Seller Beware When Using Third-Party Services to Manage Returns

The Wall Street Journal recently published an article discussing a growing practice among retailers who use third-party services to identify fraudulent returns. These services will inform retailers when they think a return is fraudulent, and some retailers will reject returns based on this information, notwithstanding what is in their return policies. The article presents an example of consumer who was surprised when a retailer rejected his return and then referred him to the third-party service.

Although retailers generally have broad discretion about how to structure their return policies, there are some legal boundaries. For example, some states have specific requirements about what must be in a return policy and how it must be disclosed. More broadly, federal and state consumer protection laws generally require that retailers clearly disclose material terms prior to a purchase. This arguably includes terms of a return policy, including any exceptions under that policy.

Third-party services that help detect return fraud can provide significant benefits for retailers. (According to the article, less fraud can also benefit consumers because retailers can offer more generous policies.) But retailers should use care when relying on these services. If a customer complies with a retailer’s return policy, and the retailer rejects the return based on information from a third-party, the retailer is likely to face complaints. Simply pointing a finger at the third-party is unlikely to help.

One key question in any consumer complaint – or worse, AG investigation or law suit – will be whether the retailer acted in accordance with its policies and whether those policies were adequately disclosed. Articles such as the one in the Wall Street Journal often serve as food for thought for class action attorneys, so if you are using (or thinking about using) a third-party service to identify fraudulent returns, now might be a good time to take a look at your policy.

When Monsters Exaggerate

The Grim Reaper, a mummy, a mad scientist, and a werewolf are riding together on a train after work. No, that’s not the start of a joke, but it is the start of a funny commercial for Spectrum TV. The four characters talk about their weekend plans, as a light rain pelts the train’s windows. When the Grim Reaper laments that his kids are upset because the “satellite dish went out in the rain . . . again,” the mummy asks: “How can they sell something that doesn’t always work in the rain?” The mad scientist observes: “It’s gonna rain eventually, right?” The commercial ends with the following words on the screen: “TV that cuts out in the rain is evil. Spectrum is Reliable.” Then: “Satellite TV Bad. Spectrum Good.”

DirecTV challenged the commercial before the NAD, arguing that it falsely disparaged satellite TV as being highly unreliable in rainy weather. In its defense, Spectrum provided a survey that asked satellite customers about their TV service and experience with weather-related outages. Spectrum argued that the survey demonstrated that “rain fade” is not a rare occurrence for satellite TV subscribers, that it occurs often enough to be a significant issue with satellite service, and that it is a source of frustration for subscribers, if they experience an outage.

The companies argued about how consumers would interpret the commercial. Spectrum argued that the commercial conveyed a narrow message that satellite TV doesn’t always work in the rain, and that outages can frustrate customers, two things that were proven by the survey. DirecTV, however, argued that consumers were likely interpret the commercial to more broadly suggest that satellite TV is highly unreliable, and that outages can occur with even light rain. The NAD generally sided with DirecTV, finding that statements like the “satellite dish went out in the rain . . . again” combined with phrases like “Satellite TV Bad” could convey a broader message about the unreliability of satellite TV.

The NAD determined that although the evidence submitted by Spectrum would support claims that occasional outages due to rain can be a problem, the evidence didn’t support the broader implied claims that satellite TV service is highly unreliable, in general, and that it doesn’t work in bad weather. Although the NAD “has also long recognized that humor can be an effective and creative way for advertisers to highlight the differences between products,” it cautioned that “humor and hyperbole do not relieve an advertiser of its obligation to support messages that their advertisements might reasonably convey – especially when the advertising disparages a competitor’s product.”

The case illustrates at least three key points. First, although we often vilify them, it’s important to remember that monsters can have the same types of problems as the rest of us. Second, advertisers are responsible for all reasonable interpretations of their claims, even if they didn’t intend to communicate some of them. And third, advertisers need to ensure that their claims are closely tailored to their substantiation. Even though a competitor’s product may have a problem or your product may perform better than theirs, you still need to make sure that you don’t inadvertently exaggerate the extent of the problem or the gap in performance.

Embedding Tweets May Be Copyright Infringement

Most companies understand they should obtain a license before using a photograph in an advertising campaign or on printed materials.  And yet companies may not think twice about embedding images from a tweet or social media post into the company’s own social media feed or website. But embedder beware.  A federal judge in the U.S. District Court for the Southern District of New York recently rejected and limited the application of the so-called “Server Test”.

In jurisdictions that have adopted the Server Test, a website publisher can only be liable for direct infringement when a copyrighted image is hosted on its own server as opposed to being embedded or linked from a third-party server. On February 15, 2018, the court in Goldman v. Breitbart News Network, LLC, et al., U.S. District Court for the Southern District of New York, No. 17-cv-3144, found that embedding a tweet of a copyrighted image can be considered copyright infringement, regardless of where the image is hosted.

The Copyright Act grants copyright owners several exclusive rights to control the distribution and use of copyrighted works, including the right to make copies of the work, the right to distribute those copies to the public, and the right to publicly display the copyrighted work. In the Goldman case, the Court held that embedding a tweet of a copyrighted image can violate the copyright owner’s exclusive display right.

See our advisory for more details.

Support for FTC Jurisdiction Over Broadband: Ninth Circuit En Banc Rules Common Carrier Exemption is “Activity,” and not “Status-based,” Reversing Earlier AT&T Victory

The Republican-led FCC’s effort to get out of the business of regulating broadband providers’ consumer practices took a step forward on Monday.  In an appeal that has been proceeding in parallel with the FCC’s “Restoring Internet Freedom” reclassification proceeding, the U.S. Court of Appeals for the Ninth Circuit issued an opinion giving the Federal Trade Commission (FTC) broad authority over practices not classified by the FCC as telecommunications services.  Specifically, the Ninth Circuit, sitting en banc, issued its long-awaited opinion in Federal Trade Commission v. AT&T Mobility, holding that the “common carrier exemption” in Section 5 of the FTC Act is “activity based,” exempting only common carrier activities of common carriers (i.e., the offering of telecommunications services), and not all activities of companies that provide common carrier services (i.e., rejecting a “status-based” exemption).  The case will now be remanded to the district court that originally heard the case.  Coupled with the FCC’s reclassification of Broadband Internet Access Services (BIAS) in the net neutrality/restoring internet freedom proceeding, the opinion repositions the FTC as top cop on the Open Internet and broadband privacy beats.


As we discussed in several earlier blog posts, this case stems from a complaint that the FTC filed against AT&T Mobility in the Northern District of California in October 2014 alleging that AT&T deceived customers by throttling their unlimited data plans without adequate disclosures.  AT&T moved to dismiss the case on the grounds that it was exempt under Section 5, based on its status as a common carrier, but the district court denied the motion, finding that the common carrier exemption was activity-based, and AT&T was not acting as a common carrier when it offered mobile broadband service, which, at the time the FCC classified as a non-common-carrier “information service.”  AT&T appealed and a three-judge panel of the Ninth Circuit reversed the district court, holding that the common carrier exemption was “status-based,” and the FTC lacked jurisdiction to bring the claim.  As we noted then, the three-judge panel’s decision was the first recent case to address the “status-based” interpretation of the common carrier exemption, and the decision – if it stood – could re-shape the jurisdictional boundaries between the FCC’s and the FTC’s regulation of entities in the communications industry.

The En Banc Court’s Analysis

The FTC appealed the case to an en banc panel of the Ninth Circuit, which issued its opinion this week.  The court’s decision relied on the text and history of the statute, case law, and significant deference to the interpretations of the FTC and FCC, which both view the common carrier exemption as activity-based rather than status-based.

The Court first analyzed the history of Section 5 and the common carrier exemption.  It found that the Congress intended the exemption to be activity based and rejected textual arguments advanced by AT&T that other statutory provisions—including Section 6 of the FTC Act and the Packers and Stockyard Exception—demonstrated that the common carrier exemption was status based.  The Court gave significant weight to the understanding of common carriers in 1914, when the FTC Act was first passed, and legislative statements made during consideration of that Act.

The Court then addressed case law that an entity can be a common carrier for some activities but not for others.  The Court found this case law to support an activity-based interpretation of the common carrier exemption.  Specifically, the Court found that while Congress has not defined the term “common carrier,” Supreme Court case law leading up to and following the passage of the FTC Act interpreted the term “common carrier” as an activity-based classification, and not as a “unitary status for regulatory purposes.”  The Court found that its approach was consistent with the Ninth Circuit’s longstanding interpretation of the term “common carrier” as activity-based, as well as the interpretations of the Second, Eleventh, and D.C. Circuits.  (AT&T did not contest these cases, but instead argued that the FCC had many legal tools to address non-common carrier activities, including Title I ancillary authority and potential structural separation.)

Notably, the Court also provided significant deference to the views of the FTC and FCC, both of which have recently expressed the view that the FTC could regulate non-common carrier activities of common carriers.  The Court cited the FCC’s amicus brief before the en banc panel and a 2015 Memorandum of Understanding between the two agencies that interpreted the common carrier exemption as activity-based.

Finally, the Court rejected arguments that the FCC’s 2015 Open Internet Order reclassifying mobile broadband as a common carrier service (or the FCC’s 2017 Restoring Internet Freedom Order reversing that classification) retroactively impacted the outcome of the appeal.

Agency Response

After the court issued its opinion, both FTC Acting Chairman Maureen Ohlhausen and FCC Chairman Ajit Pai applauded the ruling.  Chairman Ohlhausen stated that the ruling “ensures that the FTC can and will continue to play its vital role in safeguarding consumer interests including privacy protection, as well as stopping anticompetitive market behavior,” while Chairman Pai stated that the ruling is “a significant win for American consumers” that “reaffirms that the [FTC] will once again be able to police Internet service providers” after the Restoring Internet Freedom Order goes into effect.

Our Take

The Ninth Circuit’s ruling is unsurprising in some senses.  When a court grants en banc review, it often is for the purpose of reversing or at least narrowing the panel’s initial decision.  AT&T also faced fairly strong questioning during the oral argument in September.  Further, the Court’s decision affirms a position that the FTC had taken for many years and that the FCC – as evidenced by the 2015 Memorandum of Understanding – supported.  Thus, the en banc court here effectively affirms current practice.

All of that said, the issue is not settled.  AT&T’s reaction was decidedly muted, and it may still seek Supreme Court review of the question.  This option may be particularly attractive to AT&T because it noted several times during the oral argument that it faced both FTC and FCC enforcement actions against it for allegedly the same activities.  The Ninth Circuit did not mention the FCC enforcement action or the potentially conflicting interpretations of AT&T’s obligations.  It is not clear whether both actions could or would proceed as a result of the decision.

Going forward, once the FCC’s Restoring Internet Freedom Order takes effect, we can expect that the FTC will serve as the top cop for alleged broadband consumer protection violations, including with respect to open Internet- and privacy-related complaints.  And yet, there is still some uncertainty.  The FCC’s Restoring Internet Freedom Order is under appeal.  If the appeals court that ultimately hears the challenges to the Restoring Internet Freedom Order were to reverse the Order, the possibility exists that broadband services would again come under FCC common carrier jurisdiction, thereby exempting the provision of such services from FTC jurisdiction even under an activity-based interpretation of the FTC Act.  Thus, we may not have finality on broadband regulation, despite the Court’s decision this week.

More broadly, we expect that the FTC will continue to push for eliminating the common carrier exemption altogether before the Congress, as it has for many years.  Congressional action to repeal the exemption appears unlikely in the near term.

At least for now, broadband providers should continue to ensure that their privacy and broadband practices are in line with FTC guidelines and judicial interpretations of Section 5, and should comply with remaining FCC Open Internet requirements, such as the transparency rule.

FCC Net Neutrality Repeal Published in Federal Register, Triggering Deadlines for Challengers

On Thursday, February 22, 2018, the Federal Communications Commission (FCC or Commission) published the Restoring Internet Freedom Order (the Order) in the Federal Register.

As we previously discussed, the Order effectively reverses the Commission’s 2015 Open Internet Order, reclassifying broadband Internet access service as a lightly regulated Title I “information service” and eliminating the 2015 Order’s open Internet rules (while retaining a modified version of the transparency requirement).

The Order will not go into effect until after the Office of Management and Budget completes its Paperwork Reduction Act review, which could take several months. However, last Thursday’s publication is significant because it triggers deadlines for challenges to the Order, both in the courts and in Congress.

The Federal Register publication gives litigants ten days to file petitions for review in federal courts of appeals if they would like to be included in a court lottery to determine the venue for consolidating the Order’s challenges. The following petitions have already been filed:

  • New York District Attorney General Eric Schneiderman announced he and 22 other Democratic attorneys general filed a petition for review at the U.S. Court of Appeals for the D.C. Circuit;
  • Public Knowledge, Mozilla, Vimeo, National Hispanic Media Coalition, and New America’s Open Technology Institute each filed petitions for review in the D.C. Circuit;
  • The California Public Utilities Commission and Santa Clara County each filed appeals in the Ninth Circuit;

Several other parties, including the Internet Association (representing Google, Microsoft, and Amazon, among others), INCOMPAS, the Computer & Communications Industry Association (CCIA), and Free Press are expected to file petitions for review in the near term.

Federal Register publication also allows lawmakers to formally introduce a Congressional Review Act (CRA) resolution of disapproval, which would reverse the Order and prevent the Commission from subsequently introducing a substantially similar Order. While CRA resolutions are a powerful tool in the hands of the majority – as we saw with the rollback of the Broadband Privacy Order earlier this year – as the minority party, the Democrats are at a significant disadvantage. Senator Ed Markey, D-MA, and House Communications Subcommittee ranking member Mike Doyle, D-PA, have led the Democrat’s effort to draft a CRA resolution to nullify the Order. At the time of this blog post, the CRA resolution had 50 Senator co-sponsors, including all 49 Democratic senators and Senator Susan Collins, R-ME.  President Trump is not expected to support the CRA resolution, even if the measure passed both chambers of Congress.

In addition to activities in federal court and in Congress, 26 states are considering net neutrality legislation, and five state governors have issued executive orders regarding net neutrality following the Commissioners’ December 2017 vote.

We will follow up this blog post with a more comprehensive review of the Restoring Internet Freedom Order soon. In the meantime, contact any of the authors of this blog post for more information on the proceeding.

CPSC Votes to Sue Britax Over B.O.B. Strollers

Last Friday, the CPSC voted to sue Britax Child Safety, Inc. to force the company to recall various models of single and double B.O.B. jogging strollers. The one-count administrative complaint alleges that the strollers present a substantial product hazard under Section 15(a)(2) of the Consumer Product Safety Act because they contain a product defect that presents a substantial risk of injury to the public.

The CPSC claims that the three-wheel strollers’ quick release mechanism can fail to secure the front wheel to the fork, allowing that front wheel to detach during use. Furthermore, due to the design of the stroller, consumers are allegedly likely to believe that the wheel is secured when it is not. The CPSC states that it has received over 200 reports of incidents since January 2012 – 97 of which resulted in injuries, some severe, to 50 children and 47 adults. In a press release on the B.O.B. website, Britax counters that the strollers are safe when used as instructed and do not contain a defect. The company points out that the QR mechanism is “widely-used” in bicycles and strollers, and front wheel detachments only occur when wheels are installed improperly – and contrary to available written and video instructions.

The complaint requests a finding that the strollers present a “substantial product hazard” under the CPSA and an order Britax that implement a corrective action plan that includes initiating a stop-sale, notifying consumers and the public of the recall, and providing a remedy. The Commissioners voted to approve the complaint along party lines, with Acting Chairman Ann Marie Buerkle opposing the filing. As we have previously reported, the Commission’s priorities could shift if she and Republican nominee Dana Baiocco are confirmed.

Under the CPSA, manufacturers, distributors, and retailers have an obligation to report to the CPSC as soon as they obtain information that reasonably supports the conclusion that a consumer product contains a defect that could create a substantial product hazard, or creates an unreasonable risk of serious injury or death. The CPSC takes this reporting obligation very seriously, and staff do not hesitate to reach out to companies after receiving a number of consumer complaints related to a single consumer product (or set of products).

Michaels Stores Inc. Agrees to Pay $1.5 Million CPSC Civil Penalty

Last week, the Department of Justice (“DOJ”) announced that Michaels Stores Inc. has agreed to pay $1.5 million in civil penalties to settle allegations that Michaels failed to file a timely report about a safety hazard associated with a large glass vase that Michaels sold. In 2015, DOJ filed a complaint on behalf of the Consumer Product Safety Commission (“CPSC”) against Michaels, an arts and crafts retailer, with charges that the company knew of multiple consumer injuries for over a year before reporting to the CPSC. Section 15(b) of the Consumer Product Safety Act requires manufacturers, importers, distributors, and retailers to report immediately, which is defined as “within 24 hours of obtaining reportable information,” if a product has the potential to create a substantial hazard due to a defect, presents an unreasonable risk of serious injury or death, or fails to adhere to a consumer product safety rule or standard. If a company is unsure whether or not a report is required, it may investigate for up to ten working days.

Michaels sold about 200,000 vases, and the CPSC and DOJ alleged that the products could shatter in consumers’ hands because they were too thin to withstand the pressure of normal handling. Injuries reportedly associated with the breaking glass included permanent nerve damage and lacerations requiring stitches. Michaels, as the complaint asserts, “possessed information that the vases had injured one consumer in 2007 and at least four customers in the first half of 2009,” but did not report to the CPSC until February 2010.

In an unusual move for DOJ and CPSC, the original complaint alleged that, once Michaels notified the CPSC, it falsely conveyed how the glass vases were acquired, so DOJ also brought a material representation count. Specifically, the report Michaels submitted to CPSC stated that the vases were purchased from a vendor, but records identified Michaels as the importer. In April 2017, dropped the material misrepresentation claim to focus on the civil penalties and injunctive relief.

In addition to paying the civil penalty, consistent with previous civil penalties, Michaels must implement a compliance program to ensure timely and accurate reporting to the CPSC in the future.

To avoid similar consequences, companies should remember the very low bar for what triggers a Section 15(b) Report to the CPSC, even for products like glass vases that have inherent properties that could cause an injury.

Senate Commerce Committee Holds Confirmation Hearings on FTC Chair and Commissioner Nominees

The Senate Commerce, Science, and Transportation Committee held confirmation hearings yesterday for the four nominees to the Federal Trade Commission: Joseph Simons (nominated as Chair), Rohit Chopra, Noah Phillips, and Christine Wilson.  We previously discussed the nominations of Simons, Chopra, and Phillips here.   Wilson, currently a Senior Vice President at Delta Airlines and previously Chief of Staff to former FTC Chair Timothy J. Muris, was subsequently nominated to the fourth Commissioner seat.

The hearing touched on a range of consumer protection and antitrust issues from big data and interconnected devices to prescription drug pricing and the application of antitrust laws to big technology companies like Google and Facebook.  As anticipated, the nominees generally affirmed their commitment to vigorously enforce consumer protection and antitrust laws but refrained from committing to particular policy positions or advocating specific legal interpretations on hot button issues.

One notable exchange occurred when Senator Cruz spoke about his time at the FTC under former Chair Muris in the early 2000s, when both Simons and Wilson also worked at the Commission as Director of the Bureau of Competition and Chief of Staff to Chair Muris, respectively.  Cruz, Simons, and Wilson each spoke glowingly of Muris and his legacy at the Commission.  Simons noted that the biggest lesson he learned from Muris was the importance of clearly articulating priorities to agency staff, calling it “an absolutely critical thing in terms of leading the FTC” and emphasizing that that he intended to do the same upon confirmation.  Wilson praised Muris for enlisting other commissioners to help advance his agenda and noted that the multi-member composition of the Commission allows it to leverage the unique experiences and expertise of each commissioner.

While the multiple references to Muris’s tenure were framed primarily in terms of leadership philosophies, they may also signal a return to certain policy and enforcement positions taken by Muris.  For example, under Muris’s leadership, the Commission continued to apply the longstanding “reasonable basis” standard when evaluating whether an advertiser had sufficient substantiation to support a claim.  In more recent years, particularly in the area of health claims, the Commission advocated for more stringent substantiation standards that have typically only been required to approve new drugs, such as requiring two well-controlled clinical studies to support certain claims.  Muris has been an outspoken critic of this development, characterizing it as “a significant ossification of a formerly flexible standard” in a paper co-authored with Dr. Howard Beales and Robert Pitofsky.   The piece further argues that such “an arbitrary, inflexible standard would deny important information to consumers” and raise First Amendment concerns.

To be clear, the hearings didn’t touch on the approach to substantiation applied during Muris’s tenure directly, but the positive references could signal a return to a more flexible substantiation standard.  It is also encouraging for advertisers that Simons indicated his intent to make clear agency priorities and standards, presumably signaling that the Commission’s position will be well communicated to industry.

The confirmation process is expected to move quickly.  We’ll continue to monitor closely and post updates here.

State AGs Still Really Don’t Like Cy Pres Class Action Settlements

When class actions have a low settlement value relative to the size of the class, it is normal for defendants to pay out money to non-profit groups that advocate for issues relevant to the case rather than directly to class members. Last July, in “Give the Money to One Percenters, Not to Non-Profits,” I reported that 11 state Attorneys General had decided to buck this ongoing trend, asking the Third Circuit to reject a class action settlement in which Google would have paid $3 million to non-profit groups advocating for privacy rights.  The Third Circuit has not ruled on that appeal, but with a new brief to the U.S. Supreme Court, the number of state AGs advocating for this change now has grown to a bipartisan group of 20.

Courts approve these “cy pres” distributions to non-profits where they find it “infeasible” to distribute money directly to class members.  The Circuits are slightly split on what it means to be “feasible,” however, and in the new brief, the AGs chastise the Ninth Circuit for approving cy pres “whenever there is a large class.”  The AGs prefer “feasible” to be synonymous with “possible,” and whenever possible, they want money to be distributed, somehow, at least to a subset of affected class members.

In the new case, In re Google Referrer Header Privacy Litigation (captioned at the Supreme Court as Frank v. Gaos, with “Frank” being Ted Frank, head of the Competitive Enterprise Institute’s Center for Class Action Fairness), Google would pay out $8.5 million to settle claims that it inappropriately shared user searches with third party marketers.  The Ninth Circuit “quickly disposed of the argument that the district court erred by approving a cy pres-only settlement.”  Because “[o]bjectors do not contest the value of the settlement” or plead that they suffered any out-of-pocket injury from Google’s conduct, the only question was whether it was “feasible” to distribute $8.5 million to a class with 129 million estimated members who performed searches through Google. Continue Reading

Be Careful When Marketing Around the Olympics

As consumers get ready to watch the 2018 Winter Olympic Games, some companies are getting ready to capitalize on the public enthusiasm. Many marketers want to incorporate Olympics-related themes – ranging from overt mentions of the Olympics to more subtle sports references – in their ads in order to associate their brands with the attention that is being paid to the games.  Although this makes sense from a marketing perspective, it can also pose some legal risks.

The Ted Stevens Olympic & Amateur Sports Act gives the United States Olympic Committee (or “USOC”) exclusive rights to use certain words, like “Olympic,” and symbols, like the interlocking rings. The Act also prohibits use of any word, symbol, or combination thereof that “tending to cause confusion or mistake, to deceive, or to falsely suggest a connection with” the user of the marks and the Olympics. Other countries – including South Korea – have similar laws.

Some companies pay a lot of money for the right to use these marks, so if you use them without permission, you could get a letter (or worse) from an official sponsor or a group like the USOC. The USOC has even tried stop companies from using marks in hashtags. For example, in 2016, the USOC’s chief marketing officer wrote that companies could not use hashtags such as #Rio2016 or #TeamUSA.” According to some press reports, the USOC sent letters to various companies reiterating this position.

Feel free to cheer Team USA on from your personal social media accounts this summer. But remember that what may be called “patriotic” when done from your personal account could be called “infringement” when done from a business account.