Advertising Litigation Report: Vol. 2, No. 2 - Regulatory

Kramer Levin Naftalis & Frankel LLP

Negative Option Marketing Enforcement Actions in Federal Court

A negative option is a provision in an offer or agreement to sell or provide any goods or services “under which the customer’s silence or failure to take an affirmative action to reject goods or services or to cancel the agreement is interpreted by the seller as acceptance of the offer.” 16 C.F.R. § 310.2(u). A pair of recent enforcement actions demonstrates that liability under the FTC Act may be premised on a seller’s failure to disclose all the material terms of negative-option marketing features, such as subscription plans and recurring charges.


Negative Option Enforcement Action Involving DirecTV Subscriber Contracts Settles on the Morning of Trial

FTC v. DirecTV LLC, No. 3:15-cv-01129 (N.D. Cal. filed Mar. 11, 2015)

Satellite TV provider DirecTV reached a settlement in principle with the FTC regarding allegedly deceptive marketing practices involving subscriber contracts. The FTC alleged DirecTV advertised the monthly price of the first 12 months of its two-year subscription contract, but failed to mention that the next 12 months are significantly more expensive. In addition, DirecTV allegedly advertised that subscribers would receive “additional premium channels” such as “HBO, Cinemax and Showtime free of charge for a limited period of time,” but did not adequately disclose that “[c]onsumers must affirmatively cancel these premium channels before the end of the initial period to avoid monthly charges.” If subscribers tried to cancel the package before the end of two years, the FTC alleged, they were charged early cancellation fees of up to $480. The FTC sought equitable relief — including a permanent injunction, rescission or reformation of subscribers’ contracts, and disgorgement, as well as an estimated $4 billion in monetary relief to affected customers. On March 5, 2017 — the morning trial was set to begin — DirecTV filed an unopposed motion to continue trial pending confirmation of a settlement in principle with the Commission. In an April 4 status report, DirecTV reported that the parties had reduced their agreement to a writing, which is now before the Commission. “The Commission,” DirecTV noted, “currently has two sitting commissioners and three commissioner vacancies awaiting presidential appointment and congressional confirmation. Given the current composition of the Commission, both commissioners must vote in the affirmative for the Commission to accept the Proposed Order. It is possible that the settlement will not receive two affirmative votes.” View the complaint.

FTC v. AAFE Prods. Corp., No. 3:17-cv-00575 (S.D. Cal. filed Mar. 23, 2017)

The FTC charged a group of online marketers with violations of the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA) in connection with defendants’ marketing of cooking and golf-related goods and services. According to the complaint, defendants’ websites, TV infomercials and bulk email solicitations deceived consumers by prominently claiming that their products and services were free, without clearly disclosing that they would start charging consumers who did not cancel their “free trial” or return the “free” products before the end of the trial period. Defendants are also alleged to have misrepresented their return, refund and cancellation policies. The Commission is seeking entry of a permanent injunction, “ancillary” equitable relief, including recession or reformation of contracts, restitution, consumer refunds and disgorgement. View the complaint.


Sixth Circuit Declines Review of FTC Adjudication of False Biodegradability Claims

ECM BioFilms, Inc. v. FTC, --- F.3d ---, No. 15-4339, 2017 WL 1019064 (6th Cir. Mar. 16, 2017)

On March 16, the Sixth Circuit denied ECM BioFilms’ petition for review of an FTC final order finding the company acted deceptively by making false and unsubstantiated claims about a chemical additive it said would make treated plastics biodegrade in a landfill within nine months to five years — a claim ECM had maintained was supported by scientific testing. In 2015, the FTC found the company’s statements fell short of the standards prescribed in its “Green Guides,” designed to help advertisers avoid making deceptive environmental claims about their products. In its petition for review, ECM argued that the Commission’s order finding it in violation of § 5 of the FTC Act was not supported by substantial evidence and raised various other constitutional and statutory challenges. The Sixth Circuit denied the petition in its entirety, finding that the Commission’s surveys constituted substantial evidence of consumer deception. Indeed, the court reasoned, as several “sophisticated consumers” in the plastics industry had accepted ECM’s claim that its product completely biodegrades within five years, “it stands to reason that it was reasonable for an average consumer to do the same.” View the decision.


Pulley Block Systems Distributor Agrees to Stop Misleading ‘Made in U.S.A.’ Claims

Block Division, Inc., No. C-4613 (F.T.C. Apr. 12, 2017)

Block Division Inc., a Texas-based distributor of pulley block systems, agreed to stop making misleading unqualified claims that its products are made in the U.S., under a settlement with the FTC. It is the FTC’s second “Made in U.S.A.” settlement in the past five weeks. In its complaint against Block Division, the FTC alleged that the company deceived consumers with false, misleading and unsupported claims its pulley blocks and other products are “Made in U.S.A.” despite using imported steel plates that entered the U.S. from overseas already stamped with “Made in U.S.A.” The complaint also alleges that Block Division used unqualified “Made in U.S.A.” claims in advertising on its website, in stores, through trade shows and authorized dealers, on social media and through flyers and pamphlets to represent that these pulley blocks, other products and the parts used to make them were all or virtually all made in the U.S. However, the complaint states the pulley blocks and other products include significant imported parts, which are essential to the function of those products. The settlement prohibits the company from making unqualified “Made in U.S.A.” claims for any product, unless it can show the final assembly or processing — and all significant processing — take place in the U.S. and that all or virtually all ingredients or components of the product are made and sourced in the U.S. Any qualified claims must include a clear and conspicuous disclosure about the extent to which the product contains foreign parts, ingredients and/or processing. Block Division also is prohibited from making any country-of-origin claims about its products unless the claims are true and not misleading, and unless the company has a reasonable basis for making them. View the decision.

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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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