We frequently get questions about whether companies can be held liable for claims that appear in consumer reviews. Although it’s clear that there are instances in which a company can be held liable if it has a connection to the person who wrote the review, it has been less clear to what extent a company can be held liable for content in independent reviews. A new NAD decision sheds some light on where the line might be drawn.

APEC makes water filtration systems that it previously advertised as being “Made in the USA.” After an FTC inquiry, the company removed those claims from its ads, Reviewsupdated claims that appeared on third-party platforms, and made efforts to correct claims that were made by third-party marketers. That didn’t stop consumers from echoing the previous “Made in USA” claims in reviews, though. One of APEC’s competitors argued that APEC continues to benefit from those inaccurate reviews, and that the company should be required to take steps to correct them. This is especially true, the competitor argued, because APEC routinely responds to negative reviews from consumers.

NAD started by noting that an advertiser cannot make claims through consumer reviews that the advertiser can’t substantiate itself. Moreover, if an advertiser learns about inaccurate claims in third-party ads, the advertiser is responsible for taking steps to ensure that those claims are corrected. In this case, NAD determined that that responsibility did not extend to the challenged consumer reviews, though. Where do you draw the line?

According to NAD, the “critical question” is “whether the advertiser exercises control over the messages conveyed through customer reviews.” Although the lines can get blurry, “NAD determined that APEC did not exercise sufficient control over the messages conveyed by the product reviews at issue and that it is not responsible for the truthfulness of reviews . . . .” Notably, APEC did not respond to these reviews. The company’s “silence and decision to refrain from responding to reviews does not convey a message that the domestic origin claims are accurate.” And the company’s practice of responding to some reviews did not give rise to an obligation to correct unsupported claims in other reviews.

Although NAD did not hold APEC responsible for the consumer reviews that had been flagged by its competitor, “it cautioned APEC against interacting with any such reviews in any manner which may seem to validate an unsupported domestic origin claim.” This suggests that companies should exercise caution when responding, liking, or otherwise interacting with reviews that include claims that a company can’t support. A favorable interaction could be read as validation for those claims.

This week, President Trump signed an executive order outlining a national plan to promote the development and adoption of artificial intelligence (AI) technologies.  The order serves as the official launch of the “American AI Initiative,” which includes five areas of focus:

  • Invest in AI R&D – Prioritize AI investment in Federal agencies’ R&D missions
  • Unleash AI Resources – Enhance availability of Federal data, models, and computing resources to America’s AI research and development experts
  • Set AI Governance Standards – Led by the National Institute of Standards & Technology (NIST), develop technical standards for reliable, secure, trustworthy, and interoperable AI systems
  • Build the AI Workforce – Prioritize fellowships and training with Federal agencies to cultivate AI-focused skills and education
  • International Engagement and Protecting the U.S. AI Advantage – Implement an action plan to protect U.S. AI intellectual property

The order does not include a timeline or allocate specific funding for AI initiatives, though the Administration has indicated that a detailed plan to further the goals in the order will be released this year.

The order comes a day after remarks by FTC Commissioner Rohit Chopra that referred to potential negative outcomes of AI technology. In a speech at the Silicon Flatirons Conference in Colorado, Commissioner Chopra raised concerns about biases, and potential inequality based on gender or race, that can result from “black box” decision-making technology that combines AI algorithms with massive data collection. Commissioner Chopra noted that current consumer protection laws that exist to address human bias in the marketplace must similarly be structured to account for AI-generated biases, echoing sentiments raised by participants at the FTC’s AI-focused competition and consumer protection hearing held last year.

Most of our posts regarding “Made in USA” claims relate to FTC investigations and enforcement actions. Private plaintiffs, however, also closely watch those claims. For example, in 2018 plaintiffs filed a class action lawsuit against New Balance Athletics Inc. challenging qualified “Made in USA” claims. Although the plaintiffs acknowledged that New Balance qualified the claim in some places to indicate that the domestic value is at least 70%, they alleged that the general impression is that the products are American made. To resolve that litigation, a California federal judge recently granted preliminary approval to a proposed $750,000 settlement.

In Dashnaw v. New Balance Athletics, Inc., consumers alleged that New Balance mischaracterized its line of “Made in USA” sneakers because as little as 70% of the product was made with domestic components or labor. The claim appeared in advertising, on the shoes, and on the shoe boxes. The complaint acknowledged that New Balance disclosed in some places that its “Made in USA” sneakers contain a domestic value of 70% or greater, but alleged that an “Made in USA” claim appeared in places like the shoe and the shoe box. Because 30% of the value of those shoes could be attributed to a foreign country, plaintiffs alleged that the claims violated both California law, requiring that foreign materials must not exceed 5% of the final wholesale value, and FTC guidelines, stating that a product must be “all or virtually all” made in the United States.

The case was transferred from state court to the U.S. District Court for the Southern District of California, where the parties initiated settlement discussions. In April, the parties proposed a settlement of $750,000, with $215,000 going to settlement administration costs and compensation and $535,000 to consumers, with each consumer receiving up to $10. Judge Lorenz denied the settlement stating that the proposed amount was not enough for the estimated 1 million class action members. In response, the parties explained that a 5% participation rate among class members would result in full compensation and even with a 10-15% participation rate, each class member would receive 35-50% of the maximum damages the class could receive at trial, which they called a “reasonable settlement amount.” Judge Lorenz granted preliminary approval to the proposed settlement of $750,000 on January 25, 2019.

This case reminds advertisers that when using a disclosure to qualify a Made in USA claim or any other claim, the disclosure must appear consistently to maximize effectiveness. The FTC has also cautioned that even qualified claims may imply more domestic content than exists, so advertisers should avoid qualified claims unless the product has a significant amount of U.S. content or U.S. processing.

This morning, the FDA announced its intention to engage in greater oversight of the dietary supplement industry.  The announcement also conveyed that the Agency had sent 12 warning letters and five advisory letters to companies over the prior two weeks.  Some of these letters were jointly issued by FDA and the Federal Trade Commission, focusing on what the two agencies consider to be illegal and deceptive claims in advertising and labeling for products intended to treat Alzheimer’s and other serious diseases such as diabetes and cancer, rendering the products unapproved new “drugs” rather than “dietary supplements” under federal law.

In his statement, FDA Commissioner Scott Gottlieb stated an intent to step up FDA efforts to improve product safety and police deceptive claims.  Amongst other initiatives, Mr. Gottlieb stated that the Agency is developing a new “rapid response tool” to alert the public if a supplement contains an illegal ingredient or poses a health risk.  While supplement manufacturers should be pleased that efforts are being made to weed out bad actors, they should also be concerned about unintended consequences that might result from use of such a rapid response tool.  The damage to a brand from an FDA alert could be significant.

Gottlieb also indicated that FDA is working to “develop [new] guidance for preparing [new dietary ingredient] NDI notifications” to help ensure that the regulatory framework is both sufficiently flexible and adequately protects public safety.  As part of its work to modernize the NDI process, FDA is also planning to update its compliance policy regarding NDIs.  Mr. Gottlieb also weighed in on the idea of creating an FDA registry, whereby supplement manufacturers would be required to list products and ingredients.  The registry, presumably, would allow FDA to concentrate enforcement efforts, but before it could be created, Congress almost certainly would need to act.  Gottlieb’s statement seemed to acknowledge this, and he cited the possibility of “dietary supplement exclusivity” similar to the exclusivity presently enjoyed by drug manufacturers as another potential issue ripe for congressional consideration.

In order to concentrate on these issues and others affecting industry and consumers, Mr. Gottlieb reported that he has established a Dietary Supplement Working Group at the FDA, “comprised of representatives from multiple centers and offices across the agency.”  The Working Group will report directly to the Commissioner and will review “organizational structures, processes, procedures and practices in order to identify opportunities to modernize our oversight of dietary supplements.”  In addition to these steps, FDA will conduct a public meeting this spring that will focus on “responsible innovation and safety.”  All stakeholders are invited to provide comment on “how the FDA should strengthen the dietary supplement program for the future.”

Much of the justification for increased oversight is centered on what FDA has characterized as a startling increase in the number of dietary supplements generally, and adulterated and misbranded supplements specifically.  Whether the framework that FDA will put in place is narrowly conceived to address this problem, without creating unnecessary and burdensome requirements on reputable companies, remains to be seen.  Stakeholders should monitor these developments closely and consider engagement through public comments or participation at the public meeting given Gottlieb has made clear that the Agency wants to hear both from industry and consumers as it assesses how best to move forward.

Last week, five advertising and marketing trade associations jointly filed comments with the California Attorney General seeking clarification on provisions within the California Consumer Privacy Act (CCPA).

While expressing “strong support” for the CCPA’s intent, and noting the online ad industry’s longstanding consumer privacy efforts like the DAA’s YourAdChoices Program, the group proposed the following three clarifications relating to CCPA provisions that, unless modified, the group believes could reduce consumer choice and privacy:

  • Notice relating to a sale of consumer data: A company’s written assurance of CCPA compliance should satisfy the requirement to provide a consumer with “explicit notice” (under 1798.115(d)) when a company sells a consumer’s personal data that the company did not receive directly from such consumer;
  • Partial opt-out from the sale of consumer data: When responding to a consumer’s request to opt out of the sale of personal data, companies can present consumers with choices on the types of “sales” from which to opt-out, the types of data to be deleted, or whether to opt out completely, rather than simply offering an all or nothing opt-out.
  • No individualized privacy policies: Businesses should not be required to create individualized privacy policies for each consumer to satisfy the requirement that a privacy policy disclose to consumers the specific pieces of personal data the business has collected about them.

The associations signing on to the comments include the Association of National Advertisers, American Advertising Federation, Interactive Advertising Bureau, American Association of Advertising Agencies, and the Network Advertising Initiative. The comments represent an “initial” submission intended to raise the proposals above and, more broadly, highlight to the California AG the importance of the online-ad supported ecosystem and its impact on the economy.  The associations plan to submit more detailed comments in the coming weeks.

The comments coincide with a series of public forums that the California AG is hosting to provide interested parties with an initial opportunity to comment on CCPA requirements and the corresponding regulations that the Attorney General must adopt on or before July 1, 2020.

 

The FTC’s “Hey Nineteen” blog post caught our attention this past week, and not just for its witty title. One of those reasons is the reference to continued interest in “Made in USA” claims.  As we’ve written about here, “Made in America” has been a frequent enforcement target in recent years and 2018 generally continued this trend.  Here’s how it stacked up:

The FTC completed 25 investigations, settling four enforcement actions and issuing 21 closing letters.

Similarly, in 2017 the FTC settled two enforcement actions and issued 22 closing letters. All indications are that these trends will continue in 2019.

So what can companies do to avoid being the subject of an upcoming FTC Business Center blog post? Here are some tips:

Tip #1: Audit Inventory Management Systems and Processes

Mistakes can launch FTC investigations, as one company learned this past year.

In response to inquiries from the FTC, Prime-Line Products Company, a maker of corner shields, stated that after depleting its inventory of US-made corner shields, it substituted identical imported corner shields. Then, apparently inadvertently, the company continued to apply the “Made in USA” label.

Eventually, the FTC closed its investigation without bringing an enforcement action against the company. But the case serves as a reminder to companies employing the “Made in USA” label to closely manage inventory.  If only a percentage of supply is sourced to the US, companies should create internal processes to avoid mislabeling inventory.

Of course, inventory management can become challenging, especially when working with multiple dealers, distributors, or resellers that may not be familiar with inventory changes. Companies should proactively develop a compliance plan to ensure marketing remains accurate in all sales channels.

Tip #2: Train Employees

Employees, from marketing and sales to the warehouse floor, are the first line of defense against false “Made in USA” claims. Employees should be aware of when “Made in USA” claims may be made, and should be trained on processes for alerting management if they observe any inadvertent errors.

As detailed in multiple closing letters, companies targeted by FTC investigations told the FTC that they would retrain staff on proper, non-deceptive claims. This common-sense approach is advisable for all companies.  All training materials should conform to the standards laid out by the FTC in its Complying with the Made in USA Standard guidance, but should also be practical and easy-to-use.  Checklists, webinars, and workplace posters are good options for educating a company’s workforce.

Tip #3: Qualify Advertising Claims

Last year’s cases show that investigations skewed toward plain, unqualified “Made in USA” claims. Qualified claims, which provide more detail about a component made domestically or process that occurred domestically, may take up more space or obscure a company’s marketing message.  Nevertheless, when it comes to “Made in USA” labeling, accuracy counts.

In one example from the last year, The Gillette Company, LLC, was the target of an FTC inquiry due to its “Boston Made Since 1901” advertising. The FTC closed its investigation, but the example is instructive.  Gillette has deep roots in Boston and sought to use this information in an advertisement.  But without a qualification, the FTC viewed the advertisement as asserting that all of Gillette’s products are made in the US.  Gillette stated that it would re-focus its advertising campaign to highlight its Boston-based employees and manufacturing and the FTC closed the matter.

Tip #4: Size Doesn’t Matter

When it comes to enforcement of the “Made in USA” standards, there is no safe harbor for small businesses. Companies large and small were the target of investigations in 2018.

That included large companies, like Hallmark Cards, Incorporated, and IKEA Purchasing Services (US), Inc. The FTC closed investigations into each of these companies via a closing letter, without further action.

Meanwhile, the FTC’s major enforcement actions of the year were primarily against small or mid-size companies. Underground Sports Inc. d/b/a Patriot Puck imported just 400,000 hockey pucks since January 2016, but faced a significant enforcement action.  Notably, American-made claims featured prominently in these companies’ advertising.  Indeed, their conduct was so objectionable, that following announcement of these settlements, discussion has arisen regarding monetary penalties for false “Made in USA” claims.

Tip #5: Act Now!  Financial Penalties May Be Coming

FTC commissioners are very publicly debating the merits of imposing financial penalties for false “Made in USA” claims.

A leading advocate has been Commissioner Rohit Chopra, who argued in a dissent that settlements have been too lenient and are not deterring similar conduct.  But, as reported in December in this blog, Chairman Joseph Simons too is focused on the potential need to impose monetary relief.  At a hearing before the Senate Subcommittee on Consumer Protection, Product Safety, Insurance, and Data Security, Simons said, “Now we’re exploring whether we can find a good case that would be appropriate for monetary relief to serve as an additional deterrent.”

Given the political interest in increasing the penalties for false claims, companies may want to (make and actually stick to) a New Year’s resolution to make sure their “Made in USA” claims are substantiated. If you’re new to this area or need a refresher, check out our webinar and materials here.

On January 14, Plaintiffs in the consolidated case of Veera v. Banana Republic, LLC, et al., filed for approval of a preliminary class action settlement after Plaintiffs Veera and Etman successfully argued that “frustration” and “embarrassment” over unclear discounts is sufficient to meet the requirements for injury.

According to separate lawsuits filed against Banana Republic and The Gap, the companies displayed in-store signs promoting a class of merchandise for sale at a stated price (e.g., 40% off sweaters) or subject to a stated discount (e.g., “40% off your purchase”) without clearly and conspicuously identifying the items that were excluded from the offer. The lawsuits alleged that these signs were either not accompanied by any disclosure of limitations, or were accompanied by a disclosure so small and closely colored to the sign background as to not be noticeable.

In an action under California’s Unfair Competition Law (UCL), False Advertising Law (FAL), and Consumers Legal Remedies Act (CLRA), Plaintiffs claimed that, in reliance on the signs, they selected various items for purchase at the advertised discount, and out of frustration and embarrassment, ultimately bought some of the items, even after learning that the discount did not apply.

Although a lower court granted summary judgment in favor of the retailers, the California Court of Appeals concluded that Plaintiffs met the requirements to allege injury. “Injury in fact is not a substantial or insurmountable hurdle,” the Court noted, “Rather, it suffices to allege some specific, identifiable trifle of injury.” The Court agreed with the Plaintiffs claim that, but for the allegedly misleading signs, Plaintiffs would not have made the clothing purchases (even after hearing of the non-discounted price at the register).

The parties agreed upon the proposed settlement hours before the class certification hearings. The key terms of the settlement provide that The Gap will provide a one-time coupon for the purchase of up to 4 items in a Banana Republic or The Gap store at 30% off regular price to certain customers who purchased items from The Gap or Banana Republic stores in California, for use on a future purchase. The Plaintiffs in the action will also receive $8,000 each under the proposed settlement. The Gap will also pay $1 million in fees and costs, and all costs of administering the proposed settlement.

A hearing is set for March 1st on the motion for preliminary approval of the settlement.

This proposed settlement serves as a reminder about the importance of clearly and conspicuously disclosing the limitations of any offer, including the terms of a sale. We will watch the California Court of Appeals for further willingness to allow cases to go forward even when Plaintiffs claim little to no injury beyond “embarrassment.”

In the world of social media, a person’s power is often measured in terms of followers. Because more followers generally means more reach, companies who engage influencers often base their compensation on this metric. But follower counts may not always be what they seem. According to a New York Times report last year, influencers can buy fake followers (who are often bots) from companies like Devumi.

Robot HandsThis week, the New York Attorney General announced a settlement with Devumi over its practices. Among other things, the company is prohibited from selling fake followers, likes, and other types of social media interactions. And to the extent Devumi works with real influencers, it must take steps to ensure they clearly disclose any connections they have to the companies they endorse. The AG said that this settlement sends “a clear message that anyone profiting off of deception and impersonation is breaking the law and will be held accountable.”

Although this may be the first case that addresses the sale of fake followers, it’s not the first case that addresses companies using shady techniques to boost their reputations online. For example, in 2013, the New York AG announced settlements with 19 companies after a year-long undercover investigation into the reputation management industry. During the investigation, the AG learned that some agencies that promised to boost companies’ presence online did to so posting fake reviews.

What you should take away from these cases depends on your place in the industry. If you help companies boost their social media presence, take a close look at these settlements and make sure you’re not engaging in the practices that were challenged. If you’re hiring a company to boost your presence, ask that company some questions about how they plan to achieve results. And if you pay influencers based on the number of followers they have, investigate whether those followers are real people. Bots can lead to all sorts of trouble.

In the Data Business? You May Be Obligated to Register in Vermont by Thursday

Data brokers have until this Thursday to register with the Vermont Secretary of State as part of a new data broker oversight law that became effective January 1st.

Approved unanimously by the Vermont Senate last May, the Vermont Data Broker Regulation, Act 171 of 2018, requires data brokers to register annually, pay an annual filing fee of $100, and maintain minimum data security standards, but the law does not prevent data brokers from collecting or selling consumer data.

What Qualifies as a “Data Broker”?

The law only applies to “data broker[s],” defined as a “business, or unit or units of a business, separately or together, that knowingly collects and sells or licenses to third parties the brokered personal information of a consumer with whom the business does not have a direct relationship.” Continue Reading In the Data Business? You May Be Obligated to Register in Vermont by Thursday

The recent Netflix and Hulu documentaries about the Fyre Festival have thrust the failed event back into the spotlight. That was a few scandals ago, so for those of you who don’t remember it, here’s a short recap.

Billy MacFarland and Ja Rule wanted to host a luxury festival on a deserted island. They found an island that belonged to Pablo Escobar, and secured a lease on the condition that they wouldn’t mention the drug lord’s name. Not long after that, Fyre used Escobar’s name in a social media post. And not long after that, the company was forced to find a new deserted island – or find a way to make an inhabited one look deserted. (They chose option B.)

Meanwhile, a group of over 60 influencers – including Kendall Jenner and Emily Ratajkowski – got to work promoting the festival on Instagram, without disclosing that Fyre Logothey had been paid to do so. (According to some reports, the initial group of influencers were paid between $20,000 and $250,000 each.) This resulted in over 300 million impressions in 24 hours. The hype worked, and people started paying up to $12,000 for tickets.

Things on the ground were going less smoothly. When guests arrived, instead of finding the luxury accommodations, gourmet food, and big-name bands they were promised, they found FEMA tents, a food shortage, and none of those bands. If you’re wondering whether any of this is fraud, Ja Rule directly addressed that question in the Netflix documentary. During a phone call, he assured his colleagues that it’s not fraud – it’s just “false advertising.” (Note to Mr. Rule’s lawyer: maybe keep him off the witness stand.)

As MacFarland sits in jail and Ja Rule and his colleagues fight lawsuits, a federal judge gave a bankruptcy trustee permission to subpoena Kendall Jenner’s company, some of the agencies that represented other influencers, and other vendors who were paid to organize or promote the festival. It’s too early to tell what will happen next, but these developments are likely to lead to more scrutiny about how companies advertise on social media and use influencers.

We’ve posted about these issues many times before. To summarize:

  1. Social media posts are subject to advertising laws, so those posts must be truthful and not misleading;
  2. Influencers need to disclose their connections to the companies they are promoting; and
  3. Companies need to take steps to manage their influencers.

But if you don’t have time to read those posts, watch one of the documentaries, see what the Fyre organizers did, and do the opposite.