activity.

Opt-Out Violation of TCPA Will Cost Up to $3.3M

For one company, the cost of faxed advertisements with an incomplete opt-out notice could reach $3.3 million based on a recently approved settlement in a Telephone Consumer Protection Act class action.

A class of plaintiffs filed suit under the TCPA after receiving fax ads from California-based Balboa Capital Corp. that lacked a sufficient opt-out notice. According to the class, the roughly 973,879 faxes sent by the equipment leasing company did not include a fax number in order to send an opt-out request and failed to inform recipients that they needed to include their own fax number in the request.

After the trial court certified a partial class and the parties filed dueling summary judgment motions, the court said it would withhold a ruling until a settlement conference was held. The parties then reached an agreement.

Balboa promised to fund a settlement of at least $2.3 million and up to $3.3 million for a nationwide class of recipients who were sent faxes over a four-year period. The fund will also pay for $10,000 class representative incentive payments and attorney’s fees and costs.

The final dollar amount will depend on the number of class members. If the class claims, incentive awards, and attorney’s fees and costs are greater than or equal to $2.3 million but less than or equal to $3.3 million, class members will receive a payment between $175 and $275, depending on the number of faxes they received. Claimants who can actually present a copy of the fax they received will be eligible for a $500 payment.

Alternatively, if the total payment does not reach $2.3 million, the remaining settlement fund will be distributed in pro rata shares to the class up to a maximum of $1,500 per fax. If money still remains, the parties will agree upon a charity to receive a cy pres distribution.

Under the final scenario, if the total amount goes over the $3.3 million cap, the payment to each class member will be reduced on a pro rata basis. The deal also includes a permanent injunction prohibiting Balboa from fax advertising in violation of the TCPA.

U.S. District Court Judge Josephine L. Staton granted preliminary approval of the deal with one caveat. Balboa agreed not to object to counsel fees up to $1.1 million. But even if the settlement fund maximizes the agreed-upon $3.3 million, attorney’s fees and costs would constitute one-third of the total, Judge Staton noted; if the fund doesn’t go above $2.3 million, then the attorney’s fees and costs would be almost half of the common fund.

While writing that it would be “premature to make any definitive ruling on the reasonableness of class counsel’s fees and costs request at this stage,” the benchmark for reasonable class fees in the Ninth U.S. Circuit Court of Appeals is 25 percent of the common fund, the court said. “Class counsel will have to justify an upward departure from the Ninth Circuit’s fees benchmark,” Judge Staton warned.

To read the order in Vandervort v. Balboa Capital Corp., click here.

Why it matters: As part of the court’s consideration regarding whether the settlement was “fair, adequate, and reasonable under the circumstances,” Judge Staton analyzed the strength of the plaintiffs’ case. Noting that the Ninth Circuit has “yet to address the issue of whether an opt-out notice that substantially complies with the requirements of the TCPA is sufficient under the TCPA even where the notice does not comply with all the specific requirements of the law,” coupled with Balboa’s “vigorous defense,” the class’s decision to settle was reasonable, she concluded.

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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