Advertising Law - July 2016

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

  • Ad Company's Geotargeting Locates a $1M Penalty
  • Supreme Court Offers Guidance on Attorney's Fees in Copyright Cases
  • Tech Scam Defendants Settle With FTC, AG
  • FTC Lacks Trust for "Doctor Trusted" Certification Program

Ad Company's Geotargeting Locates a $1M Penalty

InMobi, a Singapore-based mobile advertising company, will pay almost $1 million in civil penalties and implement a comprehensive privacy program to settle charges that the company violated the Federal Trade Commission Act and the Children's Online Privacy Protection Act by deceptively tracking the locations of hundreds of millions of consumers, including children, to serve them geo-targeted advertising.

Although InMobi said its ad software only tracked consumers when they affirmatively opted in, as stated in its privacy settings, it actually tracked consumer locations whether or not the consumer provided permission—and even when consumers denied permission to access their location information, the agency alleged.

The problem played out on more than 1 billion devices worldwide, the FTC added, via multiple forms of location-based advertising. Combining the information collected from consumers with the wireless networks they were near, InMobi created a database that the company then used to infer the physical location of consumers even when they turned off the location collection on their device, some of whom were children.

It therefore violated COPPA's requirement that parental consent must be obtained prior to collecting and using a child's personally identifiable information, which includes geolocation data, the agency said.

"InMobi tracked the locations of hundreds of millions of consumers, including children, without their consent, in many cases totally ignoring consumers' express privacy preferences," Jessica Rich, Director of the FTC's Bureau of Consumer Protection, said in a press release about the case. "This settlement ensures that InMobi will honor consumers' privacy choices in the future, and will be held accountable for keeping their privacy promises."

To settle the case, InMobi agreed to pay $950,000 (of a $4 million partially suspended civil penalty) and make changes to its practices, including implementing a comprehensive privacy program (with independent audits every two years for the next 20 years).

The company will be prohibited from collecting consumer location information without affirmative, express consent and must honor consumers' location privacy settings. Location information of consumers collected without their consent, as well as all the information collected from children, must be deleted. Future misrepresentations about privacy practices as well as future violations of COPPA are prohibited.

To read the complaint and stipulated order in U.S. v. InMobi Pte Ltd., click here.

Why it matters: While the agency typically focuses on misleading claims made to consumers, the FTC filed suit against InMobi based on deceptive statements made to other businesses where the misrepresentations actually impacted consumers. "As a result, application developers could not provide accurate information to consumers regarding their applications' privacy practices," according to the FTC's complaint, its first action against the operator of a mobile ad network.

Supreme Court Offers Guidance on Attorney's Fees in Copyright Cases

Weighing in on attorney's fees in copyright cases, the U.S. Supreme Court unanimously held that federal courts must consider a variety of factors when determining whether to award fees to the prevailing party in an infringement dispute.

It was the second time the justices had considered the case involving Supap Kirtsaeng, who earned his living by importing and reselling textbooks. He asked family and friends to purchase English-language textbooks sold by John Wiley & Sons in Thailand and ship them to him in New York, where he sold them for less than the same books were sold in the United States. After paying his Thai suppliers, Kirtsaeng pocketed a profit.

Wiley eventually sued Kirtsaeng for copyright infringement, claiming that his activities violated the publisher's exclusive right to distribute the textbooks pursuant to the Copyright Act. Kirtsaeng invoked the "first-sale doctrine" as a defense, but Wiley countered that the doctrine did not apply when a book was manufactured abroad.

The dispute went all the way up to the Supreme Court, which decided in 2013 that the first-sale doctrine does allow the resale of foreign-made books, just as it does domestic books. Victorious, Kirtsaeng then returned to the federal district court and asked for more than $2 million in attorney's fees as the prevailing party.

Denying the motion, the federal district court gave "substantial weight" to the "objective reasonableness" of Wiley's infringement claim. Although unsuccessful, the court said the publisher's position was reasonable (noting that the Second Circuit Court of Appeals and three justices had agreed with it). The Second Circuit affirmed and Kirtsaeng again petitioned the high court.

In a unanimous opinion authored by Justice Elena Kagan, the Court agreed that substantial weight should be given to the objective reasonableness of the losing party's position. "But the court must also give due consideration to all other circumstances relevant to granting fees; and it retains discretion, in light of those factors, to make an award even when the losing party advanced a reasonable claim or defense."

Section 505 of the Copyright Act states that a district court "may … award a reasonable attorney's fee to the prevailing party." The statute authorizes fee-shifting, the Court said, but does not specify the standards that courts should adopt or guideposts to use. Prior Supreme Court precedent established that although district courts have "broad leeway" when making a decision about awards of attorney's fees, they may not treat plaintiffs and defendants any differently, and must consider awards on a case-by-case basis.

However, the courts have taken different approaches in their application of the standard. To get the courts back on track, the justices provided some additional guidance on the application of Section 505.

The objective reasonableness of a party's position should be given substantial weight, the justices agreed, "because it both encourages parties with strong legal positions to stand on their rights and deters those with weak ones from proceeding with litigation," which in turn promotes the purposes of the Copyright Act, by enhancing the probability that both creators and users will enjoy the benefits of the statute. In addition, the standard is "more administrable" and treats plaintiffs and defendants even-handedly, the Court added.

"All of that said, objective reasonableness can be only an important factor in assessing fee applications—not the controlling one," Justice Kagan wrote. "[Section] 505 confers broad discretion on district courts and, in deciding whether to fee-shift, they must take into account a range of considerations beyond the reasonableness of litigating positions. That means in any given case a court may award fees even though the losing party offered reasonable arguments (or conversely deny fees even though the losing party made unreasonable ones)."

A court may order fee-shifting because of a party's litigation misconduct, for example, or to deter repeated instances of copyright infringement or overaggressive assertions of copyright claims. "Although objective reasonableness carries significant weight, courts must view all of the circumstances of a case on their own terms, in light of the Copyright Act's essential goals," the Court said.

Applying this standard to Kirtsaeng, the justices found "serious questions" about how the lower courts framed the inquiry, expressing concern that they turned "substantial" into nearly "dispositive," by suggesting that a finding of reasonableness raised a presumption against granting fees, which "goes too far in cabining how a district court must structure its analysis and what it may conclude from its review of relevant factors."

The Court therefore vacated the denial of an award and remanded the case for the district court to "take another look at Kirtsaeng's fee application."

To read the opinion in Kirtsaeng v. John Wiley & Sons, Inc., click here.

Why it matters: Courts now have additional guidance when considering whether to award attorney's fees pursuant to Section 505 of the Copyright Act. While the justices agreed that the "objective reasonableness" of the losing party's position should be given substantial weight, the Court said it was one factor among several and should not be dispositive to the inquiry. The impact of the decision remains to be seen, as the justices emphasized the "broad leeway" afforded to district courts, which must now figure out how to apply the standard.

Tech Scam Defendants Settle With FTC, AG

The Federal Trade Commission and the Florida Attorney General halted a tech scam operation run by Vast Tech Support, OMG Tech Help, and executive Mark Donohue that reaped millions of dollars from thousands of consumers by selling bogus technical support services, the agency asserted.

In a complaint filed in Florida federal court, the FTC and the Florida AG claimed the defendants violated the Federal Trade Commission Act, the Telemarketing Sales Rule, and the state's Deceptive and Unfair Trade Practices Act by using software designed to trick consumers into believing there were problems with their computers.

The defendants ran ads claiming that the PC HealthBoost free system scan would dramatically speed up computers and prevent crashes. When consumers downloaded a free version of the product for the scan, the regulators alleged that it initiated a bogus computer system scan that "invariably" detected hundreds or thousands of purported errors in need of repair.

To "fix" the purported errors, the defendants then offered consumers a $29.97 version of the software with instructions to call a toll-free number to activate the product. Consumers who did so then faced telemarketers who relied on "high-pressure deceptive sales pitches" with additional offers of tech support products and services, sometimes by taking remote access of the computer and falsely claiming that the information displayed showed evidence of malware, the FTC and AG alleged.

According to the complaint, the defendants caused more than $22 million in consumer injury.

The settlement prohibits the defendants from misleading consumers about the nature of the products they sell or market as well as deceptive telemarketing. The corporate entities also face a ban on advertising, promoting, or selling any tech support products or services. Monetary judgments of $9 million (Donohue) and $27.2 million (the corporate defendants) were suspended.

To read the complaint and the stipulated orders in FTC v. Boost Software, click here.

Why it matters: The defendants ran afoul of both state and federal law with their tech scam, the FTC and Florida AG alleged, by deceiving consumers into paying for their products with bogus computer scans and false claims of malware.

FTC Lacks Trust for "Doctor Trusted" Certification Program

The Federal Trade Commission didn't place a lot of trust in SmartClick Media's "Doctor Trusted" certification program when it reached a deal with the company and owner Robert Vozdecky to stop their misleading claims.

The defendants marketed and sold a certification seal to hundreds of websites that offered health-related products and services (such as dietary supplements). The "Doctor Trusted" seal featured a photo of an individual in a white coat with a stethoscope, an "active" date that implied that the recommendation was current, and a "click to verify" link.

When consumers clicked on the link, a pop-up box appeared, stating that: "[Website name] was carefully evaluated by an independent medical doctor who reviewed its medical information, claims, products, terms of service, and policies, and has found the site to be trustworthy and safe for purchases as of the time of the review." The certification was issued by the "DoctorTrusted.org Consumer Protection Organization."

In reality, the seal and certificates were meaningless, the FTC alleged. The defendants did in fact hire doctors, but their review of the products on the websites was superficial, the agency said, and they made no determination as to whether the advertising claims for the products were supported.

Despite this, the defendants promoted the "Doctor Trusted" program as "one of the most effective ways to increase sales with the least amount of effort," claiming that the seal will "give visitors a new level of confidence to purchase your product." About 800 seals and certifications were sold to different websites over the course of three years at a price of $99.95 plus $39.95 per month, including websites that appeared as defendants in other FTC actions.

The defendants also operated their own websites—such as betterlivingjournal.org—that were deceptively formatted to appear to be health product review sites or independent lifestyle blogs, the agency said, when they were actually advertising vehicles and the defendants received a commission each time a consumer clicked on the site or purchased an advertised product.

Pursuant to the proposed stipulated final order, the defendants will be prohibited from misrepresenting the extent to which medical or other expertise is used to evaluate a product, that they are a consumer protection or nonprofit organization, the frequency with which they evaluate, certify, or review a product or service, and that any website is an independent resource for products or services.

The defendants will also be required to take affirmative action, including disclosing when the content of any website or other publication is not written by an objective source, but is instead an ad or paid placement, as well as disclosing any material connection between themselves and any product or service being discussed, reviewed, or evaluated on a website or other publication.

A judgment of $600,000 will be partially suspended upon payment of $35,000.

To read the complaint and proposed stipulated order in FTC v. SmartClick Media, click here.

Why it matters: "Consumers should be able to rely on seals and certificates for accurate information on how products are tested and evaluated," Jessica Rich, Director of the FTC's Bureau of Consumer Protection, said in a statement about the action. "Unfortunately, in this case, they were completely misled by the sellers of the 'Doctor Trusted' program." The case reminds marketers to proceed with caution when using seals, certifications, and reviews, particularly in the context of health claims, to ensure that the formatting of a site does not imply independent content or reviews, and to disclose any material connections that consumers may not expect.

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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