DirecTV and FTC Face Off in Federal Court Over Deceptive Pricing Claims; FTC Seeking $4 Billion in Equitable Relief

A bench trial began this week to resolve allegations by the FTC that DirecTV misled millions of consumers about the actual costs of its subscriptions.  According to the FTC, DirecTV should be required to pay $3.95 billion dollars to compensate consumers for failing to disclose that it would raise its monthly subscription price after a consumer subscribed for three months, and then again after a year.  The FTC also alleged that DirecTV failed to disclose to consumers that an early termination fee would apply if consumers tried to cancel before those increases, or any time before the initial two year contract period expired.

The FTC filed its complaint back in March 2015 in the U.S. District Court for the Northern District of California and pointed to allegedly deceptive hard copy advertisements and internet sales through DirecTV’s website.  The complaint alleges violations both of the FTC Act and the Restore Online Shoppers’ Confidence Act (ROSCA), which imposes specific requirements on negative option offers on the internet.  DirecTV filed an unsuccessful partial motion for summary judgment on the ROSCA claims, as we previously discussed here.

More than two years after the initial complaint, settlement discussions fell through when FTC Commissioner Terrell McSweeny indicated she would not support an undisclosed settlement based on skepticism about the scope of equitable monetary relief and injunctive relief of the settlement.  The $3.95 billion figure espoused by FTC attorneys in the first day of the bench trial sheds some light on why earlier negotiations may have ultimately fell through.

In the second day of trial, the FTC pressed DirecTV executives — now part of AT&T, Inc. — regarding the percentage of consumers misled by its billing practices according to internal surveys.  The executive argued that, while there was indeed some evidence of consumers being confused about pricing practices, he did not believe such confusion was related to DirecTV’s subscription price increases or early termination fees.

And in the third day of trial on Thursday, DirecTV’s former chief sales and marketing officer Paul Guyardo testified that he instructed his team to place the disclosure at the bottom of the page in small font.  When certain team members expressed concerns, Guyardo told them to proceed because he didn’t think the disclosure needed to be prominent at that point in the marketing campaign, according to his testimony.  The requisite size and location of disclosures for promotional offers is at the heart of the case.

The trial is expected to last a few weeks and is being presided over by U.S. District Judge Haywood S. Gilliam Jr.

Third Circuit Steps Back from the Brink of a Circuit Split over “Ascertainability”

Yesterday, a panel of the Third Circuit Court of Appeals took another step back from a circuit split over the extent to which aspiring class plaintiffs must show a “reliable and administratively feasible means of determining whether putative class members fall within the class definition,” and one judge called for scrapping that requirement altogether.

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Comparison Pricing Victory for Ross Stores in California

On August 2, 2017, the U.S. District Court for the Central District of California dismissed a putative class action lawsuit against Ross Stores that accused the discount retailer of misleading promotional pricing practices. The lawsuit stemmed from February and May 2015 purchases by the two lead plaintiffs of items bearing price tags with a selling price and an instruction to “Compare At” the higher, reference price. Ross has since changed the reference price signal from “Compare At” to “Comparable Value.”

The Second Amended Complaint, filed in March 2016, contained the following allegations:

  • The use of “Compare At” is deceptive, as the higher, reference price is not a price at which substantial sales of the item were made in California.
  • The higher, reference price is the price of similar, non-identical merchandise – a material fact that Ross fails to adequately disclose.
  • A reasonable consumer would expect the reference price to refer to the price of an identical item.
  •  The retailer’s explanation of its comparison pricing is “buried” on the website and out of view in stores. Specifically, the explanation states that the comparison pricing “represents a recent documented selling price of the same or similar product in full-price department stores or specialty stores[, and w]here identical products are not available [Ross] may compare to similar products and styles.”

According to the plaintiffs, these practices violate California law, which promotional pricing statutes (1) prohibit retailers from making a false or misleading statement of fact concerning the reason for a price reduction, and (2) require that an advertised reference price have been the prevailing market price for the item within the immediately preceding three months. See Cal. Civ. Code § 1770(a)(13); Cal. Bus. & Prof. Code § 17501.

In May, Ross and the plaintiffs filed a motion for summary judgment and motion for class certification, respectively. With respect to the new, “Comparable Value” signal, the Court determined that the plaintiffs lacked standing to challenge these tags because they failed to present evidence that they actually relied on the phrase when making their purchases, or that they suffered any economic injury as a result of Ross’s use of the phrase. As a result, the Court granted the motion for summary judgment with respect to Ross’s use of “Comparable Value.”

With respect to the “Compare At” signal, the Court found that the phrase is not “obviously false or misleading on its face,” and the plaintiffs had not presented evidence, other than their own declarations and price tags, in support of their argument that the reasonable consumer would expect the reference price to refer to the price of an identical item. Regardless, the Court concluded, the plaintiffs also failed to demonstrate economic harm, and therefore lacked standing to pursue their claims. Importantly, the Court rejected the plaintiffs’ reliance on the Ninth Circuit decision in Hinojos v. Kohl’s Corp., noting that, “the standard of proof on a motion for summary judgment is higher” and demands proof that the items purchased were not worth as much as Ross claims, rather than vague averments of injury.

Laura Brett Named New Director of NAD

More than a month after the retirement of former NAD Director Andrea Levine, the Advertising Self-Regulatory Council (“ASRC”) has announced NAD’s new Director: Laura Brett. Laura Brett, who has served as NAD’s Assistant Director since 2015, joined NAD in April of 2012. During her five years at NAD, Laura has authored several seminal decisions including NAD’s highly publicized 2015 DirecTV decision. She has also authored several monitoring decisions that deal with the intersection between social media and advertising law. (See, for example, NAD’s Kardashian and eSalon decisions.) Laura has spoken frequently about NAD and has earned a reputation for her strong judgment, rigorous analytical skills, and integrity.

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Read This Before Scanning A Driver’s License In New Jersey

On October 1, 2017, a new law will take effect in New Jersey, the Personal Information and Privacy Protection Act (“PIPPA”), which will severely restrict retailers’ ability to “scan” any customer’s “identification card”–a term defined to mean “a driver’s license,” “probationary license,” “non-driver photo identification card,” or any similar card “issued…for purposes of identification.” Merely looking at a license to verify identity or age is not covered by the new law, only “scanning” the license for the purpose of recording and retaining the data.  Both the Attorney General’s Office and private consumers can sue for violations, but the window for private suits is fairly narrow.

The law begins by listing the only purposes for which a retailer may “scan” an identification card at all. They are to (1) verify the person’s identity or the authenticity of the ID card (but this cannot be done if the purchaser is buying an item for cash); (2) verify age when an item is age-restricted; (3) prevent fraud in connection with returns and exchanges if “the business uses a fraud prevention service company or system”; (4) prevent fraud in credit transactions or in connection with the opening of a credit account; (5) establish or maintain a contractual relationship; (6) meet any state or federal legal obligation; (7) transmit information to a consumer reporting agency as may be permitted by law; and (8) accomplish the goals of the Health Insurance Portability and Accountability Act.

The PIPPA then says that if a retailer scans information for one of these permitted reasons, it may only scan “the person’s name, address, date of birth, the state issuing the identification card, and identification card number.” Among the other information that may be listed on a driver’s license that the law does not permit to be “scanned” are a person’s photograph, height, weight, eye color, any restrictions on the license, and the person’s status as an organ donor.  That other information may not be “scanned” at all.

If a retailer scans an identification for purposes (1) and (2)–identity and age verification–it cannot “retain” this information, even briefly. Retailers may retain information they collect for the other permitted purposes, but if they do so, they must “securely store[]” it and “promptly report[]” any breaches to the New Jersey State Police and the Attorney General’s Office pursuant to existing breach notification statutes.  The statute does not put any express limitations on the length of time this information can be retained.

The PIPPA allows the Attorney General’s Office to recover a $2,500 civil penalty for a first violation and $5,000 for each subsequent violation. It also provides that “any person aggrieved by a violation of this act can bring an action in Superior Court to recover damages.”  That private right of action would therefore seem to be limited in two very important respects.

First, a consumer can sue only if “aggrieved.” That same word appears in another New Jersey statute that has been in the news lately–the Truth-in-Consumer Contract, Warranty, and Notice Act (“TCCWNA”)–and we are awaiting word from the New Jersey Supreme Court in a pending TCCWNA case as to what it means.  Second, the statute very clearly does not say that consumers can recover the same $2,500 penalty that the Attorney General’s Office may collect.  Consumers can only sue for “damages,” which would seem to require real, out-of-pocket losses, such as those from actual identity theft.  If a data breach leads to such theft, however, and if the retailer did not “securely store” the data, class action lawsuits may be possible under the new PIPPA.

The window to comply with this new statute is a short two months. Retailers doing business in New Jersey should determine the extent to which they are scanning driver’s licenses and other ID cards and ensure that their policies for doing so, and for retaining any data collected, comply with the PIPPA.  If conducting similar business practices elsewhere, it’s a good idea to confirm compliance with similar laws to this New Jersey law in other states.

What Will Your Social Media Influencer Letter from the FTC Look Like?

We have blogged about the FTC’s barrage of letters when they were originally released in April and again last week.  Back in May, in response to a Freedom of Information Act request by the National Law Journal, the FTC released the entire set of letters set out in April.  A close review of the letters is instructive about the FTC’s priorities, the types of ancillary issues it is concerned about, and what your letter might look like if you are a company or a social media influencer who comes to the FTC’s attention.

Altogether, the FTC sent 99 letters dated between March 20 and April 1.  All of them concerned one social media channel, Instagram.  Of the letters, 45 went to the companies whose products were endorsed on Instagram, and the other 54 went to the endorsers.  The endorser letters matched the company letters; there were more endorser letters because some of the letters to companies referenced more than one endorser.

By way of recipient characteristics, the 45 companies that received the letters spanned the size spectrum from prominent, large companies such as Adidas, Chanel, Johnson & Johnson, Hasbro, and the Popeyes restaurant chain down to much smaller and less known companies.  Industry sectors included fashion, sportswear, food, dietary supplements, fitness products, cosmetics, and toys.

Endorsers that received letters generally were celebrities.  While not all of their names were familiar to this generation-X writer, the Instagram posts attached to the FTC’s letters generally received at least several thousand and often hundreds of thousands of likes, indicative that the endorser had at least a significant social media following.  As has been reported elsewhere, the prominent endorsers included Jennifer Lopez, Allen Iverson, Lindsay Lohan, Heidi Klum.  At least one, Vanessa Hudgens, was notified about endorsements for two different companies.  Letters to almost all of the endorsers were addressed in care of their agents or attorneys, again indicating their status as public personae.  This focus on high-profile endorsers is consistent with the FTC’s past statements that it does not intend to go after every small hobbyist blogger who happens to recommend a product now and then.

The letters were based on 2-page form letters (one for companies and another for endorsers) with certain additional boilerplate paragraphs inserted where appropriate and with a few lines of individually customized text describing the specific Instagram post, which was also attached to the letter as the third page.  Starting with the company form letter, the letters identified the FTC and described the purpose of the letter as “educating marketers about their responsibilities under truth-in-advertising laws and standards.”  After identifying the problematic Instagram post, the letters described the FTC’s “material connection” standard under the Endorsement Guides and provided guidance on the required “clear and conspicuous” disclosures of material connections.  All letters advised that the disclosure be within the first three lines of an Instagram post so that the viewer would see it without having to click “more,” and cautioned against burying the disclosure among multiple tags and links.  The Endorsement Guides and a FAQ about them were included with each letter.

Of interest was the extra content added to some of the company letters.  While most of the letters prefaced the information about required disclosures with, “If your company has a business relationship with [endorser], ten out of the 45 letters went farther and asserted, “It appears that [endorser] has a business relationship with your company.”  It was not always evident how the FTC reached this conclusion, but one apparent tip-off was the offer of a discount code in some Instagram posts.  Seven of the 45 letters pointed to the presence of a statement such as “Thanks @[company]!” in the post and stated that for the endorser merely to thank the company is “probably inadequate to inform customers of a material connection because it does not sufficiently explain the nature of the endorser’s relationship to your company; consumers could understand it simply to mean that the person is a satisfied customer.”  In several letters, the FTC also rejected the use of the “#sp” hashtag to identify sponsored content, claiming that consumers do not understand this hashtag, and disapproved of ambiguous hashtags containing words like “partner” or “ambassador.”

Most interestingly from this author’s perspective as a claim substantiation buff, in 10 of the 45 letters, the FTC included a paragraph hinting that it suspected the content of the Instagram post to be deceptive, separate from the failure to disclose the endorser’s material connection to the company.  This paragraph noted that the FTC’s review of the post was limited to endorser disclosures and did not attempt to determine whether the post might be deceptive in other respects, but reminded the company that it is responsible for substantiating all claims.  This language appeared in cases where the Instagram post made a performance claim, generally about weight loss, health or nutrition benefits.  This raises an important point for companies:  Inadequately disclosed endorsements that bring your advertising to the attention of the FTC may alert the agency to problems with your product claim substantiation that it might otherwise not have noticed.

The 54 letters to endorsers adhered more closely to the basic form letter.  Like the company letters, they usually said, “If there is a material connection between you and [company]” but on some occasions asserted “It appears that you have a business relationship with [company.”  They echoed the advice sent to the relevant company about the inadequacy of ambiguous hashtag disclosures and “thanks.”  Unlike the company letters, the endorser letters never commented on the possible lack of substantiation for claims made by the endorsers.

So the takeaways from the FTC’s spring Instagram endorser broadside are:

  • The FTC views this campaign as an educational initiative rather than an enforcement measure – at least for now.
  • The FTC looks at companies of any size in a variety of industries, but so far is focusing on endorsements by high-profile influencers.
  • Several commonly used short cuts for disclosing a material endorser connection in social media are not favored by the FTC.
  • Inadequate endorser disclosure can cue the FTC to other problems with advertising, including claim substantiation issues.

Missing Ingredient Claims Lead Food Advertising Class Actions So Far in 2017

For the first 28 weeks of 2017, the most frequently alleged claims in new food and beverage false-advertising class actions have related to featured product ingredients that allegedly are absent, or present only in small quantities, in the food at issue.

We reviewed news reports and other mentions of newly-filed food advertising class actions for the first part of 2017 and tabulated the central cause or causes of action to learn where the current substantive focus is in these cases. Out of 52 new food advertising class actions reported between January 1 and July 15 as having been newly filed, the largest single category – 12 cases – alleged the absence of an ingredient that was featured on the product’s label and/or marketing.  Three of the suits concerned truffle-infused cooking oils, alleging that these products actually contained no truffles.  Two cases were filed against makers of ginger ales, which the suits alleged contained no ginger.  Single cases alleged that a guacamole contained very little avocado, that coconut water contained no coconut, that veggie snacks contained no vegetables, that canned octopus was really squid, and that “steak” in a sandwich was really non-steak ground beef.

The other major categories reflect the types of food advertising claims that have been much in the news in recent months. Nine cases concerned “natural” claims.  Nine cases objected to “no sugar added” or similar claims, generally on the basis that evaporated cane juice allegedly was not characterized as a sugar.  Seven cases concerned slack fill, and a further four cases alleged underfill (i.e., not that there was empty space in the package, but that the actual weight of product was less than the stated weight).  Five cases accused the food of overstating its healthiness, and a further three charged that the product falsely claimed a nutritional benefit.  Four cases alleged that an undesirable ingredient claimed not to be in the product, such as trans fat or preservatives, actually was present.

The accompanying chart shows the 52 actions broken down into categories of claims asserted. The total assertions amount to more than 52 because some cases asserted more than one type of claim.

Based on this analysis of 2017 thus far, the two takeaways for food manufacturers are (1) advertising class actions are alive and well and remain a threat, and (2) manufacturers should pay close critical attention to the accurate characterizing of their ingredients. Other well-known controversies over hot-button issues like “natural” claims, slack fill, and the treatment of evaporated cane juice continue to play out in the courts and to be the subject of new challenges.

(Click here to enlarge image.)

Consumer Groups Push for More Regulation of Influencers

In November, we posted that four consumer groups had sent letters to FTC, encouraging the agency to investigate and bring enforcement actions regarding the use of influencers on Instagram. In April, the FTC responded by sending more than 90 letters to companies and influencers, reminding the recipients of their legal obligations. Now, the consumer groups have again contacted the FTC to complain that the agency needs to do more.

According to the latest letter, the groups tracked the 46 influencers who received letters from FTC to determine if the letters had been effective. According the survey, only one of them consistently used “proper disclosures” for paid posts. Although some influencers did occasionally post sponsored content using proper disclosures, some posts allegedly failed to comply with legal requirements. The groups concluded that the FTC’s letters were ineffective and pushed for more regulation.

The groups want the FTC to “bring enforcement actions and seek penalties for posting nondisclosed sponsored content, especially for influencers and brands that are repeat offenders.” In addition, the groups want the FTC to “work with Instagram to develop a system that makes it easy to denote paid posts consistent with FTC guidelines.” We noted last month that Instagram is already working on such a system, but the groups don’t think that it’s sufficiently robust.

As we’ve noted before, both the groups’ letters to the FTC and the FTC’s warning letters swept too broadly and included a number of posts that were not incentivized. (Click here for a BuzzFeed article with some examples.) Nevertheless, there are various examples in the latest letter that are potentially problematic and potential targets for enforcement.

If you haven’t evaluated how your company works with influencer recently, now may be a good time to do that.

Minnesota Federal Judge Says Glyphosate Claims are “Unreasonable”

A mini-trend in food litigation last year was the spate of class action cases alleging that foods advertised as “natural” contained trace amounts of the herbicide glyphosate.  “Trace” is the operative word; to the extent plaintiffs alleged the amounts they found, those amounts always were far below even what the U.S. Department of Agriculture permits to exist in foods labeled “organic.”  The plaintiffs nevertheless argued that foods labeled as “all natural” cannot contain any traces of a biocide, no matter how small.

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Understanding “Ascertainability” in Class Actions Now that the Second Circuit Has Said “No” To It.

On Friday, the Second Circuit Court of Appeals’ decision in In re Petrobras Securities refused to adopt what it called a “’heightened’ two-part ascertainability test in class action cases.  The Second Circuit agreed that class action plaintiffs must show that ‘the class is defined with reference to objective criteria,’ but did not agree that plaintiffs also must put forward “a ‘reliable and administratively feasible mechanism for determining whether putative class members fall within the class definition.’”  The Third Circuit ostensibly has required both showings in class action cases, but the Second Circuit decided to “join a growing consensus that now includes the Sixth, Seventh, Eighth, and Ninth Circuits,” all of which expressly disagreed with their interpretations of the Third Circuit’s holdings.

But are the appellate courts really in disagreement?

The Third Circuit, in fact, has never held that “a plaintiff must be able to identify all class members at [the] class certification stage.”  That quote comes from its 2015 Byrd v. Aaron’s, Inc. case, where it expressly held the opposite: “a plaintiff need only show that class members can be identified.”  In Byrd, the Third Circuit reversed a district judge’s decision denying class certification on ascertainability grounds, saying the district judge had imposed too strict a requirement.

The Third Circuit’s “ascertainability” cases all arose from facts so stark that it is hard to imagine any appellate court in the country would have decided the cases differently.  In Marcus v. BMW of North America, LLC, nobody—not the plaintiff, not BMW, and not even individual BMW dealers—knew or had any way to learn which cars had been fitted with allegedly defective tires.  In Carrera v. Bayer Corp., even the named plaintiff did not remember which diet supplement he had purchased, causing the court to wonder why Bayer should have to swallow every putative class member’s affidavit swearing that he or she purchased the subject product without being able to cross-examine.  And in Hayes v. Wal-Mart Stores, Inc., where Sam’s Club receipts did not include critical information on whether a customer purchased an “as-is” floor model, the Third Circuit merely remanded the case to determine whether the plaintiff could propose a method to establish who did and did not buy both an “as-is” product and a warranty that didn’t cover “as-is” products.

The “disagreement” among the Circuits, therefore, is over a concern that may be much more theoretical than real.  Taken to an extreme, the ascertainability requirement might mean that where a defendant has no list of class members, and where class members themselves are not likely to have retained receipts for purchases, classes can never be certified.  The Ninth Circuit refused to go that far in this year’s Briseno v. ConAgra Foods, Inc. decision.  The Ninth Circuit said it was disagreeing with the Third Circuit, but—and here is the critical part—neither the Third Circuit nor any other appeals court had actually held to the contrary.

To be sure, the Third Circuit has held that “unverifiable” affidavits as a method of proof of class membership may not suffice where reason exists to believe that class members’ memories may not be reliable.  That should not be particularly controversial.  But the Third Circuit has not held, and Judge Rendell’s strong concurrence in the Byrd case explicitly rejected, that the ascertainability doctrine should be read to “disable[e] plaintiffs from bringing small value claims as a class.”

The Second Circuit’s new Petrobras decision involved securities claims rather than consumer claims.  Under Supreme Court precedent, those who purchased Petrobras securities on a domestic exchange could be part of a putative class, but those who purchased securities abroad could not.  Although the Second Circuit refused to adopt an “ascertainability” test, it reversed the district court’s decision to certify a class because the court had not adequately considered, under the “predominance” test of Rule 23(b)(3), how it could distinguish between the two.

It therefore is hard to find much daylight between the Third Circuit in Byrd, which reversed a decision denying class certification, and the Second Circuit in Petrobras, which reversed a decision granting certification.  Both instructed district courts to figure out whether purely individual questions predominate, in which case certification must be denied. The Third Circuit has had more chances to give guidance on how to judge these questions, but unless and until a court comes out the other way in a case that actually resembles one the Third Circuit has decided, it is hard to discern true “disagreement.”  And the Supreme Court may end up speaking on the question before any real disagreement actually appears.

Class action plaintiffs anywhere in the country, including in the Third Circuit, may try to argue that they should be able to rely on affidavits from putative class members to figure out who is in the class.  In any Circuit, however, if the defendant can demonstrate that individual affiants’ memories may be unreliable on the key questions, the defendant should be able to overcome class certification.  The Third Circuit may have decided to call this “ascertainability,” but it may be thought of as predominance under another name, with a healthy helping of a defendant’s due process rights.