Advertising Law - June 2017 #2

by Manatt, Phelps & Phillips, LLP
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Manatt, Phelps & Phillips, LLP

In This Issue:
  • BART’s App Crashes Into Privacy Suit
  • Senator to FTC: Are Kids Safe With Smart Toys?
  • For $27.5M, Burlington Settles Deceptive Pricing Suit
  • Battle Over Game Lives Moves Forward

BART’s App Crashes Into Privacy Suit

By Jesse M. Brody, Partner, Advertising, Marketing and Media

San Francisco’s mass transit organization crashed into a class action in which the plaintiff alleged that its mobile app has been illegally collecting personal information from users.

The San Francisco Bay Area Rapid Transit District released an app in 2014, with the goal of providing riders with updates on the transit system as well as “a quick and discreet option” to alert security personnel and the police about safety concerns. But BART Watch also engaged in the “clandestine collection” of user data, including the “near constant” ability to locate a specific cellular device, according to a new California federal court complaint. The suit also names the app’s developer, ELERTS Corp.

Despite the app’s promise that users can make “discreet” or anonymous reports, the defendants still collect and transmit identifying information to their servers, including location information, without the consent of the users. Therefore, “these reports are not anonymous at all,” plaintiff Pamela Moreno alleged.

As a result, the unique mobile device identification numbers and geolocation of tens of thousands of California residents have been secretly collected by the government so they could be matched with other information to create “a trove of data,” the complaint stated. The actions of the defendant are “precisely the practice” the state legislature sought to protect against when it recently enacted the Cellular Communications Interception Act.

For the alleged violations of the CCIA, the Consumer Legal Remedies Act and the state constitution’s guarantee of privacy, the suit seeks to certify a class of consumers who downloaded the BART Watch app, requests a halt to the collection and transmission of user information, demands the purge of all records previously collected, and requests an award of monetary damages, including punitive and statutory damages of no less than $2,500.

To read the complaint in Moreno v. San Francisco Bay Area Rapid Transit District, click here.

Why it matters: The privacy violations alleged in the putative class action made headlines, but a spokeswoman for the agency said data is recorded only when users report a crime and if they have agreed to share the information. “BART does not use ELERTS system to randomly track users,” Alicia Trost said in a statement. “An app’s user location information is only available if the user selects the option to share their location information. And then, BART only receives the user’s location when the user is reporting an incident. For all users, sharing their contact information and location information is optional.”

Senator to FTC: Are Kids Safe With Smart Toys?

By Richard P. Lawson, Partner, Advertising, Marketing and Media

Following up on a previous letter, Sen. Mark Warner (D-Va.) sent a second missive to the Federal Trade Commission asking about the agency’s efforts to protect children’s privacy with respect to so-called smart toys.

Last July, the lawmaker penned a letter to then-Chair Edith Ramirez, expressing concern about the intersection of children’s toys and the Internet of Things (IoT). “With the increasing prevalence of connectivity and data processing abilities in children’s toys and other household products, consumers must now evaluate and weigh new—and complex—risks to their children’s safety and privacy,” Sen. Warner wrote.

In the interim, specific instances of potential privacy violations with IoT toys have been reported. A consumer group filed a complaint with the FTC asking it to investigate the My Friend Cayla doll and i-Que Intelligent Robot. The group alleged that the products were “spying” on users by recording and collecting conversations with the children who used them.

Referencing this complaint as well as news reports about CloudPets, an IoT line of toys that purportedly stored personal data in an insecure, public-facing online database that exposed over 800,000 customer credentials and more than two million voice recordings sent between parents and children, Sen. Warner said his concerns are “continued and growing.”

“I worry that protections for children are not keeping pace with consumer and technology trends shaping the market for these products,” he wrote to Acting FTC Chair Maureen K. Ohlhausen. “[R]ecent events have illustrated that in addition to security concerns with the devices themselves, new data-intensive functionalities of these devices necessitate attention to the manner in which vendors transmit and store user data collected by these devices.”

Adding to the problem: “Reports of your statements casting these risks as merely speculative—and dismissing consumer harms that don’t pose ‘monetary injury or unwarranted health and safety risks’—only deepen my concerns,” Sen. Warner said.

In addition to asking for a progress report on the My Friend Cayla complaint—as well as a query on whether the FTC has reached out to the company behind CloudPets—the letter questioned whether the agency needs more authority from Congress to effectively enforce the Children’s Online Privacy Protection Act.

“Do COPPA’s data security—including retention and data minimization—standards need to be updated?” the legislator asked. “Are companies ignoring COPPA requirements, or are COPPA requirements not keeping pace with developments in data security and cyber security best practices?”

To read Sen. Warner’s letter, click here.

Why it matters: Sen. Warner shows no signs of changing his focus regarding the potential COPPA violations posed by IoT toys, particularly in light of Acting Chair Ohlhausen’s comments “dismissing consumer harms that don’t pose ‘monetary injury or unwarranted health and safety risks’ as ‘speculative’ and ‘subjective.’” The letter requested a response from the agency within four weeks.

For $27.5M, Burlington Settles Deceptive Pricing Suit

By Jeffrey S. Edelstein, Partner, Advertising, Marketing and Media

Burlington Coat Factory agreed to pay $27.5 million to settle a deceptive pricing suit filed in California federal court.

Reflecting the current trend of consumer class actions challenging the advertising for discount pricing, James Horosny asserted that the national retailer misled consumers with the use of “Compare at” reference prices in relation to an “Our Low” price point. The price tags tricked consumers into believing they were receiving a bargain price for the same merchandise sold at higher prices by other retailers, the plaintiff alleged.

The complaint alleged Burlington violated various state laws as well as the Federal Trade Commission Act.

After the court denied the defendant’s motion to dismiss, the parties reached an agreement. An estimated 3.7 million class members—defined as those who purchased one or more product(s) that were advertised with a “Compare at” price and an “Our Low” price between July 1, 2011, and January 26, 2017, at a California store or shipped to a California address—will each receive a $7.50 merchandise credit.

Class members are entitled to receive only one merchandise credit regardless of the number of alleged violations, and the credits may be redeemed only for in-store purchases in California or online purchases. The credits, which do not expire, may also be redeemed for $5 cash.

On top of the merchandise credits, the settlement fund provides for $10,000 in plaintiff incentive fees, up to $927,500 in attorneys’ fees and costs, and up to $1,137,000 in claims administration fees.

In addition to the monetary payout, Burlington agreed to post disclosures about the basis for its “Compare at” pricing practices both in stores and on its website, hold at least one training for its buyers to review pricing practices, and conduct an audit of its pricing practices for goods sold in its California stores.

To read the settlement agreement in Horosny v. Burlington Coat Factory of California, LLC, click here.

Why it matters: Deceptive pricing suits are the hot new trend in consumer class actions, and the sizable deal in the Burlington case will certainly not discourage plaintiffs from bringing more lawsuits.

Battle Over Game Lives Moves Forward

By Jesse M. Brody, Partner, Advertising, Marketing and Media

A consumer who claimed he was tricked into promoting an online game, only to see his motivation in the form of extra lives disappear, can move forward with his lawsuit, an Illinois federal court has ruled.

To score additional lives in the wildly popular mobile app game Candy Crush, Zachery Liston linked his game account to his Facebook account. This allowed his friends on the social networking site to donate extra “lives” in the game to Liston if they downloaded the game.

Although Liston received donated lives when some of his friends installed Candy Crush based on his promotion, the maker of the game then removed the lives, according to his complaint. The suit, filed against King.com, stated claims for breach of implied contract, unjust enrichment, and violations of the Computer Fraud and Abuse Act and the consumer protection statutes of all 50 states and the District of Columbia.

King moved to dismiss. After first determining that Liston had standing to bring the action, U.S. District Court Judge John J. Tharp Jr. determined that Liston adequately stated a claim and denied the defendant’s motion.

The court rejected the defendant’s argument that Liston failed to allege an injury in fact because he played Candy Crush for free, received the donated lives at no cost, and never purchased anything from King.

Players of Candy Crush can purchase additional lives in the game at a cost of 99 cents for five lives (or roughly 20 cents per life), the court noted. As such, Liston was able to put a dollar amount on his alleged loss. He also alleged that the donated lives were effectively compensation for his “social marketing of King’s brand” when he asked his Facebook friends to download the game.

“The complaint alleges, plausibly enough, that Candy Crush lives have actual economic value; they are available for purchase at a particular price and King compensates players for marketing the game by facilitating the receipt of Donated Lives,” Judge Tharp wrote. “King’s argument that an asset that is able to sell for 20 cents has no inherent value is untenable; that the game provides a mechanism by which players may also receive such assets for free in exchange for activities that King values does not change that basic fact.”

Liston plainly has standing to complain that he lost those assets by reason of King’s conduct, whether that conduct is labeled as fraud, theft, conversion or some other legal theory, the court said.

The complaint “is sufficient to put King on notice of the essential nature of his claim: King injured Liston by preventing him from using an asset in which he had a property interest,” the court wrote. “The precise legal theory, or theories, on which such a claim may be premised, will be determined not at this stage, but during discovery, in advance of summary judgment and/or trial.”

To read the memorandum opinion and order in Liston v. King.com, Ltd., click here.

Why it matters: While the defendant told the court that the plaintiff lacked an injury and failed to state a claim based on his free use of the game and the fact that his friends donated lives, the judge agreed that Liston plausibly alleged that he received the lives in return for his “social marketing” of the game. The plaintiff was also able to put a value on his loss, since lives could be purchased for a price.

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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