Advertising Law - July 2016 #2

by Manatt, Phelps & Phillips, LLP

Manatt, Phelps & Phillips, LLP

In This Issue:

  • VW Will Pay $14.7B in Largest FTC False Ad Suit
  • FTC News: TSR Reminder, Civil Penalty Increase
  • Julia Child's Foundation Hungry for a Publicity Rights Lawsuit

VW Will Pay $14.7B in Largest FTC False Ad Suit

Volkswagen made a $14.7 billion deal with the Federal Trade Commission, the Department of Justice, and the California Attorney General over charges that the auto manufacturer deceived consumers with claims about emissions standards for its cars.

Last year it was revealed that the German-based automaker used "defeat devices" to cheat emissions tests. In a lawsuit filed on behalf of the Environmental Protection Agency by the Department of Justice, the government alleged certain vehicles were equipped with software that could detect when the car was being tested for compliance with emissions standards. When a test was being conducted, the software activated the emission control system.

The DOJ alleged that during normal driving conditions, the software would render the emission control system inoperative, thereby greatly increasing emissions up to 40 times EPA-compliance levels.

In the FTC's March federal complaint, the agency asserted that Volkswagen's advertising campaign in support of its "clean diesel" cars was false and deceptive in violation of Section 5 of the Federal Trade Commission Act. The automaker touted the vehicles as low-emission and environmentally friendly despite the presence of the defeat devices, the FTC said.

The California Attorney General's Office and California Air Resources Board (CARB) added claims under the state's Health and Safety Code and Unfair Competition law.

In what the regulators characterized as a partial settlement with the DOJ, FTC, and California AG—that resolved allegations involving Volkswagen TDI diesel Jettas, Passats, TDI Audi A3, Golfs, and Beetles for model years 2009 through 2015—VW agreed to a multipart deal involving restitution for consumers and efforts the automaker could take to mitigate environmental harm.

The company will offer consumers a buyback and lease-termination program that will cover roughly 500,000 2.0 liter diesel vehicles sold or leased in the United States. Up to $10.03 billion will also be put aside to compensate consumers under the program.

The buyback option could net consumers between $12,500 and $44,000 depending on the car's model, year, mileage, trim, and geographic location, the FTC said. For lessees, the option requires Volkswagen to pay off the loan up to 130 percent of the amount a consumer would be entitled to under the buyback program ($26,000 for a loan payoff that would cost VW $20,000 on an owner buyback, for example). Those vehicle owners who sold their cars after the issue became public may be eligible for partial compensation.

In lieu of a buyback, owners and lessees will also be given the option—if approved by the EPA—for VW to propose an emissions modification plan. However, consumers who elect this option could still recover money from VW as redress for deceptive advertising.

Volkswagen must achieve an overall recall rate of at least 85 percent of the affected 2.0 liter vehicles or pay an additional amount into the mitigation trust fund. The FTC noted that consumer payments will not be available until the settlements are approved by the court and take effect.

In addition, $4.7 billion will be allocated towards mitigating pollution and investing in green vehicle technology. Projects across the country focused on reducing emissions where 2.0 liter vehicles are located will receive $2.7 billion. The money will be placed into trust and potential beneficiaries (such as states, Indian tribes, and the District of Columbia) will be able to apply for funds.

The remaining $2 billion will be directed into technology investments over the next decade. A national EPA-approved investment plan will receive $1.2 billion, with $800 million funneled into a California-specific investment plan to be approved by CARB. To develop the plan, Volkswagen will solicit and consider input from interested parties (such as federal agencies, cities, and states) with the goal of addressing the environmental impact of the 2.0 liter vehicles.

Finally, Volkswagen agreed to injunctive relief with the FTC. Included in the proposed consent order with the agency are prohibitions on future misrepresentations that would deceive consumers about the environmental benefits or value of its vehicles or services, as well as a prohibition on the use of any device that could be used to cheat on emissions tests.

To read the proposed order with the FTC, click here.

To read the partial consent decree with the DOJ, click here.

Why it matters: The largest false advertising case in FTC history may only be the beginning for Volkswagen. The settlements do not resolve pending claims concerning VW's 3.0 liter diesel vehicles and do not address criminal liability and the many putative class action lawsuits filed across the country. "Today's announcement shows the high cost of violating our consumer protection and environmental laws," FTC Chairwoman Edith Ramirez said in a statement. "Just as importantly, consumers who were cheated by Volkswagen's deceptive advertising campaign will be able to get full and fair compensation, not only for the lost or diminished value of their car but also for the other harms that VW caused them." Deputy AG Sally Q. Yates added that the settlement "is by no means the last" from regulators concerning VW's actions. "We will continue to follow the facts wherever they go."

FTC News: TSR Reminder, Civil Penalty Increase

Advertisers, take note: The Federal Trade Commission's ban on certain types of payment under the Telemarketing Sales Rule has now taken effect and the agency has increased the maximum civil penalties for a host of violations of Section 5 of the Federal Trade Commission Act.

Last November the FTC finalized a ban on certain types of payment the agency said were "commonly exploited by con artists and scammers." As of June 23, the new prohibitions are in effect, making it illegal for telemarketers to ask consumers to pay for goods or services using cash-to-cash money transfers, remotely created payment orders, remotely created checks, and cash reload mechanisms. All four payment methods are prohibited by the TSR in both inbound and outbound telemarketing.

To help telemarketers, the Commission published guidance about the changes, which expressed the agency's concerns about the potential for fraud.

"Remotely created payment orders and checks create an unreasonable risk of consumer loss by allowing fraudulent merchants to create unsigned checks that debit a consumer's bank account without authorization," according to the updated Complying with the Telemarketing Sales Rule guidance. "Cash-to-cash money transfers and cash reload mechanisms likewise allow anonymous fraudsters to disappear with money paid by consumers for undelivered goods and services."

In other news, the agency announced that the maximum civil penalties have increased for violations of 16 provisions of Section 5 of the FTC Act and Section 7A(g)(1) of the Clayton Act, topping out at $40,000.

The final amendments to Commission Rule 1.98 adjusted the maximum civil penalty dollar amounts as required by the Federal Civil Penalties Inflation Adjustment Act Improvements of 2015, the FTC said, which directed agencies to implement a "catch-up" inflation adjustment based on a prescribed formula to increase the penalties for a variety of infractions.

For example, violations of final Commission orders issued under Section 5(b) of the FTC Act can cost up to $40,000 per violation (up from $16,000), while the failure to file required reports per Section 10 of the FTC Act runs $525 and the fines under specific statutes range from $433 (for running afoul of the Energy Policy and Conservation Act) to $3,756 (for knowing violations of the Fair Credit Reporting Act).

The new maximum penalty amounts will take effect on August 1, 2016.

To read the FTC's updated TSR guidance, click here.

For a complete list of civil penalty recalculations, click here.

Why it matters: Telemarketers should ensure that they are abiding by the new ban on certain types of payment, which applies to both inbound and outbound telemarketing. And all businesses should be aware of the jump in civil penalties imposed by the FTC, with a fine of up to $40,000 per violation possible for certain violations. The agency did note that the changes impact the maximum civil penalty per violation and the actual figure depends on the fact-specific analysis of each case. When it seeks civil penalties, the agency remains "mindful" of the statutory criteria set forth in the FTC Act, such as degree of culpability, history of prior conduct, ability to pay, and effect on ability to continue to do business, the Commission said, adding that a civil penalty leniency program exists for small businesses that meet certain criteria.

Julia Child's Foundation Hungry for a Publicity Rights Lawsuit

Julia Child's estate served up a lawsuit against Airbnb after the company ran a contest invoking the famous chef's name.

According to the California state court complaint, the short-term rental service reached out to the Julia Child Foundation for Gastronomy and the Culinary Arts in April, requesting to use her name for an upcoming contest. Honoring Child's famous refusal to allow her name or image to be used to market or sell commercial products, the Foundation (which owns all of Child's rights of publicity) declined the opportunity.

Notwithstanding the lack of permission, Airbnb and its public relations agency then engaged "in a broad marketing and promotional campaign," prominently using Child's name for an online contest to win a free night at the "Former Julia Child Home," the Foundation alleged. The contest promoted both the Airbnb brand and business, as well as the rental of a property in France from which Airbnb benefitted financially, the suit added.

The defendants used Child's name, identity, and persona on Airbnb's website, social media, and in an email blast sent to an extensive mailing list, the complaint said. Both the title and email message stated that Airbnb was giving away a free night at the "former home of Julia Child in Provence, France," where contest participants could "imagine walking the halls of Julia Child's former home," "combing over the knick knacks in her kitchen exactly as she left them," and "channeling the culinary genius of Julia Child."

Not only did the defendants misappropriate the name and likeness of Julia Child, but they also got the facts wrong, the Foundation alleged. Child and her husband stayed at the La Pitchoune cottage at various times throughout their lives, but they never owned the property, and when Child returned the keys to the owners in 1992, she removed her kitchen tools and other personal belongings.

Emphasizing Child's steadfast refusal to take part in commercial opportunities, the complaint requested a preliminary and permanent injunction against the defendants to prohibit any further commercial use of her name, identity, or persona. In addition, the Foundation requested damages for the misappropriation of Child's right of publicity under California law, including punitive and exemplary damages for the defendants' allegedly "willful and deliberate" actions.

To read the complaint in The Julia Child Foundation for Gastronomy and the Culinary Arts v. Airbnb, click here.

Why it matters: The lawsuit provides an important reminder about the dangers of using a celebrity's name or image without permission, whether dead or alive. In the case of Julia Child, the Foundation that owns her intellectual property rights emphasized that despite the "tremendous commercial value" of her name, photograph, and likeness—particularly associated with food, cooking and the culinary arts, and travel and leisure—she refused throughout her entire 40-year career to market or sell commercial products, instead focusing on public education. The commercial rights sought by Airbnb "have never been granted before by either Mrs. Child or The Julia Child Foundation," according to the complaint.

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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