Advertising Law -- Dec 14, 2012

by Manatt, Phelps & Phillips, LLP

In This Issue:

Hotel Web Sites Receive Warning Letters From the FTC

Online hotel reservation sites may be in violation of Section 5 of the Federal Trade Commission Act by misrepresenting the hotel room reservation price that consumers can expect to pay, the agency said in recent warning letters.

The Federal Trade Commission sent 22 letters to unnamed recipients, alleging that the sites engage in “drip pricing,” advertising only a fraction of a product’s total price and then adding in additional costs as the buying process continues.

Such pricing is commonly the subject of complaint from consumers, the agency said, specifically “resort fees.” The fees are mandatory charges by hotels for amenities like Internet access, use of exercise and pool facilities, or newspaper delivery during a consumer’s stay. “These mandatory fees can be as high as $30 per night, a sum that could certainly affect consumer purchasing decisions,” the FTC said in its letters.

Some online hotel reservation Web sites list the resort fee close to – but separate from – the “total” or “estimated” prices for consumers. Other sites include an asterisk with the quoted price that leads a consumer to a different page on the site where the resort fee is disclosed, typically in fine print, the FTC said. And some sites fail to identify resort fees anywhere but inform consumers that other fees may apply.

The letters from Mary K. Engle, the FTC’s Associate Director for Advertising Practices, explained how these practices may violate the law, stating that online hotel reservation sites should include in the quoted total price any unavoidable and mandatory fees, such as resort fees, that consumers will be charged to stay at the hotel. The letters continued, noting “While a hotel reservation site may break down the components of the reservation estimate (e.g., room rate, estimated taxes, and any mandatory, unavoidable fees), the most prominent figure for consumers should be the total inclusive estimate.”

After reviewing numerous hotel Web sites, the agency sent its letters to sites that failed to include mandatory resort fees in reservation quotes to consumers, strongly encouraging them to review their sites to ensure they are not misrepresenting the total price consumers can expect to pay when making a reservation. The FTC also alerted the recipients of the letters that it may take action to enforce and seek redress for any violations of the FTC Act as the public interest may require.

To read a sample warning letter, click here.

Why it matters: Companies should be on notice that regulators are watching – particularly online – for sellers to clearly and conspicuously disclose the total cost of a product or service, including upgrades, add-ons, and additional costs like “resort fees.”  In a statement about the letters, FTC Chairman Jon Leibowitz stated, “Consumers are entitled to know in advance the total cost of their hotel stays . . . so-called ‘drip pricing’ charges, sometimes portrayed as ‘convenience’ or ‘service’ fees, are anything but convenient, and businesses that hide them are doing a huge disservice to American consumers.” The agency’s interest in the disclosure of mandatory hotel fees follows attorney general activity condemning this practice. For instance, the Florida AG has entered into settlements with hotel companies requiring them to disclose mandatory fees like those described in the FTC letter, in addition to requiring independent third-party travel agencies selling hotel rooms on the companies’ behalf to disclose the same. It should be interesting to see whether the FTC extends liability to third parties engaged in this practice on a hotel’s behalf.

Not So Lucky? Jeans Brand to Pay $10M to Settle Text Message Suit

Plaintiffs in a class action against Lucky Brand Dungarees may be entitled to up to $100 each for receiving unsolicited promotional texts advertising discounted jeans in violation of the Telephone Consumer Protection Act (TCPA).

A federal district court judge in California granted preliminary approval to a settlement in the suit, estimated to cost Lucky nearly $10 million for the roughly 216,711 class members. Between August 24 and September 15, 2008, Lucky’s marketers sent nine different text messages to consumers without their prior express consent as part of a back-to-school promotion, including statements like “Get $25 off Lucky Brand Jeans.” 

Under the terms of the settlement, defendants agreed to create a fund totaling $9.9 million. After payment of settlement administration expenses, the incentive award to the named plaintiffs, and the class counsel fee award (not to exceed $2.4 million), class members will be able to request payments of up to $100 each. If the total amount required to pay each approved claim would exceed the amount in the settlement fund at that point, each class member will receive a pro rata share.

The marketing partner defendants also agreed that they would receive express consent – in the form of clear and conspicuous writing – before sending text messages in the future. Furthermore, the claim form will provide class members with the option to remove their cellular telephone number from databases from which future text messages could be sent by or on behalf of the defendants.

Subject to final approval at a hearing scheduled for May 10, 2013, U.S. District Court Judge Maxine M. Chesney found the settlement “fair, reasonable, adequate, and in the best interests of the class.”

To read the settlement agreement in Robles v. Lucky Brand, click here.

To read the court’s order preliminarily approving the settlement, click here.

Why it matters: The settlement is the most recent example of a text message ad campaign gone wrong. And while $10 million is not pocket change, other recent defendants in similar TCPA suits have agreed to pay substantially more, including Sallie Mae’s $24 million agreement and Jiffy Lube’s $47 million agreement. Papa John’s pizza chain is also currently facing potential liability of up to $250 million in a recently certified TCPA class action.

NAD: Environmental Claims for Cookware Products Are Overstated

GreenPan, the maker of non-stick cookware, should modify or discontinue certain advertising claims, including that its products are “eco-friendly” and “healthier and safer” than other non-stick cookware, the National Advertising Division recently recommended.

Teflon manufacturer E.I. DuPont de Nemours challenged GreenPan’s advertising, which included claims like “No potentially dangerous chemicals inside”; “Completely PTFE-free”; and “GreenPan products are healthier, safer and better for the environment than all PTFE products.” 

DuPont manufactures non-stick coating systems for cookware using PTFE. Traditionally, non-stick cookware was manufactured using perfluorooctanoic acid, or PFOA, which GreenPan argued has been shown to be unsafe, unhealthy, and environmentally harmful. DuPont contended that GreenPan’s claims conflate PFOA with PTFE and convey the false and disparaging message that its products are healthier and safer than PTFE-coated products, including Teflon.

Although GreenPan’s claims that its products are free of both PFOA and PTFE are literally true, “the frequent juxtaposition of GreenPan’s PFOA-free claims with broad ‘eco-friendly’ claims and tag lines, and the frequent juxtaposition of its PTFE-free claims with broad health and safety claims, transformed what may be compositional claims when standing alone into comparative superiority claims,” the NAD concluded.

The NAD recommended that GreenPan discontinue or modify its PFOA-free claims to avoid conveying the unsupported message that PTFE coatings are made with PFOA and, therefore, that its own products are better for the environment and healthier and safer than PTFE products. However, the NAD noted that GreenPan could still describe the composition of its products as PFOA-free and PTFE-free and state that the GreenPan manufacturing process is more environmentally friendly than using a PFOA processing aid, as long as it does so in a nonmisleading manner and does not expressly state or impliedly suggest product superiority over all PTFE non-stick coatings. The NAD also allowed GreenPan to keep its name, finding that no evidence existed of consumer confusion.

The NAD also expressed concern about GreenPan’s general, unqualified environmental claims, including the tagline “Health*Environment*Convenience.” This concern comes on the heels of the FTC’s recently updated Green Guides, which advised marketers to avoid making unqualified general environmental benefit claims because “it is highly unlikely that marketers can substantiate all reasonable interpretations.” Thus the NAD recommended that GreenPan discontinue its unqualified “eco-friendly” claims, as it “could reasonably convey the message that GreenPan Thermolon cookware has far-reaching environmental benefits or that it has no negative environmental impact,” in contravention of the Green Guides.

The NAD further found that the combination of unqualified claims with the GreenPan name and imagery like dewy grass blades and a green apple in the logo conveys “the message that the product is more environmentally beneficial overall because of the particular touted benefits.” Despite the accuracy of the claims – PFOA-free, PTFE-free, no harmful fumes – “there is no evidence analyzing the trade-offs resulting from the specified benefits to substantiate that the product is in fact more environmentally beneficial overall than competing non-stick pans. Nor does any other evidence support the message of broad environmental benefits conveyed by the challenged claims,” the NAD concluded. It recommended that such claims be discontinued.

The self-regulatory body also recommended that GreenPan follow the FTC’s Green Guides in developing future marketing concerning the recyclability of its product packaging.

To read the NAD’s press release about the decision, click here.

Why it matters: Environmental claims continue to be a hot topic for regulators. This decision highlights two important lessons for advertisers making green claims. First, environmental marketing claims should not overstate – directly or by implication – an environmental attribute or benefit. Thus, marketers may want to avoid making general environmental benefit claims. Second, a claim that is literally true may, in the context in which it is presented, still convey a message that is false or misleading.

Another “Natural” False Advertising Suit Survives

A federal district court judge in California denied in part a motion to dismiss, allowing claims against The Hershey Company to continue, potentially holding the company liable for falsely advertising its Special Dark Cocoa and Special Dark Kisses as “a natural source of flavanol antioxidants.”

The putative class action plaintiff claims he bought the Hershey products – at a higher price – because of the “natural” label.

Hershey filed a motion to dismiss the suit on several grounds, including that the cause of action was preempted by the Food and Drug Administration regulations, that plaintiff lacked standing, and that plaintiff failed to state a claim upon which relief could be granted. 

While the federal Food, Drug, and Cosmetic Act and the Nutrition Labeling and Education Act both regulate food labeling and advertising, the court found the plaintiff had not brought suit to enforce the federal statutes; rather, the action was based on parallel state laws, such as the Sherman Food, Drug and Cosmetic Law, that prescribe labeling requirements that are similar, if not identical, to the requirements under the FDCA and NLEA. The court explained that the state duties parallel, rather than add to, federal requirements and concluded that, contrary to defendant’s contention, complying with the demand requested by plaintiff in this cause of action would not require that defendant undertake food labeling or representation different from the provisions of the FDCA or the rules and regulations promulgated by the FDA.

The court also found plaintiff had alleged facts sufficient for Article III standing, based on plaintiff’s argument that he would not have purchased the products in question had he known the truth about the products because of proper labeling, as there were cheaper alternatives at his disposal.

To read the court’s order in Khasin v. The Hershey Company, click here.

Why it matters: The Hershey case is the latest “natural” claim lawsuit for the food industry, with dozens of other similar class actions filed this year. While there continues to be much uncertainty in this area, at least in California, defendants will be unable to get their suits dismissed on preemption grounds where plaintiffs can allege an injury-in-fact, since the state laws mirror the federal law and do not impose any additional food labeling requirements.

Facebook Proposes More Changes Affecting User Privacy

Facebook is again facing controversy over proposed changes to the site’s Data Use Policy that critics argue may result in privacy violations for users.

The night before Thanksgiving the social networking site sent an e-mail to users to inform them of three pending changes, including a proposal that would end the user voting system for policy changes, implement new filters for incoming messages, and, most controversially, introduce a plan to share data with the affiliate Instagram, which it recently acquired.

With respect to the incoming message change, the proposal would eliminate the mechanism that allows users to control who can send them messages through Facebook. Consumer groups have noted that removing users’ ability to prevent the receipt of unwanted messages may give rise to an invasion of privacy and security, as it could increase the amount of spam that users receive. 

The proposed data-sharing between affiliates immediately raised a reaction similar to when Google set off a firestorm by attempting to aggregate information between its services like Gmail and YouTube.

Consumer groups like the Center for Digital Democracy and the Electronic Privacy Information Center said the changes would violate the terms of Facebook’s recent consent order with the Federal Trade Commission. In that case, the social networking site settled allegations by the agency that it made user information public by default even though it promised to keep the information private. Facebook also agreed to give users clear and prominent notice and obtain their express consent before sharing information beyond their privacy settings, including with third parties, and establish a comprehensive privacy program subject to audit. Here, the decision to combine user profiles and share data with affiliate sites like Instagram could pose privacy concerns, as users are arguably more vulnerable to attack from hackers and identity thieves.

In a letter to Facebook CEO Mark Zuckerberg, the consumer groups urged Facebook to withdraw the proposed changes, arguing that the “proposed changes raise privacy risks for users, may be contrary to law, and violate your previous commitments to users about site governance.”

Facebook spokesman Andrew Noyes addressed the data-sharing with affiliates in a written statement: “As our company grows, we acquire businesses that become a legal part of our organization. Those companies sometimes operate as affiliates. We wanted to clarify that we will share information with our affiliates and vice versa to help improve our services and theirs.”

To read the letter from EPIC and CDD to Facebook, click here.

Why it matters: Although Facebook has faced more serious allegations of privacy violations in the past (like the FTC case), the incident has done little to improve Facebook’s reputation with respect to how it treats the privacy of its users. Ill-will towards the social networking site was exacerbated by the timing of the announcement during the holiday, which contributed to the impression that the site was attempting to sneak changes past users. Companies should proceed with caution before making changes to their privacy practices, particularly when they have a settlement with the FTC in place, as violating a consent order can result in harsh penalties. Google recently settled with the FTC for violating the terms of its consent order in a privacy case with the agency – resulting in a record $22.5 million fine.


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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