Advertising Law - February 2017 #4

by Manatt, Phelps & Phillips, LLP
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In This Issue:
  • Not-So-Smart TV: Vizio Settles Over Data Collection
  • Super Bowl Ads Get Political
  • FTC Fails High School Diploma Program
  • 5-Hour Energy Must Pay $4.3M for Deceptive Ads

Not-So-Smart TV: Vizio Settles Over Data Collection

For installing software on smart TVs and collecting viewing data on 11 million consumers without their knowledge or consent, Vizio, Inc. will pay the Federal Trade Commission and the New Jersey Attorney General $2.2 million and change its practices.

According to the regulators, beginning in February 2014, Vizio and an affiliated company manufactured smart TVs that captured second-by-second data about video displayed on the television including consumer cable, broadband, set-top box, DVD, over-the-air broadcasts, and streaming devices, with demographic information appended (such as sex, age, income, marital status, household status, household size, educational level, and household value).

Vizio—one of the largest manufacturers and sellers of Internet-connected "smart" televisions—then sold that information to third parties that used it for various purposes, including targeted advertising, the FTC and AG alleged. Although the company promoted its "Smart Interactivity" feature that "enables program offers and suggestions," Vizio never informed consumers of the collection or sale of their data, the regulators said.

To settle the charges of violating the Federal Trade Commission Act as well as New Jersey's consumer protection law, Vizio must prominently disclose and obtain affirmative express consent for its data collection and sharing. The consent order also requires the defendants to refrain from misrepresentations about privacy, security, or confidentiality of consumer information they collect.

In addition, Vizio must implement a comprehensive data privacy program (with biennial assessments), delete consumer data collected before March 1, 2016, and pay $1.5 million to the FTC and $1 million to the state of New Jersey, with $300,000 of the judgment suspended.

To read the complaint and stipulated order in FTC v. Vizio, Inc., click here.

Why it matters: Recently appointed Acting Chair of the FTC Maureen K. Ohlhausen filed a concurring statement in the action. Although she voted in favor of the stipulated order, she expressed concern about one of the allegations in the agency's complaint, that household or individual television viewing activity is sensitive information and that sharing the data without consent causes or is likely to cause a "substantial injury" under Section 5 of the FTC Act. While there may be good public policy reasons to consider such information sensitive, the statute requires the Commission to "determine whether the practice causes substantial injury that is not reasonably avoidable by the consumer and is not outweighed by benefits to competition or consumers," she said. The Vizio action "demonstrates the need for the FTC to examine more rigorously what constitutes 'substantial injury' in the context of information about consumers," Ohlhausen wrote. "In the coming weeks I will launch an effort to examine this important issue further."

Super Bowl Ads Get Political

Advertisers in the 2017 Super Bowl struggled with staying topical while not getting bogged down in the current political divide.

Some companies took the humorous approach, such as 10 Hair Care Products, running a commercial that joked about the next "four years of awful hair." The voiceover exhorts viewers, "it's up to you to do your part by making up for it with great hair," while the rest of the 30-second spot showcased a variety of hairstyles from back hair to baby hair.

Other ads touched a sore spot. Budweiser aired the story of one of its immigrant founders, Adolphus Busch, in an ad titled, "Born the Hard Way." The commercial depicts the struggles Busch went through to make his way from Germany to St. Louis in the 1800s, including commentary such as "You're not wanted here" and "Go back home." While the commercial received praise, supporters of President Donald J. Trump called for a boycott of the beer brand, perceiving the ad as negative commentary on the current administration's immigration agenda.

Budweiser denied that it was making any political statement with the commercial. "We believe beer should be bipartisan, and did not set out to create a piece of political commentary," Marcel Marcondes, vice president for marketing at Anheuser-Busch InBev, said in a statement. "However, we recognize that you can't reference the American dream today without being part of the conversation."

Pennsylvania-based lumber company 84 Lumber made headlines—even before the big game—for its commercial portraying a Spanish-speaking mother and daughter making a journey on foot interspersed with scenes of workers on a big construction project. The travelers eventually encounter a giant wall, before discovering that the construction project was a door enabling them to move through to the other side. The commercial ends with the line, "The will to succeed will always be welcome here."

The full ad was deemed "too controversial" by Fox and not allowed to air in its entirety, with the network demanding modifications. "I still can't even understand why it was censored," Maggie Hardy Magerko, the company's owner and president, told The New York Times. "In fact, I'm flabbergasted by that in today's day and age."

The ad that aired during the Super Bowl ended with the travelers encountering the wall and a note to viewers to visit the company's website to see the ending. Apparently the message worked, as 84 Lumber's site crashed from all the traffic.

To view the 10 Hair Care commercial, click here.

To see Budweiser's "Born the Hard Way," click here.

To watch the 84 Lumber ad, click here.

Why it matters: Super Bowl LI found advertisers walking a careful balance between being part of the conversation and becoming a lightning rod for criticism in a very contentious political debate—at an average cost of $5 million for a 30-second spot. As Magerko explained to the Times, "We didn't know this was going to be the hot topic six weeks ago. We knew it was a topic. We didn't know it was the topic."

FTC Fails High School Diploma Program

The operator of a high school diploma scam has resolved charges with the Federal Trade Commission over misleading consumers about its educational program.

Stratford Career Institute promoted a "high school diploma" program but the company failed to meet the basic requirements set by most states, the agency alleged in an Ohio federal court complaint in February 2016. Extensive advertising by the defendant featured multiple references to a "high school diploma," the FTC said, promising an increase in earning potential, access to better jobs and promotions, and the ability to apply for higher education.

One ad stated, "With a diploma in hand, you can qualify for better jobs, faster promotions, and higher pay. Just imagine what you can achieve!" Other advertisements—found online, on television, and in print—depicted the Stratford program as equivalent to the diploma offered by a traditional high school and able to "open up doors to job and career opportunities that were closed to you before."

But Stratford failed on all of these fronts, the agency said, charging consumers up to $989 for what was essentially a worthless piece of paper. The defendant's program only requires 18 credits for completion while many states mandate "substantially more," the FTC explained, including credits in courses not offered by Stratford.

To convince consumers to sign up, the defendant purchased search terms such as "official high school diploma," "real high school diploma," and "legal high school diploma," to improve its online search rankings. But consumers were often told by prospective employers and college admissions officers that the program was not a high school equivalent, the agency said.

Pursuant to a stipulated order, Stratford is subject to a $6.5 million judgment, partially suspended upon payment of $250,000. In addition, the company must notify current students of their right to cancel participation in the program, stop efforts to collect money from those who cancel, disclose that the diploma program may not be equivalent to a high school diploma, and stop making false claims about educational programs.

To read the complaint and the order in FTC v. Stratford Career Institute, click here.

Why it matters: The FTC accused Stratford of violating Section 5 of the Federal Trade Commission Act by falsely promising that its diploma program was equivalent to a traditional high school diploma and could help students get better jobs and access to higher education.

5-Hour Energy Must Pay $4.3M for Deceptive Ads

A Washington state court judge ordered the makers of 5-Hour Energy to pay about $4.3 million for charges related to false advertising, the state's Attorney General announced.

AG Bob Ferguson filed suit against Living Essentials LLC and Innovative Ventures LLC in 2014 for allegedly violating Washington's Consumer Protection Act. According to the complaint, the defendants engaged in deceptive advertising, claiming that their flavored energy shots are "superior to coffee," recommended by doctors, and even that 5-Hour Energy's decaffeinated formula provides energy, alertness and focus lasting "for hours."

The false claims appeared in thousands of print and broadcast ads, the AG said, as well as on the Internet and in press releases. During a three-week trial held last September, Judge Beth M. Andrus ruled in favor of the AG's Office, holding that the claims violated state law because they were false and therefore deceptive.

Now the judge has ordered the defendants to pay a total of $4.3 million: almost $2.2 million in civil penalties for violations of the Consumer Protection Act, plus an additional $2.1 million in costs and fees owed to the Attorney General.

"Defendants spent more time trying to justify the science behind their ads after-the-fact than they did before marketing the products in Washington," the court wrote in the order. "The Court was struck by the fact that Defendants presented no testimony from a single scientist actually involved in developing the contents of this product."

The judge included $64,000 in sanctions against the defendants for willful discovery violations prior to the trial. Living Essentials and Innovation Ventures "cherry-picked" documents to produce to the AG's office, the court found.

In addition to the monetary portion of the order, Judge Andrus tacked on injunctive relief. Absent competent and reliable scientific evidence as support, the defendants are prohibited from making claims about the biochemical or physiological effects of their products or their "synergistic" interactions with other ingredients, including caffeine. The companies are also banned from using survey data in their marketing or advertising unless the surveys are "created, conducted, and evaluated in an objective manner" by qualified professionals and the data is not presented in a deceptive manner.

To read the order in State v. Living Essentials, LLC, click here.

Why it matters: "The makers of 5-Hour Energy broke the law in pursuit of profit, and now they are paying for it," Washington AG Ferguson said in a statement. How did the court determine how much the defendants should pay? Based on the total number of violations for the deceptive ads and sales of the products. For example, the "Construction Site Cowboy" ad aired in Washington 975 times during the relevant period while an ad titled "Choose Wisely" played 1,040 times. Since both ads were deemed deceptive, Judge Andrus ordered payment of $100 for each airing. The court also emphasized the "scant evidence" the companies had to support their claims. "Marketers and lawyers seemed to be driving the Defendants' advertising decisions, and most of the science presented at trial was compiled by experts retained for this litigation, rather than information gathered by the Defendants while investigating the effectiveness of their own products," the court wrote.

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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