Ad Law Access : Washington D.C. Advertising Lawyer & Attorney : Kelley Drye & Warren Law Firm : New York, Chicago, Connecticut, New Jersey, Brussels

This month, the Seventh Circuit Court of Appeals ruled that the method the NCAA has used to distribute Final Four tickets since at least 1994 could constitute an unlawful lottery.

According to the complaint, each person who applied for tickets had to submit an application with up to ten entries. Each entry was a chance to win up to two tickets and required payment of a $6 non-refundable handling fee. An applicant could win only once but was required to submit the full face value of the tickets for each entry. In order to maximize the chances for winning a pair of tickets, an applicant would have to submit $3,060 (the face value of ten pairs of tickets plus a $6 handling fee for each entry). A successful applicant would receive a pair of tickets and a $2,700 refund (the total ticket price for the remaining nine entries). The $60 in handling fees would not be refunded. An unsuccessful applicant would receive a $3,000 refund (the price of the tickets minus the handling fees).

Under Indiana law, an unlawful lottery consists of three elements: (1) prize; (2) chance; and (3) consideration. The NCAA argued that its ticket distribution process only granted an opportunity to purchase tickets at full price, which was not a prize.  The court rejected this argument, holding that the plaintiffs alleged all elements of a lottery. The plaintiffs allegedly paid a per-ticket or per-entry fee (consideration) to enter a random drawing (chance) in hopes of obtaining scarce, valuable tickets (a prize). Accordingly, the Seventh Circuit reversed the lower court’s dismissal and allowed the case to go forward.

Be careful about any promotion in which people have to pay money for the chance to win something of value. Lottery laws across the country are similar in scope to the law in Indiana, so a promotion that includes prize, chance, and consideration is vulnerable to challenge in all jurisdictions. In most cases, it is essential to ensure that consumers have a way to participate without paying any money.

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Last year, KFC introduced its Kentucky Grilled Chicken, a healthier alternative to the restaurant chain's fried chicken, and promoted it heavily on the Oprah Winfrey show. As part of the promotion, Oprah invited consumers to download online coupons for a free Kentucky Grilled Chicken meal.  KFC was soon overwhelmed with requests for free meals and prematurely ended the promotion.

According to a class action lawsuit filed against the company, KFC “began almost immediately to refuse to honor the coupons” and stopped the promotion after only two days, advising customers to apply for an online rain check, instead. Less than half of the 10.2 million coupons that were downloaded were ever redeemed.  Among other things, the plaintiffs charged KFC with breach of contract, common law fraud, and violation of consumer protection statutes. This month, the court denied KFC’s motion to dismiss and allowed the case to move forward.

Marketers need to think carefully about how to structure coupon offers and take steps to anticipate redemption rates. Everyone loves a “free lunch” -- in this case, literally -- so online coupons for free products usually enjoy very high redemption rates. And once a coupon goes viral, it can be very difficult to control. These issues need to be addressed before the coupon is launched. As KFC’s experience shows, it can be difficult, if not impossible, to address them after problems start to arise. At that point, complaints and lawsuits are almost sure to follow. 

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Since the Consumer Product Safety Commission ("CPSC") began issuing its own import detention notices in June, some companies have struggled to obtain the release of detained products, particularly to determine the process the CPSC would follow and minimize the detention period.  The CPSC has now issued frequently asked questions ("FAQs") to help companies navigate the process.  Historically, Customs and Border Protection ("CBP") had issued notices for potential CPSC violations, so CPSC hopes to eliminate CBP as the middleman.

CPSC will send a detention notice to the importer of record, broker, and CBP, typically by e-mail.  If CBP has also detained the product, those issues will be resolved first.  CPSC will only detain products described in the notice, so the importer or broker should contact CBP to obtain the release of other products in the shipment.  Conditional release or exportation of products is also possible on a case-by-case basis.  Detention notices are not subject to protest, but companies will have five days to submit information supporting admissibility of the product and can request an administrative hearing.  CPSC will try to make admissibility decisions within 30 days of detention.

Given these new procedures, importers of consumer products should be in close contact with their brokers and respond quickly to detention notices.  Companies may also take a proactive approach by working with the CPSC compliance officer at CPSC headquarters to facilitate communications with the CPSC representative at the relevant port.

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One of the most powerful tools in a marketer’s arsenal is the word “free.” And it’s precisely because that word is so powerful, that consumers, regulators, and competitors, closely scrutinize how the word is used in ads and are quick to complain when they think the word is used inappropriately. Recently, Office Depot challenged ads in which OfficeMax and Staples claimed that participation in their rewards programs was “like” getting goods “free.” The National Advertising Division of the Counsel of Better Business Bureaus (the “NAD”) recommended that both companies change their ads.

OfficeMax advertised its rewards program with the phrase “It's like getting one FREE” and the following disclosure: “Pay $34.99 plus earn $35 in MaxPerks Bonus Rewards.” The Rewards, however, were subject to various restrictions. For example, customers couldn’t use reward points for 30 days, the points were subject to cancellation at any time, and the points expired after 90 days. Similarly, Staples advertised its rewards program with the following phrases: “Buy ANY of these office supplies, get 100% back in Staples Rewards” and “It’s like getting supplies for FREE.” The rewards program was also subject to certain exclusions and limitations.

Office Depot argued that both ads violated the FTC’s Guide Concerning Use of the Word “Free” and Similar Representations which states, in part, that when advertising a free offer, “all of the terms, conditions and obligations should appear in close conjunction with the offer of ‘Free’ merchandise or service.” The NAD agreed, noting that “merchandise is either free or it’s not” and that the word “free” has “cachet with consumers and should be reserved for offers that are truly without cost.” Both OfficeMax and Staples argued that no consumers were misled by the ads and indicated that they would appeal the NAD’s decisions.

Regardless of what happens with these cases on appeal, marketers should be careful when advertising that something is “free,” or even “like free.” If there are costs, requirements, or limitations associated with the free goods, those should be clearly disclosed so that consumers know exactly what they are getting.
 

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This post was written by Sarah Roller and Kristi Wolff.

Last week, the Food and Drug Administration (FDA) took the first steps needed to implement the new restaurant food labeling requirements of the Federal Food, Drug & Cosmetic Act (FDCA), requesting public comment on a number of regulatory issues that will affect compliance burdens and liability risks for companies subject to the new requirements. Submissions responding to the FDA notice can be made until September 7, 2010.

The new labeling requirements were established under FDCA amendments adopted as part of the recently enacted health care reform legislation (i.e., section 4205 of the Patient Protection and Affordable Care Act of 2010). The amendments expanded the scope of mandatory nutrition labeling requirements under FDCA section 403(q)(5), and require restaurants and other retail food establishments with at least 20 or more locations to provide “clear and conspicuous” calorie information to consumers. The FDA is specifically seeking information relating to the following issues:

• Chain Retail Food Establishments
• Determination of Calorie Content of Foods Offered by Chain Retail Food Establishments
• Vending Machine Operations
• Implementation and Enforcement

For further information about the new nutrition labeling requirements, or assistance in responding to the FDA notice, please contact one of the Kelley Drye attorneys listed above.

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