Advertising Law -- Jan 16, 2014

by Manatt, Phelps & Phillips, LLP

In This Issue:

FTC Makes New Year’s Resolution to Target Deceptive Weight-Loss Claims

While many Americans made New Year’s resolutions to lose weight or get in better shape, the Federal Trade Commission resolved to eliminate deceptive weight-loss marketing claims.

At the agency’s first press conference of 2014, Jessica Rich, director of the FTC’s Bureau of Consumer Protection, announced four settlements targeting deceptive weight-loss ads as part of “Operation Failed Resolution.”

First, and most significantly, Sensa agreed to pay $26.5 million – the second-largest amount ever recovered in a deceptive advertising settlement by the agency – for claims that its product was clinically proven to result in a weight loss of 30 pounds in six months without diet or exercise. Sensa – a product that consumers were instructed to sprinkle on their food to help them feel full and stop eating sooner – cost consumers about $60 per month.

According to the agency’s complaint, the claims were false and the studies touted in Sensa’s ads were fatally flawed. The agency also alleged that some of the consumers featured in endorsements were compensated with money and free trips.

In addition to the record Sensa settlement, the defendants – the corporate entities, CEO Adam Goldenberg, and product creator and part owner Dr. Alan Hirsch – are prohibited from making any claims about weight-loss products without two adequate and well-controlled human clinical studies.

The second suit involved New York-based L’Occitane. Skin creams like Almond Shaping Delight promised to trim inches off of users’ thighs and “visibly refine and sculpt the silhouette.” Again, the agency said the studies relied upon by the defendant were flawed – neither placebo-controlled nor blinded – and the results were exaggerated. In a proposed consent decree, L’Occitane agreed to provide $450,000 for consumer redress.

HCG Diet Direct offered a homeopathic liquid drop that included a hormone produced by the human placenta that would allegedly cause a loss of 7 pounds in 7 days or 40 pounds in 40 days. Rich said some of the consumer endorsers for the product were paid while others were related to the company’s owner. The FTC additionally challenged HCG’s claim that the product was “safe,” because the defendant urged users to restrict themselves to a 500-calorie-per-day diet, an inherently unsafe practice. While the $3.2 million judgment was suspended based on an inability to pay, the company was enjoined from disseminating future misleading claims by the settlement agreement.

Finally, Rich announced an update in prior litigation brought in conjunction with the Connecticut Attorney General against a dietary supplement maker. That company claimed that various products could produce a 25-pound weight loss in four weeks without diet or exercise. While litigation continues against several defendants, the company and its principals reached a deal with the agency and the state that prohibits false claims of rapid and substantial weight loss and requires the surrender of more than $7 million in assets.

In addition to the enforcement actions, the agency revealed a new Web site for consumers as well as Gut Check, a new tutorial for media. Ads for the products challenged in the enforcement actions “ran in trusted, nationally known publications,” Rich stated at the press conference, adding that consumers are more likely to believe claims they read in their favorite magazines or see on their favorite television stations.

In 75 letters sent to publishers, media groups, and trade associations, the FTC urged media to be a “front-line defense” to the airing of deceptive weight-loss claims. The letters and tutorial are not meant to be a shot across the bow for media, Rich noted, but “a request for teamwork” to eliminate bogus ads.

To read the complaints against the various defendants as well as the proposed settlements and consent orders, click here

Why it matters: Operation Failed Resolution is the latest effort by the FTC to stamp out deceptive weight-loss claims. Rich said the agency has filed dozens of cases against fraudulent body-slimming claims spanning decades and will “periodically bring new cases and new sweeps both to deter conduct by companies in this area and also remind consumers about the fact that many of the claims in this area are not accurate and they should be very wary of them.”

Senate Report on Data Broker Industry Released; Will Legislation Follow?

After a yearlong investigation into the data broker industry, Sen. Jay Rockefeller (D-W.Va.) released a report at a recent Senate Commerce Committee hearing at which he claimed to be “revolted” by some of the industry’s practices.

The 36-page report titled “A Review of the Data Broker Industry: Collection, Use, and Sale of Consumer Data for Marketing Purposes” made four conclusions: (1) that data brokers “collect a huge volume of detailed information on hundreds of millions of consumers,” (2) identify and classify “financially vulnerable” consumers, (3) offer products that combine both online and offline data, and (4) “operate[s] behind a veil of secrecy.”

At the Commerce Committee hearing to discuss the report, Sen. Rockefeller had harsh words for the industry, particularly the classification of consumers. He took particular issue with the creation of categories like “Ethnic Second-City Strugglers” and “Tough Start: Young Single Parents.”

The sales of such categorical lists of consumers “seem tailor made to businesses that seek to take advantage of consumers,” Sen. Rockefeller added.

He also criticized three of the nine companies from which he sought information for the report for their failure to reveal more information about their data sources. Sen. Rockefeller cautioned that he was “putting these three companies on notice today that I am not satisfied with their responses and am considering further steps I can take to get this information.”

Sen. Rockefeller also signaled his intent to continue to focus on the industry: “I’m here to say this is a very serious situation. . . . We’ve got to continue on this thing.”

To read the report, click here.

Why it matters: The report does not call for legislation, but speculation abounds that the senator will introduce a bill before his impending retirement, which will occur at the end of his current term. Coupled with a recent report from the Government Accountability Office recommending that federal legislation be passed to create baseline privacy rules for data collection, sale, and use, Sen. Rockefeller’s focus on the industry could lead to changes for data brokers – a move still being fought by the Direct Marketing Association. In a statement in response to Sen. Rockefeller’s report, DMA president Linda Woolley cited a recent study that found the data-driven marketing economy generated $156 million in revenue in 2012 and created more than 675,000 jobs. “It is disappointing that after a year and a half of cooperation from industry, a report from the Senate Committee charged with advancing U.S. commerce fails to recognize the tremendous value provided to consumers and the U.S. economy by the data-driven marketing industry,” she said.

FTC Reports on FY 2013, Do Not Call Registry

As 2013 came to a close, the Federal Trade Commission evaluated its own work over the prior months in a report to Congress and published the latest statistics on the Do Not Call Registry.

The agency’s annual Performance and Accountability report highlighted the FTC’s consumer protection efforts in the realm of privacy and data security, with Chairwoman Edith Ramirez referencing two notable cases. The agency brought its first action against a mobile device manufacturer, HTC America, as well as its first mobile cramming suit against Wise Media. Both companies agreed to settlements, in which HTC promised to develop and release software patches to fix the vulnerabilities found in its devices and in which Wise Media faced a permanent ban on cramming.

Fraudulent financial services was another area of focus for FY 2013. The agency targeted a defendant that offered members of the military and veterans deceptive home loan refinancing in violation of the Telemarketing Sales Rule. The FTC also charged a debt collection operation with harassing consumers, which resulted in the imposition of a $3.2 million penalty.

Looking forward, the report listed several strategic goals for the agency, including promoting “stronger privacy protections,” efforts to halt the use of new media to deceive consumers, targeting deceptive advertising relating to consumers’ health, evaluating environmental marketing claims, and protecting children in the marketplace pursuant to the recently revised Children’s Online Privacy Protection Act Rule.

With the Do Not Call Registry celebrating its tenth anniversary in 2013, the FTC published its biennial report to Congress as the number of registrants hit a new record high. As of September 2013, 223 million active numbers were on the list, an increase of more than 5.8 million registered numbers from the prior year.

The agency also highlighted its entrance into the mobile ecosystem that now allows consumers to register, verify, or submit complaints via mobile devices. Since the mobile launch, 27 percent of all registrations came from mobile devices, the report stated.

The downside of technological advances was also noted by the report. Voice over Internet protocol (VoIP) and caller ID spoofing have resulted in the rise of illegal robocalls, with a peak of around 200,000 consumer complaints filed per month. The agency’s efforts to combat the increase included a robocall summit and a public contest to develop technological solutions to the illegal calls.

To read the FTC’s performance and accountability report, click here

To read the Do Not Call Registry report, click here

Why it matters: The FTC’s annual report presented no surprises but reemphasized the areas of importance on which the agency will be focused in the coming year, notably consumer privacy and data security, as well as enforcement of the updated COPPA Rule.

Mystery Solved: Sherlock Holmes Is (Mostly) in the Public Domain

Sherlock Holmes himself might have declared “Elementary!” but U.S. District Court Judge Ruben Castillo stuck to more traditional language when he ruled that only a handful of elements about the detective remain protected by copyright.

Leslie Klinger, the author of numerous books and articles on Sherlock Holmes, sought a declaratory judgment against the estate of Sir Arthur Conan Doyle about the scope of copyright protection for the famous detective as well as other characters and story elements. Klinger faced the possibility that his new anthology of stories based on Holmesian elements would not be published after the estate demanded payment for a license.

Judge Castillo drew an immediate line dividing Doyle’s works. Sherlock Holmes first appeared in a story published in 1887, followed by 4 novels and 46 short stories – all of which have by now entered the public domain by date of their publication. However, 10 short stories were published after Jan. 1, 1923, and remain at issue.

The estate argued that since the later stories continued to develop the characters of Sherlock Holmes and Dr. John Watson, all of the character elements should remain under copyright protection until the final story enters the public domain in 2022.

The court disagreed. “It is a bedrock principle of copyright that ‘once work enters the public domain it cannot be appropriated as private (intellectual) property,’ and even the most creative of legal theories cannot trump this tenet,” Judge Castillo wrote.

Relying heavily on case law from the Second Circuit Court of Appeals, the court dismantled the characters into a public domain version and a copyrighted version. All of the pre-1923 story elements are therefore free for public use, the court said, while post-1923 story elements remain protected.

The court rejected the estate’s contention that “complex, three-dimensional” characters like Holmes and Watson should be subject to greater protected status, noting that the theory, if adopted, would leave courts without a workable legal standard and would “extend impermissibly the copyright of certain character elements of Holmes and Watson beyond their statutory period, contrary to the goals of the Copyright Act.”

Klinger’s victory was limited, however, as Judge Castillo found that the post-1923 story elements – like the character of Dr. Watson’s second wife, Sherlock Holmes’ retirement from his detective agency, and Dr. Watson’s background as an athlete – remain protected by copyright.

The elements are not events but “increments of expression” that warrant copyright protection, the court stated. Because the post-1923 short stories are based upon material from a preexisting work, they meet the definition of derivative works, with the new elements constituting “original expression” beyond what is contained in the public domain portion of Doyle’s work, the court said.

To read the opinion in Klinger v. Conan Doyle Estate, click here.

Why it matters: As explained by the court, the decision establishes a dividing line between pre-1923 publications and those that came after. Elements of Sherlock Holmes and his cohorts introduced prior to 1923 are fair game for public use (good news for the numerous books, TV shows, and movies devoted to the detective), while post-1923 elements remain protected for another eight years.

Noted and Quoted . . . Bloomberg BNA Turns to Marc Roth and Stacey Mayer for Insight on Protecting Brand Reputation

On January 14, 2014, Bloomberg BNA’s Social Media Law & Policy Report published an article coauthored by Manatt attorneys Marc Roth and Stacey Mayer titled “Protecting Brand Reputation in an Increasingly Mobile World.” The piece highlights the hot button social media issues for 2014 and discusses the potential public relations implications of high-profile social media campaigns.

The authors focused on the following issues to watch in 2014: (1) user-generated content; (2) consumer online reviews; (3) native advertising; and (4) real-time interactions with consumers. Brands need to closely monitor these trends and the related legal, regulatory and public relations risks of each. The authors note, “As social media platforms continue to develop and brands seek new ways to communicate with consumers, companies need to be aware of how regulators and industry self-regulatory bodies are applying their laws and rules (most of which are outdated and ill-equipped to address current activities) in order to avoid legal liability.”

To read the full article, click 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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