Advertising Law - September 2015 #3

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

  • State AGs Settle Negative Option Marketing Case for $1M
  • Did the Ashley Madison Site Cheat, Too?
  • FTC Not Green With Envy Over Environmental Certifications and Seals
  • Can You Hear Me Now? Suit Claims Twitter "Eavesdrops" on Direct Messages
  • Noted and Quoted . . . Newhope360.com Gets Briefed by Wasserman on the FTC's Homeopathic Product Advertising Workshop
  • Most Read Stories

State AGs Settle Negative Option Marketing Case for $1M

Negative option marketing cost one company $1 million in a recent deal with the Attorneys General of New York, Pennsylvania and Washington.

According to the complaint filed by the Washington Attorney General against Internet Order LLC, the company made consumers a "Risk Free," "100% Money Back Guaranteed" offer of audio courses to learn foreign languages for only $9.95 using the Pimsleur Approach. But consumers who signed up for the offer were automatically enrolled without their knowledge to receive additional courses at a cost of $256 each, with some individuals paying as much as $1,024, the complaint alleged.

Only if consumers cancelled their acceptances within a 30-day window—and paid return shipping and a potential 25% restocking fee—did consumers avoid the charges, the complaint alleged. Consumers that refused to pay the additional charges were threatened with collection agency action and "hounded" with letters.

In addition to violating the Restore Online Shoppers' Confidence Act, the complaint alleged that Internet Order and owner Dan Roitman ran afoul of state consumer protection laws by failing to clearly disclose the terms of the negative option sales program, by failing to obtain consumer consent to sign up for the program, by failing to provide a simple means of cancellation, by making material advertising misrepresentations, and by engaging in unfair collection practices.

Going forward, the company must remedy these failures. Specifically, Internet Order promised to clearly disclose the terms of any negative option sale and repeatedly notify consumers of the terms of the sale and the negative option plan in clear and easy-to-read notices at many stages of the transaction. The company must obtain express consent from consumers to enroll in a negative option plan prior to being obligated to the terms of the sale—and a pre-checked box will not suffice.

Further, consumers must be provided with an easy and effective means of cancelling an ongoing subscription. The company agreed not to charge any fees for the return of items during a free trial period and agreed to limitations on charges for consumers who return items after the free trial period. The company must train relevant employees on how to comply with the consent order and discipline those who do not comply.

In addition, the company must pay just over $1 million in restitution to consumers nationwide and additional damages to New York, Pennsylvania, and Washington based on the company's future profits made from sales between July 2016 and June 2019.

To read the complaint in Washington v. Internet Order, click here.

To read the consent decree, click here.

Why it matters: The complaints—filed separately by the Attorneys General of Pennsylvania, New York, and Washington—were some of the first filed under the Restore Online Shoppers' Confidence Act, which took effect in December 2010. The consent decrees offer a compliance road map and demonstrate the importance of obtaining prior, express consent from consumers before enrolling them in a negative option program.

Did the Ashley Madison Site Cheat, Too?

Avid Life Media, Inc., and Avid Dating Life, Inc.—the companies that own and operate dating website Ashley Madison—are facing a new problem: a false advertising lawsuit.

Designed to help individuals find others looking for sexual encounters, the Ashley Madison website targeted married individuals with the slogan, "Life is short. Have an affair." The site gained recent notoriety when hackers released the personal information of users.

Maryland resident Christopher Russell alleges that after separating from his wife, he relied on representations that Ashley Madison made about women who used the service and that he paid approximately $100 to interact with such women on the site. One problem: the women were not real, Russell claims.

The complaint alleges that the website defrauded users by creating fake female profiles and representing that it had 5.5 million female profiles, when only a small number of such profiles belonged to actual women who used the site. It also created over 70,000 female bots to send male users millions of fake messages. "More likely than not, these women were female bots with fake profiles created by Ashley Madison," according to the complaint.

The complaint also alleges that since users of the website buy credits to engage with other members and redeem such credits by sending messages to prospective matches, the messages sent by the fembots effectively tricked male users to create a profit for Ashley Madison. These factors contributed to the $115 million in gross revenue in 2014 and pretax profits of $55 million earned by its parent company.

Interestingly, Russell's lawsuit relies on the information released by the hackers to support his allegations. Data released "revealed that 'some significant percentage—the hackers say 90-95 percent—of female profiles on the site are fake and are meant to lure paying male clients into believing that the place is teeming with women ready to be whisked away to hotel rooms,'" the putative class action alleges.

Computer code for the site included descriptions for how the fembots should engage with male users, including tips like "randomizing start time so engagers don't all pop up at the same time." Analysis of the information released by the hackers revealed that bots chatted with 11,030,920 men (and just 2,409 women).

For alleged violations of Maryland's Consumer Protection Act as well as unjust enrichment, the complaint seeks compensatory damages and/or restitution or refund, as well as punitive damages.

To read the complaint in Russell v. Avid Life Media, click here.

Why it matters: The complaint alleges that Ashley Madison executives engaged in a willful and knowing fraud, citing internal emails and other communications that document the use of fembots. It also cites the company's response to an investigation by the California Attorney General in 2012 that "criminal elements" and "random fraudsters" were creating fake profiles on the site.

FTC Not Green With Envy Over Environmental Certifications and Seals

The Federal Trade Commission sent warning letters to five providers of environmental certifications and seals and 32 businesses that used them expressing concern that they may be deceptive. Their names were not released.

Released in October 2012, the Guides for the Use of Environmental Marketing Claims—better known as the FTC's Green Guides—provide guidance for advertisers making environmental marketing claims on issues ranging from "compostable" claims to advertising products made with renewable energy.

The Guides specifically require that marketers using third-party certifications and seals be able to substantiate all claims that are reasonably communicated, noting that if the seal or certification does not communicate the basis for the certification or seal, a misleading general environmental benefit claim could be conveyed.

The warning letters quoted the Guides: "Because it is highly unlikely that marketers can substantiate all reasonable interpretations of these claims, marketers should not make unqualified general environmental benefit claims."

To illustrate the problem, the agency provided two examples of environmental certifications. In the "bad" example, the seal states "Green Approved." Such a general claim is likely deceptive because "it does not convey the basis for certification" and it "is highly unlikely that marketers can substantiate all the attributes implied by general environmental benefit claims," the FTC explained.

Alternatively, a "good" example of a certification may state "Green Approved" but includes additional terminology such as "Biodegradable, Recyclable, Compostable." If the claims are accurate, the seal "is not deceptive because it lists the specific attributes that form the basis for the product's certification," the agency said.

In some cases, consumers may click on the seal or certification logo for more information. However, "the logo itself is not likely an effective hyperlink label leading to the necessary disclosures," the FTC wrote, per the Dot Com Disclosures guidance document. The symbol or icon might not provide sufficient clues about why the claim is qualified or the nature of the disclosure, and consumers may view the symbol "as just another graphic on the page."

While the FTC declined to take any legal action at the current time, the letters requested a response with an explanation of "the steps you are taking to ensure" compliance with the Green Guides.

To see the FTC's examples of "Good" and "Bad" seals, click here.

To read the letters to the certification or seal providers, click here.

To read the letters to the businesses using the certifications or seals, click here.

Why it matters: "Environmental seals and certifications matter to people who want to shop green," Jessica Rich, director of the FTC's Bureau of Consumer Protection, said in a statement about the letters. "But if the seals' claims are broader than the products' benefits, they can deceive people. We are holding companies accountable for their green claims." Green advertisers should take care to reduce the risk of deceptive claims by using "clear and prominent qualifying language that clearly conveys that the certification or seal refers only to specific and limited benefits," as suggested by the Green Guides.

Can You Hear Me Now? Suit Claims Twitter "Eavesdrops" on Direct Messages

Has Twitter been "eavesdropping" on users' Direct Messages?

According to a new class action lawsuit brought against Twitter by Twitter user Wilford Raney, the answer is yes. The California federal court complaint alleges that Twitter not only "surreptitiously eavesdrops" on Direct Messages without users' consent, but also profits from its spying.

Raney has sent and received hundreds of Direct Messages on the microblogging site, believing that they were private missives based on statements from the site that "Direct Messages are the private side of Twitter," the complaint alleged.

But in his new suit, he claimed that Twitter's system actually opens, scans and potentially alters a Direct Message before it delivers the message to the intended recipient. The complaint illustrates the scanning practice by noting how Twitter alters the contents of Direct Messages that include hyperlinks. According to the complaint, if a hyperlink is found in a Direct Message, Twitter replaces the link with its own referral link that will first direct the recipient to Twitter and then on to the eventual destination. "For example, Twitter changes links like 'www.nytimes.com' to links like 'http:/t.co/CL2SKBxr1s' (while still displaying the text 'www.nytimes.com' to its users)," the complaint alleged.

This route diversion proves "immensely" beneficial for the website, according to the lawsuit. In the above example, "the New York Times would identify Twitter as the source of internet traffic, whereas without replacing the link the source would be anonymous. The end result is that Twitter can negotiate better advertising rates," Raney said.

Because Twitter never obtained—or even requested—users' consent to read the content of their direct messages, the complaint states causes of action under the Electronic Communications Privacy Act and the California Invasion of Privacy Act, seeks a halt to the allegedly unlawful interceptions, and requests the award of statutory damages of $5,000 per class member.

To read the complaint in Raney v. Twitter, Inc., click here.

Why it matters: Similar suits are currently pending against Google and Yahoo by those without Gmail and Yahoo accounts for allegedly intercepting messages and monetizing the contents via advertising. An earlier lawsuit brought by Gmail users settled in 2014.

Most Read Stories

In case you missed any, here are our top 10 most widely read stories in August:

1. Internet Cafes Lose a Bet With the California Supreme Court

2. Tom's of Maine Settles "Natural" False Ad Suit for $4.5M

3. New Bill Would Create Criminal Penalties for TCPA Violations

4. Raise Your Glass: Maker's Mark Gets "Handmade" False Ad Suit Tossed

5. FTC Letter Provides Lessons in Data Security

6. Kardashian + Instagram + Drug Endorsement = FDA Warning Letter

7. Ad Group to FTC: Keep Right to Be Forgotten Out of U.S.

8. Every Penny Counts: Class Sues for Cash on Low Gift Card Balance

9. FDA Wants to Pour Some Sugar on the Nutrition Label

10. Keep Waiting for Marijuana Ads on TV

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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