Advertising Law - January 2017

by Manatt, Phelps & Phillips, LLP
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In This Issue:

  • SPECIAL FOCUS: Memories Light the Corners of Regulators' Minds
  • Ad Groups Seek Reconsideration of FCC Privacy Rule
  • Pyramid Scheme Shut Down by FTC
  • FTC Settles With Turn, Inc., Over Privacy Controls

SPECIAL FOCUS: Memories Light the Corners of Regulators' Minds

By Richard Lawson

The Federal Trade Commission and the Attorney General for the State of New York (NY AG) recently filed a joint lawsuit against Wisconsin based Quincy Bioscience, marketers of a product called Prevagen. While the heart of the complaint centers on the substantiation of claims that Prevagen alleviates memory loss, it's worth noting that the FTC and NY AG jointly filed this case.

As previously reported, the FTC has pursued several actions involving health and wellness claims. This case is part of that effort, as the FTC and NY AG allege significant shortcomings in the testing for the product's capabilities. For example, the lawsuit alleges that the tests failed to show that consumer memories meaningfully improve after they used the product and that the body does not process the key ingredient in a way that obtains the best benefits. The complaint further alleges that Quincy omitted test data in a chart used to market the product. The chart provided data from 8, 30 and 90 days of use. According to the complaint, had the results from 60 days been included, they would have shown a decline in user memory from 30 to 60 days.

While claims substantiation has been a core issue for the FTC for almost as long as it has existed, joint efforts between the FTC and state attorneys general have been a particular focus of the past few years. Previously, I was the Director of the Florida Attorney General's Consumer Protection Division, and while I was there the Directors of the FTC's Bureau of Consumer Protection made concerted efforts to work in close collaboration with state attorneys general. Florida, in particular, worked with the FTC on many matters quite closely and was awarded the inaugural FTC partnership award for its close collaboration. The FTC has gone on to similarly recognize its relationships with the New York and Colorado attorneys general, and the Los Angeles County Department of Consumer and Business Affairs.

The advantages of close collaboration are manifold. First and foremost, it's a force multiplier. State AGs can offer boots on the ground assistance by interviewing witnesses and conducting investigations that the FTC's D.C. or field offices can't easily undertake. Similarly, when FTC and state AG attorneys work on the case jointly, resources for processing discovery and formulating theories are doubled out of the box. From a managerial perspective, these serve two purposes: one, enforcement agencies can double the resources without increasing any financial expenditures; and two, the staff love the work. Low pay is a constant complaint among all enforcement attorneys, so when state AG and FTC attorneys share their investigative and litigation theories, they expand their professional networks and knowledge. And for state AGs, who normally appear only in state court, a chance to appear in federal court provides an opportunity for professional growth.

Collaborations are born for various reasons. FTC and state AG staff frequently attend the same conferences, where they make connections and learn about their colleagues' respective expertise, which often leads to a mutual effort. Further, there are some areas where the FTC has considerable knowledge and expertise, say, for example, in health claims substantiation, that state AGs may not possess. Lastly, settlement negotiations can have an extra sense of power and urgency when a team of state assistant attorneys general and FTC lawyers are arrayed across from the subject business's team of counsel.

The NY AG and the FTC may have teamed up in this case for some of the reasons set forth above, or perhaps for reasons completely unrelated. Whatever the motive, it seems highly likely that the FTC will continue its strong tradition of outreach and collaboration with state attorneys general in the years to come.

Ad Groups Seek Reconsideration of FCC Privacy Rule

Making good on their promise to challenge the Federal Communications Commission's proposed privacy rule, a coalition of ad industry groups filed a petition formally requesting that the agency reconsider its order.

Passed in a 3-2 vote by the Commission in November, the new rule requires ISPs to obtain opt-in consent before sensitive data (defined to include browsing and app usage history) can be collected and used for ad targeting purposes.

Members of the industry immediately spoke out against the rule, arguing that it was bad for the economy, would stifle innovation, make it harder to deliver relevant and useful advertising messages, and cause confusion because the FCC's broad interpretation of sensitive data is at odds with existing standards.

Now the industry has taken the next step by filing a petition for reconsideration with the agency over its "fundamentally flawed" order adopting the rule.

The Association of National Advertisers, American Association of Advertising Agencies, American Advertising Federation, Data & Marketing Association, Interactive Advertising Bureau, and Network Advertising Initiative told the FCC that it acted in an arbitrary and capricious manner inconsistent with congressional intent by relying on a general purpose statement of the Communications Act for its authority, that it failed to adopt less restrictive proposals, and that it did not provide sufficient time for interested parties to offer comments.

The FCC relied upon Section 222(a) of the Act, which is labeled a "General Statement" and "is clearly governed by the more detailed subsections that follow it," the groups told the Commission. "If, as the FCC now attempts to mandate, Section 222(a) were read to make all customer proprietary information confidential, the later and more specific statutory provisions clearly would be unnecessary," a conclusion that runs counter to all methods of statutory interpretation.

Further, although the Commission based its authority to promulgate the rules on Section 222, it had not done so in the prior 18 years, the groups added.

As "[t]he creation, analysis, and transfer of consumer data for marketing purposes constitutes speech," the rule raises First Amendment concerns, the ad industry cautioned the FCC. Non-misleading commercial speech regarding a lawful activity is protected under the First Amendment and requires the Commission to adopt regulations in a narrowly tailored manner that is no more restrictive of speech than necessary.

The Commission had a less restrictive, alternative proposal right in front of it, the groups said: the industry's own self-regulatory framework. The ecosystem has "functioned well for years under an enforceable self-regulatory framework" developed by the Digital Advertising Alliance that "offers consumers transparency about online data collection and a way to control the use of their online data by DAA members while allowing data-driven innovation to flourish." Opt-in consent would also signal a change in the standard for advertising and marketing uses of data, which historically has relied on opt-out mechanisms.

Finally, the groups complained that the order was adopted less than a month after the Commission issued a four-page fact sheet "outlining a drastic change in its approach" to the initial notice of proposed rulemaking. Interested parties were not given a reasonable amount of time or sufficient details to assess the modified proposal and provide comments, the industry argued.

Given all of these problems, the ANA, 4As, AAF, DMA, IAB, and NAI "respectfully request that the FCC reconsider its decision to adopt the Order regarding the use and disclosure of data by broadband providers."

To read the petition for reconsideration, click here.

Why it matters: The ad groups may have timed their petition perfectly. With the order's primary backer, FCC Chairman Tom Wheeler, set to exit the agency on January 20 as the administration changes hands, the industry may be successful in achieving an about-face by the Commission.

Pyramid Scheme Shut Down by FTC

A pyramid scheme was the subject of a deal with the Federal Trade Commission after the agency charged Vemma Nutrition Company with running an illegal multilevel marketing operation.

Vemma used a network of distributors to sell health and wellness drinks to take advantage of college students and other young adults. The advertising materials presented the company as a profitable alternative to traditional employment through a "Young People Revolution" campaign, the FTC said. Ads depicted Vemma affiliates enjoying "conspicuous displays of wealth" such as yachts and luxury cars.

But the Arizona-based company failed to disclose that its program operated in a manner that precluded most participants from earning a substantial income, the agency alleged in its complaint. It functioned as a pyramid scheme that provided compensation for recruiting new members and not legitimate retail sales. Participants were encouraged to qualify for bonuses by buying products themselves and recruiting others to do the same, the FTC said.

After Vemma expanded throughout the country and across international borders and accumulated more than $200 million in revenue in 2013 and 2014, the FTC filed a federal court complaint against the company in 2015.

Pursuant to a stipulated final order, Vemma and Benson K. Boreyko, the company's CEO, are banned from making deceptive income and unsubstantiated health claims, paying compensation for recruiting new participants to a business venture, tying a participant's compensation to his or her purchases, paying compensation unless the majority of the revenue generated by the participant came from sales to non-participants, and otherwise participating in a pyramid, Ponzi, or chain marketing scheme.

A $238 million judgment was partially suspended upon payment of approximately $470,000 and the surrender of various assets.

To read the complaint and stipulated final order in FTC v. Vemma Nutrition Company, click here.

Why it matters: "Unfortunately, extravagant income claims and compensation plans that reward recruiting over sales continue to plague the [multilevel marketing] industry," Jessica Rich, Director of the FTC's Bureau of Consumer Protection, said in a statement. "MLM companies must ensure that their promotional materials aren't misleading, and that their compensation programs focus on selling goods or services to customers who really want them, not on recruiting more distributors."

FTC Settles With Turn, Inc., Over Privacy Controls

A California-based digital advertising company must allow consumers to control their online tracking as a result of a settlement agreement with the Federal Trade Commission.

Turn, Inc.'s privacy policy represented that consumers could block targeted advertising by using their browser's settings to block or limit cookies. But the agency accused the company of using unique identifiers to track millions of consumers, even after they blocked or deleted cookies from websites. By injecting headers (50-character alphanumeric strings) into the unencrypted mobile traffic of Verizon Wireless users, Turn was able to compile profiles of users and serve them targeted ads, the FTC said.

In addition, the agency alleged that Turn misrepresented the scope of its opt-out mechanism, which was limited to mobile browsers and did not block tailored ads on mobile apps.

"Turn tracked millions of consumers online and through mobile apps even if they had taken steps to block or limit tracking," Director of the FTC's Bureau of Consumer Protection Jessica Rich said in a statement. "The FTC's order will ensure the company honors consumers' privacy choices."

The two-count administrative complaint charged Turn with violating Section 5 of the Federal Trade Commission Act by falsely claiming that consumers could block or limit cookies to restrict the company's ability to track consumers and misleading consumers to believe they could use Turn's opt-out mechanism to avoid tailored ads on mobile apps.

To settle the charges, Turn agreed that it will no longer misrepresent the extent of its online tracking or the ability of users to limit or control company use of their data. The company must provide an effective opt-out for consumers who do not want their information used for targeted advertising, and place a "prominent" hyperlink on its home page taking consumers to a disclosure about targeted advertising.

To read the complaint and consent order in In the Matter of Turn, Inc., click here.

Why it matters: The FTC offered the ad industry two takeaways from the action: first, live up to express and implied claims about consumer privacy, and second, respect consumer choice.

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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