Advertising Law -- Nov 06, 2013

by Manatt, Phelps & Phillips, LLP

In This Issue:

FTC Settles Over “Made in the U.S.A.” Claims

Back in business after the government shutdown, the Federal Trade Commission recently announced a settlement involving products falsely advertised as “Made in the U.S.A.”

E.K. Ekcessories sold a variety of merchandise, including bottle holders, iPhone covers, dog collars, and leashes, all purporting to have been “Made in the U.S.A.” or “Truly Made in the USA.” On the company’s Web site it claimed “For 28 years E.K. Ekcessories has been producing superior quality made accessories in our 60,000 sq. ft. facility in Logan, Utah” and “Our source of pride and satisfaction abounds from a true ‘Made in USA’ product.”

According to the FTC’s complaint, however, Ekcessories actually imported many of its products and components from outside the United States, rendering the origin claims deceptive, and as such, in violation of Section 5 of the Federal Trade Commission Act. For some products, the company simply applied the label without a reasonable basis for the claim, according to the agency. The FTC also alleged that Ekcessories disseminated deceptive promotional materials to third-party retailers of its products, including Amazon and REI.

Under the terms of the proposed settlement, Ekcessories cannot claim a product is made in the United States unless “all or virtually all” of the product is made in this country, as required by the Commission’s 1997 U.S. Origin Claims Enforcement Policy Statement. The Policy Statement clarifies the FTC’s position that in order to lawfully claim that a product is made in the U.S.A., companies must ensure that all significant parts and processing are of U.S. origin, with negligible or zero foreign content.

Ekcessories must also refrain from providing misleading origin claims to third-party retailers for use in advertising or labeling under the agreement. In addition, the agreement requires Ekcessories to contact all distributors that purchased or received its products over a three-year period, provide them with a copy of the consent agreement, and instruct them to remove the deceptive “Made in the U.S.A.” claims.

To read the complaint and proposed consent agreement in In the Matter of E.K. Ekcessories, click here

Why it matters: To comply with the law, advertisers making “Made in the U.S.A.” origin claims should ensure that the products at issue are “all or virtually all” made in the U.S.A., with negligible or nonexistent foreign content – and be prepared to provide a reasonable basis for the claim.

FTC Spies Settlement Over Spyware

In a second deal recently announced by the agency, rent-to-own retailer Aaron’s, Inc. reached a consent agreement with the Federal Trade Commission over allegations that the company “knowingly played a direct and vital role” in the installation and use of spyware on consumers’ rental computers.

The agency alleged that Aaron’s franchisees installed a spyware program called PC Rental Agent on rental computers without informing consumers. The spyware allowed Aaron’s franchisees to remotely install and activate an add-on program called “Detective Mode” that allowed franchisees to spy on consumers. Specifically, the software allowed the franchisees to collect data regarding the location of rented computers, and also recorded keystrokes that revealed consumers’ login credentials for online e-mail, financial, and social media accounts. The software also gathered screenshots of how consumers were using their computers, and even utilized Web cams to photograph consumers.

The PC Rental Agent software was the subject of a separate action earlier last year, when seven rent-to-own companies faced similar allegations from the FTC.

According to the FTC, Aaron’s knew that the software program was being installed on rental computers without informing consumers and knew the types of personal information the software was collecting. In fact, said the FTC, Aaron’s not only allowed the spying to continue, but also provided to its franchisees instructions regarding how to use the software and the stored data it collected. It also allegedly transmitted messages from the software to its franchisees.

Aaron’s actions caused actual harm to consumers, the FTC said. Web cam images that were transmitted included shots of children, individuals not fully clothed, and some engaged in intimate conduct. The software also captured screenshots containing confidential data like medical information, bank and credit card statements, and application forms with Social Security numbers.

Aaron’s agreed to stop using monitoring technology that captures keystrokes or screenshots, or that activates the microphone or camera on a computer, with the exception of providing technical support as requested by a consumer. Going forward, to the extent permitted monitoring software is installed on rented computers, the company promised to give clear notice at the time a computer is rented, as well as when any tracking technology is activated, unless the computer has been reported stolen.

In addition, Aaron’s agreed to delete or destroy information that was improperly collected. In the future, the company agreed to transmit properly collected data in an encrypted format. Annual monitoring of franchisees is also required under the proposed consent agreement. Franchises that fail to meet the requirements of the agreement must be terminated.

To read the complaint and proposed consent agreement in In the Matter of Aaron’s Inc., click here

Why it matters: “Consumers have a right to rent computers free of cyberspying and to know when and how they are being tracked by a company,” Jessica Rich, Director of the FTC’s Bureau of Consumer Protection, said in a press release about the case. “By enabling their franchisees to use this invasive software, Aaron’s facilitated a violation of many consumers’ privacy.” The settlement also demonstrates the agency’s broad application of liability under the FTC Act, taking action against several parties: the franchisor, Aaron’s, in the most recent case, as well as the software developer and multiple retailers that used it in the earlier action.

Illinois Supreme Court Strikes Down “Amazon Tax” Law

Ruling that the law imposed a discriminatory tax upon online performance marketers, the Illinois Supreme Court struck down the state’s so-called “Amazon tax” in a recent opinion.

Taking a position different from other courts – for example, a decision from New York’s highest court earlier this year finding that the imposition of a similar tax did not violate the Commerce Clause – the Illinois court said the federal Tax Freedom Act preempted the state law.

In 2011 Illinois amended the Use Tax and Service Use Tax Acts to update the definition of a “retailer” or “serviceman” maintaining a place of business in the state. The revised definition included “a retailer having a contract with a person located in this State under which the person, for a commission or other consideration based upon the sale of tangible personal property by the retailer, directly or indirectly refers potential customers to the retailer by a link of the person’s Internet website.”

Out-of-state online performance marketers were subject to the tax when they met a threshold of $10,000 per year in sales earned by consumer click-throughs.

The Performance Marketing Association responded with a lawsuit challenging the constitutionality of the law. The group argued that it violated the Commerce Clause of the federal Constitution because the new definition authorized the collection of use tax with respect to an activity that lacked a substantial nexus with the state of Illinois. In addition, the association argued that the provision was expressly preempted by the 2000 Internet Tax Freedom Act, which prohibits “discriminatory taxes in electronic commerce.”

Avoiding the Commerce Clause issue, which has split courts around the country, the Illinois Supreme Court found the ITFA preempted the state law.

The updated definition in the Illinois law targeted out-of-state Internet retailers, the PMA argued, and yet did not require use tax collection by out-of-state retailers that enter into performance marketing contracts with “offline” Illinois print publishers and over-the-air broadcasters.

Illinois pointed to other statutory provisions in state tax law that already imposed a use tax collection obligation on such offline performance marketing, but the court found those requirements applied only to in-state advertising.

According to the court, Internet advertising is different.

“Illinois law does not presently require out-of-state retailers who enter into performance marketing contracts for ‘offline’ print or broadcast advertising which is disseminated nationally, or internationally, to collect Illinois use tax,” the court stated. “However, under the Act, out-of-state retailers who enter into such contracts with Illinois Internet affiliates for the publication of online marketing – which is inherently national or international in scope and disseminated to a national or international audience – are required to collect Illinois use tax.”

“In this way, by singling out retailers with Internet performance marketing arrangements for use tax collection, the Act imposes discriminatory taxes within the meaning of the ITFA.”

The dissent argued that the form of advertising addressed by Illinois law has no direct analog outside the context of the Internet, making the discrimination argument moot.

To read the opinion in Performance Marketing Association v. Hamer, click here

Why it matters: Courts continue to struggle with the so-called Amazon tax, reaching different results. About one dozen states enacted similar tax laws, most of which have faced legal challenges. The Direct Marketing Association scored a victory over Colorado’s version of the law, but Amazon and Overstock lost their challenge in New York’s highest court. The companies have appealed that decision to the U.S. Supreme Court, but the Justices have not yet determined whether or not to grant certiorari.

ASME Offers Guidance on Native Advertising

The latest group to address native advertising: the American Society of Magazine Editors, which updated its guidelines to address the hot topic of sponsored content.

ASME’s Guidelines for Editors and Publishers are based on four basic principles: “Every reader is entitled to fair and accurate news and information; The value of magazines to advertisers depends on reader trust; The difference between editorial content and marketing messages must be transparent; and Editorial integrity must not be compromised by advertiser influence.”

With that backdrop in mind, the group recently added to those guidelines section D2 on Marketer-Provided Content and Native Advertising, which ASME said should be “prominently labeled as advertising, and the source of such content and the affiliation of its authors should be clearly acknowledged,” suggesting a label such as “Sponsor Content.”

In addition, native advertising “should include a prominent statement or ‘What’s This?’ rollover at the top of the advertising unit explaining that the content has been created by a marketer and that the marketer has paid for its publication.”

Finally, ASME said the type fonts and graphics used for native advertising should not resemble those used for editorial content and “should be visually separated from editorial content.”

ASME CEO Sid Holt acknowledged that some provisions of the guidelines might be controversial. “There are definitely publications that are using the same font and graphics” for editorial content and native advertising, he told Ad Age, although he declined to identify specific publications. “And they will likely disagree with this position.”

The updated guidelines came at the request of editors, Holt said, and the group is “not making a judgment for or against native advertising.” Instead, by taking a stab at issuing its own guidance, ASME hopes to avoid federal regulation on the topic. While adherence to the rules is voluntary, publications that do not follow the guidelines can face penalties such as exclusion from consideration for the National Magazine Awards.

“We’re not law givers,” Holt said. “We’re articulating best practices for the industry for magazine editors. We do feel very strongly that a self-regulating industry should follow these guidelines.”

To read ASME’s guidelines, click here.

Why it matters: Native advertising is a hot topic for advertisers, marketers, and regulators alike. The issue of native advertising will be the subject of an upcoming Federal Trade Commission roundtable event on December 4. The agency has expressed concern about the increasingly blurred lines between content and advertising and the ability of consumers to distinguish between the two. And the National Advertising Division recently reviewed Qualcomm’s sponsorship of a series of tech-related articles featured on

Noted and Quoted . . . Media Post Turns to Marc Roth on FCC’s New TCPA Regulations

Media Post sought commentary from Manatt partner Marc Roth for an October 31st article titled “Marketing Groups Protest New FCC Mobile Spam Rules” after the Direct Marketing Association petitioned the FCC asking it to refrain from enforcing some of its new Telephone Consumer Protection Act regulations.

The article underscores the “quandary for mobile marketers who obtained consumers’ consent under the prior rules” and notes that even if the FCC agrees not to enforce the regulations, they “can still serve as the basis for lawsuits.”

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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