Advertising Law -- Jul 26, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

Manatt is pleased to welcome Donna Wilson as a partner in the Firm’s litigation practice. Named by The Daily Journal as one of California’s top women litigators, Ms. Wilson focuses on consumer class and individual actions and counseling, with an emphasis on financial services, data security and privacy matters, as well as government enforcement actions and other complex business litigation.

Ms. Wilson represents clients against alleged violations of consumer protection laws, including the Fair Credit Reporting Act, Telephone Consumer Protection Act and Fair Debt Collection Practices Act. She also provides guidance on ways to enhance existing data security and privacy compliance programs.

“Natural” False Ad Settlements for $9 Million, $3.2 Million

Two consumer class actions alleging that “natural” claims were false and deceptive reached settlement deals recently, with Naked Juice agreeing to pay $9 million and ConAgra receiving judicial approval for a $3.2 million settlement.

California resident Natalie Pappas alleged that claims such as “All Natural” and “Non-GMO” on the label of Naked Juice products violated state consumer protection laws. The juices and smoothies actually contain unnatural and synthetic ingredients, according to the plaintiffs (four other suits were consolidated with Pappas’ complaint), because they contain ingredients such as ascorbic acid, niacinamide, and choline biturtrate, as well as ingredients made from genetically modified plants and organisms.

Two years and four rounds of mediation later, the parties agreed to settle the case. Naked Juice promised to provide a $9 million settlement fund out of which a national class of consumers can receive a full refund for purchased products, up to $75 with proof of purchase or between $5 and $45 without.

In addition, the company said it will redesign its labels to eliminate the “All Natural” claim and substantiate the “Non-GMO” language. The injunctive relief – valued at approximately $1.4 million – will pay for an independent testing organization to confirm the accuracy of the “Non-GMO” statement on product labels, a quality control manager to oversee the testing process for a period of five years, and an electronic database to track and verify product ingredients.

In a second deal, ConAgra reached an agreement over the claims made by subsidiary Alexia for its potato products. U.S. District Court Judge Phyllis J. Hamilton granted preliminary approval of a $3.2 million settlement fund for a national class of purchasers dating back to December 6, 2007.

The consolidated suits alleged that the use of the “All Natural” claim for frozen potato products (including waffle fries, potato bites, and several varieties of mashed potatoes) was central to the company’s marketing but misleading to consumers. Alexia’s potato products contained disodium dihydrogen pyrophosphate, or DDP, a synthetic chemical compound used to prevent discoloration in potatoes and registered as an abstract chemical, according to the complaint.

Under the terms of the settlement, Alexia will reformulate its products to live up to the “All Natural” claim. In lieu of DDP, the company agreed to use citric acid or another naturally sourced compound. Alexia reserved the right to use DDP at a future date if the Food and Drug Administration decides it can be used in conjunction with a “natural” label.

Class members will also be entitled to file a claim for a portion of the $2.5 million cash settlement fund and $700,000 voucher settlement fund. The plaintiffs in the consolidated cases can make one of three choices: a cash payment of $3.50 per product purchased with a maximum of 10 products or $35; food vouchers with a maximum savings of $3.75 per product up to a maximum of 10 products; or a combination of cash and vouchers, again maxing out at 10 products. Claims for five or fewer products simply need a class member’s contact information; for claims of six or more products, a receipt or other documentation (such as product packaging) is required.

To read the settlement agreement in Pappas v. Naked Juice Co., click here.

To read the settlement agreement in In re Alexia Foods, Inc., click here.

Why it matters: Consumers continue to file suits challenging “natural” claims, and as demonstrated by the Naked Juice and ConAgra settlements, continue to leverage multi million-dollar settlements from advertisers. Companies that choose to use “natural” labeling and advertising should be prepared for the inevitable consumer class action.

NAD Washes Away Dove’s Ad Claims

In resolving an advertising dispute in the fast-growing body wash market, the National Advertising Division recently recommended that Unilever discontinue false and disparaging advertising claims for Dove Deep Moisture Body Wash.

The Dial Corporation, maker of competing body washes, challenged Dove’s ad campaign for the body wash, which included iterations of the claim “some body washes can be harsh” and images of containers of body wash wrapped in barbed wire.

Dial also challenged a video that depicted an actress performing a product demonstration that purported to compare how Dove and competing body washes affect the skin. Using skin-colored test paper, the actress put the paper in jars with water and the body washes. Minutes later, she removed them to show the paper from the Dial jar with strips removed from the surface, while the Dove paper is minimally affected. “Wow, look at the Dial body wash paper. If it can strip this paper, imagine what it can do to your skin,” the actress says. “The Dove one looks a lot better, and it hasn’t been stripped away. Clearly, not all body washes are the same.”

In response, Dove argued that some body washes do strip proteins and lipids from the skin, and, therefore, the use of the term “harsh” was truthful and not misleading. Dove also argued that the barbed wire imagery was clearly puffery as no reasonable consumer would believe that body washes are that harsh, and that demonstrations made clear that competing products actually strip away nutrients.

Although some of the Dove ads did not specifically name a competitor, the NAD agreed with Dial that one of the messages reasonably conveyed is that competitive body washes, including Dial Spring Water body wash, are significantly harsher than Dove Deep Moisture. Because Dial’s body washes are market leaders, it would not be unreasonable for consumers to interpret the unqualified harshness claims to include its products.

As support for its harshness claims, Dove relied upon existing scientific literature which states that body wash can damage skin proteins and lipids (and is therefore “harsh”), but the NAD said more support was needed for the challenged ads. “While scientific literature may establish the general principle that ‘some body washes can be harsh’ it is not sufficient support for the message reasonably conveyed by the advertising at issue – that competing body washes, including Dial, are significantly more damaging to the skin than Dove Deep Moisture. Such a comparative performance claim would need to be supported by testing which is applicable, properly conducted, and yields statistically significant and consumer meaningful results.” The NAD recommended the discontinuation of the unqualified “harshness” claims.

Turning to the barbed wire imagery, the NAD found the message conveyed to be false and disparaging, even though consumers were unlikely to take it literally. Accordingly, the NAD also recommended that the images be discontinued. No evidence was submitted to support such a strong message that competing products caused skin damage, the NAD noted. In fact, Dove’s testing revealed that one of the Dial body washes was actually milder than Dove’s Deep Moisture.

The NAD also found that Dove’s demonstration failed to pass muster. The “bold imagery” and “unqualified statements” could lead consumers to believe that competing body washes are so harsh they actually strip layers of the skin itself, the NAD said. The group also questioned the methodology and results of the demonstration and determined that the testing was not consumer-relevant. Specifically, the NAD noted that consumers do not normally soak themselves for nine minutes using a high concentration of body wash.

Finally, the NAD recommended that Dove discontinue an establishment claim that Deep Moisture provides the “proven best care,” as it lacked support to show that it conditioned the skin better than other body washes.

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

Why it matters: The decision was a total wash for Dove, as the NAD recommended that it discontinue the challenged advertising claims. The decision also reflects a trend that the NAD is getting tougher on disparaging and comparative advertising claims, even where a competitor is not named. While expressing respect for the self-regulatory process, Dove said it plans to appeal the decision to the National Advertising Review Board.

Have COPPA Changes Resulted in Less Content, Higher Costs?

The new Children’s Online Privacy Protection Act Rule has been in effect less than one month, but the costs of compliance are already piling up, according to attendees at a panel discussion in Washington, D.C. Or, as Professor Eric Goldman said, “Do everything you can to avoid being covered by the statute.”

The Rule changes that became effective on July 1 broadened the definition of terms such as “personal information” and “operator,” and updated the requirements for notice, parental consent, confidentiality, security, and data retention and deletion.

Just weeks later, Web site and app developers and members of the ad industry gathered at a panel sponsored by TechFreedom to discuss the impact of the new Rule. Some noted that sites have simply opted out by excluding children under 13 rather than trying to achieve compliance, a move suggested by Goldman, director of the High Tech Law Institute at Santa Clara University School of Law. “Most general purpose sites will continue to look for avoidance strategies,” he predicted.

Others expressed concern about a potential chilling effect because companies are fearful of running afoul of the new Rule. The new Rule “will force major changes in the Internet ecosystem or it will dry up the offerings of many companies,” Stu Ingis, counsel for the Digital Advertising Alliance, told attendees.

According to an estimate by the Federal Trade Commission provided by TechFreedom, the cost of compliance will run existing operators more than $6,200 a year. But new companies could be facing up to $18,670 a year – a hefty price tag for a start-up or small business, speakers noted. Berin Szoka, president of TechFreedom, said that the estimates don’t include additional costs and the possible decrease of advertising revenue.

“There’s no evidence that we’ve had growth in COPPA-compliant sites for kids. Now we’ve made things a lot trickier. It’s the minefield of compliance,” said Steve DelBianco, executive director for NetChoice. “COPPA will raise costs, lower ad revenue, and we’ll see less content for kids in the future.”

But Maneesha Mithal, the FTC’s associate director of consumer protection, said the same arguments were made when COPPA first took effect – and children still had plenty to do on the Internet. “All these arguments were made before,” she said. She added that the agency plans to release additional updates addressing compliance. “We’re not going to bring ‘gotcha’ cases.”

Why it matters: While the agency attempted to calm industry members, compliance concerns remain high. It may be too soon to judge the true impact on small businesses, but apprehension about compliance and enforcement persists.

From Attempted Hero to Plaintiff

Last year, the Federal Trade Commission issued a public challenge to create “an innovative solution that will block illegal commercial robocalls on landlines and mobile phones” and offered a $50,000 cash prize for the best technological solution. At the time, David Vladeck, the Director of the FTC’s Bureau of Consumer Protection, said the “winner of our challenge will become a national hero.”

One non-winner, on the other hand, has become a thorn in the agency’s side.

David Frankel entered the contest but did not win. He is now accusing the FTC – the agency that enforces the laws prohibiting deceptive marketing – of false advertising for failing to follow the rules of its own promotion.

After the winners were announced and Frankel – an experienced hand in the telecommunications industry – was not among them, he began his protest. First, he requested the grade for his entry (which involved having phone companies share data to track robocallers to their original addresses). When the FTC refused his request, Frankel filed a Freedom of Information Act request for the scores of all 798 submissions.

The FTC provided detailed score sheets for the seven finalists (which did not include Frankel) from judges Steve Bellovin, chief technologist at the FTC; Henning Schulzrinne, chief technologist at the FCC; and Kara Swisher, co-executive editor of All Things Digital. Entries were judged on three criteria: Does it work? (50%); Is it easy to use? (25%); and Can it be rolled out? (25%).

Still unsatisfied, Frankel began an e-mail exchange with Schulzrinne, who declined to get involved in the dispute. Using an original argument, Frankel then filed a complaint with the federal Government Accountability Office, arguing that the rejection of his submission equated to the government illegally denying a bid by a contractor. The GAO dismissed his complaint.

Undaunted, Frankel appealed the decision, and the GAO has until mid-September to respond. Frank recently told The Wall Street Journal that he is considering filing a lawsuit in federal court. “I’m trying to be a hero,” he said. “I’m trying to solve the problem.”

Why it matters: As evidenced by the story, even the FTC is not immune from allegations of false advertising and controversy over a contest. The agency declined to comment on the situation when asked by the WSJ, other than to note that “[a]ll the eligible submissions were reviewed.”

FTC Testifies on Robocalls

Pending contestant heroics, the FTC still faces a challenge to keep robocalls in check, according to recent testimony.

Lois Greisman, associate director of the Commission’s Division of Marketing Practices, said the agency uses “every tool at its disposal” to combat illegal robocalls in testimony before the Senate Committee on Commerce, Science and Transportation’s Subcommittee on Consumer Protection, Product Safety, and Insurance.

While the agency has been vigilant in its efforts to enforce the Telemarketing Sales Rule, Greisman said that technology has aided robocallers in their efforts. Not only is it easier for robocallers to hide using Caller ID spoofing devices, but they can also avoid the reach of the agency by locating outside the United States. In addition, technology has made robocalling much cheaper, she added.

The Do Not Call program has been “enormously successful in protecting consumers,” Greisman said, with more than 221 million numbers currently listed on the registry. The agency devotes resources to enforcement actions and has filed 105 actions since 2004 that resulted in more than $126 million in civil penalties and $741 million in redress or disgorgement. Most recently, perfectly timed with the Do Not Call Registry’s 10th Anniversary, the FTC announced the largest civil penalty ever assessed for a TSR violation – $7.5 million against a company that allegedly scammed current and former members of the Armed Forces with false mortgage-related money saving claims.

In addition to targeting the robocallers themselves, Greisman explained that the agency has taken action against third parties that facilitate their illegal activity, such as companies that provide the software for auto-dialers and payment processors. “The Commission seeks to identify and attack chokepoints for illegal telemarketing,” Greisman said.

Law enforcement alone cannot solve the problem, she added. Consumer education remains a priority for the FTC. The agency held a Robocall Summit last year with members of the industry to brainstorm solutions to the problem. It also launched the Robocall Challenge, which offered a prize for the best technical solution to block robocalls.

To read Greisman’s prepared statement, click here

Why it matters: Greisman concluded her testimony by noting that the agency must “remain agile and creative” and continue its multifaceted approach to fighting illegal robocalls. She listed four avenues: aggressive law enforcement, efforts to spur innovation, ongoing consumer education, and work with Congress.

FTC Act, FDCPA Violations Result in $3.2 Million Penalty

The Federal Trade Commission obtained the largest civil penalty in its history against a third-party debt collector earlier this month when the agency reached a $3.2 million settlement with Texas-based Expert Global Solutions and its subsidiaries.

The defendants violated the Fair Debt Collection Practices Act and the Federal Trade Commission Act, according to the agency, by repeatedly calling consumers to collect debts early in the morning or late at night, by making calls to consumers’ workplaces, and by continuing to call even when requested to stop. The defendants continued calling even when consumers said they did not owe the debt and it had not been verified.

Messages revealing the debtor’s name and the existence of the debt were also left with third parties, the FTC said. “In many instances, individuals other than the consumer hear the message, thereby disclosing consumers’ alleged debts to persons other than the consumer without the prior consent of the consumer,” according to the complaint.

The proposed consent order contains a laundry list of prohibitions, including a halt on future violations of the FDCPA, a ban on harassing, oppressing, and abusive collection tactics, and an end to the use of any false, deceptive, or misleading representations in connection with the collection of a debt. If a consumer disputes the validity or amount of the debt, the defendants agreed to suspend collection efforts until a reasonable investigation has been conducted.

Restrictions on communications with third parties about a consumer’s debt, as well as communications with a debtor at his or her workplace are also included. In addition, the defendants will record at least 75 percent of all of their debt calls and retain the recordings for 90 days.

The agreement is subject to approval by the federal court in the Northern District of Texas, where the complaint was filed.

An international conglomerate with revenue of more than $1.2 billion in 2011 and with operating subsidiaries in the United States, Expert Global Solutions has more than 32,000 employees and is the largest debt collector in the world, the agency said. It collects debts in Barbados, Canada, India, Panama, and the Philippines.

To read the complaint in U.S. v. Expert Global Solutions, click here.

To read the proposed consent decree, click here.

Why it matters: The record settlement serves as a reminder not only to abide by the requirements of the FDCPA, but also to avoid false and deceptive business tactics generally – or face potential regulatory action.

Noted and Quoted . . . Adweek Turns to Linda Goldstein on Regulatory Risks of Native Advertising; Ronald Katz examines Ryan Hart v. Electronic Arts for the ABA

Adweek recently talked to Linda Goldstein, Chair of Manatt’s Advertising, Marketing & Media Division, regarding potential regulatory repercussions associated with the practice of native advertising, or paid placements.

The FTC recently sent a letter to several general search engine companies advising them to clearly distinguish on their Web pages between advertising, paid content and search results. It is becoming more evident that the FTC’s focus has turned to digital native advertising even if it has not yet issued any specific guidance or enforcement.

In an article published on July 10, 2013, Linda said: “Certainly, the search engine guidance should serve as an early warning to the industry that at some point in the future, unless the industry self-regulates, the FTC may be knocking on their door.”

To read the full article, click here.

On July 17, 2013, the American Bar Association’s Section of Litigation published an article authored by Manatt partner Ronald Katz titled “Third Circuit Weighs First Amendment v. Rights of Publicity.” The article provides an overview of the recent Third Circuit decision, Ryan Hart v. Electronic Arts, which provides guidance in an unclear area of law involving the rights of publicity versus First Amendment arguments.

Katz notes the decision “makes clear that, although the First Amendment is fundamental, it is not absolute. . . . In this case the First Amendment rights of video game manufacturer Electronic Arts were outweighed by the right of publicity of college football player, Ryan Hart.”

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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