Advertising Law - March 2016 #2

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

  • SPECIAL FOCUS: Lord & Taylor Settles With FTC for Not Disclosing Native Ads
  • NFL Players Fumble Publicity Rights, Lanham Act Appeal to Eighth Circuit
  • Privacy Shield Details Revealed; Will It Withstand Scrutiny?
  • Consumers Had a Lot to Complaint About in 2015
  • FDA to Study Animation in Drug Ads

SPECIAL FOCUS: Lord & Taylor Settles With FTC for Not Disclosing Native Ads

Authors: Lauren B. Aronson and Linda A. Goldstein

Less than three months after the Federal Trade Commission issued its December 2015 Policy Statement and Business Guide on native advertising ("Native Advertising Guidance"), the Commission has announced its first enforcement action and settlement in a native advertising case with department store chain Lord & Taylor. The action stems from a highly successful social media campaign launched by Lord & Taylor to promote its private label clothing brand Design Lab. The campaign included branded blog posts, photos, video uploads, native advertising editorials in online fashion magazines, and online endorsements by a team of specially selected "fashion influencers." According to the FTC, Lord & Taylor failed to disclose that the native articles and posts were paid commercial content and the fashion influencers failed to disclose that they had been paid by Lord & Taylor and received free product. Thus, because the case involves compliance with both the FTC's native advertising guidelines and the Testimonial and Endorsement Guides, it provides important lessons for marketers utilizing any form of native advertising or more broadly engaging in social influencer campaigns.

According to the FTC's complaint, Lord & Taylor engaged fashion magazines to produce native content designed to promote the Design Lab Paisley Asymmetrical dress. As part of the campaign, Nylon, an online magazine, posted a photograph to its Instagram account of the dress along with a caption. Lord & Taylor edited and approved the post without disclosing the commercial arrangement between itself and Nylon. Additionally, Nylon also ran an article regarding Design Lab, pre-approved by Lord & Taylor, without disclosing that the article was paid advertising content.

Furthermore, the FTC alleged that Lord & Taylor also engaged social media influencers to promote Design Lab on Instagram without ensuring compliance with the FTC Guides Concerning the Use of Endorsements and Testimonials in Advertising. Lord & Taylor gifted the Paisley dress to 50 fashion influencers with sizeable social media followings and paid them between $1,000 to $4,000 to post stylish photographs of themselves wearing the dress on Instagram along with a caption. While the influencers were contractually obligated to mention and tag the company by using the user designation @lordandtaylor and to add the hashtag #DesignLab to the caption, they were not contractually obligated to disclose any material connection with the company. None of the posts disclosed that the dress was given for free, that the influencer was compensated, or that the posts were part of a Lord & Taylor advertising campaign.

According to the FTC, Lord & Taylor's failure to disclose the commercial connections between itself and Nylon and the social media influencers communicated the false message to consumers that the Instagram images, captions and Nylon article were all independent content produced by unbiased consumers and an unbiased publication when in fact they were all part of Lord & Taylor's advertising campaign.

Not surprisingly, the Proposed Consent Order, which is up for public comment through April 14, 2016, prohibits Lord & Taylor from misrepresenting that "paid commercial advertising is a statement or opinion from an independent or objective publisher or source," that endorsers are independent users or ordinary consumers, or otherwise failing to disclose an unexpected connection with an endorser. Importantly, the Order also imposes significant compliance obligations on the company similar to those that the FTC imposed in a case brought several months earlier against Machinima. The company must:

  • Provide each endorser with a clear statement of responsibility regarding disclosure obligations and obtain a signed and dated statement acknowledging receipt and agreeing to comply;
  • Establish a monitoring system to monitor and review advertisements and communications made by endorsers as part of an Influencer Campaign; and
  • Immediately terminate any endorser for misrepresenting impartiality or failing to disclose a material connection.

Why it matters: The FTC has made it clear that it is closely watching Influencer Campaigns and that advertisers are responsible for ensuring that material disclosures by endorsers—social media influencers and publishers—are clearly and conspicuously disclosed. Advertisers should take note of the obligations imposed on Lord & Taylor and consider incorporating the following requirements as they develop future Influencer Campaigns.

  • Put Disclosure Obligations in the Contract. Obtain a signed agreement from endorsers with a clear statement of responsibility and agreement to comply with disclosure obligations.
  • Closely Monitor Endorsers. Create a monitoring system designed to ensure that endorsers are properly representing their relationship to the advertiser and clearly and conspicuously disclosing the material connection.
  • Training is Crucial. Make sure that affiliates are trained to properly review sponsored content and endorsements.
  • No Third Chances. If an influencer makes a mistake and fails to adequately disclose a material connection, the advertiser may give them a second chance if the advertiser has reason to believe the failure to disclose was inadvertent. However, the advertiser must inform the influencer that they will be immediately terminated in the event of a subsequent compliance failure.

NFL Players Fumble Publicity Rights, Lanham Act Appeal to Eighth Circuit

A trio of former National Football League players who elected not to participate in the $42 million settlement deal in a prior publicity rights suit against the league lost their appeal to the Eighth Circuit Court of Appeals when the federal appellate panel affirmed dismissal of their suit.

John Frederick Dryer, Elvin Lamont Bethea, and Edward Alvin White played for the NFL in the 1960s, 70s, and 80s. The three were part of a putative class action lawsuit filed by former professional players against the league's NFL Films, claiming that the defendant violated the players' rights under right of publicity laws found in various states as well as the Lanham Act.

That case settled in 2013 with the NFL agreeing to provide $42 million for a "common good fund" to help create an agency to license players' publicity rights. But Dryer, Bethea, and White opted out of the deal and elected to pursue their own claims instead. A district court judge in Minnesota granted summary judgment in favor of the NFL and the Eighth Circuit affirmed.

The players argued that the district court incorrectly determined that the Copyright Act preempted their right of publicity claims. The plaintiffs' performances in football games and interviews constituted part of their identities, they told the court, not works eligible for copyright protection.

Section 301(a) of the Copyright Act provides that federal copyright law preempts "all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright … in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright."

The NFL films at issue easily met this definition, the panel said, and the statute specifically includes fixed recordings of live performances within its purview. "The appellants do not argue that NFL Films lacked permission to record appellants' live performances in NFL games," the court said. "Nor do they dispute that the NFL maintains an enforceable copyright in the footage that NFL Films gathered during those games. Because the appellants do not challenge the NFL's use of their likenesses or identities in any context other than the publication of that game footage, we hold that the appellants' right-of-publicity claims challenge a 'work … within the subject matter of copyright.'"

Commercial speech falls outside the scope of copyright law, the players countered, and the films represent advertisements for "NFL-branded football" to promote the league for its economic benefit.

Again, the court was not persuaded. The films do not propose a commercial transaction and do not reference the NFL as a specific product, the panel said. "The films tell stories of past contests featuring NFL teams and players, and they reference the league as part of those historical events rather than as a present-day product," the court wrote. "Moreover, consumer demand for the films demonstrates that they exist as 'products' in their own right."

Consumers pay to view the films, either by purchasing copies or via subscriptions to the broadcasters that license the films to air on their networks, the panel explained. "Because the films represent speech of independent value and public interest rather than advertisements for a specific product, the NFL's economic motivations alone cannot convert these productions into commercial speech," the court said, determining the films are "expressive speech" and the Copyright Act therefore preempts the plaintiffs' right of publicity claims.

Turning to the Lanham Act, the former players contended that the films leave the impression they currently endorse or associate themselves with the NFL. The plaintiffs relied upon survey evidence showing that a statistically significant number of survey participants concluded upon viewing the films that the depicted players endorsed the NFL.

However, the plaintiffs did not claim that any statements in the films were literally false or that the films implicitly conveyed a false impression, the panel said. "Although the films as a whole may portray the NFL in a positive light, nothing in the films implies that the appellants share that perspective," the court wrote. "To the contrary, the appellants had the opportunity to share their own views when they willingly participated in interviews with the films' creators, and they do not challenge the NFL's inclusion of those interviews in the films."

While some viewers of the content may misunderstand the extent to which the appellants continue to associate with or endorse the league, "this misunderstanding alone is insufficient" to overcome the NFL's motion for summary judgment, the Eighth Circuit concluded.

To read the decision in Dryer v. NFL, click here.

Why it matters: The decision is a resounding victory for the NFL, which settled the initial publicity rights and Lanham Act litigation for $42 million only to be on the receiving end of dozens of new suits from former players that opted out of the settlement deal. Given the court's affirmation that the Copyright Act preempts the former players' claims, the films were expressive works in their own right, and that consumer misunderstanding about the extent of the players' continued association with the league was insufficient, the federal appellate panel may have signaled unlikely success for any remaining player lawsuits.

Privacy Shield Details Revealed; Will It Withstand Scrutiny?

Officials in the United States and the European Commission have released the draft text of the European Union-United States Privacy Shield, offering 132 pages of details about the new deal on the transatlantic transfer of data.

In February, the officials announced they had reached an agreement but had few specifics in place. The Framework now provides insight into what companies will be facing under the new rules.

Familiar from the prior EU-U.S. Safe Harbor are the seven principles espoused by the EU with regard to consumer privacy: notice; choice; accountability for onward transfer; security; data integrity and purpose limitation; access; and recourse, enforcement, and liability. Companies will commit to comply with these principles in order to self-certify.

While the principles remain the same, the new deal "provides stronger obligations on companies in the U.S. to protect the personal data of Europeans," according to a Fact Sheet released by the Commission, highlighting four main areas of change.

First, the Shield imposes strong obligations on companies and provides for robust enforcement, with supervision mechanisms to ensure that companies respect their obligations and face sanctions or exclusion for failure to comply. The new rules also tighten conditions for onward transfers to other partners.

The new deal establishes "clear safeguards and transparency obligations" on U.S. government access to data. The United States government—for the first time—provided written assurance that any access of public authorities for national security purposes will be subject to clear limitations and oversight mechanisms, with the creation of an Ombudsperson, tasked with following up on complaints and enquiries.

Redress options are a big part of the Shield, with multiple possibilities for EU citizens concerned about their data. In addition to the Ombudsperson, Congress enacted the Judicial Redress Act into law, which permits non-U.S. citizens to bring suit in the country if their personal data is misused. The legislation had been a sticking point during negotiations and President Barack Obama's signature on the bill led Commissioner Vera Jourova to declare it "a historic achievement in our efforts to restore trust in transatlantic data flows."

The Framework also set forth an Arbitral Model that establishes a means for redress described by the authorities as "a prompt, independent, and fair mechanism, at the option of individuals, for resolutions of claimed violations of the Principles not resolved by any of the other Privacy Shield mechanisms, if any." Complaints must be resolved by companies within 45 days.

Finally, an annual joint review mechanism is in place to monitor the functioning of the Privacy Shield. Each year, the Commission and U.S. Department of Commerce will conduct an annual privacy review of the prior year to ensure that the commitments and assurances are holding up.

Companies should also brace themselves for heightened enforcement, as Federal Trade Commission Chairwoman Edith Ramirez released a statement in conjunction with the draft text vowing that the agency "will play a significant role in enforcing commercial privacy promises under the framework," and make enforcement of the new Shield "a high priority."

While the Shield continues to move forward in the approval process, an open question remains: will it withstand judicial scrutiny in the EU? The Shield came about because the previous iteration of the transatlantic data deal, the EU-U.S. Safe Harbor, was thrown out last year by the EU's highest court.

Critics have argued the Shield offers mere cosmetic changes from the Safe Harbor and will likely be struck down by the court for the same reasons. Max Schrems, whose lawsuit led to the invalidation of the Safe Harbor, criticized the new deal for failing "to address the core concerns and fundamental flaws of U.S. intelligence laws and the lack of privacy protections in U.S. law."

To read the EU-U.S. Privacy Shield Framework, click here.

To read the Commission's Fact Sheet, click here.

Why it matters: For now, work to finalize the details of the Privacy Shield continues. While the U.S. works on getting the Ombudsperson position in place and formalizing enforcement of the new deal, the Commission is expected to issue an adequacy decision in early summer, signaling its final approval of the Shield. The Article 29 Working Party, the EU body representing the data protection authorities of each member country, announced an extension of the moratorium on enforcement actions on transatlantic data transfers until the group has reviewed the Privacy Shield Framework. In the meantime, businesses should familiarize themselves with the coming changes.

Consumers Had a Lot to Complaint About in 2015

What did consumers complain about the most in 2015?

The Federal Trade Commission released a list of consumer complaints from the previous year, with debt collection topping all other gripes with 29 percent, or 897,655 complaints. Dropping down to second place was identity theft (16 percent of complaints, with 490,220) followed by imposter scams (353,770 complaints, accounting for 11 percent of the total).

Each year, the agency's Consumer Sentinel Network compiles all of its complaints to produce a data book. The complaints include not just those made directly to the FTC by consumers but also complaints received by state and federal law enforcement agencies (such as state Attorneys General offices, the Consumer Financial Protection Bureau and the Internal Revenue Service), national consumer protection organizations, and non-governmental organizations like the Council of Better Business Bureaus.

Complaints are sorted into 30 complaint categories and ranked nationally as well as on a state-by-state basis, with a list of the top complaint categories in each state and data on the states and metropolitan areas that generated the most complaints per capita. Do Not Call complaints are reported separately by the FTC and are not included in the numbers.

A total of 3,083,379 consumer complaints were collected by the network in 2015, an increase from the 2,629,987 received in 2014. Over 1.2 million complaints were fraud related, with consumers reporting they paid more than $765 million (with a median payment of $400). The top three states for fraud and other complaints were Florida, Georgia, and Michigan, while Missouri, Connecticut, and Florida took the top three positions for identity theft complaints.

This is the first year debt collection has reached the top spot, the agency noted, with identity theft having been the undisputed leader for the last 15 years. The FTC suspects that debt collection jumped to first thanks to a data contributor that collects consumer complaints via a mobile app, which yielded a spike in complaints about unwanted debt collection calls to mobile phones. Although identity theft came down in the rankings, the number of complaints in that category still increased more than 47 percent from 2014, the FTC said.

Rounding out the top ten: telephone and mobile services (with 275,754 complaints); prizes, sweepstakes and lotteries, accounting for just 5 percent of the claims; banks and lenders, notching 131,875 complaints; shop-at-home and catalog sales, with 96,363 complaints from consumers; auto-related complaints, constituting 3 percent of consumer gripes; television and electronic media in ninth place; and credit bureaus, information furnishers, and report users with 43,939 complaints, or just 1 percent of the total complaints in 2015.

To read the Consumer Sentinel Network Data Book for January-December 2015, click here.

Why it matters: The release of the statistics provided the FTC with an opportunity to highlight its efforts to combat illegal conduct. "We recognize that identity theft and unlawful debt collection practices continue to cause significant harm to many consumers," Jessica Rich, Director of the agency's Bureau of Consumer Protection, said in a statement. "Steps like the recent upgrade to IdentityTheft.gov and our leadership of a nationwide initiative to combat unlawful debt collection practices are critical to our ongoing work to protect consumers from these harms."

FDA to Study Animation in Drug Ads

The Food and Drug Administration will consider the use of animation in drug ads, the agency announced, and whether such commercials might improperly impact consumer perception of the risks associated with the medication being advertised.

"It is important to examine whether animation in drug ads inflates efficacy perceptions, minimizes risk, or otherwise hinders comprehension of drug risks and benefits," the agency explained in a Federal Register notice. "Understanding how issues of animation and personification affect perceptions of both risks and benefits can inform FDA regarding how prescription drug risk and benefit information is processed."

Animated characters can be fictional or nonfictional, human or non-human, the FDA said, and despite variations in form, "are often used to grab attention, increase ad memorability, and enhance persuasion to ultimately drive behavior."

For example, animation has been used in drug ads to symbolize the disease, the sufferer, the mode of administration, and the mechanism of action. Drug companies may use a personified non-human character to illustrate the medical condition or drug attributes in a visually memorable way, the agency said. The limited studies that have examined the use of animation found such characters "led to much stronger brand recall and brand association scores."

"The positive effects these animations induce might transfer to the brands being advertised," the FDA wrote, and personifying animated characters may interfere with message communication. "It is also possible that animated characters may lead to lower perceived risk by minimizing or camouflaging side effects."

To better understand the impact of animation, the agency will conduct a two-part experimental study "to examine how a type of animation and non-human personification in drug ads influence consumer comprehension, processing, and perception of risk and benefit information." The FDA will look at these strategies across two different medical conditions—chronic dry eye (relatively few risks and side effects) and psoriasis (very long, serious lists of risks and side effects)—to evaluate if the findings are consistent across patient populations and medications with different levels of risk.

To read the FDA's Federal Register notice about the study, click here.

Why it matters: The FDA's discussion of its study plans did not touch upon how its findings will be used, but drug companies should keep a close eye on the agency's efforts. Depending on what the research reveals about the impact of animation and animated characters on consumer perception, drug manufacturers could be facing new regulations or agency guidance down the road.

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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