An Ingredient for Failure In “Reasonable Consumer” False Advertising Cases

Defendants have had a nice run recently in winning pleading-stage dismissal of “reasonable consumer” false advertising cases.  That run came to an end yesterday, however, when the Second Circuit Court of Appeals in New York reversed the dismissal of claims regarding Kellogg’s “Cheez-It” crackers.  The front of the “Cheez-It” package prominently describes the crackers as “Whole Grain,” but as a quick look at the Nutrition Facts panel on the side label would confirm, the crackers’ main ingredient is enriched white flour, not whole grain.

New York, California, and numerous other states apply a “reasonable consumer” test to false advertising claims.  The test is meant to be objective, with courts asking whether an advertisement would mislead an objectively reasonable consumer, not whether the actual plaintiff was or was not misled.  Federal courts regularly, and rightly, dismiss false advertising claims at the pleading stage where, as one court put it in a “slack fill” case involving an over-the-counter pain reliever, “the[] failure to read an unambiguous tablet count does not pass the proverbial laugh test.”

Courts have been much less likely to see the humor, though, in cases where a food package includes statements that plaintiffs contend are affirmatively misleading.  In yesterday’s case of Mantikas v. Kellogg Co., the Second Circuit agreed with the plaintiffs, at least at the pleading stage.  In the Court’s view, “the large, bold-faced claims of ‘WHOLE GRAIN’” on the front of the package could be construed as “misleading because they falsely imply that the grain content is entirely or at least predominantly whole grain.”  Quoting an oft-cited Ninth Circuit case, the Court wrote that the Nutrition Facts panel did not “cure[] the deceptive quality of the ‘WHOLE GRAIN’ claims because “reasonable consumers should not be expected to look beyond misleading representations on the front of the box to discover the truth from the ingredient list in small print on the side of the box.”

The main good news in this bad outcome for the defendant is that the Second Circuit reiterated another core principle in cases like this:  When ruling on an advertising claim, courts must “consider the challenged advertisements as a whole, including disclaimers and qualifying language.”  Plaintiffs, in other words, cannot just include snippets of a package in their complaint and hope to avoid judicial scrutiny of the entire package at the pleading stage.

A second good sign is that the Second Circuit distinguished—and thus impliedly blessed—other district court decisions dismissing similar claims on “reasonable consumer” grounds.  In one case the Court examined, for example, the plaintiffs claimed to have believed that crackers advertised as “made with real vegetables” contained a larger amount of vegetables than they actually did.  The district court in that other case thought reasonable consumers know “the fact of life that a cracker is not composed of primarily fresh vegetables.”  In the Cheez-It case, by contrast, reasonable consumers “understand that crackers are typically made predominantly of grain” and “look to the bold assertions on the packaging to discern what type of grain.”  The case survived, therefore, only because the alleged affirmative misrepresentation went to a central and material fact about the food product’s nature.

Because of these limitations, the Second Circuit’s decision should not be viewed as anything other than the reaffirmation of an established principle:  Food product manufacturers cannot expect to win dismissal of a false advertising case at the pleading stage by claiming that an accurate ingredient label cures an affirmatively misleading material statement on the front of a package.  If, by contrast, a plaintiff’s purported read of an advertisement is objectively unreasonable, courts still can and should examine the entire package and dismiss claims that fail the “laugh test.”

FTC Asked to Investigate Use of Influencers to Market Vodka

Earlier this week, Truth in Advertising (or “TINA.org”) sent a letter to the FTC urging the Commission to investigate Diageo’s use of influencers to market Ciroc vodka on Instagram. According to the letter, TINA.org collected more than 1,700 Instagram posts across 50 different influencers — including Ciroc brand manager and CMO Sean “Diddy” Combs — in which the influencers allegedly failed to disclose their connection to the company in a clear and conspicuous manner.

This is not the first time that consumer groups have pushed the FTC to investigate influencer campaigns. And if this is like any of the previous pushes, it’s likely that some of the posts don’t actually violate the law. For example, some groups have misstated the legal requirements in this area and have identified posts that didn’t violate the law. That led the FTC to send warning letters to individuals who actually had no connections to the brands mentioned in their posts. Nevertheless, there are various examples in this letter that may be Ciroc Postproblematic and potential targets for enforcement.

Apart from the endorsement issues, the letter goes on to describe other problems with the content of the posts, including “kids in Ciroc ads, Ciroc-fueled misogynistic ads, a recipe for cannabis-infused strawberry lemonade with Ciroc, and even a booze-drinking Santa who needs to spread the ‘liquid love.’” (There is also an image of a toddler holding a baby bottle of Ciroc.) To make matters worse, the influencers did not use age-gating features, so that minors were able to view the ads. As TINA.org points out, these practices are likely to violate the Distilled Spirits Council’s Code of Responsible Practices for alcohol ads.

TINA.org has asked the FTC to investigate Diageo and to take appropriate enforcement action.

It’s too early to tell what will happen here, but it will be interesting to see how the FTC reacts. Although companies that market age-restricted items should pay particular attention, this action holds lessons for any company that works with influencers. If you haven’t evaluated how your company manages influencer campaigns recently, now may be a good time to do that.

SEC KOs Mayweather and DJ Khaled for Promoting Cryptocurrency Without Disclosures

About a year ago, the SEC issued a warning to celebrities and social influencers who promoted Initial Coin Offerings (ICOs) on social media, noting that such promoters are subject to federal securities laws. Apparently, at least two celebrities weren’t paying attention because they recently settled the SEC’s first cases regarding promoting ICOs without proper disclosures.

Khaled Khaled, better known as music producer DJ Khaled, and professional boxer Floyd Mayweather Jr. both allegedly promoted investments in ICOs for Centra Tech Inc. in 2017 without disclosing the compensation they received in exchange for their endorsements ($50,000 for Khaled and $100,000 for Mayweather). This triggered a violation of the anti-touting provision of the federal securities laws.

A few examples of these endorsements include Khaled referring to Centra’s ICO as a “Game changer” on various social media accounts, and Mayweather tweeting that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine…”

Mayweather also allegedly failed to disclose his relationship with two other ICOs that paid him $200,000 for posts such as, “You can call me Floyd Crypto Mayweather from now on.”

In settling the charges, Khaled agreed to pay $152,725 in disgorgement, penalty, and prejudgment interest, while Mayweather agreed to pay $614,775 for the same. Mayweather and Khaled also agreed not to promote any securities, digital or otherwise, for three and two years, respectively.

Although proper disclosures in social media endorsements have been an area of concern for the FTC for years, this settlement indicates that the SEC is just as interested in making sure consumers understand when they’re seeing sponsored content in the marketing of financial products.

For more information on this topic, check out our earlier post on SEC activity and our webinar, “Advertising Under the Influence.”

Consumer Perception Surveys in NAD Cases

Last Friday, our friend August Horvath of Foley Hoag presented at an Advertising Self-Regulatory Council (ASRC) conference on consumer perception surveys.  Among the many interesting observations made by August were the following:

  • Over a 5+ year period, June 2013 to present, only 36 cases or 8 percent of total NAD cases, included reference to a consumer perception survey.   I would have expected it to be slightly higher.
  • 42 surveys were submitted in support of the challenger and 10 were submitted by the advertiser.  This distribution makes sense, given that the challenger has the time to design and field a survey prior to filing, whereas the advertiser must submit its response in accordance with the briefing schedule.
  • In 28 percent of cases decided, the NAD mentioned “the absence of consumer perception evidence,”  suggesting that NAD would be receptive to more extrinsic evidence as it considers cases involving implied claims.  Of course, this could simply be boilerplate introduction for the case reviewer’s unaided interpretation of the message being conveyed.
  • Where the NAD has rejected a survey, the most-cited reasons have been leading closed-ended questions, issues with the control question or improper control stimulus, and questionable coding of open-ended questions.
  • In assessing surveys, NAD frequently states that (1) the control stimulus should closely resemble the test stimulus, (2) test results from one ad will not be applicable to another ad, even if claims are substantially similar, (3) when testing an ad, it should be presented in the same context as it is viewed in the marketplace. 
  • Surveys that focus on the issue of materiality or whether a claim is puffery are of little use at NAD.   The former is of no surprise, given that materiality does not enter in to an assessment of whether a claim is truthful or accurate, but the finding on puffery was unexpected.  I would have thought there would be more instances where a party attempted to support its assertion that a claim was subjective and incapable of measurement (puffery) with extrinsic evidence.

In addition to August’s presentation, we heard from survey experts Daniel Ennis, Hal Poret, and Joel Steckel, as well as NAD attorrneys Annie Ugurlayan, Hal Hodes, Martin Zwerling, and Kat Dunnigan, who touched on generally accepted survey structure and principles, common flaws, and recent NAD cases involving consumer perception.

What The FTC Said About Direct Selling In 2018

Earlier this year, the Federal Trade Commission released new business guidance for direct sellers and multilevel marketers describing the legal principles that it will apply when evaluating practices under the FTC Act. Law360 published the article “What The FTC Said About Direct Selling In 2018,” co-authored by partner John Villafranco and senior associate Donnelly McDowell.  The article discusses the FTC guidance along with recent enforcement actions and staff comments, and poses seven questions direct sellers and multilevel marketers should consider as we close out 2018 and look toward the future. To read the article, please click here.

Senate Confirms Kathleen Kraninger as CFPB Director

The Senate today confirmed Kathleen Kraninger as CFPB Director by a party-line, 50-49 vote, with Sen. Tillis abstaining.  Kraninger will replace current Acting Director Mick Mulvaney, who also currently oversees Kraninger at the Office of Management Budget (OMB) where she is associate director of general government and Mulvaney is Director. Kraninger is expected to continue deregulatory initiatives launched during Mulvaney’s tenure as Acting Director at the CFPB. 

Kraninger is set to serve a five-year term pursuant to the Dodd-Frank Act.  However, current litigation challenging the constitutionality of the CFPB’s structure raises questions as to whether Kraninger will ultimately serve the full five-year term, particularly if a Democratic president is elected in 2020.  As we previously discussed here, the D.C. Circuit initially ruled that the CFPB was unconstitutionally structured because its single director can only be removed for “inefficiency, neglect of duty, or malfeasance in office,” but subsequently reversed the holding in an en banc decision.  The constitutionality of the CFPB’s structure is also being challenged in the Second and Fifth Circuits – increasing the likelihood that the Supreme Court will take up the issue at some point soon.

 

FTC Testimony Signals Possible Increase in “Made in USA” Advertising Scrutiny

On November 27, the FTC Commissioners testified on a range of issues before the Senate Subcommittee on Consumer Protection, Product Safety, Insurance, and Data Security. One excerpt that caught our attention was their comments on “Made in USA” advertising and the potential for increased scrutiny.

Here’s an excerpt of the Q&A between Sen. Shelly Moore Capito (R-WV) and the FTC Commissioners (emphasis added):

CAPITO: Okay, last question I have on fraudulent marketing would be the… fraudulent Made in America label. How prevalent is this? And what are some of the means you’re going to try to curb this practice?

SIMONS: This is fairly prevalent. We get hundreds of these, hundreds of complaints a year, that people are improperly using the Made in the USA label. We are committed to investigating those, and usually a lot of times what happens is the firm, the company doesn’t even realize that it’s a violation. So we explain to them it’s a violation and they stop it.

Sometimes companies do it intentionally, sometimes we tell them and they don’t stop and those people we sue. And one of the things that we’re exploring now, as a general rule, we have only gotten injunctive relief in cases like this previously. Now we’re exploring whether we can find a good case that would be appropriate for monetary relief to serve as an additional deterrent.

CHOPRA: I just want to add here that I think there are manufacturers out there who hire American workers and who purposely do that because they want to put the flag on their product. And for those who lie, this cheapens the Made in the USA label so it’s not just hurting American consumers, it’s hurting every American manufacturer who is trying to do right. So I want us to be much more aggressive with this, actually. And if you and Senator Cortez-Masto want to team up, finding civil penalties for some of these bad actors, we can make sure we increase compliance levels. And I got to tell you — right now there’s a country of origin labeling issues in agriculture, country of origin issues in product marketing. We have to do more to put a stop to this because this is extremely unfair to honest companies.

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NAD Finds Line Claims in Charter Commercial

One of the issues that frequently comes up in NAD cases is “line claims.” Does an ad convey a claim about a specific product? Or does it convey a claim about an entire line of products? This week, NAD released a decision that explores that issue in the context of a funny commercial by Charter in which a DIRECTV salesman shows up at a homeowner’s door and tries to pitch an offer.

The salesman starts his pitch by offering the “DIRECTV Select Double Play package with no ESPN.” When the homeowner declines, the salesman “sweetens the deal” by offering “no CBS Sports Network, no NBC Sports Network.” From there, the deals get progressively worse until the salesman’s final offer: “What I see is someone who wants to play hardball. OK, batter up! I’ll give you no popular sports channels, the early termination fees, AND I’ll add deeply disappointing AT&T Internet . . . .” The homeowner shuts the door on the salesman mid-pitch.

Although it’s true that DIRECTV’s Select Double Play package does not include any of the popular sports channels mentioned in the spot, DIRECTV argued that the commercial conveys a misleading line claim – in other words, the commercial suggests that no DIRECTV package offers those channels, something which isn’t true. Charter disagreed, and offered a survey in support of its argument that consumers weren’t confused. NAD found that the survey was flawed for a number of reasons, including problems with the survey universe, the control, and some of the questions. Therefore, NAD ignored the survey and stepped into the shoes of a reasonable consumer to determine how they would view the commercial.

One of the factors in determining whether an ad conveys a line claim is whether the ad mentions specific products or whether it refers to the brands as a whole. Here, the commercial started with a specific reference to the DIRECTV Select Double Play package. Although that’s usually helpful, NAD determined that the initial reference was not enough to avoid a line claim. Among other things, NAD focused on the manner in which subsequent “deals” were pitched, and determined that a consumer could “reasonably take away the message that the starting offer is as good as it gets, as DIRECTV has nothing better to offer – indeed, that it has nothing in the way of sports channels to offer the homeowner.” Because Charter couldn’t support that message, NAD recommended that they either modify or stop running the commercial.

If you make a claim that applies only to some products – whether they are a competitor’s products or yours – you need to be careful not to suggest that the claim applies to an entire line of products. There are certain things you can do to help avoid conveying a line claim. For example, it usually helps to focus on specific products, rather than making general brand references. But as this case demonstrates, it’s not always easy to distinguish between line claims and narrower claims. NAD frequently errs on the side of finding a line claim, so it pays to be careful.

Kelley Drye’s Ad Law Access Blog Chosen As One of the ABA Journal’s Web 100

Editors of the ABA Journal have selected Ad Law Access as one of the 2018 ABA Journal Web 100, a list of the 100 best digital media resources for a legal audience. The Web 100 honors legal blogs, podcasts, social media and, as of 2018, web tools. In addition, the magazine added five more bloggers to its Blawg Hall of Fame—featuring the very best law blogs, known for their untiring ability to craft high-quality, engaging posts sometimes on a daily basis.

Ad Law Access is published by Advertising & Marketing practice at Kelley Drye & Warren LLP. The blog provides updates on advertising and privacy law trends, issues, and developments. The posts focus on issues that in-house attorneys need to know, summarizes them in a digestible manner, and provides readers with practical tips and thoughtful analysis.

“The web is a constantly evolving space, and we enjoy shining a light on new and useful blogs, tools and people for legal professionals to follow,” ABA Journal Editor and Publisher Molly McDonough said. “We hope the Web 100 provides readers with entertainment, engagement and a way to keep abreast of the newest developments in the legal industry.”

About Kelley Drye’s Advertising and Marketing practice:

Kelley Drye’s Advertising and Marketing practice is made up of highly respected and nationally ranked attorneys, with deep and ready knowledge of advertising law, courtroom-tested litigation skills, and a reputation for integrity and credibility earned through prior experience serving with, and working across the table from, the Federal Trade Commission (FTC) and other government agencies. The practice help global brands and Fortune 500 companies that manufacture and sell products across a range of industries to navigate this dynamic and heavily regulated industry, ensuring that their marketing, advertising and promotions are both effective and compliant with federal and state laws and regulations, broadcast network and industry self-regulatory standards, and evolving best practices for traditional and new media marketing.

About the ABA Journal:

The ABA Journal is the flagship magazine of the American Bar Association, and it is read by half of the nation’s 1.1 million lawyers every month. It covers the trends, people and finances of the legal profession from Wall Street to Main Street to Pennsylvania Avenue. ABAJournal.com features breaking legal news updated as it happens by staff reporters throughout every business day, a directory of more than 4,000 lawyer blogs, and the full contents of the magazine.

About the ABA:

With nearly 400,000 members, the American Bar Association is the largest voluntary professional membership organization in the world. As the national voice of the legal profession, the ABA works to improve the administration of justice, promotes programs that assist lawyers and judges in their work, accredits law schools, provides continuing legal education, and works to build public understanding around the world of the importance of the rule of law

DC District Court Holds that eBay Can’t Compel Arbitration Based on Later-Amended Terms

In July, a DC District Court ruled that eBay could not compel a user of its services to arbitrate a dispute, even though the user had agreed to by bound by eBay’s User Agreement. That Agreement stated that the company had a right to modify the terms, and eBay had later modified those terms to include an arbitration clause for purposes of dispute resolution. Specifically, the Court held that eBay’s act of posting the updated terms did not constitute sufficient notice, and that the company had not presented proof sufficient to show that it had notified the user via email. Although the result is troubling for many companies who approach changes to website terms in the same manner that eBay did, the decision does provide some hints for what companies can do to provide support for arguments that their changes are enforceable.

Read our article in Digital Business Lawyer to learn more about the case and what you can do to help ensure that your website terms will be deemed enforceable.

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