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

A disturbing trend has emerged in false advertising litigation: plaintiffs are filing class action complaints that are virtually identical to or rely heavily on FTC complaints or FDA warning letters. Those complaints allege that certain advertising claims are false, deceptive, and/or misleading because the defendants do not possess “prior substantiation” for the claims, i.e., the advertisers do not have a reasonable basis for making the challenged claims in the first instance.

Recently, however, both federal and state courts have dismissed cases that do little more than echo FTC complaints or FDA warning letters, and have simply alleged that the defendants lacked substantiation for the challenged advertising claims, on grounds that those allegations fail to state a claim. More specifically, courts have explained that the allegations in those cases impermissibly attempt to shift the plaintiffs’ burden of proving falsity onto the defendants to show that the challenged claims, in fact, are substantiated.

A new article authored by Dana Rosenfeld and Dan Blynn that appears in the ABA’s Antitrust magazine, “The ‘Prior Substantiation’ Doctrine: An Important Check On the Piggyback Class Action,” discusses the “prior substantiation” defense to class-action lawsuits, which attempt to piggyback off of FTC pleadings and FDA warning letters.

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Earlier this year, the FTC and the Colorado Attorney General filed a lawsuit against a company that sells a wealth-building program. The company’s infomercials included testimonials from consumers who purportedly made money through the program and fine print disclosures stating that results would vary. The regulators recently announced they had obtained a court order that, among other things, requires the company to highlight the low success rate of its customers.

As we’ve mentioned in previous posts, two years ago, the FTC updated their guidelines on endorsements and testimonials. Under the new guidelines, a company can no longer feature testimonials with atypically good results and simply use a “Results Not Typical” disclaimer. Instead, a company must either feature testimonials that show typical results or include a disclosure that clearly explains the results that a typical consumer can expect to achieve.

As part of the court order, the infomercial company is forced to “clearly and prominently” include the following statement in all ads and infomercials: “Most of our customers will earn little or no money.” The order includes detailed requirements about how, when, and how often the disclosure must be made in various types of ads. In addition, the company is prohibited from representing that consumers are likely to quickly and easily make a lot of money.

This case serves as a reminder that advertisers need to ensure that all claims in their ads -- including claims that are made by consumers -- are truthful and not misleading. And companies need to be particularly careful that claims made by consumers are either representative of typical results or that the ads otherwise clearly disclose the typical results. Otherwise, a much more onerous disclosure may be forced on them by a court.

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Between January 2006 and June 2011, the National Advertising Division (NAD) of the Better Business Bureaus found that 71 percent of the consumer perception surveys introduced by parties to an NAD proceeding were unreliable and, therefore, had little or no impact on the final outcome of case. The NAD's standards for a well-executed survey are exacting, yet the NAD does not use a set formula to evaluate consumer perception evidence and may find that a survey is either reliable or fatally flawed based upon the survey design, survey questions, and the statistical significance of the survey results. Given the time and resources required to conduct a credible survey, parties to an NAD proceeding should carefully consider the factors that influence the NAD's analysis of survey evidence.

A new article in Privacy & Consumer Protection Law360, "Not All Surveys Are Created Equal," discusses the primary reasons why the NAD discounts the large majority of consumer perception surveys introduced during challenges, describes the framework by which the NAD analyzes survey evidence, and outlines the survey design characteristics that have the greatest influence on generating a reliable survey.

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On August 4, the United States Court of Appeals for the Third Circuit rendered its unanimous decision in Pernod Ricard USA, LLC v. Bacardi USA, Inc., holding that a consumer survey need not be considered when a label or other advertisement, on its face and taken as a whole, leaves no room for a reasonable consumer to be misled. The decision follows the Seventh Circuit's reasoning in Mead Johnson, stating that "never before has survey research been used to determine the meaning of words, or to set the standard to which objectively verifiable claims must be held."

This decision may indicate growing judicial skepticism of survey evidence and lead to a decline in the use of consumer surveys in false advertising cases. For more about this case, read the Kelley Drye client advisory.

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Effective today, the NAD has increased its filing fees for appeals and cross-appeals at the National Advertising Review Board to $12,000. This is the first increase in NARB filing fees since 2007. According to the NAD’s notice, “the increase is aimed at ensuring that a greater share of the actual cost of the appellate process is reflected in the filing fee so that we can maintain the high levels of timeliness and quality that participants in the self regulatory system expect.”

Click here to learn more about our team’s experience before the NAD. 

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On March 28, the Northern District of Illinois held that a single in-person sales pitch is not commercial advertising and therefore the speaker cannot be liable for a false advertising suit under the federal Lanham Act. Specifically, the court dismissed Oshkosh Corporation’s claim against Control Solutions LLC for representing to the U.S. Army that Control Solutions’ power door system was being used on All Terrain Vehicles that Oshkosh had begun making for the U.S. Army. Because the communication was targeted to a potential purchaser and thus was not made in an anonymous fashion, the court held that it was not a commercial advertisement.

This case serves as a reminder that some courts interpret federal false advertising law as applying only to a classic advertising campaign, in which a message is conveyed to many potential purchasers through a mass-marketing campaign by direct mail, television, radio, the internet, or other channels. However, other courts have held that communication to a “sufficient” portion of the purchasing public, regardless of anonymity or formality, can constitute commercial advertising under the Lanham Act.

Because courts apply flexible standards as to how much dissemination is “sufficient,” and the standard varies by industry, marketers should take the same care when they communicate with an individual as when they kick off a mass-marketing campaign. In addition, marketers should be mindful that their communications may also be governed by state laws whose standards may differ from federal standards.

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On Friday, February 4, 2011, Judges Calabresi, Lynch, and Wesley of the U.S. Court of Appeals for the Second Circuit heard oral argument in FTC v. Bronson Partners, LLC, No. 10-878.  The district court had found that appellant Bronson Partners violated the FTC Act by making deceptive claims in advertising for two weight loss products, and, in addition to awarding injunctive relief, ordered the company to pay nearly $2 million in "equitable restitution."  On appeal, Bronson Partners challenged the propriety of the district court's award of consumer redress.  

Bronson Partners' appeal argues, first, that monetary relief is not even a permissible remedy under Section 13(b) of the FTC Act.  Indeed, Section 13(b) only specifically identifies injunctions and temporary restraining orders as relief that the FTC may obtain in such actions.  However, despite the plain language of the statute, various courts have awarded the FTC  monetary relief - typically either restitution or disgorgement - under the courts' inherent equitable powers.  While several other Circuit Courts of Appeal have ruled that monetary relief is available under Section 13(b), the Second Circuit has not yet  decided that issue. 

Second, Bronson Partners argued that, assuming monetary relief  were available in a Section 13(b) case, the particular monetary award in this case was not permissible. It is well-established that only equitable forms of  relief may be awarded under Section 13(b). However,  while the district court in this case labeled its award as "equitable restitution," Bronson contends that it was actually legal relief because  the FTC failed to "trace" the  consumer payments at issue into the defendant's current possession, as required for equitable restitution.   Bronson Partners argued that,  to the extent any monetary relief may be available to the FTC under Section 13(b), it should be limited to a disgorgement of  defendants'  profits, if any. 

Bronson Partners is represented on appeal by Lew Rose, Steven Caley (who argued on behalf of Bronson Partners before the Second Circuit), Dan Blynn, and Damon Suden of Kelley Drye & Warren LLP. A decision is expected within the next few months. 

The specific issues involved in the Bronson Partners appeal were discussed in more detail in a previous blog posting available here.  

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Yesterday, an en banc panel of the D.C. Court of Appeals upheld two separate trial court determinations that a plaintiff must suffer “injury-in-fact” before initiating a claim under the District of Columbia Consumer Protection Procedures Act (“CPPA”). The 8-1 decision resolved the appeals in Grayson v. AT&T, No. 07-CV-1264, and Breakman v. AOL, No. 08-CV-1089. The plaintiffs in both cases appealed trial court rulings that granted the respective defendants’ motions to dismiss based on the plaintiffs’ failure to allege personal injury-in-fact.

In 2004, Grayson sued telecommunications carriers under the CPPA for allegedly defrauding the D.C. government by failing to report as unclaimed property the unused portion of prepaid calling cards. Grayson purchased a prepaid calling card two years before filing his claim, yet his card remained active and eligible for his use. Breakman’s original claim alleged that AOL violated the CPPA by imposing deceptive pricing on its customers who live in the District. Breakman was not an AOL customer, but brought the claim solely in “a representative capacity on behalf of the interests of the general public . . .”

Both Grayson and Breakman argued on appeal that, because Congress created the D.C. court system under Article I of the U.S. Constitution, D.C. courts were not required to follow Article III standing requirements. To establish standing under Article III, a plaintiff must suffer an injury-in-fact; there must be a causal connection between the injury and the conduct at issue; and a favorable decision must be likely to redress the injury (as articulated in Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992)). The Court rejected the appellants’ argument based on the D.C. court’s consistent application of the Article III requirements.

The Court then considered whether a 2000 amendment to the CPPA expanded the scope of the current standing doctrine. The amendment changed the language concerning who was eligible to bring a CPPA from “any consumer who suffers any damage” to “a person, whether acting for the interests of itself, its members, or the general public.” The Court acknowledged that the 2000 amendment enlarged the category of persons authorized to bring a CPPA enforcement action. Nevertheless, it found that the amendment’s legislative and drafting history lacked clear intent to override the current standing requirement. The Court further remarked that overturning the long-held standing principle “would open [the] courts to any person from anywhere who decides to lodge a complaint...even though that person has suffered no injury-in-fact.” Thus, neither Grayson nor Breakman were relieved of demonstrating injury-in-fact.

The Court concluded that Breakman’s “mere interest” in the alleged unlawfulness of AOL’s practices was insufficient to give standing, and the trial court properly dismissed his claim.

The Court determined that Grayson, on the other hand, sufficiently alleged injury-in-fact because his injury could be “derived solely from a violation . . . of his statutory legal rights created by the CPPA.” The Court also held that Grayson’s allegations met the “causal connection” and “redressability” requirements in Lujan and, therefore, the trial court erred in dismissing Grayson’s claim based on lack of standing. The Court, nonetheless, upheld the dismissal of Grayson’s claim due to his failure to state a legally viable claim upon which relief could be granted.
 

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In October, we posted that the FTC had proposed revisions to the “Guides for the Use of Environmental Marketing Claims,” more commonly known as the “Green Guides.” Among other things, the FTC’s proposed revisions address carbon offset claims and environmental certifications. In recent weeks, there has been legal actions on both of these issues.

A consumer recently filed a class action lawsuit against Fiji Water Company, alleging that Fiji falsely claims its bottled water is “carbon negative.” In addition, Fiji advertised: “we will continue to offset 120% of our emissions. That means that we are not only mitigating our environmental impact but also making up for a little bit of someone else’s.” The plaintiff alleges that consumers understand Fiji’s claims to mean that Fiji’s current operations remove more carbon from the atmosphere than they release into it. According the complaint, though, this is not true. Instead, Fiji uses a “discredited” accounting method called “forward crediting.”

This week, FTC announced a settlement with Tested Green over the company’s environmental certification program. According to the FTC, Tested Green advertised and sold environmental certifications while claiming to be the “nation’s leading certification program with over 45,000 certifications in the United States.” The FTC alleged, however, that Tested Green never tested any of the companies it provided with environmental certifications, and would “certify” anyone willing pay a certification fee. The agency charged that the company violated the FTC Act by providing the means to deceive consumers.

There has been an increased focus on green claims in light of the FTC’s announcement last year. Companies should carefully examine their claims to ensure that they are aligned with the FTC’s guidance and that they do not overstate potential environmental benefits.

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For nearly 30 years, the Federal Trade Commission ("FTC") has sought, and federal courts have awarded, monetary redress for consumers in actions brought under Section 13(b) of the Federal Trade Commission Act ("FTC Act"). A recent article authored by John Villafranco and Dan Blynn entitled, "Consumer Redress Under Section 13(b): Correcting the Record," which was published in the November 2010 issue of Regulatory Affairs Professionals Society's Regulatory Focus magazine, clarifies what a court can and cannot award in Section 13(b) litigation.

The article (i) identifies the types of equitable monetary relief that typically are awarded in such actions, and distinguishes between equitable restitution (which may be awarded) and legal restitution (which may not); (ii) discusses the concept of “tracing,” which is a necessary prerequisite to an award of restitution; and (iii) explains why disgorgement of a defendant’s net profits generally will be the only proper form and measure of consumer redress in Section 13(b) litigation.

Whether a court awards restitution or disgorgement in a Section 13(b) action can have a substantial impact on the amount of money that a defendant who violates the FTC Act might be ordered to pay in consumer redress. For example, a company that spends a significant amount of money on product advertising, marketing, and promotion might have low net profits (the measure of a disgorgement award) despite, at the same time, having high gross revenues from product sales (typically awarded in restitution). In that case, the difference between an award of disgorgement or restitution could be the difference in a redress award totaling thousands rather than millions of dollars. Thus, companies and individuals who are named defendants in Section 13(b) actions should be aware of what form of consumer redress is awardable in such litigation and how that redress is measured, as it could impact settlement negotiations with the FTC and litigation strategy generally.

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Earlier this year, we posted that the Florida Attorney General had sued a company over allegations the company enrolled consumers in a monthly subscription program without the consumers’ knowledge or consent. According to the AG, consumers who signed up for a “free trial” were automatically enrolled in the program. Today, the AG announced a settlement with another company over similar issues.

The AG claims the company offered free trials of books and magazines and billed consumers if they did not return the books or cancel the magazine subscriptions, and then enrolled the consumers in automatic renewals of magazines or automatically shipped books to them without specific consent. As part of the settlement, the company has agreed to (a) clearly and conspicuously disclose the terms of its offers, (b) provide refunds to certain consumers, and (c) pay up to $1.3 million to the AG’s Office for attorneys’ fees and costs and for future investigation and enforcement.

Companies that use trial offers must clearly and conspicuously disclose the terms of the offers before consumers sign up and incur costs. Among other things, a company must disclose whether there are any costs associated with the offers and whether a consumer has to cancel to avoid future charges. Failure to clearly disclose this information is certain to lead to complaints from consumers and challenges from regulators. These challenges can often result in costly settlements. For example, in addition to today’s settlement, the FTC recently imposed a $7.8 million penalty on a company that failed to adequately disclose the terms of its free trial.
 

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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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Last week, Best Buy filed a lawsuit against Ultimate Electronics over ads that compare Best Buy’s prices to Ultimate’s prices. According to the complaint filed in a Minnesota federal court, Ultimate’s ads make statements such as: “Every day, we shop . . . Best Buy, then adjust our prices to beat theirs, so you know we have the lowest electronics prices.” Best Buy alleges that Ultimate’s prices are frequently higher than Best Buy’s and, therefore, that consumers do need to comparison shop to obtain the lowest prices. Best Buy is seeking a permanent injunction, monetary damages, and that the court order Ultimate to run corrective advertisements.

Earlier this year, Best Buy had filed a complaint against Ultimate at the NAD, but Ultimate failed to respond to the inquiry. As a result, the NAD announced that it would refer the advertisements to the FTC for review.

Advertisers need to be careful when they make price comparisons against competitors. The NAD and NARB have both opined that generalized claims that an advertiser always offers the lowest prices are “difficult, if not impossible, to substantiate,” especially given how quickly prices can change. As this case demonstrates, if a competitor thinks that an advertiser’s price comparisons are not substantiated, the advertiser can find itself challenged in court, at the NAD, or by the FTC.

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Effective March 15, 2010, the Council of Better Business Bureaus will increase the fee it charges for CBBB Corporate Partners to file an NAD challenge from $2,500 to $3,500.  This is the first increase in the Corporate Partner filing fee since 2005.  Non-partners must pay between $6,000 and $20,000, depending on the gross annual revenue of the company.  A copy of the CBBB's announcement is available on the NAD website.

Despite this increase, the cost of bringing a challenge before the NAD is still significantly less than the cost of bringing a lawsuit under § 43(a) of the Lanham Act. Click here for an article that provides a detailed analysis of the options available to a company that wants to challenge a competitor’s claims.

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The law of comparative advertising covers advertising that compares alternative brands on price or other measurable attributes and expressly or impliedly identifies the alternative brand by name, illustration, or other distinctive information.

A new article in IP Litigator, “The Law of Comparative Advertising in the United States,” provides an overview, including the treatment of comparative advertising claims by the Federal Trade Commission and the National Advertising Division of the Council of Better Business Bureaus, Inc., and a discussion of some of the particular proof and burden-shifting issues triggered when comparative advertising claims are challenged under the Lanham Act. The article then provides practical guidance to in-house attorneys and outside counsel on strategies for challenging comparative advertising claims made by a competitor when the client contends that the claims cannot be substantiated.

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The news media have taken notice of the increase in advertising lawsuits and formal grievances filed against competitors. This month, The New York Times and The AmLaw Daily reported on the recent up-tick in false advertising challenges.

The New York Times article, “Best Soup Ever? Suits Over Ads Demand Proof” from November 22, 2009, noted that the number of cases appears to have grown as the economy has declined. Kelley Drye & Warren partner, John E. Villafranco, explained, “In this economy, where margins are a bit tighter, a lot of marketing departments have decided to become more aggressive in going after their competitors in the hopes that they can either protect their market position or capture additional market share.”

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