Advertising Law -- Jun 13, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

SPECIAL FEATURE: Manatt and Mergermarket Release New Study on U.S.-China Deal Activity in Entertainment, Advertising and Digital Media Sectors

Investment and M&A activity between the U.S. and China in the entertainment, advertising and digital media sectors will increase over the next 12 months, according to more than two-thirds of respondents surveyed in a report from Manatt, Phelps & Phillips, LLP. Conducted in association with Mergermarket, the report is based on 100 interviews with prominent American and Chinese entertainment, advertising, and digital media corporate executives, investment bankers, and private equity practitioners.

Among the key findings are that respondents based in China place social media and multimedia distribution among the top American subsectors for investment and M&A over the next 12 months. Chinese bidders are also looking to make larger deals. Respondents overwhelmingly expect Chinese bidders to take on controlling stakes of American entertainment, advertising and digital media targets over the next 12 months, government permitting, and respondents say their aim is not primarily to build shareholder value, but to bring new content or technology back to China.

To read the full survey, click here.

NAI’s Guidance on Mobile Apps Coming Soon

The National Advertising Initiative will release a Mobile Application Code in the coming weeks.

The group – made up of 90 ad networks and companies like Yahoo! that collect data or serve advertisements – released a draft version of the proposed code last month to members. NAI Executive Director Marc Groman told MediaPost he hopes the final version will be complete by the end of June.

Under the draft terms, users can opt out from receiving behaviorally targeted ads on their mobile devices, although companies may continue to collect “non-personally identifiable” data from users who have chosen to opt out. Such information includes analytics, ad optimization, and frequency capping. In addition, data connected to a specific device (and not an individual) is considered “non-personally identifiable.” However, companies must de-identify or delete the data as soon as it is no longer needed.

Opt-in consent would be required before collecting personally identifiable information (names, addresses, and phone numbers), “sensitive information” (like financial account numbers and medical conditions data), geolocation data, and “personal directory data” specific to a mobile device, like an address book or call log.

Companies must notify users when they conduct cross-app advertising and must provide information about the type of data they collect, how long it will be retained, and how it will be transferred.

Why it matters: Advertisers certainly do not lack guidance on how to deal with mobile privacy. In addition to the NAI, the Digital Advertising Alliance has promised guidance in the coming months and both the Federal Trade Commission and California Attorney General Kamala Harris have recently addressed the issue.

FTC Proposes Changes to Telemarketing Sales Rule

With the goal of limiting certain types of payment methods most commonly used by “con artists and scammers,” the Federal Trade Commission is seeking public comment on proposed amendments to the Telemarketing Sales Rule.

Four payment methods will be treated as TSR violations and would be banned: unsigned checks, “payment orders” that have been “remotely created,” “cash-to-cash” money transfers, and “cash reload” mechanisms.

“The FTC has found that unscrupulous telemarketers rely on these payment methods because they are largely unmonitored,” the agency said in a press release about the proposed amendments. The targeted methods “make it easy” to debit bank accounts without permission or get money quickly and anonymously.

The FTC also proposed expanding the TSR’s ban on telemarketing “recovery services” for an advance fee. Under the current Rule, offers to recoup losses suffered in a prior telemarketing scheme are prohibited. The change would expand the Rule to cover an offer to recoup losses suffered in any prior non-telemarketing transaction.

In addition, the agency proposed “clarifications” of other existing TSR requirements that reflect the enforcement policy of the Commission, including a clear prohibition on sharing the costs of nontransferable Do Not Call Registry fees between sellers. Further changes require telemarketers to include a description of the goods or services being purchased in all consumer express verifiable authorization recordings. The agency also made clear that the business-to-business exemption under the TSR extends only to calls to induce a sale to or contribution from a business entity, and not to calls to induce sales to or contributions from individuals employed by a business entity.

Finally, the amended TSR would make clear that the burden falls on a seller or telemarketer to demonstrate an existing business relationship with, or an express written agreement to receive calls from, a person whose number is listed on the Do Not Call Registry. Sellers or telemarketers who fail to obtain the necessary information cannot rely upon the safe harbor provision for isolated or inadvertent violations under the TSR.

The FTC posed questions regarding compliance matters and whether other changes, if any, should be made to the proposed amendments to minimize cost to consumers or industry. It also asked whether a systematic fraud monitoring and dispute resolution procedure was in place that would protect consumers who are scammed by the four payment methods the agency proposes to prohibit.

The agency is accepting comments on the proposal until July 29.

To read the proposed Rule changes, click here.

Why it matters: “These proposed amendments reflect evolutions in the marketplace toward the use of certain retail payment methods in fraud transactions and the growing expansion of recovery services to include losses incurred in non-telemarketing transactions,” the agency explained in the Federal Register notice of the proposed amendments. Entities covered by the TSR should review the proposal to understand the impact of the changes.

Will a Second Settlement Seal the Deal for Kellogg?

For a second time, Kellogg has reached a settlement with consumers who challenged advertising claims that Frosted Mini-Wheats cereal could improve children’s cognitive function and memory retention. The claims include “Does your child need to pay more attention in school? . . . A recent clinical study showed that a whole grain and fiber-filled breakfast of Frosted Mini-Wheats helps improve children’s attentiveness by nearly 20%.”

The national class action followed multiple actions by the Federal Trade Commission regarding the company’s advertising that settled for $10.6 million. That deal provided a $2.75 million payout to class members, a $5.5 million donation to charity, and $2 million in class counsel fees.

On appeal from class objectors, however, the 9th U.S. Circuit Court of Appeals reversed approval of the agreement. The panel cited concerns about the charitable distribution portion of the settlement and the “excessive” class counsel fees. The court ruled that the charitable donation was not “sufficiently related” to the plaintiff class or to the class’s underlying false advertising claims, as it “neither identifies the ultimate recipients . . . nor sets forth any limiting restriction on those recipients.”

The parties regrouped and presented a revised agreement to the district court. For the second attempt, Kellogg agreed to provide a $4 million cash fund for distribution to class members who could receive reimbursement of $5 per box up to a maximum of $15 per class member. Remaining monies would be distributed equally to cy pres recipients Consumers Union, Consumer Watchdog, and the Center for Science in the Public Interest.

However, claims notice and administration costs would be reduced by $550,000 and attorneys’ fees reduced up to 25 percent, including costs. The parties estimated the cash value to the class would total between $2 million to $2.5 million.

Kellogg also promised to refrain from using the challenged advertisements for a three-year period.

U.S. District Court Judge Irma E. Gonzalez granted preliminary approval to the deal. But she expressed concern that “as between the original settlement and the revised settlement proposed here, the value to absent class members decreased dramatically while the requested attorneys’ fees and incentive awards appear unaffected.” She cautioned the parties that “left unresolved, these concerns could result in a finding of inadequacy.”

To read the court’s order granting preliminary approval of the settlement in Dennis v. Kellogg, click here.

Why it matters: The second time may not be the charm for the settlement deal. While the court noted that cy pres recipients were each “well-established and well-regarded consumer protection organizations” that would “suffice” under the 9th Circuit’s prescriptions, “several aspects of the settlement give the court pause,” most notably the reduction in the cash value of the settlement fund. “How did mere identification of proper cy pres recipients result in such a severe drop in the value of the class’s claims? How is it that the value to the class dropped approximately 75 percent, while requested attorney’s fees appear nearly constant?” Judge Gonzalez asked. “These concerns are especially troubling given the 9th Circuit’s previous admonishments to the parties over both illusory dollar values and excessive attorney’s fees.”

Latest Salvo in Battle Over FTC’s Power

The Federal Trade Commission is not backing down. In the agency’s response to Wyndham Hotel & Resorts’ contention that the FTC has overstepped its bounds by regulating the data security practices of private companies, it didn’t hold back.

Wyndham’s arguments “rest on a tortured reading of the statute and a rejection of seventy-five years of enforcement,” the agency wrote in its motion. It further characterized the resort company’s contentions as “astonishing,” “quite dubious, if not flatly wrong,” “extraordinary,” and navigating “uncharted territory.”

The battle began in June 2012, when the FTC filed a complaint against Wyndham alleging that the company violated Section 5 of the FTC Act by misrepresenting the security measures in its privacy policy and by failing to protect customer information. Instead of negotiating a consent decree, Wyndham fought back.

The company moved to dismiss the suit, arguing the agency had overstepped its bounds and assumed statutory authority “to do that which Congress has refused: establish data security standards for the private sector and enforce those standards in federal court.”

In the latest salvo, the FTC filed its response, calling Wyndham’s motion a “baseless legal challenge.” The agency is “not suing Wyndham for the fact that it was hacked, it is suing Wyndham for mishandling consumers’ information such that hackers were able to steal it” – an area clearly under its purview, according to the brief.

The agency even disputed Wyndham’s analogies. In its motion to dismiss, Wyndham compared itself to a local furniture store that was robbed and then re-victimized by the FTC suit. “A more accurate analogy would be that Wyndham was a local furniture store that left copies of its customers’ credit and debit card information lying on the counter, failed to lock the doors of the store at night, and was shocked to find in the morning that someone had stolen the information,” the agency wrote. “Unlike Wyndham’s hypothetical furniture heist, Wyndham’s role in this matter was primarily as a vehicle for the victimization of consumers.”

Accepting Wyndham’s argument that the FTC lacks power to regulate data security would “carve out a data security exception to the FTC’s well-established unfairness authority,” the agency told the court. “Congress deliberately delegated broad power to the FTC under Section 5 of the FTC Act to address unanticipated practices in a changing economy.” Deference should therefore be accorded to the agency’s determination as to the scope of its authority to enforce the FTC Act.

Subsequent sector-specific laws (including the Fair Credit Reporting Act, the Gramm-Leach-Bliley Act, and the Children’s Online Privacy Protection Act) do not limit the scope of the FTC’s authority but merely complement the agency’s powers. Accordingly, additional data security legislation that may be passed would not undermine the agency’s existing powers but would provide additional enforcement tools, the agency argued. Such legislative and executive attempts to enact data security bills would also not strip the FTC of its authority to regulate unfair practices.

The court should similarly disregard Wyndham’s line of argument that businesses lack notice about the requirements under Section 5, the FTC said. Far from operating in a “guidance vacuum,” multiple sources of industry guidance exist on the issue of data security. Companies can also look to prior FTC enforcement actions involving data security programs for direction. “Although every situation is different, the consent orders . . . provide industry, including Wyndham, with notice of different features of data security that must be evaluated in order to maintain a reasonable data security program,” the agency wrote.

To read the FTC’s response to Wyndham’s motion to dismiss in FTC v. Wyndham, click here.

Why it matters: Neither party in the must-watch case is likely to back down. Wyndham has already taken the leap to challenge the agency’s authority, and the FTC must fight or face similar challenges from other defendants. All eyes will be on the court’s forthcoming ruling on whether or not to dismiss the suit.

Court: TCPA Opt-Out Language Required Even with Consent

Relying upon a Federal Communications Commission regulation, the 8th U.S. Circuit Court of Appeals held that a fax advertisement lacking opt-out language pursuant to the Telephone Consumer Protection Act may violate the statute even where the recipient consented to receive the ad.

The TCPA mandates that a “conspicuous” notice be included in advertisements, accompanied by a domestic telephone number and a cost-free mechanism for the recipient to opt out of receiving future “unsolicited advertisements.”

But what if consent was given to receive the ad?

Missouri resident Michael Nack consented to receive ads from Douglas Walburg. But after Nack received one faxed ad lacking opt-out information, he filed a class action suit pursuant to the TCPA.

Walburg moved for summary judgment, arguing that the statute itself does not expressly impose the requirement to include opt-out language in solicited advertisements. A federal district court agreed.

But on appeal the 8th Circuit solicited the input of the FCC, which informed the court that the contested opt-out language is required even on ads sent after obtaining a potential recipient’s consent. The agency pointed to FCC Regulation 47 C.F.R. § 64.1200(a)(3)(iv) and a 2006 order to support its position.

“[C]onsent, once granted, need not be interpreted as permanent,” the court said. “The FCC sought to ensure that even recipients who consented to receive a fax could easily and without expense stop the sending of any possible future faxes.”

Extending deference to the agency, the panel said the regulation requires senders to employ the opt-out language even with prior express permission to send the ad. The posture of the lawsuit was an inappropriate vehicle to challenge the validity of the regulation, the court added.

A party seeking to challenge an FCC regulation must first petition the agency itself and then, if denied, appeal directly to the Court of Appeals as provided by the Hobbs Act. Therefore, the statute precluded the court from evaluating the contested regulation, it concluded.

To read the opinion in Nack v. Walburg, click here.

To register for Manatt’s upcoming webinar, “Are You Ready for New TCPA Consent Requirements?” click here.

Why it matters: The 8th Circuit afforded the FCC regulation appropriate deference and reversed summary judgment for the defendant. The panel dropped several hints, however, that Walburg still had an available route if he wished to challenge the validity of the regulation and continue to fight the suit. An end run around the Hobbs Act was not permitted, but the court noted that the defendant “has not yet” elected to seek a stay of litigation to pursue his administrative remedies through the FCC. “On remand, the district court may entertain any requests to stay proceedings for pursuit of administrative determination of the issues raised herein,” the panel concluded, thereby providing a road map for the defendant.

Noted, Quoted and Socially Promoted . . . The New York Times Turns to Linda Goldstein on Celebrity Tweets and Marc Roth Shares Thoughts About Big Brother and Big Data in “Of Bytes & G-Men” on MDM’s Blog

On June 9, 2013, Linda Goldstein, Chair of Manatt’s Advertising, Marketing and Media Division, talked to The New York Times Bits blog about the enforcement risks associated with celebrities who promote products and services via social media without disclosing that they are being paid to do so.

The story, “Celebrities Product Plugs on Social Media Draw Scrutiny,” highlights a recent Twitter post by Miley Cyrus expressing her gratitude to BlackJet for her flight to Silicon Valley. It was likely unclear to Miley’s followers whether this was an advertisement for BlackJet, but when later asked about it, the chief executive of BlackJet admitted “she was given some consideration for her tweet.”

In these types of cases, Linda noted that advertisers, investors and celebrities should disclose that they will benefit from making the post. “The message to brands is that you are responsible for the action of your spokespeople, so when you engage them, they should be aware of their obligations,” she said.

To read the full article, click here.

“Of Bytes & G-Men”: The current debate over Big Data, Big Brother and the future of privacy legislation took an interesting turn last week when the government’s Prism project was exposed by a former CIA employee. How will consumers and legislators react? Click here to read the full post by Marc Roth at Manatt Digital Media blog.

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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